Q3 2025 Popular Inc Earnings Call

Speaker #1: Normally, a seasonally slow period of the year. Please turn to slide five. I would like to comment on our new strategic framework and transformation progress.

Speaker #1: Our strategy centres on three objectives . First , be the number one bank for customers by deepening relationships , earning trust , delivering value across all channels and providing exceptional service .

Speaker #1: Leveraging our very strong primacy and satisfaction scores in Puerto Rico , we are focused on advancing digital and payment solutions to further grow engagement .

Speaker #1: Second , be simple and efficient by working collaboratively , streamlining operations and reducing costs . We are committed to making our processes simpler and more effective to deliver superior solutions for our customers .

Javier Ferrer: For our latest technology flow period of the year. Please turn to slide five. I would like to comment on our new strategic framework and transformation progress. Our strategy centers on three objectives. First, be the number one bank for our customers by deepening relationships, earning trust, delivering value across all channels, and providing exceptional service. Leveraging our very strong primacy and satisfaction scores in Puerto Rico, we are focused on advancing digital and payment solutions to further grow engagement. Second, be simple and efficient by working collaboratively, streamlining operations, and reducing costs. We are committed to making our processes simpler and more effective to deliver superior solutions for our customers. Finally, be a top-performing bank by attracting and retaining top talent and converting customer and operational success into shareholder value, with a commitment to generating a sustainable 14% ROCE over the long term.

Speaker #1: And finally , be a top performing bank by attracting and retaining top talent and converting customer and operational success into shareholder value with a commitment to generating a sustainable 14% Rothesay over the long term , this framework is simple yet powerful guides our transformation , which continues to show steady and nodal progress .

Speaker #1: We are investing in seamless , secure banking solutions , expanding service channels and modernizing branches and digital platforms to provide our customers with the flexibility to connect with popular through the channels that best fits their needs .

Speaker #1: We plan to extend this digital capabilities to more products to further improve online and mobile experiences , and support future growth . Recent initiatives include the launch of a fully online personal and credit card loan origination process in Puerto Rico , and the Virgin Islands , and the expansion of digital deposit products in the US mainland .

Javier Ferrer: This framework, simple yet powerful, guides our transformation, which continues to show steady and notable progress. We are investing in seamless, secure banking solutions, expanding service channels, and modernizing branches and digital platforms to provide our customers with the flexibility to connect with Popular through the channel that best fits their needs. We plan to extend these digital capabilities to more products to further improve online and mobile experiences and support future growth. Recent initiatives include the launch of a fully online personal and credit card loan origination process in Puerto Rico and the Virgin Islands, and the expansion of digital deposit products in the U.S. mainland. On the commercial side, we are improving cash management and credit delivery for small and mid-sized businesses.

Speaker #1: On the commercial side , we are improving cash management and credit delivery for small and midsize businesses . We are pleased with the progress we have made so far in our transformation and are convinced that these efforts will continue to unlock growth opportunities and efficiencies to drive sustained financial performance .

Speaker #1: I will now turn the call over to Jorge for more details on our financial results . Jorge .

Speaker #2: Thank you . Javier . Good morning and thank you all for joining the call today . As Javier mentioned , our quarterly net income increased by 1 million to $211 million .

Speaker #2: Our EPs improved by $0.06 to $3.15 per share . These results were driven by better NII and non-interest income and a lower effective tax rate , offset somewhat by a higher provision for credit losses .

Javier Ferrer: We are pleased with the progress we have made so far in our transformation and are convinced that these efforts will continue to unlock growth opportunities and efficiencies to drive sustained financial performance. I will now turn the call over to Jorge for more details on our financial results. Jorge?

Speaker #2: As we have mentioned before , our objective is to deliver sustainable financial performance . While there is some noise in the current quarters results , we're very pleased to have once again exceeded a 13% Rothesay for the period .

Speaker #2: We continue to expect to achieve at least a 12% Rothesay in Q4 , as well as for the full year . Longer term , we remain focused on achieving a sustainable 14% return on tangible common equity .

Jorge Garca: Thank you, Javier. Good morning, and thank you all for joining the call today. As Javier mentioned, our quarterly net income increased by $1 million to $211 million. Our EPS improved by $0.06 to $3.15 per share. These results were driven by better NII and non-interest income and a lower effective tax rate, offset somewhat by a higher provision for credit losses. As we have mentioned before, our objective is to deliver sustainable financial performance. While there is some noise in the current quarter's results, we're very pleased to have once again exceeded a 13% ROCE for the period. We continue to expect to achieve at least a 12% ROCE in Q4, as well as for the full year. Longer term, we remain focused on achieving a sustainable 14% return on tangible common equity. Please turn to slide seven.

Speaker #2: Please turn to slide seven . Our net interest income of 647 million increased by 15 million and was driven by higher average deposit balances , fixed rate asset repricing in our investment portfolio and deposit pricing discipline in both of our banks .

Speaker #2: Our net interest margin expanded by two basis points on a GAAP basis and by five basis points on a tax-equivalent basis, driven by a larger balance of loans and tax-exempt investment securities.

Speaker #2: Loan growth of 502 million in the quarter was strong , with both banks contributing to the increase at BB . We saw loan growth of 357 million , reflected across most portfolios , but driven primarily by commercial and construction lending .

Jorge Garca: Our net interest income of $647 million increased by $15 million and was driven by higher average deposit balances, fixed-rate asset repricing in our investment portfolio, and deposit pricing discipline in both of our banks. Our net interest margin expanded by two basis points on a GAAP basis and by five basis points on a tax-equivalent basis, driven by a larger balance of loans and tax-exempt investment securities. Loan growth of $502 million in the quarter was strong, with both banks contributing to the increase. At BBPR, we saw loan growth of $357 million reflected across most portfolios, but driven primarily by commercial and construction lending. At Popular Bank, we saw loan growth of $145 million, also driven by the commercial and construction lending segments.

Speaker #2: A popular bank , we saw loan growth of 145 million . Also driven by the commercial and construction lending segments . Given that the underlying economic activity and demand for credit in both of our markets remains solid , we now expect consolidated loan growth in 2025 to be between 4 and 5% .

Speaker #2: As compared to the original 3% to 5% guidance for the year, despite the expected headwinds in our U.S. construction balances due to paydowns expected during the fourth quarter in our investment portfolio, we continue to reinvest proceeds from bond maturities into U.S. Treasury notes and builds.

Speaker #2: During the quarter, we purchased approximately $2.5 billion of Treasury notes with a duration of 1.4 years at an average yield of around 3.65%.

Speaker #2: We funded the purchases by reinvesting roughly $1 billion of bond maturities, along with redeploying $1.5 billion of cash reserves. We expect to continue to invest in Treasury notes to lessen our NII sensitivity to lower rates while maintaining an overall duration of 2 to 3 years in the investment portfolio.

Jorge Garca: Given that the underlying economic activity and demand for credit in both of our markets remain solid, we now expect consolidated loan growth in 2025 to be between 4% and 5%, as compared to the original 3% to 5% guidance for the year, despite the expected headwinds in our U.S. construction balances due to paydowns expected during the fourth quarter. In our investment portfolio, we continue to reinvest proceeds from bond maturities into U.S. Treasury notes and bills. During the quarter, we purchased approximately $2.5 billion of Treasury notes with a duration of 1.4 years and an average yield of around 3.65%. We funded the purchases by reinvesting roughly $1 billion of bond maturities, along with redeploying $1.5 billion of cash reserves. We expect to continue to invest in U.S.

