Popular, Inc. Announces Fourth Quarter 2022 Financial Results

Popular, Inc. (the “Corporation,” “Popular,” “we,” “us,” “our”) (NASDAQ:BPOP) reported net income of $257.1 million for the quarter ended December 31, 2022, compared to net income of $422.4 million for the quarter ended September 30, 2022. Excluding the effects of the partial release of $68.2 million of the deferred tax asset valuation allowance, the net income for the fourth quarter was $188.9 million. The net income for the third quarter was $195.8 million after excluding the impact of the completed Evertec Transactions (as defined below) and related accounting adjustments.

Ignacio Alvarez, President and Chief Executive Officer, said: “We ended 2022 with a solid performance in the fourth quarter helping us achieve record earnings of $1.1 billion for the year. During the quarter, we continued to see broad-based loan growth and strong credit quality metrics, although our net interest income was impacted by higher deposit costs, primarily related to our portfolio of P.R. public deposits.

Our record annual earnings are the product of focusing on long-term customer relationships and sustainable growth strategies. In addition to outstanding earnings, during 2022, we also completed important strategic initiatives such as the acquisition of key customer-facing channels from Evertec and launched a broad-based multi-year, technological and business process transformation across the entire Company. We also returned $631 million to our shareholders through common stock share repurchases and increased our quarterly common stock dividend to $0.55 per share.

During 2023, we will continue to leverage the benefits of the Evertec transaction and will focus on growing and deepening our strong commercial and retail franchise in P.R. as we continue to look for appropriate opportunities in the U.S. market.

While we are aware of the macroeconomic headwinds related to inflation and geopolitical risks, we are confident that given the amount of stimulative support from federal funds, P.R. will continue its growth path, albeit perhaps at a slower pace.

2023 marks our 130th anniversary. During this time, we adapted and transformed ourselves on multiple occasions to address many political, economic and competitive changes that have occurred. We are committed to continuing that transformation by investing in the future of our organization, our people and the communities we serve to meet future challenges and continue to provide value to our shareholders.”

Significant Events

Transformation Initiative:

Popular has launched a significant, multi-year corporate transformation initiative designed to expand its digital capabilities, modernize its technology platform, and implement agile and efficient business processes across the Corporation.

Since completing the Evertec Transactions on July 1, 2022, through December 31, 2022, excluding compensation costs of our employees involved in the initiative, we expensed $24 million toward this effort, primarily in professional fees and technology related expenses. In 2023, we plan an expense of approximately $50 million toward this effort, excluding employee compensation and capitalized costs. We expect the expenses tied to this transformation initiative, which will continue through 2025 to result in an enhanced digital experience for our clients, as well as better technology and more efficient processes for our employees. We expect this effort to contribute to better efficiency and higher earnings, resulting in a targeted sustainable return on tangible common equity of 14% by the end of 2025.

To facilitate the transparency of our progress with these efforts, we have now separated technology, professional fees and transactional activities as standalone expense categories in the statement of operations.

Transfer of Securities from Available-for Sale to Held-To-Maturity

In October 2022, the Corporation transferred U.S. Treasury securities with a fair value of $6.5 billion (par value of $7.4 billion) from its available-for-sale portfolio to its held-to-maturity portfolio. Management changed its intent to hold these securities to maturity, given the Corporation’s liquidity position and its intention to reduce the impact on accumulated other comprehensive income (“AOCI”) and tangible capital of further increases in interest rates.

The securities were reclassified at fair value at the time of the transfer. At the date of the transfer, these securities had pre-tax unrealized losses of $873.0 million recorded in AOCI. This fair value discount is being accreted to interest income and the unrealized loss remaining in AOCI is being amortized, offsetting each other through the remaining life of the securities. There were no realized gains or losses recorded as a result of this transfer.

While changes in the amount of unrealized gains and losses in AOCI have an impact on the Corporation’s and its wholly-owned banking subsidiaries’ tangible capital ratios, they do not impact regulatory capital ratios, in accordance with the regulatory framework.

