Popular, Inc. Announces Fourth Quarter 2021 Financial Results

• Net income of $206.1 million in Q4 2021, compared to net income of $248.1 million in Q3 2021.
• Net income of $934.9 million for the year 2021, compared to net income of $506.6 million for the year 2020.
• Net interest margin of 2.78% in Q4 2021, compared to 2.77% in Q3 2021; net interest margin on a taxable equivalent basis of 3.02% in Q4 2021, compared to 3.04% in Q3 2021.
• Credit Quality:
  • Non-performing loans held-in-portfolio (“NPLs”) decreased by $85.0 million from Q3 2021; NPLs to loans ratio at 1.9% vs. 2.2% in Q3 2021;
  • Net charge-offs (“NCOs”) was a net recovery of $7.9 million, a favorable variance by $16.7 million from Q3 2021; NCOs at (0.11%) of average loans held-in-portfolio vs. 0.12% in Q3 2021; NCOs of $20.7 million for the year 2021, a favorable variance by $165.7 million from the year 2020; NCOs at 0.07% of average loans held-in-portfolio for the year 2021 vs. 0.66% for the year 2020;
  • Allowance for credit losses (“ACL”) to loans held-in-portfolio at 2.38% vs. 2.49% in Q3 2021; and
  • ACL to NPLs at 126.9% vs. 113.6% in Q3 2021.
• Common Equity Tier 1 ratio of 17.45%, Common Equity per Share of $74.48 and Tangible Book Value per Share of $65.39 at December 31, 2021.

SAN JUAN, Puerto Rico–(BUSINESS WIRE)–Popular, Inc. (the “Corporation,” “Popular,” “we,” “us,” “our”) (NASDAQ:BPOP) reported net income of $206.1 million for the quarter ended December 31, 2021, compared to net income of $248.1 million for the quarter ended September 30, 2021.

Ignacio Alvarez, President and Chief Executive Officer, said: “Our fourth quarter results reflect a strong finish to a record year. During the quarter we continued adding new clients, increasing our deposit base and growing most of our loan portfolios. We also launched a new digital platform where small business customers in Puerto Rico can apply for loans in a more convenient way. And we were especially pleased by the performance of our U.S. mainland operations that achieved commercial loan growth of $726 million, including the $105 million from the K-2 acquisition. Our financial performance in 2021 was driven by solid credit quality trends that led to a benefit in the provision of $194 million. Our net charge-off ratio of 0.07% was the lowest since at least 2004.

Our results reflect the strength of our diverse sources of revenues. Solid financial performance and a strong capital position led to a dividend increase of 22% on our common stock effective Q2 2022 and a common stock repurchase program of $500 million for 2022.

Further demonstrating our commitment to the communities we serve, this fall we gained the certification to a host of our low-cost deposit products that meet the Bank On certification requirements. We are also proud to be included in this year’s Bloomberg Gender-Equality Index (GEI) as we continue to make strides in gender parity at Popular and across the financial industry.

While cognizant of the challenges related to the pandemic, we enter this year ready to build on the momentum of 2021, with an improving economic and fiscal environment in Puerto Rico and the rising interest rate environment.

I want to thank our colleagues whose dedication, resilience and talent helped us achieve our record results. They continue to be our most valuable asset.”

Significant Events

Fourth Quarter Financial Highlights

For the fourth quarter of 2021, the Corporation recorded net income of $206.1 million, compared to net income of $248.1 million for the previous quarter. The fourth quarter’s results include a release in the allowance for credit losses of $33.1 million driven by the releases in the Puerto Rico commercial and mortgage portfolios, resulting from improving credit quality, partially offset by reserve increases related to an increase in weight to downside economic scenarios and higher loan volumes. Net interest income was $501.3 million, an increase of $11.9 million compared to the previous quarter, mainly due to higher income from loans issued under the U.S. Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”), loan growth, coupled with activity from lease financing business acquired in October 2021 by Popular Equipment Finance LLC (“PEF”) and higher income from the repayment of purchased credit deteriorated (“PCD”) loans. Net interest margin increased 1 basis point to 2.78%. Total assets grew by $0.9 billion from the previous quarter, reflecting loan growth in Popular Bank (“PB”) and an increase in deposits across all sectors in Puerto Rico.

Acquisition of K2 Capital Group LLC

On October 15, 2021, PEF, a newly-formed wholly-owned subsidiary of PB, completed the acquisition of certain assets and the assumption of certain liabilities of Minnesota-based K2 Capital Group LLC’s (“K2”) equipment leasing and financing business (the “Acquired Business”). PEF made a payment to K2 of approximately $157 million in cash, representing a premium of approximately $42 million over the book value of K2’s net assets, which has been preliminarily recorded as goodwill. An additional approximate $29 million in earnout payments could be payable to K2 over the next three years, contingent upon the achievement of certain agreed-upon financial targets during such period.

