Popular, Inc. Announces Fourth Quarter Financial Results

Popular, Inc. (the “Corporation,” “Popular,” “we,” “us,” “our”) (NASDAQ:BPOP) reported a net loss of $102.2 million for the quarter ended December 31, 2017, compared to a net income of $20.7 million for the quarter ended September 30, 2017, reflecting a non-cash income tax expense of $168.4 million during the quarter, due to the impact of the Federal Tax Cut and Jobs Act in the Corporation’s U.S. deferred tax asset.

Ignacio Alvarez, President and Chief Executive Officer, said: “While our fourth quarter and year end results reflected the impact of a significant non-cash charge to earnings due to the recently enacted federal tax reform, this charge had no impact on regulatory capital. The fourth quarter results were also impacted by the effects of hurricanes Maria and Irma. However, notwithstanding this impact, we saw growth in our net interest income on a year over year basis. I am also pleased to report that our operations have substantially recovered from the impact of the storms with 164 of our branches in P.R. and the U.S. Virgin Islands fully operational. We are also beginning to see increased loan demand in our consumer loans portfolios, specially in auto loans. We remained pleased with our U.S. operations which experienced a 16% growth in commercial loans during 2017."

Significant Events

Hurricanes Irma and Maria

During the fourth quarter of 2017, the Corporation continued normalizing its operations after the impact of Hurricanes Irma and Maria (the “hurricanes”) that made landfall in September 2017. The government’s restoration of the electric and telecommunication services in the areas in which our branch network operates was the most critical factor leading the Corporation to operate under improved conditions. Restoration of the island’s electric infrastructure and the telecommunications network, as well as the speed of such restoration, remain the most critical challenges for Puerto Rico’s recovery from the hurricanes. Power generation is currently at approximately 85% of normal electricity production, up from 30% at the end of October, now reaching 67% of all customers.

The Corporation continued to assess the impact of the hurricanes on its buildings and operations, including the impact on its customers, potential credit losses and reduced revenue streams as a result of the business disruptions, as further detailed below. Additionally, relief efforts by the Corporation and our employees continued throughout the quarter, including the loan payment moratorium provided to consumer and commercial borrowers.

As of January 12, 2018, 164 of Banco Popular de Puerto Rico’s (“BPPR”) bank branches are open and 558 ATMs are operating. Popular is working on a plan to reopen its remaining closed retail locations as soon as possible. In the month of December 2017, our client debit and credit card purchase activity exceeded the December 2016 activity, demonstrating significant improvement in economic activity on the island and progress towards normalized levels.

Impact on Earnings Related to Hurricanes

The following summarizes the estimated impact on the Corporation’s earnings for the third and fourth quarter of 2017 as a result of the impact caused by Hurricanes Irma and Maria, net of estimated insurance receivables of $1.1 million.

Provision for Loan Losses

As of the end of the fourth quarter of 2017, the Corporation maintained a reserve for loan losses of $117.6 million, for non-covered loans, based on management’s best estimate of the impact of the hurricanes on the Corporation’s loan portfolios. This represents a downward adjustment of $4.6 million from the amounts initially estimated at the end of the third quarter of 2017. Also, during the fourth quarter the Corporation increased its estimate of losses associated with the hurricanes for the covered portfolio by $10.2 million resulting in an incremental provision expense of $2.3 million during the quarter. The Corporation may make further adjustments to these estimates as more information becomes available. Refer to additional information on the Credit Quality section of this earnings release.

Indemnity reserve

The Corporation services a portfolio of loans amounting to $1.5 billion at December 31, 2017 which were previously sold by the Corporation with credit recourse. The Corporation has estimated additional losses associated with the potential repurchase liability of loans subject to credit recourse as a result of the hurricanes. For the fourth quarter of 2017, the provision for indemnity reserves of $11.1 million included $3.4 million to account for these estimated losses. At December 31, 2017 the reserve for loans subject to credit recourse amounted to $58.8 million.

