10-Q: Popular, Inc. Reports Second Quarter 2024 Results, Net Income Reaches $177.8 Million

Popular, Inc. announces its second quarter 2024 financial results, with net income reaching $177.8 million, showcasing a positive performance compared to the same period last year.

Summary

• Popular, Inc. reported a net income of $177.8 million for the second quarter of 2024, an increase from $151.2 million in the same quarter of 2023.
• The net interest margin for the quarter was 3.22%, up from 3.14% in the second quarter of 2023, driven by higher yields on earning assets and reinvestment of maturities in higher yielding U.S. Treasury bills.
• The provision for credit losses was $46.8 million, compared to $37.2 million in the same quarter of 2023, reflecting loan growth and higher reserves in the auto leasing portfolio.
• Non-interest income increased to $166.3 million, up from $160.5 million in the second quarter of 2023, mainly due to higher income from mortgage banking activities and other service fees.
• Operating expenses were $469.6 million, an increase of $9.3 million compared to the same quarter of 2023, driven by higher technology and software expenses, personnel costs, and FDIC deposit insurance expense.
• Total assets reached $72.8 billion at June 30, 2024, compared to $70.8 billion at December 31, 2023, driven by an increase in available-for-sale investment securities and loan growth.
• Total deposits increased to $65.5 billion at June 30, 2024, up from $63.6 billion at December 31, 2023, mainly due to an increase in Puerto Rico public sector deposits and higher deposits in Popular Bank.
• Stockholders equity increased to $5.4 billion at June 30, 2024, from $5.1 billion at December 31, 2023, mainly due to net income and the amortization of unrealized losses from securities previously reclassified to held-to-maturity, partially offset by the after-tax impact of the increase in net unrealized losses in the portfolio of AFS securities and common and preferred dividends declared during the period.
• The Corporation's common equity tier 1 capital ratio was 16.48%, the tier 1 leverage ratio was 8.53%, and the total capital ratio was 18.30% at June 30, 2024.

Sentiment

Score: 7

Explanation: The document presents a generally positive outlook with improved net income and net interest margin, but also highlights some challenges such as increased operating expenses and provision for credit losses. The overall tone is cautiously optimistic.

Positives

• Net interest income increased by $36.6 million compared to the same quarter of 2023.
• The Corporation's net interest margin increased by 8 basis points compared to the same quarter of 2023.
• Non-interest income increased by $5.8 million compared to the same quarter of 2023.
• The Corporation's common equity tier 1 capital ratio, tier 1 leverage ratio, and total capital ratio all exceed the minimum requirements for being well-capitalized under the Basel III capital rules.
• Total assets and deposits both increased compared to December 31, 2023.

Negatives

• Operating expenses increased by $9.3 million compared to the same quarter of 2023.
• The provision for credit losses increased by $9.6 million compared to the same quarter of 2023.
• The Corporation's income tax expense decreased by $3.0 million compared to the same quarter of 2023.

Risks

• The Corporation's financial results are dependent upon the general trends of the Puerto Rico economy and, in particular, 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 and other actions taken to address Puerto Ricos fiscal challenges.
• 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 in general on investor and depositor sentiment regarding the stability and liquidity of banks.
• The Corporation is exposed to changes in interest rates and market liquidity, which may reduce interest margins, impact funding sources, reduce loan originations, affect our ability to originate and distribute financial products in the primary and secondary markets and impact the value of our investment portfolio and our ability to return capital to our shareholders.
• The Corporation is exposed to a failure in or breach of our operational or security systems or infrastructure or those of Evertec, Inc., our provider of core financial transaction processing and information technology services, or of third parties providing services to us, including as a result of cyberattacks, e-fraud, denial-of-services and computer intrusion, resulting in, among other things, loss or breach of customer data, disruption of services, reputational damage or additional costs to Popular.

Future Outlook

The Corporation plans to continue to monitor general business and economic conditions, industry-related indicators and trends, competition, interest rate volatility, credit quality indicators, loan and deposit demand, operational and systems efficiencies, revenue enhancements and changes in the regulation of financial services companies.

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 presentation of net interest income on a taxable equivalent basis provides meaningful information since it facilitates the comparison of revenues arising from taxable and tax-exempt sources.
• Management believes that the tangible common equity ratio and tangible book value per common share in conjunction with more traditional bank capital ratios are commonly used by banks and analysts to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets.
• Management believes that the amount it has already accrued is adequate and any incremental liability arising from the Legal Proceedings in matters in which a loss amount can be reasonably estimated will not have a material adverse effect on the Corporations consolidated financial position.

Industry Context

The Corporation operates in a highly regulated environment and may be adversely affected by changes in federal and local laws and regulations. Also, competition with other financial institutions, as well as with non-traditional financial service providers and technology companies that provide electronic and internet-based financial solutions and services, could adversely affect its profitability.

Comparison to Industry Standards

• The Corporation's capital ratios continue to exceed the minimum requirements for being well-capitalized under the Basel III capital rules, indicating a strong capital position compared to regulatory benchmarks.
• The Corporation's net interest margin of 3.22% for the quarter ended June 30, 2024, is within the range of other regional banks, but the increase of 8 basis points from the same quarter of the previous year indicates a positive trend.
• The Corporation's loan portfolio is diversified across various sectors, including commercial, mortgage, and consumer loans, which is a common practice among diversified financial institutions.
• The Corporation's reliance on deposits as a primary source of funding is consistent with industry standards for banks, but the high proportion of public sector deposits in Puerto Rico introduces a unique risk factor.
• The Corporation's trading activities are limited by internal policies and the market risk assumed is measured by the 5-day net value-at-risk (VAR), with a confidence level of 99%, which is a common practice in the financial industry.

Legal Proceedings

• The Corporation is involved in ongoing legal proceedings, including class action lawsuits related to overdraft fees, but management believes that the amount it has already accrued is adequate and any incremental liability arising from the Legal Proceedings in matters in which a loss amount can be reasonably estimated will not have a material adverse effect on the Corporations consolidated financial position.

Related Party Transactions

• The Corporation has a 15.84% equity interest in Centro Financiero BHD, S.A. (BHD), and recorded $17.4 million in equity pickup from its investment in BHD during the six months ended June 30, 2024.
• The Corporation, through its subsidiary Popular Asset Management LLC (PAM), provides advisory services to several investment companies registered under the Investment Company Act of 1940 in exchange for a fee.

Stakeholder Impact

• Shareholders will benefit from the increased net income and the announced increase in the quarterly common stock dividend from $0.62 to $0.70 per share, commencing with the dividend payable in the first quarter of 2025.
• Customers may be affected by changes in interest rates and fees, as well as by the Corporations ability to provide financial services.
• Employees may be affected by changes in personnel costs and compensation, as well as by the Corporations ability to maintain a stable and profitable business.
• The Corporation's financial condition and results of operations are dependent upon the general trends of the Puerto Rico economy, which could impact the Corporation's ability to meet its obligations to creditors and other stakeholders.

Next Steps

• The Corporation will continue to monitor general business and economic conditions, industry-related indicators and trends, competition, interest rate volatility, credit quality indicators, loan and deposit demand, operational and systems efficiencies, revenue enhancements and changes in the regulation of financial services companies.
• The Corporation will continue to evaluate the assumptions tied to the CECL accounting framework, including the reasonable and supportable period as well as the reversion window.
• 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, 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.

Key Dates

Keywords

financial results, net income, net interest margin, credit losses, operating expenses, capital ratios, Puerto Rico, deposits, loans, mortgage banking, investment securities, FDIC, PROMESA