Popular, Inc. : Announces Third Quarter Financial Results

Popular, Inc. (the “Corporation,” “Popular,” "we," "us," "our,") (NASDAQ:BPOP) reported a net income of $20.7 million for the quarter ended September 30, 2017, compared to a net income of $96.2 million for the quarter ended June 30, 2017. The results for the quarter reflect the impact of Hurricanes Irma and Maria on those markets in which the Corporation operates a significant portion of its business, including Puerto Rico, the U.S. Virgin Islands (“USVI”) and the British Virgin Islands (“BVI”).

Ignacio Alvarez, President and Chief Executive Officer, said: “Hurricanes Irma and Maria struck Puerto Rico and the Virgin Islands in a two-week period, leaving unprecedented destruction in their wake. Since day one, our priority has been to take care of our clients, our colleagues and our communities.

For the past five weeks, we have been dealing with the logistical challenges resulting from the collapse of the electric, water and telecommunications systems in Puerto Rico. Despite these challenges, we have worked relentlessly to provide access to cash and other essential banking services as quickly as possible. Thanks to the efforts of our colleagues, which have been nothing short of heroic, the number of branches and ATMs in operation has increased consistently. Only one week after Maria, we had 53 branches out of 168 and 150 ATMs out of 635 up and running, as well as all digital channels, which remained available throughout and after the hurricane. We currently have 137 branches and 397 ATMs in operation, covering the entire island, including Puerto Rico's central mountain region and the island municipalities of Culebra and Vieques, which were severely impacted by the hurricanes. In the U.S. and British Virgin Islands we are currently operating 7 out of our 9 branches.

We are working closely with our clients to assess their needs, help them rebuild and take advantage of opportunities that will surely arise. To provide relief, we offered automatic payment deferrals and loan extensions to most of our clients. In addition, we have taken various measures to support our employees in these difficult times, including monetary assistance to those that suffered significant damages to their homes and interest-free loans.

We also mobilized to help severely impacted communities through Fundación Banco Popular and the Popular Community Bank Foundation, our philanthropic arms. We launched the Embracing Puerto Rico effort, seeded the fund with a $1.1 million donation and have obtained additional funds thanks to the generosity of partners, suppliers and friends. We also contributed to “Unidos por Puerto Rico”, a fundraising campaign spearheaded by Puerto Rico’s First Lady and were one of two sponsors of the “Somos Una Voz” concert that has raised over $35 million for earthquake victims in Mexico and hurricane victims in Texas, Florida, Puerto Rico and the Caribbean. Fundación Banco Popular is leveraging the relationships it has developed with non-profit organizations and community leaders throughout its almost 40-year history, delivering assistance directly to those who need it most.

While deeply saddened by the human losses and material damage brought by the hurricanes, the resilience we have witnessed inspires us and gives us confidence that we will recover and emerge stronger than before. The current situation presents a unique opportunity to make much needed structural changes on the island, and, as the leading financial institution, Popular is ready to play an important role in efforts to build a stronger and more sustainable Puerto Rico.”

Significant Events

During the month of September, Hurricanes Irma and Maria (the "hurricanes") made landfall and subsequently caused extensive destruction in Puerto Rico, the U.S. and British Virgin Islands, disrupting the markets in which Banco Popular de Puerto Rico (“BPPR”) does business.

On September 6, 2017, Hurricane Irma made landfall in the USVI and the BVI as a Category 5 hurricane on the Saffir-Simpson scale, causing catastrophic wind and water damage to the islands’ infrastructure, homes and businesses. Hurricane Irma’s winds and resulting flooding also impacted certain municipalities of Puerto Rico, causing the failure of electricity infrastructure in a significant portion of the island. While hurricane Irma also struck Popular’s operations in Florida, neither our operations nor those of our clients in the region were materially impacted.

Two weeks later, on September 20, 2017, Hurricane Maria, made landfall in Puerto Rico as a Category 4 hurricane, causing extensive destruction and flooding throughout Puerto Rico. As a result of the Hurricane, 100% of the island’s population was left without electrical power and there was significant disruption to the water distribution system. Other basic utility and infrastructure services such as communications, ports and transportation were also materially affected, causing a significant disruption to the island’s economic activity.

Prior to the hurricanes, the Corporation had implemented its business continuity action program. Although the Corporation’s business critical systems experienced minimal outages as a result of the storms, the Corporation’s physical operations in Puerto Rico, the USVI and the BVI, including its branch and ATM networks, were materially disrupted by the storms mostly due to lack of electricity and communication as well as limited accessibility. Currently, 82% of BPPR’s bank branches are open and 63% of ATMs are operating. Popular is working on a plan to reopen its remaining closed retail locations as soon as possible.

