Popular BPOP Q1 2026 Earnings Call Transcript

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DATE

Thursday, April 23, 2026 at 11 a.m. ET

CALL PARTICIPANTS

• President & Chief Executive Officer — Javier Ferrer-Fernández
• Chief Financial Officer — Jorge Garcia
• Chief Risk Officer — Lidio Soriano

TAKEAWAYS

• Net Income -- $246 million, increasing $12 million sequentially and 38% year over year.
• Earnings Per Share -- $3.78, up $0.25 from the prior quarter and 48% above a year ago.
• Return on Common Equity (ROCE) -- 15.5%, rising from 14.4% in Q4 2025 and 11.4% last year.
• Net Interest Income (NII) -- $670 million, up $13 million sequentially, driven by fixed-rate asset repricing, higher investment balances, and lower deposit costs.
• Net Interest Margin (NIM) -- 3.66% GAAP, up 5 basis points sequentially; 4.14% taxable equivalent, up 11 basis points.
• Deposit Balances -- $67.6 billion at period end, up $1.4 billion from Q4, with retail and commercial deposits increasing $1.2 billion primarily from tax refund activity.
• Deposit Costs -- Total cost decreased 12 basis points sequentially to 1.56%; excluding Puerto Rico public deposits, cost decreased by 5 basis points to 1.09%.
• Loans -- Flat at $39.3 billion; decreases at Popular Bank due to commercial construction paydowns and exited residential mortgages, offset by moderate mortgage and commercial growth at BPPR and weaker auto lending.
• Noninterest Income -- $166 million, consistent with Q4 and at the high end of guidance, up 9% year over year, supported by 14% debit card, 6% credit card, and 13% asset management and insurance fee growth.
• Operating Expenses -- $467 million, down $6 million from Q4; excluding the FDIC reversal in Q4, expenses dropped $22 million, led by lower personnel and health care costs and seasonal lower promotion activity.
• Guidance Updates -- 2026 NII growth guided to the upper end of 5%-7%; operating expense growth reduced to 2%-3%; effective tax rate expected at the low end of the previous 15%-17% range.
• Capital Management -- $155 million in common stock repurchases and a $0.75 per share dividend paid; $126 million remaining under buyback authorization as of quarter end.
• Tangible Book Value Per Share -- $84.98, up $2.33 sequentially.
• Nonperforming Loans (NPLs) -- Down $40 million sequentially, NPLs to total loans ratio improved to 1.17% from 1.27%.
• Net Charge-Offs -- $60 million (61 bps annualized), rising from $50 million (51 bps) prior quarter, mostly due to an $11 million charge-off of a previously identified commercial real estate relationship.
• Allowance for Credit Losses (ACL) -- Increased by $16 million to $124 million, with coverage at 2.10% of loans, up from 2.05% sequentially, and coverage of NPLs up to 180% from 162%.
• Puerto Rico Macro Trends -- Unemployment rate stable at 5.6%; hotel occupancy up to 83% from 76%, RevPAR +6%, hotel demand up 10%, cruise arrivals up 40% year over year through February, and airport traffic down 2% after a record year.
• Digital Initiatives -- Launch of Mi Banco digital marketplace and two new corporate credit cards, both gaining user traction and driving purchase volumes.
• Segment Strategy Expansion -- Introduction of new segment program for doctors, dentists, and veterinarians highlighted as an example of targeted growth efforts.

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RISKS

• Javier Ferrer-Fernández said, "Quarterly net charge-offs increased primarily due to a single previously identified commercial relationship," reflecting exposure to individual large credits.
• Management explicitly noted that sustained higher oil and commodity prices "can impact our customer base," though current economic stress has not yet materialized.
• Jorge Garcia stated, "At Popular Bank, the 16 basis point reduction in deposit costs was primarily related to lower online savings deposit costs and repricing of time deposits."

SUMMARY

Popular (NASDAQ:BPOP) reported a sequential and year-over-year improvement in net income and earnings per share, supported by NII growth, margin expansion, and strict cost control. Loan balances were flat due to commercial paydowns and weaker auto lending, with management guiding consolidated loan growth to the low end of the planned 3%-4% range. Credit quality was described as favorable given lower NPLs and improved ratios, but net charge-offs rose, driven by a single commercial exposure. Deposits increased over the quarter, enabling higher investment activity, and deposit cost improvements across both core and public balances supported margin trends. Capital return to shareholders remained a strategic focus through both repurchases and dividends, with additional authorizations anticipated in the coming quarter.

