Popular, Inc. Announces Fourth Quarter 2018 Financial Results

Business Wire 23-Jan-2019 8:00 AM

• Net income of $106.4 million and an adjusted net income of $134.1 million for the fourth quarter of 2018, compared to a net income of $140.6 million for Q3 2018.
• Net income of $618.2 million and an adjusted net income of $487.3 million for the year 2018, compared to $107.7 million and an adjusted net income of $276.0 million for the year 2017.
• Net interest margin of 4.25% in Q4 2018, compared to 4.07% in Q3 2018.
• Credit Quality:
  • Non-performing loans held-in-portfolio ("NPLs") decreased by $21.4 million from Q3 2018; NPLs to loans ratio at 2.3% vs. 2.4% in Q3 2018;
  • Net charge-offs ("NCOs") increased by $43.3 million; NCOs at 1.63% of average loans held-in-portfolio vs. 1.00% in Q3 2018;
  • Provision expense of $42.6 million vs. $54.4 million in Q3 2018;
  • Allowance for loan losses of $569.3 million vs. $633.7 million in Q3 2018;
  • Allowance for loan losses to loans held-in-portfolio at 2.15% vs. 2.39% in Q3 2018; and
  • Allowance for loan losses to NPLs at 93.2% vs. 100.2% in Q3 2018.
• Common Equity Tier 1 ratio of 16.90%, Common Equity per Share of $53.88 and Tangible Book Value per Share of $46.90 at December 31, 2018.

Popular, Inc. (the "Corporation," "Popular," "we," "us," "our") (NASDAQ:BPOP) reported a net income of $106.4 million and an adjusted net income of $134.1 million for the fourth quarter ended December 31, 2018, compared to a net income of $140.6 million for the third quarter ended September 30, 2018.

Ignacio Alvarez, President and Chief Executive Officer, said: "We are very pleased with our performance in the fourth quarter, which allowed us to finish the year on a strong note. These results include the impact of a number of corporate initiatives that increased expenses for the quarter, but continue to reflect strong top line growth, improving margins and the continuing contribution to income from the Reliable transaction. We begin 2019 with enthusiasm as we build on the momentum created in 2018 and leverage the strength of our balance sheet and unique franchise to continue to drive shareholder value."

Significant Events

Puerto Rico Tax Reform

On December 10, 2018, the Governor of Puerto Rico signed into law Act No. 257 of 2018, which amended the Puerto Rico Internal Revenue Code to, among other things, reduce the Puerto Rico corporate income tax rate from 39% to 37.5%. The Corporation recognized a $27.7 million non-cash income tax expense as a result of a reduction in the Corporation's net deferred tax asset ("DTA") related to its Puerto Rico operations, due to the aforementioned reduction in tax rates at which it expects to realize the benefit of the DTA. This adjustment resulted in a reduction to Common Equity Tier 1 Capital and Total Regulatory Capital of approximately 3 bps.

Profit Sharing Plan

In 2016, the Corporation established a broad-based Profit Sharing Plan (the "Plan") where employees receive incentive compensation if the Corporation's earnings results exceed targets set by the Board of Directors. As a result of the Corporation's earnings for the year ended December 31, 2018, eligible employees will receive incentive payments of up to $5,600 per employee, half of which is to be paid in cash and the other half as a contribution to their 401(K) Savings and Investment Plan. The Corporation has recorded $25.5 million in personnel costs for the year ended December 31, 2018 as a result of the Plan, $17.5 million of which were recorded in the fourth quarter.

Voluntary Retirement Program

The Corporation has offered to eligible Puerto Rico, U.S. Virgin Islands and British Virgin Island employees the opportunity to participate in a Voluntary Retirement Program (the "VRP"). The VRP offers such employees monetary and other incentives in exchange for electing to retire, effective February 1, 2019. To qualify for the VRP, eligible employees must have attained 58 years of age and have at least 10 years of service. A total of 313 eligible employees elected to participate in the VRP. Accordingly, during the fourth quarter of 2018, the Corporation recognized $19.5 million in personnel costs related to compensation arrangements for VRP participants. The Corporation expects annual personnel costs savings of approximately $11 million as a result of the VRP.

