Prepared remarks
Good day, and thank you for standing by. Welcome to the Popular Inc second quarter 26 Conference Call. At this time, participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press *11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press *11 again. Please be advised I would now like to hand the conference over to your first speaker today, the Investor Relations Officer at Popular, Paul J. Cardillo. Please go ahead.
Good morning, and thank you for joining us. With me on the call today are our President and CEO, Javier D. Ferrer-Fernández; our CFO, Jorge Jose García; and our CRO, Lidio V. Soriano. We 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. 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 uncertainty. Factors that could cause actual results to differ materially from these forward-looking statements are discussed in today's earnings release and our SEC filings. You may find today's press releases and our SEC filings on our webpage at popular.com. I will now turn the call over to Javier.
Well, thank you, Paul, and good morning, everyone. Before going into our results, I would like to comment briefly on this morning's announcement about my retirement at the end of August. After close to 12 incredible years at Popular, with the organization in a very strong position, I have decided to focus on my health and spend 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 is not about one person; it is about the whole institution and the quality of its people. With that, please turn to slide 4 to discuss the highlights of a very strong quarter. We reported net income of $278 million and earnings per share of $4.35, an increase of $0.57 per share or 15% from Q1. The results 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 ROTCE 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 remained stable, with lower consumer net charge-offs. Nonperforming 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 $500 million authorization, and paying our quarterly dividend of $0.75 per share. Earlier this morning, we announced a planned 20% increase in our quarterly dividend to $0.90 per share and a new $1 billion share repurchase authorization. Before turning it to Jorge, I will comment briefly on the business environment in Puerto Rico. Business activity in Puerto Rico remained stable during the second quarter. While some indicators have somewhat moderated from the strong levels experienced 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 onshoring 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. Cruise passenger arrivals increased approximately 45% year over year through May. Air passenger traffic at Luis Muñoz Marín International 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 #1 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 U.S. Virgin Islands. We are pleased that more than half of Banco de Valle's Puerto Rico 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 health care professionals and pursuing opportunities in other attractive high-value segments. In the U.S., we are 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 Crecemos.' 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 collaboration over the last few years. I have 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 continued 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 provision expense. Profitability continues to improve: 17%, up from 15.5% in the first quarter and 13.3% a year ago. Given the strength of our results and our confidence in our ability to deliver sustainable returns, we are establishing a higher annual ROC 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 7. Net interest income increased by $23 million to $693 million, driven by loan growth, fixed asset repricing, and higher investment balances supported by deposit growth at BPPR. On a GAAP basis, NIM remained stable at 3.66%. On a taxable equivalent basis, NIM expanded 3 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 at 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. Customer deposits, excluding public funds, declined by $400 million. The point-to-point decreases in balances are 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 1 basis point to 1.57%, demonstrating continued stability of our funding base. At BPPR, deposit cost increased by 1 basis point, driven by a 2-basis-point increase in nonpublic customer deposits as a result of targeted retention strategies, while public deposit cost decreased by 5 basis points. At Popular Bank, deposit cost increased by 4 basis points, reflecting competitive conditions in our markets and the 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% to 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. Noninterest income increased by $15 million to $181 million and was above our guidance range. Compared to the second quarter of 2025, noninterest income improved by 7%, driven by growth in debit and credit card fees of 13% to 17%, 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 noninterest 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 personnel 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% to 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 $125 million coming from common stock repurchases. Year to date, we have repurchased $280 million in common stock. As of the end of the second quarter, we 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 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 Lidio.
