Popular, Inc. Announces Fourth Quarter 2020 Financial Results

Popular, Inc. (the “Corporation,” “Popular,” “we,” “us,” “our”) (NASDAQ:BPOP) reported net income of $176.3 million for the quarter ended December 31, 2020, compared to net income of $168.4 million for the quarter ended September 30, 2020.

Ignacio Alvarez, President and Chief Executive Officer, said: “2020 was a challenging year, beginning with a series of devastating earthquakes in Southwest Puerto Rico and followed by the unprecedented global pandemic that significantly impacted our lives and economic activity. Notwithstanding these challenges, we were able to generate $507 million in net income, even after recognizing $293 million in provision for credit losses, largely driven by the impact of the pandemic. These results reflect the strength of our franchise and diversified sources of revenue.

We closed 2020 on a high note, generating net income of $176 million in the fourth quarter, one of our best quarters ever, mainly due to higher net interest income and control of expenses. We ended the year with robust levels of capital and liquidity which will allow us to continue to serve our clients and return capital to shareholders.

I am extremely proud of what we have been able to accomplish in this difficult environment. I am especially proud of our employees for their commitment to serve our customers, whether working on the front lines or adapting quickly to working from home. We are blessed to be part of a team of dedicated colleagues who have met these challenges with courage and resilience. As we continue to witness advances in the medical field, we look forward to 2021 with a renewed sense of commitment and optimism.”

Significant Events

Financial Highlights

For the fourth quarter of 2020, the Corporation recorded net income of $176.3 million, compared to a net income of $168.4 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 it operates and on our financial results.

Net interest income for the quarter increased by $10.6 million, although net interest margin declined by 2 basis points to 3.04% due to an increase in lower yielding assets. The net interest margin continues to reflect the increase in investments in overnight Fed Funds, U.S. Treasury and U.S. Agency debt securities as well as 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.

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 initially imposed in response to the pandemic 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 thereafter gradually relaxed throughout 2020 to allow for the gradual reopening of the economy, certain restrictions remained in place or were reinstated during the fourth quarter of 2020 which resulted in many businesses not being able to operate at their full capacity. The Corporation’s results for the third and fourth quarters 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 it elected to waive in connection with such financial relief programs and resumed delinquent loan collection efforts. During 2020, the Corporation had granted loan payment moratoriums to 127,117 eligible retail customers with an aggregate book value of $4.4 billion, and to 5,099 eligible commercial clients with an aggregate book value of $3.9 billion as detailed below. These include loan payment moratoriums of government guaranteed loans that qualified for disaster relief programs as well as other available alternatives. While 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 December 31, 2020, 127,857 loans with an aggregate book value of $7.8 billion had already completed their payment moratorium period, while 4,359 loans with an aggregate book value of $0.5 billion remained under the moratorium. As of quarter-end, 97% of COVID-19 payment deferrals had expired. After excluding government guaranteed loans, 94% of remaining loans were current on their payments as of December 31, 2020. Loans considered current exclude those loans for which the COVID-19 related modification has expired but have subsequently been subject to other loss mitigation alternatives. 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.

Popular Bank’s New York Branches Realignment

As previously disclosed, 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 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 in its New York Metro region its largest regional retail network in the mainland US, with twenty-seven (27) branches located throughout Brooklyn, Bronx, Manhattan and Queens, as well as in northern New Jersey.

During the fourth quarter of 2020, the Corporation recorded a total pre-tax charge of approximately $23.2 million related to the branch realignment. This aggregate pre-tax charge included approximately $2.1 million associated with severance and related benefit costs for the 83 impacted employees and charges of approximately $21.1 million related to the abandonment of real property leases, including the impairment of right-of-use assets. The Corporation expects to incur an additional $2.0 million in expenses during 2021 related to this initiative and anticipates annual operating expense savings of approximately $12.3 million as a result of this strategic realignment.

