Popular, Inc. Announces Third Quarter 2020 Financial Results

• Net income of $168.4 million in Q3 2020, compared to net income of $127.6 million in Q2 2020.
• Net interest margin of 3.06% in Q3 2020, compared to 3.25% in Q2 2020; net interest margin on a taxable equivalent basis of 3.37% in Q3 2020, compared to 3.56% in Q2 2020.
• Credit Quality:
  • Non-performing loans held-in-portfolio (“NPLs”) decreased by $25.8 million from Q2 2020; NPLs to loans ratio at 2.5% vs. 2.6% in Q2 2020;
  • Net charge-offs (“NCOs”) decreased by $48.1 million from Q2 2020; NCOs at 0.24% of average loans held-in-portfolio vs. 0.92% in Q2 2020;
  • Allowance for credit losses (“ACL”) to loans held-in-portfolio at 3.15% vs. 3.16% in Q2 2020; and
  • ACL to NPLs at 126.1% vs. 120.8% in Q2 2020.
• Common Equity Tier 1 ratio of 15.93%, Common Equity per Share of $69.94 and Tangible Book Value per Share of $61.69 at September 30, 2020.

SAN JUAN, Puerto Rico–(BUSINESS WIRE)–Popular, Inc. (the “Corporation,” “Popular,” “we,” “us,” “our”) (NASDAQ:BPOP) reported net income of $168.4 million for the quarter ended September 30, 2020, compared to net income of $127.6 million for the quarter ended June 30, 2020.

Ignacio Alvarez, President and Chief Executive Officer, said: “We generated $168.4 million in earnings in the third quarter, reflecting the economic rebound fueled by the unprecedented level of federal stimulus. While the economic scenario remains uncertain, the strong results reflect our diversified sources of revenue and prudent risk management. Deposits continued to grow and loan demand remains low as customers are cautious and conserving cash. Our capital and liquidity levels are robust and we are well positioned to continue to serve our customers as they manage through these uncertain times. The American Bankers Association recently recognized our commitment to the community, selecting us as one of seven banks to receive the 2020 Community Commitment Award for our financial education program.

I want to thank all our colleagues who, while facing their own personal challenges as a result of the pandemic, continue to go the extra mile to serve our customers.”

Significant Events

Financial Highlights

For the third quarter of 2020, the Corporation recorded net income of $168.4 million, compared to a net income of $127.6 million for the previous quarter. The Corporation continues to monitor and be attentive to the impact of the COVID-19 pandemic, on the markets in which we operate and our results of operations, as further explained below.

The Corporation’s total assets increased by $3.1 billion during the quarter to $65.9 billion, primarily due to an increase in deposits of $2.2 billion, of which $2.0 billion were from commercial and retail clients and $0.8 billion were from the public sector in Puerto Rico, driven in part by Federal and Puerto Rico Government assistance programs related to the pandemic. The net interest margin continues to reflect the increase in earning assets concentrated in investments in overnight Fed Funds, U.S. Treasury and U.S. Agency debt securities plus an average balance of $1.4 billion loans issued pursuant to the U.S. Small Business Administration’s (“SBA”) Payment Protection Program (“PPP”), which are all lower yielding assets. Net interest income for the quarter increased by $10.1 million, although the net interest margin declined by 19 basis points to 3.06% due to the increase in lower earning assets.

Coronavirus (COVID-19) Pandemic

The disruptions related to the COVID-19 pandemic continue to have an impact on the macroeconomic environment and therefore on the financial results of the Corporation. Although certain measures imposed by the governments of Puerto Rico, the United States and United States Virgin Islands, including lockdowns, business closures, mandatory curfews and limits to public activities, were relaxed during the second and third quarters of 2020 to allow for the gradual reopening of the economy, certain restrictions continue in place which results in many businesses not being able to operate at their full capacity. The Corporation’s results for the third quarter of 2020 reflect the benefit of increased economic activity resulting from such reopening and the related improvement in the macroeconomic environment, as well as the impact of the various government stimulus programs launched in response to the pandemic.

