Executive Summary / Key Takeaways

• Puerto Rico's structural economic transformation—fueled by $45-47 billion in federal recovery funds, positive net in-migration for the first time in decades, and a manufacturing reshoring boom—positions Popular, with its dominant 40-50% market share and 130-year local franchise, as the primary beneficiary of a multi-year growth cycle that will drive loan growth, deposit expansion, and net interest margin improvement.

• Strategic transformation under new leadership marks a deliberate pivot to simplify operations (selling non-core car rental, exiting U.S. mortgage origination), modernize delivery (digital platforms, branch upgrades), and optimize the balance sheet (merging Popular Auto into BPPR to unlock $2.9 billion in additional Fed borrowing capacity), creating a leaner, more focused institution positioned to capture the Puerto Rico opportunity.

• Financial performance demonstrates resilient profitability despite Q3 2025 credit noise from two isolated commercial loan defaults ($158 million telecom C&I, $30 million Florida CRE hotel), with consolidated net interest margin expanding 27 basis points year-over-year to 3.51%, ROTCE reaching 13.05%, and management guiding to 12% ROTCE for 2025 en route to a sustainable 14% long-term target.

• Valuation remains attractive at $116.29 per share (10.3x P/E, 1.28x book value) relative to mid-teens ROTCE, 2.58% dividend yield with 25% payout ratio, and strong capital position (CET1 15.79%), particularly when compared to regional peers and considering the bank's unique exposure to Puerto Rico's accelerating economic recovery.

Setting the Scene: The Puerto Rico Opportunity Meets a Simplified Bank

Popular, Inc., founded in 1893 and headquartered in San Juan, Puerto Rico, operates as a financial holding company with two principal banking subsidiaries: Banco Popular de Puerto Rico (BPPR), the island's dominant financial institution, and Popular Bank (PB), a New York-chartered bank serving the U.S. mainland. The company generates revenue through traditional banking activities—net interest income from lending and deposit-taking, plus fee income from cards, insurance, and investment management—while maintaining specialized subsidiaries for broker-dealer and insurance services. This straightforward business model belies a complex strategic evolution, as Popular has spent the past decade navigating Puerto Rico's fiscal crisis, federal oversight under PROMESA , and external shocks like the 2023 FDIC Special Assessment, all while building what management now calls "the #1 bank for customers" in a market undergoing fundamental transformation.

Puerto Rico's banking market is structurally concentrated, with Popular commanding approximately 40-50% of both loans and deposits, followed by First BanCorp (FBP)'s FirstBank (20-25% share), OFG Bancorp (OFG)'s Oriental Bank (15-20%), and international players Scotiabank (BNS) and Santander (SAN) (each 10-15%). This oligopoly creates natural pricing power, but the real story lies in the island's economic inflection. After decades of out-migration and fiscal distress, Puerto Rico recorded positive net in-migration of 15,000 people in 2025, reversing a long-standing demographic drag. Federal disaster recovery funds totaling $45-47 billion remain available, with $44.8 billion already obligated for infrastructure projects including the electric grid, water systems, flood control, and highways. Manufacturing reshoring is accelerating beyond pharmaceuticals into medical devices, aerospace, and technology, with Amgen (AMGN)'s $650 million manufacturing expansion creating 750 direct jobs and AI-focused companies attracted by R&D tax credits. Tourism is booming, exemplified by Bad Bunny's 31-night concert residency that generated global media exposure and filled hotels during a traditionally slow period.

Against this backdrop, Popular is executing a deliberate strategic simplification. In December 2024, the company sold its daily car rental business from Popular Auto, a move designed to both streamline operations and increase borrowing capacity at the Fed discount window. This was followed in May 2025 by merging Popular Auto, LLC into BPPR, which unlocked approximately $2.9 billion in additional liquidity by allowing BPPR to pledge auto loans and leases as collateral. Simultaneously, Popular is modernizing its branch network and digital platforms, launching fully online personal and credit card loan origination in Puerto Rico and the Virgin Islands while expanding digital deposit products on the U.S. mainland. These initiatives reflect new CEO Javier Ferrer's vision, who took the helm in Q2 2025 after Ignacio Alvarez's retirement, to "be simple and efficient" while deepening customer relationships.

