Popular, Inc. Announces First Quarter 2021 Financial Results

Popular, Inc. (the “Corporation,” “Popular,” “we,” “us,” “our”) (NASDAQ:BPOP) reported net income of $262.6 million for the quarter ended March 31, 2021, compared to net income of $176.3 million for the quarter ended December 31, 2020.

Ignacio Alvarez, President and Chief Executive Officer, said: “We got off to a strong start in 2021, earning $262.6 million in the quarter, and are optimistic about the economy and our opportunities for the remainder of the year. Our results include a benefit in the provision for credit losses of $82.2 million due to an improving macro-economic environment and lower credit losses. Even after the benefit, our allowance for credit losses stands at $800 million or 2.75% of loans-held-in-portfolio. Our capital levels remain strong, which, as evidenced by the recently announced capital actions for 2021, allows us to meet the needs of our customers as we prudently return capital to our shareholders.

Our colleagues continued to achieve impressive results under challenging circumstances. We experienced growth in our top line revenue, which benefited from PPP-related income and an increase in the value of our mortgage servicing rights. We also achieved record level of deposits and additional growth in active users of our digital platforms. Notwithstanding the demographic challenges we face in Puerto Rico, we added 12,000 new customers during the quarter. We also continue to support our small and middle market clients, approving close to 13,000 loans amounting to $478 million in PPP funding during the quarter.

I am especially proud of how we have partnered with local health authorities and community organizations by lending our facilities and personnel to help accelerate vaccination efforts in Puerto Rico. As the data has demonstrated, massive vaccination is key to controlling the virus, and we are encouraged by the pace of vaccination, particularly on the island. I am happy to report that 80% of our employees in Puerto Rico have received at least one dose of the vaccine. We still have more to do in our other markets, and we are committed to encouraging and facilitating vaccination opportunities to all our colleagues.

In alignment with our corporate values, we expanded our efforts to promote financial inclusion by making a $1.0 million investment in Greenwood, a digital banking platform designed to address the financial needs of Afro-American and Latinx consumers.”

Significant Events

Financial Highlights

For the first quarter of 2021, the Corporation recorded net income of $262.6 million, compared to a net income of $176.3 million for the previous quarter. The results include a release of the allowance for credit losses of $82.2 million mainly due to the improved macroeconomic outlook and improving credit quality. Net Interest income was $479.1 million, an increase of $7.5 million compared to the previous quarter, driven by an increase in interest income and fees from the portfolio of loans under the U.S. Small Business Administration (“SBA”) Payment Protection Program (“PPP”). The net interest margin improved 3 basis points to 3.07%. Total assets grew by $0.9 billion from the previous quarter, mainly due to an increase in deposits across various sectors.

Capital Actions

On April 12, 2021, the Corporation announced the following capital actions:

• an increase in the Corporation’s quarterly common stock dividend from $0.40 per share to $0.45 per share, commencing with the dividend payable in the third quarter of 2021, subject to the approval by the Corporation’s Board of Directors; and

• common stock repurchases of up to $350 million during 2021.

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 for the quarters ended March 31, 2021 as compared with previous quarters. 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, 2021 was $479.1 million compared to $471.6 million in the previous quarter, an increase of $7.5 million. Net interest income, on a taxable equivalent basis, for the first quarter of 2021 was $529.8 million, an increase of $9.1 million when compared to $520.7 million in the fourth quarter of 2020.

The net interest margin increased 3 basis points to 3.07% compared to 3.04% in the previous quarter. The increase in the net interest margin resulted from higher PPP fees recognized and a lower cost of deposits. On a taxable equivalent basis, net interest margin for the first quarter of 2021 was 3.39 % compared to 3.35% in the fourth quarter of 2020, an increase of 4 basis points. The main variances in net interest income on a taxable equivalent basis were:

• interest income from loans increased by $5.0 million in the quarter due to the following main variances:
  
  
  • Higher interest income from commercial loans by $8.8 million mostly driven by the increase in SBA PPP interest income and fees of $11.6 million resulting mainly from the repayment of loans. These positive variances were partially offset by the impact of two fewer days in the quarter or $3.7 million,
    
    
  • consumer loans, including credit cards decreased $93 million on average or $2.7 million in interest income,
    
    
  • the combined balance of auto and lease financing increased $118 million but income from the portfolio was impacted negatively by two fewer days in the quarter or $1.5 million.

