Popular, Inc. Reports Net Income of $83.9 million for the Fourth Quarter and $245.3 million for the

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Popular, Inc. Reports Net Income of $83.9 million for the Fourth Quarter and $245.3 million for the Year Ended December 31, 2012

  • Significant progress in credit quality (excluding covered loans):
    • Non-performing loans held-in-portfolio declined by $125.4 million or 8% from Q3 2012, and down 39% from Q3 2010 peak; lowest level since Q2 2009;
    • Inflows of commercial, construction and legacy non-performing loans held-in-portfolio for Q4 2012 down by $72.9 million, or 51%, from Q3 2012, and down $401.9 million, or 47%, year over year;
    • Non-performing assets decreased by $384.4 million, or 18%, year over year;
    • Net charge-offs of $100.9 million for Q4 2012, vs. $95.8 million for Q3 2012, and $126.0 million for Q4 2011;
    • Net charge-offs declined $131.3 million, or 25%, year over year.
  • Net interest margin increased to 4.41% in Q4 2012
  • Average balance of non-covered loans grew by $361.1 million in Q4 2012, reflecting strong mortgage and commercial originations in Puerto Rico and purchases of high-quality U.S. mortgages
  • Common Equity Tier 1 ratio of 13.18% and Tangible Book Value per Share of $32.55 at December 31, 2012; capital exceeds well-capitalized threshold by $1.9 billion

SAN JUAN, Puerto Rico--(BUSINESS WIRE)-- Popular, Inc. ("the Corporation" or "Popular") (NAS: BPOP) reported net income of $83.9 million for the quarter ended December 31, 2012, compared with net income of $47.2 million for the quarter ended September 30, 2012.

Mr. Richard L. Carrión, Chairman of the Board and Chief Executive Officer, said: "Our fourth quarter results reflect the strength of our core businesses and market positions, significant further declines in non-performing loans and increases in our already strong capital ratios. In 2013, we remain focused on driving value through further progress on all these fronts and continuing to increase our strategic and financial flexibility."


Significant events for the quarter ended December 31, 2012

  • During the month of December 2012, the Corporation received a $24.2 million cash dividend from its investment in EVERTEC's parent company. Also, the Corporation recorded pre-tax income of approximately $31.6 million related to its proportionate share of a tax benefit from a tax grant received by EVERTEC from the Puerto Rico Government. The Corporation's equity investment balance in the entity stands at $73.9 million as of year-end. The Corporation's participation interest in the entity was 48.5% as of December 31, 2012.
Earnings Highlights       
  Quarters endedYears ended
(Dollars in thousands, except per share information) 31-Dec-12 30-Sep-12 31-Dec-1131-Dec-12 31-Dec-11
Net interest income$ 350,411$ 343,426$ 344,780$ 1,372,619$ 1,431,992
Provision for loan losses - non-covered loans86,25683,589123,908334,102430,085
Provision for loan losses - covered loans [1] (3,445) 22,619 55,90074,839 145,635
Net interest income after provision for loan losses267,600237,218164,972963,678856,272
FDIC loss share (expense) income(36,824)(6,707)17,447(56,211)66,791
Other non-interest income169,825122,416131,912522,553493,486
Operating expenses 296,747 290,355 311,0931,211,148 1,150,297
Income before income tax103,85462,5723,238218,872266,252
Income tax expense (benefit) 19,914 15,384 263(26,403) 114,927
Net income $ 83,940 $ 47,188 $ 2,975$ 245,275 $ 151,325
Net income applicable to common stock $ 83,009 $ 46,257 $ 2,044$ 241,552 $ 147,602
Net income per common share - basic and diluted [2] $ 0.81 $ 0.45 $ 0.02$ 2.35 $ 1.44
 
[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
 
   Quarters ended Years ended
(In thousands) 31-Dec-12 30-Sep-12 31-Dec-1131-Dec-12 31-Dec-11
     

Income Statement

Interest income on covered loans$ 76,998$ 70,584$ 88,424$ 301,441$ 412,678
Total FDIC loss share (expense) income(36,824)(6,707)17,447(56,211)66,791
Other non-interest income2813101,0921,21112,810
Provision for loan losses (3,445) 22,619 55,90074,839 145,635
Total revenues less provision for loan losses $ 43,900 $ 41,568 $ 51,063$ 171,602 $ 346,644
 