Technology, Products, and Strategic Differentiation: Modernizing a 130-Year-Old Franchise

Popular's technological transformation is not about chasing fintech buzzwords but about operationalizing efficiency gains that fund growth investments. The company has launched a fully online personal and credit card loan origination process across Puerto Rico and the Virgin Islands, reducing processing times and improving customer experience. Commercial customers benefit from improved cash management and credit delivery platforms designed for small and midsized businesses. These digital initiatives are complemented by physical branch modernization, creating a hybrid model that leverages Popular's extensive network—169 branches and 616 ATMs in Puerto Rico—while meeting evolving customer preferences for digital engagement.

The strategic rationale extends beyond customer convenience. By automating loan origination and back-office processes, Popular can reduce operating expenses while improving risk management. The company tightened credit standards in 2023, which management credits for the improved performance of recent consumer loan vintages. This proactive risk management, combined with digital tools that enable faster monitoring and response, positions Popular to maintain asset quality even as loan growth accelerates. The "so what" is clear: technology investments are not just cost centers but enablers of both growth and margin expansion, allowing Popular to capture the Puerto Rico opportunity without sacrificing profitability.

The merger of Popular Auto into BPPR exemplifies this efficiency mindset. By consolidating the auto leasing subsidiary into the bank, Popular eliminated redundant corporate structures while simultaneously enhancing BPPR's liquidity profile. This move increased BPPR's available liquidity by $2.9 billion, providing flexibility to fund loan growth or manage through periods of deposit volatility. Similarly, the decision to exit U.S. residential mortgage origination and close four underperforming New York Metro branches reflects disciplined capital allocation—exiting businesses where Popular lacks competitive advantage to focus resources on its core Puerto Rico franchise and relationship-based U.S. commercial lending.

Financial Performance & Segment Dynamics: Resilient Growth Despite Credit Noise

Popular's Q3 2025 results demonstrate the bank's ability to generate profitable growth even while absorbing credit losses from two isolated commercial loans. Consolidated net income of $211.3 million increased $56 million year-over-year, driven by a $74 million increase in net interest income that expanded the net interest margin 27 basis points to 3.51%. This NIM expansion reflects the bank's asset-sensitive positioning, with lower deposit costs (down 37 basis points to 1.79%) and higher yields from investment securities more than offsetting modest pressure from declining short-term market rates. The taxable-equivalent NIM reached 3.90%, highlighting the value of Popular's municipal securities portfolio in a higher-rate environment.

The BPPR segment remains the crown jewel, generating $765.2 million in revenue (up 2.9% year-over-year) and $189 million in net income (up 50% from $125.8 million). The segment's net interest margin expanded 30 basis points to 3.71%, driven by lower interest expense on deposits—particularly Puerto Rico public funds, which repriced down 10 basis points in Q2 and 38 basis points in Q1—and higher yields from U.S. Treasury securities. Loan balances grew $982.8 million year-to-date across commercial, construction, mortgage, auto, and leasing portfolios, reflecting broad-based demand from a strengthening local economy. Deposit costs decreased steadily throughout 2025, falling from 1.67% in Q4 2024 to 1.52% in Q2 2025, as market-linked public deposits repriced with a quarterly lag tied to 3-month Treasury rates.

The Popular U.S. segment tells a more nuanced story. While revenue grew 3.2% to $201.3 million and net interest margin expanded 21 basis points to 2.94%, net income declined to $17.8 million from $28.8 million due to a $13 million non-cash goodwill impairment at Popular Equipment Finance (PEF). Management attributed this charge to lower projected earnings from reduced lending activity, a candid acknowledgment that the equipment leasing business faces headwinds. In response, Popular Bank is exiting U.S. residential mortgage origination and closing four underperforming New York Metro branches, actions that should improve segment profitability in 2026. The segment's loan growth of $596.7 million year-to-date, concentrated in commercial and construction lending, demonstrates that Popular can compete effectively in relationship-based U.S. markets while shedding commoditized businesses.

Credit quality requires careful analysis. Q3 2025 saw two large commercial loans enter non-performing status: a $158.3 million C&I facility to a Puerto Rico telecommunications company experiencing operational challenges after an acquisition, and a $30.1 million Florida CRE hotel loan that incurred a $13.5 million charge-off. Management emphasized these were "isolated circumstances that do not reflect broader credit quality concerns," noting both loans remained current on payments but were placed on nonaccrual due to deteriorating fundamentals and management's stated intent to "rightsize" capital structures. Excluding these cases, credit metrics were stable, with net charge-offs of $57.8 million (down slightly year-over-year) and consumer portfolios showing improved credit quality that reduced provision expenses. The "so what" is critical: while the two NPLs increased Q3 provision expenses, they appear idiosyncratic rather than systemic, and Popular's proactive classification demonstrates conservative risk management.

