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CALL PARTICIPANTS
Executive Vice President and Chief Financial Officer — Orlando Berges-González
Chief Operating Officer — Ramon Rodriguez
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TAKEAWAYS
Net Interest Income — Increased due to a $126 million rise in average loan balances and a 3 basis point yield improvement, aided by an extra day in the quarter.
Average Residential Portfolio — Grew by $19 million, showing continued expansion in this segment.
Expenses — Reached $124.9 million, up $1 million from the previous quarter, primarily from a $2.8 million valuation adjustment in OREO and offset by a $2.3 million employee retention credit.
Efficiency Ratio — Held at 50%, unchanged from the previous quarter, with management reiterating guidance for a 50%-52% efficiency ratio range over the next couple of quarters.
Nonperforming Assets (NPAs) — Decreased by $8.6 million, with non-accrual loans down $3.8 million and OREO balances reduced by $5 million, including the aforementioned adjustment.
Net Charge-Offs — Totaled $19.9 million, or 62 basis points of average loans, Up $800,000 and 2 basis points from the prior quarter.
Allowance for Credit Losses (ACL) — Declined by $1.6 million to $247 million, led by residential mortgage improvements and partially offset by a commercial loan allowance increase reflecting projected CRE price deterioration.
Allowance to Loans Ratio — Fell four basis points to 1.89% (189 basis points), mainly due to a nine-basis-point drop in residential mortgage reserves.
Deposit Costs — Management expects some reduction in deposit costs in Q4 2025, with government index deposits moving with rates and core retail deposit costs not expected to decline immediately.
Tax Rate Guidance — Orlando Berges-González stated, The number that we put in the press is an effective tax rate of about 22.2%, which is the estimate for the full year.
Share Repurchases — $50 million in common stock repurchased; the board approved an additional $100 million authorization with an assumption of $50 million per quarter through 2026.
Tangible Book Value per Share — Rose to $11.79, aided by a $49 million fair value improvement in for-sale securities.
Tangible Common Equity Ratio — Increased to 9.7%, impacted by securities portfolio fair value gains.
Loan Growth Guidance — adjusting from the previous “mid-single digit” (originally 5%) target.
New Loan Originations — Commercial originations yielding about 6.7% on average, mortgages in the 6%-6.4% range, consumer loans at 10.5%, with spreads unchanged but base rates declining on reinvestments.
Liquidity Reinvestment — $600 million of investment cash flows to reprice in Q4 2025 at average yields of 1.5%, with reinvestment options currently 50 to 100 basis points lower than expiring yields.
Competitive Deposit Landscape — Government deposit competition mainly comes from smaller banks and existing players, not new external entrants, with 40% of the government deposit book indexed to market rates as of Q3 2025.
Mainland M&A Strategy — Management remains open to M&A in Florida for franchises that complement current operations, emphasizing organic growth as the capital deployment priority.
SUMMARY
Management affirmed a stable efficiency ratio and consistent expense guidance, reinforcing cost discipline despite higher OREO losses. While NPAs showed modest improvement and net charge-offs continued to normalize, declines in the allowance ratio reflected stronger residential mortgage performance and updated macro expectations. Shareholder returns intensified through new share buyback authorizations and sustained dividend payments, backed by improved tangible equity metrics. Loan growth targets were moderated in response to weaker auto and unsecured credit demand. Commercial and residential lending pipelines remain supportive. Deposit costs are expected to decline gradually as rates fall, with mix shifts and timing influencing near-term margin outlooks.
Orlando Berges-González clarified, “we still have $38 million from this year’s authorization. We can move back and forth and increase or decrease as we believe is prudent. Again, open market is our approach. No ASR’s are, you know, on schedule or as part of the strategy.”
Investment securities cash flows will predominantly reprice in November and December, with reinvestment yields below expiring asset rates due to lower market rates.
Competitive deposit pressures are largely limited to local players, with U.S. Treasury options influencing only a segment of high-end customers.
Near-term onshoring announcements have not yet produced material economic impact on Puerto Rico, though longer-term benefits may bolster some sectors as projects become operational after mid-2026.
INDUSTRY GLOSSARY
OREO (Other Real Estate Owned): Real estate acquired through loan foreclosure, held temporarily until sale or resolution.
ALCL (Allowance for Credit Losses): Reserve set aside to cover estimated future loan losses across the portfolio.
Beta (Deposits): The degree to which deposit rates change relative to changes in benchmark interest rates.
CRE (Commercial Real Estate): Loans and assets secured by income-producing or development real estate, including office, retail, and industrial properties.
SOFR (Secured Overnight Financing Rate): A broad U.S. dollar measure of the cost of borrowing overnight collateralized by Treasury securities, used as a floating-rate loan benchmark.
Full Conference Call Transcript
Ramon Rodriguez: Loans increased by $3.8 million related to a $126 million increase in average balances, a 3 basis points increase in yield, and we had an extra day in the quarter, which also improved the net interest income. The average balance on the residential portfolio grew $19 million for the quarter. For the fourth quarter, we will continue to benefit from yield improvements from the reinvestment of the cash flows from the investment portfolio. But this will be partially offset by the two projected Federal Reserve rate cuts that would result in a reduction in yields on the floating commercial loan portfolio as well as the cash balances.
Remember, we have a floating commercial portfolio, about half of it is floating with either prime or SOFR mostly as it stands today. Knowing that we have an asset-sensitive position, repricing on the asset side will happen faster than on the liability side. We expect that margin for the fourth quarter to be sort of flat with increases in net interest income coming from loan portfolio growth. In terms of other income for the quarter, it was relatively flat. There was a slight reduction in card processing income due to lower transaction volumes.