Net interest income on a taxable equivalent basis – Non-GAAP financial measure

Net interest income for the quarter ended December 31, 2020 was $471.6 million compared to $461.0 million in the previous quarter, an increase of $10.6 million. Net interest income, on a taxable equivalent basis, for the fourth quarter of 2020 was $520.7 million, an increase of $13.8 million when compared to $506.9 million in the third quarter of 2020.

The net interest margin decreased 2 basis points to 3.04% in the fourth quarter of 2020, compared to 3.06% 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, partially offset by the decrease in deposit costs. On a taxable equivalent basis, the net interest margin was 3.35 % compared to 3.37% in the third quarter of 2020, a decrease of 2 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 $9.7 million as maturities from short-term U.S. Treasury securities were reinvested in higher yielding mortgage-backed securities. Investment securities also reflected an increase of $1.2 billion in average volume resulting from the increase in average deposits of $1.7 billion. The change in the composition of the investment portfolio resulted in a higher yield of 7 basis points;
  
  
• interest income from loans remained flat quarter over quarter but reflected the variances in the respective portfolios, as follows:
  
  
  • The repurchase of $808 million in mortgage loans at the end of the third quarter of 2020 was the main driver of the increase in mortgage loan interest income of $2.8 million and of the decrease of 38 basis points in the portfolio yield, as the yield on these loans is approximately 3.53%;
    
    
  • consumer loans, including credit cards decreased $116 million in average or $3.6 million in interest income; and
    
    
  • the combined balance of auto and lease financing increased $172 million but resulted in a lower yield driven by a lower discount amortization of the portfolio acquired from Wells Fargo in 2018 and a higher amortization of deferred loan origination fees.
    

The above changes in portfolio composition resulted in a reduction of the total loan yield of 16 basis points when compared to the previous quarter. The Corporation recognized income of $11.5 million related to loans issued under the SBA PPP program, compared to $10.3 million in the previous quarter. These loans carry a yield of approximately 3.23%, including the amortization of fees received under the program, that at December 31, 2020 had $33.1 million in unamortized balance; and

• lower interest expense on deposits by $4.2 million, or 4 basis points, due to lower interest cost, mainly at PB.

Net interest income for the Banco Popular de Puerto Rico (“BPPR”) segment amounted to $402.1 million for the quarter ended December 31, 2020, compared to $394.7 million in the previous quarter. Net interest margin for the fourth quarter of 2020 was 3.07%, a decrease of 6 basis points when compared to 3.13% for the previous quarter. As discussed above, the net interest margin was impacted by higher average balances of Fed Funds and other investment securities, which carry a low yield. The cost of interest-bearing deposits for the quarter was 0.22%, compared to 0.24% for the previous quarter. Total cost of deposits for the quarter was 0.17%, compared to 0.18% reported in the third quarter of 2020.

Net interest income for PB was $79.6 million for the quarter ended December 31, 2020, compared to $76.5 million during the previous quarter. The increase of $3.1 million in net interest income was primarily due to lower deposit costs. Net interest margin for the quarter was 3.35%, an increase of 17 basis points when compared to 3.18% reported in the third quarter of 2020, mainly due to a decrease in deposit costs. The cost of interest-bearing deposits was 0.79%, compared to 0.98% in the previous quarter. Total cost of deposits for the quarter, including demand deposits, was 0.65%, compared to 0.81% reported in the third quarter of 2020.