As previously disclosed, beginning in March 2020, the Corporation implemented several financial relief programs in response to the pandemic, including loan payment moratoriums, suspensions of foreclosures and other collection activity, as well as waivers of certain fees and service charges. During the third quarter of 2020, the Corporation reinstated the imposition of the fees the Corporation elected to waive in connection with such financial relief programs and resumed its delinquent loan collection efforts. As of September 30, 2020, the Corporation had granted loan payment moratoriums to 125,736 eligible retail customers with an aggregate book value of $4.5 billion, and to 5,063 eligible commercial clients with an aggregate book value of $4.1 billion as further detailed below. COVID-19-related moratoriums were offered beginning in March of 2020. Certain clients benefitted from loan payment moratoriums offered by the Corporation since mid-January 2020 as a result of seismic activity in the Southern region of the island in January 2020. At September 30, 2020, 124,884 loans with an aggregate book value of $7.9 billion had already completed their payment moratorium period, while 5,915 loans with an aggregate book value of $0.7 billion are still under the moratorium. As of quarter end, 95% of COVID-19 payment deferrals have expired. After excluding government guaranteed loans that are still pending to complete their COVID-19 related modifications, 95% of the remaining loans were in turn current on their payments. The following table presents the moratoriums granted by loan portfolio.

The delinquency status of loans subject to the Corporation’s payment moratorium programs remains unaltered during the payment deferral period and the Corporation continues to accrue interest income during such term.

The extent to which the pandemic further impacts our business, results of operations and financial condition (including our regulatory capital, liquidity ratios and realizability of deferred tax assets), as well as the operations of our clients, customers, service providers and suppliers, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the speed and strength of economic recovery and actions taken by governmental authorities and other third parties in response thereto.

Loan repurchase transaction

During the quarter ended September 30, 2020, the Corporation completed bulk loan repurchases from its Ginnie Mae (“GNMA’’), Fannie Mae (“FNMA’’) and Freddie Mac (‘’FHMLC’’) (combined ‘’GSEs’’) loan servicing portfolios with an aggregate balance of $807.6 million. The transactions were executed to limit future exposures to principal and interest advances as well as sundry losses and to deploy liquidity to increase interest income. At September 30, 2020, loans with an aggregate unpaid principal balance of $106 million, corresponding to the portfolio acquired from FNMA and FHMLC, had been modified under the Corporation’s COVID-19 relief or other loss mitigation programs.

The following table presents a summary of the impact of the transactions.

Goodwill Impairment Evaluation

The Corporation is in the process of completing its annual goodwill impairment test, using July 31, 2020 as the evaluation date. Management has continued to monitor changes in circumstances related to the impact of the COVID-19 pandemic and the effect of the current and projected interest rate environment to determine if these changes would more likely than not result in an impairment of goodwill. The Corporation expects to complete its evaluation prior to the filing of its Form 10-Q for the quarter ended September 30, 2020 with the Securities and Exchange Commission. An impairment of goodwill would result in a non-cash expense, net of tax impact. A charge to earnings related to a goodwill impairment would not impact regulatory capital calculations.

Popular Bank New York Branches Optimization Strategy

On October 27, 2020, Popular Bank (“PB”), the United States mainland banking subsidiary of the Corporation, authorized and approved a strategic realignment of its New York Metro branch network that will result in eleven (11) branch closures and related staffing reductions. The branch closures are expected to be completed, subject to applicable regulatory requirements, by January 29, 2021.

This strategic realignment, which will allow PB to reduce its operating expenses, leverage resources to enhance its focus on small and medium size businesses, as well as support changing customer behaviors, was approved after an assessment of PB’s current branch network, including its usage, proximity to its other branches and customer needs. PB will maintain our largest regional retail network in the mainland US with twenty-seven (27) branches in its New York Metro region, located throughout Brooklyn, Bronx, Manhattan and Queens, as well as in northern New Jersey.

As a result of PB’s closure of the eleven (11) New York Metro region branches, the Corporation expects to record a total pre-tax charge of approximately $24.5 million, of which $23.1 million is expected to be recognized during the fourth quarter of 2020. This aggregate pre-tax charge includes approximately $2.4 million in costs associated with severance and related benefit costs for the 83 impacted employees and charges of approximately $20.0 million associated with the impairment of right-of-use assets related to the abandonment of real property leases. The Corporation anticipates annual operating expense savings of approximately $13 million as a result of this strategic realignment. These estimates could change as the Corporation’s plan evolves and becomes finalized.