Capital Actions

On December 7, 2022 the Corporation completed the settlement of its previously announced accelerated share repurchase agreement (“ASR Agreement”) for the repurchase of an aggregate $231 million of Popular’s common stock, for which an initial 2,339,241 shares (the “Initial Shares”) were delivered on August 26, 2022. The transaction was accounted for as a treasury stock transaction. As a result of the receipt of the Initial Shares, the Corporation recognized in shareholders’ equity approximately $185 million in treasury stock and $46 million as a reduction of capital surplus. Upon the final settlement of the ASR Agreement, the Corporation received an additional 840,024 shares of common stock and recognized approximately $60 million as treasury stock with a corresponding increase in its capital surplus account. The Corporation repurchased a total of 3,179,265 shares at an average purchase price of $72.66 under the ASR Agreement.

Partial Release of the Deferred tax Asset Valuation Allowance

During the fourth quarter of 2022, the Corporation recorded a partial reversal of the deferred tax asset valuation allowance of the U.S. operations of $68.2 million. As of December 31, 2022 the deferred tax asset ("DTA") for the U.S. operations, mainly related to net operating losses (“NOLs”), was valued at $278 million, net of the corresponding valuation allowance of $423 million. The additional reversal during the fourth quarter was determined based on management’s expectation of the realization of additional amounts of federal and states NOLs over their remining carryover period. The determination was based on the U.S. operations’ sustained profitability during the years ended December 31, 2021 and 2022, together with evidence of stable credit metrics and the length of the expiration of the net operating losses. As of December 31, 2022, the Corporation had approximately $525 million in DTA related to federal NOLs with expiration dates between 2028 and 2033 and approximately $155 million in DTA related to state NOLs with expiration dates between 2031 and 2036.

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, 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 December 31, 2022 was $559.6 million, compared to $579.6 million in the previous quarter, a decrease of $20.0 million. Net interest income on a taxable equivalent basis for the fourth quarter of 2022 was $621.5 million compared to $646.6 million in the previous quarter, a decrease of $25.1 million.

Net interest margin for the quarter was 3.28% compared to 3.32% in the previous quarter. On a taxable equivalent basis, net interest margin for the fourth quarter of 2022 was 3.64%, compared to 3.71% in the prior quarter. The decrease in net interest margin is mainly related to a higher interest expense on deposits, partially offset by higher volume of loans and change to the earning asset mix, with increases in loan balances and reductions to lower yielding money markets, investments and trading securities. The main variances in net interest income on a taxable equivalent basis were:

• higher interest expense on deposits by $78.4 million due to the increase in rates, mainly from Puerto Rico government deposits.

partially offset by:

• higher interest income from money market deposits by $13.9 million, resulting from higher yield of the portfolio by 166 basis points driven mainly by the full quarter’s effect of increases in the interest on excess funds at the Federal Reserve at the end of July and September, fully impacting the fourth quarter, and further increases at the beginning of November and mid-December, partially offset by lower volume by $1.5 billion mainly related to a decrease in deposits and a higher loan volume; and
• quarter-over-quarter, the Corporation’s loan portfolio’s average balance increased by $980 million reflecting increases in the U.S. and P.R. and across all major loan segments except construction loans. Loan origination in a higher interest rate environment and the repricing of adjustable-rate loans resulted in a higher yield on loans by 31 basis points. The categories with the highest impact were commercial loans with an increase of $29.5 million in interest income or 49 basis points and consumer loans that increased $8.1 million or 52 basis points

Net interest income for the Banco Popular de Puerto Rico (“BPPR”) segment amounted to $472.4 million for the fourth quarter of 2022, compared to $488.1 million in the third quarter of 2022. Net interest margin remained flat at 3.26% compared to 3.27% in the third quarter of 2022. The decrease in net interest income of $15.7 million was mostly driven by a higher cost of deposits, partially offset by the improvement in the yield on earning assets and the change to the asset mix. The yield on earning assets increased 45 basis points driven by the repricing of money market investments and adjustable-rate loans and a higher volume of average loans by $671 million. Earning assets decreased by $1.6 billion mainly driven by the decrease of P.R. public sector and commercial interest-bearing deposits. The cost of interest-bearing deposits increased 67 basis points to 1.13% from 0.46% the previous quarter. The increase in the cost of deposits was mainly impacted by the repricing of public funds and corporate clients. Total deposit cost for the quarter increased by 49 basis points from 0.34% to 0.83%.

