Popular, Inc. Announces Third Quarter Financial Results

Popular, Inc. (the “Corporation” or “Popular”) (NASDAQ:BPOP) reported net income of $46.8 million for the quarter ended September 30, 2016, compared to net income of $89.0 million for the quarter ended June 30, 2016.

Mr. Richard L. Carrión, Chairman of the Board and Chief Executive Officer, said: “The results for the third quarter reflect the strength of our franchise and disciplined approach to risk management. We achieved stable revenue and credit metrics notwithstanding the economic challenges in Puerto Rico and the low interest rate environment.”

Significant Events

As previously announced, on October 3, 2016 the review board issued a final arbitration award denying Banco Popular de Puerto Rico’s request for reimbursement of approximately $55 million in shared loss claims that were the subject of one of the disputes between Banco Popular de Puerto Rico (“BPPR”) and the Federal Deposit Insurance Corporation, as receiver, under the commercial loss share agreement entered into in connection with the Westernbank FDIC-assisted transaction. As a result, for the quarter ended September 30, 2016, Popular recognized a pre-tax charge of approximately $55 million and a corresponding reduction to its FDIC indemnification asset.

Adjusted results – Non-GAAP

The Corporation prepared its Consolidated Financial Statement using accounting principles generally accepted in the U.S. (“U.S. GAAP” or the “reported basis”). In addition to analyzing the Corporation’s results on a reported basis, management monitors the “Adjusted net income” of the Corporation and excludes the impact of certain transactions on the results of its operations. Management believes that the “Adjusted net income” provides meaningful information about the underlying performance of the Corporation’s ongoing operations. The “Adjusted net income” is a non-GAAP financial measure.

The following tables reflect the results of operations for the third and second quarters of 2016, with adjustments to exclude the impact of certain events during the third and second quarters of 2016, to arrive at the adjusted net income.

Adjusted Net Income - Reconciliation to GAAP Financial Measures

Net interest income

Net interest income for the quarter ended September 30, 2016 was $353.7 million, compared to $360.6 million for the previous quarter. Net interest margin was 4.12% for the quarter compared to 4.33% for the previous quarter. The impact of having one more day in the quarter contributed $2.6 million to the net interest income.

The decrease in net interest income was mainly related to:

• Lower income from the WB loan portfolio by $8.9 million, or 129 basis points, which for the second quarter included the benefit of $2.1 million, or 41 basis points, from the bulk sale. The results were also impacted by lower yields as a result of the quarterly recast process, the successful resolution of certain loans in the second quarter and lower volume of loans, due to the normal portfolio run-off.
• Higher cost of deposits by $1.7 million or 2 basis points mainly in the U.S. associated to increase in money market and time deposits to fund loan growth.

These negative variances were partially offset by:

• Higher income from investment securities by $1.2 million mainly from higher levels of mortgage backed securities both at BPPR and the U.S.
• Higher income from commercial loans by $2.9 million due to higher levels from the U.S. portfolio.

BPPR’s net interest income amounted to $303.7 million for the quarter ended September 30, 2016, compared to $310.4 million for the previous quarter. The decrease of $6.7 million in net interest income was mainly due to lower income from WB loans by $8.9 million as mentioned above, partially offset by higher income from mortgage backed securities and the $2.1 million impact of having one more day in the quarter. Net interest margin declined to 4.49% from 4.71% in the previous quarter mainly driven by lower yields from WB loans, as explained above, and higher volume of overnight investments driven by the increase in Government deposits. Earning assets in P.R. yielded 4.86%, down from 5.08% in the previous quarter, while the cost of interest bearing liabilities remained flat from the previous quarter at 0.53%.

BPNA’s net interest income was $65.3 million, compared to $65.5 million for the previous quarter. The decrease of $0.2 million in the net interest income is mainly driven by higher expense from deposits to fund loan growth and the purchase and reinvestment of investment securities in a lower rate environment. These negative variances were partially offset by higher income from commercial loans due to the growth of this portfolio. Net interest margin decreased 19 basis points to 3.61% compared to 3.80% for the previous quarter driven by the above mentioned variances. U.S. earning assets yielded 4.32%, compared to 4.47% in the previous quarter, while the cost of interest bearing liabilities was 0.94%, compared to 0.87% in the previous quarter.

Non-interest income

Non-interest income was $76.0 million for the third quarter of 2016, a decrease of $34.5 million when compared to the second quarter of 2016. The decrease in non-interest income was driven primarily by higher FDIC loss-share expense by $49.1 million as a result of a $54.9 million charge related to the FDIC arbitration award, partially offset by lower recoveries on assets to be shared with the FDIC in the recovery period.

