Popular Q3 2026 Earnings Call Transcript
Popular (NASDAQ:BPOP) reported third-quarter financial results on Thursday. The transcript from the company’s third-quarter earnings call has been provided below.
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Summary
Popular Inc. reported Q3 2026 net income of $266 million and EPS of $4.21, a decrease from last quarter but a 34% increase year-over-year. The company saw higher net interest income and stable credit trends, though offset by increased operating expenses and lower noninterest income.
The loan portfolio grew by $293 million, driven by commercial and mortgage lending, but total deposits fell by $1.5 billion due to lower Puerto Rico public sector balances. Popular Inc. repurchased $179 million in common stock and increased the quarterly dividend to $0.90 per share.
Economic conditions in Puerto Rico remain stable, with solid consumer spending and tourism contributing positively. New strategic initiatives include launching simpler deposit products and a new account for college students, aiming to deepen customer relationships. The company completed onboarding to a new cash management platform for commercial clients, enhancing money movement capabilities.
Net interest income increased by $6 million to $699 million; the net interest margin slightly decreased due to market conditions. Operating expenses rose, primarily due to higher personnel costs, but the company expects full-year operational expenses to increase by approximately 2%.
Popular Inc.’s credit performance remained stable with some increase in nonperforming loans; guidance suggests net charge-offs will be 80 to 90 basis points for the full year. Capital actions included returning $236 million to shareholders through stock repurchases and dividends; they expect similar repurchase activity in 2027.
Full Transcript
OPERATOR
Good day and thank you for standing by. Welcome to the Popular Inc. third quarter 2026 conference call. At this time all participants are in listen-only mode. After the speaker’s presentation there will be a question and answer session. To ask a question during the session you will need to press star 11 on your telephone. You will then hear an automated message. If you wish to withdraw your question, please press star 11 again. Please be advised that today’s conference is being recorded.
I would like to hand the conference over to your first speaker today, Investor Relations Officer of Popular, Paul Cardillo. Please go ahead.
Paul Cardillo (Investor Relations Officer)
Good morning and thank you for joining us. With me on the call today are our President and CEO Jorge Garcia and our CFO Leo Soriano. They will review our third quarter results and then answer your questions. Other members of our management team, including our CRO Luis Sosa, 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. 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 earnings release and our SEC filings on our website at popular.com. I will now turn the call over to Jorge.
Jorge Garcia (Chief Executive Officer)
Thank you, Paul, and good morning, everyone. Please turn to slide 4 to discuss the highlights of another solid quarter. We reported net income of 266 million and earnings per share of $4.21, a decrease of $0.14 per share from the second quarter. Results reflected higher net interest income and stable underlying credit trends, partially offset by higher operating expenses and lower noninterest income. Compared with the third quarter of last year, earnings per share increased by 34%.
Our ROTC was 15.8% compared with 17% in the second quarter and 13.1% in the third quarter of 2025. Loans held in portfolio increased by $293 million, driven by growth in commercial and mortgage lending. Total deposits decreased by 1.5 billion, primarily reflecting lower Puerto Rico public sector balances. Excluding public funds, customer balances decreased by approximately 289 million. The delta was consistent with our expectations and third quarter seasonality. Credit performance remained stable. Net charge-offs declined from the second quarter while nonperforming loans increased, primarily reflecting a commercial relationship at BPPR that was placed on nonaccrual.
We continue to return capital to shareholders, repurchasing 179 million of common stock in the quarter. We also increased the quarterly dividend to $0.90 per share beginning with the payment on October 1st. While some indicators have moderated from the strong levels experienced over the last several years, economic conditions and business activity in Puerto Rico remain stable. The labor market continued to be healthy. Total employment increased to approximately 1.26 million in September, its highest level of the year, as the labor force grew by roughly 24,000 people in the quarter while employment grew by 18,000 jobs. The unemployment rate increased modestly to 6.2%, largely reflecting a higher participation rate rather than job losses.
Job growth was strongest in leisure and hospitality, with most other sectors showing modest growth or broadly stable conditions. Consumer spending was solid during the quarter, as evidenced by Popular’s customers’ debit and credit card sales volume, which increased by approximately 7% year over year. Tourism was another source of meaningful support for the Puerto Rico economy. Through August, hotel occupancy improved by more than 4 percentage points to approximately 79%.