The Reliable Acquisition

As previously disclosed, on August 1, 2018, Popular Auto, LLC ("Popular Auto"), Banco Popular de Puerto Rico's auto finance subsidiary, completed the acquisition of approximately $1.6 billion in retail auto loans and $341 million in primarily auto-related commercial loans from Wells Fargo & Company's ("Wells Fargo") auto finance business in Puerto Rico ("Reliable").

During the fourth quarter of 2018, retrospective adjustments were made to the estimated fair values of the loans acquired from Reliable in order to reflect new information obtained during the measurement period of circumstances that existed as of the acquisition date, in accordance with U.S. GAAP (defined below). The adjustments resulted in a higher fair value ascribed to the loan portfolio acquired from Wells Fargo by $16.4 million and a corresponding decrease in goodwill recognized in connection with the transaction. The related cumulative adjustment to the amortization of the fair value discounts for the retail and commercial portfolios offset each other, resulting in an immaterial impact to the Corporation's results.

For the quarter ended December 31, 2018, the acquisition of Reliable contributed approximately $18.0 million to net income, compared to $11.7 million for the previous quarter, comprised of net interest income of $42.4 million (September 30, 2018 - $30.7 million), $6.4 million (September 30, 2018 - $5.1 million) of operating income, including servicing fees from a portion of the portfolio retained by Wells Fargo and serviced by Popular Auto, and expenses of $11.7 million (September 30, 2018 - $8.6 million, including $3.8 million of transaction related expenses). These net earnings were subject to the marginal statutory corporate tax rate of 39%.

Redemption of Senior Notes

On October 15, 2018, the Corporation redeemed $450 million aggregate principal amount of its outstanding 7.00% Senior Notes due 2019 (the "2019 Notes"). The redemption was funded with available cash and the proceeds from the issuance, on September 11, 2018, of $300 million aggregate principal amount of 6.125% Senior Notes due 2023 (the " 2023 Notes") in an underwritten public offering pursuant to an effective shelf registration statement filed with the Securities and Exchange Commission. The Corporation recognized $12.5 million in expenses associated with the accelerated amortization of debt issuance costs and the redemption price of the 2019 Notes.

Common Stock Repurchase Plan

During the fourth quarter of 2018, the Corporation completed a $125 million accelerated share repurchase transaction ("ASR") with respect to its common stock. In connection therewith, the Corporation had received an initial delivery of 2,000,000 shares of common stock during the third quarter of 2018 and received 438,180 additional shares of common stock during the fourth quarter of 2018. 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 $51.27. The Corporation accounted for this as a treasury stock transaction.

Planned Capital Actions for 2019

On January 23, 2019, the Corporation announced the following actions as part of its capital plan for 2019: (i) an increase its quarterly common stock dividend from $0.25 per share to $0.30 per share, beginning in the second quarter of 2019, subject to approval by its Board of Directors, and (ii) up to $250 million in common stock repurchases.

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 the reported basis, management monitors the "Adjusted net income" of the Corporation and excludes from such calculation the impact of certain transactions on the results of its operations. Management believes that "Adjusted net income" provides meaningful information to investors about the underlying performance of the Corporation's ongoing operations. "Adjusted net income" is a non-GAAP financial measure.

The table below describes adjustments to net income for the quarter ended December 31, 2018. No adjustments are reflected for the third quarter of 2018.

Net interest income

Net interest income for the quarter ended December 31, 2018 was $476.2 million, compared to $451.5 million for the previous quarter. Net interest margin was 4.25% for the quarter, compared to 4.07% for the previous quarter. As a result of the May 2018 termination of the loss share agreements (the "FDIC Shared-Loss Agreements") entered into with the Federal Deposit Insurance Corporation in connection with the acquisition of certain assets and assumption of certain liabilities of Westernbank, the presentation of net interest income has been adjusted since the second quarter of 2018 to present the income from the loans acquired from Westernbank (the "WB Loans") in their respective loan segments. Previously, the Corporation presented the income associated with the WB Loans aggregated into a single line in its analysis of average balances and yields (Tables D and E). The presentation for prior periods has been adjusted accordingly for comparative purposes.