Operating Expenses

As detailed in the table above the results for the third and fourth quarters of 2017 include expenses related to structural damages caused by the hurricanes to the Corporation’s branches, buildings and repossessed properties. At the end of the fourth quarter, the Corporation has recorded year to date expenses related to structural damages of $6.5 million, net of the related insurance receivable of $1.1 million, a downward adjustment of $0.3 million and $6.4 million, respectively, from the initial estimates at the end of the third quarter. The results also include other operating expenses for costs such as donations, debris removal, fuel for backup generators, satellite telecommunication, personnel support and other ancillary costs associated with hurricane recovery efforts.

Revenue Reduction

In addition to the previously mentioned incremental provision and direct operating expenses, results for the third and fourth quarters of 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 to businesses and consumers in hurricane-affected areas, as well as the economic and operational disruption on the Corporation’s mortgage origination, servicing and loss mitigation activities. For the fourth quarter of 2017, the Corporation estimates that these revenue captions resulted in a decrease in income of approximately $20 million when compared to pre-hurricane levels, taking into account the earnings for the comparative quarter of the previous year, among other measures, primarily driven by the disruption in our operations. This compares to approximately $11 million impact during the third quarter.

While significant progress has been made in economic and transactional activity since September, 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.

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

Tax Cut and Jobs Act

On December 22, 2017, the Tax Cut and Jobs Act (the “Act”) was signed into law by President Trump. The Act, among other things, reduced the maximum corporate tax rate from 35% to 21% in the U.S. As a result, during the fourth quarter of 2017 the Corporation recorded an income tax expense of $168.4 million, related to the write-down of the deferred tax asset (“DTA”) from its U.S. operations.

The Act contains other provisions, effective on January 1, 2018, which may impact the Corporation’s tax calculations and related income tax expense in future years. Management will continue to evaluate the impact of the Act and may make further adjustments as a result of additional analysis and additional guidance issued on the legislation.

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 to investors about the underlying performance of the Corporation’s ongoing operations. The “Adjusted net income” is a non-GAAP financial measure.

No adjustments are reflected for the third quarter of 2017.

[1]On December 22, 2017, the Tax Cut and Jobs Act ("the Act") was signed into law by the President of the United States. The Act, among other things, reduced the maximum federal Corporate tax rate from 35% to 21%. The adjustment reduced the DTA related to the Corporation's U.S. operations as a result of a lower realizable benefit at the lower tax rate.

Net interest income

Net interest income for the quarter ended December 31, 2017 was $387.2 million, compared to $378.2 million for the previous quarter. Net interest margin was 3.90% for the quarter compared to 3.96% for the previous quarter.

The increase of $9.0 million in net interest income was mainly related to the following:

Positive variances:

• Higher income from money market investments by $2.7 million due to both a higher average volume of funds available to invest related to a higher balance of deposits mainly from the Puerto Rico government deposits and higher yield by 5 basis points due to the increase in rates at the end of 2017;
• higher income from investment securities due to higher volume related to U.S. Treasury securities acquired during the fourth quarter and higher yield on those securities. The increase in the portfolio yield of 2 basis points accounts for $1.4 million additional income for the quarter while the increase in volume represents an increase of $1.8 million;
• higher income from commercial loans by $1.7 million due to higher volume predominantly related to the loan growth in the U.S.;
• higher income from the consumer loans portfolio by $3.5 million or 39 basis points mainly driven by a higher yield from the credit card portfolio; and
• lower cost of interest bearing deposits by 2 basis points, or $0.1 million, mainly NOW and money market deposits, partially offset by higher volumes from government, retail and commercial clients.

Negative variances:

• Lower income from mortgage loans by $1.8 million, or 12 basis points mostly due to the waiver of late payment fees to clients.

