Classified in: Business
Subjects: EARNINGS, Conference Call, Webcast

Popular, Inc. Announces Fourth Quarter 2019 Financial Results

Popular, Inc. (the "Corporation," "Popular," "we," "us," "our") (NASDAQ:BPOP) reported net income of $166.8 million for the quarter ended December 31, 2019, compared to net income of $165.3 million for the quarter ended September 30, 2019.

Ignacio Alvarez, President and Chief Executive Officer, said: "2019 was an outstanding year during which we achieved record core earnings. During the year, we increased EPS and TBV by 14% and 17%, respectively, and grew our customer base in Puerto Rico by 45,000, reflecting the strength of our franchise.

While we exhibited strong performance throughout the year, the results for the fourth quarter reflected the cumulative impact of the three recent interest rate cuts. The reduction in rates negatively impacted our net interest income and margin for the quarter. However, the fundamentals of our business remained solid with fee income demonstrating continued strength and achieving loan growth in both Puerto Rico and the U.S. We continue to pursue opportunities for expense management and operational efficiencies as we implement additional investments in our people, technology and businesses to position the institution for strong and sustainable long-term results.

We are proud of our accomplishments during 2019 and optimistic about our prospects for 2020. Yet, we are deeply saddened by the seismic events that have impacted the southern part of the island this month, including a magnitude 6.4 earthquake on January 7^th. The damage is mainly concentrated in sixteen municipalities in the southern region. Fortunately, none of our employees suffered physical harm and our facilities are in sound condition. We resumed operations on the day following the earthquake and have provided uninterrupted service since then. While the impact on our operations was limited, many residents in the south suffered significant damages to their homes, public schools remain closed and the ensuing aftershocks have made it difficult for people in the region to regain a sense of normalcy.

As we have done in the past, we swiftly responded through our foundation, which has close ties with non-profit organizations and communities in the south, to bring immediate assistance to affected areas. A little more than two years ago Puerto Rico faced, and managed through, Hurricane Maria, an island-wide disaster with different and widespread challenges. Although the scale of these events is not comparable to Maria, we remain attentive to the impact it could have in some sectors of the economy, such as hospitality. The people of Puerto Rico are demonstrating overwhelming solidarity and support and are facing this situation with the resolve to move forward. We will continue working with them, confident that Puerto Rico will once again demonstrate its spirit and its ability to rebuild."

Significant Events

Common Stock Repurchase Plan

On December 12, 2019, the Corporation completed its previously announced $250 million accelerated share repurchase transaction ("ASR") with respect to its common stock, a component of its 2019 capital plan. In connection therewith, the Corporation received an initial delivery of 3,500,000 shares of common stock during the first quarter of 2019 and received 1,165,607 additional shares of common stock on December 12, 2019. The final number of shares delivered at settlement was based on the average daily volume weighted average price of its common stock, net of a discount, during the term of the ASR, which amounted to $53.58. The Corporation accounted for the ASR as a treasury stock transaction.

Planned Capital Actions for 2020

On January 9, 2020, the Corporation announced the following actions as part of its capital plan for 2020: (i) an increase in the Corporation's quarterly common stock dividend from $0.30 per share to $0.40 per share, commencing with the dividend payable in the second quarter of 2020, subject to the approval of the Corporation's Board of Directors; and (ii) common stock repurchases of up to $500 million.

Redemption of Series B Preferred Stock

On January 24, 2020, the Corporation announced that on February 24, 2020, the Corporation will redeem all outstanding shares of its 8.25% Non-Cumulative Monthly Income Preferred Stock, Series B ("Series B Preferred Stock"). The Series B Preferred Stock will be redeemed at the redemption price of $25.00 per share, plus $0.1375 in accrued and unpaid dividends on each share, for a total payment per share in the amount of $25.1375. 

Net interest income

Net interest income for the quarter ended December 31, 2019 was $467.4 million, compared to $477.0 million for the previous quarter. Net interest margin was 3.83% for the quarter, compared to 4.00% in the previous quarter.