Non-interest income

Non-interest income increased by $16.1 million to $144.9 million for the quarter ended December 31, 2020, compared to $128.8 million for the quarter ended September 30, 2020. The increase in non-interest income was primarily driven by:

• higher service charges on deposit accounts by $2.3 million, mainly in the BPPR segment, due to higher non-sufficient funds and ACH return fees;

• higher other service fees by $1.3 million, principally at the BPPR segment, due to higher credit card fees by $0.9 million, mainly in interchange income resulting from higher transactional volumes, and higher trust fees by $0.6 million;

• higher income from mortgage banking activities by $19.3 million mainly due to the impact during the third quarter of 2020 of the bulk loan repurchase completed by BPPR from its GNMA, FNMA and FHLMC servicing portfolio which resulted in a $8.8 million negative fair value adjustment to its mortgage servicing rights (“MSRs”), a $10.5 million loss in interest advances related to GNMA loans, offset by $3.4 million in fees recognized in connection with the bulk loan repurchase; and

• a favorable variance in net gain (loss) on sale of loans, including valuation adjustments, of $2.5 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;

partially offset by:

• a decrease in net gain, including impairment, on equity securities of $3.7 million mainly related to a $4.1 million gain on sale of certain equity securities at PB during the third quarter of 2020;

• an unfavorable variance in adjustments to indemnity reserves on previously sold loans of $2.0 million in part due to a recourse reserve release of $5.1 million related to the bulk loan repurchase from FNMA and FHLMC during the third quarter of 2020; and

• lower other operating income by $3.8 million mainly due to lower net earnings from the combined portfolio of investments under the equity method by $4.2 million.

Refer to Table B for further details.

Operating expenses

Operating expenses for the fourth quarter of 2020 totaled $375.9 million, an increase of $14.9 million from the third quarter of 2020. The quarter reflected $23.2 million in expenses related to PB’s branch optimization initiative. Additionally, during the quarter the Corporation reclassified $10.0 million of the provision expense for unfunded loan commitments to the provision for credit losses caption. Excluding these two items, the net increase would have been $1.7 million. The increase in operating expenses was driven primarily by:

• Higher personnel cost by $6.3 million due to $2.1 million in severance expense related to PB’s branch initiative, higher pension and postretirement expense by $1.8 million related mainly to higher retirement savings plan expense due to an additional by-weekly payroll, and seasonal compensation in BPPR and higher incentive compensation accrual of $2.5 million;

• higher net occupancy expense by $16.9 million due to $19.0 million in costs related to the termination of real property leases associated with PB’s New York branch optimization initiative, including the impairment of the right-of-use assets;

• higher professional fees by $7.6 million mainly due to higher advisory expenses by $5.0 million related to corporate initiatives and higher processing and technology services by $1.6 million; and

• higher business promotion expenses by $1.8 million due to higher seasonal advertising expense by $2.2 million.

Partially offset by:

• Lower other real estate owned expenses by $2.4 million due to higher gain on sale of foreclosed mortgage properties; and

• lower other operating expenses by $15.6 million mainly due to the reclassification of $10.0 million in provision for unfunded commitments from the other expenses line to the provision for credit losses caption. Additionally, operational losses were lower by $3.8 million due to lower legal reserves partially offset by $2.1 million in impairment losses on leasehold improvements associated with PB’s New York branch optimization initiative.

Full-time equivalent employees were 8,522 as of December 31, 2020, compared to 8,514 as of September 30, 2020.

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

Income taxes

For the quarter ended December 31, 2020, the Corporation recorded an income tax expense of $43.0 million, compared to $41.2 million for the previous quarter. The increase in income tax expense was mainly attributable to higher income before tax during the fourth quarter of 2020. The effective tax rate (“ETR”) for the fourth quarter of 2020 was of 20%, flat when compared to the previous quarter. The ETR of the Corporation is impacted by the composition and source of its taxable income.

Credit Quality

Overall, the Corporation’s credit quality remained stable during the fourth quarter of 2020. The financial relief granted to eligible borrowers in response to the COVID-19 pandemic, comprised mainly of payment deferrals of up to six months, largely ended during the third quarter of 2020. Management continues to closely follow macroeconomic conditions and although the outlook indicates improvements, the full effects of the pandemic and the pace of the recovery remains uncertain. The improvement over the last few years in the risk profile of the Corporation’s loan portfolios positions Popular to operate successfully under the ongoing challenging environment. We 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 Popular operates and how delinquencies and NCOs evolve.