Speaker #2: And in the past , balances decreased by 704 million , while average balances grew by 793 million . For Rico public deposits ended the quarter at 20.1 billion , a decrease of 842 million when compared to Q2 .

Speaker #2: We continue to expect public deposits to be in the range of 18 to $20 billion at , excluding Puerto Rico public deposits , ending deposit balances decreased by 162 million .

Speaker #2: And on an average , deposits decreased by 44 million , demonstrating the impact of our continued focus on deposit retention strategies at popular Bank .

Jorge Garca: Treasury notes to lessen our NII sensitivity to lower rates while maintaining an overall duration of two to three years in the investment portfolio. Ending deposit balances decreased by $704 million, while average balances grew by $793 million. Puerto Rico public deposits ended the quarter at $20.1 billion, a decrease of $842 million when compared to Q2. We continue to expect public deposits to be in the range of $18 to $20 billion. At BBPR, excluding Puerto Rico public deposits, ending deposit balances decreased by $162 million and on an average deposits decreased by $44 million, demonstrating the impact of our continued focus on deposit retention strategies. At Popular Bank, ending deposit balances increased by approximately $216 million net of intercompany deposits. Total deposit costs increased by one basis point at both banks. At BBPR, the increase was mostly due to a higher average balance of public deposits.

Speaker #2: Ending deposit balances increased by approximately 216 million , net of intercompany deposits . Total deposit costs increased by one basis point at both banks at BPR , the increase was mostly due to a higher average balance of public deposits .

Speaker #2: Given the results year to date , along with the anticipated Nim expansion in Q4 from repricing of our fixed rate earning assets , we continue to expect to see NII growth of 10 to 11% in 2025 .

Speaker #2: Please turn to slide eight. Non-interest income was $171 million, an increase of $3 million compared to Q2 and above the high end of our 2025 quarterly guidance.

Speaker #2: We continue to see solid performance across most of our fee generating segments , including robust customer transaction activity . This quarter . We also benefited from a $5 million retroactive payment from a tenant related to an amended lease contract .

Jorge Garca: Given the results year to date, along with the anticipated NIM expansion in Q4 from repricing of our fixed-rate earning assets, we continue to expect to see NII growth of 10% to 11% in 2025. Please turn to slide eight. Non-interest income was $171 million, an increase of $3 million compared to Q2 and above the high end of our 2025 quarterly guidance. We continue to see solid performance across most of our fee-generating segments, including robust customer transaction activity. This quarter, we also benefited from a $5 million retroactive payment from a tenant related to an amended lease contract. Given the trends year to date and particularly the stability in customer transaction activity, we now expect Q4 non-interest income to be in a range of $160 to $165 million. This will result in total non-interest income between $650 and $655 million for the year. Please turn to slide nine.

Speaker #2: Given the trends year to date and particularly the stability in customer transaction activity , we now expect Q4 non-interest income to be in a range of 160 to $165 million .

Speaker #2: This will result in total non-interest income between 650 and 655 million for the year . Please turn to slide nine . Total operating expenses were $495 million , an increase of 3 million when compared to last quarter .

Speaker #2: Largest variance was related to a 13 million non-cash goodwill impairment in our US based equipment leasing subsidiary , due to lower projected earnings .

Speaker #2: Offsetting this was a 13.5 million quarter over quarter reduction in other operating expenses , driven by the effect of a reversal . This quarter of a 5 million claims accrual recorded in Q2 and a similar reduction in operational reserves .

Speaker #2: We also saw a 3.6 million increase in personnel costs , mainly due to annual salary and merit increases , effective in July , along with the impact of employee termination benefits related to cost efficiency initiatives at popular Bank , specifically , as part of our ongoing efforts to improve profitability , we decided to exit the US Residential mortgage origination business and to close four underperforming branches in the New York metro area .

Jorge Garca: Total operating expenses were $495 million, an increase of $3 million when compared to last quarter. The largest variance was related to a $13 million non-cash goodwill impairment in our U.S.-based equipment leasing subsidiary due to lower projected earnings. Offsetting this was a $13.5 million quarter-over-quarter reduction in other operating expenses, driven by the effect of a reversal this quarter of a $5 million claims accrual recorded in Q2 and a similar reduction in operational reserves. We also saw a $3.6 million increase in personnel costs, mainly due to annual salary and merit increases effective in July, along with the impact of employee termination benefits related to cost efficiency initiatives at Popular Bank. Specifically, as part of our ongoing efforts to improve profitability, we decided to exit the U.S. residential mortgage origination business and to close four underperforming branches in the New York metro area.

Speaker #2: We will remain focused on areas where we feel we can invest to achieve improved operating leverage. We continue to expect the increase in 2025 expenses to be between 4% and 5% when compared to last year.

Speaker #2: Our effective tax rate in the third quarter was 14.5% , compared to 18.5% in Q2 , driven by a higher proportion of exempt income .

Speaker #2: This higher exempt income , along with the impact of changes to Puerto Rico's tax code , will result in an effective tax rate for Q4 in the range of 14 to 16% , and for the year , we now expect the effective tax rate to be between 16 and 18% .

Jorge Garca: We will remain focused on areas where we feel we can invest to achieve improved operating leverage. We continue to expect the increase in 2025 expenses to be between 4% and 5% when compared to last year. Our effective tax rate in the third quarter was 14.5% compared to 18.5% in Q2, driven by a higher proportion of exempt income. This higher exempt income, along with the impact of changes to Puerto Rico's tax code, will result in an effective tax rate for Q4 in the range of 14% to 16%. For the year, we now expect the effective tax rate to be between 16% and 18%. Please turn to slide 10. Regulatory capital levels remain strong. Our CET1 ratio of 15.8% decreased by 12 basis points, mainly due to loan growth and the effects of capital actions net of our quarterly net income.

Speaker #2: Please turn to slide ten . Regulatory capital levels remain strong . Our Cet1 ratio of 15.8% decreased by 12 basis points , mainly due to loan growth and the effect of capital actions , net of our quarterly net income .

Speaker #2: Tangible book value per share . At the end of the quarter was $79.12 , an increase of $3.71 per share . During by our net income and lower unrealized losses in our MBS portfolio , offset in part by our capital return activity in the quarter .

Speaker #2: During the third quarter , we declared a quarterly common stock dividend of $0.75 per share , an increase of $0.05 from Q2 . Finally , we repurchased approximately 119 million in shares during Q3 and as of September 30th , still had 49,000,429 million remaining on our active share repurchase authorization .

Speaker #2: With that , I turn the call over to Lidio .

Speaker #3: Thank you , Jorge . Good morning , and thank you for joining the call . Turning to slide number 11 , the ratio of NPLs to total loans held in portfolio increased to 1.3% compared to 82 basis points in the prior quarter .

Jorge Garca: Tangible book value per share at the end of the quarter was $79.12, an increase of $3.71 per share, driven by our net income and lower unrealized losses in our MBS portfolio, offset in part by our capital return activity in the quarter. During the third quarter, we declared a quarterly common stock dividend of $0.75 per share, an increase of $0.05 from Q2. Finally, we repurchased approximately $119 million in shares during Q3, and as of September 30, still had $429 million remaining on our active share repurchase authorization. With that, I turn the call over to Lidio.

Speaker #3: Credit quality metrics were impacted by two unrelated commercial exposures in BPR , resulting in an increase in NPLs and net charge offs . This impact relates to borrowers circumstances and do not reflect broader credit quality concerns .

Speaker #3: The first loan is a commercial industrial facility . Extended to a telecommunication company in Puerto Rico , experiencing reduced revenue due to operational challenges and client attrition .