Net interest income for Popular Bank (“PB”) was $94.2 million for the quarter ended December 31, 2022, compared to $98.9 million during the previous quarter, a decrease of $4.7 million. Net interest margin decreased 29 basis points in the quarter to 3.55% compared to 3.84% in the third quarter of the year. The decrease in net interest margin was mostly driven by a higher cost of deposits, partially offset by higher volume of loans and the repricing, of adjustable-rate loans driven by the changes in interest rates. The cost of interest-bearing deposits was 1.71% compared to 0.85%, or an increase of 86 basis points while total deposit cost was 1.34% compared to 0.67% in the previous quarter.

Non-interest income

Non-interest income amounted to $158.5 million for the fourth quarter of 2022, a decrease of $268.0 million compared to $426.5 million in the previous quarter. The results for the third quarter of 2022 included $257.7 million from the gain on the sale of the Corporation’s shares from Evertec, Inc. (“Evertec”), including those sold in connection BPPR’s acquisition of certain assets from Evertec Group, LLC, a wholly owned subsidiary of Evertec, to service certain BPPR channels (the “Evertec Business Acquisition”), the subsequent the sale of BPPR’s remaining 7,065,634 shares of common stock of Evertec, Inc. (together with the Evertec Business Acquisition, the “Evertec Transactions”) and related accounting adjustments. Other factors that contributed to the variance in non-interest income were:

• Lower service charges on deposit accounts by $5.3 million due to lower overdraft related charges and lower cash management service charges from commercial clients due to higher earnings credits on transactional accounts;
• lower mortgage banking activities by $2.9 million due to a negative variance in the valuation of mortgage servicing rights by $2.1 million and a negative variance of $1.0 million in gains from loans securitization activity, net of valuation adjustments on loans held-for-sale;
• an unfavorable variance in the adjustments for indemnity reserves on loans previously sold of $1.9 million;
• a favorable adjustment recorded in the third quarter of $9.2 million in the fair value of the contingent consideration related to purchase price adjustments for the Popular Equipment Finance (“PEF”) acquisition of the K2 Capital Group LLC business in 2021 (‘’K2 Acquisition’’), after the Corporation updated its estimates related to the realizability of the earnings targets for the contingent payment; and
• lower earnings from the portfolio of equity method investments by $2.2 million, excluding Evertec;

partially offset by:

• a gain of $8.2 million from the sale of an investment which had been previously written off;
• higher other service fees by $2.6 million mainly due to higher credit and debit card fees related to interchange income and seasonal activity, partially offset by lower insurance fees, including contingent payments of approximately $500,000 received during the third quarter; and
• a favorable variance of $1.8 million on the fair value adjustments to the portfolio of equity securities related to deferred benefit plans, which have an offsetting effect recorded as higher personnel costs;

Refer to Table B for further details.

Operating expenses

Operating expenses for the fourth quarter of 2022 totaled $461.7 million, a decrease of $14.4 million when compared to the third quarter of 2022. The variance in operating expenses was driven primarily by:

• lower personnel costs by $3.7 million mainly due to a decrease in health insurance costs by $4.7 million, lower profit-sharing accrual and lower commissions, incentives and other bonuses by $2.6 million partially offset by higher salaries and other personnel costs by $3.6 million;
• lower credit and debit card processing and transactional expenses by $3.3 million mainly due to transaction volume rebates and incentives recognized during the quarter;
• higher other real estate owned (OREO) benefit by $6.7 million mainly due to higher gain on sale of mortgage and commercial properties and higher expense claim reimbursement from federal government agency programs;
• lower other operating expenses by $12.0 million, mainly due to the effect of a previous quarter expense related to the Evertec Transactions of $17.3 million, partially offset by $2.0 million of higher sundry loss reserves and
• a goodwill impairment charge of $9.0 million recorded during the previous quarter due to a decrease in PEF’s projected earnings considered as part of the Corporation’s annual goodwill impairment analysis.

partially offset by:

• higher equipment expenses by $1.1 million due to higher maintenance and repair costs of equipment;
• higher professional fees by $1.5 million mainly due to higher advisory expense related to corporate initiatives;
• higher technology and software expenses by $9.9 million mainly due to various ongoing technology projects;
• higher other processing and transactional services by $3.7 million mainly due to higher incentives received during the prior quarter related to the ATH Network Participation Agreement entered into in connection with the Evertec Business Acquisition; and
• higher business promotion expenses by $3.8 million mainly due to seasonal projects and sponsorships during the quarter.

