Popular (BPOPM) Q2 2026 earnings call transcript

I would now like to hand the conference over to your first speaker today, the Investor Relations Officer at POPULAR, Paul Cardillo. Please go ahead.

Good morning, and thank you for joining us. With me on the call today is our President and CEO, Javier Ferrer, our CFO, Jorge Garcia, and our CRO, Lidio Soriano. They will review our results for the second quarter and then answer your questions. Other members of our management team 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.

Well, thank you, Paul, and good morning, everyone. Before going into our results, I'd like to comment briefly on this morning's announcement about my retirement at the end of August. After closing, I will now turn the call over to Javier. Javier Bautista, CEO of the United States of America, and I will now turn the call over to Javier. I will reflect briefly on this morning's announcement about my retirement at the end of August. After close to 12 incredible years at POPULAR, and with the organization in a very strong position, I have decided to focus on my health and spending meaningful time with my family and close friends. I do so with great pride about what we have accomplished as a team and with complete confidence that POPULAR is left in the best possible hands.

Jorge has the experience, the vision, and the heart to lead this organization forward with strength and care. He is not only a great professional, but even a better human being. I will work closely with him in the coming weeks in what will surely be a successful transition. Jorge also has the support of an extraordinary management team, which includes among other talented and dedicated leaders, Lidio as the new CFO, and Luis Sosa as the new CRO. I extend my most sincere congratulations to the three of them. These appointments reflect a thoughtful succession process and demonstrate the depth, experience, and strength of our leaders. It's not about one person. It's about the whole institution and the quality of its people.

Okay, with that, please turn to slide four to discuss the highlights of a very strong quarter. We reported net income of $278 million, an earnings per share of $4.35, an increase of $0.57 per share, or 15% from the first quarter. Reflected higher net interest income, solid fee generation, continued balance sheet growth, and strong capital generation. Compared to the second quarter of last year, earnings per share increased by 41%. Our ROTC improved to 17% during the quarter. We are very pleased with these results and remain focused on delivering sustainable, through the cycle, shareholder returns. Loans held in portfolio increased by $460 million during the quarter, driven by growth in commercial, construction, and mortgage lending, while deposits increased by $2.6 billion, primarily reflecting higher balances of Puerto Rico public deposits.

Credit performance remains stable with lower consumer net charges. Non-performing loans declined during the quarter, reflecting the resolution of a telecom relationship. We continue to return capital to shareholders, repurchasing $125 million of common stock, fully utilizing our prior $500 million authorization, and paying our quarterly dividend of $0.75 per share. Earlier this morning, we announced a planned 20% increase in our quality dividend to $0.9 per share and a new $1 billion share pre-purchase authorization. Before turning it to Jorge, I will comment on the business environment in Puerto Rico briefly. Business activity in Puerto Rico remains stable during the second quarter, while some indicators have somewhat moderated from the strong levels experienced over the last few years. Over the last several years, overall economic conditions continue to be supported by a healthy labor market, strong tourism activity, ongoing infrastructure investment, and strong consumer spending.

The labor market is healthy, with unemployment at 5.8% in June. Employment remained broadly stable and continued to benefit from strength in construction, leisure, and hospitality. Consumer spending remains strong. POPULAR's debit and credit card sales volume increased by more than 7% year-over-year, demonstrating continued activity across our customer base. Mortgage balances at Banco Popular increased modestly during the quarter, and demand continues to be supported by strong underlying fundamentals, although affordability remains a constraint. Construction activity remains strong and is being supported by both public and private investment, including the continued deployment of federal disaster recovery funds and a growing pipeline of private sector projects. We are encouraged by the unshoring and manufacturing investment activity. Since 2025, the manufacturing sector has announced approximately $2.3 billion of investments and more than 5,000 direct jobs across pharmaceutical, aerospace, logistics, technology, and advanced manufacturing sectors.

Tourism continues to be a major source of strength for the Puerto Rico economy. Hotel demand approached 2 million room nights, or 81% occupancy, from January through May of this year, increasing approximately 7% versus the same period in 2025. To boot, cruise passenger arrivals increased approximately 45% year-over-year through May. Air passenger traffic at Luis Muñoz Lighting Airport moderated a bit from record levels, declining approximately 4% year over year during the quarter. However, Puerto Rico continues to benefit from airline expansion announcements, including new routes and increased service from JetBlue, Southwest Frontier, and Avelo Airlines, which should support future visitation and economic activity.