• Management confirmed the outlook for 2026 NII growth at the upper end of its 5%-7% guidance, with ongoing positive trends in deposit retention and cost management.
• Efficiency efforts yielded lower-than-expected expense growth, with new expense guidance of 2%-3% for the year, independent of profit-sharing accruals, and technology investments continue as planned.
• Dividend and repurchase strategies are described as robust, with board-level capital updates expected before the next quarterly call.
• Leadership emphasized a disciplined approach to profitability and capital deployment, noting that through the cycle refers to a period when there was major stress in the economy. The company aims to deliver on profitability targets despite headwinds, focusing on sustainability. Progress has been made, but management notes they are not claiming victory yet and will continue to pursue improvements for shareholders.
• On feasibility of new strategic expansion, management reiterated the focus on current operations, stating there is "No change in our outlook on M&A," and any growth in the U.S. would be commercially rather than branch led.
• Provisioning actions were primarily isolated to specific cases and may decline if current macroeconomic and credit trends continue.
• Puerto Rico economic indicators — including job market, consumer spending, and tourism — remain supportive, and ongoing reshoring momentum is expected to benefit local infrastructure, albeit with a multi-year lag until full impact.

INDUSTRY GLOSSARY

• BPPR: Banco Popular de Puerto Rico, Popular, Inc.'s principal bank subsidiary in Puerto Rico.
• NIM: Net Interest Margin, the difference between interest income generated and interest paid to lenders, relative to interest-earning assets.
• ACL: Allowance for Credit Losses, the reserve set aside to cover estimated loan losses.
• RevPAR: Revenue Per Available Room, a key metric used in the hospitality industry for hotel performance.

Full Conference Call Transcript

Javier Ferrer-Fernández: Thank you, Paul, and good morning, everyone. Please turn to Slide 4, where we share highlights of our strong operating performance in the first quarter. We reported net income of $246 million and earnings per share of $3.78, up $12 million and $0.25 per share from the fourth quarter. The improvement was driven by higher net interest income, margin expansion and lower operating expenses. Net income and EPS improved by 38% and 48%, respectively, compared to the first quarter of 2025. We continue to invest in our businesses and expand our capabilities in support of our strategic objectives. When we deliver for our customers, our franchise strengthens and our shareholders' benefit.

Overall credit trends remained favorable with lower NPLs and improved NPL ratios. Quarterly net charge-offs increased primarily due to a single previously identified commercial relationship. We also demonstrated our commitment to returning capital to our shareholders by repurchasing $155 million in common stock and paying a quarterly common stock dividend of $0.75 per share. Our ROCE was 15.5%, up from 14.4% in the fourth quarter of 2025 and 11.4% a year ago. We are very pleased with these returns and remain focused on reaching our 14% through the cycle objective. Before turning the call over to Jorge, I will comment on the business environment in Puerto Rico.

Business activity in Puerto Rico remained positive, supported by steady trends in employment and consumer activity with manufacturing, construction and tourism leading the way. We're closely monitoring ongoing geopolitical developments as sustained higher oil and commodity prices can impact our customer base. As of the end of the first quarter, we have not seen significant signs of economic stress. The labor market remains healthy with the unemployment rate at 5.6%, stable near historic lows. Three sectors have outperformed the broader labor market. Construction, transportation and warehousing and leisure and hospitality. Consumer spending remains healthy. Combined credit and debit card purchase by Banco Popular customers increased by approximately 5% and compared to the first quarter of 2025.

We continue to see healthy demand for homes in Puerto Rico. Mortgage balances at Banco Popular increased modestly during the quarter. Momentum in the construction sector continues to be solid with public and private investment fueling higher employment and strong liquidity. We're optimistic that these trends will persist given the backlog of obligated federal disaster recovery funds. On the private side, real estate and tourism development projects and the renewed focus on reshoring to Puerto Rico by global manufacturing companies should continue to support economic growth on the island. The tourism and hospitality sector continues to be an important contributor to the Puerto Rico economy.

Year-to-date through February, hotel occupancy increased to 83%, up from 76% in the same period last year. Over the same period, RevPAR increased 6%. Hotel demand averaged roughly 400,000 room nights, representing 10% growth versus the same month in 2025. Passenger traffic at Luis Munoz Marin International Airport was down 2% in the first quarter after a record year in 2025. JetBlue also announced an expansion of its San Juan Hub with 5 new nonstop domestic routes beginning in the spring of 2026. Cruise activity has also been a meaningful tailwind after record cruise arrivals in 2025, arrivals accelerated sharply in the first 2 months of 2026 with year-to-date arrivals through February up 40% year-over-year.

In addition, the Puerto Rico Tourism Company announced a strategic partnership with Royal Caribbean, beginning in July of this year that would establish San Juan as the cruise lines home port. Moving to our strategic framework. We continue to advance our 3 objectives, a growing number of initiatives are gaining traction simultaneously and the pace of execution is accelerating. One of our objectives is to be the #1 bank for our customers, by delivering exceptional service and products. A key part of that is making it easier for customers to engage with Popular through our digital channels. We recently launched an integrated marketplace within our digital app Mi Banco, one of Puerto Rico's most widely used mobile apps.