Specializing in the healthcare industry, the Acquired Business provides a variety of lease products, including operating and finance leases, and also offers private label vendor finance programs to equipment manufacturers and healthcare organizations. The acquisition provides PB with a national equipment leasing platform that complements its existing healthcare lending business.

As part of the transaction, PEF acquired approximately $115 million in net assets that consisted mainly of commercial finance leases.

The transaction was accounted for as a business combination. The Corporation is in the process of finalizing the assessment of the fair value of the net assets acquired as part of the transaction and expects to complete its assessment before the filing of its annual report on Form 10-K for the year ended December 31, 2021. Any fair value adjustments would impact the value of the recorded assets and liabilities with a corresponding offset to goodwill.

Capital Actions

Redemption of Trust Preferred Securities

On November 1, 2021, the Corporation redeemed all outstanding 6.70% Cumulative Monthly Income Trust Preferred Securities (the “Trust Preferred Securities”) issued by the Popular Capital Trust I (the “Trust”) (liquidation amount of $25 per security and amounting to $186,663,800 (or $181,063,250 after excluding the Corporation’s participation in the Trust of $5,600,550) in the aggregate). The redemption price for the Trust Preferred Securities was equal to $25 per security plus accrued and unpaid distributions up to and excluding the redemption date in the amount of $0.139583 per security, for a total payment per security in the amount of $25.139583. Upon redemption, Popular delisted the Trust Preferred Securities (NASDAQ: BPOPN) from the Nasdaq Global Select Market.

Announcement of 2022 Capital Actions

On January 12, 2022 the Corporation announced the following capital actions:

• an increase in the Corporation’s quarterly common stock dividend from $0.45 per share to $0.55 per share, commencing with the dividend payable in the second quarter of 2022, subject to the approval by the Corporation’s Board of Directors; and
• common stock repurchases of up to $500 million during 2022.

The Corporation’s planned common stock repurchases may be executed in the open market or in privately negotiated transactions. The timing and exact amount of such repurchases will be subject to various factors, including market conditions and the Corporation’s capital position and financial performance.

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 and E for the quarter and year ended December 31, 2021, 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 December 31, 2021 was $501.3 million compared to $489.4 million in the previous quarter, an increase of $11.9 million. Net interest income, on a taxable equivalent basis, for the fourth quarter of 2021 was $543.9 million, an increase of $7.6 million when compared to $536.3 million in the third quarter of 2021. The increase in net interest income on a taxable equivalent is mainly related to the repayment of PCD loans, higher PPP fees during the quarter and the activity recognized in the quarter from PEF’s recently acquired lease financing business.

Net interest margin for the fourth quarter was 2.78% compared to 2.77% in the previous quarter. The increase in net interest margin is due to the repayment of PCD loans and higher PPP loan fees related to loans, partially offset by a lower yield on money markets and investment securities due to lower volume of mortgage-backed securities. On a taxable equivalent basis, net interest margin for the fourth quarter of 2021 was 3.02% compared to 3.04% in the third quarter of 2021, a decrease of 2 basis points. The main variances in net interest income on a taxable equivalent basis were:

• Higher interest income from loans by $8.2 million mainly due to the following:
  • Higher income from commercial loans including $3.7 million from the repayment of PCD loans, interest income and fees from PPP loans by $1.2 million and $2.4 million from loans acquired by PEF from K2. Interest income for the commercial portfolio also reflected loan growth at PB which, excluding PPP loans and including the finance lease portfolio acquired by PEF, increased by $726 million or 13% and $284 million in average balances from the previous quarter;
  • Auto and lease financing continued its positive trend increasing by $102 million in average balances and reflecting an increase in interest income of $0.7 million
    
    Partially offset by:
  • Lower interest income from mortgage loans due lower average volume resulting from continued amortization of the Banco Popular de Puerto Rico (“BPPR”) portfolio
  • Lower interest expense on borrowings resulting from the redemption during the quarter of the Trust Preferred Securities, totaling $186.7 million.

These positive variances were partially offset by:

• Lower interest income from money market investments, trading and investment securities by $3.4 million due lower volume and yield of mortgage-backed securities, partially offset by a higher volume of lower yielding U.S. Treasury notes.