Moving to our strategic framework, we continue advancing our three objectives. To be the number one bank for our customers. To be simple and efficient. And to be a top performing bank. Our strategy is centered on delivering innovative, relevant solutions to our clients that deepen relationships, Improve their experience in every interaction with us and support sustainable growth across the markets we serve. To achieve this, we are focused on providing our clients with the flexibility to interact with POPULAR through the channel that best meets their needs while maintaining our high service standards. Frankly, it comes down to delivering great experiences. To blend the speed and convenience of self-service with personalized support and the human touch, we have continued to invest in our physical and digital channels.

Key examples are the ongoing modernization of our retail network to enhance branch appearance and improve technological capabilities. Our extensive branch network provides us with a competitive advantage in Puerto Rico and the Virgin Islands. We are pleased that more than half of Puerto Rico's, Banco Popular of Puerto Rico's branches, have been upgraded to our new look and feel. We also continue to leverage digital tools to strengthen engagement with our retail customers and help them make informed financial decisions, These initiatives are delivering measurable results. On the commercial side, our modernized cash management platform is improving the client's experience through mobile functionality and enhanced money movement capabilities. Also, our newly launched corporate credit card solutions continue to gain traction and already account for nearly half of our commercial purchase volume.

We continue to expand our targeted segments strategy by tailoring our offerings to the unique needs of specific client groups throughout their personal and professional journeys. In Puerto Rico, we are deepening relationships with healthcare professionals and pursuing opportunities in other attractive, high-value segments. In the U. S. , we're working to enhance our community association banking business, developing capabilities that simplify the customer experience and enable business growth. Together, these initiatives reinforce the strategic intent behind our new institutional campaign, Aquí Creces. The campaign reflects our conviction that POPULAR is uniquely positioned to support the growth of our customers, businesses, and communities we serve. As they grow, we grow. I will now turn the call over to Jorge for more details on our financial results.

Jorge?

Thank you, Javier. Good morning, and thank you all for joining the call today. Before covering the quarter's results, I want to thank Javier for his leadership, guidance, and collaborations over the last few years. I've worked with him for over a decade and learned a lot from him.

I am grateful for his friendship above all else. I look forward to working closely with him through the transition and continuing to benefit from his advice as he gets ready to enjoy a well-deserved retirement. I am also excited to continue working alongside Lidio in his new role as CFO. I know firsthand that he will bring experience, analytical rigor, and an innovative perspective to the finance organization.

On a personal level, I am honored by the opportunity to lead this great organization. After more than 20 years working across our U. S. and Puerto Rico operations, I have learned that what makes POPULAR special is our people. This is an organization with many leaders who help sustain its success. I am fortunate to take on this role at a time of great momentum and enthusiasm. I do not take this responsibility lightly, and I hope to inspire my colleagues to continue building on that momentum for years to come. As Javier said, this was a very strong quarter. We performed ahead of our expectations across nearly all categories, as our teams continue to be focused on executing their business plans in support of our key strategic objectives.

Results reflected higher net interest income, stronger fee income, expense discipline, and a lower probation expense. Our profitability continues to improve. RODSI increases 17%, up from 15.5% in the first quarter and 13.3% a year ago. Given the strength of our results and confidence in our ability to deliver sustainable returns, we are establishing a higher NL RODSI objective of 14 to 17%. We will continue to use all available levers to position the company as a top performing bank relative to mainland peers and to deliver attractive returns through the cycle. Please turn to slide seven Net interest income increased by million to million driven by the loan growth fixed asset repricing and higher investment balances supported by deposit growth at BPPR On a gap basis, NIM remained stable at 3.66%.

On a taxable equivalent basis, NIM expanded three basis points to 4.17%, primarily reflecting a higher contribution from tax-exempt assets in the quarter. Ending loan balances increased by $460 million, including growth in commercial and construction lending across both banks and continued mortgage growth at BPPR. Our loan growth guidance remains consistent from last quarter at the low end of the 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 $1.1 billion of Treasury notes with a duration of 2.8 years and an average yield of around 3.9%. Deposit balances ended the quarter at $70.2 billion, increasing by $2.6 billion compared to the first quarter. Puerto Rico public deposits increased by approximately $3 billion, while customer deposits, excluding public funds, declined by approximately $400 million.