The platform gives our retail customers access to exclusive offers, discounts and benefits from a wide variety of merchants while enabling businesses, many of them small and medium-sized to reach a high volume of potential customers. This allows us to create meaningful connections between our retail and commercial customers and strengthens the value of banking with Popular. We also launched 2 new corporate credit cards designed to facilitate payments and optimize cash flow. Both have gained traction and driven purchase volume. In addition to our core, retail and commercial efforts, we are advancing targeted segment strategies to improve service, enable more personal relationship-based engagement and position Popular as the primary bank earlier in our relationship with our customers.

A recent example is our newly launched program designed to meet the unique financial needs of doctors, dentists and veterinarians. The momentum behind these initiatives reflects the energy and focus of our teams. We are encouraged to see that execution translating into stronger results, and we expect the benefits to become more visible over time. And with that, I turn the call over to Jorge for more details on our financial results.

Jorge Garcia: Thank you, Javier. Good morning, and thank you all for joining the call today. As Javier mentioned, our quarterly net income increased by $12 million to $246 million, and our EPS improved by $0.25 to $3.78. Compared to adjusted net income in the fourth quarter, which excluded a partial reversal of the [ SDIC ] special assessment reserve, net income increased by $22 million. These results were driven by better NII, higher NIM and lower expenses partly offset by a slightly higher provision for credit losses. Our objective is to deliver sustainable financial results, and we are pleased to have generated a 15.5% roughly for the period.

We will continue to use all levers to position the company as a top-performing bank when compared to our mainland peers. Please turn to Slide 7. Net interest income of $670 million increased by approximately $13 million, driven by fixed rate asset repricing and a higher balance of investments due to higher deposit balances and lower deposit costs at both banks. Net interest margin expanded 5 basis points to 3.66% on a GAAP basis. On a taxable equivalent basis, the margin improved by 11 basis points to 4.14%, driven primarily by lower interest expense, including a meaningful reduction in the cost of Puerto Rico public deposits.

Ending loan balances were essentially flat at $39.3 billion, down about $38 million from the fourth quarter, driven primarily by lower balances at Popular Bank due to paydowns in the construction segment and runoff from the exited residential mortgage business. At BPPR, modest growth in the mortgage and commercial segments were somewhat offset by weaker trends in auto lending. Given the slower demand in the consumer and auto segments, we expect consolidated loan growth in 2026 to be at the low end of our original 3% to 4% range. In our investment portfolio, we have maintained our strategy of reinvesting proceeds from bond maturities into U.S. treasury notes and bills.

During the quarter, we purchased approximately $1.9 billion of treasury notes with a duration of 2.6 years at an average yield of around 3.7%, taking advantage of a modestly steeper curve. Deposit balances ended the quarter at $67.6 billion, $1.4 billion higher than the fourth quarter. Retail and commercial deposits increased by $1.2 billion, driven by tax refund activity. On an average basis, total deposits increased by $1.1 billion or by $384 million when excluding Puerto Rico public deposits. Puerto Rico public deposits increased by $250 million to end the quarter at $19.7 billion. We continue to expect public deposits to be in the range of $18 billion to $20 billion for the year.

Total deposit costs decreased by 12 basis points quarter-over-quarter to 1.56%, with improvement in both of our banks. Excluding Puerto Rico public deposits, total deposit costs decreased by 5 basis points to 1.09%. At BPPR, deposit cost decreased by 11 basis points mostly as a result of Puerto Rico public deposits repricing lower by 31 basis points due to lower short-term rates. At Popular Bank, the 16 basis point reduction in deposit costs was primarily related to lower online savings deposit costs and repricing of time deposits. Given positive deposit trends in Puerto Rico, we now expect 2026 net interest income growth at the upper end of our 5% to 7% guidance range. Please turn to Slide 8.

Noninterest income was $166 million, in line with Q4 and at the high end of our quarterly guidance, with solid performance across most of our fee-generating segments. Compared to the first quarter of 2025, noninterest income improved by 9%, driven by growth in debit and credit card fees of 14% and 6%, respectively, as well as 13% increase in asset management and insurance fees, demonstrating our ability to benefit from our breadth of product offerings. We continue to expect quarterly noninterest income to be in the range of $160 million to $165 million. Please turn to Slide 9. Total operating expenses were $467 million, a decrease of $6 million when compared to Q4.

Excluding the FDIC reversal in Q4, operating expenses decreased by $22 million. The decrease was primarily driven by lower personnel costs, as the fourth quarter included a profit-sharing accrual of approximately $13 million, along with the impact of fewer calendar days in the first quarter. This quarter also benefited from lower employee health care-related costs. We also saw lower seasonal business promotion expenses and lower professional fees, partly offset by higher technology and software expenses, reflecting our continued investment in technology and transformation initiatives. We expect full year expenses to increase by 2% to 3% compared to our original guidance of 3%. We will continue to prioritize investments in our people and technology and continue to target expense efficiencies.