Thank you, Jorge. 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 his friendship to me. I am also excited and humbled to take on the CFO role succeeding Jorge, and I look forward to supporting him as he steps into the CEO role. Finally, I want to congratulate Luis Sosa, who will succeed me as chief risk officer. Luis has been a trusted partner and I am 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 strength, 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-offs 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 continued to be strong, with historically low delinquency levels and net recoveries. While underlying consumer mortgage trends continue to improve, credit metrics this quarter were primarily influenced by two significant commercial developments. First, we resolved our largest nonperforming relationship: a $155 million commercial loan that had been classified as nonperforming 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 2 for $84 million. From a credit quality perspective, this removed the corporation's largest nonperforming commercial exposure. Separately, two unrelated commercial and industrial relationships totaling approximately $129 million were placed on nonaccrual status. These were borrower-specific situations and are not indicative of broader deterioration in the portfolio or the industries in which those borrowers operate. Turning to slide 11. Total nonperforming loans decreased by $45 million to $413 million and the NPL ratio improved to 1.04% compared with 1.17% in the prior quarter. BPPR 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 $137 million, primarily reflecting the two C&I relationships I discussed. We continue to monitor commercial trends closely; however, the activity remains isolated to a small number of borrowers. Turning to slide 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-offs and NPL inflows 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 telecommunications relationship and continued improvement in consumer portfolio performance. These benefits were partly offset by reserves established for the new commercial inflows and continued loan 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, underlying trends in our portfolio remained stable, supported by continued trends in the consumer mortgage portfolio. We have proactively addressed our largest nonperforming exposure, maintain strong reserve coverage, and continue 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, Lidio and Jorge, for your kind words and update. We are very happy with our second quarter results. During the quarter, we delivered strong earnings 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 Mi Crédito 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-term 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 who 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 leave with enormous satisfaction and gratitude 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. Thank you.
Questions and answers
Press *11 on your telephone and wait for your name to be announced. Our first question comes from Jared David Shaw of Barclays. Your line is open.
Thank you. Good morning. Javier, congratulations on your retirement. And Jorge, Lidio, and Luis, looking forward to working with you in your new roles as well.
Alright. Thank you. It's been a privilege. Thank you.
Yeah. There are a lot of good things in this quarter to talk about. But when you look at the target for ROTCE and the buyback that was announced, have you changed your underlying expectations for optimal capital levels? And should we think of that $1 billion as a 12-month goal for buybacks?
Good morning, Jared. This is Jorge. First, the authorization does not have a time limit, so I want to clarify that it is not a 12-month deadline. We did say that we would be executing buybacks for the rest of the year in the $300 to $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 have had year to date, that will cover around 100% of the 2025 net income. We like to lay out that math and then let the balance sheet grow, and that certainly helps reduce the CET1 as we go forward. We are still open to optimizing our capital stack, meaning we are looking at additional tier 1 capital to strengthen that part and free efficiency in our capital stack. But frankly, the market rates are just not in our favor right now, and there is no reason for us to do that. Given the size of capital that we have, this is really just an optimization strategy. Other than that, we remain committed. We have tried to be more intentional in our discussions to reduce CET1, but we continue in our philosophy that we want to do this over time and maintain flexibility.
And then looking at loan growth, it sounds like clearly the underlying economy is still strong and you are in a really good position. What would have to happen, either in your business, to see loan growth expectations move higher or even up to the higher end of the range, given what we've seen so far this year?
We did have strong growth in both markets this quarter. In the U.S., our construction portfolio has seen some continued increase, but we still believe there are headwinds 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, projects are moving. That is a bit of a headwind. In Puerto Rico, over the last few years, and including in the second quarter, we benefited from some large-ticket loans. If we look at the pipeline, while there is still a lot of activity and good opportunities, we do see fewer of those large-ticket loans. That is something we have in mind. Looking further out, we do expect probably more spending in public works or infrastructure projects as we approach a political election year in 2028. Given our size, we usually get the first look at these projects. We are not always going to pursue them, and we are not always going to win, but we will be selective. Also note that resolving the $155 million loan this quarter reduced the net growth of the loan portfolio.
Okay. Thanks. If I could ask one more: regarding the inflows, those two loans you called out, any thought around what loss content could be there? Or if you have a reserve, or is that something you can work out over time but not necessarily with a lot of loss content?
A lot of the driver for the provision this quarter was those two loans, actually. When you look at the overall performance of our credit book, it was actually positive: improved delinquency performance and credit metrics in our consumer portfolio and continued strong mortgage performance. A lot of the provision that we recorded was related to those loans. We did not specifically disclose the exact reserve amounts for each loan, but the provision reflected our assessment based on the information we had as of today.
Thank you.
Our next question comes from Brett Rabatin of Stonix Group. Your line is open.
Hey, good morning, everyone. I will add my congratulations to everyone on their new endeavors and roles.
