Popular, Inc. Announces Second Quarter 2023 Financial Results

Popular, Inc. (the “Corporation,” “Popular,” “we,” “us,” “our”) (NASDAQ:BPOP) reported net income of $151.2 million for the quarter ended June 30, 2023, compared to net income of $159.0 million for the quarter ended March 31, 2023.

Ignacio Alvarez, President and Chief Executive Officer, said: “Popular achieved another strong quarter, with net income of $151 million. We are particularly pleased by the growth in our loan portfolios, both in Puerto Rico and the United States, which allowed us to maintain our net interest income stable despite higher deposit costs. Our deposit base remained strong and well-diversified. Our results were further bolstered by positive credit quality trends and healthy non-interest income. We continued investing in areas such as people, regulatory compliance and technology, confident that they will contribute to our long-term success. We are encouraged by the resiliency of the U.S. economy and sustained economic activity in Puerto Rico. Our strong levels of capital and liquidity position us well to support such activity and serve the evolving needs of our growing customer base.”

Significant Events

Redemption of Senior Notes

On March 13, 2023, the Corporation issued $400 million aggregate principal amount of 7.25% Senior Notes due 2028 (the “2028 Notes”) in an underwritten public offering. On July 14, 2023, the Corporation announced that it will use a portion of the net proceeds of the 2028 Notes offering to redeem, on August 14, 2023, the outstanding $300 million aggregate principal amount of its 6.125% Senior Notes due September 2023. The redemption price will be equal to 100% of the principal amount plus accrued and unpaid interest through the redemption date.

Refer to Table I for further details of liquidity sources.

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 Tables D and E for the quarter ended June 30, 2023 and Table F for the six-month periods ended June 30, 2023 and 2022. 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 June 30, 2023 was $531.7 million, flat over the previous quarter. Net interest income on a taxable equivalent basis for the second quarter of 2023 was $558.4 million compared to $570.4 million in the previous quarter, a decrease of $12.0 million. The decrease in the taxable equivalent net interest income is related to a lower volume of exempt investments and higher disallowed interest expense in the Puerto Rico tax computation. The latter results from the increase in the Corporation’s cost of deposits that is attributable to the tax-exempt income. Refer to the income taxes discussion for further information.

Net interest margin for the quarter was 3.14%, compared to 3.22% in the first quarter of 2023, a decrease of eight basis points. On a taxable equivalent basis, net interest margin for the second quarter of 2023 was 3.29%, compared to 3.46% for the prior quarter. The main variances in net interest income on a taxable equivalent basis were:

• higher interest expense on deposits by $50.3 million due to the increase in rates, mainly from the increase in volume and cost of Puerto Rico government deposits, and a higher cost in most deposit categories in both Banco Popular de Puerto Rico (“BPPR”) and Popular Bank (“PB” or “Popular U.S. Operations”);

partially offset by:

• higher interest income from loans by $30.4 million resulting from an increase in average loans by $635 million, reflecting increases in both BPPR and PB and across all major lending segments. Loan origination in a higher interest rate environment and the repricing of adjustable-rate loans resulted in a higher yield on loans by 18 basis points. The categories with the highest impact were commercial loans, which increased by $18.5 million in interest income, or 20 basis points, and consumer loans which increased by $5.6 million, or 36 basis points; and
• higher interest income from investment securities, trading and money market investments by $12.6 million driven mainly by a higher volume of money market investments, which reflects a 50 basis points increase in yield related to the increase in the Federal funds rate, partially offset by a lower volume of investment securities.

Net interest income for the BPPR segment amounted to $453.1 million for the second quarter of 2023, $3.3 million higher than the first quarter of 2023. Net interest margin decreased three basis points to 3.21% compared to 3.24% in the first quarter of 2023. The decrease in net interest margin was due to a higher volume of deposits and to a shift in the mix of BPPR deposits towards higher yielding Puerto Rico government deposits. The increase in net interest income at the BPPR segment can be attributed to a higher volume of loans and overnight Fed funds reserves. Earning assets yield at the BPPR segment improved to 4.57%, an increase of 22 basis points from the prior quarter. The average volume of earning assets at the BPPR segment increased $521 million while the average volume of total deposits increased by $539 million, mainly P.R. public sector deposits. Public sector deposits were $1.2 billion higher on average than during Q1 2023 and were partially offset by decreases in commercial interest-bearing deposits. The cost of interest-bearing deposits at BPPR increased 34 basis points to 1.95% from 1.61% the previous quarter. The increase in the cost of deposits at BPPR was mainly impacted by the repricing of public funds. Total deposit costs in the second quarter of 2023 were 1.44%, compared to 1.18% in the quarter ended March 31, 2023, an increase of 26 basis points. Excluding the increase in public deposit costs, total commercial and retail deposits at BPPR increased by 14 basis points during the quarter.