Reconstruction of the island’s electric infrastructure and restoration of the telecommunications network remain the most critical challenges for Puerto Rico’s recovery from the hurricanes. As of October 27, 2017, the Government of Puerto Rico estimated that electricity generation remained at 28% of pre-hurricane levels. “Point of sale” (POS) activity throughout the Island has been impacted by lack of electricity and telecommunications at many merchant locations. By the third week of October, debit and credit card purchase activity from our clients stood at approximately 55% to 65% when compared to pre-hurricane activity.

Impact on Earnings Related to Hurricanes

The following summarizes the estimated impact on the Corporation’s earnings for the quarter ended September 30, 2017 as a result of the impact caused by Hurricanes Irma and Maria, net of estimated insurance receivables of $7.5 million.

Provision for Loan Losses

Damages associated with Hurricanes Irma and Maria impacted certain of the Corporation’s asset quality measures, including higher delinquencies and non-performing loans. Payment channels, collection efforts and loss mitigation operations were interrupted during the last month of the quarter as a result of the hurricanes. An incremental provision expense of $69.9 million was made to the allowance for loan losses based on management’s best estimate of the impact of the hurricanes on the Corporation’s loan portfolios and the ability of borrowers to repay their loans, taking into consideration currently available information and the already challenging economic environment in Puerto Rico prior to the hurricanes.

Management has initially estimated that the effects of the hurricanes could result in loan losses in the range of $70 to $160 million. However, since the Corporation’s base allowance for loan losses already incorporated reserves for environmental factors such as unemployment and deterioration in economic activity of approximately $58 million, management increased the environmental factors reserve by $64.3 million to $122.2 million using the near mid-range as the best estimate. The $69.9 million provision also includes $5.6 million for the portfolio of purchased credit impaired loans, accounted for under ASC 310-30, for which the estimated cash flows were adjusted to reflect the three-month payment forbearance offered to certain eligible borrowers, as discussed above. Since there is significant uncertainty with respect to the full extent of the impact due to the unprecedented nature of Hurricane Maria, the estimate is judgmental and subject to change as conditions evolve. Management will continue to carefully assess and review the exposure of the portfolios to hurricane-related factors, economic trends and their effect on credit quality. Refer to additional information on the Credit Quality section of this earnings release.

Operating Expenses

The Corporation has over 200 branches and office buildings and over 2,000 repossessed properties in the areas affected by the hurricanes. While the Corporation has completed a preliminary estimate of the physical damages to these properties, it has been unable to individually examine each of these properties. As the Corporation continues to evaluate the extent of the damages, additional adjustments may be necessary. However, the Corporation believes that given its level of insurance coverage, the estimated impact of damages to these properties should not vary materially.

The results for the quarter include $6.6 million in expenses, net of $7.5 million in insurance receivables, from structural damages caused by the hurricanes to branches, buildings and repossessed properties as a result of the hurricanes. An additional $2.9 million in other operating expenses are reflected for costs such as donations, debris removal, fuel for backup generators and other ancillary costs associated with hurricane recovery efforts.

Expenses for the fourth quarter are expected to be between $320 and $330 million and consistent with our previous estimate of annual expenses.

Revenue Reduction

In addition to the previously mentioned incremental provision and direct operating expenses, results for the three months ended September 30, 2017 were impacted by the hurricanes in the form of a reduction in revenue resulting from reduced merchant transaction activity, the waiver of certain late fees and service charges, including ATM transaction fees, to businesses and consumers in hurricane-affected areas, as well as the economic and operational disruption in the Corporation’s mortgage origination, servicing and loss mitigation activities due to the hurricanes' operational and economic impact. These revenue captions resulted in a decrease in income of approximately $11 million in lower income when compared to the previous quarter, primarily driven by the disruption in our operations over the last 10 days of the quarter.

While the continued impact on transactional and collection based revenues will depend on the speed at which electricity, telecommunications and general merchant services can be restored across the region, we currently estimate that revenues in the fourth quarter could be further negatively impacted in an amount representing an additional $5 to $20 million from this quarter's results, excluding any impact on valuation of MSRs.

Refer to the Interest Income, Non-Interest Income and Expense sections of this earnings release for further information.

