Popular, Inc. Announces First Quarter Financial Results

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Popular, Inc. Announces First Quarter Financial Results

  • Reports net loss of $ 120.3 million for the quarter ended March 31, 2013, reflecting a $180.6 million after-tax loss on bulk asset sale and valuation adjustments
  • Adjusted net income of $60.3 million, excluding the effect of asset sale and valuation adjustments
  • Completed sale of assets with book value of $509.0 million, of which $500.6 million were in non-performing status
  • Significant progress in credit quality (metrics exclude covered loans):

Including the impact of the bulk sale:

  • Non-performing assets declined by $565.2 million, or 32%, quarter over quarter;
  • Non-performing loans held-in-portfolio declined by $374.5 million or 26% from Q4 2012, and decreased by 55% from Q3 2010 peak to reach lowest level since 2008;
  • Inflows of non-performing loans held-in-portfolio, excluding consumer loans, declined by $60.3 million, or 25%, from Q4 2012;
  • OREO decreased by $112.1 million, or 42%, quarter over quarter.

Excluding the impact of the bulk sale:

  • Non-performing assets declined by $64.6 million, or 4%, quarter over quarter;
  • Non-performing loans held-in-portfolio declined by $41.8 million from Q4 2012;
  • Net charge-offs decreased by $19.5 million from Q4 2012; NCO ratio decreased to 1.55%, reaching lowest level since 2008.
  • Net interest margin of 4.39% in Q1 2013, vs. 4.41% in Q4 2012
  • Common Equity Tier 1 ratio of 12.36% and Tangible Book Value per Share of $31.21 at March 31, 2013; capital exceeds well-capitalized threshold by $1.7 billion

SAN JUAN, Puerto Rico--(BUSINESS WIRE)-- Popular, Inc. (the "Corporation" or "Popular") (NAS: BPOP) reported a net loss of $120.3 million for the quarter ended March 31, 2013, compared to net income of $83.9 million for the quarter ended December 31, 2012.

Mr. Richard L. Carrión, Chairman of the Board and Chief Executive Officer, said: "We delivered a good underlying performance in the quarter and two important transactions were completed in recent weeks. The non-performing asset sale, the successful IPO of EVERTEC and the continuing organic improvements in our credit quality build on our efforts to derisk our balance sheet, build capital and continue to drive value for our shareholders."

Earnings Highlights
  
(Unaudited)Quarters ended
(Dollars in thousands, except per share information)31-Mar-13 31-Dec-12 31-Mar-12
Net interest income$345,347$350,411$337,582
Provision for loan losses - non-covered loans206,30086,25682,514
Provision for loan losses - covered loans [1] 17,556   (3,445)  18,209 
Net interest income after provision for loan losses121,491267,600236,859
FDIC loss share expense(26,266)(36,824)(15,255)
Other non-interest income [2]43,841169,825139,163
Operating expenses 316,250   296,747   296,167 
(Loss) income before income tax(177,184)103,85464,600
Income tax (benefit) expense (56,877)  19,914   16,192 
Net (loss) income$(120,307) $83,940  $48,408 
Net (loss) income applicable to common stock$(121,237) $83,009  $47,477 
Net (loss) income per common share - basic and diluted [3]$(1.18) $0.81  $0.46 
 
[1] Covered loans represent loans acquired in the Westernbank FDIC-assisted transaction that are covered under FDIC loss sharing agreements.
[2] Other non-interest income for the fourth quarter of 2012 includes $31.6 million related to the Corporation's proportionate share of a tax benefit from a tax grant received by EVERTEC from the Puerto Rico Government.
[3] Per share data has been adjusted to retroactively reflect the 1-for-10 reverse stock split effected on May 29, 2012.

Recent significant events

  • On April 12, 2013 EVERTEC, Inc. ("EVERTEC" or the "Company") completed an initial public offering ("IPO") of 25.3 million shares, raising approximately $505.3 million. In connection with the IPO, EVERTEC sold 6.3 million of newly issued common stock in the offering and Apollo Global Management LLC ("Apollo") and Popular respectively sold 10.2 million and 8.8 million shares of the Company retaining a stake of 33.6% and 33.5%, respectively. If the underwriters exercise their overallotment option in full, Popular and Apollo would own 33.5% and 28.8% of the outstanding common stock of EVERTEC, respectively.