Lidio Soriano: Thank you, Jorge. Good morning, and thank you for joining the call. Turning to slide number 11, the ratio of NPLs to total loans held in portfolio increased to 1.3% compared to 82 basis points in the prior quarter. Credit quality metrics were impacted by two unrelated commercial exposures in BBPR, resulting in an increase in NPLs and net charge-offs. This impact relates to borrower-specific circumstances and does not reflect broader credit quality concerns. The first loan is a commercial and industrial facility extended to a telecommunications company in Puerto Rico, experiencing reduced revenue due to operational challenges and client attrition following a business acquisition. As of September 30, we classified this loan as non-accrual, with a carrying value of approximately $158 million and drove the increase in provisional expenses in the quarter. The second loan is a commercial real estate facility secured by a hotel property in Florida.

Speaker #3: Following a business acquisition . As of September 30th , we classified this loan as Non-accrual with a current value of approximately 158 million and drove the increase in provision expenses in the quarter .

Speaker #3: The second loan is a commercial real estate facility secured by hotel property in Florida . This loan has also been placed on Nonaccrual status and carries a value of 30 million .

Speaker #3: As of September 30th . Which includes a 14 million charge of recognized during the quarter . Excluding these two cases , credit quality metrics were stable .

Speaker #3: We continue to closely monitor the economic environment and borrower performance as economic uncertainty remains a key consideration. We are confident that the risk profile of our loan portfolios positions us to operate successfully under the current environment.

Speaker #3: Turning to slide number 12 . Net charge off amounted to 58 million , or annualized 60 basis points , compared to 42 million or 45 basis points in the prior quarter .

Lidio Soriano: This loan has also been placed on non-accrual status and carries a value of $30 million as of September 30, which includes a $14 million charge-off recognized during the quarter. Excluding these two cases, credit quality metrics were stable. We continue to closely monitor the economic environment and borrower performance as economic uncertainty remains a key consideration. We are confident that the risk profile of our loan portfolios positions Popular to operate successfully under the current environment. Turning to slide number 12, net charge-off amounted to $58 million, or annualized 60 basis points, compared to $42 million, or 45 basis points in the prior quarter. Net charge-off in BBPR increased by $16 million, mostly due to the $14 million charge-off related to the $30 million commercial NPL inflow mentioned earlier.

Speaker #3: Net charge offs in Beaver increased by 16 million , mostly due to the 14 million charge of related to the 30 million commercial NPL inflow mentioned earlier .

Speaker #3: Consumer net charge offs increased by 4 million , mostly due to higher auto loans . Net charge off by 6 million , partially offset by a 2 million reduction in credit card net charge offs .

Speaker #3: Given our credit performance year to date . And inflows this quarter . We expect net charge offs to be between 50 to 65 basis points for the full year .

Speaker #3: The allowance for credit losses increased by 17 million to 786 million , while the provision for credit losses increased by 29 million to 75 million .

Speaker #3: Both increases were driven by the impact of the two commercial exposure , offsetting part by improvements in the quality of the consumer portfolios .

Lidio Soriano: Consumer net charge-off increased by $4 million, mostly due to higher auto loans net charge-off by $6 million, partially offset by a $2 million reduction in credit card net charge-offs. Given our credit performance year to date and NPL inflows this quarter, we expect net charge-off to be between 50 to 65 basis points for the full year. The allowance for credit losses increased by $17 million to $786 million, while the provision for credit losses increased by $29 million to $75 million. Both increases were driven by the impact of the two commercial exposures, offset in part by improvements in the credit quality of the consumer portfolios. The comparison ratio of ACL to loans held in portfolio remains stable at 2.03%, while the ratio of ACL to NPLs was 157% compared to 247% in the previous quarter. With that, I would like to turn the call over to Mr.

Speaker #3: The compression ratio of ACL to loans held in portfolio remained stable at 2.03% , while the ratio of ACL to NPLs was 157% , compared to 247% in the previous quarter .

Speaker #3: With that , I would like to turn the call over to Mr. Ferrer for his concluding remarks . Gracias .

Speaker #1: Well , thank you , Lydia and Jorge , for your updates . We are very pleased with our financial performance in the third quarter .

Speaker #1: We increased revenues , maintained expense , discipline , generated strong loan growth and benefited from stable customer deposit trends . We are determined to close out 2025 on a high note as we continue to execute on our strategy , and I am urging our teams to remain focused on deposit retention , loan generation and particularly on our expense discipline .

Speaker #1: We will continue to generate value for our shareholders and deliver our objectives . We will achieve this by concentrating on our strategic framework , be the number one bank for our customers .

Lidio Soriano: Ferrer for his concluding remarks. Gracias.

Javier Ferrer: Thank you, Lidio and Jorge, for your updates. We are very pleased with our financial performance in the third quarter. We increased revenues, maintained expense discipline, generated strong loan growth, and benefited from stable customer deposit trends. We are determined to close out 2025 on a high note as we continue to execute on our strategy, and I am urging our teams to remain focused on deposit retention, loan generation, and particularly on our expense discipline. We will continue to generate value for our shareholders and deliver our ROCE objectives. We will achieve this by concentrating on our strategic framework: be the number one bank for our customers, be simple and efficient, and be a top-performing bank. I want to give a shout-out to our colleagues and recognize their hard work. I see what they do every day: in our branches, call centers, and centralized offices.

Speaker #1: Be simple and efficient and be a top performing bank . I want to give a shout out to our colleagues and recognize their hard work .

Speaker #1: I see what they do every day in our branches , call centers and centralised offices . We are pushing ourselves to deliver more for our clients every day , and I am incredibly grateful for their commitment .

Speaker #1: We are now ready to answer your questions .

Speaker #4: Thank you . If you would like to ask a question , please press star followed by one on your telephone keypad . If you would like to withdraw your question , please press star followed by two .

Speaker #4: When preparing to ask your question , please ensure your device is unmuted locally . First question comes from Jared Shore with Barclays . Your line is open .

Speaker #4: Please go ahead .

Speaker #5: Hey good morning everybody .

Speaker #2: Hey good morning .

Speaker #6: Jared .

Speaker #5: Maybe starting just on on the margin and on on asset yields with the securities yields . I'm sorry . With the securities purchases this quarter , should we assume that that trend continues ?

Javier Ferrer: We are pushing ourselves to deliver more for our clients every day, and I am incredibly grateful for their commitment. We are now ready to answer your questions.

Speaker #5: And I guess where where are the new purchase yields . It looks like maybe we won't be able to see net yield expansion much more from here .

Operator: Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. First question comes from Jared Shore with Barclays. Your line is open. Please go ahead.

Speaker #5: If we if we see the rate cuts .

Speaker #2: No , I mean , let me first answer the the yield expansion . We do believe that we still have strong tailwinds . You can see in our appendix we provide to you kind of the the upcoming maturities .

Speaker #2: And the investment portfolio . Those are still coming off at , you know , one and change . And you know we expect to be able to continue to get a significant spread pickup on those maturities .

[Analyst 1]: Hey, good morning, everybody.

Ignacio Alvarez: Hey, good morning, Jared.

[Analyst 1]: Maybe starting just on the margin and on asset yields, with the securities yields, I'm sorry, with the securities purchases this quarter, should we assume that that trend continues? I guess where are the new purchase yields? It looks like maybe we won't be able to see net yield expansion much more from here if we see the rate cuts.

Speaker #2: So while they may , you know , be priced lower as rates are coming down , if you remember that a large portion of our portfolio is also being financed and , you know , let's call it , you know , monies fungible .