Cruise passenger arrivals increased by 27% through September. Air passenger traffic has moderated from record levels but remained healthy, declining approximately 3% year over year. Construction activity is supported by public and private investment, including the ongoing deployment of federal disaster recovery funds and a growing pipeline of private sector projects. We continue to see demand in the energy sector as well as in warehousing and logistics.
Overall, Puerto Rico’s economic environment is stable, supported by healthy employment, tourism, infrastructure investment and private sector development. At the same time, in Puerto Rico we are monitoring affordability pressures that are being driven by inflation and the higher cost of fuel and energy. We continue to focus on the three objectives we have shared previously: being the number one bank for our customers, being simple and efficient, and being a top-performing bank.
We are on the right path and we will continue to execute with discipline. Being the number one bank for our customers means building stronger relationships and continuing to strengthen our deposit franchise—one of our most important competitive advantages. That starts with giving customers the flexibility to bank through the channel that best meets their needs while continuing to enhance our products and maintain our high service standards. On the retail side, this quarter we launched a simpler deposit product that encourages behaviors such as direct deposits to eliminate banking fees that will help us build deeper relationships over time.
We also launched an account for college students to establish relationships earlier in their financial journey. These efforts advance our segment-led strategy, which leverages specialized offerings to unlock opportunities and deepen customer relationships. Our successful healthcare professional program is one example of this segment-led approach. The program supports deposit retention and has also generated more than $90 million in new loans this year.
On the commercial side, we completed the final wave of customer onboarding to our new cash management platform, concluding a multi-year effort. The platform provides greater flexibility and mobile access and enhanced money movement capabilities for our commercial clients. This strengthens our value proposition for business clients and further differentiates our commercial banking franchise in Puerto Rico and gives us a platform to continue to enhance functionality.
Together, these initiatives demonstrate that our strategy is translating into tangible results. I look forward to building on this momentum with our teams as we continue advancing our objectives. I will now turn the call over to Leo for more details on our financial and credit performance.
Lidio Soriano (Chief Financial Officer)
Thank you, Jorge, and good morning, everyone. As Jorge said, we delivered another solid quarter. Our focus on generating sustainable returns remained evident this quarter with ROTCE of 15.8% compared with 17% in the second quarter. Please turn to slide number 7. Net interest income increased by 6 million to 699 million, driven by higher income from investment securities and commercial loans. On a GAAP basis, net interest margin declined by three basis points to 3.63%, and on a taxable equivalent basis, NIM was 4.16%, one basis point lower than last quarter. Ending loan balances increased by 293 million, driven by commercial and mortgage loans. We now expect full-year loan growth for 2026 of approximately 2%, primarily reflecting lower auto and lease activity and more moderate commercial growth in our investment portfolio.
We have maintained our strategy of reinvesting proceeds from U.S. Treasury note maturities into two- and three-year notes. During the quarter we invested approximately 1.4 billion with an average duration of 2.7 years, an average yield of approximately 4.3%. This represented a pickup of approximately 206 basis points on the notes that matured during the quarter. Ending deposits were 68.7 billion, down 1.5 billion from the second quarter. Puerto Rico public deposits decreased by 1.2 billion to 21.5 billion. On an average basis, total deposits increased by 502 million. Excluding Puerto Rico public deposits, average customer deposits decreased by 619 million. Customer balances were consistent with historical patterns and continue to reflect the strength of our deposit franchise. We continue to expect Puerto Rico public deposits to remain between 20 billion and 22 billion for the rest of the year.
Total deposit cost increased by 7 basis points to 1.64%, primarily reflecting higher rates on market-linked Puerto Rico public deposits that increased by 11 basis points. Excluding these balances, deposit cost increased by 3 basis points to 1.13%, including an increase of 2 basis points in private-sector deposit cost at BBPR and a 1 basis point increase at Popular Bank. For the year, we expect net interest income to increase by approximately 8.5%.
Please turn to slide number 8. Net interest income decreased by 5 million to 176 million but remained above our guidance range. The quarter included a 5 million benefit associated with a commercial loan refinancing. Compared with the third quarter of 2025, non-interest income increased by 3%, reflecting growth in debit and credit card fees of 10% and 8%, respectively, and a 60% increase in brokerage and asset management fees. These results demonstrate the benefit of a broad product offering.