The point-to-point decreases in balances is consistent with historical seasonality as our clients spent the windfall from tax refunds. This activity also drove the lift in interchange income during the quarter. On an average basis, total deposits increased by $1.9 billion or by $800 million when excluding Puerto Rico public deposits. Despite some seasonal movement in customer balances, overall deposit trends remain stable and continue to reflect the strength of our franchise. Puerto Rico public deposits ended the quarter at $22.7 billion. We expect public deposits to be in the range of $20 to $22 billion for the rest of the year. Total deposit cost increased by one basis point to 1.57%, demonstrating continued stability of our funding base. At BBPR, deposit cost increased by one basis point, driven by a two basis point increase in non-public customer deposits as a result of targeted retention strategies, while public deposit cost decreased by five basis points.

At POPULAR Bank, deposit costs increased by four basis points, reflecting competitive conditions in our markets and online deposit space. Given the favorable funding trends in Puerto Rico and balance sheet growth, we now expect net interest income to increase between 8% and 9% for the year. While higher balances of Puerto Rico public deposits contribute to NII growth, their higher cost is expected to temper some of the benefit to margin. Therefore, we expect NIM to remain generally stable for the rest of the year. Please turn to slide 8. Non-interest income increased by $15 million to $181 million and was above our guidance range. Compared to the second quarter of 2025, non-interest income improved by 7%, due to my growth in debit and credit card fees of 13% and 7% respectively, as well as a 7% increase in asset management and insurance fees.

demonstrating our ability to benefit from our breadth of product offerings. We now expect quarterly non-interest income to be in the range of $165 million to $170 million for the year, reflecting continued strength in interchange income from the debit and credit card activities, and including growing contributions from our corporate credit card offerings. Please turn to slide 9. Operating expenses increased by approximately $17 million to $484 million. The increase was primarily related to higher personal costs, including profit-sharing expense and performance-based compensation linked to the corporation's financial results. Business promotion expenses also increased due to higher credit card loyalty program activity. We continue to invest in technology, digital capabilities, and transformation initiatives, along with our annual salary increases that are expected to impact personnel expenses during the second half of the year.

Based on current trends, we expect full-year expense growth to remain at approximately 2% to 3% for the year, including profit-sharing expenses. Our effective tax rate was 14% during the quarter, driven by higher tax exempt income. We now expect the effective tax rate for the year to be between 14 and 15% due to higher projected exempt income. Please turn to slide 10. Tangible book value per share increased by $2.96 to $87.94, while CET1 increased 16 basis points to 16.1%, reflecting strong internal capital generation.

During the quarter, we returned a total of $174 million to shareholders, with approximately $125 million coming from common stock repurchases. Year to date, we have repurchased $280 million in common stock, and as at the end of the second quarter, have fully utilized the $500 million common stock repurchase authorization approved in 2025. Earlier today, we announced a 20% increase in our quarterly dividend to $0.90 per share beginning in the fourth quarter, subject to board approval, as well as a new share repurchase authorization of up to $1 billion. During the remainder of 2026, we expect to repurchase an additional $300 million to $400 million in common stock.

Our capital actions continue to reflect a balanced approach between supporting growth, maintaining capital strength, and returning excess capital to shareholders. With that, I turn the call over to Lidia.

Thank you, Jorge, and good morning. Before turning to credit, I would like to briefly acknowledge the leadership transition we announced today. First, I want to express my sincere gratitude to Javier for his leadership, guidance, dedication to POPULAR, and friendship to me. I'm also excited and humbled to take on the CFO role, succeeding Jorge, and I look forward to supporting him Finally, I want to congratulate Luis Sousa, who will succeed me as Chief Risk Officer. Luis has been a trusted partner, and I'm confident he will do an outstanding job leading our risk organization.