Speaker #2: But it's really being financed by a public deposits . And we would expect those public deposits to also benefit from lower the lower rate environment , giving us the opportunity to create that spread .

Ignacio Alvarez: No. Let me first answer the yield expansion. We do believe that we still have strong tailwinds. In our appendix, we provide to you kind of the upcoming maturities in the investment portfolio. Those are still coming off at, you know, one and change. We expect to be able to continue to get a significant spread pickup on those maturities. While they may, you know, be priced lower as rates are coming down, remember that a large portion of our portfolio is also being financed in, let's call it, you know, money's tangible, but still being financed by public deposits. We would expect those public deposits to also benefit from the lower rate environment, giving us the opportunity to create that spread. We do continue to expect our NIM to expand in the fourth quarter and beyond.

Speaker #2: So we we do continue to expect our Nim to expand in the fourth quarter . And beyond .

Speaker #5: Okay . And then on the the loan side , what about new loan yields this quarter ? Oh , sorry . Go ahead .

Speaker #6: Yeah .

Speaker #2: On the on okay . On new loan yields during the quarter we still saw you know kind of the condition that we had been seeing for the last year where particularly in in personal loans and auto lending will see we still see some yield pickup .

Speaker #2: You know quarter over quarter . I would expect Jared that maybe that would slow down a little bit , particularly in the auto .

Speaker #2: The auto volumes are new car sales activity is slowing down . And it's possible that , you know , it wouldn't be unreasonable to believe that that would result in more competitive pricing to maintain demand for auto sales .

[Analyst 1]: Okay. What about new loan yields this quarter? Oh, sorry. Go ahead.

Speaker #2: But , you know , if we said in the past there's a lot of , you know , front and back book in that auto loan portfolio in particular .

Ignacio Alvarez: Okay. On new loan yields, during the quarter, we still saw the condition that we had been seeing for the last year, where particularly in personal loans and auto lending, we still see some yield pickup quarter over quarter. I would expect, Jared, that maybe that would slow down a little bit, particularly in the auto volumes or new car sales activity is slowing down. It's possible that it wouldn't be unreasonable to believe that that would result in more competitive pricing to maintain demand for auto sales. As we said in the past, there's a lot of front and back book in that auto loan portfolio in particular. When you look back, given the average life of those loans, assuming the same type of risk profile, we still see opportunities of repricing given the current rate environment.

Speaker #2: And when you look back , given the the average life of those of those loans , assuming the same type of risk profile , we still see opportunities of repricing given the current rate environment .

Speaker #5: Okay . All right . Thanks . And then maybe just shifting on to the credit side , especially on the auto . You know , there was an increase in delinquency .

Speaker #5: But it's still lower I guess year over year . How are you how are you looking at the the credit trends over the next few quarters ?

Speaker #5: Within within auto and consumer I guess more broadly .

Speaker #3: I mean , I will say that the variation that you saw this quarter is within the seasonality of of the portfolio . We continue to be very optimistic about the consumer given the trends in in Puerto Rico , given trends in employment , liquidity of our client base .

Speaker #3: And we see losses are about in the auto portfolio , about 45 basis points below last year . So we we're comfortable with our position and the outlook for the portfolio .

[Analyst 1]: Okay. All right. Thanks. Maybe just shifting onto the credit side, especially on the auto, you know there was an increase in delinquency, but it's still lower, I guess, year over year. How are you looking at the credit trends over the next few quarters within auto and consumer, I guess, more broadly?

Speaker #5: Great . Thank you .

Speaker #4: We now turn to team up with Wells Fargo . Your line is open . Please go ahead .

Speaker #7: Hey good morning .

Speaker #6: Good morning . Sticking with sticking with the credit commentary . The large CNI loan , I guess . What are the specifics ? Reserves that you set aside for that ?

Lidio Soriano: I will say that the variation that you saw this quarter is within the seasonality of the portfolio. We continue to be very optimistic about the consumer, given the trends in Puerto Rico, given the trends in employment liquidity of our client base. We see losses are about in the auto portfolio about 45 basis points below last year. We're comfortable with our position and the outlook for the portfolio.

Speaker #6: The timing of resolution , as you see it . And I'm just wondering , you know , why I moved into Non-performers right away instead of kind of up the risk migration chain ?

Speaker #6: Did they stop making payments or is that still accruing at this point ? Maybe start there ?

[Analyst 1]: Great. Thank you.

Speaker #3: Okay , I mean , the thank you . Thank you for the question . They continue to make payments . So the loans are coming from a payment standpoint .

Operator: We now turn to Tima Prisilla with Wells Fargo. Your line is open. Please go ahead.

[Analyst 2]: Hey, good morning.

Speaker #3: So that's that's that in terms of our decision to I mean , it has actually situation has been deteriorated over time . And we have been downgrading the loans over time .

Ignacio Alvarez: Good morning.

[Analyst 2]: Sticking with the credit commentary, the large C&I loan, I guess, what are the specific reserves that you set aside for that, the timing of resolution as you see it? I'm just wondering, you know, why it moved into non-performers right away instead of kind of up the risk migration chain. Did they stop making payments, or is that still accruing at this point? Maybe start there.

Speaker #3: For us , I mean , we we it is a business that carries a significant amount of debt and management has indicated their intent to right size , its capital structure , including a liability management of the liability structure so that drove our decision .

Lidio Soriano: Okay. Thank you. Thank you for the question. They continue to make payments, so the loans are current from a payment standpoint. In terms of our decision, the situation has been deteriorating over time, and we have been downgrading the loans over time. For us, it is a business that carries a significant amount of debt, and management has indicated their intent to right-size its capital structure, including liability management of the liability structure. That drove our decision to place it in non-accrual status.

Speaker #3: I'm sorry , that drove our decision to place it in Nonaccrual status .

Speaker #6: Okay . And then I guess in terms of specific reserve and any kind of timeline around .

Speaker #3: I think time resolution most likely is next year . Sorry . Most likely next year . In terms of specific research , we are not we have not provided that information at this time .

Speaker #3: So .

Speaker #2: Yeah , you can assume that the driver of the variance in the quarter and provision was related to these loans . So yeah .

Speaker #6: Okay . And I mean this is a little bit of a larger credit , just maybe stack ranking the loan book . Is this one of the larger credits that you guys carry .

Speaker #6: Is this kind of typical size just given your , your place in the Puerto Rico economy ? And maybe just talk a little bit more broadly as to , you know , the health of the economy from a business standpoint versus a consumer standpoint .

[Analyst 2]: Okay. I guess in terms of specific reserve and any kind of timeline around planned resolution?

Lidio Soriano: I think planned resolution most likely is next year. Most likely next year. In terms of specific reserves, we have not provided that information at this time.

Speaker #6: And if there are any kind of signs that that might be flashing yellow or any other kind of degradation .

Ignacio Alvarez: Yeah, Timur, you can assume that the driver of the variance in the quarter in provision was related to these loans.

Speaker #3: If you look our portfolio over the years , we shifted our portfolio from being more of a SME portfolio to a corporate credit type of portfolio .

[Analyst 2]: Okay. This is a little bit of a larger credit, just maybe stack ranking the loan book. Is this one of the larger credits that you guys carry? Is this kind of typical size, just given your place in the Puerto Rico economy? Maybe just talk a little bit more broadly as to the health of the economy from a business standpoint versus a consumer standpoint, and if there are any kind of signs that might be flashing yellow or any other kind of degradation.

Speaker #3: And we have seen strong trends over the last few years , and we are actually , if you look , I think the last time we had .