Our effective tax rate in the first quarter was 16%, unchanged from the fourth quarter. We now expect the effective tax rate for the year to be at the low end of our original 15% to 17% guidance range due to higher projected excess income. Please turn to Slide 10. Tangible book value per share at the end of the quarter was $84.98, an increase of $2.33 per share driven by our net income and offset in part by our capital return activity. During the quarter, we repurchased approximately $155 million in common stock. We ended the quarter with $126 million remaining under our active repurchase authorization, which we expect to exhaust during the second quarter.

As we have said in the past, we seek to maintain an active repurchase authorization in place and we are targeting an update on capital actions before the second quarter's earnings call. In addition to common stock repurchases, we also expect to continue evaluating capital optimization alternatives and pursue a dividend increase during the year. Of course, our plans are subject to market conditions, regulatory considerations and any required Board approvals. With that, I turn the call over to Lidio.

Lidio Soriano: Thank you, Jorge and good morning to all. Credit quality metrics remained stable during the first quarter with lower early delinquency, NPLs and inflows and higher net charge-offs. Despite the uncertain economic environment, our consumer's businesses remain resilient. We continuously monitor our portfolios for signs of stress where our data remain consistent with normal seasonal behavior and no deterioration. Turning to Slide #11. Nonperforming assets and loans decreased by $37 million and $40 million, respectively, mainly due to Banco Popular de Puerto Rico. NPLs in BPPR decreased by $39 million.

This was driven by reductions in the commercial portfolio due to an $11 million charge-off related to a commercial real estate facility classified as NPL in the third quarter of 2025 and consumer due to lower auto NPLs driven by increased payment activity. In the U.S., NPLs decreased by $2 million. Inflows of NPLs decreased by $7 million, with an improvement of $5 million in the U.S. and $2 million in BPR. The ratio of NPLs to total loans held in portfolio was 1.17% compared to 1.27% in the previous quarter. Turning to Slide #12. Net charge-offs amounted to $60 million or annualized 61 basis points compared to $50 million or 51 basis points in the prior quarter.

Last quarter results included $5 million in recoveries from the sales of previously charged-off auto loans and credit cards. Excluding this, the net charge ratio for the fourth quarter was 57 basis points. Net charged-off in EDPR increased by $10 million driven by the $11 million commercial net charge-off mentioned previously. Based on current trends and macroeconomic outlook, we reiterate our 2026 annual net charged-off guidance of 55 to 70 basis points. The allowance for current losses increased by $16 million to $124 million. The change was mostly in BPPR which had higher results in the commercial portfolio due to loan modifications and additional specific reserve for a single power in the telecommunication industry.

Additionally, the [ ACL ] for the mortgage portfolio increased slightly due to changes in the macroeconomic scenarios. These increases were offset in part by a reduction in the ACL for consumer loans, mainly in the auto portfolio, reflecting improvements in credit quality. In the U.S., the ACL increased by $1.4 million from the previous quarter. The cooperation ratio of the ACL to loans held in portfolio was 2.10% compared to 2.05% in the previous quarter, while the ratio of the ACL to NPLs held in portfolio increased 180% from 162%. With that, I would like to turn the call over to Javier for his concluding remarks. Thank you.

Javier Ferrer-Fernández: Thank you, Lidio and Jorge, for your updates. We're happy with our strong first quarter results. We grew an interest income, expanded our margin and reduced operating expenses, all while continuing to invest in the franchise and advance our strategic priorities. While we are very pleased with the quarter, we remain focused on execution, growing deposits, regaining loans and maintaining strong expense discipline. We are confident that the sustained execution of our strategy will advance our ultimate goal to be a top-performing bank with excellent talent, delivering sustainable profitable growth and long-term value to our shareholders. On a more personal note, this past February marked a milestone for Popular.

We brought together our 9,200 employees for the first time in over 20 years. And I have to say it was awesome. The event reminded each one of us, what it means to be part of Popular and connected us with our history. The excitement was palpable, and it was simply an unforgettable day. On behalf of my colleagues, I thank our clients and shareholders for their continued trust and support. We are very proud to be the leader in the Puerto Rico market. We're ready to answer your questions.

Operator: [Operator Instructions] And our first question comes from Jared Shaw of Barclays.

Jared David Shaw: Maybe just starting with the great growth on the deposit side, how should we think about average in end of period deposits sort of over the next few quarters as some of the tax refunds maybe get spent?

Unknown Executive: Yes. So traditionally, we do see increases in ending deposits in the first quarter. This quarter, we saw also increases in average deposits that we're bringing in to strength from the fourth quarter results. Historically, in the second quarter, we would also expect ending balances to trend lower, but average balances higher after tax season overlaps the March and April and people kind of spend that money through the quarter. And then as you know, the third quarter is where we actually see ending balances coming down and then in the fourth quarter, we tend to see ending balances come back up historically.

