Popular : Announces Fourth Quarter Financial Results

• Net loss of $4.1 million and Adjusted net income of $88.5 million for the fourth quarter of 2016
• Net income of $216.7 million and Adjusted net income of $358.1 million for the year 2016
• Net interest margin of 4.02% in Q4 2016, compared to 4.12% in Q3 2016
• Credit Quality (excluding covered loans):
  • Non-performing loans held-in-portfolio (NPLs) decreased by $21.4 million from Q3 2016; NPLs to loans ratio stable at 2.5% vs. 2.6% in Q3 2016;
  • Net charge-offs (NCOs) increased by $21.1 million; NCOs at 1.00% of average loans held-in-portfolio vs. 0.63% in Q3 2016;
  • Allowance for loan losses of $510.3 million vs. $525.6 million in Q3 2016; Allowance for loan losses to loans held-in-portfolio at 2.24% vs. 2.33% in Q3 2016;
  • Allowance for loan losses to NPLs at 91.5% vs. 90.7% in Q3 2016.
• Common Equity Tier 1 ratio of 16.47%, Book Value per Common Share of $50.08 and Tangible Book Value per Share of $43.12 at December 31, 2016

SAN JUAN, Puerto Rico--(BUSINESS WIRE)-- Popular, Inc. (the 'Corporation' or 'Popular') (NASDAQ:BPOP) reported a net loss of $4.1 million for the quarter ended December 31, 2016, compared to net income of $46.8 million for the quarter ended September 30, 2016. The results for the fourth quarter of 2016 reflect an after-tax charge amounting to $87 million, related to the unfavorable award under the portfolio sales arbitration with the FDIC, as receiver.

Mr. Richard L. Carrión, Chairman of the Board and Chief Executive Officer, said: 'Despite the impact of the adverse FDIC arbitrations, during 2016 we demonstrated the strength of our franchise by generating strong revenues and improving credit quality. We also continued to achieve strong loan growth in our U.S. business. As we announced today, we are pleased that the progress made during 2016 allowed us to increase our quarterly common stock dividend from $0.15 to $0.25 and establish a $75 million common stock repurchase program.'

Significant Events

As previously announced, BPPR has filed statements of claim requesting that a review board determine certain matters relating to the loss-share claims under its commercial loss share agreement with the FDIC, as receiver for Westernbank (the 'FDIC'),including with respect to the FDIC's refusal to concur in certain of BPPR's portfolio sales under the commercial loss share agreement, for which BPPR was seeking damages in the amount of $88.5 million plus interest. On December 12, 2016, the review board in the arbitration described above issued an award denying BPPR's claim. As a result, for the quarter ending December 31, 2016, the Corporation recognized a pre-tax charge of $116.8 million in connection with unreimbursed losses considered in the arbitration, the related adjustment to the true-up obligation owed to the FDIC at the end of the loss-share agreements in 2020 and recoveries previously incorporated in the net damages claimed in the arbitration.

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 fourth and third quarters of 2016, with adjustments to exclude the impact of certain events during the fourth and third 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 December 31, 2016 was $355.4 million, compared to $353.7 million for the previous quarter. Net interest margin was 4.02% for the quarter compared to 4.12% for the previous quarter.

The increase in net interest income was mainly related to:

• Higher income from money market, trading and investment securities by $4.1 million due mainly to higher average balance of mortgage backed and U.S. Treasury securities; and
• Higher income from commercial loans by $2.7 million, or 3 basis points, driven by loan growth in the U.S. and higher yields at BPPR due to the impact on the variable rate portfolio of the increase in market rates in the recent months.

These positive variances were partially offset by:

• Lower income from consumer loans by $2.0 million, or 1 basis point, driven by lower average balances at both BPPR and BPNA due to high yield loan portfolio run-offs;
• Lower income from the Westernbank ('WB') loan portfolio by $1.3 million, or 9 basis points, due to normal run-off and as a result of the quarterly recast process; and
• Higher interest expense on deposits by $2.4 million, or 1 basis point, mainly related to higher deposits costs in the U.S. to fund loan growth and an unfavorable adjustment on equity linked deposits at BPPR. Average balance of deposits increased by 4% related to increases in government deposits in P.R. and retail deposits in the U.S.

BPPR's net interest income amounted to $305.4 million for the quarter ended December 31, 2016, compared to $303.7 million for the previous quarter. The increase of $1.7 million in net interest income was mainly due to higher income from investment securities and higher yield from commercial loans, partially offset by lower income from WB loans, consumer loans and an unfavorable adjustment on equity linked deposits, as mentioned above. The net interest margin for the fourth quarter was 4.39%, a decline of 10 basis points when compared to 4.49% for the previous quarter. The change in the mix of earning assets as higher yielding assets mature, particularly WB and consumer loans, and the investment portfolio and cash at the Fed increases, resulted in a negative impact to the net interest margin.