This decrease was partially offset by:

• Higher other service fees by $2.2 million due to higher life insurance commission revenues;
• Higher net gain on sale of loans by $8.5 million as a result of the sale of a non-accrual public sector credit during the third quarter; and
• Higher other operating income by $5.2 million mainly due to higher aggregated net earnings from investments under the equity method, principally due to the unfavorable adjustment of $2.2 million recorded during the second quarter as a result of the EVERTEC restatement.

Refer to Table B for further details.

See additional details on accounting for the 2010 FDIC-Assisted transaction in Table O.

Operating expenses

Operating expenses amounted to $323.7 million for the third quarter of 2016, an increase of $14.5 million when compared to the second quarter of 2016. The increase in operating expenses was driven primarily by:

• Higher personnel cost by $4.5 million mainly due to higher salaries from increased full time equivalent employees, an additional working day in the quarter and higher commission compensation in the insurance and wealth management subsidiaries;
• Higher other taxes by $1.2 million mainly due to higher municipal license and sales tax;
• Higher professional fees by $0.6 million mainly due to higher programming, processing and other technology services by $1.9 million and higher attorney fees by $1.4 million related to the FDIC arbitration proceedings, partially offset by lower credit related expenses and reduced other professional fees from the bulk sale of Westernbank loans and OREO during the second quarter;
• Higher other operating expense by $9.2 million mainly due to higher operational losses at BPPR and BPNA including increased reserves for legal matters, curtailment losses on insured mortgage claims in our mortgage servicing business and higher incidence of credit card fraud losses; and
• A goodwill impairment charge of $3.8 million at the securities subsidiary, recorded as part of the Corporation’s annual goodwill impairment analysis.

These increases were partially offset by:

• Lower OREO expenses by $1.7 million mainly due to the loss on the bulk sale of Westernbank OREO during the second quarter, partially offset by higher mortgage OREO write-downs at BPPR; and
• Lower credit and debit card processing, volume, interchange and other expenses by $3.0 million due mainly to earned volume credits.

Non-personnel credit-related costs, which include collections, appraisals, credit related fees, and OREO expenses, amounted to $15.3 million for the third quarter of 2016, compared to $18.0 million for the second quarter of 2016. The decrease was principally due to lower losses on sales of OREO at BPPR.

Full-time equivalent employees were 7,866 as of September 30, 2016, compared to 7,826 as of June 30, 2016.

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

Income taxes

For the quarter ended September 30, 2016, the Corporation recorded an income tax expense of $15.8 million, compared to $32.4 million for the previous quarter. The decline in the income tax expense is mainly driven by lower taxable income at BPPR. Additionally, in the third quarter BPPR recognized a $4.4 million benefit related to reversal of uncertain tax positions reserves associated with expired statutory provisions.

The effective income tax rate for the third quarter of 2016 was 25%, compared to 27% for the previous quarter. The effective tax rate is impacted by the composition and source of the taxable income.

Credit Quality

The Corporation continued to experience stable credit trends despite challenging economic conditions in Puerto Rico. The shift in the composition and the risk profile of the credit portfolios over the last few years has better positioned the Corporation to operate in the Island’s environment. The Corporation continues to closely monitor changes in credit quality trends and is focused on taking measures to minimize risks. The U.S. operation continued to reflect positive results with strong growth and favorable credit quality metrics.

• Inflows of NPLs held-in-portfolio, excluding consumer loans, decreased by $5.6 million quarter-over-quarter, mainly driven by lower commercial inflows of $13.5 million, offset by higher mortgage inflows of $7.7 million in the BPPR segment.
• Non-performing loans held-in-portfolio increased slightly by $1.6 million from the second quarter of 2016, mainly driven by higher mortgage NPLs of $7.7 million, offset by lower commercial NPLs of $5.5 million in the BPPR segment. At September 30, 2016, NPLs to total loans held-in-portfolio remained flat at 2.6% quarter-over-quarter.
• Net charge-offs remained flat at $35.1 million quarter over quarter. NCOs in the BPPR segment decreased by $3.3 million mainly driven by a decrease of $7.1 million in the consumer NCOs due to a $7.1 million recovery related to the sale of previously charged-off credit cards and personal loans. BPPR construction NCOs increased by $4.1 million, mostly related to higher recoveries in the previous quarter. NCOs in the BPNA segment increased by $3.0 million, mostly due to higher mortgage NCOs. The ratio of annualized net charge-offs to average non-covered loans held-in-portfolio was 0.63%, flat from the second quarter of 2016. The $7.1 million recovery from consumer loans reduced the NCO ratio by 13 bps. Refer to Table J for further information on net charge-offs and related ratios.
• The allowance for loan losses increased by $7.5 million from the second quarter 2016 to $525.6 million, mostly driven by the $9.4 million reserve increase related to the annual recalibration of the environmental factors adjustment. The general and specific reserves related to non-covered loans totaled $396.5 million and $129.1 million, respectively, at quarter-end, compared with $395.3 million and $122.8 million, respectively, as of June 30, 2016. The ratio of the allowance for loan losses to loans held-in-portfolio was 2.33% in the third quarter of 2016, compared to 2.30% from the previous quarter.
• The ratio of the allowance for loan losses to NPLs held-in-portfolio increased to 90.7%, compared to 89.7% in the previous quarter.
• The provision for loan losses for the third quarter of 2016 amounted to $42.6 million, increasing by $2.9 million from the previous quarter. The provision to net charge-offs ratio was 121.2% in the third quarter 2016, compared to 127.4% in the previous quarter, excluding the recoveries related to the bulk sale of Westernbank loans.