So our guide increased towards the higher end of the guide because we are expecting more retention of those deposit balances. Our teams are very much focused not only retention but also in deposit growth. And so we -- while we would expect ending balances to perhaps come down from these levels, we do not expect them to see a runoff as we saw like in 2024, for example.

Jared David Shaw: Okay. So I mean overall, though, I mean, you're still feeling like average account size is stabilized at a higher level and sort of like the magnitude of what, like you said in the past may not be as severe?

Unknown Executive: Yes. So I think we saw the peak in 2022, those averages are like 40% higher. Those have come down to like the third -- low 30s, 30%, 32% and has been stable for the last couple of years. We are bringing in new clients that's resulting in higher balances. We're seeing strength across not only the retail, but commercial, we see strength in our small and middle market clients. Our corporate clients also have a lot of liquidity, but they tend to be managing their treasury excess cash a little bit better. So overall, we've been very happy with the trends.

Jared David Shaw: Okay. And then in the past, you've talked about looking for potential acquisitions in the mainlands that match up with your geographic focus. Any update on your thoughts there? And if you're not able to find something that fits would we -- could we expect maybe more of an organic de novo expansion utilizing some of your capital?

Unknown Executive: Javier, I'll go for the first one. No change in our outlook on M&A. Our primary focus continues to be our transformation efforts and growing profitability of the institution. You want to take the second one?

Javier Ferrer-Fernández: in terms of de novo growth strategy, I mean, it's tough to compete in the U.S. markets in retail, which is what normally would see with de novos. We have been successful in expanding some of our national businesses through either team acquisition or team hires and maybe that's opportunity. It's not unusual for banks our size to be looking at that, leveraging those niche businesses. But I think at this stage, we have opportunity to improve profitability in our U.S. operations organically, but not necessarily through investing in a big branch de novo expansion.

Unknown Executive: And in Puerto Rico, frankly, I mean we are the strongest in the market given our branch footprint. It's a differentiating factor for us, continues to be. In the United States, as Javier saying, our strategy is more commercial led. So I mean it's going to be difficult to actually expand in any major way our footprint in terms of branches.

Jared David Shaw: Okay. And if I could just ask one final one. Just have you been seeing any spread compression on the loan portfolio or on new loans and were you putting on new loans in the quarter?

Javier Ferrer-Fernández: If you look at the levels and yields, we continue to be successful in expanding and are keeping our loan yields fairly flat even with rates coming down. So we have not seen that broad-based. I mean we talked in the last call how competition, particularly in Puerto Rico and auto. And you've seen kind of with the trends in that portfolio that we could see it potentially maybe more competition in pricing. But so far, we've tried to get our teams to focus, particularly in the U.S. business, where we see maybe particularly the beginning of the year, more competitive pricing.

We've tried to push our teams to be smart and provide profitable loan growth, not just loan growth and focus on relationship banking, making sure that those relationships are coming in with deposits. So that gives us kind of a fresh start on making sure that we're not chasing irrational pricing on loans.

Operator: And our next question comes from Brett Rabatin of StoneX Group.

Unknown Analyst: Good morning, everyone. Wanted to start on the NII guide. And it was great to see the first quarter higher NII than expected lower expenses. Just thinking about the high end of the guide, with the slight growth in balance sheet would kind of imply the margin is fairly flattish, but you still have securities that are maturing. Any thoughts on -- I know you don't like to give market guidance, but any thoughts on the margin? And then just as you see it, maybe the opportunities relative to NII growth from here?

Javier Ferrer-Fernández: We do expect the margin to grow by the end of the year. We had a nice expansion in the first quarter, driven a lot by the repricing of the public deposits. We don't expect that level of repricing to occur. That's going to be dependent on what happens to short-term rates. And certainly, the price with a lag -- so I think I would expect the expansion of the margin to be slower in the second quarter, but then continue to expand as we drive to that higher NII guidance. So as you said, we do have the tailwinds of the fixed rate investment portfolio to continue to reprice. So that hasn't changed.

Unknown Analyst: Okay. And if the Fed doesn't cut interest rates, would that put you above the higher end of the range on NII?

Jorge Garcia: Our current guidance assumes no further cuts in 2026. For us, I'd love to see the steepening of the curve, but margin really depends on the mix of deposits, we are heavier on public deposits that we'll have an impact on that margin. Really, the NII guidance is kind of how we see the front now. Deposit balances will -- as we said, and the deposit costs are really kind of the drivers of that spread and being able to get above the -- our current guidance.