With that, credit quality remained stable during the second quarter, supported by continued improvement in consumer credit performance, stable mortgage trends, and the resolution of a previously disclosed commercial loan. In the consumer portfolio, performance continued to improve. Consumers remained resilient despite elevated gas prices and inflation, supported by higher tax refunds and a solid labor market. Net charge ups benefited from lower losses in the auto portfolio and the allowance for consumer loans declined, reflecting improved credit quality in auto and credit cards. Mortgage performance continues to be strong, with historical low delinquency levels and net recoveries. While underlying consumer and mortgage trends continue to improve, reported credit metrics this quarter were primarily influenced by two significant commercial developments.

First, we resolved our largest non-performing relationship, a $155 million commercial loan that has been classified as non-performing since the third quarter of 2025. During the quarter, we recognized a $71 million charge-off and transferred the remaining $84 million balance to loans held for sale. The sale was completed on July 2nd for $84 million. From a credit quality perspective, this resolved and removed the corporation's largest non-performing commercial exposure. Separately, two unrelated commercial and industrial relationships totaling approximately $129 million were placed on non-accrual status. These were borrower specific situations and are not indicative of broader deterioration in the portfolio or in the industries in which those borrowers operate.

Turning to slide number 11, total non-performing loans decreased by $45 million to $413 million, and the NPL ratio improved to 1.04% compared with 1.17% in the prior quarter. BPR NPLs decreased by 52 million, while NPLs in POPULAR Bank increased by 8 million, primarily driven by commercial NPLs. Excluding consumer loans, NPL inflows increased by approximately 137 million, primarily reflecting the two C&I relationships I discussed. We continue to monitor commercial trends closely. However, the activity remains isolated through a small number of borrowers.

Turning to slide number 12, net charge-offs were 104 million, or an annualized 1.05%, compared to 60 million, or 61 basis points in the prior quarter. The increase was primarily driven by the 71 million charge-off associated with the resolved commercial relationship. Excluding this commercial charge-off, the net charge-off ratio was 33 basis points, driven by continued improvement in consumer performance, including lower auto losses and net recoveries in our mortgage portfolio. Given our year-to-date commercial charge-off and NPL influence this quarter, we now expect net charge-off to be in the range of 65 to 80 basis points for the full year. The decline in the allowance was largely driven by the resolution of the telecommunication relationship and continued improvement in consumer portfolio performance.

These benefits were partly offset by reserves established for the new commercial inflows and continued low growth. Our allowance coverage remains strong. The ACL to loans ratio was 1.97%, and the ACL to NPL ratio increased to 190% from 180% in the prior quarter.

To summarize, while the quarter included a few discrete commercial credit events, the underlying trends in our portfolio remain stable, supported by continuing strength in the consumer mortgage portfolio. We have proactively addressed our largest non-performing exposure, maintained strong reserve coverage, and continued to monitor our loan book.

With that, I would like to turn the call over to Javier for his concluding remarks.

Thank you. Thank you, Lydia and Jorge, for your kind words and updates. We are very happy with our second quarter results. During the quarter, we delivered strong earning growth, stable margin performance, continued balance sheet growth, and announced meaningful increases in capital return to our shareholders. At the same time, we continue to advance our strategic priorities and invest in the long-term growth of our franchise. A source of pride for me and our employees is supporting our communities through investments and partnerships that create long-term social, environmental, and economic value. These efforts and the progress achieved in 2025 are detailed in our Corporate Sustainability Report, published in June. Some highlights include the deployment of more than $1.1 billion in loans to support small businesses and entrepreneurs across our regions, and the launch of MiCredito to help customers better understand and improve their credit profile.

Together with our financial performance and our three strategic objectives these efforts reflect our commitment to creating long value for our customers employees communities and shareholders On behalf of my colleagues I thank our clients and shareholders for their continued trust and support in POPULAR On a personal note I want to express my profound gratitude to everyone that has been a part of my extraordinary journey at POPULAR A journey full of challenges overcome, shared learnings, and above all, relationships with special people that I will always treasure.

I am especially grateful to my colleagues at POPULAR for their support, trust, and dedication throughout the years. Leading this organization has been truly a privilege. I live with enormous satisfaction and grateful as I see POPULAR solid, united, and moving forward with a clear purpose and strategy. And with that, we are now ready to answer your questions.

It's been a privilege. It's been a privilege.