The increase of $24.7 million in net interest income is mainly the result of the following:

Positive variances:

• Higher income from money market, trading and investments by $6.6 million, or 17 basis points, as a result of higher yields during the quarter, including the impact of the increase in the Fed Funds rate by 25 basis points at the end of the third quarter and in December 2018 as well as a shift in invested balances from money market investments to higher earning debt securities;
• Higher income from the consumer loans portfolio by $19.0 million, or 18 basis points, mainly driven by income from the portfolio acquired from Reliable, which impacted the prior quarter for only two months due to the acquisition closing at the beginning of August. Interest income included $16.2 million related to the amortization of the fair value discount recognized in connection with the Reliable transaction, compared to $9.3 million for the previous quarter;
• Higher income from the commercial loans portfolio by $5.4 million, or 10 basis points, mainly due to the prepayment of a loan accounted for under ASC 310-30 at Banco Popular de Puerto Rico ("BPPR") which resulted in a positive adjustment to its yield. The impact of higher market rates in the adjustable rate portfolio and growth at Popular Bank ("Popular U.S.") also contributed to the positive variance; and
• Lower borrowing costs by $3.7 million, or 30 basis points, due to the repayment of the 2019 Senior Notes and the redemption of $53 million in Trust Preferred Securities during the previous quarter.

Negative variance:

• Higher cost of interest-bearing deposits by $10.1 million, or 11 basis points, due mainly to higher average balances in NOW and money market and savings accounts, impacted primarily by public sector deposits at BPPR and higher cost of U.S. deposits, mainly from Popular U.S.'s online platform.

BPPR's net interest income amounted to $408.7 million for the quarter ended December 31, 2018, compared to $388.5 million in the previous quarter. The increase of $20.2 million in net interest income was mainly due to the income from the consumer loan portfolio acquired from Reliable, primarily as a result of a full quarter of results versus only two months in the prior quarter, higher income from money market, trading and investment securities resulting from higher yields and higher income from the commercial loans portfolio as previously stated. These positive results were partially offset by higher interest expense on deposits, mainly from public sector deposits. The net interest margin for the fourth quarter of 2018 was 4.51%, an increase of 16 basis points when compared to 4.35% for the previous quarter. The increase in net interest margin was due to the composition of earning assets, the increase in market rates and the prepayment of a loan accounted for under ASC 310-30, as mentioned above. BPPR's earning assets yielded 5.04%, compared to 4.81% in the previous quarter, while the cost of interest-bearing deposits was 0.73%, or 11 basis points higher than the 0.62% reported in the previous quarter.

Net interest income for Popular U.S. was $77.9 million, for the quarter ended December 31, 2018, compared to $76.2 million during the previous quarter. The increase of $1.7 million in net interest income was mainly due to higher volume and yields on commercial loans, driven in part by higher loan fees from the early cancellation of loans and higher market rates. These positive variances were partially offset by higher funding costs. Net interest margin for the quarter increased 11 basis points to 3.61%, compared to 3.50% for the previous quarter. The increase in net interest margin was mostly due to higher proportion of earning assets in loans, which carry a higher yield as compared to money market deposits and investments, partially offset by higher cost of deposits mostly raised through Popular U.S.'s online deposit platform. Earning assets yielded 4.74%, compared to 4.54% in the previous quarter, while the cost of interest-bearing deposits was 1.38%, compared to 1.26% in the previous quarter.

Non-interest income

Non-interest income increased by $2.2 million to $153.2 million for the quarter ended December 31, 2018, compared to $151.0 million for the previous quarter. The Corporation recognized as other income $9.5 million in recoveries for hurricane-related claims during each of the third and fourth quarters of 2018. The variance in non-interest income was primarily driven by:

• Higher other service fees by $5.9 million due to higher credit card late fees by $1.2 million as a result of the previous quarter including a reversal of income related to charged off loans; higher debit and credit card interchange fees due to higher transactional volumes; and higher other fees by $2.6 million in part due to retail auto loan servicing fees received from Wells Fargo; and
• higher income on mortgage banking activities by $8.1 million mainly due to a favorable fair value adjustment on mortgage servicing rights of $8.8 million recorded during the fourth quarter.