The decrease of $9.6 million in net interest income is mostly related to the decrease in interest rates that occurred during the third and fourth quarters of 2019, resulting in a quarter-over-quarter reduction of approximately 50 basis points in average Fed Funds and U.S. Treasury Bill rates. These decreases in rates, in combination with the composition of earning assets, are the main drivers of the 17 basis point reduction in net interest margin during the quarter. Average earning assets increased $1.0 billion quarter over quarter mainly in overnight money market investments. These investments, even though accretive to net interest income, have a lower yield when compared to the rest of the earning assets therefore impacting negatively the net interest margin. The most significant variances in the quarter were:

• Lower income from money market, trading and investments by $6.6 million due to lower yields by 21 basis points mainly related to short-term investments in U.S. Treasury bills and overnight funds at the Federal Reserve. The decrease in yield was partially offset by a higher volume of earning assets; and
• lower interest income from the commercial loan portfolio by $5.1 million or a 22 basis points decrease in yield, resulting from lower market rates in the adjustable rate portfolio and originations in a declining interest rate environment.

Partially offset by:

• Lower interest expense on deposits driven by a 5 basis point reduction in interest costs, partially offset by a higher average balance in P.R. public sector and commercial deposits at Banco Popular de Puerto Rico ("BPPR") and digital channel deposits at Popular Bank ("Popular U.S." or "PB").

BPPR's net interest income amounted to $402.9 million for the quarter ended December 31, 2019, compared to $412.2 million in the previous quarter. Net interest margin for the fourth quarter of 2019 was 4.08%, a decrease of 18 basis points when compared to 4.26% for the previous quarter. The decrease in net interest margin was impacted by a higher average volume of money market investments, which carry a lower yield, a decrease in the yield of the investment portfolio, commercial and consumer loan portfolios resulting from lower market rates, as mentioned above, and a reduction of $1.0 million in the discount amortization of the auto loan portfolio acquired from Wells Fargo in 2018. BPPR's earning assets yielded 4.62%, compared to 4.83% in the previous quarter, while the cost of interest-bearing deposits was 0.73%, or 4 basis points lower than the 0.77% reported in the previous quarter. Total cost of deposits for the quarter was 0.57%, compared to 0.60% reported in the third quarter of 2019.

Net interest income for PB was $73.6 million, for the quarter ended December 31, 2019, compared to $74.4 million during the previous quarter. The decrease of $0.8 million in net interest income was primarily due to a lower yield on loans, mainly variable rate commercial loans, partially offset by a lower cost of deposits mainly driven by a change in the deposit mix. Net interest margin for the quarter was 3.18%, a reduction of 11 basis points when compared to 3.29% for the previous quarter. Earning assets yielded 4.42%, compared to 4.60% in the previous quarter, while the cost of interest-bearing deposits was 1.55%, compared to 1.63% in the previous quarter. Total cost of deposits for the quarter was 1.34% compared to 1.40% reported in the third quarter.

Non-interest income

Non-interest income increased by $9.7 million to $152.4 million for the quarter ended December 31, 2019, compared to $142.7 million for the quarter ended September 30, 2019. The increase in non-interest income was primarily driven by:

• Higher other services by $4.3 million, mainly at the BPPR segment, due to higher insurance fees by $3.0 million principally resulting from $4.2 million in contingent insurance commissions recognized during the fourth quarter and higher debit and credit card fees by $1.0 million as a result of higher interchange fees due to higher transactional volumes;

• higher income from mortgage banking activities by $3.0 million mainly due to the lower unfavorable fair value adjustments on mortgage servicing rights ("MSRs") by $3.3 million due to lower estimated prepayments, partially offset by a decrease in projected late fee income; and

• a favorable variance in adjustments to indemnity reserves on previously sold loans of $4.7 million mainly due to lower provision related to loans previously sold with credit recourse.

These variances were partially offset by:

• Lower other operating income by $2.8 million principally due to lower net earnings from the combined portfolio of investments under the equity method by $1.7 million and lower modification fees received for the successful completion of loss mitigation alternatives by $1.5 million.

Refer to Table B for further details.

Operating expenses

Operating expenses for the fourth quarter of 2019 totaled $390.6 million, an increase of $14.1 million when compared to the third quarter of 2019. The increase in operating expenses was driven primarily by:

• Higher personnel cost by $10.6 million due to higher commissions and annual incentives and an increase in headcount;

• higher professional fees by $4.6 million, mainly due to higher advisory expenses by $3.5 million related to Corporate initiatives, and higher audit and tax services by $1.2 million mainly related to work on new accounting pronouncements;

• higher business promotion by $4.8 million due to higher advertising expense by $1.7 million, which includes seasonal initiatives, an increase of $0.9 million in donations and higher customer reward program expense by $0.6 million;

• higher credit and debit card processing volume, interchange and other expenses by $1.0 million; and

• higher FDIC insurance expense by $2.2 million, mainly due to the small bank assessment credit received at Popular Bank during the third quarter of 2019.