The Corporation recognized income of $23.2 million related to loans issued under the SBA PPP program, compared to $22.0 million in the previous quarter. These loans carried a yield of approximately 17.86% in this quarter, including the amortization of fees received under the program, compared to 10.10% last quarter. This portfolio of loans issued under the SBA PPP declined by $265.2 million in BPPR to a balance of $255.3 million and declined by $51.4 million in PB to a balance of $97.9 million. On December 31, 2021, the portfolio [at BPPR and PB] had a remaining [aggregate] balance of unamortized fees of $18.1 million.

Net interest income for the BPPR segment amounted to $425.9 million for the fourth quarter of 2021, compared to $419.2 million for the third quarter. Net interest margin for the fourth quarter of 2021 was 2.73%, a decrease of 2 basis points when compared to 2.75% for the previous quarter. As discussed above, net interest margin was positively impacted by the repayment of PCD loans, higher PPP fees and a higher volume of auto and lease financing loans, but the earning assets mix continues to impact the net interest margin. The cost of interest-bearing deposits was 0.16% compared to 0.17% in the previous quarter. Total cost of deposits for the quarter was 0.12%, compared to 0.13% reported for the third quarter of 2021.

Net interest income for PB was $83.2 million for the quarter ended December 31, 2021, compared to $80.0 million during the previous quarter. Net interest margin for the quarter was 3.47% or 11 basis point higher than the previous quarter. The increase in net interest income is driven by a higher volume of commercial loans, as discussed above, from both origination activity and the acquisition of the equipment finance leases business from K2. The lower cost on deposits also benefited the net interest margin at PB. The cost of interest-bearing deposits was 0.52% or 4 basis points lower than the 0.56% reported in the third quarter, decreasing for the ninth consecutive quarter. Total cost of deposits for the quarter, including demand deposits, was 0.40%, compared to 0.43% in the previous quarter.

Non-interest income

Non-interest income decreased by $4.6 million to $164.7 million for the quarter ended December 31, 2021, compared to $169.3 million for the quarter ended September 30, 2021. The variance in non-interest income was primarily driven by:

• lower other operating income by $14.8 million mainly due to lower net earnings from the combined portfolio of investments under the equity method by $5.4 million and the impact of a gain of $7.0 million recognized in the third quarter of 2021 by BPPR as a result of the sale and partial leaseback of two corporate office buildings;
  
  partially offset by:
• higher other service fees by $3.3 million mainly due to higher insurance fees by $3.5 million principally resulting from contingent insurance commissions that are typically recognized during the fourth quarter and higher credit card fees by $2.2 million mainly in interchange income; and
• higher income from mortgage banking activities by $8.7 million mostly due to a favorable variance in fair value adjustments on mortgage servicing rights (“MSRs”) of $7.5 million mainly due to a decrease in estimated prepayments and an increase in float earnings and higher realized gains on closed derivative positions by $1.7 million.

Refer to Table B for further details.

Operating expenses

Operating expenses for the fourth quarter of 2021 totaled $417.4 million, an increase of $29.2 million when compared to the third quarter of 2021. The variance in operating expenses was driven primarily by:

• higher personnel cost by $2.8 million mainly due to salary increases and higher incentives and commissions;
• higher equipment expense by $2.6 million due to higher purchases of equipment by $0.6 million, higher amortization of software maintenance and higher depreciation of equipment held for operating leases by $0.5 million, the latter, related to the activity at PEF;
• higher business promotion expenses by $7.7 million mainly as a result of seasonal activities, higher donations by $1.8 million and higher credit cards rewards expense related to transactional volumes by $2.0 million;
• higher other operating expenses by $14.6 million due to impairment losses on undeveloped properties by $5.0 million, based on the estimated fair value as these were reclassified to held for sale or held for investments based on management’s intended use, and higher sundry losses by $9.7 million, including $3.7 million related to the termination of a white label credit card contract and higher legal reserves; and
• higher amortization of intangibles by $5.3 million due to a write-down on impairment of a trademark.

Partially offset by:

• lower credit and debit card processing and other expenses by $4.2 million mainly due to volume incentives.

Full-time equivalent employees were 8,351 as of December 31, 2021, compared to 8,342 as of September 30, 2021.

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

Income taxes

For the quarter ended December 31, 2021, the Corporation recorded an income tax expense of $75.6 million, compared to $83.5 million for the previous quarter. The decrease in income tax expense was mainly attributable to lower income before tax during the fourth quarter of 2021. The effective tax rate (“ETR”) for the fourth quarter of 2021 was 27%, or 2% higher when compared with the previous quarter. The ETR for the year was 25%. The ETR of the Corporation is impacted by the composition and source of its taxable income.