We expect fourth-quarter non-interest income of approximately 170 million. Please turn to slide number 9. Operating expenses increased by 21 million to 506 million. The increase was primarily related to higher personnel costs, including annual salary adjustments, higher profit-sharing expenses, and increased performance-based compensation linked to the corporation’s financial results. Based on current trends, we now expect full-year operational expenses to increase by approximately 2%, including the maximum profit-sharing contribution.
Our effective tax rate was 14% during the quarter, driven by higher taxes and income. For the full year, we expect an effective tax rate of 14%. Turning to credit, overall credit quality was stable during the third quarter. Consumer performance remained favorable, with net charge-offs continuing at a historical low level despite a seasonal increase in auto losses. Mortgage performance also remained strong with historically low delinquencies and net recoveries. Commercial credit metrics were influenced by developments involving two unrelated commercial and industrial relationships. We placed a 74 million relationship on nonaccrual status and recorded a 34 million partial charge-off on a credit that entered nonperforming status in the second quarter.
The two credits are in different industries and do not share a common risk factor. In each case, the deterioration was driven primarily by borrower-specific issues. Please turn to slide number 10. Total nonperforming assets decreased by 10 million, reflecting the sale of the 84 million nonperforming loan held for sale, while total NPLs increased by 52 million to 466 million. The NPL ratio increased to 1.16% from 1.04% in the prior quarter. Excluding consumer loans, NPL inflows decreased by 56 million from the second quarter.
Turning to slide number 11, net charge-offs were 73 million, or annualized 73 basis points, compared with 104 million, or 1.05%, in the prior quarter. Given our year-to-date commercial charge-offs and NPL inflows this quarter, we now expect net charge-offs to be in the range of 80 to 90 basis points for the full year. While we will provide formal 2027 guidance when we report fourth-quarter results in January, looking ahead to 2027, our initial expectation is that net charge-offs will be in the range of roughly 60 to 75 basis points.
Overall, underlying credit metrics were stable and reserve coverage remained strong. We remain vigilant and continue to take a disciplined approach to managing risk. Turning now to capital, please turn to slide number 12. Tangible book value per share decreased by $1.64 to $86.30, primarily reflecting lower market values on available-for-sale investment securities. The tangible common equity ratio was 7.05%, down 13 basis points from the second quarter. We remain comfortable with both the absolute level of TCE and the growth sensitivity of the securities portfolio to changes in interest rates. Our capital actions will continue to balance the need to support growth, maintain capital strength, and return excess capital to shareholders.
During the quarter we returned 236 million to shareholders, including 179 million through common stock repurchases. We also increased our quarterly common stock dividend by 20%. In the fourth quarter, we expect to repurchase between 150 and 200 million of common stock. Based on current conditions, we expect quarterly repurchases to remain within a similar range in 2027. And finally, we continue to target a 14% to 17% annual proceed. With that, I will turn the call back to Jorge for his concluding remarks. Thank you.
Jorge Garcia (Chief Executive Officer)
Thank you, Lidio. During my first two months as CEO, I have been visiting branches, regional offices, and customers across our markets. I have experienced firsthand the trust our customers place in us and their deep connections with our teams. I also continue to hear from customers that they are optimistic about Puerto Rico’s long-term opportunities and how vital it is that we play a role in that outcome. Staying connected also extends to the communities we serve. Two weeks ago, as we celebrated our 133rd anniversary, I joined hundreds of colleagues who volunteered at food banks, youth centers, and other nonprofits as part of our Embracing Our Communities Day of Service. These experiences reaffirmed what I already knew. What makes Popular special is our people. Our pride and commitment are the foundation of our sustainable success.
I am fortunate to step into this role with a strong capital position, a solid franchise, a talented team, and real momentum. Our responsibility is to carry that forward and continue creating long-term value for our customers, shareholders, colleagues, and our communities. I am grateful to my colleagues for their commitment and the results they deliver. We intend to be active participants in shaping what lies ahead and not simply react to it. With that, we’re now ready to take your questions.