Expenses for the quarter were $124.9 million, which is $1 million higher than last quarter, mostly due to the net loss on the OREO operation related to the $2.8 million valuation adjustment I just mentioned. Also, payroll expenses decreased by $300,000 due to the $2.3 million employee retention credit. That basically compensated for the $1.8 million increase we had from ordinary increases and from an additional payroll day in the quarter. If we were to exclude OREOs and the employee retention credit, expenses were $126.2 million, which compares to $124 million in the second quarter. This is slightly above our guidance but very much in line with the $125 million to $126 million we had provided.
The efficiency ratio for the quarter was 50%, pretty much unchanged when compared to the second quarter. The projected expense trend for technology projects and business promotion efforts we plan to do in the fourth quarter. And so we reiterate our guidance expense base of $125 million to $126 million for the next couple of quarters. We still believe our efficiency ratio will be in that range of 50% to 52% considering expenses and income components. In terms of credit quality, it remained fairly stable in the quarter.
NPAs decreased by $8.6 million, basically a $3.8 million decrease in non-accrual loans, mostly residential mortgages and CRE loans, and a $5 million reduction in OREO balances that includes the $2.8 million adjustment on the VI property I mentioned. Inflows to non-accrual were $32.2 million, which is $2.2 million lower than last quarter. Mostly commercial and residential mortgage inflows of $6.7 million, which are offset by a $4.5 million increase in consumer inflows. Loans in early delinquency, defined as thirty to eighty-nine days past due, increased by $8.9 million, mostly one case in the Florida region, a million-dollar commercial case that the payment was not received until later in October.
In terms of consumer loans, early delinquency remained relatively flat from the second quarter, increasing only $300,000. Moving on to the allowance, the allowance is down $1.6 million to $247 million. The decrease was mainly in the residential mortgage portfolio as loss severities have continued to improve. On the other hand, the allowance for commercial loans increased based on the portfolio growth and some deterioration that is projected on the CRE price index as part of the macroeconomic forward projections. The ratio of the allowance for credit losses to loans decreased four basis points to 189, and this was mostly a decrease of nine basis points in the allowance for credit losses on the residential mortgage portfolio.
Net charge-offs for the quarter were $19.9 million, sixty-two basis points of average loans, which is up $800,000 from the prior quarter or two basis points. Last quarter we had an $800,000 commercial loan recovery, and this quarter we did not have any of this size to offset some of the charge-offs. As Aurelio mentioned, consumer charge-off levels continue to be normalizing, and commercial charge-offs continue to be very low. On the capital front, again, our strong capital base continues to support the actions of share repurchases and dividends. During the quarter, we declared $29 million in dividends and repurchased the $50 million in common stock we had mentioned.
Regulatory capital ratios continue to be low, but these capital actions were offset by the earnings generated in the quarter. In addition to all this, we registered a percent increase in the tangible book value per share to $11.79, and the tangible common equity ratio expanded to 9.7% also due to the $49 million improvement in the fair value of our for-sale securities. The remaining ALCL still represents $2.42 in tangible book value per share and over 177 basis points in the tangible common equity ratio. As we announced yesterday, our Board approved an additional $100 million in share repurchase.
Our intention is to continue the approach of opportunistically executing on our capital actions based on market circumstances, with the base assumption of repurchasing approximately $50 million per quarter through 2026. But again, as we have done so far, we will continue to deploy our capital in a thoughtful manner looking for the long-term best interest of our franchise and our shareholders. With that, operator, I would like to open the call for questions.
Operator: Sure. We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on the telephone keypad. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. We will make a quick pause here for the questions to be registered. And our first question comes from Brett Rabatin with Holt Group.
Brett Rabatin: Hey guys, good morning. Hey, Ben. Wanted to start off morning. I wanted to start off just wanna make sure on the tax situation, that’s one time, right? That does not continue from here in terms of any benefit.
Orlando Berges-González: Well, there will be a benefit in the sense that we will not have reversals of deferred tax asset at these levels. But there is a benefit on the normal operating losses or expenses we have at the holding company. Those are annual expenses that now we are not yielding any tax benefit. And they will be offset also against revenues from this sub. So it is not that it is a huge amount, but you saw that the effective tax rate came down a bit, and that is reflecting some of that benefit. So not at the level of this reversal of DTA, but there is a little benefit on the effective tax rate going forward.
Brett Rabatin: Okay. That is helpful. Then wanted just to talk about I have seen the stats, I know that the auto lending has finally come in as expected for some time a bit. Any thoughts on the health of the consumer in Puerto Rico and your credit trends seem fairly stable from a consumer perspective. But just wanted to hear any thoughts on how you guys are seeing on the ground consumer activity.
Orlando Berges-González: Well, I think it is clearly auto sales we can call it normalizing. We were expecting for the year a 5% adjustment coming down. Actually 7% year to date, but obviously, it was disrupted by increased sales in the second quarter because of the tariff when they were coming. Now you see a reduction. Some sales were accelerated. So I think we need to see what happens this quarter to normalize those auto sales and see what is the real stable volume. They have fluctuated between 100 to 120 units, 20,000 units per year for some years. So we expect somewhere in that range probably the second half of the year will determine how we project 2026.
Yes, demand has been lower. It has been on the other hand unsecured credit demand is being a little bit lower. We remember three years ago, two years ago we have been doing adjusted policies. We have seen the good performance of the portfolios across the board. And some of the higher losses that we experienced in credit cards and unsecured are being leveling. So we expect stability on the consumer. But we do not expect portfolio growth that we achieved for some years. So that portfolio growth will come from resi which is performing excellent and from the commercial portfolios that we continue to gain some share across the different sectors.
So that I will say stability in the consumer obviously working hard to manage any contraction of the portfolio. As we continue to move on with products and services on that segment.
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Note: This is an earnings call transcript. Content may contain errors.