Unknown Analyst: Okay. That's helpful, Jorge. And then the other question I had was just around capital and 15.9% CET1. It sounds like you're going to give a lot more color in 2Q. And I think it's great that you guys have kind of acknowledged that investors have wanted to see the capital base deployed. Any color that you can give us just around your thoughts on end of your capital ratios or targets or anything that as you're working through this, if you could share with us on your progress there?

Unknown Executive: We want them to be lower than they are now, unless we make a lot of money and not. But no, I mean, we really -- we are committed. We obviously have said in the past that we want this to be -- we want to do it in kind of over time in a controlled manner, but we certainly are committed to doing that. We're trying to be more intentful in our language and how we communicate about this. And we are committed to executing.

Operator: And our next question comes from Timur Braziler of UBS.

Timur Braziler: Going back to the profitability comment. 2 straight quarters now above that 40% objective I guess, Javier I was a little surprised to kind of hear you reiterate that comment on remaining focused on reaching that 14% through the cycle objective. Are we not there yet? And I guess that phrase through the cycle, like how far out are we looking in terms of that level of sustainability?

Javier Ferrer-Fernández: Thank you for your question. I think that -- I mean 2 quarters, 2 great back-to-back reps quarters, a trend doesn't necessarily make. So I mean, we like that to continue obviously. And I think that through the cycle comment refers to a period when, of course, we were seeing stress -- major stress in the economy. And so that we actually demonstrate that facing the sort of more sort of headwinds we deliver on profitability targets. So that's how we're thinking about it. Again, I think the teams are doing great, but we don't want to -- remember that we also use the concept of sustainability. It needs to be sustainable.

So that will take a little bit longer for us to claim victory. And of course, once we get there, we're not stopping there. And that's important. I mean, remember that we used the 14 when we launched a little bit over 3 years ago, our transformation program. So again, very happy with the mindset at shift and what we're producing for shareholders, but we're not there yet.

Timur Braziler: Got it. Okay. That's good color. I appreciate that. Maybe sticking on the capital question. Any kind of color you can provide on just Basel III proposals, what type of impact that might have on your capital day?

Unknown Executive: Yes. So first, we're not subject to the category 4 with [ AOCI ]. So we're small enough that, that doesn't impact us. We've done the preliminary review, Timur. And basically, we're -- our estimates are consistent with what the Fed guidance is that will be the impact for smaller banks. Obviously, the end result will depend on our balance sheet when that goes into place and whatever the final rule has. But right now, it's consistent with the estimates. And that's a reduction in risk-weighted assets, basically.

Timur Braziler: Yes. Okay. And then just one more for me. I appreciate the full year guide on public funds. Just wondering, second quarter specifically, if there's any reason why we shouldn't be penciling in kind of a historical type run rate for the planned increase in public funds in 2Q?

Unknown Executive: I mean I don't want to speculate. I mean, as you know, it's over 200 different clients, thousands of accounts. We talk to our clients, our relationship officers talk to our clients. We have some visibility, but some of these are big numbers that move around. So we're going to stick to the $18 billion to $20 billion range.

Timur Braziler: Okay. And then sorry, I just want to make sure I'm understanding the Basel III impact. I think it was around 7% was the Fed guidance? Is that kind of what you're alluding to in terms of impact on RWA?

Unknown Executive: That is correct.

Operator: And our next question comes from Arren Cyganovich of Truist.

Arren Cyganovich: Just want to hear your views on onshoring manufacturing in Puerto Rico. Obviously, last year, there were a lot of large announced investments. I haven't really seen any kind of new wins yet this year. Anything that you're hearing in terms of new potential investments in -- have you seen any actual benefits yet from the ones that were announced last year?

Unknown Executive: You're right, there hasn't been any new public announcements by the government, so we don't want to get in front of them. But they continue working through the great line. They continue working on more entities coming in. There's 2 more entities that we've heard about. So -- but yes, looking at what's happening in the world, it's totally rational to believe that the momentum in continued investment, be it in big operations that are already located in Puerto Rico or new entities coming into Puerto Rico nor in United States also from Canada and the Far East and Europe, even should continue. So we are, again, expecting announcements from Puerto Rico government on it.

But we don't want to get in front of rumors, but -- so far, all the rumors we've heard before, the actual announcement from last year, the Eli Lilly is the Ambience of the world found out. So we have our fingers crossed that the momentum will continue on reshoring for Puerto Rico. And as you know, manufacturing represents approximately 44% of our GDP. So it's an important contributor to our economy. I don't know direct jobs are also indirect jobs, most importantly.

Arren Cyganovich: Have any of the ones that were announced last year started to get produced yet or any movement there? Is it going to take some time?

Unknown Executive: Yes, it take some time. We have seen some new ones coming in and opening accounts with us and purchasing property and stuff like that. So they're setting up, typically it's a process where once they announced -- the government announced that means that they've got into an agreement with the companies and then the companies after that, start opening bank accounts, investing in real estate, getting third-party service providers coming in and doing the work. So we've seen some of that. So it has started. But as we've always said, it's going to take 3 to 5 years to actually get the actual numbers and the impact.