Speaker #3: One issue with a large bank was a large group was in 2019 . I think we will continue to focus in that segment that we think there are significant opportunities in Puerto Rico .

Speaker #3: They have done performed very well over the years and that is the nature of our portfolio . Every now and then you might see a situation .

Speaker #3: I think the important is we stick to our underwriting discipline and the performance of the portfolio has been very strong and we feel comfortable with exposures that we have today .

Lidio Soriano: If you look at our portfolio over the years, we shifted our portfolio from being more of an SME portfolio to a corporate credit type of portfolio. We have seen strong trends over the last few years. If you look, I think the last time we had one issue with a large bank was a large group was in 2019. I think we will continue to focus in that segment. We think there are significant opportunities in Puerto Rico. They have done perform very well over the years. That is the nature of our portfolio. Every now and then, you might see a situation. I think the importance is we stick to our underwriting discipline. The performance of the portfolio has been very strong, and we feel comfortable with the exposures that we have today.

Speaker #1: Yeah . And if I may add to that , I mean to your to your to your question about the macro , I think in our commentary , we were clear that we are not seeing , you know , any , any , any sort of yellows or reds or any insects in Puerto Rico .

Speaker #1: You know , referencing some something that somebody said in United States , it's it's , you know , it's we , we we are seeing a , a strong economy .

Speaker #1: But as Leo just said , it so happens that we continue to focus on large commercial opportunities . And from time to time , as happened this quarter , and it hasn't happened in a long time , there may be an isolated credit event that occurs due to idiosyncratic , specific issues that are unrelated to the underlying economic backdrop .

Ignacio Alvarez: Yeah. If I may add to that, to your question about the macro, I think in our commentary, we were clear that we are not seeing any sort of yellows or reds or any insects in Puerto Rico, referencing something that somebody said in the United States. We are seeing a strong economy. As Lidio just said, it so happens that we continue to focus on large commercial opportunities. From time to time, as happened this quarter, and it hasn't happened in a long time, there may be an isolated credit event that occurs due to idiosyncratic borrower-specific issues that are unrelated to the underlying economic backdrop. That's exactly how we feel. I can't really point to anything in the Puerto Rico economy that gives us any pause or worry, au contraire, as they say, you know, across the ocean.

Speaker #1: And that's exactly how we feel. So I can't really point to anything in the Puerto Rico economy that gives us any pause or worry.

Speaker #1: AU contraire . As they say , you know , across the ocean , we feel that , you know , the economy is is performing well .

Speaker #1: And our big customers are investing and continue to to move on with their projects .

Speaker #6: That's great . Thank you . And then just lastly , for me , encouraging to hear that margin expansion is going to continue here .

Speaker #6: I'm just wondering from an NII standpoint , you guys reiterated the guidance . It is a little bit wide in terms of the range .

Speaker #6: Just as it implies to for Q , should we assume that margin expansion portends to NII kind of flat to up here as we go through these rate cuts or just given some of the lags , maybe NII growth stalls here over the next couple of quarters ?

Speaker #6: Thank you . Yeah .

Ignacio Alvarez: We feel that the economy is performing well, and our big customers are investing and continue to move on with their projects.

Speaker #2: Yeah , I , I think first , you know , I want to reiterate that , you know , we continue to see the benefits of fixed asset repricing .

Speaker #2: You know loan growth , all those things should continue to to contribute to improving NII and the expansion of the margin . As you mentioned , the guidance for NII .

[Analyst 2]: That's great, Carlos. Thank you. Lastly, for me, encouraging to hear that margin expansion is going to continue here. I'm just wondering, from an NII standpoint, you guys reiterated the guidance. It is a little bit wide in terms of the range, just as it implies to Q4. Should we assume that margin expansion portends to NII kind of flat to up here as we go through these rate cuts, or just given some of the lags, maybe NII growth stalls here over the next couple of quarters? Thank you.

Speaker #2: You know, we left it where it was. Part of that has to do with our perspective on public deposit balances in the fourth quarter.

Speaker #2: You know , we still expect to be within the range , but maybe not at the high end of the range where we are at and when we close out Q3 , we also mentioned the lag in pricing of these deposits .

Speaker #2: You know , we continue to be slightly asset sensitive , particularly in the early stages of moves of , you know , fed funds rate .

Ignacio Alvarez: Yeah. Yeah. I think first, I want to reiterate that we continue to see the benefits of fixed asset repricing. Loan growth, all those things should continue to contribute to improving NII and the expansion of the margin. As you mentioned, the guidance for NII, we left it where it was. Part of that has to do with our perspective on public deposit balances in the fourth quarter. We still expect to be within the range, but maybe not at the high end of the range where we are at when we close out Q3. You also mentioned the lag in pricing of these deposits. We continue to be slightly asset-sensitive, particularly in the early stages of moves of Fed funds rate. As we stated before, the cost of public deposits are linked to short-term market rates. In general, they reprice on a quarterly lag.

Speaker #2: But as we stated before , the cost of public deposits , you know , are linked to short term market rates . And in general , they reprice on a quarterly lag , you know , this is the we've never given the the index , but we're going to do Paul a favor .

Speaker #2: And it's , you know , tied to three month treasuries . You know , obviously spread and you know so they are in a lag .

Speaker #2: So, over time, we would expect to see the effects of changes in rates be reflected in the cost of deposits with a beta of near one.

Speaker #2: And that pricing structure will continue to support , you know , our fixed asset repricing and investment portfolio , making sure that we generate that , improving spread on that investment .

Speaker #2: But , you know , anytime there's , you know , movements in the fed , you know , maybe there is a little bit of a lag .

Speaker #2: Not always right . We talked about that in the past that if the market and treasuries get ahead in anticipation of fed moves , we might be able to benefit a little quicker .

Ignacio Alvarez: We've never given the index, but we're going to do Paul a favor and it's tied to three-month treasuries, obviously minus the spread. They are in a lag. Over time, we would expect to see the effects of changes in rates be reflected in the cost of public deposits with a beta of near one. That pricing structure will continue to support our fixed asset repricing and the investment portfolio, making sure that we generate that improving spread on that investment. Anytime there's movement in the Fed, maybe there is a little bit of a lag. Not always, right? We talked about that in the past, that if the market and treasuries get ahead in anticipation of Fed moves, we might be able to benefit a little quicker. We've kind of incorporated all that into our NII guidance for the fourth quarter.

Speaker #2: But we've kind of incorporated all that into our NII guidance for the fourth quarter . But we have a high level of of confidence that as , as that stabilizes and the passage of time and , you know , into 2026 and beyond , we'll continue our previous growth trends .

Speaker #6: Great . Thank you .

Speaker #4: Our next question comes from Ben Gerlinger with Citi . Your line is open . Please go ahead .

Speaker #8: Hi . Good morning .

Speaker #2: Hi , Ben .

Speaker #8: Not to belabor the point on credit , it's pretty clear that you guys are doing phenomenal relative to like , the last ten years .

Speaker #8: But I found it interesting that your guide you kind of fine tuned a lot , whereas the charge off outlook you just brought up the low end .

Ignacio Alvarez: We have a high level of confidence that as that stabilizes and the passage of time and into 2026 and beyond, we'll continue our previous growth trends.

Speaker #8: So when you think about the 65 bips on the high end , on a on the full year basis . That would imply something pretty draconian for the fourth quarter .

Speaker #8: I mean , is that a possibility or how should we think about that considering the other , other guidance ? Portions were fine tuned .

[Analyst 2]: Great. Thank you.

