Popular, Inc. Announces Third Quarter 2019 Financial Results

• Net income of $165.3 million in Q3 2019, compared to net income of $171.1 million in Q2 2019.
• Net interest margin of 4.00% in Q3 2019, compared to 4.11% in Q2 2019.
• Credit Quality:

• Non-performing loans held-in-portfolio (“NPLs”) decreased by $6.6 million from Q2 2019; NPLs to loans ratio remained at 2.1% from Q2 2019;
• Net charge-offs (“NCOs”) increased by $20.7 million from Q2 2019; NCOs at 1.01% of average loans held-in-portfolio vs. 0.71% in Q2 2019;
• Allowance for loan losses to loans held-in-portfolio at 1.90% vs. 2.01% in Q2 2019; and
• Allowance for loan losses to NPLs at 91.9% vs. 96.3% in Q2 2019.

• Common Equity Tier 1 ratio of 17.46%, Common Equity per Share of $60.57 and Tangible Book Value per Share of $53.41 at September 30, 2019.

SAN JUAN, Puerto Rico–(BUSINESS WIRE)–Popular, Inc. (the “Corporation,” “Popular,” “we,” “us,” “our”) (NASDAQ:BPOP) reported net income of $165.3 million for the quarter ended September 30, 2019, compared to net income of $171.1 million for the quarter ended June 30, 2019.

Ignacio Alvarez, President and Chief Executive Officer, said: “The third quarter was another solid one as we continued to build on the strong performance of the first half of the year. While results reflect higher operating expenses due to investments in key areas such as technology, compliance and our people, we maintained our net interest income stable despite the interest rate environment, increased our non-interest income and benefited from a lower provision expense.  We added 12,000 new clients and increased consumer loan balances in Puerto Rico and grew our commercial and mortgage portfolios in the United States.”

Earnings Highlights
(Unaudited)	Quarters ended						Nine months ended
(Dollars in thousands, except per share information)	30-Sep-19		30-Jun-19		30-Sep-18		30-Sep-19	30-Sep-18
Net interest income	$476,991		$476,316		$451,469		$1,424,270	$1,258,652
Provision for loan losses	36,539		40,191		54,387		118,555	183,774
Provision for loan losses – covered loans [1]	–		–		–		–	1,730
Net interest income after provision for loan losses	440,452		436,125		397,082		1,305,715	1,073,148
FDIC loss-share income	–		–		–		–	94,725
Other non-interest income	142,712		138,326		151,021		417,468	404,602
Operating expenses	376,475		363,015		365,437		1,086,910	1,025,107
Income before income tax	206,689		211,436		182,666		636,273	547,368
Income tax expense	41,370		40,330		42,018		131,923	35,613
Net income	$165,319		$171,106		$140,648		$504,350	$511,755
Net income applicable to common stock	$164,389		$170,175		$139,718		$501,558	$508,963
Net income per common share – basic	$1.71		$1.77		$1.38		$5.17	$5.01
Net income per common share – diluted	$1.70		$1.76		$1.38		$5.16	$5.00
[1] Covered loans represent loans acquired in the Westernbank FDIC-assisted transaction that were covered under the terminated FDIC Shared-Loss Agreements.

Net interest income

Net interest income for the quarter ended September 30, 2019 was $477.0 million, compared to $476.3 million for the previous quarter. Net interest margin was 4.00% for the quarter, compared to 4.11% for the previous quarter.

The increase of $0.7 million in net interest income is mainly the result of $5.4 million from higher volume of earning assets and a $3.8 million positive impact of one more day in the third quarter. This increase was partially offset by $8.5 million due to lower yields mainly from the impact of the 25 basis point decreases in the Fed Funds rate that occurred at the end of July and in mid-September 2019.

Significant variances were:

• Higher income from money market, trading and investments by $1.9 million due to higher volume, mostly driven by an increase in public sector deposits at Banco Popular de Puerto Rico (“BPPR”); and
• Higher income from the consumer loan portfolio by $1.7 million, due to higher loan volume in the BPPR segment driven primarily by an increase in auto loans and leases and consumer loans originated through BPPR’s E-loan channel.