Changes in portfolio composition, including the above-mentioned changes, resulted in an increase in the total loan yield of 15 basis points when compared to the previous quarter. The Corporation recognized income of $23.1 million related to loans issued under the SBA PPP program, compared to $11.5 million in the previous quarter. These loans have a yield of approximately 7.21% in this quarter compared to 3.23% last quarter, including the amortization of fees received under the program that at March 31, 2021 had $50.1 million in unamortized balance; and

• lower interest expense on deposits by $3.2 million, or 3 basis points, due to lower interest cost at Popular Bank (“PB”)

The total net impact on net interest income of the two fewer days in this quarter when compared to the fourth quarter of 2020 is estimated at $7.7 million.

The net interest income for the Banco Popular de Puerto Rico (“BPPR”) segment amounted to $410.3 million for the quarter ended March 31, 2021, compared to $402.1 million in the previous quarter. The net interest margin for the first quarter of 2021 was 3.10%, an increase of 3 basis points when compared to 3.07% for the previous quarter. As discussed above, the net interest margin was positively impacted by higher interest income and fees from the repayment of PPP loans of approximately $11.2 million. The cost of interest-bearing deposits was 0.21%, compared to 0.22% for the previous quarter. Total cost of deposits for the quarter was 0.16%, compared to 0.17% reported in the fourth quarter of 2020.

Net interest income for PB was $79.2 million for the quarter ended March 31, 2021, compared to $79.6 million during the previous quarter. Net interest margin for the quarter was 3.35%, flat quarter over quarter. The cost of interest-bearing deposits was 0.66%, compared to 0.79% in the previous quarter, decreasing for the sixth consecutive quarter. Total cost of deposits for the quarter, including demand deposits, was 0.54%, compared to 0.65% reported in the fourth quarter of 2020.

Non-interest income

Non-interest income increased by $8.8 million to $153.7 million for the quarter ended March 31, 2021, compared to $144.9 million for the quarter ended December 31, 2020. The increase in non-interest income was primarily driven by:

• higher income from mortgage banking activities by $7.6 million mainly due to a favorable variance in fair value adjustments on mortgage servicing rights (“MSRs”) of $9.2 million principally due to a decrease in estimated prepayments driven by increases in interest rates and higher gains on closed derivative positions by $4.7 million; partially offset by lower gains on securitization transactions by $6.0 million; and

• higher other operating income by $5.8 million mainly due to higher net earnings from the combined portfolio of investments under the equity method by $3.5 million and a higher gain on sale of daily auto rental units by $2.0 million;

partially offset by:

• an unfavorable variance in adjustments to indemnity reserves on previously sold loans of $2.9 million mainly due to higher provision expense related to loans previously sold with credit recourse.

Refer to Table B for further details.

Operating expenses

Operating expenses for the first quarter of 2021 totaled $375.5 million, a decrease of $0.4 million from the fourth quarter of 2020. The fourth quarter reflected $23.2 million in expenses related to PB’s New York branch optimization initiative. Additionally, during the fourth quarter of last year, the Corporation also 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 $12.8 million. The variance in operating expenses was driven primarily by:

• Lower net occupancy expense by $16.8 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 during the fourth quarter of 2020;

• lower professional fees by $4.1 million mainly due to lower advisory expenses by $4.9 million related to corporate initiatives; and

• lower business promotion expenses by $3.9 million due to lower seasonal advertising expense by $2.7 million.