These increases were partially offset by:

• Lower other operating expenses by $9.5 million due to lower operational losses by $5.9 million, including legal contingency reserves and a $2.6 million loss related to an undeveloped corporate site which was placed for sale during the third quarter of 2019.

Full-time equivalent employees were 8,560 as of December 31, 2019, compared to 8,457 as of September 30, 2019.

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

Income taxes

For the quarter ended December 31, 2019, the Corporation recorded an income tax expense of $15.3 million, compared to $41.4 million for the previous quarter. During the fourth quarter of 2019, the Corporation recorded a tax benefit of approximately $18 million related to the revision of the amount of exempt income earned in prior years, that resulted in the amendment of income tax returns for BPPR for the years 2015 to 2017. During the third quarter of 2019 a tax benefit of $4.1 million was recorded related to revisions to the amount of exempt income for the current year. The effective tax rate ("ETR") for the fourth quarter of 2019 was 8%. Excluding the exempt income adjustment discussed above, the ETR for the quarter would have been 18%.

The ETR of the Corporation is impacted by the composition and source of its taxable income. For the year 2020, the Corporation expects its consolidated effective tax rate to be within a range of 19% to 21%.

Credit Quality

During the fourth quarter of 2019, the Corporation's credit quality metrics continued to show favorable trends. The credit metrics of our BPPR operations reflected lower non-performing loans, lower NPL inflows and stable NCOs. The U.S. operations net charge-offs increase was related to the taxi medallion portfolio. The Corporation continues to be attentive to the performance of its portfolios and related credit metrics. The following presents credit quality results for the fourth quarter of 2019:

• Inflows of NPLs held-in-portfolio, excluding consumer loans, decreased by $22.9 million quarter-over-quarter, as the prior quarter included the impact of $24.6 million of certain troubled debt restructured commercial real estate loans at BPPR.
• Total non-performing loans held-in-portfolio decreased by $30.0 million from the third quarter of 2019. The BPPR segment NPLs decreased by $21.6 million with reductions in the commercial and mortgage NPLs of $19.1 million and $12.3 million, respectively. This reduction was in part offset by higher consumer NPLs by $9.1 million, mostly related to auto loans. The PB segment NPLs decreased by $8.4 million mostly due to a construction loan sold during the quarter. At December 31, 2019, the ratio of NPLs to total loans held-in-portfolio was 1.9% compared to 2.1% in the third quarter of 2019.
• NCOs increased by $14.0 million from the third quarter of 2019, primarily driven by higher PB commercial NCOs of $15.5 million, mostly related to the taxi medallion loan portfolio which had a carrying value of $19.1 million at December 31, 2019. The BPPR NCOs remained stable quarter-over-quarter. The Corporation's ratio of annualized net charge-offs to average loans held-in-portfolio was 1.21%, compared to 1.01% in the third 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 $34.7 million from the third quarter of 2019 to $477.7 million. The BPPR segment ALLL decreased by $18.1 million, principally driven by lower reserves for the commercial portfolio, in part offset by higher reserves for the auto loans portfolio. PB's ALLL decreased by $16.5 million driven by taxi medallion portfolio charge-offs.
• The general and specific reserves totaled $392.5 million and $85.2 million, respectively, at quarter-end, compared with $416.5 million and $95.8 million, respectively, as of September 30, 2019. The ratio of the allowance for loan losses to loans held-in-portfolio was 1.74% in the fourth quarter of 2019, compared to 1.90% in the previous quarter. The ratio of the allowance for loan losses to NPLs held-in-portfolio stood at 90.5% compared to 91.9% in the previous quarter.
• The provision for loan losses for the fourth quarter of 2019 increased by $10.7 million from the prior quarter. The provision for the BPPR and PB segments increased by $6.4 million and $4.3 million, respectively. The provision to net charge-offs ratio was 57.7% in the fourth quarter of 2019, compared to 53.9% in the previous quarter.

