Executive Summary / Key Takeaways

• Popular, Inc. delivered a strong first quarter in 2025, marked by significant net interest income growth and margin expansion, driven by strategic deposit management and favorable asset repricing.
• Loan and deposit growth continued in Q1 2025, particularly in Puerto Rico and the U.S. commercial and construction segments, signaling ongoing economic activity and successful deposit retention efforts despite market uncertainties.
• Credit quality metrics showed broad improvement in Q1 2025, with lower non-performing assets, non-performing loans, and net charge-offs, supported by proactive risk management and encouraging performance from recent loan vintages.
• The company maintains a robust capital position, evidenced by a strong CET1 ratio and the ongoing share repurchase program and increased dividend, providing flexibility for capital return and strategic investments.
• Management anticipates continued net interest income growth and margin expansion in 2025, alongside targeted loan growth and expense control, aiming for at least a 12% return on tangible common equity by year-end, underpinned by ongoing transformation initiatives and a favorable operating environment in its core market.

Setting the Scene: A Resilient Franchise in Dynamic Markets

Popular, Inc. stands as a diversified financial holding company with deep historical roots in Puerto Rico, where its principal subsidiary, Banco Popular de Puerto Rico (BPPR), commands the leading retail banking franchise. Over decades, Popular has expanded its footprint, establishing a significant presence in the U.S. mainland through Popular Bank (PB) and operating in the U.S. and British Virgin Islands. This geographic diversification, while exposing the company to distinct regional economic cycles and regulatory environments, has also built a resilient franchise capable of navigating significant challenges, including Puerto Rico's prolonged recession, natural disasters like Hurricane María, and the global pandemic. The company's history is one of adaptation, leveraging its established brand and local expertise to maintain a strong market position.

In the competitive landscape, Popular faces a mix of large global banks like Banco Santander and Citigroup , as well as regional players such as Oriental Bank and First BanCorp , particularly in Puerto Rico. While larger institutions may possess greater scale and broader technological resources, Popular differentiates itself through its deep community ties, extensive branch network in Puerto Rico, and a strategic focus on customer relationships. Indirect competition from fintech firms offering specialized digital services adds pressure across all markets, requiring Popular to continuously enhance its digital offerings and operational efficiency.

The broader banking industry is currently shaped by evolving macroeconomic conditions, including fluctuating interest rates, persistent inflationary pressures, and geopolitical uncertainties that influence economic growth, consumer behavior, and regulatory priorities. Changes in federal funding, tax policies, and trade tariffs also play a significant role, particularly impacting the Puerto Rico economy. In this dynamic environment, Popular's strategy centers on leveraging its core strengths, enhancing operational efficiency through technology, managing risk prudently, and optimizing its balance sheet to drive sustainable profitability and shareholder value.

Technological Edge and Transformation Initiatives

Technology is a critical component of Popular's strategy, serving as both a competitive differentiator and a driver of operational efficiency. The company is actively engaged in a multi-year transformation initiative focused on modernizing its customer channels and improving the overall customer experience. This involves significant investment in technology and talent, with the goal of streamlining processes and increasing personalization in its service delivery.

Specific, quantifiable performance metrics for all technological platforms were not detailed. Management highlighted tangible benefits from these efforts. For instance, updates to the consumer digital banking application in Puerto Rico have reportedly improved the time to production of releases by 30% over the past two years. This suggests an increased agility in deploying new features and enhancements, which is crucial for maintaining competitiveness against nimble fintech rivals and larger banks with substantial technology budgets. The strategic intent behind these investments is clear: to deepen client relationships by providing the right solutions at the right time through preferred channels, thereby enhancing customer loyalty and maximizing opportunities within its franchise. The focus on digital platforms and operational efficiency is expected to contribute to cost control and potentially improve profitability over time, helping to counter the scale advantages of larger competitors and the low-cost models of some indirect rivals.

Financial Performance: Riding the Tailwinds

Popular's financial performance in the first quarter of 2025 demonstrated significant momentum, building on a solid finish to 2024. Net interest income (NII) surged to $605.6 million, a notable increase of $54.9 million compared to the first quarter of 2024. This robust growth was the primary driver behind the 24 basis point expansion in the net interest margin (NIM) to 3.40% (3.73% on a taxable equivalent basis). The improvement in NII and NIM was attributed to a combination of factors: lower interest expense on deposits, particularly the repricing of Puerto Rico public deposits and certain non-public demand and savings accounts, coupled with higher income from the reinvestment of U.S. Treasury securities at more favorable rates and growth in the loan portfolio.

The decrease in deposit costs was a key tailwind, with the cost of P.R. public deposits falling by 87 basis points to 3.32%. This offset the impact of higher average balances and costs in time deposits within Popular Bank. While income from money market investments saw a decline due to lower yields resulting from Federal Funds rate movements and reduced volume, the overall benefit from asset repricing and deposit cost management significantly boosted net interest income.