Net interest income for PB was $87.5 million for the quarter ended June 30, 2023, compared to $90.1 million during the previous quarter, a decrease of $2.6 million. Net interest margin decreased by 33 basis points in the quarter to 3.01%, compared to 3.34% in the first quarter of 2023. The decrease in net interest margin was mostly driven by a higher cost of deposits, partially offset by a higher volume of loans and the repricing of adjustable-rate loans. The cost of interest-bearing deposits was 3.02%, compared to 2.47% during the first quarter of 2023, or an increase of 55 basis points, while total deposit cost was 2.55% compared to 2.01% in the previous quarter.

Non-interest income

Non-interest income amounted to $160.5 million for the quarter ended June 30, 2023, a decrease of $1.5 million when compared to $162.0 million for the quarter ended March 31, 2023. The main factors that contributed to the variance in non-interest income were:

• lower income from mortgage banking activities by $5.1 million, mainly related to an unfavorable variance of $4.8 million related to the fair value adjustments of mortgage servicing rights (“MSRs”), including the impact of portfolio runoff; and

• lower other operating income by $2.6 million mainly due to $7.0 million recognized in income during the first quarter of 2023 from successful insurance claim reimbursements related to prior period legal matters, partially offset by higher earnings from the portfolio of equity method investments;

partially offset by:

• higher service charges on deposit accounts by $3.1 million, mainly due to $2.9 million in non-balance compensation fees related to cash management services on commercial customer accounts; and

• higher other service fees by $4.2 million, mainly due to higher credit card and debit card fees due to higher volume of transactions and higher merchant acquiring fees from the revenue sharing agreement with Evertec Inc.

Refer to Table B for further details.

Operating expenses

Operating expenses for the second quarter of 2023 totaled $460.3 million, an increase of $19.6 million when compared to the first quarter of 2023. The variance in operating expenses was driven primarily by:

• higher professional fees by $16.7 million mainly due to higher advisory services by $12.9 million related to corporate initiatives focused on regulatory, compliance and cyber security efforts, the impact of the grant in May 2023 of $1.9 million in directors’ share based payment, and an increase in audit fees by $1.1 million;

• higher technology and software expenses by $3.8 million mainly due to an increase in information technology professional and consulting fees by $2.1 million and higher software amortization expense by $1.1 million;

• higher processing and transactional services expenses by $3.9 million mainly due to broad based retail customers' debit card replacement costs incurred during the second quarter of 2023 of $3.4 million; and

• higher business promotion expenses by $6.2 million mainly due to higher customer reward program expenses in our credit card business by $4.3 million and higher advertising and sponsorship expense by $1.8 million;

partially offset by:

• lower personnel costs by $7.3 million, mainly due to a decrease in performance shares and restricted stock expenses by $4.8 million, and lower other compensation expenses by $5.0 million due to the impact of the minimum salary increase on vacations accruals and incentive payments adjustments, both recorded in the first quarter, and payroll taxes that are traditionally higher in the first quarter of the year; partially offset by an increase in health insurance costs by $2.3 million; and

• lower FDIC deposit insurance expense by $2.1 million due to a decrease in the assessment rate driven by the adoption of the Financial Accounting Standards Board (‘’FASB’’) issued Accounting Standards Update (‘’ASU’’) 2022-02 during the first quarter of 2023, which eliminated the accounting guidance for trouble debt restructures (‘’TDRs’’).

Full-time equivalent employees were 9,124 as of June 30, 2023, compared to 8,975 as of March 31, 2023.

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

Income taxes

For the quarter ended June 30, 2023, the Corporation recorded an income tax expense of $43.5 million compared to an income tax expense of $46.3 million for the previous quarter. The favorable variance in income tax expense was mainly attributable to lower income before tax. The effective tax rate (“ETR”) for the second quarter of 2023 was 22.4% while the ETR for the first quarter was 22.6%.