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

Speaker #3: And I mean , I would say that as we mentioned in the in the remarks , we we took a , a reserve and a provision for some of the exposure we charge off one of the two related exposure .

Lidio Soriano: Hi, good morning.

Ignacio Alvarez: Hi, Ben. Not to belabor the point on credit, because it's pretty clear that you guys are doing phenomenal relative to like the last 10 years. I found it interesting that your guide, you kind of fine-tuned a lot, whereas the charge-off outlook, you just brought up the low end. When you think about the 65 bps on the high end on a full-year basis, that would imply something pretty draconian for the fourth quarter. I mean, is that a possibility, or how should we think about that considering the other guidance portions were fine-tuned?

Speaker #3: There is a possibility that we may have to take charge of in the exposure that we reserve this quarter , which did not charge off , and that is driving the results overall .

Speaker #3: I mean , if you exclude that we continue to expect a very solid performance out of our the rest of our book . So that's the only thing that we are caveat in terms of the range that we provided to you .

Speaker #2: Yeah . Ben , I you know , in other words , we talked about this in the past where , where , when we provide that that spread in the guidance of net charge off , we are trying to put in for idiosyncratic events that could happen at portfolio at any given time .

Lidio Soriano: I mean, I will say that as we mentioned in the remarks, we took a reserve and a provision for some of the exposure. We charge off one of the two related exposures. There is a possibility that we may have to take charge-offs in the exposure that we reserved this quarter, which did not charge off, and that is driving the results. Overall, if you exclude that, we continue to expect a very solid performance out of the rest of our book. That's the only thing that we are caveat in terms of the range that we provided to you.

Speaker #2: Certainly the activity that we have seen year to date , as you say , you know , don't reflect necessarily a lot of opportunities to get to that high end without it being a commercial loan .

Speaker #8: Got it . Okay . That's helpful . And I know you guys have gone through quite a bit of initiatives on the expense front .

Speaker #8: Is there anything I know you're not going to give me a 26 guide , but is there anything in 26 that we could potentially prepare for outside of just kind of a normal cost inflation ?

Ignacio Alvarez: Yeah. Ben, in other words, we talked about this in the past, where when we provide that spread in the guidance of net charge-offs, we are trying to put in for idiosyncratic events that could happen in our portfolio at any given time. Certainly, the activity that we have seen here today, as you say, does not reflect necessarily a lot of opportunities to get to that high end without it being a commercial loan. Got it. Okay. That's helpful. I know you guys have gone through quite a bit of initiatives on the expense front. Is there anything? I know you're not going to give me a 2026 guide, but is there anything in 2026 that we could potentially prepare for outside of just kind of normal cost inflation? Yeah.

Speaker #2: Yeah . You're right . We're not going to give anything . 27 try , try . Good try . You know we're very happy with with the cost discipline and a lot of initiatives that are ongoing .

Speaker #2: We talked about it last in the last quarter's call . There's a lot of efforts around really just focusing focusing on execution and really what Javier said is , you know , focus on excellence .

Speaker #2: And there there's a lot of efforts that are ongoing that are , you know , maybe a lot of singles and bunts and but they add up , they add up and this quarter we saw some of those , we saw some of the actions we talked about the activity in the US .

Speaker #2: You know, it's not easy impacting our colleagues, but we did make the decision to terminate our mortgage origination business in the U.S.

Speaker #2: We don't believe , given our funding profile and the positive franchise in the US , that that's a business that we really want to be in at this time .

[Analyst 2]: You're right. We're not going to give you anything '26.

Ignacio Alvarez: Good try. Good try. Good try. You know, we're very happy with the cost discipline and a lot of initiatives that are ongoing. We talked about it in the last quarter's call. There's a lot of efforts around really just focusing on execution and really what Javier says, you know, focus on excellence. There's a lot of efforts that are ongoing that are, you know, maybe a lot of singles and bunts, but they add up. They add up. This quarter, we saw some of those. We saw some of the actions. We talked about the activity in the U.S. You know, it's not easy impacting our colleagues, but we did make a decision to terminate our mortgage origination business in the U.S.

Speaker #2: And there are other things across the organization . I would say the important part is that those efforts are sustainable . They're not one offs .

Speaker #2: And we do expect to see those benefits that would allow us to reinvest in other things . We talked to you in the past about slowing down our expense growth rate .

Speaker #2: These are all the things that allow us to do that . While continuing to invest in areas that we think will add value and get us closer to that 14% .

Speaker #2: Roxy .

Speaker #9: Gotcha . Sounds good . Thank you guys .

Speaker #2: Thank you .

Speaker #4: We now turn to Kelly Motta with KB . Your line is open . Please go ahead .

Ignacio Alvarez: We don't believe, given our funding profile and the positive franchise in the U.S., that that's a business that we really want to be in at this time. There are other things across the organization. I would say the important part is that those efforts are sustainable. They're not one-offs. We do expect to see those benefits that would allow us to reinvest in other things. We've talked to you in the past about slowing down our expense growth rate. These are all the things that allow us to do that while continuing to invest in areas that we think will add value and get us closer to that 14% ROCE.

Speaker #10: Hey good morning . Thanks for the question . I will pick up on that 14% that you mentioned . You've been above 13 .

Speaker #10: The next two quarters . The last two quarters , it seems like we have 14 in sight . I , I appreciate the guidance around at least 12 for the year , which seems very doable .

Speaker #10: I'm wondering if you have any update on on the timing of the 14 one and then two . You know , given what you've laid out with your NII trajectory is , has there been any discussion in terms of whether 14 is the right place to stop as as a sustainable ?

Lidio Soriano: Gotcha.

Ignacio Alvarez: Sounds good. Thank you, guys.

[Analyst 2]: Thank you.

Operator: We now turn to Kelly Motta with KBW. Your line is open. Please go ahead.

Speaker #10: Rossi or could we see that ? I would say that .

[Analyst 3]: Hey, good morning. Thanks for the question. I will pick up on that 14% ROCE you mentioned. You've been above 13 the last two quarters. It seems like we have 14 in sight. I appreciate the guidance around at least 12% for the year, which seems very doable. Wondering if you have any update on the timing of the 14, one, and then two, you know, given what you've laid out with your NII trajectory. Has there been any discussion in terms of whether 14 is the right place to stop as a sustainable ROCE, or could we see that potential expire?

Speaker #11: For .

Speaker #2: Yeah , Kelly . Good morning . For certain . We're not going to stop at 14 . It is a guiding principle and we want to get there .

Speaker #2: But we're not going to stop there . And I you know , you know , having said that , what we want to make sure is that sustainable performance .

Speaker #2: We said that in the past . We I agree with you . We're a lot closer today than we were . You know , a year ago when we pulled back that guide for this year , a lot of effort from a lot of people , a lot of things going right .

Speaker #2: And we just want to make sure that we continue to execute. And, you know, more to come in terms of guidance and when and how we get there.

Speaker #2: But the important part is we continue to believe strongly that we get there through improving our net income performance and our operating leverage .

Speaker #2: And whatever we do on the capital side just adds to to to the opportunity to get there . And surpass it .

[Analyst 2]: Yeah. I would say that, yeah, Kelly, good morning. For certain, we're not going to stop at 14. It is a guiding principle, and we want to get there, but we're not going to stop there. Having said that, what we want to make sure is that sustainable performance. We said that in the past. I agree with you. We're a lot closer today than we were a year ago when we pulled back that guide for this year. A lot of effort from a lot of people, a lot of things going right, and we just want to make sure that we continue to execute. More to come in terms of guidance and when and how we get there. The important part is we continue to believe strongly that we get there through improving our net income performance and our operating leverage.