OPERATOR
Thank you. At this time we’ll conduct a question-and-answer session. As a reminder, to ask questions, you’ll need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by. We’ll compile the Q&A roster. And our first question comes online of Jerry Shaw, Barclays, and line’s open.
Jerry Shaw (Analyst at Barclays)
Hey, good morning.
Jorge Garcia (Chief Executive Officer)
Good morning.
Jerry Shaw (Analyst at Barclays)
Thanks. Maybe just starting with credit in walking through some of the items you spoke about. So the one new commercial nonperformer, I guess if we, without that, commercial nonperformers would have been lower. And then when we look at the net charge-off guidance for fourth quarter, I guess that implies about 100 basis points. So is that going to be some loss content in that commercial loan, or is that just more overall weaker expectations in the portfolio?
Luis
Good morning, this is Luis. I would say that our net charge-off guidance for the fourth quarter mainly reflects our potential scenarios, including the CNIM bill that we have disclosed.
Jorge Garcia (Chief Executive Officer)
I think if I can add, I mean, what is important is, I mean, we see the core portfolios continue to behave very well. As we said in the prepared remarks, both consumer and mortgage portfolio exhibited strong performance in the third quarter. And as our expectation went to a fourth quarter, the guidance that we provided reflects the cases that we’re working on.
Jerry Shaw (Analyst at Barclays)
Okay. Okay. So overall though, apart from the one-offs, you still feel pretty good about credit, it sounds like. And then any update on the outlook for preferred issuance or any capital restocking beyond the buyback?
Lidio Soriano (Chief Financial Officer)
Jerry, I mean, the rates continue to not be attractive to us. I mean, as we’ve said, this is really a discretionary transaction. We still can have plenty of room to continue our repurchase activity. This is something that makes things better for our capital stack and optimizes it. And we’ll be strategic and take advantage if we see an opportunity. But right now we’re not just going to force a transaction that doesn’t.
Jerry Shaw (Analyst at Barclays)
Okay, thanks. If I could just sneak a third one in. Do you know what the update of the balance of federal spending is? You talked about continued spending from that 48 billion out there. What’s remaining left of allocated but not spent.
Jorge Garcia (Chief Executive Officer)
Yeah, slightly above 43 billion. And one thing important there, we did see a pickup in the third quarter from the FEMA funds that are managed through the local COR3 group. That, you know, basically year to date we’re running just slightly below the entire year, or at the end of the third quarter, we’re slightly below the total of last year, almost 40% higher than at the same time last year. So we’re glad to see a little bit of that pickup.
OPERATOR
Thank you. One moment for our next question. Our next question comes in line of Terry McAvoy of Wells Fargo. Line is now open.
Terry McAvoy (Analyst at Wells Fargo)
Hi, good morning, can you hear me?
Jorge Garcia (Chief Executive Officer)
Good morning, Terry, and thank you for picking up coverage. Welcome, welcome to the call.
Terry McAvoy (Analyst at Wells Fargo)
Thank you, much, much appreciated. First question, the new consumer deposit product, was that in response to market demand or customer demand? Are your competitors offering that? And then financially, what’s the full-quarter impact? It was rolled out in August. And how should we think about maybe a full-year impact of what that could mean to fee income?
Jorge Garcia (Chief Executive Officer)
Yeah, so a couple of things. Certainly it is something that we hear from our customers. They want simpler products, lower fees. So the idea is to launch a product that gives them the opportunity to establish relationships and deepening that relationship that go along with the primacy, customer primacy that we’re targeting. The other thing of launching the project, it just continues to be part of our strategy to create segment-led strategies. We believe that there is still great opportunity in Puerto Rico for us to be able to deepen and provide more value, enhance functionality to certain segments, both in the retail as well as in the commercial. So that’s a big driver in terms of the fee.
What we did is we did reclassify
Lidio Soriano (Chief Financial Officer)
Over a million accounts into these new products to be able to give existing clients the benefit and not essentially put the onus on them on having to change accounts. That resulted, I think with a reduction in the quarter, over a $2 million increase in fee income. So on an annualized basis, you know, probably somewhere between 8 and 10 million dollars. Of course, you know, we expect to be able to gain traction and increase our deposits to offset some of that.
And you know, it’s embedded in the guide for the fourth quarter. 170 million target for fees for the quarter.
Jorge Garcia (Chief Executive Officer)
So in the past when we look at our models and stress tests, we don’t see a lot of stress related to one or two moves in the rate and certainly not where the rates are today in terms of where we are. Higher for longer will help us continue to take benefits of the tailwind of the repricing of our investment portfolio. We certainly look forward to stability if we can. The rhythm of change and the movement, particularly at the short-term end of the curve, creates some noise given the exposure we have in the repricing of our public funds.
But overall higher for longer is favorable for us. We get to take higher benefit on tax advantages of some of the investments. And we have not found, particularly at these levels, where there’s significant stress to our borrowers from those rates. Demand in Puerto Rico continues to be strong. A lot of the transactions are not going to be rate sensitive. We do see some more rate sensitivity in the U.S. at times. But frankly right now the pipelines, particularly around construction projects in the U.S., continue to be strong, even looking through to the current rate environment.
OPERATOR
Thank you. One moment for our next question. Our next question comes from the line of Timur Braziler of UBS. Your line is now open.
Timur Braziler (Analyst at UBS)
Hi, good morning. Starting on the reinvestment rate, I think it was 1.4 billion purchased at 4.3%, I guess. Why 4.3%? I mean it’s a decent amount lower than the two- and three-year yields were during the quarter. And I guess as we roll forward into 4Q and beyond, should that reinvestment rate more so mirror that two- and three-year rate or are we, call it, you know, 40, 50 basis points below it going forward?
Lidio Soriano (Chief Financial Officer)
I would just add that, as you see, we have some of the slides in the appendix. We have a significant amount of investments that we are repricing on a quarterly basis, around 1.5, 1.6, out of which 600, 700 relates to legacy investments that were 1.25%, and even the newer investments were 3.25%. So going forward, we will continue to see a significant pickup in the yield of that portfolio, given the repricing dynamics and given the interest rate environment that we have today.
Timur Braziler (Analyst at UBS)
Okay, great. And then maybe looking at the public funds, you guys have been closer in guiding those balances more recently. But I’m wondering, particularly going into the ’28 election, is there any kind of empirical data that you can point to as to projects kicking off? Like, is there a risk through ’27 that some of the public funds that are sitting on balance sheet are actually being utilized? Or maybe looking at history is different versus this time when there’s a little bit more flush in liquidity.
But I guess what is the way that you guys are framing risk around public funds balances in reference to the election that’s coming up two years from now?
Jorge Garcia (Chief Executive Officer)
So I think a couple of things, Timur. I mean, number one, yes, I think we would expect some pickup in activity related to municipal spending, particularly at the municipal level, maybe not as much at the central government level. But a couple of things there. First, remember that there are a lot of projects that are still rebuilding with FEMA and federal funds. A lot of those projects are at the municipal level. So where we think we will see some of the first impact is in seeing a speed-up or a pickup in the activity, maybe the mayors and the municipalities prioritizing either projects that are big scale or that can be completed quickly. Since that money is going to be coming in from federal funds as a flow in and out, those monies are not sitting on our balance sheet right now. So other than that, you also have the federal oversight board that still manages for a balanced budget, and the government needs to be able to get those budgets approved and execute to those approved budgets by the oversight board.
So, I mean, we give ranges and in those ranges we tend to incorporate scheduled payments like for pensions or kind of the continued value bonds and then some sense of operating accounts, and certainly competition. Right? I mean, we actively bid on retaining certain excess funds from the government clients. But in terms of predicting or projecting that we’re going to see significant declines because of infrastructure spend out of these funds, that is not something that we think will be significant.
Timur Braziler (Analyst at UBS)
Great. Thanks for that color.
OPERATOR
Thank you. One moment for our next question. Our next question comes from the line of Arren Cyganovich of Truist Securities. Your line is now open.
Arren Cyganovich (Analyst at Truist Securities)
Thanks. Maybe just talk a little bit about the loan growth expectation, modest slowdown in loan growth into the fourth quarter makes sense in terms of the auto and consumer, but commercial has been pretty strong over the couple of quarters. What’s driving the more moderate expectation there into the quarter?
