Operator: Good day, and thank you for standing by. Welcome to the Popular, Inc. Q3 2026 conference call. At this time, all participants are on listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. You will then hear an automated message inviting your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I will now hand the conference over to your first speaker today, Investor Relations Officer of Popular, Paul Cardillo. Please go ahead.
Paul Cardillo: 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 Q3 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.
Paul Cardillo: 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.
Jorge García: 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 Q2. Results reflected higher net interest income and stable underlying credit trends, partially offset by higher operating expenses and lower non-interest income. Compared with Q3 of last year, earnings per share increased by 34%. Our ROTCE was 15.8% compared with 17% in Q2 and 13.1% in Q3 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.
Jorge García: Excluding public funds, customer balances decreased by approximately $289 million. The delta was consistent with our expectations and Q3 seasonality. Credit performance remained stable. Net charge-offs declined from Q2, 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 1 October. 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.
Jorge García: 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.
Jorge García: 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 1 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.
Jorge García: Being the number 1 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.
Jorge García: On the commercial side, we completed the final wave of customer onboarding to our new cash management platform, concluding a multiyear 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.
Lidio Soriano: 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 Q2. Please turn to slide number seven. 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.
Lidio Soriano: 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 Q2. Puerto Rico public deposit 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.
Lidio Soriano: 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 number eight. 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 Q3 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 brokerage and asset management fees. These results demonstrate the benefit of our broad product offering. We expect Q4 non-interest income of approximately $170 million. Please turn to slide number nine.
Lidio Soriano: 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 taxes and income. For the full year, we expect an effective tax rate of 14%. Turning to credit. Overall credit quality was stable during the Q3. Consumer performance remained favorable, with net charge-offs continuing at a historical low level despite a seasonal increase in auto losses. Mortgage performance also remained strong, with historically low delinquencies and net recoveries. Commercial credit metrics were influenced by developments involving two unrelated commercial and industrial relationships.
Lidio Soriano: We placed a $74 million relationship on non-accrual status and recorded a $34 million partial charge-off on a credit that entered non-performing status in the Q2. The two credits are in different industries and do not share a common risk factor. In each case, the deterioration was driven primarily by borrower-specific issues. Please turn to slide number 10. Total non-performing assets decreased by $37 million, reflecting the sale of the $84 million non-performing loan held for sale. While total NPLs increased by $52 million to $466 million, the NPL ratio increased to 1.16% from 1.04% in the prior quarter. Excluding consumer loans, NPL inflows decreased by $56 million from the Q2. Turning to slide number 11. Net charge-offs were $73 million, or annualized 73 basis points, compared with $104 million or 1.05% in the prior quarter.
Lidio Soriano: Given our year-to-date commercial charge-offs and NPL inflows this quarter, we now expect net charge-offs to be in the range of 80 to 90 basis points for the full year. While we will provide formal 2027 guidance when we report Q4 results in January, looking ahead to 2027, our initial expectation is that net charge-offs will be in the range of roughly 60 to 75 basis points. Overall, underlying credit metrics were stable and reserve coverage remained strong. We remain vigilant and continue to take a disciplined approach to managing risk. Turning now to capital. Please turn to slide number 12. Tangible book value per share decreased by $1.64 to $86.30, primarily reflecting lower market values on available-for-sale investment securities. The tangible common equity ratio was 7.05%, down 13 basis points from the Q2.
Lidio Soriano: We remain comfortable with both the absolute level of TCE and the rate sensitivity of the securities portfolio to changes in interest rates. Our capital actions will continue to balance the need to support growth, maintain capital strength, and return excess capital to shareholders. During the quarter, we returned $236 million to shareholders, including $179 million through common stock repurchases. We also increased our quarterly common stock dividend by 20%. In the Q4, we expect to repurchase between $150 and $200 million of common stock. Based on current conditions, we expect quarterly repurchases to remain within a similar range during 2027. Finally, we continue to target a 14% to 17% annual ROTCE. With that, I will turn the call back to Jorge for his concluding remarks. Thank you.