Javier Ferrer-Fernández: And the largest announcements are expansions of facilities so they will require some significant construction investment in time. So we will first see that impact on the construction side.

Arren Cyganovich: Great. And then lastly, just, Lidio, you had mentioned some loan modifications in commercial. Are these anything new abnormal increases, decreases? Just curious if you could give us a little color on that.

Lidio Soriano: I mean nothing that I would characterize as being affecting the broader portfolio just one-offs, some clients are having some financial difficulty and we executed some non modification, but nothing that impacts the whole portfolio.

Operator: And our next question comes from Kelly Motta of KBW.

Kelly Motta: Maybe to kick it off on expenses. I see -- I think you were very well controlled in the first quarter and the guidance range is brought down a bit. Just wondering if you can opine upon the drivers of that variance I know there's some transformation efforts in play, wondering if some of those investments have been kicked out another year or 2.

Unknown Executive: Thank you, Kelly. I mean there's always part of projects that maybe are slow to start. I wouldn't say that anything has been canceled or that is resulting in that reduction. But we are seeing -- we did benefit from a handful of things, better negotiations, some adjustments to expected expenditures that were lower in the first quarter, we reduced some excess accruals from the incentive payouts for profit sharing from last year. So those are all the things that you see the benefit in the first quarter, and that benefit will sustain for the year. There's others that are timing differences and -- but we'll continue to invest in technology. We'll continue to invest in people.

We will continue efficiency efforts. Our expense targets for the year already included around $50 million of efficiency efforts. We continue to improve upon some of those. So that's all part of our embedded guidance. So there's just a lot of things going on, but at no moment, are we like pulling back on our technology and transformation efforts. There are shifts. For example, we went live on our ERP in January. So there are shifts in how those costs translate in terms of expenses, the things maybe were being capitalized before, now they're being amortized. But overall, we are happy with the level of focus of our teams on cost control and in execution.

Kelly Motta: Got it. And just as a point of clarification, I guess. This guidance range doesn't include any of that excess profit sharing. So if you were to say, beat your NII outlook, that's the type of thing where those expenses would kick in. Is that the correct way to think through that cadence?

Unknown Executive: That is the correct way. I mean we love to be able to pay profit sharing. We believe that those programs are aligned with our shareholders. That means that we are performing better than expectations. And if you assume that our original guidance are based in part by our expectations and budgets, and our interest should be aligned. Our current guidance does not include any profit sharing expense. But remember last year, even with a near $40 million profit sharing expense, we were able to deliver on our original expense guidance and of course, we always want to challenge our teams to be able to do more and absorb any incremental expenses that were not part of our plan.

Kelly Motta: Got it. Maybe last question, if I can just slip it in on the size of the balance sheet. Cash money market investments have come down year-over-year. They were relatively flat about $4.8 billion, $4.9 billion-ish the past 2 quarters. Is that a good level on a go-forward basis? Or would you anticipate continued role into securities and loans off that [4.85 ] level?

Unknown Executive: I think we've had that level for the last 2 or 3 quarters. We're comfortable with where we're at on that. We still have -- yes, I'll leave it at that.

Operator: And our next question comes from Gerard Cassidy of RBC.

Gerard Cassidy: If I recall my credit ratings correctly, and looking at your slide deck, you showed that S&P and Moody's have you on watch list with a positive implications. And it looks like you're notch below investment grade by those 2 rating agencies. I know Fitch, I think, is an investment grade. Can you share with us when do you think they'll determine whether they're going to lift that credit rating? And can you also remind us what is the last time Popular rated investment grade by Moody's or S&P?

Unknown Executive: Well, I'd love to be able to guess the answer the first question, Gerard. What I would say is that we are focused on discussions with the rating agencies. We had an advocacy effort to make sure we continue to educate them and spending time, making sure that they are up to date and everything that's going on with Popular and Puerto Rico. But I cannot begin to guess. We believe that our ratings should be better, frankly. But -- and how long has it been? And my guess is probably go back to 2005, 2006 before the financial crisis.

Jorge Garcia: It's an insightful question. I think that if you -- we have sort of retaken the efforts to make clear S&P and Moody's and visit with the inventory was suggesting. If you look at the purely numerical thresholds for us to be considered investment grade. I mean, we were there. But there are other things that may come into their consideration of us as Puerto Rico's largest financial institution as they see Puerto Rico -- and so -- but I think, again, if you only -- if you were to look at us as a peer banks, given our performance, we would definitely be [indiscernible] rated.

Unknown Executive: But we'll take our positive outlook. We'll take that as momentum.

