BPOP - Popular Inc. Announces First Quarter 2022 Financial Results

• Net income of $211.7 million in Q1 2022, compared to net income of $206.1 million in Q4 2021.
• Net interest margin of 2.75% in Q1 2022, compared to 2.78% in Q4 2021; net interest margin on a taxable equivalent basis of 3.05% in Q1 2022, compared to 3.02% in Q4 2021.
• Credit Quality:
  • Non-performing loans held-in-portfolio (“NPLs”) decreased by $28.0 million from Q4 2021; NPLs to loans ratio at 1.8% vs. 1.9% in Q4 2021;
  • Net charge-offs (“NCOs”) were $3.8 million, compared to a net recovery of $7.9 million in Q4 2021; NCOs at 0.05% of average loans held-in-portfolio vs. (0.11%) in Q4 2021;
  • Allowance for credit losses (“ACL”) to loans held-in-portfolio at 2.29% vs. 2.38% in Q4 2021; and
  • ACL to NPLs at 130.4% vs. 126.9% in Q4 2021.
• Common Equity Tier 1 ratio of 16.26%, Common Equity per Share of $60.78 and Tangible Book Value per Share of $51.16 at March 31, 2022.

Popular, Inc. (the “Corporation,” “Popular,” “we,” “us,” “our”) (NASDAQ:BPOP) reported net income of $211.7 million for the quarter ended March 31, 2022, compared to net income of $206.1 million for the quarter ended December 31, 2021.

Ignacio Alvarez, President and Chief Executive Officer, said: “We had a solid quarter with net income of $212 million, building on the momentum of our record 2021 results. We saw broad-based loan growth, across geographies and most business lines, while maintaining strong asset quality metrics. Net charge-offs were five basis points for the quarter. We continued to see deposit growth from our private sector clients. Our deposit franchise in Puerto Rico will be an even greater source of strength as interest rates rise as expected. Our capital ratios remained strong, allowing us to continue to return capital to our shareholders and increase our common stock dividend. Going forward, we remain optimistic about the economic outlook, yet cognizant of the possible challenges to the macroeconomic environment resulting from the war in Ukraine, inflation and the evolving health situation.

I am thankful to our team who have continued to perform at a high level and deliver results under a myriad of changing conditions. Finally, our thoughts and prayers are with the people of Ukraine as they suffer the horrible consequences of the war.”

Significant Events

Entry into Asset Purchase Agreement with Evertec; Renegotiation and Extension of Commercial Agreements

On February 24, 2022, the Corporation and Banco Popular de Puerto Rico (“BPPR”), entered into an Asset Purchase Agreement (the “Purchase Agreement”), with Evertec, Inc. (“EVERTEC”) and Evertec Group, LLC, a wholly owned subsidiary of EVERTEC (“EVERTEC Group”), pursuant to which BPPR will purchase from EVERTEC Group certain information technology and related assets currently used by EVERTEC to service certain of BPPR’s key channels (the “Acquired Assets”) under the Amended and Restated Master Service Agreement (the “MSA”), dated September 30, 2010, among the Corporation, BPPR and EVERTEC. In connection with the purchase of the Acquired Assets, BPPR will assume certain liabilities relating to the Acquired Assets (together with the purchase of the Acquired Assets, the “Transaction”). The Transaction is expected to close on or about June 30, 2022, subject to the satisfaction of certain closing conditions.

In connection with the consummation of the Transaction (the “Closing”), the Corporation will transfer to EVERTEC Group, as consideration for the Transaction, shares of EVERTEC’s common stock (“EVERTEC Common Stock”) having an aggregate value of approximately $197 million, subject to certain purchase price adjustments, based on a price per share of $42.84, which value was determined at the time of entering into the Purchase Agreement. As a result of this transfer, the Corporation expects that its percentage ownership of the outstanding shares of EVERTEC Common Stock will be reduced from its current level, which is approximately 16.2%, to approximately 10.5% immediately following the Closing. As part of the transaction, the Corporation has also agreed to reduce its voting interest in EVERTEC below 4.5%, whether through selling shares of EVERTEC common stock or a conversion of such shares into non-voting preferred stock. The Corporation expects to sell down its stake in EVERTEC below 4.5% following the closing and intends to return to shareholders, via common stock repurchases, the after-tax gains resulting from such sale, subject to the receipt of regulatory approvals.