Partially offset by:

• Lower interest income from the commercial loan portfolio by $2.7 million, principally due to lower market rates in the adjustable rate portfolio, the impact of the payoff of a large loan on the purchased credit impaired portfolio and originations in the U.S. in a lower interest rate environment; and
• Higher interest expense on deposits resulting from higher average balances mainly in the P.R. public sector and digital deposit channel in Popular Bank (“ Popular U.S.” or “ PB”) and the impact of one more day in the quarter of $0.9 million. Cost of interest-bearing deposits decreased 4 basis points driven mainly by the decrease in cost of public sector deposits in P.R. offset in part by an increase in the cost of digital channel deposits in Popular U.S.

BPPR’s net interest income amounted to $412.2 million for the quarter ended September 30, 2019, compared to $411.5 million for the previous quarter. Net interest margin for the third quarter of 2019 was 4.26%, a decrease of 11 basis points when compared to a net interest margin of 4.37% for the previous quarter. The decrease in net interest margin was mainly due to higher average volume of investment securities, which carry a lower yield, and a decrease in the yield of the money market portfolio and of the commercial loan portfolio as a result of lower market rates. Also impacting net interest margin was the payoff of a large commercial loan included in the purchased credit impaired portfolio, as mentioned above, and a lower discount amortization of the loan portfolio acquired from Wells Fargo in 2018 (the “Reliable Transaction”), partially offset by a lower cost of deposits. BPPR’s earning assets yielded 4.83%, compared to 4.98% in the previous quarter, while the cost of interest-bearing deposits was 0.77%, or 6 basis points lower than the 0.83% reported in the previous quarter. Total cost of deposits for the quarter was 0.61%, compared to 0.64% reported in the second quarter of 2019. The impact of one more day in the quarter represented approximately $3.1 million in additional net interest income at BPPR.

Net interest income for Popular U.S. was $74.4 million for the quarter ended September 30, 2019, compared to $74.6 million during the previous quarter. The decrease of $0.2 million in net interest income was primarily due to higher cost of deposits, as explained above, partially offset by higher volume of commercial and mortgage loans. Net interest margin for the quarter decreased 14 basis points to 3.29%, compared to 3.43% for the previous quarter. Earning assets yielded 4.60%, compared to 4.71% in the previous quarter, while the cost of interest-bearing deposits was 1.63%, compared to 1.59% reported for the previous quarter. Total cost of deposits for the quarter was 1.40% compared to 1.37% reported in the second quarter of 2019. The impact of one more day in the quarter represented approximately $0.6 million in additional net interest income at PB.

Non-interest income

Non-interest income increased by $4.4 million to $142.7 million for the quarter ended September 30, 2019, compared to $138.3 million for the quarter ended June 30, 2019. The increase in non-interest income was primarily driven by:

• Higher service charges on deposit accounts by $1.4 million, mainly at BPPR, due to higher fees on transactional cash management services; and

• higher income from mortgage banking activities by $12.3 million, mainly due to the unfavorable adjustment on mortgage servicing rights (“MSRs”) of $17.2 million recorded during the previous quarter driven by higher estimated prepayment and lower earnings rate due to lower interest rates, compared to an unfavorable adjustment of $4.8 million this quarter.

These variances were partially offset by:

• Lower other service fees by $2.7 million, mainly in insurance fees, due to $3.5 million in contingency insurance commissions received during the second quarter of 2019, partially offset by higher credit card fees;

• unfavorable variance in adjustments to indemnity reserves on previously sold loans of $5.3 million due to the release of a $4.4 million reserve taken in connection with a 2013 transaction settled during the second quarter of 2019; and

• lower other operating income by $0.8 million, principally due to lower gains on sales of daily rental units by $0.7 million and lower recoveries of previously charged-off loans from the portfolio acquired as part of the Reliable Transaction by $0.6 million, partially offset by higher net earnings from the portfolio of investments under the equity method by $0.4 million.

Refer to Table B for further details.

Operating expenses

Operating expenses for the third quarter of 2019 totaled $376.5 million, an increase of $13.5 million when compared to the second quarter of 2019. The increase in operating expenses was driven primarily by:

• Higher personnel cost by $6.2 million due to higher salaries by $3.9 million as a result of annual merit increases during the quarter and a higher headcount, and an increase of $3.2 million related to annual incentives, including the Corporation’s Profit-Sharing Plan, tied to the Corporation’s financial performance. Through the three quarters ended September 30, 2019, the Corporation has accumulated a total of $19.4 million in anticipated profit-sharing expenses;

• higher professional fees by $3.3 million, mainly due to higher advisory expenses by $4.8 million related to Corporate initiatives and higher programming, processing and other technology services by $2.1 million, partially offset by lower legal fees by $2.0 million; and

• higher other operating expenses by $6.0 million due to higher operational losses, including legal contingency reserves by $4.1 million and a $2.6 million loss related to an undeveloped corporate site which was placed for sale.

