10-Q: Popular, Inc. Reports Strong Q3 Earnings Amidst Rising NPLs

Popular, Inc. announced a significant increase in net income and net interest income for the third quarter and first nine months of 2025, driven by loan growth and lower deposit costs, despite a notable rise in non-performing loans and a goodwill impairment charge.

Summary

• Net income for the third quarter of 2025 increased by $56.0 million to $211.3 million, compared to $155.3 million in the prior year's quarter.
• Net income for the first nine months of 2025 rose by $162.9 million to $599.3 million, up from $436.4 million in the same period of 2024.
• Net interest income for Q3 2025 grew by $74.0 million to $646.5 million, with the net interest margin expanding by 27 basis points to 3.51%.
• Total assets reached $75.1 billion as of September 30, 2025, an increase of $2.1 billion from December 31, 2024.
• Loans held-in-portfolio increased by $1.6 billion to $38.7 billion, with growth across commercial, construction, mortgage, auto, and leasing portfolios.
• Total deposits increased by $1.6 billion to $66.5 billion, driven by high-cost deposits and Puerto Rico public deposits.
• Non-performing loans (NPLs) increased by $151.4 million to $502.2 million, primarily due to two unrelated commercial exposures totaling $188.4 million.
• The ratio of NPLs to total loans held-in-portfolio rose to 1.30% from 0.95% at December 31, 2024.
• A goodwill impairment charge of $13.0 million was recognized in the U.S. based equipment leasing subsidiary (Popular Equipment Finance) due to lower projected earnings.
• The allowance for credit losses (ACL) to NPLs ratio decreased to 156.6% from 212.7% at December 31, 2024.
• The Common Equity Tier 1 Capital ratio was 15.79%, a slight decrease from 16.03% at December 31, 2024.

Sentiment

Score: 6

Explanation: While net income, net interest income, and loan growth were strong, the significant increase in non-performing loans due to specific commercial exposures and the goodwill impairment charge introduce notable credit quality and asset valuation concerns. The mixed economic outlook for Puerto Rico and broader market uncertainties also temper enthusiasm, leading to a moderately positive but cautious sentiment.

Positives

• Net income increased significantly by $56.0 million for the quarter and $162.9 million for the nine months ended September 30, 2025.
• Net interest income grew by $74.0 million in Q3 2025, driven by lower cost of deposits, higher yields on U.S. Treasury securities, and strong loan growth.
• Net interest margin expanded by 27 basis points to 3.51% in Q3 2025, and by 26 basis points to 3.46% for the nine months.
• Total loans held-in-portfolio increased by $1.6 billion, reflecting broad-based growth across commercial, construction, mortgage, auto, and leasing segments.
• Total deposits increased by $1.6 billion, with non-interest-bearing deposits remaining stable, indicating effective deposit retention strategies.
• Stockholders' equity increased by $502.6 million to $6.1 billion, and tangible book value per common share rose by $10.96 to $79.12.
• The Corporation and its banking subsidiaries remain well-capitalized, with a Common Equity Tier 1 Capital ratio of 15.79%.
• Net charge-offs decreased by $0.7 million for the quarter and $25.3 million for the nine months ended September 30, 2025, indicating improved performance in some loan categories, particularly consumer loans.

Negatives

• Non-performing loans (NPLs) increased significantly by $151.4 million to $502.2 million, primarily due to two large, unrelated commercial exposures.
• The ratio of NPLs to total loans held-in-portfolio rose to 1.30% from 0.95% at December 31, 2024, indicating a deterioration in credit quality.
• The allowance for credit losses (ACL) to NPLs ratio decreased to 156.6% from 212.7% at December 31, 2024, reflecting reduced coverage for non-performing assets.
• Operating expenses increased by $28.0 million for the quarter and $39.1 million for the nine months, partly due to a non-cash goodwill impairment charge and higher personnel costs.
• A goodwill impairment charge of $13.0 million was recognized for the Popular Equipment Finance (PEF) reporting unit due to lower projected earnings.
• The Puerto Rico Economic Activity Index showed a 0.9% year-over-year decline in June 2025, suggesting ongoing economic challenges in a key market.