Net interest income on a taxable equivalent basis – Non-GAAP financial measure

Net interest income for the quarter ended September 30, 2020 was $461.0 million compared to $450.9 million in the previous quarter, an increase of $10.1 million. Net interest income, on a taxable equivalent basis, for the third quarter of 2020 was $506.9 million, an increase of $13.9 million when compared to $493.0 million in the second quarter of 2020.

The net interest margin decreased by 19 basis points to 3.06% in the third quarter of 2020, compared to 3.25% in the previous quarter. The reduction in the margin reflects an increase in the investments in overnight Fed Funds and in U.S. Treasury and U.S. Agency debt securities plus an average balance of $1.4 billion in SBA PPP loans, compared with an average balance of $913 million for the previous quarter. These assets, although accretive to net interest income, are lower yielding assets and therefore compressed the net interest margin. The redeployment into relatively short tenured assets responds in part to the uncertainty of the tenure of the deposit growth. On a taxable equivalent basis, net interest margin was 3.37 % compared to 3.56 % in the second quarter of 2020, a decrease of 19 basis points. The main variances in net interest income on a taxable equivalent basis were:

• Higher income from money market, trading and investment securities by $6.0 million, mainly due to higher average balance of U.S. Agency mortgage backed debt securities;
• higher interest income from loans by $2.4 million mainly driven by the acceleration of the discount amortization related to the prepayment of a commercial loan, higher income from mortgage and auto loans driven by higher originations and higher average balance of SBA PPP loans by approximately $0.5 billion, partially offset by lower income from personal and credit card loans. During the quarter, the Corporation recognized income of $10.3 million related to loans issued under the SBA PPP program, compared to $6.5 million in the previous quarter. As mentioned above, these loans carry a lower yield (approximately 2.88%, including the amortization of fees received under the program that at September 30, 2020 still had $41.4 million in unamortized balance); and
• lower interest expense on deposits by $5.2 million, or 8 basis points, due to lower interest cost, mainly at Popular Bank

The net interest income for the Banco Popular de Puerto Rico (“BPPR”) segment amounted to $394.7 million for the quarter ended September 30, 2020, compared to $387.2 million in the previous quarter. The net interest margin for the third quarter of 2020 was 3.13%, a decrease of 26 basis points when compared to 3.39% for the previous quarter. As discussed above, the net interest margin was impacted by higher average balances of SBA PPP loans by approximately $0.4 billion and of the investments in overnight Fed Funds and other short-term investments, which carry a low yield. The cost of interest-bearing deposits was 0.24%, compared to 0.28% for the previous quarter. Total cost of deposits for the quarter was 0.18%, compared to 0.22% reported in the second quarter of 2020, a decrease of 4 basis points.

Net interest income for Popular Bank (“Popular U.S.” or “PB”) was $76.5 million for the quarter ended September 30, 2020, compared to $73.7 million during the previous quarter. The increase of $2.8 million in net interest income was primarily due to lower deposit costs by 20 basis points, partially offset by lower income from loans, mainly personal loans. Net interest margin for the quarter was 3.18%, an increase of 11 basis points when compared to 3.07% reported in the second quarter of 2020, mainly due to a decrease in deposit costs. The cost of interest-bearing deposits was 0.98%, compared to 1.18% in the previous quarter. Total cost of deposits for the quarter was 0.81%, compared to 1.01% reported in the second quarter.

Non-interest income

Non-interest income increased by $16.7 million to $128.8 million for the quarter ended September 30, 2020, compared to $112.1 million for the quarter ended June 30, 2020. The increase in non-interest income was primarily driven by:

• Higher service charges on deposit accounts by $6.7 million, mainly in the BPPR segment, due to higher transaction volumes and the reinstatement of certain fees and service charges which were waived during the second quarter of 2020 as part of the financial relief programs implemented in response to the COVID-19 pandemic;
• higher other service fees by $17.8 million, mainly at the BPPR segment, due to higher debit and credit card fees by $13.4 million as a result of increased economic activity after business disruptions caused by the COVID-19 pandemic and the reinstatement of previously waived fees;
• an increase in net gain, including impairment, on equity securities of $2.7 million mainly related to a gain on sale of certain equity securities at PB;
• a favorable variance in adjustments to indemnity reserves on previously sold loans of $5.3 million mainly due to a recourse reserve release related to the bulk loan repurchase from FNMA and FHLMC; and
• higher other operating income by $1.9 million mainly due to higher net earnings from the combined portfolio of investments under the equity method by $2.8 million and $4.1 million in higher revenues recognized by our auto lending subsidiary principally associated to daily car rental activities. The second quarter included a gain of $5.6 million as a result of the sale and partial leaseback of the corporate office building that houses our auto lending subsidiary;

