Popular, Inc. Reports Net Income of $47.2 million for the Quarter Ended September 30, 2012

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Popular, Inc. Reports Net Income of $47.2 million for the Quarter Ended September 30, 2012

  • Continued improvement in credit quality (excluding covered loans):
    • Non-performing loans held-for-sale declined by $70 million or 39% from Q2 2012
    • Non-performing assets declined by $57 million from Q2 2012, down 22% from Q3 2010 peak; lowest level since Q2 2009
    • Net charge-offs were $95.8 million for Q3 2012 vs. $98.0 million for Q2 2012; declining for the fourth consecutive quarter
  • Net interest margin increased to 4.37% in Q3 2012 from 4.33% for Q2 2012, reflecting lower funding costs
  • Common Equity Tier 1 ratio of 12.72% and Tangible Book Value per Share of $32.15 at September 30, 2012
  • Company reaffirms full-year 2012 earnings guidance of between $210 and $225 million

SAN JUAN, Puerto Rico--(BUSINESS WIRE)-- Popular, Inc. ("the Corporation" or "Popular") (NAS: BPOP) reported net income of $47.2 million for the quarter ended September 30, 2012, compared with net income of $65.7 million for the quarter ended June 30, 2012.

Mr. Richard L. Carrión, Chairman of the Board and Chief Executive Officer, said: "Third quarter results reflected continued strength and stability in our revenues, further declines in non-performing loans and charge-offs, and increases in our already strong capital ratios. Our number one priority is continuing to reduce non-performing assets, which will improve returns and increase our strategic and financial flexibility."


Earnings Highlights - Third Quarter 2012

  Quarters ended
(Dollars in thousands, except per share information) 30-Sep-12 30-Jun-12 30-Sep-11
Net interest income $ 343,426 $ 341,200 $ 369,311
Provision for loan losses - non-covered loans83,58981,743150,703
Provision for loan losses - covered loans [1] 22,619 37,456 25,573
Net interest income after provision for loan losses237,218222,001193,035
FDIC loss share (expense) income(6,707)2,575(5,361)
Other non-interest income122,41691,149127,751
Operating expenses 290,355 327,879 282,355
Income (loss) before income tax62,572(12,154)33,070
Income tax expense (benefit) 15,384 (77,893) 5,537
Net income $ 47,188 $ 65,739 $ 27,533
Net income applicable to common stock $ 46,257 $ 64,809 $ 26,602
Net income per common share - basic and diluted [2] $0.45 $0.63 $0.26

[1] Covered loans represent loans acquired in the Westernbank FDIC-assisted transaction that are covered under FDIC loss sharing agreements.

[2] Per share data has been adjusted to retroactively reflect the 1-for-10 reverse stock split effected on May 29, 2012.

 

Financial Impact of FDIC-Assisted Transaction
   
       
(In thousands) 30-Sep-12 30-Jun-12 30-Sep-11
 

Income Statement

Interest income on covered loans$ 70,584$ 79,094$ 105,809
Total FDIC loss share (expense) income(6,707)2,575(5,361)
Other non-interest income310310-
Provision for loan losses 22,619 37,456 25,573
Total revenues less provision for loan losses $ 41,568 $ 44,523 $ 74,875
 

Balance Sheet

Loans covered under loss-sharing agreement with FDIC$ 3,903,867$ 4,016,330$ 4,512,423
FDIC loss share asset1,559,0571,631,5941,895,059
FDIC true-up payment obligation 103,189 100,198 96,720
 

See additional details on accounting for FDIC-Assisted transaction in Table O.

Net interest income

Net interest margin for the third quarter of 2012 increased 4 basis points to 4.37% as compared to the second quarter of 2012. Net interest income reached $343.4 million, an increase of $2.2 million from the second quarter. The main drivers of the improvement in net interest margin are:

  • Decrease in interest expense on deposits of approximately $5.5 million, or 9 basis points, reflecting continuing progress in repricing the deposit base and a decrease in the average balance of deposits, mainly in certificates of deposit.
  • Decrease in the cost of short-term borrowings of approximately 73 basis points or $3.2 million. This decrease was driven mainly by the early termination of $350 million in repurchase agreements during the second quarter of 2012 that had a cost of 4.36%.
  • Interest income on the non-covered portfolio increased by $6.5 million. The increase was driven mainly by consumer loans, which showed the benefit of $225 million of portfolio purchases at the end of the second quarter. Interest income on the covered portfolio decreased by $8.5 million mainly due to the pay-off, during the second quarter of 2012, of a commercial single loan pool accounted for under ASC 310-30, resulting in the remaining discount being accreted into interest income during that period.
  • Yields on the investment securities portfolio declined by 28 basis points or $3.2 million mainly due to prepayments and reinvestment under a lower interest rate environment.
  • The BPPR segment's net interest margin for the third quarter increased 4 basis points from 5.07% in the second quarter to 5.11% in the third quarter of 2012. Net interest income amounted to $300.9 million for the quarter ended September 30, 2012, compared with $298.5 million for the previous quarter. The improvement was mainly related to lower cost of borrowings and interest bearing deposits and higher interest income related to acquired consumer loans, partially offset by lower interest income from covered loans as mentioned above.
  • The BPNA segment earned $69.6 million in net interest income for the quarter ended September 30, 2012 in line with the previous quarter. Net interest margin increased by 2 basis points to 3.57% due to a 13 basis point reduction in cost of interest bearing deposits partially offset by an 8 basis point decline in yield on earning assets mainly in investment securities.

Provision for Loan Losses

(In thousands) 30-Sep-12 30-Jun-12 30-Sep-11
Provision for loan losses - non-covered loans   
BPPR$ 69,738$ 66,443$ 131,058
BPNA13,851 15,300 19,645
83,58981,743150,703
Provision for loan losses - covered loans 22,619 37,456 25,573

The provision for loan losses for the third quarter of 2012 amounted to $106.2 million, a decrease of $13.0 million versus the previous quarter, mainly driven by lower provision for the covered loan portfolio.

  • The provision for loan losses for the non-covered loan portfolio increased by $1.8 million from second quarter 2012.
    • The provision for loan losses for non-covered loans in the BPPR reportable segment increased by $3.3 million from the second quarter of 2012, primarily reflecting higher net charge-offs in the commercial loan portfolio resulting from the ongoing portfolio review.
    • The provision for loan losses in the BPNA reportable segment decreased by $1.4 million from the second quarter of 2012, primarily due to the effect of lower net charge-offs in all loan portfolios except the mortgage loan portfolio.
  • The provision for loan losses on the covered loan portfolio decreased by $14.8 million from second quarter 2012, driven primarily by loans accounted for pursuant to ASC 310-30.
    • The provision for loan losses for loans accounted under ASC 310-30 was $17.9 million for the third quarter of 2012, compared with $28.2 million for the previous quarter. The $10.3 million decrease was mostly due to certain commercial and construction loan pools which reflected higher increases in expected loss estimates for the second quarter of 2012. Overall expected losses on the covered portfolio continue to be lower than originally estimated.
    • The provision for loan losses on covered loans accounted under ASC 310-20 was $4.7 million for the quarter ended September 30, 2012, compared with $9.2 million for the second quarter of 2012.

Non-interest income

Non-interest income increased by $22.0 million versus the second quarter, driven primarily by the following items:

  • Net gain on sale of loans, including unfavorable valuation adjustments on loans held-for-sale, totaled $18.5 million for the third quarter of 2012, compared with a net loss of $15.4 million for the second quarter of 2012. The favorable variance of $33.9 million was principally due to $27.3 million in valuation adjustments recorded during the second quarter on commercial and construction loans held-for-sale in the BPPR segment as a result of the impact of revised appraisals and market indicators.
  • Also, trading activities reflected an increase of $5.8 million in realized and unrealized gains on mortgage-backed securities, which were partially offset by an increase of $1.1 million in hedging costs.

These increases were partially offset by:

  • FDIC loss share expense of $6.7 million recognized in the third quarter of 2012, compared with FDIC loss share income of $2.6 million for the second quarter of 2012 (further detailed in Exhibit O). This variance was principally associated with the decrease of $14.8 million in the provision for loan losses and of reimbursable loan-related expenses on the covered loans which reduced the mirror offset, and higher unfavorable fair value adjustments in the true-up payment obligation, partially offset by a lower amortization of the loss share asset.
  • The other operating income decrease of $7.2 million was driven mainly by a $2.5 million gain from the sale of the wholesale indirect general agency property and casualty business during the second quarter, a $2.0 million decline in investment banking fees from the institutional securities business and a $1.5 million consulting fee received from EVERTEC during the second quarter.

Refer to table B for further details.

Operating expenses

Operating expenses decreased by $37.5 million versus the second quarter, driven primarily by the following items:

  • The recognition in the second quarter of a $25.0 million loss on early extinguishment of debt primarily related to the cancellation of certain high-cost repurchase agreements.
  • A $12.6 million decline in other operating expenses mainly due to lower costs associated with the collection efforts of the covered loan portfolio.
  • Personnel costs declined by approximately $4.8 million, driven mainly by reduced medical costs and lower salaries expense and by the absence in the third quarter of branch staff uniform and rebranding expenses that were recorded in the second quarter.

These decreases were partially offset by:

  • Higher other real estate owned (OREO) expenses of approximately $3.5 million, driven mainly by lower gain on sales, particularly for the commercial properties at BPNA. Gain on sale of commercial properties declined by approximately $11 million. This decline was partially offset by a decline in fair value adjustments of approximately $7 million, driven mainly by the impact of revised appraisals for construction properties in BPPR during the second quarter.

Non-personnel credit related costs, which includes collections, appraisals, credit related fees and OREO expenses, amounted to $18.1 million for the third quarter of 2012, compared to $13.5 million for the second quarter of 2012. The increase is principally due to an increase in OREO expenses of $3.5 million as mentioned above and in other credit costs of approximately $1.0 million.

Full-time equivalent employees ("FTEs") were 8,074 as of September 30, 2012, compared with 8,093 as of June 30, 2012 and 8,329 as of December 31, 2011.

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

Income taxes

Income tax expense amounted to $15.4 million for the quarter ended September 30, 2012, compared with an income tax benefit of $77.9 million for the second quarter of 2012, when the Corporation recognized an income tax benefit of $72.9 million as a result of the agreement signed with the P.R. Treasury which stated that covered loans are capital assets and will be taxed at the capital gain tax rate of 15%. Excluding the effect of extraordinary items, the Corporation expects an effective tax rate of approximately 16% for its Puerto Rico banking operations for 2012.

Credit Quality:

Non-Performing Assets
       
(In thousands) 30-Sep-12 30-Jun-12 30-Sep-11
Total non-performing loans held-in-portfolio, excluding covered loans $1,550,500 $1,562,818 $1,731,671
Non-performing loans held-for-sale108,886178,652259,776
Other real estate owned ("OREO"), excluding covered OREO 252,024 226,629 175,785
Total non-performing assets, excluding covered assets1,911,4101,968,0992,167,232
Covered loans and OREO 208,235 209,793 86,301
Total non-performing assets 2,119,645 2,177,892 2,253,533
Net charge-offs for the quarter (excluding covered loans) 95,791 97,976 135,175
 
Ratios (excluding covered loans):      
Non-performing loans held-in-portfolio to loans held-in-portfolio7.47%7.56%8.38%
Allowance for loan losses to loans held-in-portfolio3.073.143.35
Allowance for loan losses to non-performing loans, excluding loans held-for-sale 41.04 41.50 39.99

Credit quality continues to improve as the Company addresses its non-performing loan balances and manages asset exposures.

  • Net charge-offs in the third quarter were at the lowest level since the first quarter of 2008. Annualized net charge-offs to average non-covered loans held-in-portfolio decreased 6 basis points to 1.87% for the third quarter from 1.93% for the second quarter of 2012. The reduction was principally driven by lower net charge-offs in practically all loan portfolios, partially offset by an increase of $6.9 million in commercial net charge-offs, mainly in the BPPR reportable segment. This increase was mainly the result of the ongoing portfolio review. Refer to Table J for further information on net charge-offs and related ratios.
  • Non-performing loans held-for-sale decreased by $70 million, or 39%, mainly driven by $59 million of certain construction loans in the BPPR reportable segment which were resolved, as part of the Company's strategic efforts to reduce non-performing loans, and the transfer of $17 million of other construction loans to other real estate owned.
  • Non-performing loans (NPL) held-in-portfolio declined by $12 million from the second quarter of 2012 and were 34% lower than peak levels in the third quarter of 2010. The decline was primarily driven by a reduction of $18 million in non-performing construction loans, partially offset by an increase in consumer non-performing loans. Overall NPL levels continued to decline, reflecting continued improvement in the levels of problem loans.
  • Inflows of commercial, construction, and legacy non-performing loans held-in-portfolio increased by $33 million from the second quarter, mainly associated with four commercial real estate borrowers with aggregate outstanding of $28 million in the BPPR reportable segment. Inflows to mortgage non-performing loans held-in-portfolio decreased by $5 million.
  • OREO, excluding covered OREO, increased by $25 million from the second quarter, reflecting continuing efforts to aggressively resolve non-performing loans.
  • The ratio of allowance for loan losses to loans held-in-portfolio, excluding covered loans, stood at 3.07% as of September 30, 2012 compared with 3.14% as of June 30, 2012. The general and specific reserves related to non-covered loans totaled $529 million and $107 million at quarter-end, compared with $561 million and $88 million, respectively, as of June 30, 2012. The decrease in the general reserve component reflects improvements in credit quality metrics, particularly in the commercial, legacy and consumer loan portfolios. The increase in the specific reserve component was mainly driven by one commercial real estate borrower and higher volume of residential mortgage troubled debt restructured loans in the BPPR reportable segment.
Credit Quality by Segment
   
(In thousands)      
BPPR (non-covered loans) 30-Sep-12 30-Jun-12 30-Sep-11
Provision for loan losses$ 69,738$ 66,443$ 131,058
Net charge-offs71,04167,42289,666
Total non-performing loans held-in-portfolio1,284,0261,276,2941,336,918

Allowance/loans held-in-portfolio

 2.96% 2.99% 3.01%
 
       
BPNA 30-Sep-12 30-Jun-12 30-Sep-11
Provision for loan losses$ 13,851$ 15,300$ 19,645
Net charge-offs24,75030,55445,509
Total non-performing loans held-in-portfolio266,474286,524394,753

Allowance/loans held-in-portfolio

 3.35% 3.51% 4.19%

BPPR Reportable Segment:

  • The provision for loan losses for the non-covered loan portfolio increased by $3.3 million from the second quarter 2012 mainly due to higher net charge-offs in the commercial loan portfolio.
  • Net charge-offs, excluding covered loans, increased by $3.6 million from the second quarter 2012, principally due to an $8.5 million increase in commercial net charge-offs. This increase was mainly the result of the ongoing portfolio review, partly offset by declines in the mortgage, construction, and consumer loan portfolios.
  • Total non-performing loans held in portfolio, excluding covered loans, increased by $8 million from the second quarter 2012. This increase mainly reflects higher commercial and consumer NPLs by $21 million and $6 million, respectively, partly offset by a reduction of $18 million in the construction portfolio. This increase in commercial NPLs was largely driven by four commercial real estate relationships.
  • The allowance for loan losses as a percent of non-covered loans held in portfolio decreased to 2.96% from 2.99% in second quarter 2012, reflecting reserve reductions across all loan portfolios, except residential mortgage loans, for which the reserve-to-loans ratio increased to 2.54% at September 30, 2012 compared to 2.50% at June 30, 2012.

BPNA Reportable Segment:

  • The provision for loan losses decreased by $1.4 million from second quarter 2012, reflecting lower net charge-offs, partly offset by a lower reserve release compared with the second quarter of 2012.
  • Net charge-offs decreased by $5.8 million from the second quarter of 2012, mainly driven by reductions from the consumer, commercial, and legacy loan portfolios.
  • Total non-performing loans held in portfolio decreased by $20 million from the second quarter of 2012, mainly related to the resolution of a certain large commercial loan relationship, as well as overall improvements in credit performance, particularly in the commercial and legacy portfolios.
  • The allowance for loan losses as a percent of loans held in portfolio decreased to 3.35% from 3.51% in second quarter 2012, reflecting continued improvements in credit trends, particularly in the commercial and legacy loan portfolios.