Jorge García: Thank you, Lidio. During my first 2 months as CEO, I have been visiting branches, regional offices, and customers across our markets. I have experienced firsthand the trust our customers place in us and their deep connections with our teams. I also continue to hear from customers that they are optimistic about Puerto Rico's long-term opportunities and how vital it is that we play a role in that outcome. Staying connected also extends to the communities we serve. 2 weeks ago, as we celebrated our 133rd anniversary, I joined hundreds of colleagues who volunteered at food banks, youth centers, and other nonprofits as part of our Embracing Our Communities Day of Service. These experiences reaffirmed what I already knew. What makes Popular special is our people. Our pride and commitment are the foundation of our sustainable success.
Jorge García: I am fortunate to step into this role with a strong capital position, a solid franchise, a talented team, and real momentum. Our responsibility is to carry that forward and continue creating long-term value for our customers, shareholders, colleagues, and our communities. I am grateful to my colleagues for their commitment and the results they deliver every day. We intend to be active participants in shaping what lies ahead and not simply react to it. With that, we are now ready to take your questions.
Operator: Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Jared Shaw, Barclays. Your line is now open.
Jared Shaw: Hi, good morning.
Lidio Soriano: Good morning.
Jorge García: Good morning.
Jared Shaw: Thanks. Maybe just starting with credit in walking through some of the items you spoke about. The one new commercial non-performer, I guess if we, without that commercial non-performance would have been lower. When we look at the net charge-off guidance for Q4, I guess that implies about 100 basis points. Is that going to be some loss content in that commercial loan, or is that just more overall weaker expectations in the portfolio?
Luis Sousa: Good morning, this is Luis. I would say that our net charge-off guidance for Q4 mainly reflects our potential scenarios, including the C&I and BL test that we have disclosed.
Jorge García: I think if I can add, what is important is that we see the core portfolios continue to behave very well. As we said in the prepared remarks, both consumer and mortgage portfolio exhibited a strong performance in Q3, and that is our expectation going to Q4. The guidance that we provided reflects some of the cases that we are working on.
Jared Shaw: Okay. Overall though, apart from the one-offs, you still feel pretty good about credit, it sounds like. Okay. Then any update on the outlook for preferred issuance or any capital restacking beyond the buyback?
Jorge García: Jerry, the rates continue to not be attractive to us. As we have said, this is really a discretionary transaction. We still have plenty of room to continue our repurchase activity. This is something that makes things better for our capital stack, optimizes it, and we will be strategic and take advantage if we see an opportunity. But right now, we are not just going to force a transaction that does not make sense.
Jared Shaw: Okay, thanks. If I could just sneak one third one in. Do you know what the update of the balance of federal spending is? You talked about continued spending from that $48 billion out there. What is remaining left of allocated but not spent?
Jorge García: Yeah, slightly above $43 billion.
Jared Shaw: Thanks.
Jorge García: One thing important there, we did see a pickup in spend in Q3 from the FEMA funds that are managed through the local COR3 group. Basically year-to-date, we are running just slightly below the entire year. At the end of Q3, we are slightly below the total of last year, almost 40% higher than at the same time last year. So we are glad to see a little bit of that pickup.
Jared Shaw: Thanks.
Operator: Thank you. We will move on for our next question. Our next question comes from the line of Terry McEvoy of Wells Fargo. Your line is now open.
Terry McEvoy: Hi. Good morning. Can you hear me?
Lidio Soriano: Yes, we can.
Jorge García: Good morning, Terry, and thank you for picking up coverage. Welcome to the call.
Terry McEvoy: Thank you. Much appreciated. First question, the new consumer deposit product, was that in response to market demand or customer demand? Are your competitors offering that? Then financially, what is the full quarter impact? It was rolled out in August, and how should we think about maybe a full-year impact of what that could mean to fee income?
Jorge García: A couple of things. Certainly, it is something that we hear from our customers. They want simpler products, lower fees. The idea is to launch a product that gives them the opportunity to establish relationships and deepening that relationship that go along with the customer primacy that we are targeting. The other thing of launching the product is it just continues to be part of our strategy to create segment-led strategy. We believe that there is still great opportunity in Puerto Rico for us to be able to deepen and provide more value and enhance functionality to certain segments, both in the retail as well as in the commercial. That is a big driver.