The following presents credit quality results for the fourth quarter of 2020:

• At December 31, 2020, total non-performing loans held-in-portfolio increased by $3.4 million from September 30, 2020. BPPR’s NPLs increased by $6.7 million, driven by higher mortgage NPLs by $44.3 million, in part offset by a decrease of $37.9 million in the commercial NPLs. The increase in mortgage NPLs is due to the delinquency progression after the expiration of the payment moratorium. Excluding the increase of $133 million in NPLs related to the adoption of CECL related to purchase credit deteriorated loans, NPLs have decreased by $2.6 million from December 31, 2019, before the impact of the COVID-19 pandemic. Excluding government guaranteed loans, 94% of the COVID-19 residential loans deferrals remain current. The decrease in commercial NPLs was mostly related to impairment charge-offs from previously reserved collateral dependent loans. PB’s NPLs decreased by $3.3 million due to a previously reserved construction loan that was partially charged-off during the quarter. At December 31, 2020, the ratio of NPLs to total loans held-in-portfolio remained flat at 2.5% when compared to the third quarter of 2020.
• Inflows of NPLs held-in-portfolio, excluding consumer loans, increased by $1.7 million quarter-over-quarter. In BPPR, total inflows increased by $18.6 million driven by a mortgage inflow increase of $48.9 million, due to delinquency progression at the expiration of the moratorium period. The NPL inflows at PB decreased by $16.9 million mostly due to lower commercial inflows by $12.4 million.
• NCOs increased by $25.2 million from the third quarter of 2020. BPPR ‘s NCOs increased by $27.4 million, primarily driven by higher commercial NCOs by $19.1 million, mostly related to previously reserved commercial loans. Consumer and mortgage loan NCOs increased by $4.8 million and $2.6 million, respectively, during the fourth quarter of 2020. This quarter, the Corporation’s ratio of annualized net charge-offs to average loans held-in-portfolio was 0.58%, compared to 0.24% in the third quarter of 2020. Refer to Table M for further information on net charge-offs and related ratios.
• At December 31, 2020, the allowance for credit losses (“ACL”) reflected a decrease of $29.6 million from the third quarter of 2020 to $896.3 million. The ACL incorporates an updated economic outlook based on Moody’s Analytics forecasts for the United States and Puerto Rico. The updated economic outlook is more favorable than previous forecasts. This improvement prompted decreases in reserve levels that were partially offset with qualitative reserves aimed at addressing specific risks. Higher net charge-offs during the quarter also contributed to the reduction in ACL. The allowance for the BPPR and PB segments each decreased by $14.8 million, mostly concentrated in the consumer portfolios influenced by the improvements in the macroeconomic scenarios and lower volumes. The ratio of the allowance for credit losses to loans held-in-portfolio was 3.05% in the fourth quarter of 2020, compared to 3.15% in the previous quarter. The ratio of the allowance for credit losses to NPLs held-in-portfolio stood at 121.5%, compared to 126.1% in the previous quarter.
• Given that any one economic outlook is inherently uncertain, the Corporation leverages multiple scenarios to estimate its ACL. The ACL is estimated by weighting the outputs of Moody’s Analytics’ S1 (optimistic), Baseline, and S3 (pessimistic) scenarios. Among the three scenarios used to estimate the ACL, the Baseline is assigned the highest probability, followed by the S3 scenario given the uncertainties in the economic outlook and downside risk. The current baseline scenario shows improvement in both 2021 GDP growth and unemployment when compared to previous estimates. The 2021 forecasted GDP growth is now 4.1% for U.S. and mid 2% for PR, with higher growth in 2022. This compares favorably with the previous 2021 forecast of 3.5% for U.S. and 2.1% for PR. The US and PR forecasted unemployment rate average for 2021 is now closer to 7% and 8%, respectively. This is an improvement over the previous estimates of 8.4% for the U.S. and 11.3% for PR.
• The provision for credit losses for the loans portfolios for the fourth quarter of 2020 decreased by $8.7 million from the prior quarter, mostly due to the improvements in the macroeconomic scenarios. The provision for the BPPR segment increased by $17.1 million, due to higher NCOs during the quarter, while the provision for the PB segment decreased by $25.7 million. The provision to net charge-offs ratio was 25.6% in the fourth quarter of 2020, compared to 115.4% in the previous quarter.
• During the quarter the Corporation reclassified $10.0 million of the expense for unfunded loan commitments from other operating expenses to the provision for credit loss caption. During the fourth quarter of 2020, we also recognized an additional expense of $2.6 million related to the unfunded loan commitments reserve, compared to $6.6 million during the previous quarter. Additionally, during the fourth quarter of 2020 we recorded a reduction to the reserve for credit losses in our investment portfolio of $2.2 million, compared to $0.3 million in the third quarter of 2020. The provision for unfunded loan commitments, provision for credit losses on our loan and lease portfolios and provision for credit losses on our investment portfolio are aggregated and presented in the provision for credit losses caption in our Statement of Operations.

