Popular, Inc. (“the Corporation” or “Popular”) (NASDAQ:BPOP) reported net income of $65.7 million for the quarter ended June 30, 2012, compared with net income of $48.4 million for the quarter ended March 31, 2012.
Mr. Richard L. Carrión, Chairman of the Board and Chief Executive Officer, said: “Two consistently positive trends stand out in this quarter’s results. First, our net interest margin and our revenue-generating capacity remain strong. Second, credit metrics keep improving. The decrease of $120 million in non-performing loans marks our largest quarterly decline in this credit cycle. Despite various headwinds we are continuing our progress.”
Refer to the accompanying “Financial Supplement to Second Quarter 2012 Earnings Release” for detailed financial information and key performance ratios. Table B provides a breakdown of main categories in the income statement.
Earnings Highlights – Second Quarter 2012 compared with First Quarter 2012
|(Dollars in thousands except per share information)|| June 30,
| March 31,
|Net interest income||$341,200||$337,582||$||3,618|
|Provision for loan losses – non-covered loans||81,743||82,514||(771||)|
|Provision for loan losses – covered loans ||37,456||18,209||19,247|
|Net interest income after provision for loan losses||222,001||236,859||(14,858||)|
|FDIC loss share income (expense)||2,575||(15,255||)||17,830|
|Other non-interest income||91,149||139,163||(48,014||)|
|(Loss) income before income tax||(12,154||)||64,600||(76,754||)|
|Income tax (benefit) expense||(77,893||)||16,192||(94,085||)|
|Net income applicable to common stock||$64,809||$47,477||$||17,332|
|Net income per common share - basic and diluted ||$0.63||$ 0.46||$||0.17|
|  Covered loans represent loans acquired in the Westernbank FDIC-assisted transaction that are covered under FDIC loss sharing agreements.
 Per share data has been adjusted to retroactively reflect the 1-for-10 reverse stock split effected on May 29, 2012.
- The results for the second quarter of 2012 reflect a tax benefit of $72.9 million related to the tax treatment of the loans acquired in the Westernbank FDIC-assisted transaction (the “Acquired Loans”). In June 2012, the Puerto Rico Department of the Treasury (the “P.R. Treasury”) and the Corporation entered into a Closing Agreement (the “Closing Agreement”) to clarify that those Acquired Loans are a capital asset and any gain resulting from such loans will be taxed at the capital gain tax rate of 15% instead of the ordinary income tax rate of 30%, thus reducing the deferred tax liability on the estimated gain and recognizing an income tax benefit for accounting purposes during the quarter. As part of the Closing Agreement, the Corporation prepaid to the P.R. Treasury the estimated tax of $72.9 million related to these estimated capital gains. The effective tax rate for the Corporation’s Puerto Rico banking operations for 2012 is estimated at 20%.
- During the second quarter of 2012, negative valuation adjustments on commercial and construction loans held-for-sale of approximately $34.7 million were recognized by Banco Popular de Puerto Rico (“BPPR”). The quarterly valuation analyses of the outstanding loans held-for-sale, which considered the impact of recent appraisals and market indicators, resulted in an unfavorable adjustment of $27.3 million for the current quarter. Also, there were $7.4 million in additional unfavorable valuation adjustments, mostly from the reclassification of certain loans from loans held-for-sale to other real estate. As of June 30, 2012, commercial and construction loans held-for-sale in the BPPR reportable segment amounted to $177 million.
- During the quarter ended June 30, 2012, the Corporation recognized a loss on the early extinguishment of debt of $25.0 million related to the early termination of $350 million in outstanding repurchase agreements (“repos”) with contractual maturities between March 2014 and May 2014, with an average cost of 4.36%. The Corporation anticipates replacing these repos with short-term borrowings at current market rates.
- In early May 2012, the Corporation received a $131 million cash dividend from its investment in EVERTEC’s parent company. As a result of the dividend, the Corporation’s equity investment balance in the entity was reduced by the amount of the dividend and stands at $62 million as of quarter-end. The Corporation’s participation interest in the entity was 48.5% as of quarter-end.
- During the quarter ended June 30, 2012, approximately $273 million in performing mortgage loans were acquired by Banco Popular North America (“BPNA”) and $225 million in performing consumer loans by BPPR.
- The Company announced that it now expects to earn between $210 million and $225 million for 2012. This is a higher nominal range than the $185 million to $200 million range previously disclosed. However, after excluding the three unusual events of the quarter (i.e., the tax benefit, the expense on the early extinguishment of high-cost repos and the negative valuation adjustments on loans held for sale) the range is $10 million less than previously disclosed.