Full-time equivalent employees were 8,813 as of December 31, 2022 compared to 8,747 as of September 30, 2022.

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

Income Taxes

For the quarter ended December 31, 2022, the Corporation recorded an income tax benefit of $50.3 million compared to an income tax expense of $68.0 million for the previous quarter. The favorable variance in income tax expense was mainly attributable to a partial reversal of the deferred tax asset valuation allowance of the U.S. operation during the fourth quarter of $68.2 million and lower income before tax, higher benefit from tax-exempt income, including true-up adjustment of $9.5 million in relation to the fiscal year 2021 tax returns for the P.R. subsidiaries filed in the fourth quarter and related year-to-date adjustments for the same concept. The effective tax rate (“ETR”) for the fourth quarter was of (24)%. Excluding the impact of the partial release of the valuation allowance and true up adjustment, the ETR for the fourth quarter was of 12%, compared to 14% for the previous quarter. The ETR of the Corporation is impacted by the composition and source of its taxable income. The Corporation expects its ETR for the year 2023 to be within a range from 18% to 22%.

Credit Quality

During the fourth quarter of 2022, the Corporation continued to reflect stable credit quality trends with low levels of NCOs and decreasing NPLs. We continue to closely monitor changes in the macroeconomic environment and on borrower performance, given inflationary pressures and geopolitical uncertainty. However, management believes that the improvement over recent 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 2022:

• At December 31, 2022, total non-performing loans held-in-portfolio decreased by $14.0 million from September 30, 2022. BPPR’s NPLs decreased by $8.2 million, mostly driven by lower mortgage and commercial NPLs by $10.4 million and $5.3 million, respectively, in part offset by higher auto loans NPLs by $6.5 million. PB’s NPLs decreased by $5.8 million quarter-over-quarter, mostly due to a $8.7 million charge-off on a previously reserved commercial borrower in the healthcare industry that was placed in non-accrual status the previous quarter. At December 31, 2022, the ratio of NPLs to total loans held-in-portfolio remained flat at 1.4%, compared to the third quarter of 2022.
• Inflows of NPLs held-in-portfolio, excluding consumer loans, decreased by $2.7 million quarter-over-quarter. In BPPR, total inflows increased by $5.0 million, mostly driven by higher mortgage inflows of $5.1 million. Mortgage inflows continued trending lower than pre-pandemic levels. NPL inflows at PB decreased by $7.6 million quarter-over-quarter, mainly driven by the abovementioned commercial healthcare loan placed in non-accrual in the previous quarter.
• NCOs amounted to $31.2 million, an increase of $13.0 million when compared to the third quarter of 2022. BPPR’s NCOs remained stable, increasing by $1.5 million quarter-over-quarter, mainly driven by higher consumer NCOs by $5.5 million, mostly due to higher auto NCOs, in part offset by lower mortgage NCOs by $4.0 million. PB’s NCOs increased by $11.5 million quarter-over-quarter, mainly due to the charge-off on the abovementioned healthcare loan. During the fourth quarter of 2022, the Corporation’s ratio of annualized net charge-offs to average loans held-in-portfolio was 0.39%, compared to 0.24% in the third quarter of 2022. Refer to Table M for further information on net charge-offs and related ratios.
• At December 31, 2022, the ACL increased by $17.2 million, or 2.5%, from the third quarter of 2022 to $720.3 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 baseline scenario assumes a 2023 annualized GDP growth for Puerto Rico and the United States of 1.3% and 0.7%, respectively, compared to 2.2% and 1.5% in the previous quarter. For 2022, annualized expected growth was 2.6% and 1.8% for Puerto Rico and United States, respectively. The reduction in 2023 is due to the expected slowdown in the economy as a result of tight monetary policy, weaker job growth and persistent inflation.
• The 2023 average unemployment rate remained largely consistent quarter-over-quarter forecasted at 7.8% and 4.0% for Puerto Rico and United States, respectively, compared to 7.8% and 3.9% respectively, in the previous forecast. In 2023, weaker job growth due to the expected slowdown in the economy will contribute to the increase in unemployment rate from 2022 average levels of 6.4% for Puerto Rico and 3.7% for the United States.
• In BPPR, the ACL increased by $24.6 million, mostly driven by changes in the economic scenario, higher loan volumes and changes in credit quality. The ACL for the PB segment decreased by $7.4 million quarter-over-quarter, mainly driven by an $8.7 million charge-off on the previously mentioned commercial healthcare NPL. The Corporation’s ratio of the allowance for credit losses to loans held-in-portfolio was 2.25% in the fourth quarter of 2022, compared to 2.23% in the previous quarter. The ratio of the allowance for credit losses to NPLs held-in-portfolio stood at 163.9%, compared to 155.1% in the previous quarter.
• The provision for credit losses for the loan portfolios for the fourth quarter of 2022 was an expense of $48.3 million, compared to an expense of $39.5 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 $44.4 million, compared to an expense of $28.7 million in the previous quarter, while the provision for the PB segment was an expense of $3.9 million, compared to an expense of $10.8 million in the previous quarter.
• The provision for unfunded commitments for the third quarter of 2022 was an expense of $1.5 million, compared to an expense of $0.4 million in the previous quarter. The provision for credit losses in our investment portfolio was a benefit of $0.3 million, flat quarter-over-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.