Jorge García: In terms of the fee, what we did is we did reclassify over 1 million accounts into these new products to be able to give existing clients the benefit and not essentially put the onus on them on having to change accounts. That resulted, I think, with a reduction in the quarter of around $2 million decrease in fee income. So on an annualized basis, it is probably somewhere between $8 million and $10 million. Of course, we expect to be able to gain traction and increase our deposits to offset some of that. It is embedded in the guide for Q4 at $170 million target for fees for Q4.
Terry McEvoy: Great. Thank you. Then maybe as a follow-up, how could a higher for longer rate environment impact loan demand? Then on that same theme, are there particular industries within your commercial portfolio that are more sensitive to higher rates that you are monitoring today?
Jorge García: In the past, when we look at our models and stress tests, we do not see a lot of stress related to one or two moves in the rate, and certainly not where the rates are at today. In terms of where we are at, higher for longer will help us continue to take benefits of the tailwind of the repricing of our investment portfolio. We certainly look forward to stability. The rhythm of change and the movement of particularly the short-term end of the curve creates some noise given the exposure we have in the repricing of our public funds. But overall, higher for longer, it is favorable for us. We get to take a higher benefit on tax advantages of some of the investments, and we have not found particularly these levels where there is significant stress to our borrowers from those rates.
Jorge García: Demand in Puerto Rico continues to be strong. A lot of the transactions are not going to be rate sensitive. We do see some more rate sensitivity in the US at times. But frankly, right now, the pipelines particularly around commercial projects, I am sorry, construction projects in the US continues to be strong even looking through to the current rate environment.
Terry McEvoy: That is great. Thanks for taking my questions.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Timur Braziler of UBS. Your line is now open.
Timur Braziler: Hi, good morning. Starting on the reinvestment rate, I think it was $1.4 billion purchased at 4.3%. I guess why is 4.3%? It is a decent amount lower than the 2 and 3-year yields were during the quarter. As we roll forward into Q4 and beyond, should that reinvestment rate more so mirror that 2 and 3-year rate, or are we, call it, 40, 50 basis points below it going forward?
Juan Pablo: Yeah. Good morning. This is Juan Pablo, Treasurer. Yeah, part of the reflection is if you recall the quarter, it did not start out where it ended up, right? So we are effectively purchasing bonds as they mature during the month, and any given period like this one where you start out lower and ended up higher, obviously you are going to miss out on the higher rate, right? So I think of it more as on average during the quarter and not just the endpoint as a quarter.
Juan Pablo: Yeah.
Juan Pablo: That is in effect what we are doing as we got about $1.5, $1.6 billion coming due every quarter. We just kind of continue that mechanical process.
Lidio Soriano: I would just add to that, as you see when we add some of the slide in appendix, we have a significant amount of investments that we are repricing on a quarterly basis around 1.5, 1.6, out of which 600, 700 relates to legacy investments that were 1.25%. Even the newer investments were 3.25%. Going forward, we will continue to see a significant pickup in the yield of that portfolio given the repricing dynamics and given the interest rate environment that we have today.
Timur Braziler: Okay, great. Then maybe looking at the public funds, you guys have been closer in guiding those balances more recently. I am wondering, particularly going into the 2028 election, is there any kind of empirical data that you can point to as to projects kicking off? Is there a risk through 2027 that some of the public funds that are sitting on balance sheet are actually being utilized? Maybe looking at history is different versus this time where there is a little bit more flush in liquidity. I guess what is the way that you guys are framing risk around public fund balances in reference to the election that is coming up two years from now?
Jorge García: I think a couple of things, Timur. Number one, yes, I think we would expect some pickup in activity related to municipal spending, particularly at the municipal level, maybe not as much at the central government level. A couple of things there. First, remember that there are a lot of projects that are still rebuilding with FEMA and federal funds. A lot of those projects are at the municipal level. So where we think we will see some of the first impact is in seeing a speed-up or a pickup in the activity. Maybe the mayors and the municipalities are prioritizing either projects that are a big scale or that can be completed quickly, since that money is going to be coming in from federal funds as a flow. So it is in and out. Those monies are not sitting on our balance sheet right now.