Speaker #10: Okay . Got it . That is that's really helpful . And then and then on the tax rate , the reduction in guide you called out the higher proportion of tax exempt income as well as some changes in the tax rate .

Speaker #10: And there there is some noise and appreciating . You know , you're not giving 2026 guidance . I'm just hoping if you could , you know , kind of help us out with what is this full year 2025 a good core run rate ahead , or can you expand upon , you know , the the Puerto Rico tax rate change and how that kind of impacts the go forward ?

Speaker #10: Just any color on that would be helpful, given that there are a lot of moving parts here.

[Analyst 2]: Whatever we do on the capital side just adds to the opportunity to get there and surpass it.

Speaker #2: Yeah . So I would ground on , on , on two things . One , this this quarter there were not any like real discrete events that impacted the effective tax rate of this quarter .

[Analyst 3]: Okay. Got it. That's really helpful. On the tax rate, the reduction in guide, you called out the higher proportion of tax-exempt income, as well as some changes in the tax rate. There is some noise, and appreciating, you know, you're not giving 2026 guidance. I'm just hoping if you could, you know, kind of help us out with what is this full year 2025 a good core run rate ahead, or can you expand upon, you know, the Puerto Rico tax rate change and how that kind of impacts the go forward? Just any kind of color on that would be helpful, given that there is a lot of moving parts here.

Speaker #2: It was lower given the mix of taxable income and tax exempt income . We did benefit . You know , that $5 million other operating income number does have a tax preferred , a preferred tax treatment .

Speaker #2: So that that helped . But but I say that so that , you know , it is a good basis to start off .

Speaker #2: And then when you look at the guidance for the fourth quarter where we're talking about is saying we're reversing , you know , this change in the tax law in Puerto Rico will allow us to reverse the related tax expense during the year .

Speaker #2: So I tell you , this whole long story to say that the guide for 2025 of 16 to 18% really ends up being a fairly clean number for us for this year , that guide does not really have a lot of noise of discrete events that we that are , you know , that are not part of our normal tax strategy .

[Analyst 2]: Yeah. I would ground on two things. One, this quarter, there were not any real discrete events that impacted the effective tax rate of this quarter. It was lower, given the mix of taxable income and tax-exempt income. We did benefit, you know, the $5 million other operating income number does have a preferred tax treatment. That helped. I say that so that, you know, it is a good basis to start off. When you look at the guidance for the fourth quarter, what we're talking about is saying we're reversing, you know, this change in the tax law in Puerto Rico will allow us to reverse the related tax expense during the year. I tell you this whole long story to say that the guide for 2025 of 16% to 18% really ends up being a fairly clean number for us for this year.

Speaker #2: You can infer from that whatever you'd like , we can confirm it in January when we give you the 25th .

Speaker #11: Guide .

Speaker #10: Fair enough . Last question . If I can sneak it in , you know , some of your competitors have noted increased competition on the deposit side .

Speaker #10: One was on government deposits , the other was , you know , some of the initiatives they're doing wondering if you could just expand upon the market competition you're seeing in Puerto Rico .

Speaker #10: One and two , like , has there been any news of any new entrants to the island specifically ? You know , on the depository side ?

[Analyst 2]: That guide does not really have a lot of noise of discrete events that are not part of our normal tax strategy. You can infer from that whatever you'd like. We can confirm it in January when we give you the 2026 guide.

Speaker #10: Thank you .

Speaker #1: Well , I'll take that . I'll start by saying not not that we're aware of . No , no new entrants in the depository side .

Speaker #1: Puerto Rico competition . Yes . I mean , it's it's a it's a it's a vibrant market . And there is competition every day .

[Analyst 3]: Fair enough. Last question, if I can sneak it in. Some of your competitors have noted increased competition on the deposit side. One was on government deposits. The other was some of the initiatives they're doing. Wondering if you could just expand upon the market competition you're seeing in Puerto Rico, one. Two, has there been any news of any new entrants to the island specifically on the depository side? Thank you.

Speaker #1: We compete every day for for our for our piece of , of the of the business and for customers . So but we're going to be rational while we're doing that .

Speaker #1: Yet we won't lose any good clients on pricing , on and on terms . So we're seeing competition . It's it's it's it's normal .

Lidio Soriano: I'll start by saying not that we're aware of, no new entrants in the depository side of Puerto Rico. Competition, yes. I mean, it's a vibrant market, and there is competition every day. We compete every day for our piece of the business and for customers, but we're going to be rational while we're doing that. Yet we won't lose any good clients on pricing and on terms. We're seeing competition. It's normal. You see how some of our esteemed bank competitors in Puerto Rico are sort of positioning themselves as challenger banks or, you know, whatever banks. Frankly, we like where we're at, and we like the fact that the franchise has certainly been re-energized. We're not behaving like a 132-year bank, and more to come on that, quite frankly. I don't know what else to say other than we like where we're at.

Speaker #1: We have now now now you see now you see how some of our esteemed bank competitors in Puerto Rico are sort positioning themselves as challenging .

Speaker #1: Challenger banks or , you know , whatever banks . But , but but frankly , you know , we we we like where we're at and we , we like the fact that that that the franchise is has is certainly been re-energized .

Speaker #1: And we're not behaving like 132 year , you know , bank and more to come on that quite , quite frankly . So we you know , I don't know I don't know what else to say other than we're at .

Speaker #10: Great . Thank you so much . I will step back .

Speaker #4: Oh, the next question comes from Gerard Cassidy with RBC. Your line is open. Please go ahead.

Speaker #12: Hi . Good morning . This is Thomas Letty standing in for Gerard . Loan growth in the quarter was strong . As you mentioned .

Speaker #12: And just on the back of the increased competition on the deposit side , I'm curious in booking new CNI and CRE loans . Have you seen a similar increase in competition ?

Speaker #12: Maybe resulting in less rigorous underwriting standards ? In other words , you know , anything you can tell us about changes in underwriting standards on loans ?

Speaker #12: You're originating now versus , say , a year ago ?

[Analyst 3]: Right. Thank you so much. I will step back.

Speaker #1: I mean , I guess each one of us can answer that , but no , the answer is no . And , you know , we have a very strong credit underwriting process .

Operator: Our next question comes from Jared Cassidy with RBC. Your line is open. Please go ahead.

Speaker #1: And , you know , Lydia . Lydia leads the risk side . And then our business side as well . We are not going to do anything that that doesn't make any sense .

[Analyst 1]: Hi. Good morning. This is Thomas Leddy standing in for Gerard. Loan growth in the quarter was strong, as you mentioned. Just on the back of the increased competition on the deposit side, I'm curious, in booking new C&I and CRE loans, have you seen a similar increase in competition, maybe resulting in less rigorous underwriting standards? In other words, anything you can tell us about changes in underwriting standards on loans you're originating now versus, say, a year ago?

Speaker #1: Frankly , we we tend to be a bit conservative by nature . Quite frankly . But I'm not seeing anything in in originations that , that that points to to that concern .

Speaker #2: Yeah . From talking to our bankers and listening to the teams , the pushback we get in competition . Competition is more pricing .

Speaker #2: You know , we're seeing maybe particularly you know , we're hearing in , you know , some entrants in the New York market and maybe South Florida where people are being a little more aggressive in pricing .

Lidio Soriano: I mean, I guess each one of us can answer that. No, the answer is no. You know, we have a very strong credit underwriting process. Lidio leads the risk side and our business side as well. We are not going to do anything that doesn't make any sense, frankly. We tend to be a bit conservative by nature, quite frankly. I'm not seeing anything in originations that points to that concern.