- The net interest margin was 4.33% for the second quarter of 2012, compared with 4.27% for the first quarter of 2012. The increase in net interest income of $3.6 million for the second quarter of 2012, compared with the first quarter of 2012, was principally due to a higher yield on the covered loan portfolio and a lower average balance and cost of interest-bearing deposits, partially offset by a lower yield on investment securities and a reduction in the yield of non-covered loans. Refer to Table D for detailed information on average financial condition balances and an analysis of yield / rates by main categories.
- The increase in interest income on loans was mostly due to an increase in the interest derived from covered loans by $4.3 million, or 69 basis points. This increase was primarily attributable to a commercial single loan pool accounted for under ASC 310-30 that was paid off in the second quarter of 2012 and its remaining discount was accreted into interest income.
- Additionally, there was an increase of $2.3 million in interest income in the non-covered mortgage loan portfolio, which was mainly associated with higher volumes driven by loan purchases by BPNA during the second quarter of 2012.
- The decrease in interest income on non-covered construction loans of $3.1 million was principally related to the Corporation’s U.S. mainland operations’ full recovery of certain large loan relationships during the first quarter of 2012 that had been in non-accrual.
- The decrease in interest income on consumer loans of $1.5 million was mainly related to the credit cards portfolio due to a combination of lower average balances and lower blended rates.
- The Corporation’s interest expense on deposits decreased by $3.2 million, or 5 basis points, reflecting the continuing progress in repricing the Corporation’s deposit base and a decrease in the average balance of deposits, mainly in retail certificates of deposit and brokered certificates of deposit.
- Additionally, the interest expense on short-term borrowings, including repos, declined $0.5 million, as the Corporation used available liquid funds to repay short-term debt.
- The BPPR reportable segment recorded $298.5 million in net interest income for the quarter ended June 30, 2012, compared with $290.1 million for the quarter ended March 31, 2012. The net interest margin was 5.07% for the second quarter of 2012, compared with 4.90% for the first quarter of the current year. The increase in net interest income was principally due to higher interest income from the covered loan portfolio by $4.3 million as previously explained, coupled with the reduction in the interest expense on deposits due to lower volumes and a reduction in the average cost from 0.87% for the first quarter of 2012 to 0.81% for the second quarter of 2012.
- The BPNA reportable segment recorded $69.6 million in net interest income for the quarter ended June 30, 2012, compared with $74.1 million for the quarter ended March 31, 2012. The net interest margin was 3.55% for the second quarter of 2012, compared with 3.78% for the first quarter of the current year. The decrease in net interest income was principally related to the commercial and construction loan portfolios’ lower volumes and to the previously mentioned interest recovery related to certain large loan relationships collected during the first quarter, partially offset by higher mortgage loan volume related to purchases during the second quarter of 2012.
- The provision for loan losses for the quarter ended June 30, 2012 amounted to $119.2 million, an increase of $18.5 million when compared with the first quarter of 2012, mainly related to the covered loan portfolio. The ratio of total allowance for loan losses to loans held-in-portfolio stood at 3.10% as of June 30, 2012, compared with 3.25% as of March 31, 2012.
- The provision for loan losses for the non-covered loan portfolio amounted to $81.7 million, relatively unchanged from the first quarter of 2012. The current quarter provision for loan losses reflected lower net charge-offs and reductions in the allowance for loan losses, mainly from the commercial, legacy and consumer loan portfolios as a result of continued improvement in credit trends. These improvements were in part offset by higher loss trends in the residential mortgage loan portfolio in the BPPR reportable segment coupled with a lower reserve release, compared to the first quarter of 2012, as the first quarter included a net benefit of $24.8 million from the enhancements to the Corporation’s allowance for loan losses methodology. The increase in the residential mortgage loan loss trends was principally related to the implementation of a revised charge-off policy during the first quarter of 2012.