Jorge García: Other than that, you also have the federal oversight board that still manages for a balanced budget, and the government needs to be able to get those budgets approved and execute to those approved budgets by the oversight board. We give ranges, and in those ranges, we tend to incorporate scheduled payments, like for pensions or kind of the
Lidio Soriano: contingent value
Jorge García: the contingent value bonds, and then some sense of operating accounts, and certainly competition, right? We actively bid on retaining certain excess funds from the government clients. But in terms of predicting or projecting that we are going to see significant declines because of infrastructure spend out of these funds, that is not something that we think will be significant.
Timur Braziler: Great. Thanks for that color.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Aaron Sinovage of Truist Securities. Your line is now open.
Arren Cyganovich: Thanks. Maybe you could just talk a little bit about the loan growth expectation, modest slowdown in loan growth into Q4. Makes sense in terms of the auto and consumer side. Commercial has been pretty strong over the past couple of quarters. What is driving the more moderate expectation there into the quarter?
Jorge García: Yeah. Certainly when you look at it from the original guidance and where we are at now, the auto portfolio is one of the areas where we have been under our expectations for the year. So that certainly has an impact. The other thing is that we are trying to be a lot more disciplined in our US business as well. Historically, we drove the teams to kind of hit their budget targets. That has resulted in a lot of single product clients that we are not deepening those relationships. We are pushing our teams to really create deeper relationships, lead with deposits. Even in CRE and multi-family transactions, we want to make sure that we have a whole relationship. That is certainly slowing down the production of our US team. We are also expecting some payoffs in our construction portfolio in the US, like we saw in this quarter.
Jorge García: There are strong pipelines coming behind those, but as you can imagine, those construction projects do take a little bit more time to start seeing the effect. in Puerto Rico, there is still good demand. I think the issue in Puerto Rico is more about supply. We have been benefiting from 6% to 9% growth over the last few years. Some of that growth has been driven by tax incentives, and there are only so many large transactions that can occur in Puerto Rico. So I still see a lot of positive movement in Puerto Rico, a lot of positive demand, but just the scale and supply of it is reducing.
Arren Cyganovich: Okay. I know you are not going to give 2027 guidance, but does that impact your view in terms of loan growth post this quarter? It sounds like you have some headwinds there.
Jorge García: We have talked in the past that we have been growing outpacing the Puerto Rico economy and GDP significantly. Given our size over time, we should be growing closer or slightly above the Puerto Rico economy. I think what is important as we look forward, Aaron, is that we will continue to see NII growth. We look at our projections into 2027, particularly in this environment, given the tailwinds that we have with the investment portfolio repositioning and the loan demand that we are seeing and the current prices, we do expect to continue to see creating operating leverage in 2027.
Arren Cyganovich: Okay. Can you just remind me on the ROTCE updated guidance of 14% to 17% that you put out there last quarter, or I think it was last quarter. That is more of a kind of a longer-term expectation, right? Just over time, not necessarily expectation for next year.
Jorge García: No. I guess we-
Arren Cyganovich: I know you're earning that now, but I just didn't know if that was like if you're always expecting to earn between that seems
Jorge García: Always is a tough word.
Arren Cyganovich: Right.
Jorge García: Based on the environment that we're seeing, the balance sheet structure and all our plans and the execution that we're seeing from our teams, we felt very comfortable giving the guidance of 14% to 17% on an annual basis. That's what we're driving our teams to.
Lidio Soriano: I think what is important, we wanted it to also be sustainable. So it takes into account potentially different operating environments. That's why maybe a little bit of the wider range and why so wide. For us, the sustainable part is as important as just hitting the target.
Jorge García: Thank you.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Kelly Motta of KBW. Your line is now open.
Kelly Motta: Hi.
Jorge García: Good morning, Kelly.
Kelly Motta: Good morning. Thanks for the questions here. Piecing together the outlook for loan growth coming in a little bit weaker with auto being a higher-yielding category, just wondering as we think through the outlook ahead for specifically loan yields, if there could be some pressure offsetting the rate hikes from just a change in mix and overall how new origination yields are coming in. Thanks.