Additionally, as part of the Closing, the Corporation and BPPR will also enter with EVERTEC into, among other commercial agreements, a Second Amended and Restated Master Services Agreement (the “Second A&R MSA”), pursuant to which EVERTEC Group will continue to provide various key information technology and various transaction processing services to the Corporation, BPPR and their respective subsidiaries, which services are provided under the currently effective MSA.

Capital Actions

On March 1, 2022 the Corporation announced that on February 28, 2022 it entered into an accelerated share repurchase agreement (the “ASR Agreement”) to repurchase an aggregate of $400 million of Popular’s common stock. Popular previously disclosed in a press release on January 12, 2022 its plan to repurchase up to $500 million of its common stock as part of its planned capital actions for 2022.

Under the terms of the ASR Agreement, on March 2, 2022 the Corporation made an initial payment of $400 million and received an initial delivery of 3,483,942 shares of Popular’s Common Stock (the “Initial Shares”).

The transaction was accounted for as a treasury stock transaction. Furthermore, as a result of the receipt of the Initial Shares, the Corporation recognized in shareholders’ equity approximately $320 million in treasury stock and $80 million as a reduction of capital surplus. Upon the final settlement of the ASR Agreement, the Corporation expects to further adjust its treasury stock and capital surplus accounts to reflect the final delivery or receipt of cash or shares, which will depend on the volume-weighted average price of the Corporation’s common stock during the term of the ASR Agreement, less a discount. The final settlement of the ASR Agreement is expected to occur no later than the third quarter of 2022.

Popular expects to execute during the remainder of the year, in the open market or in privately negotiated transactions, the remaining $100 million in common stock repurchases contemplated as part of the Corporation’s 2022 capital actions announced in January 2022. The timing and exact amount of such additional repurchases will be subject to various factors, including market conditions and the Corporation’s capital position and financial performance.

On February 23, 2022, the Corporation’s Board of Directors approved a quarterly cash dividend of $0.55 per share, an increase from the previous $0.45 per share quarterly dividend, on its outstanding common stock. The dividend was paid on April 1, 2022 to shareholders of record at the close of business on March 15, 2022.

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

Net interest income, on a taxable equivalent basis, is presented with its different components in Table D for the quarter ended March 31, 2022, and comparable periods. Net interest income on a taxable equivalent basis is a non-GAAP financial measure. Management believes that this presentation provides meaningful information since it facilitates the comparison of revenues arising from taxable and tax-exempt sources.

Non-GAAP financial measures used by the Corporation may not be comparable to similarly named non-GAAP financial measures used by other companies.

Net interest income for the quarter ended March 31, 2022 was $494.3 million compared to $501.3 million in the previous quarter, a decrease of $7.0 million. Net interest income, on a taxable equivalent basis, for the first quarter of 2022 was $548.1 million, an increase of $4.2 million when compared to $543.9 million in the last quarter of 2021. The increase in the taxable equivalent adjustment results from BPPR’s higher volume of tax-free investment securities in Puerto Rico.

Net interest margin for the quarter was 2.75% compared to 2.78% in the last quarter of 2021. On a taxable equivalent basis, net interest margin for the first quarter of 2022 was 3.05% compared to 3.02% in the fourth quarter of 2021. The main variances in net interest income on a taxable equivalent basis were:

• higher interest income from money markets, trading and investment securities by $18.4 million resulting from a higher volume by $540 million, in turn driven by an increase in the average U.S. Treasury portfolio by $4.2 billion, partially offset by lower volume of money market investments by $3.1 billion and higher yields by 17 basis points driven by higher market rates and the composition of the portfolio; and
• higher interest income from consumer loans mainly driven by a higher average volume in both P.R. and the U.S.

partially offset by:

• lower interest income from commercial loans by $16.5 million resulting from lower income form loans under the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) by $12.6 million, lower interest income from the repayment of purchased credit deteriorated (“PCD”) loans and the impact of 2 fewer days in the quarter or approximately $4.1 million. This negative effect was offset in part by an increase of $346 million in the average volume of commercial loans, at both P.R. and the U.S segments, for a $4.4 million benefit;
• a decrease in auto and lease financing income of $1.6 million mainly driven by two fewer days in the quarter when compared to the prior quarter, partially offset by higher loan volume by $62 million.