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

CECL became effective on January 1, 2020. Based on its preliminary analysis and the information currently available, the Corporation has estimated an increase in its allowance for loan and lease losses ranging from $320 million to $350 million, or 67% to 73%. This increase is driven by the Puerto Rico mortgage, auto and credit cards loans portfolio. This increase will be reflected as a decrease to the opening balance of retained earnings, net of income taxes, except for approximately $14 million related to loans currently accounted under the Accounting Standards Codification ("ASC") Subtopic 310-30, which would result in a reclassification between balance sheet accounts. Based on the Corporation's preliminary estimates, the day-one impact of the adoption of CECL would result in a reduction in Tangible Book Value of approximately $2, or 4%.

As part of the adoption of CECL, the Corporation has made the election to break the existing pools of purchased credit impaired ("PCI") loans previously accounted for under the ASC Subtopic 310-30 guidance. These loans will be accounted for on an individual loan basis under the purchased credit deteriorated loans ("PCD") accounting methodology under CECL. Following existing accounting guidance, PCI loans have been excluded from non-performing status. Upon transition to the individual loan measurement, these loans will no longer be excluded from non-performing status, resulting in an increase of $283 million in reported NPLs during the first quarter of 2020. This increase includes $156 million in loans currently over 90 days past due and $127 million in loans that are not delinquent in their payment terms but would be reported as non-performing due to other credit quality considerations.

The Corporation expects to continue to be well capitalized under the Basel III regulatory framework after the adoption of CECL. The Corporation will avail itself of the option to phase in over a period of three years the day-one effects on regulatory capital arising from the adoption of CECL. Considering the phase-in period provided by the regulatory framework, the estimated decrease of the Common Equity Tier One and Total Capital ratios would be of approximately 25bps.

 

Total assets decreased by $0.4 billion from the third quarter of 2019, driven by:

• A decrease of $2.0 billion in cash and money market investments, mainly due to purchases of U.S. Treasury securities.

Partially offset by:

• An increase of $1.2 billion in debt securities available-for-sale mainly due to purchases of U.S. Treasury securities, partially offset by maturities and paydowns of mortgage-backed securities; and
• an increase of $0.4 billion in loans held-in-portfolio due to growth of commercial loans, auto loans and leases, and credit cards at the BPPR segment as a result of the acquisition detailed below, coupled with an increase at PB across its commercial, construction and mortgage loan portfolios.

Total liabilities decreased by $0.5 billion from the third quarter of 2019, mainly due to:

• A decrease of $0.4 billion in deposits, mainly from the Puerto Rico public sector at BPPR; and
• A decrease of $0.1 billion in notes payable due to maturities of Federal Home Loan Bank advances at PB.

Stockholders' equity increased by approximately $108.3 million from the third quarter of 2019, principally due to net income for the quarter of $166.8 million, partially offset by lower unrealized gains on debt securities available-for-sale by $16.9 million, the pension and postretirement benefit plan adjustment of $13.7 million and 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 17.78%, $62.42 and $55.10, respectively, at December 31, 2019, compared to 17.46%, $60.57 and $53.41 at September 30, 2019. Refer to Table A for capital ratios.

Acquisition of credit cards portfolio

On December 31, 2019, BPPR acquired, in an all cash transaction, a credit card portfolio with an aggregate principal amount of $74 million for approximately $78 million. Additionally, BPPR has acquired the rights to issue the JetBlue co-branded loyalty credit card program in Puerto Rico. BPPR plans on launching the new credit card product during the second half of 2020. The acquired credit card portfolio will continue to be serviced by the seller on an interim basis until the system conversion is completed.

Refer to Table C for the Statements of Financial Condition.

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 September 30, 2019, and in our Form 10-K for the year ended December 31, 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 in Puerto Rico auto and equipment leasing and financing, investment banking, broker-dealer and insurance services through specialized subsidiaries. In the mainland United States, Popular provides retail, mortgage and commercial banking services through its New York-chartered banking subsidiary, Popular Bank, which has branches located in New York, New Jersey and Florida.

Conference Call

Popular will hold a conference call to discuss its financial results today Tuesday, January 28, 2020 at 10:00 a.m. Eastern Time. The call will be open to the public and broadcasted 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 the dial-in telephone number 1-866-235-1201 or 1-412-902-4127. There is no charge to access the call.

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 Friday, February 28, 2020. The replay dial-in is: 1-877-344-7529 or 1-412-317-0088. The replay passcode is 10137877.

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

 

 

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