Total assets increased by $1.4 billion from the second quarter of 2016 driven by:

• An increase of $1.2 billion in money market investments mainly at BPPR due to an increase in cash balances from deposits;
• An increase of $0.4 billion in investment securities available-for-sale mainly at BPNA due to purchases of mortgage-backed agency pools, partially offset by sales and principal pay-downs; and
• A net increase of $58.5 million in non-covered loans held-in-portfolio mainly driven by growth in the commercial portfolio at BPNA by $138.4 million, partially offset by a decrease in mortgage loans portfolio at BPPR of $73.7 million impacted by lower originations of residential mortgages.

These positive variances were partially offset by a decrease of $61.6 million in the FDIC loss-share asset due mainly to the $54.9 million charge related to review board’s denial of BPPR’s claim in connection with arbitration proceedings with the FDIC.

Total liabilities increased by $1.4 billion from the first quarter of 2016, principally driven by:

• An increase of $1.6 billion in deposits mainly due to increases in deposits from the Puerto Rico government, NOW accounts, and non-interest bearing demand deposits at BPPR. Refer to Table G for additional information on deposits.

Stockholders’ equity increased by approximately $20.6 million from the second quarter of 2016, mainly as a result of net income for the quarter of $46.8 million, partially offset by an unfavorable variance of $14.4 million in unrealized gains on securities available-for-sale, declared dividends of $15.6 million on common stock and $0.9 million in dividends on preferred stock.

Common equity tier-1 ratio (“CET1”), book value per share and tangible book value per share were 16.64%, $51.85 and $44.86, respectively at September 30, 2016 compared to 16.29%, $51.68 and $44.62 at June 30, 2016. Refer to Table A for capital ratios.

Forward-Looking Statements

The information contained in this news release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management’s current expectations and are subject to risks and uncertainties. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2015, the Quarterly Reports on Form 10-Q for the quarters ended March 31, 2016 and June 30, 2016, and our other filings with the Securities and Exchange Commission for a discussion of factors that may cause the Corporation's actual results to differ materially from any future results expressed or implied by such forward-looking statements. Those filings are available on the Corporation’s website (www.popular.com) and on the Securities and Exchange Commission website (www.SEC.gov). The Corporation does not undertake to update or revise any forward-looking statement to reflect events or circumstances that may arise after the date of such statements.

Founded in 1893, Popular, Inc. is the leading banking institution by both assets and deposits in Puerto Rico and ranks among the top 50 U.S. banks by assets. Popular provides retail, mortgage and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico, as well as auto and equipment leasing and financing, investment banking, broker-dealer and insurance services through specialized subsidiaries. In the United States, Popular has established a community-banking franchise providing a broad range of financial services and products with branches in New York, New Jersey and Florida under the name of Popular Community Bank.

An electronic version of this press release can be found at the Corporation’s website: www.popular.com.

Popular will hold a conference call to discuss the financial results today Tuesday, October 25, 2016 at 11:00 a.m. Eastern Time. The call will be broadcast live over the Internet and can be accessed through the investor relations section of the Corporation’s website: www.popular.com.

Listeners are recommended to go to the website at least 15 minutes prior to the call to download and install any necessary audio software. The call may also be accessed through a dial-in telephone number 1-866-235-1201 or 1-412-902-4127.

A replay of the webcast will be archived in Popular’s website. A telephone replay will be available one hour after the end of the conference call through Thursday, November 24, 2016. The replay dial in is 1-877-344-7529 or 1-412-317-0088. The replay passcode is 10093046.