Net interest income

Net interest income for the quarter ended September 30, 2017 was $378.2 million, compared to $374.5 million for the previous quarter. The impact of having one more day in the quarter had a positive effect in net interest income of $2.7 million. Net interest margin was 3.96% for the quarter compared to 4.02% for the previous quarter.

The increase of $3.7 million in net interest income was mainly related to the following:

Positive variances:

• Higher income from money market investments by $4.4 million, or 21 basis points, due to both a higher average volume of funds available to invest related mostly to a higher balance of deposits and a higher yield due to the increases in rates by the U.S. Federal Reserve late in the second quarter of 2017. The average rate of the money market investments portfolio for the quarter was 1.27%, compared to 1.06% in the second quarter of 2017;
• Higher income from commercial loans by $6.1 million, or 6 basis points, driven by higher average loan balances in both U.S. and Puerto Rico and a higher yield at BPPR due in part to one additional day in the quarter and the impact on the variable rate portfolio from the above-mentioned increases in rates; and
• Higher income from the consumer loans portfolio by $1.9 million, due to higher balances in both U.S. and Puerto Rico mostly resulting from loans acquired during the quarter, partially offset by lower yields mainly in the credit cards portfolio and the waiver of late payment fees from clients granted as part of Popular’s hurricane relief efforts,

Negative variances:

• Lower interest income from investment securities by $1.3 million, or 2 basis points, mainly due to lower yields, particularly on mortgage backed securities and collateralized mortgage obligations, and lower average balances driven by the amortization and prepayments of the portfolios;
• Lower income from mortgage loans by $2.5 million, or 10 basis points, due to lower yields impacted by loan delinquencies as a result of the business disruption from hurricanes Irma and Maria and the above-mentioned waiver of late payment fees to clients. Also, lower average balances resulting from lower lending activity and portfolio run-off both in P.R, and the U.S., contributed to the decline.
• Lower income from the portfolio acquired from Westernbank (“WB loans”) by $2.0 million, due to the normal portfolio amortization and lower yields; and
• Higher interest expense from deposits by $0.3 million, or 3 basis points, mostly due to higher volume of government and commercial deposits in Puerto Rico, a higher volume of time deposits in the U.S. to fund its commercial loan growth and the negative impact of one more day in the quarter.

BPPR’s net interest income amounted to $321.1 million for the quarter ended September 30, 2017, compared to $319.7 million for the previous quarter. The increase of $1.4 million in net interest income was mainly due to higher income from money market investments resulting from higher volumes and yields, as previously stated. Also, the results for the quarter reflected a higher yield from commercial loans resulting from higher volumes and the increase in market rates and higher income from consumer loans due to the acquisition of loans, as discussed above. These positive variances were partially offset by lower income from mortgage loans impacted by delinquencies resulting from the business disruption from Hurricanes Irma and Maria and the waiver of late payment fees related to the hurricanes, lower income from WB loans and higher interest expense on deposits mainly from the P.R. government. The net interest margin for the third quarter was 4.28%, a decline of 8 basis points when compared to 4.36% for the previous quarter. The decrease in net interest margin results mainly from the composition of earning assets, which has shifted towards lower yielding assets resulting from higher balances of Fed Funds, mainly as a result of higher balances of deposits and lower volume of WB loans, which carry a high yield relative to the non-WB portfolio. Puerto Rico assets yielded 4.63%, compared to 4.69% in the previous quarter, while the cost of interest bearing liabilities was 0.49%, compared to 0.46% in the previous quarter.

Banco Popular North America’s (“BPNA”) net interest income was $71.5 million, compared to $69.7 million in the previous quarter, mainly due to higher income resulting mostly from higher volume of commercial and consumer loans and the positive impact of one more day in the quarter, partially offset by higher deposit and short-term borrowing costs. Net interest margin decreased 4 basis points to 3.50%, compared to 3.54% for the previous quarter mostly due to higher cost of funds. U.S. earning assets yielded 4.29%, compared to 4.30% in the previous quarter, while the cost of interest bearing liabilities was 1.03% compared to 0.99% in the previous quarter.