Jorge García: I think with the higher rates, the current higher rates impact those consumer loans a lot more, right? Than the commercial. If you look over the last, I would say, probably since the Fed started moving rates down, we have been seeing kind of incremental yields in our loan portfolio every quarter. This quarter was, I think, the first time we see a decline in those yields as I think the portfolio starts stabilizing. The way I look at it, I think given the ins and outs of the portfolio, auto, for example, our originations are, even this quarter where we didn't grow, I think the originations were like $450 million. So it is significant amount of volume that is coming in. So it's going to depend on, obviously, the credit risk profile of those clients, the terms of those loans.
Jorge García: But right now, I don't think loan yield is something that's putting pressure in terms of as we look forward. It's not a concern for us. Again, the NII, we do see NII continuing to expand in 2027. Yeah.
Kelly Motta: Got it. Okay. That's helpful. On expenses, I appreciate you lowered to the lower end of the guide, which is nice given the incentive compensation with revenue coming in so strong. Just wondering the drivers of that, if additional you were better at getting some cost savings out, or if maybe projects have been kicked out till next year. Thanks.
Jorge García: We have not made any conscious decisions to move projects. For us, the rhythm of the project is more about capacity, how much we can continue. We've actually thrown in some non-budgeted or unanticipated projects this year. The teams have done a great job in delivering efficiencies. Around $50 million in recurring efficiencies have been implemented and identified. We expect that amount to be a benefit next year. Obviously, at some point, we're going to start seeing expense growth again. But the teams have done an awesome job. The 2% includes the, as you mentioned, profit-sharing. We are expecting, at this rate, to max out that profit-sharing payment based on our formulas, and that's all embedded into that guide.
Jorge García: But it goes to just a lot of effort from a lot of people that are just. We call it a lot of bunts and singles, nothing huge to create those efficiencies and savings.
Kelly Motta: Great. I will step back. Thank you.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Gerard Cassidy, RBC Capital Markets. Your line is now open.
Gerard Cassidy: Hi, Jorge Garcia. Hi, Lidio Soriano.
Jorge García: Hello.
Jorge García: Hey, Gerard, how are you?
Gerard Cassidy: Jorge, now with Terry covering you, maybe you guys could do your call from Portland in July. The weather's nice.
Jorge García: I figure October, it's not that cold and the leaves are pretty.
Gerard Cassidy: It is gorgeous up here today, that's for sure. Thank you. Question for you. Can you guys share with us how much of your US deferred tax asset do you expect to utilize over the next 2 to 3 years? What needs to change to support a release of that large valuation allowance? If you are able to do that, of course, what are the implications for cash taxes and CET1 capital should that happen or when that happens?
Lidio Soriano: Let me just give you some of the numbers, then I will give you what it will take in order for us to be able to utilize more of that DTA. Our DTA number gross is around $600 million, net of an allowance of close to $385 million. That gives a net of about $215 million DTA. The majority of that DTA expires between the years 2028 and 2031. The one way that we can use it is to become more profitable. That is it. The more money we make, the more we are going to be able to use our DTA. The team have done a great job of improving profitability in the US this year and last year, that is something that obviously we feel very proud and something we continue to work hard in order to realize as much as we can from those NOLs.
Jorge García: One thing, Gerard, the DTA in the US is NOL base, it is not part of regulatory capital. There are some limitations. So even if you were in a situation where you could reverse more of that DTA, it is not going to have a benefit on CET1. Now, the flip side of that is that the income that US business is generating that capital is actually accruing at essentially a pre-tax level instead of at the after-tax amount that you see on a GAAP basis.
Gerard Cassidy: Very good. Correct. Then just to circle back to credit. When you think about the large credit that went into non-accrual in Q2 and now it is off, of course, and you took a charge as well, then the large credit that showed up this quarter. When you guys do the post-mortem analysis of what went wrong with the credit or the underwriting, what did you learn or can you share with us, what were some of maybe the shortfalls in the underwriting, possibly, or just really, what did you learn from those two experiences?
Luis Sousa: Those two experiences in particular, I would say part of the learnings, in one of the cases, it was a client that was extending into a new venture. So I think that is always something that we look very carefully from underwriting standpoint. So that is something that we need to keep in our teams. As you are diversifying your industry, that is something that also bring risk with it. I think the other one is a longstanding client, we have a very profitable relationship. Over time, he is in the food service industry, but over time, competition and market conditions in the island. From that, I do not know. I am not sure. Other than having a closer look at the client and being on top of the client on a day-to-day basis, I do not think that from underwriting perspective, there was anything that we needed to change.