Speaker #2: And frankly , you know , we you know , if those loans are not true relationships , you know , and they're not coming with deposits , we're not we're not going to pursue that , particularly in the US and Puerto Rico .

Speaker #2: We might have a different strategy echoing with with Javiera previously said in his comments .

Speaker #12: Okay. No, that's helpful. Thank you.

[Analyst 2]: From talking to our bankers and listening to the teams, the pushback we get in competition is more pricing. We're seeing maybe, particularly, you're hearing in some entrants in the New York metro area and maybe South Florida, where people are being a little more aggressive in pricing. Frankly, if those loans are not true relationships and they're not coming with deposits, we're not going to pursue that, particularly in the U.S. In Puerto Rico, we might have a different strategy, echoing what Javier previously said in his comments.

Speaker #4: We now turn to Aaron Ciganovic with Truist Securities. Your line is open. Please go ahead.

Speaker #13: Thanks , Aaron . By the way .

Speaker #11: Welcome to the call , Aaron .

Speaker #2: Thank you for picking up .

Speaker #13: The call for .

Speaker #11: For us in Puerto Rico, Bank. So, welcome.

Speaker #13: Good good to be back . Maybe we could just talk a little bit about Javier . Your commentary around investment initiatives that you have in your transformation plan or the second leg of your transformation plan .

Speaker #13: How are you thinking about all of the items that you kind of mentioned in your prepared remarks with regard to the cost in?

[Analyst 1]: Okay, no, that's helpful. Thank you.

Operator: We now turn to Aaron Sychanovich with Truist Securities. Your line is open. Please go ahead.

Speaker #13: Would that be a step up in cost , or do you see some efficiencies that you'll be gaining that will help offset some of the the further investment as you as you continue down that path ?

[Analyst 2]: Thanks.

Ignacio Alvarez: Hey, Aaron, by the way.

[Analyst 2]: Hi, Javier.

Ignacio Alvarez: Welcome to the call, Aaron.

[Analyst 2]: Thank you for picking up the call.

Ignacio Alvarez: No, thank you.

[Analyst 2]: For us and other Puerto Rico banks, welcome.

Speaker #2: Sorry , Aaron . I mean , the one thing I'll reiterate , you know , our goal here is to be able to continue to invest and and generating opportunities and efficiencies to be able to then continue to to reinvest at the level , slowing down the overall level of expense growth .

[Analyst 1]: Good. Good to be back. Maybe we could just talk a little bit about, Javier, your commentary around investment initiatives that you have in your transformation plan or the second leg of your transformation plan. How are you thinking about all of the items that you mentioned in your prepared remarks with regard to the cost? Would that be a step up in cost, or do you see some efficiencies that you'll be gaining that will help offset some of the further investment as you continue down that path?

Speaker #1: Yeah . So there's there's going to be a the beginning . And in certain periods . Right . A disconnect . Right between initial investments and then results from , from from those investments , which is what Jorge is referring to .

Speaker #1: And we think that's okay . As long as , as long as the , the actual investment makes sense to us , we're not going to do something dramatic or irrational .

Ignacio Alvarez: Sorry, Aaron. The one thing I'll reiterate, you know, our goal here is to be able to continue to invest and generating opportunities and efficiencies to be able to then continue to reinvest at the level, slowing down the overall level of expense growth.

Speaker #1: But , you know , we we have to invest in our technology to continue to compete not only not only in Puerto Rico , but , you know , we compete with folks that come from the United States .

Speaker #1: You may imagine , you know , the big players are already here and they have the best technology . So we our program is is rational .

Lidio Soriano: Yeah. Okay. There is going to be at the beginning and in certain periods, a disconnect between initial investments and then results from those investments, which is what Jorge García is referring to. We think that's okay as long as the actual investment makes sense to us. We're not going to do something dramatic or irrational. You know, we have to invest in our technology to continue to compete, not only in Puerto Rico, but we compete with folks that come from the United States. You may imagine the big players are already here, and they have the best technology. Our program is rational in that way, and I think our expense base shows it. Yeah. I don't perceive that we're going to go above and beyond a particular sort of threshold.

Speaker #1: That way . And and I think our expense base shows it . Yeah . So I don't I don't I don't , I don't perceive that we're , we're going to go above and beyond a particular sort of threshold .

Speaker #2: Yeah . And what happens is , you know , right , right now we've got over 80 projects that are ongoing . Some of them have higher levels of of current investments , some are , you know , in capitalizing modes , but a lot of them are in dual expense mode as you're developing , particularly with SaaS licensing agreements , you're paying for your new system and you're paying for your old system .

Speaker #2: So over time , as you start generating the cost avoidances and turning off old system that allows us buffers to continue to reinvest , you know , following , you know , a business case and value add analysis .

Speaker #2: But when we talk about , you know , being able to slow down the rate of growth , that's the kind of thing that we're talking about is how do we shift and reallocate expenses and savings to continue to improve the business and add value to our shareholders .

[Analyst 2]: Yeah. What happens is that right now, we've got over 80 projects that are ongoing. Some of them have higher levels of current investments. Some are in capitalizing modes, but a lot of them are in dual expense mode. As you're developing, particularly with SaaS licensing agreements, you're paying for your new system and you're paying for your old system. Over time, as you start generating the cost avoidances and turning off old system, that allows us buffers to continue to reinvest, following a business case and value-add analysis. When we talk about being able to slow down the rate of growth, that's the kind of thing that we're talking about: how do we shift and reallocate expenses and savings to continue to improve the business and add value to our shareholders?

Speaker #1: So , and then I say this , and that's a very important point that George just made . We're not looking at this on a siloed view .

Speaker #1: Right . So so we're saying if we are going if we are investing in in , you know , in the transformation , we want to make sure that if we can generate some savings in other parts of the bank , which will , of course , kind of fund that , transformation , that that's the mindset .

Speaker #1: And in many cases , we've been able to do that . And that minimizes the impact of of the actual investment . So again , I mean , it's a broad based program .

Speaker #1: We're very excited about it . And we're starting to see results . And we'll continue because as I said , I mean , we're also creating a transformation mindset in our in our teams .

Lidio Soriano: That's a very important point that Jorge just made. We're not looking at this on a siloed view, right? If we are going with, if we are investing in, you know, in the transformation, we want to make sure that if we can generate some savings in other parts of the bank, which will, of course, kind of fund that transformation, that's the mindset. In many cases, we've been able to do that. That minimizes the impact of the actual investment. Again, it's a broad-based program. We're very excited about it, and we're starting to see results. We'll continue because, as I said, we're also creating a transformation mindset in our teams, right? We need to continue moving forward.

Speaker #1: Right? We need to continue moving forward. So.

Speaker #13: Thank you . I appreciate the color .

Speaker #11: Sure .

Speaker #1: Thank you .

Speaker #4: This concludes our Q&A . On our hand . Back to Javier Ferrer CEO . For any final remarks .

Speaker #1: Well , thank you . Thanks again , everybody for joining us and for your questions . Really appreciate that . We look forward to updating you on our fourth quarter results in January .

Speaker #1: Thank you .

[Analyst 2]: Thank you. I appreciate the color.

Lidio Soriano: Sure. Thank you.

Operator: This concludes our Q&A. I want to hand back to Javier Ferrer, CEO, for any final remarks.

Lidio Soriano: Thank you. Thanks again, everybody, for joining us and for your questions. Really appreciate that. We look forward to updating you on our fourth quarter results in January. Thank you.

Operator: The reviews and adjustments based call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines.