Popular (NASDAQ:BPOP) reported second-quarter financial results on Thursday. The transcript from the company's second-quarter earnings call has been provided below.
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Summary
Popular Inc. reported strong financial results for Q2 2026, with net income of $278 million and earnings per share of $4.35, up 15% from Q1. The company also announced a 20% increase in its quarterly dividend to $0.90 per share and a new $1 billion share repurchase authorization.
The company experienced growth in its loan portfolio and deposits, with commercial, construction, and mortgage lending driving a $460 million increase in loans, and deposits rising by $2.6 billion due to higher Puerto Rico public deposits.
CEO Javier Ferrer announced his retirement, effective at the end of August, with Jorge Garcia set to succeed him. The company is focused on strategic initiatives like enhancing digital and physical channels, and expanding its corporate credit card solutions, all aligning with its objectives to be a top-performing bank.
Despite some seasonal declines, deposit trends remain stable. Net interest income increased, supported by loan growth and higher investment balances, and the company expects an 8% to 9% net interest income growth for the year.
Credit quality remained stable, with improved consumer performance and the resolution of a major nonperforming loan. Popular continues to monitor commercial trends closely, with net charge-offs expected to range from 65 to 80 basis points for the full year.
Full Transcript
OPERATOR
Welcome to the Popular Inc. second quarter 2026 conference call. At this time, all participants are in a 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 advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your first speaker today, the Investor Relations Officer at Popular, Paul Cardillo. Please go ahead.
Paul Cardillo, Investor Relations Officer
Good morning and thank you for joining us. With me on the call today is our President and CEO, Javier Ferrer, our CFO Jorge Garcia, and our CRO, Lidio Soriano. They will review our results for the second quarter and then answer your questions. Other members of our management team will also be available during the Q&A session. Before we begin, I would like to remind you that during today's call we may make forward-looking statements regarding Popular, such as projections of revenue, earnings, credit quality, expenses, taxes and capital, as well as statements regarding Popular's plans and objectives.
These statements are based on management's current expectations and are subject to risks and uncertainties. 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.
Javier D. Ferrer, President & Chief Executive Officer
Well, thank you, Paul, and good morning, everyone. Before going into our results, I'd like to comment briefly on this morning's announcement about my retirement at the end of August. After close to 12 incredible years at Popular and with the organization in a very strong position, I have decided to focus on my health and spending meaningful time with my family and close friends. I do so with great pride about what we have accomplished as a team and with complete confidence that Popular is left in the best possible hands.
Jorge has the experience, the vision and the heart to lead this organization forward with strength and care. He's 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 Sousa as the new CRO. I extend my most sincere congratulations to the three of them.
These appointments reflect a thoughtful succession process and demonstrate the depth, experience and strength of our leaders. It's not about one person, it's about the whole institution and the quality of its people. Okay, with that, please turn to slide 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 the first quarter. 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 prior 500 million authorization and paying our quarterly dividend of $0.75 per share. Earlier this morning, we announced a planned 20% increase in our quarterly dividend to $0.90 per share and a new 1 billion share repurchase authorization.
Before turning it to Jorge, I will comment on the business environment in Puerto Rico. Briefly, 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. To boot, cruise passenger arrivals increased approximately 45% year over year through May. Air passenger traffic at Luis Muñoz Marín Airport moderated a bit from record levels, declining approximately 4% year over year during the quarter.
However, Puerto Rico continues to benefit from airline expansion announcements including new routes and increased service from JetBlue, Southwest, Frontier and Avelo Airlines, which should support future visitation and economic activity. Moving to our strategic framework, we continue advancing our three objectives: to be the number one bank for our customers, to be simple and efficient, and to be a top-performing bank. Our strategy is centered on delivering innovative, relevant solutions to our clients that deepen relationships, improve their experience in every interaction with us and support sustainable growth across the markets we serve.
To achieve this, we are focused on providing our clients with the flexibility to interact with Popular through the channel that best meets their needs while maintaining our high service standards. Frankly, it comes down to delivering great experiences to blend the speed and convenience of self-service with personalized support and the human touch. We have continued to invest in our physical and digital channels. Key examples are the ongoing modernization of our retail network to enhance branch appearance and improve technological capabilities.
Our extensive branch network provides us with a competitive advantage in Puerto Rico and the Virgin Islands. We're pleased that more than half of Puerto Rico's Banco Popular branches have been upgraded to our new look and feel. We also continue to leverage digital tools to strengthen engagement with our retail customers and help them make informed financial decisions. These initiatives are delivering measurable results. On the commercial side, our modernized cash management platform is improving the client's experience through mobile functionality and enhanced money movement capabilities.
Also, our newly launched corporate credit card solutions continue to gain traction and already account for nearly half of our commercial purchase volume. We continue to expand our targeted segments strategy by tailoring our offerings to the unique needs of specific client groups throughout their personal and professional journeys. In Puerto Rico, we are deepening relationships with healthcare professionals and pursuing opportunities in other attractive high-value segments.
In the U.S., we're working to enhance our community association banking business, developing capabilities that simplify the customer experience and enable business growth. Together, these initiatives reinforce the strategic intent behind our new institutional campaign Aqui Creces. Aqui Creces. The campaign reflects our conviction that Popular is uniquely positioned to support the growth of our customers, businesses and communities we serve. As they grow, we grow.
I will now turn the call over to Jorge for more details on our financial results.
Jorge Garcia (Chief Financial Officer)
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've worked with him for over a decade and learned a lot from him. I am grateful for his friendship above all else. I look forward to working closely with him through the transition and continuing to benefit from his advice as he gets ready to enjoy a well‑deserved retirement.
I'm also excited to continue working alongside Lidio in his new role as CFO. I know firsthand that he will bring experience, analytical rigor, and an innovative perspective to the finance organization. On a personal level, I am honored by the opportunity to lead this great organization. After more than 20 years working across our U.S. and Puerto Rico operations, I have learned that what makes Popular special is our people. This is an organization with many leaders who help sustain its success.
I am fortunate to take on this role at a time of great momentum and enthusiasm. I do not take this responsibility lightly, and I hope to inspire my colleagues to continue building on that momentum for years to come. As Javier said, this was a very strong quarter. We performed ahead of our expectations across nearly all categories as our teams continue to be focused on executing their business plans in support of our key strategic objectives. Results reflected higher net interest income, stronger fee income, expense discipline, and a lower provision expense.
Our profitability continues to improve. ROTCE increased to 17%, up from 15.5% in the first quarter and 13.3% a year ago. Given the strength of our results and confidence in our ability to deliver sustainable returns, we are establishing a higher annual ROTCE 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 three basis points to 4.17%, primarily reflecting a higher contribution from tax‑exempt assets. In the quarter, ending loan balances increased by $460 million, including growth in commercial and construction lending across both banks and continued mortgage growth at BPPR.
Our loan growth guidance remains consistent from last quarter at the low end of the 3% to 4% range. In our investment portfolio, we have maintained our strategy of reinvesting proceeds from bond maturities into U.S. Treasury notes and bills. During the quarter, we purchased approximately $1.1 billion of Treasury notes with a duration of 2.8 years 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, while customer deposits excluding public funds declined by approximately $400 million. The point‑to‑point decrease in balances is consistent with historical seasonality as our clients spent the windfall from tax refunds. This activity also drove the lift in interchange income during the quarter. On an average basis, total deposits increased by $1.9 billion, or by $800 million when excluding Puerto Rico public deposits.
Despite some seasonal movement in customer balances, overall deposit trends remain stable and continue to reflect the strength of our franchise. Puerto Rico public deposits ended the quarter at $22.7 billion. We expect public deposits to be in the range of $20 to $22 billion for the rest of the year. Total deposit costs increased by 1 basis point to 1.57%, demonstrating continued stability of our funding base. At BPPR, deposit costs increased by 1 basis point, driven by a 2 basis point increase in non‑public customer deposits as a result of targeted retention strategies, while public deposit costs decreased by 5 basis points.
At Popular Bank, deposit costs increased by 4 basis points, reflecting competitive conditions in our markets and online deposit space. Given the favorable funding trends in Puerto Rico and balance sheet growth, we now expect net interest income to increase between 8% and 9% for the year. While higher balances of Puerto Rico public deposits contribute to NII growth, their higher cost is expected to temper some of the benefit to margin. Therefore, we expect NIM to remain generally stable for the rest of the year.
Please turn to Slide 8. 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% and 7%, respectively, as well as a 7% increase in asset management and insurance fees, demonstrating our ability to benefit from our breadth of product offerings. We now expect quarterly noninterest income to be in the range of $165 million to $170 million for the year, reflecting continued strength in interchange income from debit and credit card activities, 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, and are expected to impact personnel expenses during the second half of the year.
Based on current trends, we expect full‑year expense growth to remain at approximately 2% to 3% for the year, including profit‑sharing expenses. Our effective tax rate was 14% during the quarter, driven by higher tax‑exempt income. We now expect the effective tax rate for the year to be between 14% and 15% due to higher projected exempt income. Please turn to Slide 10. Tangible book value per share increased by $2.96 to $87.94, while CET1 increased 16 basis points to 16.1%, reflecting strong internal capital generation.
During the quarter, we returned a total of $174 million to shareholders, with approximately $125 million coming from common stock repurchases. Year to date, we have repurchased $280 million in common stock and, as of the end of the second quarter, have fully utilized the $500 million common stock repurchase authorization approved in 2025. Earlier today, we announced a 20% increase in our quarterly dividend to $0.90 per share beginning in the fourth quarter, subject to board approval, as well as a new share repurchase authorization of up to $1 billion.
During the remainder of 2026, we expect to repurchase an additional $300 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.
Lidio Soriano, Chief Financial Officer
Thank you, Jorge, and good morning. Before turning to credit, I would like to briefly acknowledge the leadership transition we announced today. First, I want to express my sincere gratitude to Javier for his leadership, guidance, dedication to Popular, and friendship to me. I'm also excited and humbled to take on the CFO role succeeding Jorge, and I look forward to supporting him as he steps into the CEO role. Finally, I want to congratulate Luis Sousa, who will succeed me as Chief Risk Officer.
Luis has been a trusted partner, and I'm confident he will do an outstanding job leading our risk organization. With that, credit quality remains stable during the second quarter, supported by continued improvement in consumer credit performance, stable mortgage trends, and the resolution of a previously disclosed commercial loan. In the consumer portfolio, performance continued to improve. Consumers remained resilient despite elevated gas prices and inflation, supported by higher tax refunds and a solid labor market.
Net charge‑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 and mortgage trends continue to improve, reported 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 resolved and 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 in 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, formally driven by commercial NPLs. Excluding consumer loans, NPL inflows increased by approximately $137 million, primarily reflecting the two C&I relationships I discussed. We continue to monitor commercial trends closely; however, the activity remains isolated 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‑off and NPL inflows this quarter, we now expect net charge‑offs to be in the range of 65 to 80 basis points for the full year.
The decline in the allowance was largely driven by the resolution of the telecommunication relationship and continued improvement in consumer portfolio performance. These benefits were partly offset by reserves established for the new commercial inflows and continued 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, the underlying trends in our portfolio remain stable, supported by continuing strength in the consumer and mortgage portfolio.
We have proactively addressed our largest nonperforming exposure, maintained 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.
Javier D. Ferrer, President & Chief Executive Officer
Thank you, Lydia and Jorge, for your kind words and updates. We are very happy with our second quarter results. During the quarter, we delivered strong 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 Credito 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 that has been a part of my extraordinary journey at Popular. A journey full of challenges overcome, shared learnings, and above all, relationships with special people that I will always treasure. I am especially grateful to my colleagues at Popular for their support, trust, and dedication throughout the years.
Leading this organization has been truly a privilege. I leave with enormous satisfaction and grateful as I see Popular solid, united, and moving forward with a clear purpose and strategy. And with that, we are now ready to answer your questions.
OPERATOR
Thank you. As a reminder, to ask a question, please 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 while we compile the Q and A roster. And our first question comes from Jared Shaw at Barclays. Your line is open.
Jared Shaw, Analyst at Barclays
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.
Javier D. Ferrer, President & Chief Executive Officer
All right. Thank you. It's been a privilege. Been a privilege. Thank you.
Jared Shaw, Analyst at Barclays
Yeah, I guess there's a lot of good things in this quarter, I guess, to talk about. But when you look at the target for ROTCE and the buyback that's announced, have you changed your underlying expectations for optimal capital levels, and should we think of that billion dollars as a 12-month goal for buybacks?
Lidio Soriano, Chief Financial Officer
So, good morning, Jared. So first, the authorization does not have a time limit. So, you know, I want to clarify that it is not a 12-month deadline or anything like that. We did say that we would be executing buybacks for the rest of the year in the $300 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've had year to date, that will cover around 100% of the 2025 net income.
So we like kind of that pace. We understand the math, let the balance sheet grow, and that certainly helps reduce the CET1 as we go forward. We're still open to optimizing our capital stack. We're still out there considering the additional Tier 1 capital to strengthen that part and create that efficiency in our capital stack. But frankly, the market rates are just not in our favor right now and there's no reason for us to do that given the size of capital that we have.
And that really is just an optimization strategy. Other than that, we continue committed. We've tried to be more intentful in our discussions to reduce the CET1, but we continue in our philosophy that we want to do this over time. We want to have that flexibility. But certainly we understand.
Jared Shaw, Analyst at Barclays
All right, thanks for that. And then looking at loan growth, it sounds like clearly the underlying economy is strong and you're in a really good position there. What would have to happen, I guess 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?
Jorge Garcia (Chief Financial Officer)
Yeah, we did have strong growth in both markets this quarter. In the U.S., we've talked about our construction portfolio that has seen some continued increase. We do still believe that there are headwinds there in the timing of payoffs as people term out those construction loans versus the pipeline and the speed at which, particularly in our New York multifamily development market, is moving. So that's a little bit of a headwind. In Puerto Rico over the last few years, including in the second quarter, we benefit from some large-ticket loans.
And as we look at the pipeline, while there's still a lot of activity and a lot of good opportunities, we do see fewer of those large-ticket loans. So that is something that we have in mind as we look maybe further out. We do expect probably more spending in public works or infrastructure projects. As you know, certainly we approach a political, you know, an election year in 2028. There is a lot of activity like that in Puerto Rico. And as you know, given our size, we usually get the first look at all these projects.
We're not always going to pursue them. We're not always going to win, but we are going to have a good chance to be selective and we continue to intend to do that. One thing I'll note on our guidance: certainly resolving the $155 million loan this quarter, that also reduces the net growth of the loan portfolio.
Jared Shaw, Analyst at Barclays
Yeah. Okay, thanks. And I guess just if I could ask one more just on the inflow, those two loans that you called out, any thought around what loss content could be there if you have a specific reserve, or is that just something that you think you work out over time, but not necessarily a lot of loss content?
Lidio Soriano, Chief Financial Officer
I think a lot of the driver for the provision this quarter was those two loans, actually. So, I mean, when you look at the overall performance of our credit book, it was actually positive. We said there was improved performance credit metrics from our consumer portfolio and continued strong performance from our mortgage book. So a lot of the provision that we have was related to those loans. We did not specifically talk about the amounts, but we think, I mean, they're adequately reserved based on the information that we have as of today.
OPERATOR
Thank you. And our next question comes from Brett Rabitin of Stonex Group. Your line is open.
Brett Rabitin, Analyst at StoneX Group
Hey, good morning, everyone. And I'll add my congratulations to everyone on their new endeavors and roles. So congrats.
Javier D. Ferrer, President & Chief Executive Officer
Thank you.
Brett Rabitin, Analyst at StoneX Group
Yeah, yeah. Good to be back. Wanted to, I guess, first just talk about the competitive landscape. And it sounded to me like a little bit like perhaps you were seeing some increased competition. Can you just talk about both the U.S. and Puerto Rico and what you guys are seeing, if there's any increased competitive levels on the island in particular?
Lidio Soriano, Chief Financial Officer
Yeah, I'll share some thoughts and then Jorge obviously will chime in. I think we've been saying in the last few quarters that we've seen competition. There's always competition in Puerto Rico. I mean, don't get this idea that this is a market where competition is not present. We compete every day for what we do, and not only local competition, but also competition from big banks and fintechs and other financial institutions that come in and compete in different segments and products and services.
But that said, competition is still rational. We've also said that we will defend our turf and price rationally and reasonably both on the deposit and on the credit products, because we don't want to do anything that doesn't make any sense, and sometimes we'll let some opportunities pass if they don't make sense to us, all things considered. So in the United States—Jorge, if you want to add anything.
Jorge Garcia (Chief Financial Officer)
Yeah. So 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, you know, more localized players. And then in the New York market, it tends to be from bigger players. We're also seeing tough competition in the online channels where really the yield is your competitive advantage there. So in Puerto Rico, our deposit cost did go up on the non-public 2 basis points.
This is something that we have kind of forecast or predicted to you guys in these conversations. And they're just reflective of our kind of targeted focus on retaining relationships. And we've been, since I guess the end of 2024, just revised kind of our focus, the structures, incentives, as well as exception pricing matrix that allows us, and it's been very successful for us, to retain good clients.
Brett Rabitin, Analyst at StoneX Group
Okay, that's really helpful. And then on the expense guidance for the year, you obviously tweaked it down. But even at the higher end in particular of the 2 to 3%, it implies a pretty good pickup from here. Even with the higher incentive compensation related stuff in 2Q, are there any projects related in the back half of the year that would raise professional fees? Or can you talk about the inflection in the back half versus 2Q in particular?
Lidio Soriano, Chief Financial Officer
Sure. We do expect expenses to go higher in the second half. One big item, as I mentioned in my prepared remarks, is our annual salary increases. They're effective in July, so that probably adds four or five million dollars a quarter just on that. And then we continue to work on our transformation efforts. And as we said in the past, you have kind of this ebb and flow of projects that get done and move on. And certainly that's all part of the guide.
I think one part that's important and I think the significant change is that the guide does include the range of profit sharing, including if we had to max out on the profit sharing, it still fits within the range that we're providing you.
Brett Rabitin, Analyst at StoneX Group
Okay, that's great. Thanks for all the color, guys.
OPERATOR
Thank you. Thank you. And our next question comes from Erin Saiganovich of Truist Securities. Your line is open.
Erin Saiganovich, Analyst at Truist Securities
Thank you. Best wishes, Javier. I really enjoyed meeting you last year while I was kind of revamping on the name. And I think your passion and your intensity definitely stand out and I'm sure your family is going to look forward to that.
Javier D. Ferrer, President & Chief Executive Officer
I can't be in the house too much because my wife won't like it. But yes, thank you for those very kind words.
Erin Saiganovich, Analyst at Truist Securities
And congratulations to Jorge, Lidio, and Luis. Definitely will look forward to continue working with you. On the deposit side, ex-government, they were down. I know you just talked about some of the competition. It looked like demand deposits was the area where there was a little bit of a decline. Any color in terms of that—economic, seasonality, etc.?
Lidio Soriano, Chief Financial Officer
Yeah, thank you. There is seasonality. I mean, I think we go through, and what we said in the past is that we see in the first quarter that ending balances go up, average balances are flattish, they move along. The second quarter we see higher average balances and ending balances start coming down. And it's just really the cycle of tax refunds and then people using those tax refunds. Third quarter we would expect the ending balances to come down and we would also expect average balances to come down.
That's been our kind of trend over the last few years. And in the fourth quarter we see that the ending balances come up and average balances are more stable. So the second quarter really behaved as we would have expected based on those seasonal trends. Averages were significantly up. Ending balances did come down. I think excluding non-public in Puerto Rico is around 250 million. When we look at and double click on the activity from our clients, frankly where we see the big increase in outflows is in POS, so interchange.
And that's consistent with the fee income that you saw increasing in debit card and credit card fee. That's, I think, 7, 13% up year over year. So we truly see our clients really using this money and spending it. We did see some higher payments to government, so higher tax payments from some of our clients. And again that's consistent with the increase that we saw in public funds. A large part of that increase was driven by estimated tax payments, particularly from pharmaceuticals and manufacturing companies.
UNKNOWN, Analyst
Okay, I appreciate that. And then maybe in terms of the consumer credit continuing to be very strong, was that also impacted by the one-time tax benefit to individuals in the quarter in Puerto Rico? And any kind of sustainable benefit, or is that more of just kind of a one time for the quarter.
Lidio Soriano, Chief Financial Officer
I think in the same token there is seasonality in deposits, there is also seasonality in our consumer performance. What I think we're most encouraged is the level of delinquencies and charge-offs are below the same period last year. So it's not only that we see the seasonality, which is driven by tax return—you see lower losses and lower delinquencies in the first half of the year than the second half—but in this first half of the year it's actually lower than what we had last year.
So we are very, very encouraged by the trends in our consumer portfolio.
UNKNOWN, Analyst
Thanks, Lydia.
OPERATOR
Thank you. And our next question comes from Tamar Brasilier of UBS. Your line is open.
Tamar Brasilier, Analyst at UBS
Hi, good morning everyone. Maybe again looking at the back end of the year, I was going to ask on the deposit trends as well, just if the second quarter end-of-period decline is any kind of indication one way or another to the magnitude of third-quarter seasonality. And I guess in a similar light, you had mentioned margin flat for the rest of the year with some moving dynamics around fixed asset repricing and maybe some higher costs on the public fund side.
I guess with the three-month moving up, the three-month Treasury yield moving up during 2Q, is the expectation that margin is flat in each of the next two quarters, or could you see that tick down in 3Q and then recover in 4Q as some of those public funds are wound down?
Lidio Soriano, Chief Financial Officer
I mean, when we say stable, we do mean stable for the rest of the year based on what we're seeing now. The first driver is the mix, right? We've increased our target for public funds by 10%. So that's our highest or the most costly deposit that we have in Puerto Rico, you know, at size. So that's not, you know, not unreasonable to see that they would have an impact on NIM. The other thing is just exactly what you talked about, is that the three-month Treasuries have been going up.
That's not necessarily being reflected in a move in federal funds. So we're not getting, you know, there's a little bit of basis risk there that narrows the spread on that. We'll continue our strategy of investing in Treasury T-bills and notes. That will mitigate some of that. But clearly as we look out, both our NII guidance and our NIM guidance are taking into consideration kind of what we're seeing in futures right now.
Tamar Brasilier, Analyst at UBS
Okay, that's helpful.
Lidio Soriano, Chief Financial Officer
We're not doing any changes by the Fed, by the way, in that scenario.
Tamar Brasilier, Analyst at UBS
Okay, that's helpful. Thank you. And then one more on the updated ROTC range. Obviously seasonally strong quarter. I think adjusted ROTC this quarter was like 16 and a half or so, I guess. Where are we now, kind of in your mind from a core standpoint? And as you think about the strength that the bank and the island has been enjoying over the last couple of years, are we nearing that kind of peakish level here right now? Or is the expectation, if you kind of normalize the last couple of quarters, that ROTC in this current environment can continue grinding higher?
Javier D. Ferrer, President & Chief Executive Officer
Well, I'm just going to say I'm going to react to the peak comments. I mean, I don't think we're nowhere near our peak and what we can achieve as a franchise. I just want to say that. And then maybe Jorge may add some rational numbers to it. I mean we're not stopping here. Quite frankly, I think we've only begun. We're seeing the efforts of, you know, a lot of work in our transformation program the last four years. Teams are energized. So, I mean, I think we can't really talk about a peak.
I mean, as I said, we're just beginning.
Jorge Garcia (Chief Financial Officer)
I'm not sure that I need to add anything to that. That's great.
Tamar Brasilier, Analyst at UBS
Thank you. And then just last for me on capital return. So you upsized the buyback here. I'm just wondering, in terms of mainland M&A, if I'm not mistaken, you have some NOLs that are beginning to expire in 2028. I'm just wondering where that factors in to the potential for doing mainland M&A and then on the buyback, would you need to optimize that capital stack prior to really leaning into it, or is this kind of back end of the year run rate a good one to extrapolate for the time going forward?
Jorge Garcia (Chief Financial Officer)
Let me answer the question about the DTA first, and then I'm sure Javier can talk about M&A, but I'm not sure I quite understood the last part of that question. So please let's set that aside. We'll go back to it if you don't mind. On the DTA, you're right. The NOLs begin to expire in 2028. The best way to realize the benefit of those is increase our profitability. We are focused on doing that. We are not going to drive an acquisition strategy to realize the benefit of that DTA.
As you know, the part of the DTA or the NOL that we're not going to utilize is reserved. So it's not part of our tangible value at this stage. It is certainly a benefit if you were to look at an M&A acquisition, but it's not going to be the driver for buying something. So I don't know. Javier?
Javier D. Ferrer, President & Chief Executive Officer
Yeah, thank you, Jorge. I think you've heard us say that our primary focus continues to be on our transformation efforts. We're always looking for opportunities to add profitable niche businesses and teams and assets in the U.S., as we stated. But hold-back M&A is not a priority. And, you know, we've also said that, you know, there is a high threshold for any transaction that we may consider, and we level the opportunities to grow inorganically as long as they meet a few criteria and, you know, compelling enough for us to consider relocating resources away from transformation—being one, core deposits.
It needs to strengthen our deposit franchise with lower-cost deposits. It needs to be commercially led. It needs to enhance our commercial-led niche business strategy. It needs to be consistent, geographically creative market penetration in our existing footprint, increasing opportunities for value creation through cost synergies, or extend presence to adjacent markets or geographies. Scale is going to be important, or would be important, should be right-size for our U.S. business, and for me most importantly, of course, is the cultural fit. It needs to be aligned to our culture of performance and employee well-being. So, you know, we're very mindful of it. So that's our stand on M&A. And by the way, you can imagine we're very collaborative around here. We put those together as a team. I don't think that the answer will be much different the next quarter.
Jorge Garcia (Chief Financial Officer)
You had, Tamar, a third part to your question related to preferreds. Can you repeat that so we can address it?
Tamar Brasilier, Analyst at UBS
Yeah, I guess maybe. And thank you for the color on M&A. I guess maybe another way of asking the buyback question is if you do issue preferreds, if you do capitalize or optimize the capital stack, would you be more inclined to use those proceeds to maybe front-load or upsize the amount you're willing to buy back in any given quarter?
Lidio Soriano, Chief Financial Officer
Absolutely, absolutely. I mean, for us, optimizing capital would mean we're shifting CET1 to Additional Tier 1, and whatever proceeds would be used to promptly or quickly reduce the CET1 by a similar amount.
Tamar Brasilier, Analyst at UBS
Perfect. Thank you guys, and Javier again, congratulations on the well-earned retirement. Looking forward to working with you, Jorge, in your new role and the new team. Thanks, guys.
Javier D. Ferrer, President & Chief Executive Officer
Thank you for those kind words.
OPERATOR
Thank you, and our next question comes from Kelly Mata of KBW. Your line is open.
Kelly Mata, Analyst at KBW
Hi, good morning. At the risk of beating a dead horse, just congrats again, Javier, on your retirement. Congrats to Jorge and Lydio on your subsequent promotions. I hope, Javier, you have something really fun planned, and looking forward to working with Jorge and Lydia in your expanded roles.
Javier D. Ferrer, President & Chief Executive Officer
Thank you. Kelly, any ideas you can share of that, I'm all ears.
Kelly Mata, Analyst at KBW
But, you know, I always have some fun ideas. Maybe offline. Maybe kicking it off on expenses: like you reiterated your guide on expenses, but clearly the NII outlook is better, fee outlook is better. Presumably you guys are getting some higher profit-sharing expenses with that. Wondering, you know, understanding that aspect of it, I'm wondering if there were potentially projects that were pushed out or additional savings realized. Just hoping even though the overall isn't changed, if we could kind of work through the moving pieces of that.
Lidio Soriano, Chief Financial Officer
I mean, we definitely have efficiency efforts that are ongoing. In our kind of baseline number this year we had about $50 million in savings across the organization. None of these are huge big splash projects. These are really asking people to take an extra step and focus on excellence, operational excellence, and things as simple as, you know, we note that teams will hoard computers, you know, because they're worried that if they have a computer crash, then they can, you know, have a spare.
Well, if you have a lot of people keeping spare computers for an emergency, it adds up a lot of cost. So we've gone back out and, you know, destroyed them, sold them, whatever we need to do to dispose of them. That has a lot of savings just on an ongoing basis. And this is an example of the kind of aspects. We are not managing the transformation or the large technology project-driven investments to manage our expenses. I mean, certainly we create budgets and we have an appetite of the level of work we're going to do.
But we're not trying to slow down a project to try to meet an expense guidance. We believe in the efforts of the team and the priority that this has and the value to our shareholders. So truly it's some things: maybe you slow down your hiring process, or a project gets delayed, or you get lucky on something you thought we were going to cost to dispose and didn't cost to dispose it. All these little things make a difference in our range.
UNKNOWN, Analyst
Got it. That's helpful. And then maybe, maybe one for Lydia. I'm going to throw out a credit question. I think pre-COVID, you guys used to always talk about maybe an 80 to 120 basis point normalized net charge-off ratio. Clearly, even with the, you know, was nice to see the cleanup you had of that like large NPL this quarter that impacted net charge-off. But clearly the underlying net charge-off ratio continues to stack lower relative to historical norms.
Any update on how you guys are thinking about what normalized net charge-off looks like at Popular? Now that we're six years out of the start of the pandemic,
Lidio Soriano, Chief Financial Officer
I think we are providing guidance of our expectation for the year that should help inform that decision. And I agree with you. I mean we, we have seen strong performance from our book, particularly our mortgage book. Our mortgage, back in the days when you're citing the 120 basis points, that book had losses of around 1%. Over the last three or four years, there have been net recoveries rather than losses. And that performance I think is driving the good results that you're seeing from our book.
UNKNOWN, Analyst
Great. That's helpful. I'll step back. Congrats again to all.
Lidio Soriano, Chief Financial Officer
Thank you.
OPERATOR
Thank you. And if you have a question, please press star 11. And our next question comes from Gerard Cassidy of RBC. Your line is open. And he seems to have changed his mind. So this concludes the question and answer session in today's conference call. Thank you for participating. And you may now disconnect.
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