Balance Sheet

Loans covered under loss-sharing agreements with FDIC$ 3,755,972$ 3,903,867$ 4,348,703
FDIC loss share asset1,399,0981,559,0571,915,128
FDIC true-up payment obligation 111,519 103,189 98,340

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

Net interest income

Net interest margin for the fourth quarter of 2012 increased 4 basis points to 4.41% when compared with the third quarter of 2012. Net interest income reached $350.4 million, an increase of $7.0 million from the third quarter. The main drivers of the improvement in net interest margin are:

  • Increase of $6.4 million in interest income on the covered loan portfolio. The higher yield of the covered loan portfolio was mainly the result of a substantial reduction in expected losses and the resolution of certain commercial loans in excess of their book value.
  • Decrease of approximately $2.1 million, or 3 basis points, in interest expense on deposits, reflecting continuing progress in repricing the deposit base and a decrease in the average balance of deposits, mainly in brokered and non-brokered certificates of deposit.
  • Decrease of approximately $1.8 million, or 24 basis points in interest expense on notes payable, driven by replacing long-term FHLB advances with brokered certificates of deposit and repurchase agreements at a lower cost.
  • Banco Popular de Puerto Rico's (BPPR) net interest margin increased 7 basis points from 5.11% in the third quarter to 5.18% in the fourth quarter. Net interest income amounted to $309.1 million for the quarter ended December 31, 2012, compared with $300.9 million for the previous quarter. The improvement was mainly the result of higher interest income from covered loans and a lower cost of borrowings as mentioned above.
  • Banco Popular North America (BPNA) earned $68.5 million in net interest income for the quarter ended December 31, 2012 compared with $69.6 million in the previous quarter. The decrease in the net interest margin of 6 basis points to 3.51% was mainly caused by a decrease in the yield of commercial and mortgage loans and of investment securities due to prepayments, partially offset by a 12 basis point reduction in the cost of interest-bearing deposits.
Provision for Loan Losses
     
  Quarters endedYears ended
(In thousands) 31-Dec-12 30-Sep-12 31-Dec-1131-Dec-12 31-Dec-11
Provision for loan losses - non-covered loans
BPPR$78,092$69,738$88,128$282,061$341,596
BPNA  8,164   13,851  35,780 52,041  88,489
Total provision for loan losses- non-covered loans  86,256   83,589  123,908 334,102  430,085
Provision (reversal) for loan losses - covered loans  (3,445)  22,619  55,900 74,839  145,635
Total provision for loan losses $82,811  $106,208 $179,808$408,941 $575,720

The provision for loan losses for the fourth quarter of 2012 amounted to $82.8 million, a decrease of $23.4 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 $2.7 million from third quarter 2012.
    • The provision for loan losses for non-covered loans at BPPR increased by $8.4 million from the third quarter of 2012, primarily reflecting higher net charge-offs in the commercial loan portfolio mainly related to one particular relationship.
    • The provision for loan losses at BPNA operations decreased by $5.7 million from the third quarter of 2012, primarily due to continued improvements in credit trends.
  • The provision for loan losses on the covered loan portfolio decreased by $26.1 million from the third 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 $1.6 million for the fourth quarter of 2012, compared with $17.9 million for the previous quarter. The $16.3 million decrease was mostly due to certain commercial and construction loan pools, which reflected lower expected loss estimates for the fourth 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 declined by $9.8 million from the previous quarter, primarily driven by a reduction in the specific reserve of a particular commercial loan relationship.

Non-interest income

Non-interest income increased by $17.3 million versus the third quarter, driven primarily by the following items:

  • A $37.9 million increase in other operating income principally due to $31.6 million of income recorded from the Corporation's interest in EVERTEC during the fourth quarter related to its proportionate share of a tax benefit from a tax grant received by EVERTEC from the Puerto Rico Government.
  • An $11.7 million increase in net gain on sale of loans as a result of higher gains on securitization transactions at BPPR and sales of U.S. commercial loans held-for-sale.
  • Reduction of $5.5 million in adjustments to the indemnity reserves on loans sold, mainly as a result of improvements in delinquency trends of mortgage loans serviced subject to credit recourse as well as a declining portfolio and lower provision in the representations and warranties reserve in the U.S. mainland. The Corporation stopped selling loans subject to credit recourse in 2009.