BPPR’s net interest income amounted to $328.8 million for the quarter ended December 31, 2017, compared to $321.1 million for the previous quarter. The increase of $7.7 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, a higher volume and yield of investment securities driven by recent U.S. Treasury purchases contributed to the increase. Higher volume of loans also contributed to the increase in interest income, mainly higher yield from the credit card portfolio, partially offset by lower income from mortgage loans driven by the waiver of late payment fees related to the hurricanes. The net interest margin for the fourth quarter was 4.21%, a decline of 7 basis points when compared to 4.28% 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 in Fed Funds, mainly due to higher balances of Puerto Rico government deposits and the acquisition of investment securities. BPPR’s earning assets yielded 4.54%, compared to 4.63% in the previous quarter, while the cost of interest bearing liabilities was 0.47%, or two basis points lower than the 0.49% in the previous quarter.

Banco Popular North America’s (“BPNA”) net interest income was $72.7 million, compared to $71.5 million in the previous quarter, mainly due to higher volume of commercial and construction loans, partially offset by the related funding costs. Net interest margin decreased 4 basis points to 3.46%, compared to 3.50% for the previous quarter mostly due to higher cost of funds. U.S. earning assets yielded 4.28% compared to 4.29% in the previous quarter, while the cost of interest bearing liabilities was 1.06% compared to 1.03% in the previous quarter.

Non-interest income

Non-interest income amounted to $86.1 million for the quarter ended December 31, 2017, compared to $100.4 million for the previous quarter. The results for the quarter reflect a reduction in various revenue streams, mostly as a result of the impact of the hurricanes. The unfavorable variance of $14.2 million in non-interest income was primarily driven by:

• Lower service charge on deposits accounts by $5.4 million due to lower transactional cash management billings primarily due to the effects of Hurricane Maria;
• lower other service fees by $5.0 million mainly credit cards fees due to the waiver of late payment fees and debit card fees at BPPR as part of the hurricane relief efforts, largely impacted by lower interchange income resulting from lower transaction volumes due to the impact of the hurricanes;
• lower income on mortgage banking activities by $7.1 million in part due to $2.2 million in lower mortgage servicing fees, which are recognized as loan payments are collected, due to lower mortgage payments from the moratoriums offered as part of the hurricanes relief efforts; higher unfavorable fair value adjustments on mortgage servicing rights by $2.0 million; and lower net gain on sale of loans mostly due to lower volume from securitization transactions; and
• unfavorable variance in adjustments to indemnity reserves of $4.7 million due to an increase in the reserves for credit recourse and representation and warranties; including $3.4 million in incremental reserves estimated due to the hurricanes impact.

These negative variances were partially offset by:

• Favorable variance on the FDIC loss-share expense by $6.6 million due to a change in the related true-up payment obligation as a result of an increase in the discount rate; and
• higher other operating income by $1.5 million mainly due to higher earnings from investments under the equity method.

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 $322.0 million for the fourth quarter of 2017, an increase of $4.9 million when compared to the third quarter of 2017. The increase in operating expenses was driven primarily by:

• Higher net occupancy expense by $1.6 million mostly due to higher repair and maintenance expenses at BPPR related to the hurricanes;
• higher professional fees by $8.8 million mainly associated with the impact of consulting and advisory engagements that carried over from Q3 into Q4 due to the hurricane related disruptions in the third quarter;
• higher business promotion expense by $3.1 million mainly due to higher advertising and promotion expense related to disaster relief activities and communications in response to the hurricanes; and
• higher FDIC deposit insurance by $1.2 million, mainly due to increased asset base.

These increases were partially offset by:

• Lower OREO expenses by $4.4 million due to the write-down of $2.7 million recorded during the third quarter related to the impact of the hurricanes on commercial, construction and mortgage properties at BPPR; and
• lower other operating expenses by $5.2 million as a result of $3.9 million of write-down of premises and equipment related to the hurricanes, recorded during the third quarter, lower printing and supplies and lower sundry losses.