Thank you, Brett. Welcome back.
I wanted to first talk about the competitive landscape. It sounded like perhaps you were seeing some increased competition. Can you talk about both the U.S. and Puerto Rico and what you are seeing, particularly on the island?
I will share some thoughts, and then Jorge will chime in. We have been saying in the last few quarters that we have seen increased competition. There is always competition in Puerto Rico; we compete every day. Not only local competition, but also competition from big banks, fintechs, and other financial institutions that enter specific segments and products. That said, the competition is still rational. We will defend our turf and price rationally and reasonably, both on the deposit and credit sides. We do not want to do anything that does not make sense, and sometimes we will let some opportunities pass if they do not align with our underwriting and pricing standards. Jorge, do you want to add the U.S. view?
In the U.S., we are seeing continued competition, particularly in Florida and New York. In Florida, we see a lot of competition from smaller community banks and more localized players. In New York, competition tends to come from bigger players. We are also seeing tough competition in online channels where yield is the competitive advantage. In Puerto Rico, our deposit cost did go up on the nonpublic side by 2 basis points. This reflects our targeted focus on retaining relationships. Since the end of 2024, we revised our focus, incentive structures, and pricing exception matrixes, which has been successful for retaining good clients.
That is helpful. On the expense guide for the year, you reiterated your guide, but even at the higher end of 2% to 3% it implies a pickup from here, even with higher incentive compensation in Q2. 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 Q2 in particular?
We do expect incentives to be higher in the second half. One big item is our annual salary increases, effective in July, which probably adds around $4 to $5 million a quarter just on that. We continue to work on transformation efforts, and as we've said in the past, there is an ebb and flow of projects that get completed and others that begin. That dynamic is part of our guide. An important point is that the guide includes the range for profit-sharing; even if we were to max out profit-sharing, it still fits within the range we're providing.
Great. Thanks for the color, guys.
Our next question comes from Arren Cyganovich of Truist Securities. Your line is open.
Thank you. Best wishes to Javier. I really enjoyed meeting you last year. Your passion and intensity definitely stand out, and I'm sure your family will look forward to your extra time at home.
You know, I cannot be in the house too much or my wife will not like it. But yes, thank you for those very kind words. Congratulations to Jorge, Lidio, and Luis.
I definitely look forward to continuing to work with you.
On the deposit side, excluding government deposits, they were down. It looked like demand deposits were the area of decline. Any color around that—seasonality or other drivers?
Yes, there is seasonality. In the first quarter, ending balances go up; average balances are flatter. In the second quarter, we see higher average balances and ending balances start coming down as clients spend tax refunds. Third quarter, we expect ending balances to come down and average balances to decline. That has been the trend over the last few years. For this quarter, excluding public funds in Puerto Rico, the reduction was around $250 million. Looking at client activity, the big increase in outflows was POS and interchange activity, consistent with the fee income increase in card fees. We also saw higher tax payments from some clients, consistent with the increase in public funds driven by estimated tax payments particularly from pharmaceuticals and manufacturing companies.
On consumer credit continuing to be strong, was that also impacted by a one-time tax benefit to individuals in Puerto Rico this quarter? Is that a one-time effect or somewhat sustainable?
In the same token, there is seasonality in deposits and in consumer performance. What is most encouraging is that levels of delinquencies and charge-offs are below the same period last year. So the first half of this year shows lower losses and lower delinquencies than the first half of last year. We are very encouraged by the trends in our consumer portfolio.
Thank you.
Our next question comes from Timur Braziler of UBS. Your line is open.
Hi, good morning, everyone.
Morning, Timur.
Looking at the back half of the year on deposit trends, is the Q2 end-of-period decline any indication of the magnitude of Q3 seasonality? Also, you mentioned margin being flat for the rest of the year with some moving dynamics around deposit pricing and perhaps higher costs on the public fund side. With 3-month Treasury yields moving up in 2Q, do you expect margin to be flat in each of the next two quarters, or could it tick down in 3Q and recover in 4Q as some public funds are wound down?