Jorge Garcia (Chief Executive Officer)
Certainly when you look at from the original guidance and where we’re at now, the auto portfolio is one of the areas where we’ve been under our expectations for the year. So that certainly has an impact. The other thing is that we are trying to be a lot more disciplined in our U.S. business as well. Historically, we drove the teams to kind of hit their budget targets, and that has resulted in a lot of single-product clients that we’re not deepening those relationships.
And we’re pushing our teams to really create deeper relationships, lead with deposits, and even in CRE and multifamily transactions, we want to make sure that we have a whole relationship, and that’s certainly slowing down the production of our U.S. team. We’re also expecting some payoff in our construction portfolio in the U.S., like we saw in this quarter. There are strong pipelines coming behind those, but as you can imagine, those construction projects do take a little bit more time to start seeing the effect.
In Puerto Rico, there is still good demand. I think the issue in Puerto Rico is more about supply. We’ve been benefiting from 6% to 9% growth over the last few years. Some of that growth has been driven by tax incentives, and there’s only so many large transactions that can occur in Puerto Rico. So I still see a lot of positive movement in Puerto Rico, a lot of positive demand. Just the scale and supply of it is reducing.
Arren Cyganovich (Analyst at Truist Securities)
Okay. I mean, I guess that doesn’t. I know you’re not going to give 2027 guidance, but does that impact your view in terms of loan growth post this quarter? I mean, it sounds like you have some headwinds there.
Jorge Garcia (Chief Executive Officer)
I mean, we’ve talked in the past that we have been growing, outpacing the Puerto Rico economy and GDP significantly. Given our size over time, we should be growing closer or above, you know, slightly above the Puerto Rico economy. I think what’s important as we look forward, Aaron, is that we will continue to see NII growth when we look at our projections into ’27, particularly in this environment, given the tailwinds that we have with the investment portfolio repositioning and the loan demand that we’re seeing and the current prices.
We do expect to continue to see creating operating leverage in 2027.
Arren Cyganovich (Analyst at Truist Securities)
Okay. And can you just remind me on the ROTC updated guidance of 14% to 17% that you put out there last quarter, or I think it was last quarter, that’s more of a kind of a longer-term expectation, right? Like just over time. Not necessarily, you know, expectations. I mean, I guess we. I know you’re earning that now, but, you know, I just didn’t know if that was like if you’re always expecting to earn between. That seems, you know, I think always,
Jorge Garcia (Chief Executive Officer)
Always is a tough word. But based on the environment that we’re seeing, you know, the balance sheet structure and all our plans and the execution that we’re seeing from our teams, we felt very comfortable giving the guidance of the 14% to 17% on an annual basis. And that’s what we’re driving our teams to. I think what is important, we want it to also be sustainable. So it takes into account potentially different operating environments. So that’s why maybe a little bit of a wider range. And why so wide? I mean, for us the sustainable part is as important as just hitting the target.
Arren Cyganovich (Analyst at Truist Securities)
Got it. Okay, thank you.
OPERATOR
Thank you. One moment for our next question. Our next question comes from the line of Kelly Mora of KBW. The line is now open.
Jorge Garcia (Chief Executive Officer)
Hi, good morning, Kelly.
Kelly Mora (Analyst at KBW)
Thanks for the questions. Here, you know, piecing together the outlook for loan growth coming in a little bit weaker with auto being the higher-yielding category. Just wondering as we think through the outlook ahead for specifically loan yields, if there could be some pressure offsetting the rate hikes from just a change in mix and overall how new origination yields are coming in. Thanks.
Lidio Soriano (Chief Financial Officer)
I think with the higher rates, I mean, the current higher rates impact those consumer loans a lot more than the commercial. And we have been, if you look over the last, I would say probably since the Fed started moving rates down, we had been seeing kind of incremental yields on our loan portfolio every quarter, and this quarter was, I think, the first time we see a decline in those yields as the, I think, the portfolio starts stabilizing. I mean, the way I look at it, I think, given the ins and outs of the portfolio—I mean, auto, for example, our originations are, even this quarter where we didn’t grow, I think the originations were like 450 million. So it is a significant amount of volume that is coming in. So it’s going to depend on, obviously, the credit risk profile of those clients, the terms of those loans. But right now I don’t think loan yield is something that’s putting pressure in terms of, as we look forward, it’s not a concern for us.
Again, the NII, we do see NII continuing to expand in 2027.