Gerard Cassidy: Yes. I agree. As a follow-up question, I know you guys talked about the price of oil. You haven't seen any significant signs of economic stress at these elevated price levels. Can you share with us a couple of things? Do you recall in the first quarter of 2022, when Russia invaded Ukraine, obviously, the price of oil shot up. What kind of impact did that have on credit quality back then? And then second, if oil stays elevated at $125 a barrel, let's say, throughout the year, it would appear to weigh on the -- not only the Puerto Rican economy, but the U.S. economy as well. And what do you think that could do to credit quality?

And then lastly, can you also remind us, I know the island is very dependent upon oil for its energy but I thought the island was moving to other alternative sources, maybe, natural gas, LNG, if you can update us on anything if I remember that correctly.

Lidio Soriano: I would say, Gerard, this is Lidio. I will say that the answer to that is going to depend on the length where the first of all stays at this level. I mean, similar to the -- in 2022, I mean, the situation was -- or the increase in oil prices was short list, and that had a very minimal impact in terms of the delinquencies and the credit quality portfolio. So for us, I think the key is the -- and the impact for Puerto Rico and our portfolio is going to be the length of time in which we have elevated oil prices in the island.

As we noted in our prepared remarks, we are very comfortable with our portfolios. We have seen no deterioration in the credit quality. We've seen normal seasonal patterns. And actually, our delinquencies are better than the last quarter, obviously, and much better than this time last year. So we're very, very pleased with our portfolio.

Unknown Executive: The premise of your question is spot on. I mean we're no different than financial institutions in the United States. If the content continues for a long time and oil doesn't come down, as you know, dependent on that to create generate electricity in Puerto Rico. There's been growth in other sources of energy for Puerto Rico, but I don't think we're going to be able to switch quick enough not to have higher oil prices for longer impact us and our customers. So far, we haven't seen it.

I think the second quarter will be -- will tell the tale more accurately if, in fact, the country continues and the price continues to go up or stay higher for longer.

Gerard Cassidy: Very good. And Lidio, can I just circle back on your comment about delinquencies. Is it as simple as the health of the economy being as good as it is? You guys mentioned the unemployment rate is near record lows. Is it that straightforward that the health of the economy is the underlying factor that the delinquencies and credit are as strong as they are in the consumer books?

Lidio Soriano: As always a combination of factors. But certainly, I mean, the driver for the performance of consumer books is employment. In addition to that, as alluded by Jorge in his remarks, you also have them in the first quarter, refund activity in Puerto Rico, we have given -- based on data provided by the local IRS. They have returned -- refund to customers around $2.2 billion, which is slightly up ahead of the pace of last year, about $300 million ahead of the base of last year. That's obviously impacted the liquidity of consumers in Puerto Rico and their ability to pay their loans.

Operator: [Operator Instructions] And our next question comes from Manuel Navas at Piper Sandler.

Manuel Navas: I think this builds off a little bit of the last commentary. But you added reserves on the commercial NPL from the third quarter. But most other loan buckets had lower reserves, especially with the auto and consumer, especially with delinquencies down, could there be some upside in provisioning from here? Reserves coming down? Or what do you -- how do you feel the progression should come -- go forward from here in credit costs?

Lidio Soriano: Mean I like your thoughts. But I mean, I agree with you. I mean we had very strong performance from our consumer books, and that led to like the release of reserves, particularly in the [ older ] portfolio. We have done a lot over the last few years in order to improve the performance. So it is not by chance, it's also by the work that we have done in the commercial book, as we have said in the past, this is mostly corporate book. So every now and then, we have a situation or one-off clients that we may need to reserve for. We haven't seen anything that indicate that we have rock-based issues with our portfolios.

We have dealt as we mentioned that in the third quarter of last year and to some extent in the first quarter of this year with 2 particular case, one related to commercial real estate in the U.S. and one related to telecom company in Puerto Rico. But we think if the economy stays where we are and that includes this level that there might be an opportunity in the quarters ahead. So we'll see.

Manuel Navas: And that opportunity could show up in a couple of different places. And I'm going to probably ask a question that has already been asked a couple of times is, do you anticipate the buyback accelerates?

Unknown Executive: I mean we'll be consistent. We'll come back to you and to the levels, we'll be consistent in trying to bring down the level of capital. But frankly, I mean, we're looking at it over a multi-quarter period to try to get to levels -- target levels that make sense. And I'm not sure that any given quarter, any provision really changes in our projected provision or where we're at is going to make a difference in our repurchase strategy.

Manuel Navas: Understandable. Is the update that we're expecting at some point this quarter, would it include business line changes anything beyond just an update on a reauthorization of shares?

Unknown Executive: We're talking about just our traditional kind of update on kind of authorization from our Board and perhaps dividend increases, et cetera.

Operator: I'm showing no further questions at this time. This concludes today's conference call. Thank you for participating, and you may now disconnect.

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