10-Q: Popular, Inc. Reports First Quarter 2024 Results; Net Income Declines Amidst Higher Expenses

Popular, Inc. announced its first quarter 2024 results, revealing a decrease in net income compared to the same period last year, influenced by increased operating expenses and a higher provision for credit losses.

Summary

• Popular, Inc.'s net income for the first quarter of 2024 was $103.3 million, a decrease from $159.0 million in the same quarter of 2023.
• Net interest margin decreased to 3.16% from 3.22% in the first quarter of 2023, primarily due to higher deposit costs.
• The provision for credit losses increased to $72.6 million, up from $47.6 million in the first quarter of 2023, driven by higher reserves in commercial and consumer portfolios.
• Non-interest income rose slightly to $163.8 million, compared to $162.0 million in the same quarter of the previous year.
• Operating expenses increased to $483.1 million, up from $440.7 million in the first quarter of 2023, mainly due to higher personnel costs, technology expenses, and the impact of the FDIC special assessment.
• The Corporation's total assets were $70.9 billion at March 31, 2024, compared to $70.8 billion at December 31, 2023.
• Total deposits increased to $63.8 billion at March 31, 2024, from $63.6 billion at December 31, 2023.
• The common equity tier 1 capital ratio was 16.36%, the tier 1 leverage ratio was 8.45%, and the total capital ratio was 18.19% as of March 31, 2024.

Sentiment

Score: 4

Explanation: The document presents a mixed picture with some positive aspects, such as increased net interest income and strong capital ratios, but the negative aspects, such as decreased net income, increased operating expenses, and higher provision for credit losses, outweigh the positives, resulting in a slightly negative sentiment.

Positives

• Net interest income increased by $19.1 million compared to the same quarter of the previous year.
• Total deposits increased by $190.5 million from the previous quarter.
• The Corporation's regulatory capital ratios remained strong, exceeding the minimum requirements for being well-capitalized.

Negatives

• Net income decreased by $55.7 million compared to the same quarter of the previous year.
• Net interest margin decreased by 6 basis points compared to the same quarter of the previous year.
• Operating expenses increased by $42.4 million compared to the same quarter of the previous year.
• The provision for credit losses increased by $25.0 million compared to the same quarter of the previous year.

Risks

• The Corporation's financial results are dependent on the general trends of the Puerto Rico economy and the residential and commercial real estate markets.
• The Corporation is exposed to the impact of the pending debt restructuring proceedings under Title III of PROMESA.
• The Corporation is exposed to the impact of changes in interest rates and market liquidity.
• The Corporation is exposed to the impact of bank failures or adverse developments at other banks and related negative media coverage of the banking industry.
• The Corporation is exposed to the impact of additional Federal Deposit Insurance Corporation (FDIC) assessments.
• The Corporation is exposed to the impact of a failure in or breach of its operational or security systems or infrastructure or those of third parties providing services to it, including as a result of cyberattacks.

Future Outlook

The Corporation's future performance is subject to various factors, including economic conditions, interest rate changes, regulatory changes, and competition in the financial services industry. Management will continue to monitor and review the U.S. operations results, including recent earnings trends, the pre-tax earnings forecast, any new tax initiative, and other factors, including net income versus forecast, targeted loan growth, net interest income margin, changes in deposit costs, allowance for credit losses, charge offs, NPLs inflows and NPA balances.

Management Comments

• Management believes that the Adjusted net income provides meaningful information about the underlying performance of the Corporations ongoing operations.
• Management believes that the improvements over recent years in risk management practices and the risk profile of the Corporations loan portfolios position Popular to continue to operate successfully under the current challenging environment.

Industry Context

The results reflect the challenges faced by financial institutions in a changing economic environment, including higher interest rates and inflationary pressures. The decrease in net interest margin and the increase in operating expenses are consistent with trends seen across the banking industry.

Comparison to Industry Standards

• The decrease in net interest margin from 3.22% to 3.16% is a common trend in the banking industry as institutions face higher deposit costs due to the increase in interest rates by the Federal Reserve.
• The increase in operating expenses by $42.4 million is higher than the average increase in operating expenses for the banking industry, mainly due to the impact of the FDIC Special Assessment and higher personnel costs.
• The increase in the provision for credit losses by $25.0 million is also higher than the average increase in the banking industry, mainly due to changes in credit quality in the commercial and consumer portfolios.
• The Corporation's capital ratios remain strong, exceeding the minimum requirements for being well-capitalized under the Basel III capital rules, which is consistent with the performance of other well-capitalized banks.
• The Corporation's tangible book value per common share of $60.06 is within the range of other banks with similar asset sizes.

Legal Proceedings

• The Corporation is involved in a class action lawsuit regarding overdraft fees, which is currently in the settlement phase.
• The Corporation is involved in a class action lawsuit regarding overdraft fees, which is currently in the mediation phase.

Related Party Transactions

• The Corporation has a 15.84% equity interest in Centro Financiero BHD, S.A. and recorded $7.3 million in equity pickup from this investment.
• The Corporation, through its subsidiary Popular Asset Management LLC (PAM), provides advisory services to several investment companies and charged $0.4 million in net fees.

Stakeholder Impact

• Shareholders may be concerned about the decrease in net income and the increase in operating expenses.
• Customers may be affected by changes in fees and interest rates.
• Employees may be affected by changes in personnel costs and compensation.
• Creditors may be affected by changes in the Corporations credit ratings and financial condition.

Next Steps

• The Corporation will continue to monitor and review the U.S. operations results, including recent earnings trends, the pre-tax earnings forecast, any new tax initiative, and other factors.
• The Corporation will continue to monitor the impact of the FDIC Special Assessment and its effect on future results.
• The Corporation will continue to monitor the impact of the ongoing Title III proceedings under PROMESA.

Key Dates

Keywords

net interest income, credit losses, operating expenses, Puerto Rico, FDIC, capital ratios, mortgage servicing rights, loan portfolio, deposits, intercompany distributions