Non-personnel credit-related costs, which include collections, appraisals, credit related fees and OREO expenses, amounted to $10.6 million for the fourth quarter of 2017, compared to $15.3 million for the third quarter of 2017. The decrease was principally due to lower write-downs on OREO at BPPR.

Full-time equivalent employees were 7,784 as of December 31, 2017, compared to 7,787 as of September 30, 2017.

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

Income taxes

For the quarter ended December 31, 2017, the Corporation recorded an income tax expense of $182.1 million, compared to a benefit of $20.0 million for the previous quarter. As discussed above, the results for the fourth quarter include an income tax expense of $168.4 million from the write down of the DTA of the Corporation’s U.S. operations, as a result of the Act, which reduced the maximum federal corporate tax rate from 35% to 21%. The Act contains other provisions, effective on January 1, 2018, which may impact the Corporation’s tax calculations and related income tax expense in future years. Management will continue to evaluate the impact of the Act and may make further adjustments as a result of additional analysis and additional guidance issued on the legislation. At December 31, 2017, the Corporation had a deferred tax asset amounting to $1.1 billion, net of a valuation allowance of $0.4 billion. The DTA related to the U.S. operations was $0.3 billion, net of a valuation allowance of $0.4 billion.

The income tax benefit for the third quarter reflected the impact of the losses related to the hurricanes, which resulted in a reduction of taxable income and the related effective tax rate in our Puerto Rico operations.

The effective tax rate of the Corporation is impacted by the composition and source of its taxable income. For 2018, the Corporation expects its consolidated effective tax rate to range from 21% to 24%.

Credit Quality

The Corporation continues to monitor asset quality measures given the impact of Hurricanes Irma and Maria on the loan portfolios and the moratorium granted to certain consumer and commercial borrowers, which have led to lower inflows to non-performing loans and NPL balances. The U.S. operation continued to reflect strong growth and favorable credit quality metrics, once the impact of the U.S. taxi medallion portfolio acquired from the FDIC in the assisted sale of Doral Bank is excluded. The Corporation will continue to monitor changes in credit quality trends given the continued challenges in Puerto Rico, heightened by Hurricane María. The following presents asset quality results for the fourth quarter of 2017:

• Inflows of NPLs held-in-portfolio, excluding consumer loans, decreased by $81.4 million quarter-over-quarter, mainly driven by lower inflows in the P.R. mortgage portfolio of $95.7 million, prompted by the payment plan implemented post Hurricane Maria.
• Total non-performing loans held-in-portfolio decreased by $35.0 million from the third quarter of 2017, driven by lower P.R. mortgage NPLs of $31.3 million, primarily driven by payments and charge-offs, as inflows were minimal due to the payment moratorium post Hurricane María. At December 31, 2017, the ratio of NPLs to total loans held-in-portfolio stood at 2.3% compared to 2.5% in the third quarter of 2017.
• Net charge-offs increased by $40.7 million from the third quarter of 2017, driven by: (i) higher U.S. commercial NCOs by $26.7 million mainly related to the U.S. taxi medallion portfolio (ii) higher P.R. commercial NCOs of $8.9 million related to two previously reserved relationships, and (iii) higher P.R. mortgage NCOs of $6.5 million impacted by the temporary suspension of collection and foreclosure activities after the hurricanes. The Corporation’s ratio of annualized net charge-offs to average non-covered loans held-in-portfolio was at 1.61%, compared to 0.92% in the third quarter of 2017. Refer to Table J for further information on net charge-offs and related ratios.
• The allowance for loan losses decreased by $23.7 million from the third quarter of 2017 to $590.2 million. The P.R. segment ALLL decreased by $6.1 million, mostly driven by a $6.5 million decrease as a result of the annual ALLL review and recalibration. The environmental factors reserve associated with the impact of Hurricane Maria on the loan portfolios decreased by $4.6 million to $117.6 million, compared to $122.2 million in the previous quarter. 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 as additional information becomes available. The U.S. segment ALLL decreased by $17.5 million, driven by $31.6 million U.S. taxi medallion related charge-offs.
• The general and specific reserves related to non-covered loans totaled $481.1 million and $109.1 million, respectively, at quarter-end, compared with $498.7 million and $115.2 million, respectively, as of September 30, 2017. The ratio of the allowance for loan losses to loans held-in-portfolio was 2.43% in the fourth quarter of 2017, compared to 2.65% from the previous quarter.
• The ratio of the allowance for loan losses to NPLs held-in-portfolio increased to 107.1%, compared to 104.8% in the previous quarter.
• The provision for loan losses for non-covered loans for the fourth quarter of 2017 decreased by $87.7 million quarter-over-quarter, as the prior quarter included $66.4 million related to the impact of Hurricane Maria on the P.R. loan portfolios. Excluding this impact, the provision for the P.R. segment increased by $4.3 million, while the U.S. provision decreased by $25.5 million. The U.S. decrease was attributed to higher impairments for the U.S. taxi medallion purchased credit impaired loans that resulted in a provision expense of $37.0 million and $10.2 million in the third and fourth quarters, respectively. The provision to net charge-offs ratio was 74.7% in the fourth quarter of 2017, compared to 297.4% in the previous quarter.