Partially offset by:

• lower income from mortgage banking activities by $13.3 million mainly due to higher unfavorable fair value adjustments on mortgage servicing rights (“MSRs”) by $12.9 million, of which $8.8 million was related to the bulk loan repurchases from the Corporation’s GNMA, FNMA and FHLMC loan servicing portfolio; and $10.5 million in interest advanced losses related to the loans repurchased in bulk from GNMA; partially offset by higher mortgage servicing fees by $3.9 million mainly related to fees in arrears collected and recognized in connection with the bulk repurchase transactions, and higher gains on securitization transactions and whole loan sales by $5.4 million; and
• an unfavorable variance in net (loss) gain on sale of loans, including valuation adjustments, of $4.4 million mainly due to a $2.0 million negative adjustment recognized during the third quarter of 2020 on the held-for-sale taxi medallion portfolio at PB compared to a net gain of $2.2 million recognized on the sale of taxi medallions during the second quarter of 2020.

Refer to Table B for further details.

Operating expenses

Operating expenses for the third quarter of 2020 totaled $361.1 million, an increase of $12.8 million from the second quarter of 2020. The increase in operating expenses was driven primarily by:

• Higher equipment expenses by $3.2 million mainly due to higher amortization expense;
• higher professional fees by $3.9 million mainly due to higher processing and technology services by $5.5 million related to increased customer activity;
• higher business promotion expenses by $2.4 million due primarily to higher customer reward program expense in our credit card business by $1.9 million due to higher purchasing activities by our customers;
• higher credit and debit card processing fees and higher interchange and other expenses by $1.9 million due to higher volume of transactions; and
• higher other operating expenses by $4.3 million mainly due to higher operational losses reserves by $4.7 million and a higher provision for unused loan commitments by $4.3 million, partially offset by lower subsequent write-downs of foreclosed auto units by $3.5 million.

Partially offset by:

• Lower personnel cost by $3.2 million due to lower salaries by $2.1 million, lower employee deferred compensation plans expense by $1.2 million; partially offset by higher commission, incentives and other bonuses by $1.8 million due to higher production.

Full-time equivalent employees were 8,514 as of September 30, 2020, compared to 8,525 as of June 30, 2020.

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

Income taxes

For the quarter ended September 30, 2020, the Corporation recorded an income tax expense of $41.2 million, compared to $24.6 million for the previous quarter. The increase in income tax expense was mainly attributed to higher income before tax during the third quarter of 2020. The effective tax rate (“ETR”) for the third quarter of 2020 was of 20%, compared to 16% in the previous quarter.

The ETR of the Corporation is impacted by the composition and source of its taxable income. For the fourth quarter of 2020, the Corporation currently expects its consolidated ETR to be within the 19% to 22% range.

Credit Quality

The Corporation’s credit performance remained stable during the third quarter of 2020, aided by payment deferrals, government stimulus measures instituted in response to the COVID-19 pandemic and the resumption of collection efforts. Notwithstanding these indicators and the increase in economic activity experienced during the quarter, the effect of the pandemic and the full extent of its economic disruption remains uncertain. Management believes that the improvement over the last few years in the risk profile of the Corporation’s loan portfolios better positions Popular to operate successfully under the ongoing challenging environment. Management will continue to carefully monitor the exposure of the portfolios to the COVID-19 pandemic related risks, changes in the economic outlook of the regions in which we operate and how delinquencies and NCOs evolve during the next several quarters.

The following presents credit quality results for the third quarter of 2020:

• At September 30, 2020, total non-performing loans held-in-portfolio decreased by $25.8 million from June 30, 2020. BPPR’s NPLs decreased by $32.9 million, driven by lower mortgage, consumer (mostly auto loans), and commercial NPLs by $27.2 million, $13.8 million, and $11.9 million, respectively, offset in part by an increase of $21.5 million in construction NPLs. PB’s NPLs increased by $7.1 million, driven by a $9.1 million construction relationship. During the first quarter of 2020, NPLs increased by $278 million as a result of the implementation of CECL for purchased credit deteriorated (“PCD”) loans.

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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