These increases were partially offset by:

  • An increase of $3.7 million in trading account losses mainly driven by lower gain on sale of trading securities. During the third quarter the Corporation sold approximately $140.7 million in trading mortgage-backed securities which resulted in a gain on sale of approximately $3.4 million, net of hedging costs. Also, during the fourth quarter there were higher unrealized losses on trading mortgage-backed securities due to higher prepayment rates and higher realized and unrealized losses of local municipal bonds due to rating downgrades of municipal agencies in Puerto Rico.
  • An increase of $30.1 million in FDIC loss-share expense, principally caused by higher amortization of the loss-share asset due to lower expected losses, a release of allowance for loan and lease losses during the fourth quarter and higher unfavorable fair value adjustments of $5.3 million in the true-up payment obligation. See additional details about covered portfolio and FDIC indemnity asset in Table O.

Refer to table B for further details.

Operating expenses

Operating expenses increased by $6.4 million versus the third quarter, driven primarily by the following items:

  • An increase of $4.8 million in personnel costs, driven mainly by sales incentives, retail commissions, training expenses and other compensation costs.
  • An increase of $2.5 million in net occupancy expenses related to higher expenses at BPNA for property maintenance and repair and rent and higher real property taxes in the Puerto Rico and U.S. operations.
  • An increase of $4.8 million in professional fees mainly due to appraisal and programming costs, processing fees, and other technology costs related to services from EVERTEC.
  • An increase of $1.9 million in business promotion expenses tied to year-end institutional campaigns in Puerto Rico and higher expenses in customer affinity programs.
  • An increase of $9.0 million in other operating expenses due mainly to higher costs associated with the Westernbank covered loan portfolio, of which 80% are reimbursable by the FDIC, and higher provision for operational losses in the Puerto Rico and US operations. These costs were partially offset by a lower provision for unused commitments at BPPR.

These increases were partially offset by:

  • Lower FDIC deposit insurance expenses of $10.5 million, driven mainly by revisions in the deposit insurance premium calculation and efficiencies achieved from the internal reorganization of Popular Mortgage into BPPR.
  • A $4.8 million decrease in other real estate owned (OREO) expenses, driven mainly by higher gains on sales of commercial properties at both BPPR and BPNA. This decrease was partially offset by an increase in fair value adjustments for commercial properties in BPPR.

Non-personnel credit-related costs, which include collections, appraisals, credit related fees, and OREO expenses, amounted to $14.1 million for the fourth quarter of 2012, compared with $18.1 million for the third quarter of 2012. The decrease was principally due to higher gains on sales of commercial OREOs at both BPPR and BPNA, partially offset by an increase in unfavorable fair value adjustments for commercial properties at BPPR.

Full-time equivalent employees ("FTEs") were 8,072 as of December 31, 2012, compared with 8,074 as of September 30, 2012 and 8,329 as of December 31, 2011. The decline in FTEs is largely due to the retirement window for qualifying employees that was announced in October 2011 and implemented during the first quarter of 2012. When compared with the fourth quarter of 2011, salary expenses are down $2.2 million, or approximately $8.8 million on an annualized basis.

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

Income taxes

Income tax expense amounted to $19.9 million for the quarter ended December 31, 2012, compared with an income tax expense of $15.4 million for the third quarter of 2012.

Credit Quality:

Non-Performing Assets
       
(In thousands) 31-Dec-12 30-Sep-12 31-Dec-11
Total non-performing loans held-in-portfolio, excluding covered loans $1,425,133 $1,550,500 $1,737,850
Non-performing loans held-for-sale96,320108,886262,302
Other real estate owned ("OREO"), excluding covered OREO  266,844   252,024   172,497 
Total non-performing assets, excluding covered assets1,788,2971,911,4102,172,649
Covered loans and OREO  213,469   208,235   192,771 
Total non-performing assets $2,001,766  $2,119,645  $2,365,420 
Net charge-offs for the quarter (excluding covered loans) $100,854  $95,791  $126,045 
 