Following the IPO, EVERTEC is refinancing all of its outstanding debt. As part of this refinancing, Popular will receive payment in full for its portion of the EVERTEC debt held by it. As a result of these transactions, Popular will recognize an after tax gain of approximately $169.4 million during the second quarter of 2013, comprised of the following:

  • $130.4 million gain on the sale of its previously held EVERTEC common stock
  • $45.9 million gain on its investment in EVERTEC resulting from the issuance of the new common stock by EVERTEC
  • An estimated $4.2 million gain from the repayment of the debt
  • An estimated $5.7 million from the accelerated payment of contractual consulting fees
  • A loss of approximately $16.8 million from Popular's proportionate share of EVERTEC's debt prepayment penalty, consulting fees and other related costs

After the transaction, Popular's investment in EVERTEC will have a book value of $74.9 million. Total cash proceeds received by Popular from the sale of the shares and repayment of the debt will be $254.3 million.

  • On March 25, 2013, Banco Popular de Puerto Rico ("BPPR") completed a sale of assets with a book value of $509.0 million, of which $500.6 million were in non-performing status, comprised of commercial and construction loans, and commercial and single-family real estate owned, with a combined unpaid principal balance on loans and appraised value of other real estate owned of approximately $987 million to a newly created joint venture. BPPR retained a 24.9% equity interest in the joint venture. BPPR provided seller financing for approximately $182.4 million to fund a portion of the purchase price and certain closing costs. In addition, BPPR provided financing of $65.0 million to cover cost-to-complete amounts and expenses of certain assets, as well as certain expenses of the purchasing entity. This transaction resulted in an after tax loss of $174.4 million.

The following table presents the results of operations for the quarter ended March 31, 2013, excluding the impact of the sale of non-performing assets and valuation adjustments.

 Quarters ended
(Unaudited)31-Mar-13 31-Dec-12 (US GAAP) Variance
(In thousands)

Actual Results
(US GAAP)

Impact of Sale of NPAsAdjusted Results (Non GAAP)  
Net interest income$345,347$-$345,347$350,411$(5,064)
Provision for loan losses - non-covered loans206,300148,82357,47786,256(28,779)
Provision for loan losses - covered loans [1] 17,556  -  17,556   (3,445)  21,001 
Net interest income after provision for loan losses121,491(148,823)270,314267,6002,714
FDIC loss share expense(26,266)-(26,266)(36,824)10,558
Net (loss) gain on sale of loans, including valuation adjustments on loans held-for-sale [2](48,959)(61,387)12,42830,196(17,768)
Other non-interest income [3]92,800(10,700)103,500139,629(36,129)
OREO expense46,74137,0469,6951,0798,616
Other operating expenses 269,509  5  269,504   295,668   (26,164)
(Loss) income before income tax(177,184)(257,961)80,777103,854(23,077)
Income tax (benefit) expense (56,877) (77,388) 20,511   19,914   597 
Net (loss) income$(120,307)$(180,573)$60,266  $83,940  $(23,674)
[1] Covered loans represent loans acquired in the Westernbank FDIC-assisted transaction that are covered under FDIC loss sharing agreements.
[2] Net (loss) gain on sale of loans, includes $8.8 million of negative valuation adjustments on loans held for sale which were transferred to held-in-portfolio subsequent to the sale.
[3] Other non-interest income for the fourth quarter of 2012 includes $31.6 million related to the Corporation's proportionate share of a tax benefit from a tax grant received by EVERTEC from the Puerto Rico Government.
Financial Impact of FDIC-Assisted Transaction  
(Unaudited)     
(In thousands)31-Mar-13 31-Dec-12 31-Mar-12
 

Income Statement

Interest income on covered loans$72,184$76,998$74,764
Total FDIC loss share (expense)(26,266)(36,824)(15,255)
Other non-interest income242281310
Provision for loan losses 17,556   (3,445)  18,209 
Total revenues less provision for loan losses$28,604  $43,900  $41,610 
 

Balance Sheet

Loans covered under loss-sharing agreements with FDIC$3,362,446$3,755,972$4,221,788
FDIC loss share asset1,380,5921,399,0981,880,357
FDIC true-up payment obligation 118,294   111,519   99,962 