These increases were partially offset by:

• Lower FDIC deposit insurance by $2.4 million, mainly due to the small bank assessment credit received at Popular Bank.

Full-time equivalent employees were 8,457 as of September 30, 2019, compared to 8,372 as of June 30, 2019.

For a breakdown of operating expenses by category refer to Table B.

Income taxes

For the quarter ended September 30, 2019, the Corporation recorded an income tax expense of $41.4 million, compared to $40.3 million for the previous quarter. During the third quarter of 2019, the Corporation recorded a tax benefit of $4.3 million related to revisions to the amount of exempt income for the current year. During the second quarter of 2019, the Corporation recorded a tax benefit of approximately $6.3 million related to adjustments pertaining to tax periods for which the statute of limitations had expired. The effective tax rate (“ETR”) for the third quarter of 2019 was 20%. Excluding the exempt income adjustment discussed above, the ETR for the quarter would have been 22%.

In the fourth quarter of 2019, in connection with the filing and true up of the Corporation’s 2018 Puerto Rico tax return, the Corporation will also amend its tax returns for the years 2015-2017, which will include a revision of the amount of exempt interest income resulting in a positive tax adjustment within a range of $15 million to $20 million.

The ETR of the Corporation is impacted by the composition and source of its taxable income. For the year 2019, the Corporation expects its consolidated effective tax rate to be within a range of 20% to 22%.

Credit Quality

NPLs for the BPPR segment for the third quarter of 2019, remained relatively flat from the second quarter of 2019. However, charge offs for the BPPR segment increased mainly as a result of previously reserved commercial loans and revisions to the auto loans charge-off policy. Credit quality metrics of our U.S. operation remained favorable. The Corporation continues to be attentive to the performance of its portfolios and related credit metrics. The following presents credit quality results for the third quarter of 2019.

• Inflows of NPLs held-in-portfolio, excluding consumer loans, increased by $39.6 million quarter-over-quarter, primarily related to troubled debt restructured commercial real estate loans at BPPR.
• Total non-performing loans held-in-portfolio decreased by $6.6 million from the second quarter of 2019. The BPPR segment NPLs remained essentially flat reflecting lower mortgage and consumer NPLs of $13.0 million and $4.3 million, respectively, offset by higher commercial NPLs of $17.2 million. The PB segment NPLs decreased by $4.9 million mostly due to charge-offs. At September 30, 2019, the ratio of NPLs to total loans held-in-portfolio remained at 2.1% from the second quarter of 2019.
• Net charge-offs increased by $20.7 million from the second quarter of 2019, primarily driven by higher BPPR commercial and consumer NCOs of $10.4 million and $9.4 million, respectively. The commercial NCOs increase was mainly driven by the abovementioned previously reserved restructured commercial real estate loans, for which impaired amounts were charged-off during the quarter. The increase in consumer NCOs was mainly related to revisions and alignment in the auto loans charge-off policy. The Corporation’s ratio of annualized net charge-offs to average loans held-in-portfolio was 1.01%, compared to 0.71% in the second quarter of 2019. Refer to Table J for further information on net charge-offs and related ratios.
• The allowance for loan and lease losses (“ALLL”) decreased by $31.3 million from the second quarter of 2019 to $512.4 million. The BPPR segment ALLL decreased by $25.4 million, principally driven by lower reserves for the commercial portfolio prompted by charge-offs taken during the quarter on previously reserved loans, a $8.2 million reserve release from a $40 million loan relationship, in the ASC 310-30 portfolio, sold during the quarter, and continued improvements in the loss trends of the mortgage portfolio. These decreases were offset in part by higher reserves for auto loans mainly related to the growth of the portfolio. PB’s ALLL decreased by $5.9 million, principally due to lower reserves for the U.S. taxi medallion portfolio.
• The general and specific reserves totaled $416.5 million and $95.8 million, respectively, at quarter-end, compared with $443.6 million and $100.0 million, respectively, as of June 30, 2019. The ratio of the allowance for loan losses to loans held-in-portfolio was 1.90% in the third quarter of 2019, compared to 2.01% in the previous quarter. The ratio of the allowance for loan losses to NPLs held-in-portfolio stood at 91.9% compared to 96.3% in the previous quarter.
• The provision for loan losses for the third quarter of 2019 decreased by $3.7 million from the prior quarter as a result of positive adjustments in certain qualitative reserves, the release from the loan relationship sold during the quarter, and lower loss trends in the mortgage portfolio. The provision to net charge-offs ratio was 53.9% in the third quarter of 2019, compared to 85.2% in the previous quarter.