BPNA's net interest income was $65.3 million, flat when compared with the previous quarter. Higher income from investment securities and commercial loans, were offset by lower income from consumer loans and higher costs of deposits. Net interest margin decreased 14 basis points to 3.47% compared to 3.61% for the previous quarter driven by a higher cost of deposits to fund loan growth. U.S. earning assets yielded 4.21%, compared to 4.32% in the previous quarter, while the cost of interest bearing liabilities was 0.96%, compared to 0.94% in the previous quarter. The change in the mix of earning assets driven by investments in securities and commercial loans at lower rates as well as higher funding costs had a negative impact on the net interest margin.

Non-interest(loss) income

The unfavorable variance in non-interest (loss) income of $76.2 million, when compared to the third quarter of 2016, was primarily driven by:

• Higher FDIC loss-share expense by $68.6 million primarily due to a $116.8 million charge related to the portfolio sales arbitration decision denying BPPR's claims under the commercial loss sharing agreement and $9.9 million in additional adjustments related to restructured commercial loans. The results for the third quarter included a $54.9 million charge related to a restructured loan adverse arbitration award;
• Unfavorable variance in net gain on sale of loans of $8.5 million as a result of the gain on the sale of a non-accrual public sector loan during the third quarter; and
• Lower other operating income by $2.9 million mainly due to lower earnings from investments under the equity method by $2.7 million.

These negative variances were partially offset by:

• Higher other service fees by $6.1 million due to higher insurance commission revenues related to contingent commissions typically received during the fourth quarter. Refer to Table F for a breakdown of other service fees.

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 $320.9 million for the fourth quarter of 2016, a decrease of $2.8 million when compared to the third quarter of 2016. The decrease in operating expenses was driven primarily by:

• Lower other operating expense by $10.9 million mainly due to lower operational losses at BPPR and BPNA as a result of higher reserves for legal matters, curtailment losses on insured mortgage claims in our mortgage servicing business and a higher incidence of credit card fraud losses during the third quarter; and
• A goodwill impairment charge of $3.8 million at the securities subsidiary during the third quarter of 2016, recorded as part of the Corporation's annual goodwill impairment analysis.

These decreases were partially offset by:

• Higher personnel cost by $1.2 million mainly due to higher training and development, severance and employee benefit cost, partially offset by lower salaries and commissions;
• Higher professional fees by $4.4 million mainly due to higher legal fees and other professional fees related to the FDIC arbitration proceedings, partially offset by lower collections, appraisals and other credit related fees;
• Higher business promotion by $2.7 million due to seasonally higher advertising expense at BPPR;
• Higher OREO expenses by $2.4 million mainly due to higher losses and write-downs on mortgage OREO at BPPR; and
• Higher credit and debit card processing, volume, interchange and other expenses by $1.2 million due to earned volume credits during the third quarter.

Non-personnel credit-related costs, which include collections, appraisals, credit related fees, and OREO expenses, amounted to $14.8 million for the fourth quarter of 2016, compared to $15.3 million for the third quarter of 2016. The decrease was principally due to lower collections expense at BPPR.

Full-time equivalent employees were 7,828 as of December 31, 2016, compared to 7,866 as of September 30, 2016.

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

Income taxes

For the quarter ended December 31, 2016, the Corporation recorded an income tax benefit of $1.8 million from its continued operations, compared to an income tax expense of $15.8 million for the previous quarter. The decline in the income tax expense is mainly driven by the operating loss at BPPR for the fourth quarter, compared to the taxable income for the previous quarter. In the third quarter BPPR recognized a $4.4 million benefit related to the reversal of uncertain tax positions reserves associated with expired statutory provisions.

The effective income tax rate for the fourth quarter was 25%, remaining flat from the previous quarter. The effective tax rate is impacted by the composition and source of the taxable income.

Credit Quality

Credit quality trends continued stable when compared to the third quarter of 2016. The Puerto Rico region experienced a decrease of NPLs, a decrease of inflows to NPLs, and higher charge-offs. The U.S. operation continued to reflect positive results with strong growth and favorable credit quality metrics. The Corporation continues to be attentive to changes in credit quality trends given challenging economic conditions in Puerto Rico.