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

Net interest income

Net interest margin for the first quarter of 2013 decreased 2 basis points to 4.39% when compared with the fourth quarter of 2012. Net interest income reached $345.3 million, a decrease of $5.0 million from the previous quarter. The main drivers of the decrease in net interest margin are:

  • Nearly all of the nominal decrease in net interest income was due to the impact of having two fewer days in the first quarter of 2013 than in the fourth quarter of 2012 and the proportion of loans with interest accrued on actual/actual basis.
  • Decrease of $3.5 million, or 2 basis points, in interest income on non-covered loans, primarily commercial loans in Puerto Rico, mainly due to fewer days.
  • Decrease of $4.8 million in interest income on the covered loan portfolio. During the fourth quarter of 2012, the covered portfolio reflected higher nominal income mainly from the resolution of certain commercial loans in excess of their book value during that quarter. The yield on the covered commercial loan portfolio for the first quarter of 2013 was 8.31%, or 30 basis points higher than the fourth quarter of 2012, mainly as a result of higher expected cash flows which are reflected in the accretable yield and recognized over the life of the loans.
  • Decrease of approximately $2.5 million, or 4 basis points, in interest expense on deposits, $0.9 million of which was due to fewer days in the first quarter of 2013 with the remaining improvement related to continuing progress in repricing the deposit base, which partially offset the decrease in interest income.
  • Banco Popular de Puerto Rico's (BPPR) net interest margin remained stable from the previous quarter at 5.18%. Net interest income amounted to $304.9 million for the quarter ended March 31, 2013, compared with $309.1 million for the previous quarter. The decrease was mainly related to the impact of fewer days on the commercial loans and the previously discussed effect of the covered loan portfolio. This decrease was partially offset by a 5 basis points reduction in the cost of interest-bearing deposits.
  • Banco Popular North America (BPNA), our U.S. banking subsidiary that does business as Popular Community Bank, earned $68.0 million in net interest income for the quarter ended March 31, 2013, compared with $68.5 million in the previous quarter. The decrease in the net interest margin of 3 basis points to 3.48% was mainly caused by a decrease in the yield of commercial, mortgage and consumer loans, and of investment securities. This decrease was partially offset by a 2 basis points reduction in the cost of interest-bearing deposits.
Provision for Loan Losses   
 
  Quarters ended
(In thousands) 31-Mar-13 31-Dec-12 31-Mar-12
Provision for loan losses - non-covered loans:
BPPR$204,289$78,092$67,788
BPNA  2,011  8,164   14,726
Total provision for loan losses - non-covered loans  206,300  86,256   82,514
Provision (reversal) for loan losses - covered loans  17,556  (3,445)  18,209
Total provision for loan losses $223,856 $82,811  $100,723

The provision for loan losses for the first quarter of 2013 amounted to $223.9 million, an increase of $141.0 million versus the previous quarter, mainly related to the $148.8 million impact of the bulk loan sale. Excluding the impact of the sale, the provision for the first quarter of 2013 was $75.1 million, declining by $7.7 million from the fourth quarter of 2012.

  • The provision for loan losses for the non-covered loan portfolio increased by $120.0 million from the fourth quarter of 2012, mainly due to the impact of the sale. Excluding the impact of the sale, the provision for the first quarter of 2013 was $57.5 million, decreasing by $28.8 million, reflecting improvements in credit quality, as underlying losses and NPLs continue to trend downwards at BPPR and BPNA.
  • The provision for loan losses for non-covered loans at BPPR decreased by $22.6 million from the fourth quarter of 2012, excluding the impact of the sale.
  • The provision for loan losses at BPNA decreased by $6.2 million from the fourth quarter of 2012.

  • The provision for loan losses on the covered loan portfolio increased by $21.0 million from the previous quarter.
  • The provision for loan losses for loans accounted under ASC 310-30 increased by $12.5 million from the fourth quarter of 2012, mostly due to certain commercial and construction loan pools, which reflected higher expected loss estimates for the first quarter of 2013. 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 increased by $8.5 million from the previous quarter, driven by a provision reversal of $5.0 million in the fourth quarter of 2012, which was primarily due to a reduction in the specific reserve of a particular commercial loan relationship.