Partially offset by:

• Higher personnel cost by $17.2 million due to $13.8 million in higher commission, incentives, and other bonuses, including higher performance shares and restricted stock expenses by $7.9 million; and higher expense related to annual employee incentives tied to the Corporation’s financial performance by $7.4 million; and

• higher other operating expenses by $9.2 million mainly due to the reclassification, during the fourth quarter of 2020, of $10.0 million in provision for unfunded commitments from the other expenses line to the provision for credit losses, partially offset by $2.1 million in impairment losses on leasehold improvements associated with PB’s New York branch optimization initiative, also recorded in the fourth quarter of 2020.

Full-time equivalent employees were 8,469 as of March 31, 2021, compared to 8,522 as of December 31, 2020.

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

Income taxes

For the quarter ended March 31, 2021, the Corporation recorded an income tax expense of $76.8 million, compared to $43.0 million for the previous quarter. The increase in income tax expense was mainly attributable to higher income before tax during the first quarter of 2021. The effective tax rate (“ETR”) for the first quarter of 2021 was of 23%, compared to 20% for the previous quarter. The ETR of the Corporation is impacted by the composition and source of its taxable income. The increase in the ETR rate for the first quarter of 2021 was primarily attributed to higher income at the Puerto Rico marginal tax rate.

Credit Quality

During the first quarter of 2021, the Corporation exhibited improved credit quality metrics and lower credit costs, driven by the improving economic environment, which reflects the impact of the unprecedented amounts of government stimulus in response to the COVID-19 pandemic. We will continue to closely monitor economic conditions, the effect of the pandemic on our loan portfolios and associated risks. However, management believes that the improvement over the last few years in the risk profile of the Corporation’s loan portfolios, along with the government stimulus, positions Popular to operate successfully under the current environment.

The following presents credit quality results for the first quarter of 2021:

• At March 31, 2021, total non-performing loans held-in-portfolio decreased by $39.6 million from December 31, 2020. BPPR’s NPLs decreased by $34.4 million, driven by lower mortgage NPLs by $23.6 million, reflective of the resumption of consistent loan payments following the end of the COVID-19 moratorium period. Construction NPLs decreased by $6.6 million mostly due to a previously reserved loan that was partially charged-off during the quarter. PB’s NPLs decreased by $5.2 million mostly related to a commercial loan transferred to loans-held-for-sale. Excluding government guaranteed loans, at March 31, 2021, the Corporation had 122,216 loans with an aggregate book value of $6.8 billion that had completed their moratorium period, of which 114,900 loans, or 94%, with an aggregate book value of $6.5 billion were current in their payments. At March 31, 2021, the ratio of NPLs to total loans held-in-portfolio was 2.4%, compared to 2.5% in the fourth quarter of 2020.

• Inflows of NPLs held-in-portfolio, excluding consumer loans, decreased by $29.6 million quarter-over-quarter. In BPPR, total inflows decreased by $35.7 million driven by mortgage inflows decreasing by $32.0 million, as the prior quarter was impacted by an increase in mortgage inflow due to the delinquency progression at the expiration of the moratorium period. The NPL inflows at PB increased by $6.1 million during the quarter, mostly due to higher construction inflows related to a loan that reached 90 days past due during its renewal process. As of March 31, 2021, the loan was current.

• NCOs decreased by $21.0 million from the fourth quarter of 2020. BPPR ‘s NCOs decreased by $21.7 million, primarily driven by lower commercial NCOs by $18.6 million, as the prior quarter included impairment charge-offs from previously reserved loans. Consumer NCOs decreased $12.5 million, mainly due to recoveries of $7.6 million related to the sale of previously fully charged-off loans during the first quarter of 2021. These decreases were partially offset by higher construction NCOs by $6.5 million related to a previously reserved loan that was partially charged-off during the quarter. During the first quarter of 2021, the Corporation’s ratio of annualized net charge-offs to average loans held-in-portfolio was 0.29%, compared to 0.58% in the fourth quarter of 2020. Refer to Table M for further information on net charge-offs and related ratios.