Financial Condition

Financial Condition Highlights
   
   
(In thousands) 30-Sep-12 30-Jun-12 30-Sep-11
Total assets$ 36,503,366$ 36,612,179$ 38,275,323
Total loans held-in-portfolio (net)23,896,54823,916,10924,413,388
Deposits26,319,49927,414,78027,953,340
Borrowings5,017,1413,620,4195,318,551
Stockholders' equity 4,068,983 4,021,237 4,012,601
  • Total loans held-in-portfolio, excluding covered loans, increased by $88 million from June 30, 2012, driven by performing mortgage loan purchases at BPNA of $67 million and loans purchased and originated by the Puerto Rico operations, offset by charge-offs amounting to $95.8 million and by the normal amortization of the portfolios. Refer to Table G for a breakdown by loan categories.
  • Total loans held-for- sale decreased by $27 million, driven mainly by $59 million of certain construction loans in the BPPR reportable segment which were resolved, and the transfer of $17 million of other construction loans to other real estate owned. These decreases were offset by an increase in mortgage loans of approximately $44 million in the BPPR reportable segment related to loans originated or purchased with the intent to be sold or securitized.
  • Trading securities decreased by approximately $191 million, driven mainly by more mortgage pool production sales and an additional sale of approximately $141 million in trading securities during the third quarter, resulting in a gain on sale of approximately $3.4 million, net of hedging costs. The Corporation executed a higher volume of mortgage-backed securities sales during the third quarter in order to take advantage of current mortgage spreads in Puerto Rico originated pools.
  • Deposits decreased by $1.1 billion from June 30, 2012, reflecting the Corporation's substitution of maturing brokered deposits with cheaper short-term borrowings. Brokered deposits amounted to $2.6 billion as of September 30, 2012, compared to $3.1 billion as of June 30, 2012. Also, non-brokered time deposits decreased by $336 million, driven mainly by retail certificates of deposit. Demand deposits declined by $288 million, driven mainly by public funds received during the second quarter. Table G presents a breakdown of deposits by major categories.
  • Borrowings increased by $1.4 billion as the Corporation replaced maturing brokered deposits and time deposits with short term advances and repurchase agreements at a lower cost.
  • Stockholders' equity increased by $48 million from June 30, 2012, mainly as a result of the net income for the quarter. Refer to Table A for capital ratios and Table N for Non-GAAP reconciliations.

Refer to Table C for the Statements of Condition.

Outlook

The Company reaffirmed its expectation for 2012 net income of between $210 million and $225 million.

Forward-Looking Statements

The information included in this news release contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and involve certain risks and uncertainties that may cause actual results to differ materially from those expressed in forward-looking statements. Factors that might cause such a difference include, but are not limited to (i) the rate of growth in the economy and employment levels, as well as general business and economic conditions; (ii) changes in interest rates, as well as the magnitude of such changes; (iii) the fiscal and monetary policies of the federal government and its agencies; (iv) changes in federal bank regulatory and supervisory policies, including required levels of capital; (v) the relative strength or weakness of the consumer and commercial credit sectors and of the real estate markets in Puerto Rico and the other markets in which borrowers are located; (vi) the performance of the stock and bond markets; (vii) competition in the financial services industry; (viii) possible legislative, tax or regulatory changes; (ix) the impact of the Dodd-Frank Act on our businesses, business practice and cost of operations; and (x) additional Federal Deposit Insurance Corporation assessments. For a discussion of such factors and certain risks and uncertainties to which the Corporation is subject, see the Corporation's Annual Report on Form 10-K for the year ended December 31, 2011, as well as its filings with the U.S. Securities and Exchange Commission. Other than to the extent required by applicable law, including the requirements of applicable securities laws, the Corporation assumes no obligation to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances 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 36th by assets among U.S. banks. 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, Illinois, Florida and California.

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

Popular will hold a conference call to discuss the financial results on Friday, October 19, 2012 at 10:30 a.m. Eastern time. The call will be broadcast 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 866-713-8565 or 617-597-5324. The conference code is 49080948.

A replay of the webcast will be archived in Popular's website during the respective period. A telephone replay will be available from 12:30 p.m. on Friday, October 19, 2012 to 11:59 p.m. on Friday, October 26, 2012, at 888-286-8010 or 617-801-6888. The replay passcode is 67907864.

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Popular, Inc.
Financial Supplement to Third Quarter 2012 Earnings Release
 
Table A - Selected Ratios and Other Information
 
Table B - Consolidated Statement of Operations
 
Table C - Consolidated Statement of Financial Condition
 
Table D - Consolidated Average Balances and Yield / Rate Analysis - QUARTER
 
Table E - Consolidated Average Balances and Yield / Rate Analysis - YEAR-TO-DATE
 
Table F - Other Service Fees
 
Table G - Loans and Deposits
 
Table H - Non-Performing Assets
 
Table I - Activity in Non-Performing Loans
 
Table J - Allowance for Credit Losses, Net Charge-offs and Related Ratios
 
Table K - Allowance for Loan Losses - Breakdown of General and Specific Reserves - CONSOLIDATED
 
Table L - Allowance for Loan Losses - Breakdown of General and Specific Reserves - PUERTO RICO OPERATIONS
 
Table M - Allowance for Loan Losses - Breakdown of General and Specific Reserves - U.S. MAINLAND OPERATIONS
 
Table N - Reconciliation to GAAP Financial Measures