Ratios (excluding covered loans):      
Non-performing loans held-in-portfolio to loans held-in-portfolio6.79%7.47%8.44%
Allowance for loan losses to loans held-in-portfolio2.963.073.35
Allowance for loan losses to non-performing loans, excluding loans held-for-sale  43.62   41.04   39.73 

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

  • Non-performing loans (NPL) held-in-portfolio declined by $125.4 million, or 8%, from the third quarter of 2012 and were 39% lower than peak levels in the third quarter of 2010. The reduction in NPLs was principally attributed to a decrease of $90.0 million in Puerto Rico commercial NPLs.
  • Inflows of commercial, construction and legacy non-performing loans held-in-portfolio decreased by $72.9 million, or 51%, from the third quarter as underlying credit performance continues to improve due to successful efforts in managing early delinquency and greater economic stability.
  • OREO, excluding covered OREO, increased by $14.8 million from the third quarter, as a result of continuing efforts to aggressively resolve non-performing loans.
  • Net charge-offs for the fourth quarter were $100.9 million, compared with $95.8 million for the previous quarter. The increase was principally driven by higher commercial and mortgage net charge-offs of $4.5 million and $4.9 million at BPPR, respectively, offset in part by lower losses in BPNA loan portfolios. Refer to Table J for further information on net charge-offs and related ratios.
  • The ratio of allowance for loan losses to loans held-in-portfolio, excluding covered loans, stood at 2.96% as of December 31, 2012, compared with 3.07% as of September 30, 2012. The general and specific reserves related to non-covered loans totaled $510.6 million and $111.1 million at quarter-end, compared with $528.9 million and $107.4 million, respectively, as of September 30, 2012. The decrease in the allowance for loan losses is driven by the improvement in credit quality and stability in net charge-offs.
Credit Quality by Segment
 
(In thousands)Quarters ended
BPPR 31-Dec-12 30-Sep-12 31-Dec-11
Provision for loan losses $78,092 $69,738 $88,128
Net charge-offs78,05071,04178,309
Total non-performing loans held-in-portfolio,
excluding covered loans1,191,9821,284,0261,371,242
Allowance/ non-covered loans held-in-portfolio  2.92%  2.96%  3.06%

 

Quarters ended
BPNA 31-Dec-12 30-Sep-12 31-Dec-11
Provision for loan losses $8,164 $13,851 $35,780
Net charge-offs22,80424,75047,736
Total non-performing loans held-in-portfolio,
excluding covered loans233,151266,474366,608
Allowance/ non-covered loans held-in-portfolio  3.07%  3.35%  4.11%

BPPR Segment

  • The provision for loan losses for the non-covered loan portfolio increased by $8.4 million from the third quarter 2012, mainly due to higher net charge-offs in the commercial loan portfolio.
  • Net charge-offs, excluding covered loans, increased by $7.0 million from the third quarter 2012, principally due to increases in commercial loans net charge-offs of $4.5 million, mainly due to one particular relationship, and $4.9 million increase in mortgage loans net charge-offs.
  • Total non-performing loans held in portfolio, excluding covered loans, decreased by $92.0 million from the third quarter 2012. This decrease was mainly driven by a decline in commercial NPLs of $90.0 million. Continued aggressive collection and loss-mitigation efforts have led to lower inflows of non-performing loans and higher volume of loans returning to accrual status after assessing borrower's willingness and capacity of debt repayment.
  • Inflows of commercial non-performing loans held-in-portfolio decreased by $55.3 million, or 58%, from the third quarter reflecting stronger underlying credit performance.
  • The allowance for loan losses for non-covered loans held-in-portfolio remained unchanged at $445.3 million from the third quarter of 2012. The allowance for loan losses as a percentage of non-covered loans held in portfolio decreased to 2.92% from 2.96% in third quarter 2012.

BPNA Segment

  • The provision for loan losses in the third quarter of 2012 decreased by $5.7 million. The allowance for loan losses as a percentage of loans held in portfolio decreased to 3.07% from 3.35% in the third quarter 2012. Sustained improvements in credit quality trends drove the reduction in both the provision and the allowan
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