Popular, Inc. Announces Third Quarter 2020 Financial Results

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. At September 30, 2020, the ratio of NPLs to total loans held-in-portfolio was 2.5% compared to 2.6% in the second quarter of 2020.

• Inflows of NPLs held-in-portfolio, excluding consumer loans, increased by $5.9 million quarter-over-quarter. In BPPR, total inflows decreased by $13.5 million driven by a mortgage inflow decrease of $41.0 million, while the commercial and construction inflows in aggregate increased by $27.6 million, mostly related to a $21.5 million construction relationship, as mentioned above. The NPL inflows at PB increased by $19.4 million from the previous quarter, mainly driven by higher construction inflows related to a $9.1 million loan from a single borrower in the New York region and commercial inflows of $10.8 million related to an administrative delinquency on a performing loan that matured and reached 90 days during its renewal process. The loan renewal was completed during the quarter and the loan was returned to accrual status before the quarter ended.

• NCOs trended significantly lower during the quarter, decreasing by $48.1 million from the second quarter of 2020, aided by the pandemic relief programs, as well as the resumption of collection and repossession activity. BPPR ‘s NCOs decreased by $48.4 million, primarily driven by lower consumer NCOs by $36.0 million, mostly related to auto loans. We continue to be attentive to changes in delinquencies and NCOs, as most deferrals expired during the third quarter of 2020 and given the uncertainty around the outlook of the pandemic. The Corporation’s ratio of annualized net charge-offs to average loans held-in-portfolio was 0.24%, compared to 0.92% in the second quarter of 2020. Refer to Table M for further information on net charge-offs and related ratios.

• At September 30, 2020, the allowance for credit losses (“ACL”) reflected an increase of $7.4 million from the second quarter of 2020 to $925.9 million. The ACL incorporates the current economic outlook using Moody’s Analytics’ September scenarios, as well as the effect of the credit risk rating downgrades of certain commercial borrowers during the quarter, the hotel industry representing the largest impacted segment. These increases were in part offset by lower reserves for consumer loans influenced by lower balances, delinquencies and the impact of the macroeconomic scenario. The ratio of the allowance for credit losses to loans held-in-portfolio was 3.15% in the third quarter of 2020, compared to 3.16% in the previous quarter. The ratio of the allowance for credit losses to NPLs held-in-portfolio stood at 126.1%, compared to 120.8% in the previous quarter.

• Given that any one economic outlook is inherently uncertain, the Corporation leverages multiple scenarios to estimate its ACL. For the third quarter’s ACL computation, the Corporation combined Moody’s Analytics’ September S1 (optimistic), Baseline, and S3 (pessimistic) scenarios. Probability weights were applied to each such scenario’s outputs as part of the ACL estimation process. When compared to the Moody’s Analytics’ second quarter’s June Baseline scenario, the third quarter’s Baseline scenario assumes a more favorable increase in economic activity from the third quarter of 2020 through the second quarter of 2021, with continued growth thereafter. A significant second wave of COVID-19 infections as well as delays in the additional government stimulus continue to be key risks to the Baseline forecast. Among the three scenarios used in the ACL, the Baseline is assigned the highest probability, followed by the S3 scenario given the uncertainties in the economic outlook and downside risk. For the second quarter’s ACL computation, the Corporation only utilized Moody’s Analytics’ June Baseline scenario, which assumed that a significant pickup in economic activity would occur in the third quarter of 2020 driven by federal assistance programs, followed by a period of tepid growth.

• The provision for credit losses for the third quarter of 2020 decreased by $43.7 million from the prior quarter, linked to significantly lower NCOs for the quarter. The provision for the BPPR segment decreased by $52.7 million, reflective of lower NCOs, while the provision for the PB segment increased by $9.1 million mainly due to the use of the probability weights in the estimation process. The provision to net charge-offs ratio was 115.4% in the third quarter of 2020, compared to 97.2% in the previous quarter.

Total assets increased by $3.1 billion from the second quarter of 2020, driven by:

• An increase of $2.4 billion in cash and money market investments, mainly due to an increase in deposits;

• an increase of $0.4 billion in debt securities available-for-sale mainly due to purchases of U.S. agency mortgage-backed securities, partially offset by maturities and paydowns of U.S. Treasury securities; and

• an increase of $0.3 billion in loans held-in-portfolio mainly due to growth of auto loans at BPPR by $0.1 billion and an increase of $0.4 billion in mortgage loans at BPPR mainly due to loan repurchases from its GSEs loan servicing portfolio.

Total liabilities increased by $3.0 billion from the second quarter of 2020, mainly due to:

• An increase of $2.2 billion in deposits, mainly from an increase at BPPR, of which $0.8 billion related to public sector deposits and $2.0 billion related to retail and commercial demand and savings accounts, including an increase of $0.7 billion in GNMA custodial deposit balances related to the repurchases that were transferred out in early October, partially offset by a decrease of $0.5 billion in deposits at PB; and

• an increase of $0.7 billion in other liabilities due to an increase of $1.0 billion in unsettled purchases of debt securities; partially offset by a reduction in the liability for GNMA loans sold with a repurchase option of $0.4 billion as a result of the previously mentioned GNMA repurchase.

Stockholders’ equity increased by approximately $131.9 million from the second quarter of 2020, principally due to net income for the quarter of $168.4 million, partially offset by declared dividends of $33.7 million on common stock and $0.3 million in dividends on preferred stock.

Common equity tier-1 ratio (“CET1”), common equity per share and tangible book value per share were 15.93%, $69.94 and $61.69, respectively, at September 30, 2020, compared to 15.71%, $68.40 and $60.13 at June 30, 2020. 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 and regulatory proceedings (including as a result of any participation in and execution of government programs related to the COVID-19 pandemic), new accounting standards on the Corporation’s financial condition and results of operations, the scope and duration of the COVID-19 pandemic, actions taken by governmental authorities in response thereto, and the direct and indirect impact of the pandemic on Popular, our customers, service providers and third parties. 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, 2019, our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020, and in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 to be filed with the Securities and Exchange Commission. Our filings are available on the Corporation’s website (www.popular.com) and on the Securities and Exchange Commission website (www.sec.gov). The Corporation assumes no obligation to update or revise any forward-looking statements or information which speak as of their respective dates.

About Popular, Inc.

Popular, Inc. (NASDAQ: BPOP) is the leading financial institution in Puerto Rico, by both assets and deposits, and ranks among the top 50 U.S. bank holding companies by assets. Founded in 1893, Banco Popular de Puerto Rico, Popular’s principal subsidiary, provides retail, mortgage and commercial banking services in Puerto Rico and the U.S. Virgin Islands. Popular also offers in Puerto Rico auto and equipment leasing and financing, investment banking, broker-dealer and insurance services through specialized subsidiaries. In the mainland United States, Popular provides retail, mortgage and commercial banking services through its New York-chartered banking subsidiary, Popular Bank, which has branches located in New York, New Jersey and Florida.

Conference Call

Popular will hold a conference call to discuss its financial results today Wednesday, October 28, 2020 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 the dial-in telephone number 1-866-235-1201 or 1-412-902-4127. There is no charge to access the call.

A replay of the webcast will be archived in Popular’s website. A telephone replay will be available one hour after the end of the conference call through Saturday, November 28, 2020. The replay dial-in is: 1-877-344-7529 or 1-412-317-0088. The replay passcode is 10148486.

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