When we say stable, we do mean stable for the rest of the year based on current expectations. The first driver is mix: we have increased our target for public funds by about 10% and those are among the most costly deposits we hold. Also, 3-month Treasuries have been moving up, which is not necessarily reflected in a move in federal funds, so there is a little basis risk that narrows spread. We will continue our strategy of investing in Treasuries, bills, and notes, which will mitigate some of that. Our NII and NIM guidance take into consideration what we are seeing in futures today and any expected Fed action.
That is helpful. One more on the updated ROTCE range: adjusted ROTCE this quarter was around 16.5%. Are we near peak levels here, or do you expect ROTCE in the current environment to continue grinding higher once you normalize recent quarters?
I want to react to the 'peak' comment: I do not think we are near our peak or where this franchise can go. We have only begun. We are seeing the results of our transformation efforts over the last four years. Teams are energized and we are just beginning; I am not saying we are at a peak.
That is great.
Last on capital return: you upsized the buyback. I understand some NOLs begin to expire in 2028. How does that factor into potential mainland M&A? And if you were to optimize the capital stack, would you be more inclined to front-load buybacks?
On the DTA and NOLs beginning 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 solely to realize the benefit of the DTA. The portion of the DTA we are not going to utilize is reserved and not part of our tangible value at this stage. It can be a benefit for an acquisition, but it won't be the driver for an acquisition.
Our primary focus continues to be on our transformation efforts. We're always looking for opportunities to add profitable niche businesses and teams in the U.S., but whole-bank M&A is not a priority. There is a high threshold for any transaction we may consider. Any opportunity would need to meet criteria: strengthen core deposits with lower-cost funding, be commercially led, enhance our niche commercial strategy, be geographically consistent, be right-sized for our U.S. business, and—most importantly—fit culturally with our organization.
Can you repeat the last part of your question so we can address it?
Yes. If you did issue preferreds or otherwise optimize capital, would you use proceeds to front-load or upsize buybacks in any given quarter?
Absolutely. For us, optimizing capital would mean shifting CET1 into additional tier 1, and any proceeds would be used to promptly or quickly reduce CET1 by a similar amount, which could allow us to deploy more capital to buybacks.
Perfect. Thank you, guys. Javier, again, congratulations on a well-earned retirement. Looking forward to working with you, Jorge, and the new team.
Thank you for those kind words.
Our next question comes from Kelly Motta of KBW. Your line is open.
At the risk of repeating, congratulations again, Javier, on your retirement, and congratulations to Jorge and Lidio on your promotions. I hope Javier has something really fun planned. Looking forward to working with Jorge and Lidio in your expanded roles. Starting on expenses: you reiterated your guide, but NII and fee outlooks are better. Presumably profit sharing expenses will be higher. Were there projects pushed out or additional savings realized? Even though the overall guide is unchanged, can you walk through the moving pieces?
We have ongoing efficiency efforts. In our baseline number this year, we identified about $50 million in savings across the organization. None of these are large splash projects; they are operational excellence steps. For example, teams sometimes hoard spare computers for emergencies. If many people keep spare computers, it adds up. We reviewed and disposed of excess equipment, which provides ongoing savings. We're not managing transformation or large technology projects simply to hit expense guidance: we believe in these investments. These efficiency steps include slowing hiring in some areas, delaying a project or two, or realizing unexpected savings in disposals. All these smaller actions help us remain within our 2% to 3% expense growth guide.
Got it. That is helpful. One for Lidio: pre-COVID you guys talked about a normalized net charge-off ratio of maybe 80 to 120 basis points. Even after the large NPL cleanup this quarter, the underlying net charge-off ratio continues to track lower relative to historical norms. Any update on how you think about normalized net charge-offs now that we are further out from the pandemic?
We provided guidance for the year that should inform that view. We have seen very strong performance from our book, particularly mortgages. Historically, the mortgage book had losses around 1%, but for the last three to four years there have been net recoveries rather than losses. That performance is driving the good results you're seeing in our overall net charge-off metrics.
That is helpful. I will step back. Congrats again to all.
Thank you.
Our next question comes from Gerard Cassidy of RBC. Your line is open.
(No question asked; caller changed their mind.)
This concludes the question-and-answer session and today's conference call. Thank you for participating, and you may now disconnect.