The Corporation recognized income of $10.6 million related to loans issued under the SBA PPP, compared to $23.2 million in the previous quarter. These loans carried a yield of approximately 17.01% in this quarter, including the amortization of fees received under the program, compared to 17.86% last quarter. This portfolio of loans issued under the SBA PPP declined by $141 million in BPPR to a balance of $114 million and declined by $39 million in Popular Bank (“PB” or “Popular U.S.”) to a balance of $59 million. On March 31, 2022, the portfolio at BPPR and PB had a remaining aggregate balance of unamortized fees of $8.1 million.

Net interest income for the BPPR segment amounted to $415.2 million for the first quarter of 2022, compared to $425.9 million for the fourth quarter of 2021. Net interest margin for the first quarter of 2022 was 2.67% a decrease of 6 basis points when compared to 2.73% for the previous quarter. As discussed above, net interest margin was negatively impacted by lower SBA PPP income and lower payment of PCD loans, partially offset by the positive impact of higher investment securities balances. The cost of interest-bearing and total deposits remained unchanged from the previous quarter at 0.16% and 0.12%, respectively.

Net interest income for PB was $86.5 million for the quarter ended March 31, 2022, compared to $83.2 million during the previous quarter. Net interest margin for the quarter was 3.56% compared to 3.47% the previous quarter. The increase in net interest income results mainly from a higher volume of commercial and consumer loans. The lower cost on deposits also resulted in a benefit to PB’s net interest margin. The cost of interest-bearing deposits was 0.46% or 6 basis points lower than the 0.52% reported in the last quarter of 2021, while the total cost of deposits, including demand deposits, was 0.36%, compared to 0.40% in the previous quarter.

Non-interest income

Non-interest income decreased by $10.0 million to $154.7 million for the quarter ended March 31, 2022, compared to $164.7 million for the quarter ended December 31, 2021. The variance in non-interest income was primarily driven by:

• lower other service fees by $6.7 million, mainly due to lower insurance fees by $3.7 million principally resulting from contingent insurance commissions that are typically recognized during the fourth quarter and lower credit card fees by $2.0 million mainly in interchange income due to seasonal purchasing activity in the previous quarter; and
• lower income from mortgage banking activities by $4.2 million mainly due to a loss on sale of loans and securitization activities of $1.5 million, compared to a gain of $5.4 in the previous quarter due to a lower volume of transactions and lower market rates, partially offset by higher realized gains on closed derivative positions by $3.4 million;

partially offset by:

• higher other operating income by $4.9 million mainly due to higher earnings from the portfolio of equity method investments and higher income from the sale of auto rental units.

Refer to Table B for further details.

Operating expenses

Operating expenses for the first quarter of 2022 totaled $402.3 million, a decrease of $15.1 million when compared to the fourth quarter of 2021. The variance in operating expenses was driven primarily by:

• lower net occupancy expenses by $2.0 million due to lower rent and electricity expenses;
• lower business promotion expenses by $10.8 million mainly due to lower advertising and promotion expenses by $5.7 million a result of seasonal activities during the fourth quarter of 2021, lower donations by $2.8 million and lower credit cards rewards expense as a result of transactional volumes by $1.7 million;
• lower other operating expenses by $11.4 million due to the effect during the previous quarter of an impairment charge on undeveloped properties by $5.0 million and lower sundry losses by $5.0 million mainly related to the termination of a white label credit card contract during prior quarter; and
• lower amortization of intangibles by $5.2 million due to an impairment write-down of a trademark during the fourth quarter of 2021.

partially offset by:

• higher personnel cost by $6.5 million mainly due to higher performance shares and restricted stock expenses by $6.3 million; higher payroll taxes by $5.1 million; partially offset by $3.1 million in lower incentives related to the profit-sharing plan which is tied to the Corporation’s financial performance;
• higher professional fees by $3.4 million mainly due to higher advisory expenses related to corporate initiatives; and
• higher credit and debit card processing and other expenses by $3.8 million due in part to lower volume incentives.

Full-time equivalent employees were 8,492 as of March 31, 2022, compared to 8,351 as of December 31, 2021.

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

Income taxes

For the quarter ended March 31, 2022, the Corporation recorded an income tax expense of $50.5 million, compared to $75.6 million for the previous quarter. The decrease in income tax expense was mainly attributable to lower income before tax and higher exempt income during the first quarter of 2022. The effective tax rate (“ETR”) for the first quarter of 2022 was 19.3%, compared to 27% in the fourth quarter of 2021. The ETR of the Corporation is impacted by the composition and source of its taxable income. The Corporation expects its ETR for the year 2022 to be within a range from 18% to 20%.