Non-interest income

Non-interest income amounted to $100.4 million for the quarter ended September 30, 2017, compared to $116.8 million for the previous quarter. The results for the quarter reflect a reduction in various revenue streams, as a result of the impact of Hurricanes Irma and Maria. The reduction in revenues resulted from business interruptions causing lower volumes of transactions as well as disaster relief measures taken by the Corporation to help its customers. The unfavorable variance of $16.4 million in non-interest income was primarily driven by:

• Lower other service fees by $5.7 million mainly in credit and debit card fees at BPPR largely impacted by lower interchange income resulting from lower transaction volumes due to the business disruption in the regions impacted by the hurricanes and the waivers of credit card late fees during the month of September as a result of the disaster relief measures for customers implemented in response to the hurricanes;
• Lower income on mortgage banking activities by $5.5 million due to lower mortgage servicing fees driven by an increase in delinquency, due to the impact of the hurricanes on payment channels, collection and loss mitigation efforts; higher unfavorable fair value adjustments on mortgage servicing rights; and lower net gain on sale of loans mostly due to lower volume from securitization transactions also in part due to the aforementioned business disruption;
• Unfavorable variance in adjustments to indemnity reserves of $3.5 million due to an increase in the reserve for credit recourse;
• Higher FDIC loss-share expense by $3.5 million due to an unfavorable impact in the mirror accounting of impaired loans and higher recoveries on assets to be shared with the FDIC in the recovery period; and
• Lower other operating income by $5.4 million mainly due to lower earnings from investments under the equity method.

These negative variances were partially offset by an other-than-temporary impairment charge of $8.3 million on senior Puerto Rico Sales Tax Financing Corporation (“COFINA”) bonds classified as available-for-sale recorded during the previous quarter.

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 $317.1 million for the third quarter of 2017, an increase of $10.3 million when compared to the second quarter of 2017. The increase in operating expenses was driven primarily by:

• Higher personnel cost by $0.8 million mostly due to higher salaries;
• Higher business promotion expense by $1.9 million mainly due to higher donations, which includes $1.1 million in donations to the hurricane relief efforts, and higher advertising expense, partially offset by lower customer reward program expense; and
• Higher other operating expenses by $13.8 million which includes $3.9 million of write-down of premises and equipment, $1.0 million in debris removal and other costs related to Hurricane Maria, higher provision for unused commitments by $1.5 million and higher legal contingency reserves.

These increases were partially offset by:

• Lower professional fees by $2.2 million mainly due to lower programming, processing and other technology services; and
• Lower OREO expenses by $4.9 million due to lower write-downs on valuation of mortgage properties at BPPR.

Non-personnel credit-related costs, which include collections, appraisals, credit related fees and OREO expenses, amounted to $15.3 million for the third quarter of 2017, compared to $20.4 million for the second quarter of 2017. The decrease was principally due to lower write-downs on OREO at BPPR.

Full-time equivalent employees were 7,787 as of September 30, 2017, compared to 7,789 as of June 30, 2017.

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

Income taxes

For the quarter ended September 30, 2017, the Corporation recorded an income tax benefit of $20.0 million, compared to an income tax expense of $35.7 million for the previous quarter.

The income tax benefit for the quarter reflects the impact of the losses related to the hurricanes, which result in a reduction of taxable income and the related effective tax rate in our Puerto Rico operations, as the level of exempt income increases in proportion to the Corporation’s taxable income. The Corporation expects its effective tax rate for the year 2017 to be between 21% and 23%.

Credit Quality

As previously noted, asset quality measures were impacted by the damages caused by the hurricanes, which led to higher delinquencies and non-performing loans, as payment channels, collection efforts and loss mitigation operations were interrupted and mainly unavailable for the last 10 days of the quarter. A provision was made to the allowance for loans losses based on management’s best estimate of the impact of the hurricanes on the ability of the borrowers to repay their loans, in light of an already fragile economy in Puerto Rico prior to the hurricanes. Management will continue to carefully assess the exposure of the portfolios to hurricane-related factors, economic trends, and their effect on credit quality.

In response to the hurricanes’ effects on its customers, the Corporation implemented a 90-day moratorium, equal to three months of suspended payments for consumer and certain commercial borrowers that were current or less than ninety days past due in their payments as of September 30, 2017. The following presents asset quality results for the third quarter of 2017:

• Total non-performing loans held-in-portfolio increased by $38.8 million from the second quarter of 2017, driven by higher P.R. mortgage NPLs of $31.3 million, negatively impacted by the disruptions caused by Hurricane Maria. At September 30, 2017, NPLs to total loans held-in-portfolio were at 2.5% compared to 2.4% in the second quarter of 2017.
• Inflows of NPLs held-in-portfolio, excluding consumer loans, increased by $13.4 million quarter-over-quarter, mainly driven by higher inflows in the P.R. mortgage portfolio of $15.7 million.
• Net charge-offs decreased by $4.5 million from the second quarter of 2017, driven by: (i) lower P.R. commercial NCOs of $12.2 million, driven by the effect of a $12.3 million charge-off taken on a large commercial relationship during the previous quarter, partially offset by, (ii) higher U.S. commercial NCOs of $4.9 million related to the Taxi Medallion portfolio, and (iii) higher P.R. consumer NCOs of $4.5 million, mainly due to collection disruptions caused by Hurricane Maria. The Corporation’s ratio of annualized net charge-offs to average non-covered loans held-in-portfolio was at 0.92%, compared to 1.01% in the second quarter of 2017. Refer to Table J for further information on net charge-offs and related ratios.
• The allowance for loan losses (“ALLL”) increased by $104.7 million from the second quarter of 2017 to $613.9 million at September 30, 2017. The P.R. segment ALLL increased by $69.8 million. The environmental factors reserve, which considers unemployment and deterioration in economic activity, increased by $64.3 million to $122.2 million based on management’s best estimate, including the hurricanes’ impact on the loan portfolios using currently available information. While the reserve was increased to $122.2 million as the near mid-range estimate, management’s estimate ranged from approximately $70 million to $160 million. The provision expense for the quarter also includes $2.1 million for the portfolio of non-covered purchased credit impaired loans, accounted for under ASC 310-30, for which the estimated cash flows were adjusted to reflect the three-month payment forbearance offered to certain eligible borrowers. Since there is significant uncertainty with respect to the full extent of the impact due to the unprecedented effects of Hurricane Maria, the estimate is judgmental and subject to change as conditions evolve. Management will continue to carefully assess and review the exposure of the portfolios to hurricane-related factors, economic trends and their effect on credit quality. The U.S. segment ALLL increased by $34.8 million, driven by higher reserves for the U.S. taxi medallion portfolio.

• The general and specific reserves related to non-covered loans totaled $498.7 million and $115.2 million, respectively, at quarter-end, compared with $393.9 million and $115.3 million, respectively, at June 30, 2017. The ratio of the allowance for loan losses to loans held-in-portfolio was 2.65% in the third quarter of 2017, compared to 2.22% from the previous quarter.
• The ratio of the allowance for loan losses to NPLs held-in-portfolio increased to 104.8%, compared to 93.1% in the previous quarter.
• The provision for loan losses for non-covered loans for the third quarter of 2017 increased by $107.7 million quarter-over-quarter, which includes the above mentioned charge of $64.3 million related to Hurricane Maria’s estimated impact on the P.R. loan portfolios. The $34.8 million increase in the U.S. segment was mostly related to higher impairments for the taxi medallion portfolio. The provision to net charge-offs ratio was 297.4% in the third quarter of 2017, compared to 86.92% in the previous quarter.

Total assets increased by $1.4 billion from the second quarter of 2017, driven by:

• An increase of $1.3 billion in money market investments, mainly at BPPR, due to higher liquidity driven by an increase in deposit balances;
• A net increase of $0.3 billion in non-covered loans held-in-portfolio, mainly driven by growth of commercial loans at BPNA; and
• An increase of $0.2 billion primarily in accounts receivable related to maturities of U.S. Treasury securities pending to be settled.

These positive variances were partially offset by:

• A decrease of $0.3 billion in investment securities available-for-sale mainly in U.S. Treasury securities at BPPR.

Total liabilities increased by $1.4 billion from the second quarter of 2017, principally driven by:

• An increase of $1.1 billion in deposits mainly due to an increase in commercial savings and NOW deposits and demand deposits from the Puerto Rico public sector at BPPR. Refer to Table G for additional information on deposits; and
• An increase of $0.2 billion in other short-term borrowings at BPNA.

Stockholders’ equity increased by approximately $7.4 million from the second quarter of 2017, mainly as a result of net income for the quarter of $20.7 million and lower unrealized losses on securities available-for-sale, offset by declared dividends of $25.5 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 16.63%, $51.31 and $44.79, respectively at September 30, 2017, compared to 16.68%, $51.26 and $44.71 at June 30, 2017. Refer to Table A for capital ratios.

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, and the impact of Hurricanes Irma and Maria on us. 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, 2016, the Quarterly Reports on Form 10-Q for the quarters ended March 31, 2017 and June 30, 2017, and in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 to be filed with the SEC. 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 assumes no obligation to update or revise any forward-looking statements or information which speak as of their respective dates.

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, October 31, 2017 at 11:00 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 Thursday, November 30, 2017. The replay dial-in is: 1-877-344-7529 or 1-412-317-0088. The replay passcode is 10113654.

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