Total assets increased by $1.7 billion from the third quarter of 2017, driven by:

• An increase of $1.1 billion in investment securities available-for-sale mainly due to purchases of U.S. Treasury securities at BPPR; and
• A net increase of $1.1 billion in non-covered loans held-in-portfolio, due to an increase of $0.8 billion in mortgage loans at BPPR due to the rebooking of loans previously pooled into GNMA securities. Under the GNMA program, issuers such as BPPR have the option but not the obligation to repurchase loans that are 90 days or more past due. For accounting purposes, these loans subject to the repurchase option are required to be reflected on the financial statements of the Bank with an offsetting liability. While the borrowers for our serviced GNMA portfolio benefited from the loan payment moratorium, the delinquency status of these loans continued to be reported to GNMA without considering the moratorium. Additionally, growth in commercial loans at BPPR and BPNA by $0.3 billion contributed to the increase.

These positive variances were partially offset by:

• A decrease of $0.3 billion in cash and money market investments at BPPR and BPNA due in part to the deployment of liquidity into investment securities as mentioned above; and
• A decrease of $0.3 billion in other assets primarily in accounts receivable related to maturities of U.S. Treasury securities that were settled during the quarter and a decrease in the DTA, mainly at BPNA due to the write-down taken as a result of the impact of the Act (refer to additional information on the Income Taxes section of this earnings release).

Total liabilities increased by $1.9 billion from the third quarter of 2017, principally driven by:

• An increase of $1.2 billion in deposits mainly due to an increase in demand deposits and savings deposits at BPPR. Refer to Table G for additional information on deposits; and
• An increase of $0.8 billion in other liabilities at BPPR due to an increase in the liability for GNMA loans sold with a repurchase option due to an increase in delinquency resulting from the moratorium, as noted above.

These positive variances were partially offset by:

• A decrease of $0.1 billion in other short-term borrowings at BPNA.

Stockholders’ equity decreased by approximately $0.2 billion from the third quarter of 2017, mainly as a result of net loss for the quarter of $102.2 million, declared dividends of $25.5 million on common stock, $0.9 million in dividends on preferred stock, and higher unrealized losses on securities available-for-sale by $55.7 million.

Common equity tier-1 ratio (“CET1”), common equity per share and tangible book value per share were 16.30%, $49.51 and $43.02, respectively at December 31, 2017, compared to 16.63%, $51.31 and $44.79 at September 30, 2017. 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, 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, June 30, 2017 and September 30, 2017, and in our Annual Report on Form 10-K for the year ended December 31, 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, January 23, 2018 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 23, 2018. The replay dial-in is: 1-877-344-7529 or 1-412-317-0088. The replay passcode is 10115688.

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