Kelly Mora (Analyst at KBW)
Got it. Okay. That’s helpful. And then on expenses, I appreciate you lowered to the lower end of the guide, which is nice given the incentive compensation with revenue coming in so strong. Just wondering the drivers of that. If additional you were better at getting some cost savings out or if maybe projects have been kicked out till next year. Thanks.
Lidio Soriano (Chief Financial Officer)
We have not made any conscious decisions to move projects. I mean, for us the rhythm of the project is more about capacity, how much we can continue. We’ve actually thrown in some non-budgeted or unanticipated projects this year. The teams have done a great job in delivering efficiencies. Around $50 million in recurring efficiencies have been implemented and identified. We expect that amount to be a benefit next year. Obviously it’s not. At some point we’re going to start seeing expense growth again, but the teams have done an awesome job.
The 2% includes the, as you mentioned, profit sharing. We are expecting at this rate to max out that profit sharing payment based on our formulas, and that’s all embedded into that guide. But it goes to just a lot of effort from a lot of people that are just, what we call it, a lot of bunts and singles, nothing huge to create those efficiencies and savings.
OPERATOR
Thank you. One moment for our next question. Our next question comes from the line of Gerard Cassidy, RBC Capital Markets. Your line is now open.
Gerard Cassidy (Analyst at RBC Capital Markets)
Hi Jorge. Hi Lidio.
Jorge Garcia (Chief Executive Officer)
Hello. How are you?
Gerard Cassidy (Analyst at RBC Capital Markets)
Jorge? Now with Terry covering, maybe you guys can do your call from Portland in July. The weather’s nice.
Jorge Garcia (Chief Executive Officer)
I figure October, some are cold and the leaves are pretty.
Gerard Cassidy (Analyst at RBC Capital Markets)
It is gorgeous up here today, that’s sure. Thank you. Question for you. Can you guys share with us how much of your U.S. deferred tax asset do you expect to utilize over the next two to three years and what needs to change to support a release of that large valuation allowance? And then what are the implications if you’re able to do that? Of course. What are the implications for cash, taxes and CET1 capital, should that happen or when that happens?
Lidio Soriano (Chief Financial Officer)
Let me just give you some numbers and then I’ll give you what it will take in order for us to be able to utilize more of that DTA. Our DTA number gross is around $600 million, net of an allowance of close to $385 million. That gives a net of about $250 million DTA that the majority of that DTA expires between the years 2028 and 2031, and the one way that we can use it is to become more profitable. I mean, that’s it. I mean, the more money we make, the more we’re going to be able to use our DTA.
We have done, the team have done, a great job of improving profitability in the U.S. this year and last year, and that’s something that obviously we feel very proud and something that we continue to work hard in order to realize as much as we can from NOLs. One thing, Gerard, the DTA in the U.S. is NOL-based and is not part of regulatory capital. There are some limitations. So even if you were in a situation where you could reverse more of that DTA, it’s not going to have a benefit on CET1. Now the flip side of that is that the income that the U.S. business is generating, that capital is actually accruing at essentially a pretax level instead of the after-tax amount that you see on a GAAP basis.
Gerard Cassidy (Analyst at RBC Capital Markets)
Very good. Correct. Then just to circle back to credit, when you think about the large credit that went into nonaccrual in the second quarter and now it’s off, of course, and you took a charge as well, and then the large credit that showed up this quarter, when you guys do the post-op analysis of what went wrong with the credit, you know, the underwriting, what did you learn, or can you share with us what were some of maybe the shortfalls in the underwriting possibly, or just really what did you learn from those two experiences?
Jorge Garcia (Chief Executive Officer)
I mean, in those two experiences in particular, I would say, I mean, part of the learnings, I mean, in one of the cases it was a client that was extending into a new venture. So I think that’s always something that we look very carefully from an underwriting standpoint. So that’s something that we need to keep bringing our teams. As you’re diversifying your industry, that’s something that also brings risk with it. I think the other one is a long-standing client which has had a very profitable relationship over time.