   

Non-Performing Assets
(Unaudited)
(In thousands)	30-Sep-19		30-Jun-19		30-Sep-18
Total non-performing loans held-in-portfolio	$557,792		$564,358		$632,488
Other real estate owned (“OREO”)	117,928		118,851		133,780
Total non-performing assets	$675,720		$683,209		$766,268
Net charge-offs for the quarter	$67,840		$47,153		$63,687
Ratios:
Loans held-in-portfolio	$27,007,975		$27,005,745		$26,512,168
Non-performing loans held-in-portfolio to loans held-in-portfolio	2.07%		2.09%		2.39%
Allowance for loan losses to loans held-in-portfolio	1.90		2.01		2.39
Allowance for loan losses to non-performing loans, excluding loans held-for-sale	91.86		96.33		100.19
Refer to Table H for additional information.

Provision for Loan Losses
(Unaudited)		Quarters ended						Nine months ended
(In thousands)		30-Sep-19		30-Jun-19		30-Sep-18		30-Sep-19	30-Sep-18
Provision for loan losses:
BPPR		$34,479		$28,975		$51,877		$94,908	$153,000
Popular U.S.		2,060		11,216		2,510		23,647	30,774
Total provision for loan losses – non-covered loans		$36,539		$40,191		$54,387		$118,555	$183,774
Provision for loan losses – covered loans		–		–		–		–	1,730
Total provision for loan losses		$36,539		$40,191		$54,387		$118,555	$185,504

Credit Quality by Segment
(Unaudited)
(In thousands)				Quarters ended
BPPR				30-Sep-19		30-Jun-19		30-Sep-18
Provision for loan losses				$34,479		$28,975		$51,877
Net charge-offs				59,900		37,167		58,846
Total non-performing loans held-in-portfolio				520,773		522,525		580,803
Allowance / loans held-in-portfolio				2.26%		2.38%		2.83%
				Quarters ended
Popular U.S.				30-Sep-19		30-Jun-19		30-Sep-18
Provision for loan losses				$2,060		$11,216		$2,510
Net charge-offs				7,940		9,986		4,841
Total non-performing loans held-in-portfolio				37,019		41,833		51,685
Allowance / loans held-in-portfolio				0.87%		0.97%		1.10%

Preliminary impact estimate of the adoption of the current expected credit loss model (“CECL”)

The Corporation has continued its evaluation and implementation efforts with respect to CECL, in accordance with Accounting Standards Update (“ASU”) 2016-13, which will be effective on January 1, 2020. The ultimate impact on the Corporation of the adoption of CECL will depend on the composition of the Corporation’s portfolios as well as the economic conditions and forecast at the time of adoption.

Based on its preliminary analysis and the information currently available, utilizing loan balances and macroeconomic scenarios as of June 30, 2019, the Corporation expects that its allowance for loan and lease losses would increase by a range from $360 million to $400 million, or 85% to 95%, excluding purchased credit impaired loans. This increase is driven by the Puerto Rico mortgage, auto and credit cards loans portfolio. This increase would be reflected as a decrease to the opening balance of retained earnings, net of income taxes. Based on the Corporation’s preliminary estimates, assuming adoption at September 30, 2019, the day one impact of the adoption of CECL would result in a reduction in Tangible Book Value of approximately $3, or 5%.

The Corporation expects to continue to be well capitalized under the Basel III regulatory framework after the adoption of this standard. The Corporation will avail itself of the option to phase in over a period of three years the day one effects on regulatory capital from the adoption of CECL. Considering the phase in period provided by the regulatory framework, the estimated decrease to the Common Equity Tier One and Total Capital ratios would be of approximately 30 bps.