• At March 31, 2021, the allowance for credit losses (“ACL”) reflected a decrease of $95.5 million from the fourth quarter of 2020 to $800.8 million. The ACL incorporates an updated economic outlook for the United States and Puerto Rico. The updated economic outlook is more favorable than previous forecasts prompting substantial reductions in reserves across different portfolios. These decreases in reserve levels were partially offset with qualitative reserves aimed at addressing uncertainties in specific portfolios, mainly in U.S. commercial real estate. The allowance for the BPPR and PB segments decreased by $58.1 million and $37.4 million, respectively. The ratio of the allowance for credit losses to loans held-in-portfolio was 2.75% in the first quarter of 2021, compared to 3.05% in the previous quarter. The ratio of the allowance for credit losses to NPLs held-in-portfolio stood at 114.7%, compared to 121.5% 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 optimistic, baseline, and pessimistic scenarios. Among the three scenarios used to estimate the ACL, the baseline is assigned the highest probability, followed by the pessimistic 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 at 4.9% for U.S. and 3.4% for P.R., compared to 4.1% and 2.5%, respectively, in the previous 2021 forecast. Expectations for 2022 also present an improvement over the prior forecast. The U.S. and P.R. forecasted unemployment rate average for 2021 is now 6.09% and 7.98%, respectively. This is an improvement over the previous estimate of 7.41% for the U.S. and 8.34% for P.R.

• The provision for credit losses for the loans portfolios for the first quarter of 2021 decreased by $86.6 million to a benefit of $75.8 million, amid improved macroeconomic outlook and lower NCOs for the quarter. The provision for the BPPR segment decreased by $64.7 million, while the provision for the PB segment decreased by $21.8 million.

• The provision for unfunded commitments for the first quarter of 2021 reflected a benefit of $6.2 million, compared to $2.6 million provision expense during the previous quarter, driven by the improvements in macroeconomic outlook and credit quality metrics. During the fourth quarter of 2020, the Corporation reclassified $10.0 million of the expense for unfunded loan commitments from other operating expenses to the provision for credit loss caption for a total provision for unfunded commitments of $12.6 million for the period. The provision for credit losses in our investment portfolio was a benefit of $0.2 million, compared to a benefit of $2.2 million in the fourth 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 $0.9 billion from the fourth quarter of 2020, driven by:

• an increase of $1.2 billion in debt securities available-for-sale, mainly due to purchases of U.S. treasury securities and agency mortgage-backed securities, partially offset by paydowns and a decrease in unrealized gains of $0.4 billion in this portfolio;

partially offset by:

• a decrease of $0.3 billion in loans held-in-portfolio, mainly in commercial loans at BPPR, in part due to the repayments of PPP loans.

Total liabilities increased by $1.1 billion from the fourth quarter of 2020, mainly due to:

• an increase of $1.9 billion in deposits mainly due to higher private demand deposits by $1.6 billion at BPPR and PB and higher savings account deposits at BPPR by $0.3 billion;

partially offset by:

• a decrease of $0.8 billion in other liabilities, mainly due to the settlement of purchases of debt securities.

Stockholders’ equity decreased by approximately $131.1 million from the fourth quarter of 2020, principally due to lower accumulated unrealized gains on debt securities available-for-sale by $369.9 million, offset by net income for the quarter of $262.6 million, less declared dividends of $33.7 million on common stock and $0.4 million in dividends on preferred stock.

Common equity tier-1 ratio (“CET1”), common equity per share and tangible book value per share were 17.15%, $69.63 and $61.42, respectively, at March 31, 2021, compared to 16.26%, $71.30 and $63.07 at December 31, 2020. 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 (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, 2020, and in our Form 10-Q for the quarter ended March 31, 2021 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 Wednesday, April 28, 2021 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 1-866-235-1201 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 Friday, May 28, 2021. The replay dial-in is: 1-877-344-7529 or 1-412-317-0088. The replay passcode is 10153733.

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