He’s in the food service industry. Over time, competition and market conditions in the island from there, I mean, I don’t know, I’m not sure. I mean, other than having a closer look at the client and being on top of the client on a day-to-day basis, I don’t think that from an underwriting perspective there was anything that we needed to change. And I think, Gerard, I mean, given our position in Puerto Rico, we want to lend to some of these, you know, the telecom transaction, that was a fairly large deal. It made sense to us as the primary bank in Puerto Rico to lead into an acquisition of a large telecom provider in Puerto Rico. Unfortunately, these are operational issues, that the integration of the acquisition didn’t go well and we end up having to take the hit for it.
I think the other part that’s important is that we’ve been able to work through a handful of these C&I loans over the last few quarters, but we still have been able to perform and slower those losses and be able to continue to improve our profitability. I mean, maybe just to finalize, when you look at it, we have thousands of relationships. We have issues with maybe two cases last year and three cases this year. So just to keep in mind that the performance of our book has been very, very strong, notwithstanding the fact that every now and then we may have issues with another customer.
Gerard Cassidy (Analyst at RBC Capital Markets)
Appreciate the color. Thank you.
OPERATOR
Thank you. One moment for our next question. Again, as a reminder, to ask a question, you’ll need to press Star one one on your telephone. Our next question comes in, Manuel Navalis of Piper Sandler. Your line is now open.
Jorge Garcia (Chief Executive Officer)
Hi, Manuel.
Manuel Navalis (Analyst at Piper Sandler)
Hey guys. How should I think about the near-term NIM? I hear you on the NII guide for the year, NII improvement for next year, and I kind of want to think about that near-term NIM and how it could enter next year, especially if there’s like a December rate hike as well.
Lidio Soriano (Chief Financial Officer)
I mean, when you look at our NIM, I think we have, as Jorge mentioned in earlier commentary, we have a lot of tailwinds related to the repricing of our investment portfolio. So that’s going to lead to increasing asset yields as well as the repricing of some of our short-term assets and short-term liabilities. We have also, we guided, we said we expect net interest income to continue to grow, continue to be the guide for us as an organization. So in that regard, I mean, you can think we’ll see an ascending trajectory that is going to depend upon the mix between assets, between treasuries and investments, sorry, between investments and loans.
I think the other factor is the level of public deposits. That’s really a big driver. I mean, if we continue to see growth in public deposits, that does put pressure on NIM. It’s not good for NIM, but it does contribute nicely to NII and we’ll take the NII growth.
Manuel Navalis (Analyst at Piper Sandler)
Got it. And just switching over to growth for a second, what dynamics would need to come into play for loan growth to accelerate? I hear you that perhaps the tendency is more towards GDP levels of Puerto Rico, where that’s the longer-term trend. But what would give you some tailwind on loan growth?
Jorge Garcia (Chief Executive Officer)
Yeah, I mean, I think one of the cool things about going from the accounting and finance world to the CEO role is being able to spend time with clients and spending a lot of time with our customers. And you hear a lot of people enthusiastic about the opportunities in Puerto Rico. And these are people thinking three, five, ten years down the road, and you see some of their projects, some of their visions, some of those dreams. And if they start coming to fruition, you see acceleration.
We’re able to bring in and see population growth in the U.S., attract the professionals and the diaspora of Puerto Rico. You see $40 of manufacturing jobs, I’m sorry, $4 billion of manufacturing investment announced as those things are coming in. If you’re seeing a shift in population and the ecosystem that goes around some of those investments, you know, certainly, you know, those are things that could help the entire economy of Puerto Rico and we’ll benefit from that lift.
Manuel Navalis (Analyst at Piper Sandler)
I appreciate that. Last question here is shifting over to the ROTC guide. What are kind of the biggest drivers of the high end of that guide or the low end of that? It’s through the cycle, but as you look into next year, just kind of thoughts on what could really drive it towards the high end, but potentially what could drive it to the lower end.
Jorge Garcia (Chief Executive Officer)
We love the ROTC guidance because it captures everything. Manuel, so certainly when you look at that band, credit cost provision is a factor. NII growth, continued NII growth, is a positive factor. Our ability to be able to execute on our segment-led strategies in Puerto Rico and deepening deposit relationships in Puerto Rico, which we believe we can do, that will help the top end of that range. So these are all things that drive profitability in banks, and it’s no different for us.
Manuel Navalis (Analyst at Piper Sandler)
I appreciate the commentary. Thank you.
OPERATOR
Thank you. I’m showing no further questions at this time. Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.
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