• Inflows of NPLs held-in-portfolio, excluding consumer loans, decreased by $9.5 million quarter-over-quarter, mainly driven by lower mortgage inflows of $12.9 million.
• Non-performing loans held-in-portfolio decreased by $21.4 million from the third quarter of 2016, driven by lower mortgage and commercial NPLs of $15.9 million and $7.2 million, respectively. At December 31, 2016, NPLs to total loans held-in-portfolio ratio was 2.5%, compared to 2.6% in the third quarter of 2016.
• Net charge-offs increased by $21.1 million from the third quarter of 2016. Excluding $7.1 million recovery related to the sale of previously charged-off credit cards and personal loans in the third quarter of 2016, net charge-offs increased by $14.0 million quarter over quarter. This increase was mainly driven by higher commercial and mortgage NCOs in the BPPR segment by $6.0 million and $5.7 million, respectively. Commercial NCOs included a $5.9 million charge-off taken on a single borrower previously reserved. The Corporation's ratio of annualized net charge-offs to average non-covered loans held-in-portfolio stood at 1.00%, compared to 0.63% in the third quarter of 2016. The $7.1 million recovery from consumer loans reduced the NCO ratio by 13 bps in the previous quarter. Refer to Table J for further information on net charge-offs and related ratios.
• The allowance for loan losses decreased by $15.3 million from the third quarter 2016 to $510.3 million. The general and specific reserves related to non-covered loans totaled $398.9 million and $111.4 million, respectively, at quarter-end, compared with $396.5 million and $129.1 million, respectively, as of September 30, 2016. The ratio of the allowance for loan losses to loans held-in-portfolio was 2.24% in the fourth quarter of 2016, compared to 2.33% from the previous quarter.
• The ratio of the allowance for loan losses to NPLs held-in-portfolio increased slightly to 91.5%, compared to 90.7% in the previous quarter.
• The provision for loan losses for the fourth quarter of 2016 remained flat amounting to $40.9 million. The third quarter of 2016 included $7.1 million recovery impact from the sale of the above mentioned consumer loans. The provision to net charge-offs ratio was 72.8% in the fourth quarter of 2016, compared to 121.2% in the previous quarter.

Total assets decreased by $0.4 billion from the third quarter of 2016 driven by:

• A decrease of $1.1 billion in money market investments mainly at BPPR due to the deployment of liquidity into longer termed investment securities; and
• A decrease of $83.1 million in the FDIC loss-share asset due mainly to the $81.3 million write-down related to the review board's denial of BPPR's claim in connection with arbitration proceedings with the FDIC during the fourth quarter of 2016. Refer to Table O for further details.

These negative variances were partially offset by:

• An increase of $0.6 billion in investment securities available-for-sale mainly at BPPR due to purchases of U.S Treasury securities and mortgage-backed agency pools; and
• A net increase of $0.2 billion in non-covered loans held-in-portfolio mainly driven by growth in the commercial portfolio at BPNA by $0.3 billion, partially offset by lower balances of consumer, residential mortgage, and commercial loans at BPPR by $0.1 billion.

Total liabilities decreased by $0.2 billion from the third quarter of 2016, principally driven by:

• A decrease of $0.3 billion in federal funds purchased and assets sold under agreements to repurchase mainly due to a net decrease in repurchase agreements principally at BPPR; and
• A decrease of $68.1 million in other liabilities primarily due to a reduction in the liability for GNMA loans with a repurchase option due to higher repurchase activity during the fourth quarter, partially offset by the impact on the true-up payment obligation related to the adverse portfolio sales arbitration award and other commercial loss share agreement adjustments and the pre-tax adjustment of pension and postretirement benefit plans.

These negative variances were partially offset by:

• An increase of $0.2 billion in deposits mainly due to increases in savings and money market deposits at BPNA, partially offset by decreases in deposits from the Puerto Rico public sector at BPPR. Refer to Table G for additional information on deposits.

Stockholders' equity decreased by approximately $182.4 million from the third quarter of 2016, mainly as a result of a net loss for the quarter of $4.1 million, declared dividends of $15.6 million on common stock and $0.9 million in dividends on preferred stock, higher net unrealized losses on securities available-for-sale by $152.6 million, and a $11.4 million after-tax adjustment of pension and postretirement benefit plans.

Common equity tier-1 ratio ('CET1'), book value per share and tangible book value per share were 16.47%, $50.08 and $43.12, respectively at December 31, 2016 compared to 16.64%, $51.85 and $44.86 at September 30, 2016. Refer to Table A for capital ratios.

Refer to Table C for the Statements of Financial Condition.

Cautionary Note Regarding Forward-Looking Statements

The information contained in this press release contains 'forward-looking statements' within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts, but instead represent only management's beliefs regarding future events and current expectations, many of which, by their nature, are inherently uncertain and outside of the control of the Corporation. It is possible that the Corporation's actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated or implied in these forward-looking statements. 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, June 30, 2016 and September 30, 2016, and our other filings with the Securities and Exchange Commission for a discussion of some of the risks and important factors that could affect the Corporation's future results and financial condition. 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.

Conference Call

Popular will hold a conference call to discuss its financial results today Tuesday, January 24, 2017 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 Friday, February 24, 2017. The replay dial in is 1-877-344-7529 or 1-412-317-0088. The replay passcode is 10098325.

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