Credit Quality

During the fourth quarter of 2021, the Corporation continued to exhibit strong credit quality trends and low credit costs with net recoveries in NCOs and decreasing NPLs. We continue to closely monitor COVID-19 pandemic related risks on borrower performance and changes in the pace of economic recovery as new variants continue to emerge. 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 fourth quarter of 2021:

• At December 31, 2021, total non-performing loans held-in-portfolio decreased by $85.0 million from September 30, 2021. BPPR’s NPLs decreased by $94.6 million, driven by lower commercial, mortgage and construction NPLs by $63.3 million, $20.7 million and $14.4 million, respectively. The commercial and construction NPLs decrease reflects payoffs related to troubled loan resolutions, and loans that were returned to accrual status during the quarter. The mortgage NPLs decrease was mainly due to the combined effects of collection efforts, increased foreclosure activity and the on-going low levels of early delinquency compared with pre-pandemic trends. PB’s NPLs increased by $9.6 million, mostly due to higher mortgage and commercial NPLs by $7.5 million and $2.7 million, respectively. The mortgage NPLs increase was mostly driven by loans that did not resume payment at the end of the deferral period. At December 31, 2021, the ratio of NPLs to total loans held-in-portfolio was 1.9%, compared to 2.2% in the third quarter of 2021.

• Inflows of NPLs held-in-portfolio, excluding consumer loans, increased by $2.6 million quarter-over-quarter. In BPPR, total inflows decreased by $7.1 million, mostly driven by lower commercial and mortgage inflows of $5.2 million and $2.4 million, respectively. Mortgage inflows continued trending lower than pre-pandemic levels. NPL inflows at PB increased by $9.6 million during the quarter, mostly due to higher mortgage NPL inflows by $7.4 million, as explained above.

• NCOs decreased by $16.7 million from the third quarter to net recoveries of $7.9 million. BPPR‘s NCOs decreased by $17.0 million, primarily driven by lower commercial NCOs by $15.7 million mostly related to recoveries from the resolution of the abovementioned commercial non-performing loans. During the fourthquarter of 2021, the Corporation’s ratio of annualized net charge-offs to average loans held-in-portfolio was (0.11%), compared to 0.12% in the third quarter of 2021. Refer to Table M for further information on net charge-offs and related ratios.

• At December 31, 2021, the ACL decreased by $23.2 million, or 3.2%, from the third quarter of 2021 to $695.4 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. In response to recent events that impact both epidemiological and fiscal assumptions, the weight assigned to the pessimistic scenario was increased this quarter.

• In BPPR, the ACL decreased by $22.6 million mainly driven by reductions in the commercial and mortgage loans ACL. Improved appraisals, releases of qualitative reserves as well as continued borrower performance contributed to the lower ACL for these segments. The ACL for the PB segment remained flat quarter-over-quarter, as the effect of releases in qualitative reserves was partially offset by higher loan volumes and the increase in weight applied to the pessimistic scenario. The ratio of the allowance for credit losses to loans held-in-portfolio was 2.38% in the fourth quarter of 2021, compared to 2.49% in the previous quarter. The ratio of the allowance for credit losses to NPLs held-in-portfolio stood at 126.9%, compared to 113.6% in the previous quarter.

• The current baseline forecast continues to show a favorable economic scenario. GDP growth is expected for Puerto Rico and United States in 2022 and 2023. In addition, the unemployment rate is expected to continue to improve in both regions through 2022 and remain stable in 2023.

• The provision for credit losses for the loan portfolios for the fourth quarter of 2021 reflected a benefit of $31.4 million, compared to a benefit of $58.6 million in the previous quarter, reflecting the previously mentioned changes in the allowance for credit losses and NCOs recoveries. The provision for the BPPR segment was a benefit of $30.6 million, compared to a benefit of $36.0 million in the previous quarter, while the provision for the PB segment was a benefit of $0.9 million, compared to a benefit of $22.7 million in the previous quarter.

• The provision for unfunded commitments for the fourth quarter of 2021 reflected a benefit of $0.5 million, compared to a benefit of $1.5 million in the previous quarter. The provision for credit losses in our investment portfolio was a benefit of $1.1 million, compared to a benefit of $1.0 million in the third 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.

Contacts

Popular, Inc.

Investor Relations:
Paul J. Cardillo, 212-417-6721

Investor Relations Officer

pcardillo@popular.com

or

Media Relations:
MC González Noguera, 917-804-5253

Executive Vice President and Chief Communications & Public Affairs Officer

mc.gonzalez@popular.com

Read full story here