Total assets increased by $15.6 million from the third quarter of 2020, driven by:

• an increase of $383.3 million 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;

partially offset by:

• a decrease of $293.2 million in cash and money market investments, mainly due to purchases of debt-securities available-for-sale; and

• a decrease of $79.7 million in other assets.

Total liabilities decreased by $101.0 million from the third quarter of 2020, mainly due to:

• a decrease of $884.2 million in other liabilities mainly due to a decrease of $764.2 million in unsettled purchases of debt securities and a reduction in the liability for GNMA loans sold with a repurchase option of $104.2 million; and

• a decrease in other short-term borrowings by $100.0 million due to maturities of FHLB advances at PB;

partially offset by:

• an increase of $844.4 million in deposits, of which $494 million are related to Puerto Rico public sector deposits and $534 million are related to retail and commercial demand and savings accounts at BPPR.

Stockholders’ equity increased by approximately $116.6 million from the third quarter of 2020, principally due to net income for the quarter of $176.3 million, partially offset by declared dividends of $33.7 million on common stock, $0.4 million in dividends on preferred stock and lower unrealized gains on debt securities available-for-sale by $22.9 million.

Common equity tier-1 ratio (“CET1”), common equity per share and tangible book value per share were 16.26%, $71.30 and $63.07, respectively, at December 31, 2020, compared to 15.93%, $69.94 and $61.69 at September 30, 2020. Refer to Table A for capital ratios.

Refer to Table C for the Statements of Financial Condition.

Cautionary Note Regarding Forward-Looking Statements

This press release contains “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, including without limitation those about Popular’s business, financial condition, results of operations, plans, objectives and future performance. These statements are not guarantees of future performance, are based on management’s current expectations and, by their nature, involve risks, uncertainties, estimates and assumptions. Potential factors, some of which are beyond the Corporation’s control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. Risks and uncertainties include without limitation the effect of competitive and economic factors, and our reaction to those factors, the adequacy of the allowance for loan losses, delinquency trends, market risk and the impact of interest rate changes, capital market conditions, capital adequacy and liquidity, the effect of legal 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, June 30, 2020, and September 30, 2020, and in our Annual Report on Form 10-K for the year ended December 31, 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 Thursday, January 28, 2021 at 10:00 a.m. Eastern Time. The call will be open to the public and broadcasted live over the Internet and can be accessed through the Investor Relations section of the Corporation’s website: www.popular.com.

Listeners are recommended to go to the website at least 15 minutes prior to the call to download and install any necessary audio software. The call may also be accessed through 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 Sunday, February 28, 2021. The replay dial-in is: 1-877-344-7529 or 1-412-317-0088. The replay passcode is 10150838.

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