So, good morning, Gareth, Jorge. So, first, the authorization does not have a time limit. So, you know, I want to clarify that it is not a 12-month deadline or anything like that. We did say that we would be executing buybacks for the rest of the year in the $300-400 million range. If you add that to the dividends expected with the increase in the third and fourth quarter, along with the activity that we've had year-to-date, that will cover around 100% of the 2025 net income. So we like kind of that pace to understand the math and let the balance sheet grow, We're still open to optimizing our capital stack. We're still out there considering the additional tier one capital to strengthen that part and create that efficiency in our capital stack.

But frankly, the market rates are just not in our favor right now, and there's no reason for us to do that, even the size of capital that we have, and that really is just an optimization strategy. Other than that, we continue to be committed. We've tried to be more intentful in our discussions to reduce the CET1, but we continue in our philosophy that we want to do this over time. We want to have that flexibility, but certainly we understand.

Yeah, we did have a strong growth in both markets this quarter. In the U. S. , we've talked about our construction portfolio that has seen some continued increase. We do still believe that there are headwinds there in the timing of payoffs as people term out those construction loans versus the pipeline and the speed at which, particularly in our New York, multifamily development market is moving. So that's a little bit of a headwind. In Puerto Rico, over the last few years, including in the second quarter, we benefit from some large-ticket loans.

And as we look at the pipeline, while there's still a lot of activity and a lot of good opportunities, we do see fewer of those large-ticket loans. So that is something that we have in mind. As we look maybe further out, we do expect probably more spending in public works or infrastructure projects. As you know, certainly we approach a political, you know, a election year in 2028. There is a lot of activity like that in Puerto Rico. And as you know, given our size, we usually get the first look at all these projects. We're not always going to pursue them. We're not always going to win, but we are going to have a good chance to be selective.

And we continue to intend to do that. One thing I'll note on our guidance, certainly resolving the $155 million loan this quarter, that also reduces the net growth of the loan portfolio.

Yeah, okay.

I think a lot of the driver for the probation this quarter was those two loans, actually. So, I mean, when you look at the overall performance of our credit book, it was actually positive. We said there was improved delinquency performance credit metrics from our consumer portfolio and continued strong performance from our mortgage book. So a lot of the probation that we had was related to those loans. We did not specifically talk about the amounts, but we think they are adequately reserved based on the information that we have as of today.

Thank you. Thank you, Randy. Welcome back.

GOOGLE BORRES- Yeah, I'll share some thoughts, and then Jorge, obviously, will chime in. I mean, I think we've been saying in the last few quarters that we've seen, you know, competition. There's always competition in Puerto Rico. I mean, I don't get this idea that this is a market where competition is not present. We compete every day for what we do. And not only local competition, but also competition from big banks and fintechs and other financial We have a lot of institutions that come in and compete in different segments and products and services. But that said, I mean, competition is still rational. So we also said that we will defend our turf and price rationally and reasonably, both on the deposit and on the credit products.

So, because we don't want to do anything that doesn't make any sense, and sometimes we'll let some opportunities pass if they don't make sense to us, right? Considering all things considered. So in the United States, and I'm worried if you want to add anything. Yeah, so in the U. S. , we are seeing continued competition, particularly in Florida, New York.

In Florida, we see a lot of competition from smaller community banks, you know, more localized players. And then in the New York market, it tends to be from bigger players. We're also seeing tough competition in the online channels where really the yield is your competitive advantage there. So in Puerto Rico, our deposit costs did go up on the non-public two basis points. This is something that we have kind of forecast or predicted to you guys in these conversations. And they're just reflective of our kind of targeted focus on retaining relationships. And we've been, since, I guess, the end of 2024, just revised kind of our focus, the structures, incentives, as well as exception pricing matrices that allows us.

And it's been very successful for us to retain good clients.

And then on the expense guidance for the year, you obviously tweaked it down. But even at the higher end in particular of the 2% to 3%, it implies a pretty good pick out from here, even with the higher incentive compensation related stuff in 2Q. Are there any projects related in the back half of the year that would raise professional fees, or can you talk about the inflection in the back half versus 2Q in particular? Sure. We do expect expenses to go higher in the second half. One big item, as I mentioned in my prepared remarks, is our annual salary increases. They're effective in July, so that probably adds $4 or $5 million a quarter just on that.