Non-interest income, however, experienced a decrease, falling by $11.8 million to $152.1 million compared to the prior year quarter. This was primarily due to lower other operating income, specifically impacted by the sale of the daily car rental business in the fourth quarter of 2024. Operating expenses also saw a reduction, decreasing by $12.1 million to $471.0 million. This decrease was mainly attributable to the absence of the FDIC special assessment and interest accrued related to prior period taxes that were recorded in the first quarter of 2024, along with lower equipment expenses. These reductions were partially offset by increases in municipal license tax, regulatory examination fees, and technology and software expenses, reflecting ongoing investments and regulatory costs.

The effective tax rate (ETR) for the quarter was 20.2%, a significant decrease from 35.0% in Q1 2024, contributing positively to net income. This lower expense was partly due to certain tax withholding expenses recorded in the prior year quarter. Overall, the financial results underscore the company's ability to capitalize on the current interest rate environment and manage its funding costs effectively, driving profitability despite some fluctuations in non-interest revenue and ongoing operational investments.

Balance Sheet Strength and Liquidity Position

Popular's balance sheet reflects a solid and growing financial foundation. Total assets stood at $74.0 billion at March 31, 2025, an increase of $993.2 million from December 31, 2024. This growth was primarily fueled by increases in available-for-sale (AFS) securities and the loan portfolio, partially offset by decreases in money market investments and held-to-maturity (HTM) securities.

The investment portfolio remains a key component, with AFS securities increasing by $1.2 billion, driven by strategic investments in U.S. Treasury securities and a decrease in unrealized losses. HTM securities saw a decrease due to maturities. Loans held-in-portfolio grew by $146.4 million to $37.3 billion, with growth in Popular U.S. (commercial and construction) offsetting a decrease in BPPR (commercial prepayments). Despite some segment-specific dynamics, overall loan demand, particularly in Puerto Rico, remains strong.

Deposits continued their upward trend, increasing by $934.9 million to $65.8 billion. This growth was broad-based, with increases in interest-bearing deposits across both BPPR and Popular U.S. Average deposit balances also grew, including a notable increase in average deposit balance excluding Puerto Rico public deposits. Puerto Rico public deposits, a significant funding source representing 30% of total deposits, increased slightly to $19.6 billion and are expected to remain within a range of $18 billion to $20 billion in the short term. Total deposits remain substantially higher than pre-pandemic levels, providing a stable funding base.

Borrowings saw a slight decrease, totaling $1.10 billion. The company maintains robust liquidity, with available liquidity increasing to $22.6 billion. Core deposits, representing 92% of total deposits, continue to finance a large portion of earning assets, highlighting the stability of the funding structure. Popular's capital position remains strong, with the Common Equity Tier 1 Capital ratio at 16.11%, comfortably exceeding regulatory requirements and supporting the company's well-capitalized status. The completion of the CECL transition period phase-in in Q1 2025 further clarifies the regulatory capital picture. Tangible book value per common share increased, reflecting strong earnings and improved unrealized losses in the investment portfolio, even after accounting for capital return activities.

Credit Quality: Continued Improvement

Credit quality metrics demonstrated favorable trends in the first quarter of 2025, reinforcing management's confidence in the loan portfolio's resilience. Total non-performing assets (NPAs) decreased by $41.9 million compared to the end of 2024, driven by a $36.7 million reduction in total non-performing loans (NPLs) and a $5.2 million decrease in other real estate owned (OREO). The decrease in NPLs was observed across both BPPR (lower auto, mortgage, and commercial NPLs) and Popular U.S. (commercial loan sale).

The ratio of NPLs to total loans held-in-portfolio improved to 0.84% at March 31, 2025, down from 0.95% at December 31, 2024. While performing loans subject to potential future classification remain a focus area ($495.0 million), the overall trend in delinquencies (30+ days past due) also showed improvement, decreasing to 3.06% of total loans from 3.47%.

The allowance for credit losses (ACL) for loans held-in-portfolio increased by $16.1 million to $762.1 million. This increase was primarily driven by changes in economic scenario probability weights, with the weight assigned to the pessimistic scenario being increased due to current economic uncertainty, resulting in an $18.2 million increase in reserves. This was partially offset by improvements in credit quality and changes in portfolio mix. The ratio of ACL to loans held-in-portfolio increased slightly to 2.05%, while the ratio of ACL to NPLs held-in-portfolio significantly improved to 242.7%, reflecting a strong coverage level.

Annualized net charge-offs (NCOs) to average loans held-in-portfolio were 0.53% for Q1 2025, down from 0.71% in Q1 2024. The decrease in NCOs was observed in both segments, driven by lower commercial and consumer losses. Management is encouraged by the performance of recent consumer loan vintages and the stable credit quality in commercial and mortgage portfolios, believing the company is well-positioned to operate successfully even under more difficult economic conditions.

Outlook and Guidance

Popular's management provided a clear outlook for 2025, signaling expectations for continued financial improvement despite the prevailing macroeconomic uncertainty. The company anticipates consolidated loan growth for the full year to be in the range of 3% to 5%, with the lower end of this range considered more likely given the current environment. This growth is expected to be supported by continued strong demand in Puerto Rico and a pickup in activity in certain U.S. segments like commercial and construction lending.