Non-interest income

Non-interest income decreased by $115.4 million compared with the fourth quarter of 2012, driven primarily by the following items:

  • A $79.2 million decrease in net gain on sale of loans. This decrease was principally driven by the loss of $61.4 million related to the bulk sale of non-performing commercial and construction loans, which includes unfavorable valuation adjustment on loans held-for-sale transferred to held-in-portfolio of approximately $8.8 million. Excluding the effect of the NPA sale, the gain on sale of loans declined by $17.8 million due to a securitization and higher loan sale activity recorded by BPPR's mortgage division in the fourth quarter of 2012.
  • An increase of $12.9 million in adjustments to the indemnity reserves on loans sold, mainly as a result of $10.7 million recorded in connection with the bulk sale of non-performing loans.
  • A $35.6 million decrease in other operating income, principally due to $31.6 million of income recorded during the fourth quarter of 2012 related to the Corporation's proportionate share of a tax benefit from a tax grant received by EVERTEC from the Puerto Rico Government.
  • A decrease of $4.9 million in other service fees, mainly related to contingent insurance commissions which are typically recognized during the fourth quarter.

These increases were partially offset by:

  • A decrease of $10.6 million in FDIC loss-share expense mainly due to higher mirror accounting on credit impairment losses. 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 $19.5 million versus the fourth quarter of 2012, driven primarily by:

  • An increase of $45.7 million in other real estate owned (OREO) expenses, due mainly to the loss of $37.0 million incurred as a result of the bulk sale of commercial and single-family real estate owned and higher gain on sales of commercial OREOs at both BPPR and BPNA, which offset OREO expenses during the fourth quarter of 2012.

This increase was partially offset by:

  • A decrease of $6.1 million in professional fees mainly due to lower attorney collection fees at BPPR and lower technology service fees.
  • Lower FDIC deposit insurance expenses of $4.4 million, driven mainly by an incremental assessment credit of $6.2 million recognized during the first quarter of 2013 as a result of revisions in the deposit-insurance premium calculation and efficiencies achieved from the internal reorganization of Popular Mortgage into BPPR during the fourth quarter of 2012.
  • A decrease of $9.3 million in other operating expenses due largely to lower provision for operational losses by $4.5 million, both in BPPR and BPNA, and lower other general operating expenses.

Excluding the impact of the bulk sale, operating expenses declined by $17.5 million.

Non-personnel credit-related costs, which include collections, appraisals, credit related fees, and OREO expenses, but excluding the impact of the transaction, amounted to $20.3 million for the first quarter of 2013, compared with $14.1 million for the fourth quarter of 2012. The increase was principally due to higher gain on sales of commercial OREOs at both BPPR and BPNA, which offset OREO expenses during the fourth quarter of 2012.

Full-time equivalent employees ("FTEs") were 8,144 as of March 31, 2013, compared with 8,072 as of December 31, 2012, and 8,074 as of March 31, 2012. The increase of 72 FTEs from the fourth quarter of 2012, which includes some temporary personnel, is related to the addition of resources in the retail banking and individual credit divisions to supplement the demand in the mortgage business, as well as support for certain of the Corporation's initiatives.

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

Income taxes

For the quarter ended March 31, 2013, the Corporation recorded an income tax benefit of $56.9 million, reflecting the net operating loss generated by the sale of non-performing assets, compared with an income tax expense of $19.9 million for the fourth quarter of 2012.

Credit Quality

The following table presents non-performing assets information and the effect that the bulk sale had on these balances.

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Non-Performing Assets
(Unaudited)     
31-Mar-1231-Dec-1231-Mar-13
(In thousands)

Net inflows/
(outflows)

Sale of NPAsTotal
Total non-performing loans held-in-portfolio, excluding covered loans[1]$1,681,803$1,425,133$(41,773)$(332,752)$1,050,608
Non-performing loans held-for-sale232,29396,320(19,129)(59,449)17,742
Other real estate owned ("OREO"), excluding covered OREO 193,768  266,844  (3,709) (108,436) 154,699 
Total non-performing assets, excluding covered assets2,107,8641,788,297(64,610)(500,637)1,223,049
Covered loans and OREO 203,254  213,469