And then we continue to work on our transformation efforts. And as we said in the past, you have kind of this ebb and flow of projects that get done and move on. And certainly that's all part of the guide. I think that one part that's important, and I think the significant change, is that the guide does include the range of profit sharing, including if we had to max out on the profit sharing, it still fits within the range that we're providing you.

I can't be in the house too much because my wife won't like it, but yes, thank you for those very kind words.

There is seasonality. I mean, I think we go through, and what we've said in the past is that we see in the first quarter that ending balances go up. Average balances are, you know, flattage. They can move along. The second quarter, we see higher average balances and ending balances start coming down, and it's just really the cycle of tax refunds and then people using those tax refunds. Third quarter, we would expect the ending balances to come down, and we would also expect Average balances to come down. That's been our kind of trend over the last few years. And in the fourth quarter, we see that, you know, the ending balances come up and average balances are more stable.

So the second quarter really behaved as we would have expected based on those seasonal trends. Averages that were significantly up, ending balances did come down. I think excluding non-public in Puerto Rico is around $250 million. When we look at and double-click on the activity from our clients, frankly, where we see the big increase in outflows is in POS, so interchange. And that's consistent with the fee income that you saw, increasing in debit card and credit card fee that's, you know, I think 7%, 13% up year over year. So we truly see our clients really using this money and spending it. We did see some higher payments to government so higher tax payments from some of our clients And again that consistent with the increase that we saw in public funds that a large part of that increase was driven by estimated tax payments particularly from pharmaceuticals and manufacturing companies Okay, I appreciate that.

And then maybe in terms of the consumer credit continuing to be very strong, you know, was that also, you know, impacted by, Is there any one-time tax benefit to individuals in the quarter in Puerto Rico, and any kind of sustainable benefit, or is that more of just kind of a one-time for the quarter? I think in the same token, there is seasonality in deposits. There is also seasonality in our consumer performance.

What I think we're most encouraged is the level of delinquencies and charges are below the same period last year. So it's not only that we see the seasonality, which is driven by tax return. You see lower losses and lower delinquencies in the first half of the year than the second half. But in this first half of the year, it's actually lower than what we had last year. So we are very, very encouraged by the trends in our consumer portfolio.

Thanks, Lydia.

Yeah. I mean, when we say stable, we do mean stable for the rest of the year based on what we're seeing now. The first driver is the mix. We've increased our target for public funds by 10%. That's our highest or the most costly deposit that we have in Puerto Rico at size. That's not unreasonable to see that they would have an impact on NIM. The other thing is just exactly what you talked about, is that the three-month treasuries have been going up. That's not necessarily being reflected in a move in federal funds, so there's a little bit of basis risk there that narrows the spread. On that, we'll continue our strategy of investing in treasuries, T-bills, and notes that will mitigate some of that, but clearly as we look out, both our NII guidance and our NIM guidance are taking into consideration kind of what we're seeing.

And then one more on the updated ROTC range. Obviously, seasonally strong quarter, I think adjusted ROTC this quarter was like 16 and a half or so. So I guess where are we now kind of in your mind from a core standpoint? And as you think about the strength that the bank and the island have been enjoying over the last couple of years, are we nearing that kind of peakish level here right now? Or is the expectation, if you kind of normalize the last couple of quarters, that ROTC in this current environment can continue grinding higher? Well, I'm just going to say, I'm going to react to the peak comments. I mean, I don't think we're nowhere near our peak and what we can achieve as a franchise.

I just want to say that. And then maybe Horton may add some rational numbers to this. I mean, we're not stopping here, quite frankly. I think we've only begun. We're seeing the efforts of a lot of work in our transformation program the last four years. Teams are energized. So, I mean, I think we can't really talk about a peak. I mean, as I said, we're just beginning.

I'm not sure that I need to add anything to that.

And then just last for me on capital return. So, you upsized the buyback here. I'm just wondering in terms of mainland M&A, if I'm not mistaken, you have some NOLs that are beginning to expire in 2028. I'm just wondering where that factors in to the potential for doing mainland M&A. And then on the buyback, would you need to optimize that capital stack prior to really leaning into it, or is this kind of back end of the year run rate a good one to extrapolate for the time going forward? Let me answer the question about the DTA first, and then I'm sure Javier can talk about M&A.