The ETR of the Corporation is impacted by the composition and source of its taxable income. The Corporation expects the ETR for the year 2023 to be within a range from 22% to 25%.

Credit Quality

During the second quarter of 2023, the Corporation continued to reflect strong credit quality metrics with low levels of net charge offs (“NCOs”) and decreasing non-performing loans (“NPLs”). We continue to closely monitor changes in the macroeconomic environment and on borrower performance, given inflationary pressures and geopolitical risks. However, management believes that the improvement over recent years in the risk profile of the Corporation’s loan portfolios positions Popular to continue to operate successfully under the current environment.

The following presents credit quality results for the second quarter of 2023:

• At June 30, 2023, total non-performing loans held-in-portfolio decreased by $26.9 million from March 31, 2023. BPPR’s NPLs decreased by $26.6 million, mostly driven by lower mortgage NPLs by $29.9 million, in part offset by higher construction NPLs due to a single $9.3 million relationship. PB’s NPLs remained flat quarter-over-quarter. At June 30, 2023, the ratio of NPLs to total loans held-in-portfolio was 1.2%, compared to 1.3% in the first quarter of 2023.

• Inflows of NPLs held-in-portfolio, excluding consumer loans, decreased by $10.0 million quarter-over-quarter. In BPPR, total inflows decreased by $10.6 million, mainly driven by lower commercial and mortgage NPLs by $13.4 million and $6.5 million, respectively, in part offset by the abovementioned construction relationship inflow. PB inflows remained flat quarter-over-quarter.

• NCOs amounted to $24.0 million, decreasing by $8.8 million when compared to the first quarter of 2023. BPPR’s NCOs decreased by $12.8 million quarter-over-quarter, mainly driven by lower consumer NCOs by $14.5 million, due to a $10.5 million line of credit charge-off in the prior quarter, coupled with lower auto loan NCOs by $4.7 million during the quarter. PB’s NCOs increased by $4.0 million due to a fully reserved commercial loan charged-off during the quarter. During the second quarter of 2023, the Corporation’s ratio of annualized NCOs to average loans held-in-portfolio was 0.29%, compared to 0.41% in the first quarter of 2023. Refer to Table O for further information on NCOs and related ratios.

• At June 30, 2023, the allowance for credit losses (“ACL”) increased by $11.1 million from the first quarter of 2023 to $700.2 million. In BPPR and PB, the ACL increased by $9.1 million and $2.0 million, respectively. These increases were mostly driven by specific reserves for collateral dependent U.S. commercial and P.R. construction loans, changes in macroeconomic scenarios, higher loan volumes and migration of P.R. consumer credit scores, partially offset by changes in the assignments of probability weights to macroeconomic scenarios, as discussed below, and reductions in qualitative reserves.

• 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. During the second quarter 2023, due to positive trends the Corporation lowered the probability weights assigned to the pessimistic scenario and increased the probability weight assigned to the baseline scenario, prompting a reserve release of $5.8 million. The baseline scenario continues to be assigned the highest probability, followed by the pessimistic scenario, and then the optimistic scenario.

• The 2023 annualized GDP growth in the baseline scenario stands at 1.5% and 1.6% for Puerto Rico and the United States, respectively, compared to 2.1% and 1.3% in the previous quarter. The 2023 forecasted average unemployment rate for Puerto Rico improved to 6.3% from 6.9% in the previous forecast, while in the United States unemployment levels remained stable at 3.6%, compared to 3.5% in the previous forecast.

• The Corporation’s ratio of the ACL to loans held-in-portfolio was 2.12% in the second quarter of 2023, compared to 2.13% in the previous quarter. The ratio of the ACL to NPLs held-in-portfolio stood at 181.6%, compared to 167.1% in the previous quarter.

• The provision for credit losses for the loan portfolios for the second quarter of 2023 was an expense of $35.7 million, compared to an expense of $47.1 million in the previous quarter, reflecting the previously mentioned changes in the allowance for credit losses. The provision for the BPPR segment was an expense of $28.4 million, compared to an expense of $45.2 million in the previous quarter, while the provision for PB was an expense of $7.3 million, compared to an expense of $1.9 million in the previous quarter.

• 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.