Risks

• The rate of growth or decline in the economy and employment levels, particularly in Puerto Rico, where a significant portion of the business is concentrated.
• Adverse economic conditions, including high levels of inflation, affecting housing prices, the job market, consumer confidence, and spending habits, which may impact non-performing assets, charge-offs, and provision expense.
• Changes in interest rates and market liquidity, which may reduce interest margins, impact funding sources, reduce loan originations, and affect the value of the investment portfolio.
• The impact of bank failures or adverse developments at other banks and related negative media coverage on investor and depositor sentiment.
• The current fiscal and economic challenges of Puerto Rico and the measures taken by the Puerto Rico Government and the Federally-appointed oversight board.
• Uncertainty regarding future balances of Puerto Rico public sector deposits, which may be impacted by federal funds received and the financial condition of the Puerto Rico Government.
• Unforeseen or catastrophic events, including extreme weather events, natural disasters, acts of violence or war, or health-related crises, which could disrupt operations.
• Ability to achieve expected benefits from transformation initiatives, including projected earnings, efficiencies, and return on tangible common equity.
• Changes in federal bank regulatory and supervisory policies, including required levels of capital, liquidity, and resolution-related requirements.
• Increases to or additional Federal Deposit Insurance Corporation (FDIC) assessments.
• A failure in or breach of operational or security systems or infrastructure, including cyberattacks, e-fraud, and denial-of-service attacks.
• Potential judgments, claims, damages, penalties, fines, enforcement actions, and reputational damage from pending or future litigation and regulatory investigations.
• The ongoing U.S. government shutdown could adversely affect customers and the broader Puerto Rico economy, with uncertain duration and scope.

Future Outlook

Management expects Puerto Rico's real GNP to grow by 1.1% in fiscal year 2025 and 0.5% in fiscal year 2026. Puerto Rico public deposits are expected to range between $18 billion and $20 billion in the short term, though their rate of change is uncertain. The Corporation anticipates a reduction in income tax expense by approximately $7.7 million in Q4 2025 due to a tax election. The probability weight for the pessimistic economic scenario remains above 2024 levels due to ongoing economic uncertainty.

Management Comments

• The determination of classifying the two large commercial loans as NPLs was driven by factors specific to the individual borrowers and are not believed to be indicative of a broader decline in portfolio credit quality.
• The Corporation continues to closely monitor the economic landscape and borrower performance, as economic uncertainty remains a key consideration.
• The Corporation's experience managing credit risk under different macroeconomic and operating environments and, more recently, the steps taken around credit tightening supports management's view that exposure to riskier borrowers is adequately managed.
• Carefully monitoring the performance of our loan portfolio and its response to the environment will continue to be a priority.

Industry Context

The banking industry continues to navigate a complex economic environment characterized by fluctuating interest rates and persistent inflationary pressures. While the Federal Reserve has begun to reduce interest rates, the U.S. Consumer Price Index remains above the 2% target, and the Puerto Rico Economic Activity Index shows a decline, indicating mixed economic signals. The industry faces ongoing challenges from potential government shutdowns and geopolitical events, which can impact depositor confidence and loan performance. Banks with significant regional concentrations, like Popular, Inc. in Puerto Rico, are particularly sensitive to local economic and fiscal conditions, including government debt restructuring efforts and federal funding dynamics. The increase in NPLs, even if attributed to specific exposures, highlights the continued need for robust credit risk management across the sector.