These positive variances were partially offset by:

• Higher unrealized net losses on equity securities by $2.4 million;
• unfavorable variance in adjustments to indemnity reserves of $3.4 million related to loans previously sold with credit recourse at BPPR; and
• lower other operating income by $7.1 million principally due to lower modification fees received for the successful completion of loss mitigation alternatives by $6.8 million as a result of loan modification levels, which had materially increased as a result of the implementation of hurricane relief programs, normalizing.

Refer to Table B for further details.

Operating expenses

Operating expenses of $396.5 million for the fourth quarter of 2018, an increase of $31.0 million when compared to the third quarter of 2018. The increase in operating expenses was driven primarily by:

• Higher personnel costs by $33.3 million, mainly due to higher other personnel cost by $29.3 million as a result of $17.2 million recognized in connection with the implementation of the VRP and the recognition of $17.5 million (compared to $5.0 million for the previous quarter) related to annual incentives tied to the Corporation's financial performance; higher pension, postretirement and medical insurance by $3.0 million, also impacted by the benefits provided pursuant to the VRP and higher salaries by $3.0 million. These increases were partially offset by lower commission, incentive and other bonuses by $2.0 million;

• higher net occupancy expense by $5.9 million due to $3.4 million of recoveries for hurricane-related insurance claims recorded during the third quarter of 2018 and higher rent expense in Popular Bank;
• higher professional fees by $5.2 million mainly associated with higher consulting, audit and tax fees;
• higher business promotion expenses by $6.2 million due to higher seasonal advertising costs by $3.1 million and higher donations by $1.4 million; and
• a loss of $12.5 million resulting from the early extinguishment of the 2019 Senior Notes.

These increases were partially offset by:

• Lower FDIC deposit insurance by $3.4 million due to the termination of the temporary surcharge assessed by the FDIC to raise its Reserve Ratio;
• lower OREO expenses by $5.6 million due to $3.3 million in insurance reimbursement related to recoveries for hurricane-related claims and gain on sale of mortgage properties;
• lower credit and debit card processing, volume, interchange and other expenses by $4.2 million as a result of incentives received for exceeding volume targets; and
• lower other operating expenses by $19.5 million mainly resulting from a $19.6 million write-down related to the capitalized software cost of a technology project discontinued by the Corporation during the third quarter of 2018.

Full-time equivalent employees were 8,474 as of December 31, 2018, compared to 8,363 as of September 30, 2018.

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

Income taxes

For the quarter ended December 31, 2018, the Corporation recorded an income tax expense of $84.0 million, compared to $42.0 million for the previous quarter. As previously discussed, as a result of the enactment of Act No. 257 of 2018, which amended the Puerto Rico Internal Revenue Code to, among other things, reduce the corporate income tax rate from 39% to 37.5%, during the fourth quarter the Corporation recognized a non-cash income tax expense of $27.7 million resulting from adjustments to the DTA related to its Puerto Rico operations due to the lower tax rate, which reduces the expected benefit of the DTA . Excluding the impact of this adjustment, the effective tax rate for the fourth quarter of 2018 was 30%, as more income was recognized at the 39% marginal tax rate in Puerto Rico and the debt extinguishment expenses were not subject to a tax benefit.

The effective tax rate 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 from 22-25%.

Credit Quality

Overall, the Puerto Rico segment continued to reflect a positive credit quality trend, with metrics better than, or improving to levels equal to, those prevailing prior to the impact of Hurricanes Irma and Maria in September 2017. The Corporation continues to closely monitor its portfolios and related credit metrics given Puerto Rico's ongoing economic and fiscal challenges. The results of our U.S. operation also remained solid with strong growth and favorable credit quality metrics. The following presents credit quality results for the fourth quarter of 2018.