- The provision for loan losses on the covered loan portfolio, which increased by $19.2 million, was primarily driven by loans accounted for pursuant to ASC 310-30. The provision for loan losses for loans accounted under ASC 310-30 amounted to $28.2 million for the quarter ended June 30, 2012, compared with $11.4 million for the first quarter of 2012. The increase of $16.8 million in the provision for loan losses on these loans was prompted by credit losses in excess of those originally estimated at the acquisition date, related to certain commercial and construction loan pools. The provision for loan losses related to loans accounted under ASC 310-20 amounted to $9.2 million for the quarter ended June 30, 2012, compared with $6.8 million for the first quarter of 2012. Net charge-offs on these covered loans accounted for under ASC 310-20 amounted to $29.6 million, an increase of $25.3 million from the first quarter of 2012. This increase in net charge-offs was mainly related to the receipt of discounted pay-offs from two particular relationships, for which impaired amounts were reserved in prior periods.
- Net loss on sale of loans, including unfavorable valuation adjustments on loans held-for-sale, totaled $15.4 million for the second quarter of 2012, compared with a net gain of $15.5 million for the first quarter of 2012. The negative variance of $30.9 million, compared with the first quarter, was principally due to valuation adjustments on loans held-for-sale from the quarterly valuation analysis of $27.3 million.
- Higher trading account losses by $5.1 million primarily due to higher realized losses on derivatives in the mortgage banking business, that are economically offset by higher gains on securitization transactions, but which benefits are recorded in the net gain (loss) on sale of loans category.
- Other service fees decreased by $4.0 million, mostly due to a quarter-over-quarter unfavorable variance in mortgage servicing fees of $6.6 million, primarily from higher unfavorable valuation adjustments, partially offset by an increase in credit card fees of $1.7 million mainly as a result of higher interchange fees from increased customer purchasing activity. Refer to Table F in the Financial Supplement for a breakdown of other service fees.
- The category of other operating income in Table B shows a decrease of $5.7 million mostly due to lower income from investments accounted for under the equity method principally driven by a quarter-over-quarter negative variance of $7.7 million from the equity pick-up from PRLP 2011 Holdings, LLC, which holds the commercial and construction loans sold by BPPR during 2011, of which BPPR retained a 24.9% equity participation. Partially offsetting this unfavorable variance was a gain of $2.5 million from the sale of the wholesale indirect general agency property and casualty business of Popular Insurance during the second quarter of 2012.
- The above unfavorable variances in non-interest income were partially offset by FDIC loss share income of $2.6 million recognized in the second quarter of 2012, compared with FDIC loss share expense of $15.3 million for the first quarter of 2012. This variance was principally associated with the increase of $19.2 million in the provision for loan losses on covered loans and with the recognition of $10.7 million mirror offset of reimbursable loan-related expenses from the FDIC under the loss sharing agreements, partially offset by higher amortization of the loss share asset mainly due to a reduction in expected losses and as a result of the pay-off of a single loan pool during the quarter. Refer to Table O for financial information on the covered loans and the composition of the FDIC loss share income (expense).
- Higher loss on early extinguishment of debt by $25.0 million primarily related to the previously mentioned cancellation of certain high-cost repos by BPPR.
- Higher business promotion expenses by $4.1 million mostly from credit card reward programs and other retail product promotional campaigns in Puerto Rico and from BPNA’s New York Region’s rebranding efforts concentrated in the second quarter.
- Higher professional fees by $4.0 million, mainly from appraisal services, credit collection efforts through attorneys and consulting fees, including services related to strategic projects to achieve efficiencies, such as the redesigning of credit lending and administration processes.
- The category of other operating expenses in Table B shows an increase of $18.8 million, which was mainly driven by the following factors: lower credits to the provision for unfunded credit commitments by $4.4 million in the second quarter of 2012, compared with the first quarter of 2012, mainly due to decreases in the funding rate and a lower magnitude of improvements in the potential loss expectations than in the previous quarter; and to costs associated with the collection efforts of the covered loan portfolio. Under the loss share agreements, 80% of certain expenses are reimbursable by the FDIC and although the related expenses are reflected in this category, the 80% offset to these expenses is recorded in the income statement category of FDIC loss share income (expense) in non-interest income, as previously indicated.
- The variance in the category of other real estate owned costs, which considers gains (losses) on sale of properties and fair value write-downs from valuation assessments, was principally due to higher gains on the sale of commercial and construction real estate properties by $10.6 million, including sales by BPPR and BPNA.
- Personnel costs decreased by $5.2 million, as shown in Table B, principally due to a decrease in the category of salaries by $1.0 million; pension, postretirement and medical insurance costs by $2.3 million; and in other personnel costs by $3.5 million. These favorable variances were partially offset by an increase in commissions, incentives and other bonuses of $1.6 million, mostly from an increase in fees from the sale and administration of investment products from the retail business at Popular Securities.
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