Comparison to Industry Standards

• The net interest margin (NIM) expansion of 27 basis points in Q3 2025 to 3.51% is a strong performance, potentially outperforming many regional banks that may be experiencing NIM compression due to deposit cost pressures.
• The Common Equity Tier 1 Capital ratio of 15.79% remains robust and well above the Basel III minimum requirement of 6.5% for a well-capitalized institution, indicating strong capital adequacy compared to industry peers.
• The significant increase in non-performing loans (NPLs) to 1.30% of total loans held-in-portfolio, while attributed to specific exposures, represents a notable deterioration in asset quality that could be higher than the average for well-managed U.S. regional banks, which typically aim for NPL ratios below 1%.
• The decrease in the allowance for credit losses (ACL) to NPLs ratio to 156.6% from 212.7% suggests a reduction in the buffer against potential future losses on non-performing assets, which might be lower than some industry leaders who maintain higher coverage ratios.
• Loan growth of $1.6 billion is positive and indicates successful origination efforts, potentially outpacing some competitors in a tighter lending environment.
• The goodwill impairment charge of $13.0 million for Popular Equipment Finance indicates a specific underperformance within a business unit, which is not an industry-wide trend but rather a company-specific challenge.

Corporate Governance

Legal Proceedings

• Management estimates that the range of reasonably possible losses for current Legal Proceedings, in excess of amounts accrued, ranged from $0 to approximately $7.2 million as of September 30, 2025.
• The outcome of any legal and regulatory proceedings is inherently uncertain and depends on judicial interpretations of law and findings of regulators, judges, and/or juries.

Related Party Transactions

• The Corporation holds a 15.63% equity interest in Centro Financiero BHD, S.A. (BHD) in the Dominican Republic.
• During the nine months ended September 30, 2025, the Corporation recorded $17.0 million in equity pickup from BHD and received $20 million in cash dividend distributions.
• Popular, Inc. (PIHC) fully and unconditionally guarantees certain borrowing obligations issued by its 100% owned consolidated subsidiaries amounting to $94 million.
• PIHC also fully and unconditionally guarantees on a subordinated basis $193 million of capital securities (trust preferred securities) issued by wholly-owned issuing trust entities.

Stakeholder Impact

• Shareholders: Positive impact from increased net income, expanded net interest margin, and increased common stock dividends ($0.75 per share). Negative impact from goodwill impairment and increased NPLs, which could affect future profitability and share price.
• Employees: Positive impact from higher personnel costs, including profit sharing accrual and performance-based incentives. Some employees affected by termination benefits due to business unit changes.
• Customers: Loan growth across various portfolios indicates continued access to credit. Potential negative impact from economic uncertainties in Puerto Rico and the U.S. government shutdown.
• Creditors: Capital ratios remain strong, exceeding minimum requirements, providing comfort regarding the company's ability to meet its obligations. Increased NPLs could be a concern if not managed effectively.
• Regulatory Bodies: The Corporation remains well-capitalized and is subject to ongoing regulatory scrutiny, including FDIC special assessments and compliance with Basel III capital rules.

Next Steps

• Management will continue to monitor and review the U.S. operations results, including recent earnings trends, pre-tax earnings forecast, and other factors.
• The Corporation will continue to monitor the performance of its loan portfolio and its response to the economic environment.
• The Corporation expects to lower its income tax expense by approximately $7.7 million during the fourth quarter of 2025 due to an election to treat certain single members LLCs as disregarded entities.

Key Dates

Recommendation

Popular, Inc. demonstrated strong financial performance with significant increases in net income, net interest income, and loan growth, coupled with an expanded net interest margin. The increase in common stock dividends is also a positive signal. However, these positives are tempered by a notable deterioration in asset quality, evidenced by a substantial rise in non-performing loans due to specific commercial exposures, and a goodwill impairment charge. The decrease in the ACL to NPLs ratio indicates reduced coverage. Given the mixed signals, including ongoing economic uncertainties in Puerto Rico and the U.S. government shutdown, a 'hold' recommendation is appropriate. Investors should closely monitor credit quality trends and the resolution of the identified non-performing assets.

Keywords

Banking, Financial Services, Puerto Rico, Commercial Banking, Mortgage Lending, Consumer Loans, SEC Filing, 10-Q, Net Interest Income, Net Interest Margin, Non-Performing Loans, Credit Quality, Goodwill Impairment, Capital Ratios, Deposits, Loan Growth, Share Repurchase