Credit Quality

During the first quarter of 2022, the Corporation continued to exhibit strong credit quality trends and low credit costs with low level of NCOs and decreasing NPLs. We continue to closely monitor changes on borrower performance and in the pace of economic recovery, given the rising interest rate environment and geopolitical uncertainty. However, management believes that the improvement over the last few years in the risk profile of the Corporation’s loan portfolios positions Popular to operate successfully under the current environment.

The following presents credit quality results for the first quarter of 2022:

• At March 31, 2022, total non-performing loans held-in-portfolio decreased by $28.0 million from December 31, 2021. BPPR’s NPLs decreased by $27.5 million, mostly driven by lower mortgage NPLs by $27.3 million. The mortgage NPLs decrease was mainly due to the combined effects of collection efforts, increased foreclosure activity and the sustained low levels of early delinquency compared with pre-pandemic trends. PB’s NPLs remained flat quarter-over-quarter. At March 31, 2022, the ratio of NPLs to total loans held-in-portfolio was 1.8%, compared to 1.9% in the fourth quarter of 2021.
• Inflows of NPLs held-in-portfolio, excluding consumer loans, remained flat quarter-over-quarter. In BPPR, total inflows increased by $5.3 million, mostly driven by higher commercial and mortgage inflows of $3.8 million and $2.0 million, respectively. Mortgage inflows continued trending lower than pre-pandemic levels. NPL inflows at PB decreased by $4.9 million during the quarter, mostly driven by a decrease of $7.2 million in mortgage inflows, as the prior quarter included the impact of loans that did not resume payment after the end of COVID-19-related payment deferral periods.
• NCOs amounted to $3.8 million, an unfavorable variance of $11.7 million when compared to the fourth quarter. BPPR‘s NCOs increased by $13.1 million, as the prior quarter included recoveries from the resolution of certain commercial non-performing loans. During the first quarter of 2022, the Corporation’s ratio of annualized net charge-offs to average loans held-in-portfolio was 0.05%, compared to (0.11%) in the fourth quarter of 2021. Refer to Table M for further information on net charge-offs and related ratios.
• At March 31, 2022, the ACL decreased by $17.6 million, or 2.5%, from the fourth quarter of 2021 to $677.8 million. The ACL incorporated updated macroeconomic scenarios for Puerto Rico and the United States. Given that any one economic outlook is inherently uncertain, the Corporation leverages multiple scenarios to estimate its ACL. The baseline scenario continues to be assigned the highest probability, followed by the pessimistic scenario.
• The current baseline forecast continues to show a favorable economic scenario. 2022 annualized GDP growth of 3.5% and 3.7% is expected for Puerto Rico and United States, respectively. This represents a reduction for both Puerto Rico and United States since last quarter’s GDP growth forecast was 4.0% and 4.6%, respectively. Changes in assumptions related to fiscal stimulus and higher energy prices contributed to the reduction. The 2022 average unemployment rate is forecasted at 7.3% and 3.6% for Puerto Rico and United States, respectively. This is consistent with previous expectations for both regions. Puerto Rico’s unemployment rate forecast benefits from the Bureau of Labor Statistics (“BLS”) revisions that show a stronger than expected labor market.
• In BPPR, the ACL decreased by $17.6 million, mainly driven by reductions in qualitative reserves due to substantial improvements in employment levels in Puerto Rico. Recent updates by the BLS show that employment levels in Puerto Rico have already surpassed pre-pandemic levels. This contributed to a lower commercial, mortgage and consumer loans ACL. The decrease in qualitative reserves was partially offset by the impact of higher loan volumes and changes in the macroeconomic scenario. The ACL for the PB segment remained flat quarter-over-quarter as higher loan volumes in both the commercial real estate and consumer portfolios offset reductions in qualitative reserves. The ratio of the allowance for credit losses to loans held-in-portfolio was 2.29% in the first quarter of 2022, compared to 2.38% in the previous quarter. The ratio of the allowance for credit losses to NPLs held-in-portfolio stood at 130.4%, compared to 126.9% in the previous quarter.
• The provision for credit losses for the loan portfolios for the first quarter of 2022 reflected a benefit of $14.4 million, compared to a benefit of $31.4 million in the previous quarter, reflecting the previously mentioned changes in the allowance for credit losses. The provision for the BPPR segment was a benefit of $12.7 million, compared to a benefit of $30.6 million in the previous quarter, while the provision for the PB segment was a benefit of $1.7 million, compared to a benefit of $0.9 million in the previous quarter.
• The provision for unfunded commitments for the first quarter of 2022 reflected a benefit of $0.8 million, compared to a benefit of $0.5 million in the previous quarter. The provision for credit losses in our investment portfolio was a benefit of $0.3 million, compared to a benefit of $1.1 million in the fourth quarter of 2021. 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 decreased by $5.6 billion from the fourth quarter of 2021, driven by:

• a decrease of $7.5 billion in money market investments, mainly due to lower Puerto Rico public sector deposits and purchases of U.S. Treasury securities;

partially offset by:

• an increase of $1.4 billion in debt securities available-for-sale, mainly due to purchases of U.S. Treasury securities, offset in part by maturities and paydowns of U.S. Treasury and agency mortgage-backed securities; and
• an increase in loans held-in-portfolio by $0.4 billion, mainly due to loan growth in the commercial portfolios in both Puerto Rico and the U.S. (mainly in the health care sector at PB) and construction portfolios, and purchases of third-party lending consumer loans, partially offset by a decrease in the mortgage portfolio, mainly due to loan payoffs and amortizations.

Total liabilities decreased by $4.3 billion from the fourth quarter of 2021, driven by:

• a decrease of $4.1 billion in deposits, mainly due to lower Puerto Rico public sector deposits by $5.5 billion at BPPR as a result of the payments made by Puerto Rico pursuant to the Plan of Adjustment for Puerto Rico under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”); and
• a decrease in borrowings of $94 million, mainly due to the maturity during this quarter of $75 million in short-term borrowings.

Stockholders' equity decreased by $1.3 billion from the fourth quarter of 2021, principally due to an increase in accumulated unrealized losses on debt securities available-for-sale by $1.1 billion due to a decline in fair value of fixed-rate debt securities as a result of the rising interest rate environment, the impact of the $400 million ASR and declared quarterly common stock dividends, partially offset by the net income of $211.7 million for the quarter.

Common equity tier-1 ratio (“CET1”), common equity per share and tangible book value per share were 16.26%, $60.78 and $51.16, respectively, at March 31, 2022, compared to 17.42%, $74.48 and $65.26 at December 31, 2021. Refer to Table A for capital ratios.

Cautionary Note Regarding Forward-Looking Statements

This press release contains “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, including without limitation those about Popular’s business, financial condition, results of operations, plans, objectives and future performance. These statements are not guarantees of future performance, are based on management’s current expectations and, by their nature, involve risks, uncertainties, estimates and assumptions. Potential factors, some of which are beyond the Corporation’s control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. Risks and uncertainties include, without limitation, the effect of competitive and economic factors, and our reaction to those factors, the adequacy of the allowance for loan losses, delinquency trends, market risk and the impact of interest rate changes, capital market conditions, capital adequacy and liquidity, the effect of legal and regulatory proceedings, new accounting standards on the Corporation’s financial condition and results of operations, the scope and duration of the COVID-19 pandemic (including the appearance of new strains of the virus), 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. Other factors include the length of time necessary for Popular to consummate the Transaction; the ability to satisfy the conditions to the closing thereof; the receipt of any regulatory approvals necessary to effect the Transaction and the contemplated return to shareholders of net gains resulting from a sale of EVERTEC shares effected in connection with the consummation of the Transaction; the ability to successfully transition and integrate the assets acquired as part of the Transaction, related operations, employees and third party contractors; unexpected costs, including, without limitation, costs due to exposure to any unrecorded liabilities or issues not identified during due diligence investigation of the Transaction or that are not subject to indemnification or reimbursement by EVERTEC; risks that Popular may be affected by operational and other risks arising from the acquisition of the acquired assets or by adverse effects on relationships with customers, employees and service providers and business and other risks arising from the extension of Popular’s current commercial agreements with EVERTEC. 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, 2021, and in our Form 10-Q for the quarter ended March 31, 2022 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 Tuesday, April 26, 2022 at 11:00 a.m. Eastern Time. The call will be open to the public and broadcasted live over the Internet and can be accessed through the Investor Relations section of the Corporation’s website: www.popular.com .

Listeners are recommended to go to the website at least 15 minutes prior to the call to download and install any necessary audio software. The call may also be accessed through the dial-in telephone number 1-844-200-6205 (Toll Free) or 1-646-904-5544 (Local). The dial-in access code is 659646.

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 Tuesday, May 24, 2022. The replay dial-in is: 1-866-813-9403 or 1-929-458-6194. The replay passcode is 408334.

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