Capital management remains a key strength. Popular resumed its $500 million stock repurchase program in 2024, added another $500 million program, and increased the quarterly dividend to $0.75 per share in Q2 2025.

The company repurchased $346 million in stock year-to-date while maintaining a robust Common Equity Tier 1 ratio of 15.79% and tangible book value per share of $79.12 (up $10.96 from year-end 2024).

Management has been clear that while Puerto Rico concentration warrants a higher capital buffer than peers, it does not require the 400-500 basis point excess currently held, suggesting potential for continued capital returns as the balance sheet optimizes.

Outlook, Management Guidance, and Execution Risk

Management's guidance framework centers on achieving a sustainable 14% ROTCE over the long term, a target that requires execution across the entire P&L and balance sheet. For 2025, Popular expects to deliver at least 12% ROTCE, driven by 4-5% loan growth (raised from initial 3-5% guidance), 10-11% net interest income growth, and expense growth of 4-5%. The loan growth target is notable for its conservatism—despite strong year-to-date performance, management expects headwinds from U.S. construction loan paydowns in Q4, yet still raised guidance, signaling confidence in Puerto Rico demand.

Net interest income growth of 10-11% assumes continued NIM expansion from the repricing of fixed-rate assets and lower deposit costs, particularly from Puerto Rico public deposits that reprice quarterly based on 3-month Treasury rates. CFO Jorge Garcia explicitly expects public deposits to remain in the $18-20 billion range, representing approximately 30% of total deposits, providing a stable, low-cost funding base that benefits as rates decline. The company's decision to extend duration in its investment portfolio by adding U.S. Treasury notes while reducing Treasury bills and Fed reserves has shifted its interest rate sensitivity to become slightly liability-sensitive, positioning it to benefit from rate cuts while protecting against further declines.

Operating expense growth of 4-5% includes a $13 million profit-sharing accrual in Q2 2025, which management views as aligning employee and shareholder interests. The transformation program, encompassing over 80 projects, aims to generate efficiencies that can be reinvested into technology and modernization, effectively funding growth while slowing expense growth. This "self-funding" model is critical to achieving the ROTCE target, as it allows Popular to invest in digital capabilities without sacrificing margin expansion.

Credit guidance anticipates net charge-offs of 50-65 basis points for the full year, a modest increase from earlier guidance to reflect potential losses from the two Q3 NPLs. Chief Risk Officer Lidio Soriano emphasized that excluding these isolated cases, credit quality metrics were stable, with consumer portfolios performing well due to prior-year credit tightening and Puerto Rico's strong employment conditions. The unemployment rate of 5.6% hovers near all-time lows, and consumer spending via Popular's cards increased 5% year-over-year in Q3, supporting management's optimistic outlook.

The key execution risk lies in successfully navigating the leadership transition while maintaining operational momentum. CEO Javier Ferrer, who took over in Q2 2025, must balance continued investment in digital transformation with expense discipline, manage credit risk in a growing loan portfolio, and optimize capital allocation between growth investments and shareholder returns. The decision to exit U.S. mortgage origination and close underperforming branches demonstrates focus, but Popular U.S. remains a drag on overall returns, with the PEF goodwill impairment highlighting challenges in equipment leasing.

Risks and Asymmetries: What Could Break the Thesis

The most material risk remains Popular's geographic concentration in Puerto Rico, which generates the vast majority of earnings. While the island's economic trajectory is positive, it remains vulnerable to natural disasters, potential changes in federal support, and the lingering effects of past fiscal mismanagement. A slowdown in federal disaster recovery spending or a reversal of the recent in-migration trend would directly impact loan demand and deposit growth, while any deterioration in the island's infrastructure could trigger credit losses beyond the currently isolated commercial cases. The "so what" is that Popular's higher capital buffer, while prudent, may not fully insulate the bank from a severe Puerto Rico-specific shock.

Execution risk on the digital transformation presents a second-order concern. While Popular is investing in modern platforms, competitors like OFG Bancorp are pursuing aggressive "Digital First" strategies that could capture younger, tech-savvy customers. If Popular's hybrid approach fails to deliver both digital convenience and branch-based relationship banking, it could lose market share in consumer lending and deposits, particularly as fintechs and digital-only banks offer higher-yielding deposit products. Management's comment that they continue to see "outflows of roughly $100 million a month into our Popular Securities subsidiary" suggests deposit competition remains intense, even as overall deposit costs decline.