• Inflows of NPLs held-in-portfolio, excluding consumer loans, remained stable quarter-over-quarter, increasing slightly by $761 thousand. P.R. mortgage inflows for the quarter remained better than pre-hurricane levels, primarily due to lower early delinquencies.
• Total non-performing loans held-in-portfolio decreased by $21.4 million from the third quarter of 2018, mainly driven by lower P.R. mortgage NPLs of $25.2 million, reflective of lower inflows for the quarter and increased foreclosure activity after the termination of the moratorium period related to the hurricanes. At December 31, 2018, the ratio of NPLs to total loans held-in-portfolio was 2.3%, compared to 2.4% in the third quarter of 2018.
• Net charge-offs increased by $43.3 million from the third quarter of 2018, primarily driven by higher P.R. commercial NCOs of $49.3 million. This increase was related to charge-offs from two large commercial relationships. This increase was in part offset by lower consumer and mortgage NCOs by $6.9 million and $3.9 million, respectively, as the prior quarter was impacted by post-moratorium effects. The U.S. NCOs increased by $5.6 million mostly due to a previously reserved construction loan. The Corporation's ratio of annualized net charge-offs to average loans held-in-portfolio was 1.63%, compared to 1.00% in the third quarter of 2018. Refer to Table J for further information on net charge-offs and related ratios.
• The allowance for loan and lease losses ("ALLL") decreased by $64.4 million from the third quarter of 2018 to $569.3 million. The P.R. segment ALLL decreased by $53.0 million, principally driven by the abovementioned charge-offs, coupled with improvements in the loss estimates of the purchased credit impaired loans accounted for under ASC 310-30 and improvements in loss trends in our consumer portfolio. The hurricane-related reserve has been substantially eliminated. However, the ALLL balance at December 31, 2018 included $50 million in environmental factors reserves to account for potential losses in our P.R. commercial portfolio not embedded in our historical loss rates. The U.S. segment ALLL decreased by $11.4 million, mostly due to the construction charge-off recorded during the quarter.
• The general and specific reserves totaled $449.7 million and $119.7 million, respectively, at quarter-end, compared with $503.2 million and $130.5 million, respectively, as of September 30, 2018. The ratio of the allowance for loan losses to loans held-in-portfolio was 2.15% in the fourth quarter of 2018, compared to 2.39% from the previous quarter. The ratio of the allowance for loan losses to NPLs held-in-portfolio stood at 93.2% compared to 100.2% in the previous quarter.
• The provision for loan losses for the fourth quarter of 2018 decreased by $11.8 million, driven by a decrease of $8.4 million in the P.R. expense. The provision to net charge-offs ratio was 39.8% in the fourth quarter of 2018, compared to 85.4% in the previous quarter.

Total assets decreased by $0.3 billion from the third quarter of 2018, driven by:

• A decrease of $0.4 billion in cash and money market investments, mainly due to the repayment of the 2019 Senior Notes;

Partially offset by:

• An increase of $0.3 billion in debt securities available-for-sale mainly due to purchases of U.S. Treasury securities at BPPR, partially offset by maturities and calls of U.S. agencies and pay-downs of mortgage-backed securities and collateralized mortgage obligations.

Total liabilities decreased by $0.5 billion from the third quarter of 2018, mainly due to:

• A decrease of $0.5 billion in notes payable due to the redemption on October 15, 2018 of the 2019 Senior Notes.

Stockholders' equity increased by approximately $0.2 billion from the third quarter of 2018, principally due to lower unrealized losses on debt securities available-for-sale by $0.1 billion and net income for the quarter of $106.4 million; partially offset by declared dividends of $25.1 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 16.90%, $53.88 and $46.90, respectively, at December 31, 2018, compared to 16.19%, $51.77 and $44.62 at September 30, 2018. Refer to Table A for capital ratios.

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 proceedings and new accounting standards on the Corporation's financial condition and results of operations, the impact of Hurricanes Irma and Maria on us, our ability to successfully integrate the auto finance business acquired from Wells Fargo, as well as the unexpected costs, including, without limitation, costs due to exposure to any unrecorded liabilities or issues not identified during the due diligence investigation of the business or that are not subject to indemnification or reimbursement, and risks that the business may suffer as a result of the acquisition, including due to adverse effects on relationships with customers, employees and service providers. 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, 2017, our Quarterly Report on Form 10-Q for the quarters ended March 31, 2018, June 30, 2018 and September 30, 2018, and our Form 10-K for the year 2018 to be filed with the SEC. 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. 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 Wednesday, January 23, 2019 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 a 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 Saturday, February 23, 2019. The replay dial-in is: 1-877-344-7529 or 1-412-317-0088. The replay passcode is 10127730.

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