Jorge García: I think, Gerard, given our position in Puerto Rico, we want to lend to some of these deals. The telecom transaction, that was a fairly large deal. It made sense to us as the primary bank in Puerto Rico to lead into an acquisition of a large telecom provider in Puerto Rico. Unfortunately, these are operational issues that the integration of the acquisition didn't go well, and we end up having to take the hit for it. I think the other part that's important is that we've been able to work through a handful of these C&I loans over the last few quarters, but we still have been able to perform, absorb those losses, and be able to continue to improve our profitability.
Luis Sousa: Maybe just to finalize, Gerard. When you look at it, we have thousands of relationships. We have issues with maybe 2 cases last year and 3 cases this year. Just to keep in mind that the performance of our book has been very, very strong, notwithstanding the fact that every now and then, we may have issues with one of our customers.
Gerard Cassidy: Appreciate the color. Thank you.
Operator: Thank you. One moment for our next question. Again, as a reminder, to ask a question, you'll need to press star 1 1 on your telephone. Our next question comes from the line of Manuel Navas of Piper Sandler. Your line is now open.
Jorge García: Hi, Manuel.
Manuel Navas: Hey. Hey, guys. How should I think about the near-term NIM? I hear you on the NII guide for the year, NII improvement for next year, and I just kind of want to think about the near-term NIM and how it could enter next year, especially if there is like a December rate hike as well.
Lidio Soriano: When you look at our NIM, I think we have, as Jorge Garcia mentioned in the earlier commentary, we have still a lot of tailwinds related to the repricing of our investment portfolio. That is going to lead to an increase in asset yields as well as the repricing of some of our short-term assets and short-term liabilities. We have also guided, we said we expect net interest income to continue to grow. It continue to be the guide for us as an organization. In that regard, you can think of, we will see an ascending trajectory that is going to depend upon the mix between our assets between Treasuries and investment. Sorry, between investments and loans.
Jorge García: I think the other factor is the level of public deposits. That is really a big driver, Manuel. If we continue to see growth in public deposits, that does put pressure on NIM. It is not good for NIM, but it does contribute nicely to NII, and we will take the NII growth.
Manuel Navas: Got it. Just switching over to growth for a second. What dynamics would need to come into play for loan growth to accelerate? I hear you that perhaps the tendency is more towards GDP levels of Puerto Rico, where that is the longer-term trend. What would give you some tailwind on loan growth?
Jorge García: Yeah. One of the cool things about going from the accounting and finance world to the CEO role is being able to spend time with clients and spending a lot of time with our customers. You hear a lot of people enthusiastic about the opportunities in Puerto Rico. These are people thinking 3, 5, 10 years down the road. You see some of their projects, some of their visions, some of those dreams, and if they start coming to fruition, you see acceleration. If we are able to bring in and see population growth in the US attract the professionals and the diaspora of Puerto Rico, you see $4 billion of manufacturing jobs, I am sorry, $4 billion of manufacturing investment announced.
Jorge García: As those things start coming in, if you are seeing a shift in population and the ecosystem that goes around some of those investments, certainly those are things that could help the entire economy of Puerto Rico and will benefit from that lift.
Manuel Navas: I appreciate that. Last question here is shifting over to the ROTCE guide. What are the biggest drivers of the high end of that guide or the low end of that through the cycle? As you look into next year, just thoughts on what could really drive it towards the high end, but potentially what could drive it to the lower end.
Jorge García: We love the ROTCE guidance because it captures everything, Manuel.
Manuel Navas: Sure
Jorge García: Certainly when you look at that band, credit cost provision is a factor. NII growth, continued NII growth is a positive factor. Our ability to be able to execute on our segment-led strategies in Puerto Rico and deepening deposit relationships in Puerto Rico, which we believe we can do, that will help the top end of that range. These are all things that drive profitability in banks, and it is no different for us.
Manuel Navas: I appreciate the commentary. Thank you.
Operator: Thank you. I am showing no further questions at this time. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