Net interest income (NII) is projected to increase by 7% to 9% in 2025. This growth is expected to be driven by the ongoing benefits of reinvesting maturing lower-yielding securities into higher-yielding assets and loan originations in the current rate environment. Further net interest margin (NIM) expansion is also anticipated, supported by lower costs of online deposits at Popular Bank and the continued repricing dynamics of the deposit base.

Quarterly non-interest income is expected to range between $155 million and $160 million, reflecting the impact of the Q4 2024 business sale and planned initiatives to enhance fee income. Total operating expenses are guided to increase by approximately 4% on a GAAP basis for the full year, incorporating investments in transformation and typical seasonal expenses. The effective tax rate for the year is expected to be in a range of 19% to 21%.

Management reiterated its target to achieve at least a 12% Return on Tangible Common Equity (ROTCE) by the fourth quarter of 2025, with a longer-term aspiration for a sustainable 14% ROTCE. These targets underscore the expected profitability improvements driven by NII growth, expense management, and capital optimization through the ongoing share repurchase program.

Risks and Challenges

While the outlook is positive, Popular faces several risks and challenges. Geographic concentration in Puerto Rico exposes the company to the island's economic and fiscal conditions, including the pace of federal fund disbursement and the potential for fiscal measures impacting government entities and employees. Although the economy shows signs of recovery, factors like inflation and potential tariff impacts introduce uncertainty.

Competition remains intense across all markets, from traditional banks to fintechs, potentially impacting deposit costs, loan pricing, and market share. Interest rate risk, including repricing and basis risk, could affect NII and the value of financial instruments. Liquidity risk, while currently well-managed with ample available sources, could be pressured by unexpected deposit outflows driven by economic factors or loss of confidence.

Credit risk is inherent in lending activities, and while metrics improved in Q1 2025, a deterioration in economic conditions could lead to higher delinquencies and losses. The ACL methodology relies on economic scenarios and estimates, which are subject to change. Regulatory and compliance risks are significant, given the highly regulated nature of the banking industry, and changes in policies or increased assessments (like the FDIC special assessment) can impact results. Operational and cybersecurity risks are also critical, with potential for disruption, data breaches, and associated costs. Litigation and investigations pose additional uncertainties.

Competitive Positioning: Leveraging Local Strength and Digital Ambition

Popular occupies a strong competitive position, particularly in Puerto Rico, where its extensive network and deep customer relationships provide a significant moat against rivals like Oriental Bank (OFG) and First BanCorp (FBP). While these local competitors are formidable, Popular's scale and diversified offerings, including investment banking and insurance services, contribute to higher cross-selling efficiency and revenue per customer compared to peers like FBP. Popular's brand recognition and regulatory advantages as a U.S. territory bank also provide a distinct edge, supporting pricing power and customer loyalty that help maintain market share against local and global players.

Against larger, globally-focused banks like Banco Santander (SAN) and Citigroup (C), Popular competes effectively in core banking segments by leveraging its local expertise and operational efficiency. While these larger rivals may possess more advanced technological capabilities and greater scale in areas like international transactions or certain investment banking products, Popular's focus on optimizing its local operations and enhancing its digital platforms aims to narrow these gaps. The ongoing transformation initiative, with its focus on improving digital banking speed and customer experience, is a direct strategic response to the technological advantages held by some competitors.

Popular's financial performance metrics, such as higher return on equity and net margins compared to several peers, underscore its current competitive strength and operational effectiveness. This financial health provides the resources needed to invest in technology and strategic initiatives to defend and grow market share. However, maintaining this edge requires continuous investment to keep pace with technological advancements and careful management of deposit costs in competitive markets, particularly in the U.S. The company's ability to execute on its digital strategy and manage its funding structure will be key determinants of its long-term competitive success.

Conclusion

Popular, Inc. has demonstrated a strong start to 2025, with robust financial results driven by effective balance sheet management and favorable market dynamics. The company's core investment thesis is rooted in its leading position in the resilient Puerto Rico market, its diversified business model, a commitment to enhancing operational efficiency through technology, and a prudent approach to risk and capital management. The recent performance highlights the successful execution of strategies aimed at optimizing net interest income and controlling expenses, while maintaining strong credit quality.

Looking ahead, management's guidance signals continued growth and profitability improvements, supported by anticipated loan growth, further NIM expansion, and the benefits of ongoing transformation initiatives. While macroeconomic uncertainties and competitive pressures persist, particularly in the U.S. market and the digital space, Popular's strong capital position, ample liquidity, and improving credit metrics provide a solid foundation. The leadership transition, with Javier Ferrer poised to take the helm, is expected to ensure continuity and fresh energy to drive the company towards its sustainable return on tangible common equity targets, leveraging its unique franchise and technological advancements to navigate the evolving financial landscape.