But I'm not sure I quite understood the last part of that question, so please set that aside, and we'll go back to it, if you don't mind. On the DTA, you're right, the NOLs to begin to expire in 2028. The best way to realize the benefit of those is to increase our profitability. We are focused on doing that. We are not going to drive an acquisition strategy to realize the benefit of that DTA. As you know, the part of the DTA or the NOL that we're not going to utilize is reserved, so it's not part of our tangible value at this stage. It is certainly a benefit if you were to look at an M&A acquisition, but it's not going to be the driver for buying something.

So, I don't know, Javier.

Yeah, no, thank you, Jorge. I think you've heard us say that our primary focus continues to be on our transformation efforts. We're always looking for opportunities to add profitable niche businesses and teams and assets in the U. S. , as we've stated.

But whole bank M&A is not a priority. And, you know, we've also said that, you know, there is a high threshold for any transaction that we may consider, and we live on the opportunities to grow inorganically as long as they meet a few criteria. And compelling enough for us to consider relocating resources away from transformation being one. Core deposits, it needs to strengthen our deposit franchise with lower cost deposits. It needs to be commercially led, it needs to enhance our commercial led niche business strategy. It needs to be consistent geographically, create greater market penetration in our existing footprint, increasing opportunities for value creation through cross synergies or extend presence to adjacent markets or geographies. Scale is going to be important or would be important, should be right size for our U. S. business.

And for me, most importantly, of course, is the cultural fit. It needs to be aligned to our culture of performance and employee well-being. So, you know, we're very mindful of it. So that's our stand on M&A. And by the way, you can imagine we're very collaborative around here. We put those together as a team. I don't think that the answer will be much different the next quarter.

You had a team where a third part to your question related to preferreds. Can you repeat that so we can address that? Yeah, I guess maybe, and thank you for the caller on M&A.

Absolutely. I mean, for us, optimizing capital would mean we're shifting CET1 to additional Tier 1 and whatever proceeds would be used to promptly or quickly reduce the CET1 by a similar amount.

Thank you, Kelly. Any ideas you can share of that?

Yeah, I mean, we definitely have efficiency efforts that are ongoing. In our kind of baseline number this year, we had about $50 million in savings across the organization. None of these are huge, you know, big splash projects. These are really asking people to take an extra step and focus on excellence, operational excellence. And it's, you know, things as simple as, you know, we note that teens will hoard computers, you know, because they're worried that if they have a computer, you know, crash, then they can, you know, have a spare. Well, if you have a lot of people keeping spare computers for an emergency, it adds up a lot of cost. So we've gone back out and, you know, destroyed them, sold them, whatever we need to do to dispose of them.

And that has a lot of savings on just an ongoing basis. And this is an example of the kind of aspects. We are not managing the transformation or the large technology project-driven investments to manage our expenses. I mean, certainly we create budgets and we have an appetite of the level of work we're going to do, but we're not trying to slow down a project to try to, you know, meet an expense guidance. We believe in the efforts of the team and the priority that this has and the value to our shareholders. So, truly, it's, you know, some things maybe you slow down your hiring process or a project gets delayed or, you know, you get lucky on something you thought were going to cost to dispose and it didn't cost to dispose it.

You know, all these little things make a difference in our range.

Lydia, I'm going to throw out a credit question. I think pre-COVID, you guys used to always talk about maybe an 80 to 120 basis point normalized net charge off ratio. Clearly, even with the, you know, was nice to see the cleanup you had of that like large NPL that this quarter that impacted net charge off, but clearly the underlying net charge off ratio continues to stack lower relative to historical norms. Any update on how you guys are thinking about what normalized net charge-off looks like at POPULAR now that we're six years out of the start of the pandemic?

I think we are providing guidance of our expectation for the year that should help inform that decision. And I agree with you. I mean, we have seen strong performance from our book, particularly our mortgage book. Our mortgage, back in the days when you're citing the 120 basis points, that book had losses of around 1%. And for the last three or four years, there have been net recoveries rather than losses.

And that performance, I think, is driving the good results that you're seeing from our book.