These estimates are preliminary and are subject to further work and analysis by the Corporation as part of its implementation efforts, including the consideration of qualitative factors, which may impact reserves, the review of significant assumptions and the model validation process.

 

Financial Condition Highlights
(Unaudited)
(In thousands)				30-Sep-19				30-Jun-19				30-Sep-18
Cash and money market investments				$5,670,645				$3,563,819				$5,010,010
Investment securities				16,773,578				17,038,098				13,344,548
Loans				27,007,975				27,005,745				26,512,168
Total assets				52,480,415				50,617,221				47,919,428
Deposits				44,166,195				42,059,837				39,648,827
Borrowings				1,379,767				1,604,670				2,046,003
Total liabilities				46,571,967				44,897,387				42,675,079
Stockholders’ equity				5,908,448				5,719,834				5,244,349

Total assets increased by $1.9 billion from the second quarter of 2019, driven by:

• An increase of $2.1 billion in cash and money market investments, mainly due to an increase in Puerto Rico public sector deposits;

Partially offset by:

• A decrease of $0.3 billion in debt securities available-for-sale, mainly due to maturities and paydowns of mortgage-backed securities.

Total liabilities increased by $1.7 billion from the second quarter of 2019, mainly due to:

• An increase of $2.1 billion in deposits, mainly in Puerto Rico public sector deposits at BPPR;

Partially offset by:

• A decrease of $0.2 billion in other short-term borrowings due to maturities of Federal Home Loan Bank advances at PB; and
• A decrease of $0.2 billion in other liabilities due to purchases of securities transactions that settled during the quarter.

Stockholders’ equity increased by approximately $188.6 million from the second quarter of 2019, principally due to net income for the quarter of $165.3 million and higher unrealized gains on debt securities available-for-sale by $51.0 million, net of declared dividends of $29.0 million on common stock and $0.9 million in dividends on preferred stock.

Common equity tier-1 ratio (“CET1”), common equity per share and tangible book value per share were 17.46%, $60.57 and $53.41, respectively, at September 30, 2019, compared to 16.80%, $58.63 and $51.44 at June 30, 2019. Refer to Table A for capital ratios.

Cautionary Note Regarding Forward-Looking Statements

This press release contains “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, including without limitation those about Popular’s business, financial condition, results of operations, plans, objectives and future performance. These statements are not guarantees of future performance, are based on management’s current expectations and, by their nature, involve risks, uncertainties, estimates and assumptions. Potential factors, some of which are beyond the Corporation’s control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. Risks and uncertainties include without limitation the effect of competitive and economic factors, and our reaction to those factors, the adequacy of the allowance for loan losses, delinquency trends, market risk and the impact of interest rate changes, capital market conditions, capital adequacy and liquidity, the effect of legal and regulatory proceedings and new accounting standards on the Corporation’s financial condition and results of operations. All statements contained herein that are not clearly historical in nature, are forward-looking, and the words “anticipate,” “believe,” “continues,” “expect,” “estimate,” “intend,” “project” and similar expressions, and future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions, are generally intended to identify forward-looking statements.

More information on the risks and important factors that could affect the Corporation’s future results and financial condition is included in our Annual Report on Form 10-K for the year ended December 31, 2018, our Form 10-Q for the quarters ended March 31, 2019, June 30, 2019, and in our Form 10-Q for the quarter ended September 30, 2019 to be filed with the Securities and Exchange Commission. Our filings are available on the Corporation’s website (www.popular.com) and on the Securities and Exchange Commission website (www.sec.gov). The Corporation assumes no obligation to update or revise any forward-looking statements or information which speak as of their respective dates.

About Popular, Inc.

Popular, Inc. is the leading financial institution in Puerto Rico, by both assets and deposits, and ranks among the top 50 U.S. bank holding companies by assets. Founded in 1893, Banco Popular de Puerto Rico, Popular’s principal subsidiary, provides retail, mortgage and commercial banking services in Puerto Rico and the U.S. Virgin Islands. Popular also offers auto and equipment leasing and financing, investment banking, broker-dealer and insurance services through specialized subsidiaries.

Contacts

Popular, Inc.
Investor Relations:
Paul Cardillo, 212-417-6721

Senior Vice President, Investor Relations Officer

or
Media Relations:
Teruca Rullán, 787-281-5170 or 917-679-3596 (mobile)

Senior Vice President, Corporate Communications

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