Total assets amounted to $67.6 billion at December 31, 2022, a decrease of $3.1 billion from the third quarter of 2022, driven by:

• A decrease in debt securities of $3.9 billion due to maturities and paydowns, partially offset by purchases and a favorable variance of $193.4 million in net unrealized losses in the portfolio of available-for-sale securities.

partially offset by:

• an increase in loans held-in-portfolio of $0.6 billion across all loan categories, except construction loans. The increase was mainly due to commercial loan growth at both BPPR and PB and an increase in mortgage and consumer loans at BPPR, mainly in personal loans and credit cards.

Total liabilities decreased by $3.5 billion from the third quarter of 2022, driven by:

• a decrease of $3.6 billion in deposits, mainly in Puerto Rico public sector deposits by $2.2 billion, and non-public deposits by $1.4 billion mainly from commercial interest-bearing accounts in Puerto Rico;

partially offset by:

• an increase in borrowings of $115.0 million, mainly due to advances from the FHLB at PB.

Stockholders' equity increased by $418.6 million from the third quarter of 2022, principally due to net income for the quarter of $257.1 million and a favorable variance of $193.4 million in net unrealized losses in the portfolio of available-for-sale securities, partially offset by dividends declared for the quarter.

Common equity tier-1 ratio (“CET1”), common equity per share and tangible book value per share were 16.39%, $56.66 and $44.97, respectively, at December 31, 2022, compared to 16.04%, $50.26 and $38.69 at September 30, 2022. Refer to Table A for capital ratios.

Refer to Table C for the Statements of Financial Condition.

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 regarding 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 Popular’s ability to successfully execute its transformation initiative, including, but not limited to, achieving projected earnings, efficiencies and return on tangible common equity and accurately anticipating costs and expenses associated therewith. The Corporation’s ability to successfully transition and integrate the assets acquired as part of the Evertec Business Acquisition, 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 Evertec Business Acquisition or that are not subject to indemnification or reimbursement by Evertec; operational risks that may affect Popular 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 may also cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. 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 Form 10-K for the year ended December 31, 2021, in our Form 10-Q for the quarters ended March 31, 2022, June 30, 2022 and September 30, 2022, and in our Form 10-K for the year ended December 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 Wednesday, January 25, 2023 at 10:00 a.m. Eastern Time. The call will be broadcast 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 a dial-in telephone number 1-844-200-6205 (Toll Free) or 1-646-904-5544 (Local). The dial-in access code is 922986.

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, February 24, 2023. The replay dial in is: 1-866-813-9403 or 1-929-458-6194. The replay passcode is 431712.

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