Interest rate sensitivity has shifted from asset-sensitive to liability-sensitive, per management's disclosure. While this positions Popular to benefit from rate cuts, it also means the bank could face NIM pressure if rates rise unexpectedly or if deposit repricing lags asset repricing in a volatile rate environment. The explicit link of Puerto Rico public deposit costs to 3-month Treasury rates with "a beta of near 1" provides transparency but also creates a direct transmission mechanism for rate volatility into funding costs.

The two Q3 NPLs, while described as isolated, warrant monitoring. If similar credit issues emerge in other commercial loans—particularly in the $20.1 billion Puerto Rico public sector portfolio or the $596.7 million of U.S. commercial loan growth—the provision expense could escalate beyond the guided 50-65 basis points. Management's rationale for placing the performing telecom loan on nonaccrual—management's stated intent to "rightsize its capital structure"—suggests a conservative approach, but also indicates that covenant-light or loosely monitored loans could present future surprises.

Valuation Context: Positioning Relative to Growth and Returns

At $116.29 per share, Popular trades at 10.3x trailing earnings and 1.28x book value, metrics that appear modest for a bank generating 13.05% ROTCE and targeting 14% long-term. The dividend yield of 2.58% with a 25% payout ratio provides income while retaining capital for growth, and the active share repurchase program ($346 million year-to-date) signals management's belief that the stock remains attractive.

Comparing Popular to its Puerto Rico peers reveals a mixed picture. First BanCorp (FBP) trades at 9.8x earnings with an 18.43% ROE, higher than Popular's 13.05% ROTCE, reflecting FBP's more efficient operations and higher NIM (4.33% vs Popular's 3.51%). However, Popular's scale ($75.1 billion in assets vs FBP's ~$20 billion) and dominant market share provide greater earnings stability and pricing power. OFG Bancorp trades at 9.2x earnings with 14.82% ROE, but its smaller scale limits its ability to compete for large commercial relationships and reduces operational efficiency.

The international banks—Scotiabank (BNS) and Banco Santander (SAN)—trade at higher multiples (17.7x and 11.2x earnings, respectively) but generate lower ROEs (8.99% and 13.72%) and have minimal Puerto Rico exposure, making them poor comparables. Their global diversification provides stability but reduces exposure to Puerto Rico's unique growth dynamics.

Popular's valuation must also be considered in the context of its transformation. The exit from non-core businesses, digital investments, and balance sheet optimization are near-term drags that should generate long-term benefits. The PEF goodwill impairment and mortgage business exit create one-time charges that obscure underlying earnings power, while the Popular Auto merger and digital initiatives require upfront investment. Adjusting for these factors, Popular's core banking operations likely trade at a lower multiple than reported, suggesting the market has not fully recognized the earnings potential from Puerto Rico's recovery.

Conclusion: A Unique Combination of Structural Tailwinds and Strategic Focus

Popular, Inc. represents a rare combination of dominant market position, structural economic tailwinds, and strategic clarity. Puerto Rico's transformation—from a struggling territory dependent on debt restructuring to a growing economy benefiting from federal investment, reshoring, and positive demographics—provides a multi-year growth engine that few regional banks can match. Popular's 130-year history, extensive branch network, and deep local relationships create a moat that insulates it from competition while enabling it to capture the upside.

The strategic pivot under CEO Javier Ferrer—simplifying the business, modernizing delivery, and optimizing the balance sheet—addresses past inefficiencies and positions Popular to convert top-line growth into sustainable ROTCE improvement. While the Popular U.S. segment remains a work in progress, the core BPPR franchise is firing on all cylinders, with NIM expansion, loan growth, and improving credit metrics (excluding isolated commercial cases) demonstrating the earnings power of the Puerto Rico recovery.

The key variables for investors to monitor are straightforward: Puerto Rico's economic indicators (employment, in-migration, federal spending), NIM expansion from deposit repricing and asset rotation, credit quality trends beyond the two Q3 NPLs, and execution on digital initiatives that will determine long-term competitive positioning. If Popular can deliver on its 14% ROTCE target while maintaining its dominant market share, the current valuation of 10.3x earnings and 1.28x book value appears conservative, particularly given the bank's unique exposure to Puerto Rico's renaissance and its disciplined capital return strategy.