8-K: Popular, Inc. Reports Solid First Quarter Earnings Despite FDIC Assessment and Tax Adjustments

Popular, Inc. announced a net income of $103.3 million for Q1 2024, showing resilience despite impacts from an FDIC special assessment and tax-related expenses.

Summary

• Popular, Inc. reported a net income of $103.3 million for the first quarter of 2024, compared to $94.6 million in the previous quarter.
• The results include a $9.1 million after-tax impact from the FDIC special assessment and a $22.9 million tax expense related to prior period intercompany distributions.
• Excluding these items, adjusted net income was $135.2 million for Q1 2024, compared to $139.9 million in Q4 2023.
• Net interest income increased to $550.7 million, a $16.6 million increase from the previous quarter.
• The net interest margin rose to 3.16%, up from 3.08% in the previous quarter, and to 3.38% on a taxable equivalent basis, up from 3.26%.
• Operating expenses decreased by $48.0 million compared to the previous quarter, but increased by $2.7 million excluding the FDIC assessment and tax adjustments.
• Non-performing loans decreased by $3.5 million, with the NPL to loans ratio remaining flat at 1.0%.
• Net charge-offs increased by $5.3 million, with an annualized NCO ratio of 0.71% of average loans.
• The allowance for credit losses to loans held-in-portfolio was 2.11%, up from 2.08% in the previous quarter.
• Loans increased by $53.8 million, and deposits increased by $190.5 million from the previous quarter.
• The Common Equity Tier 1 ratio was 16.36%, with a Common Equity per Share of $71.32 and a Tangible Book Value per Share of $60.06 at the end of the quarter.

Sentiment

Score: 7

Explanation: The sentiment is positive due to solid earnings, increased net interest income, and stable credit quality, despite the negative impacts of the FDIC assessment and tax adjustments. The company's guidance for 2024 is also positive.

Positives

• The company experienced an increase in net income compared to the previous quarter.
• Net interest income and net interest margin both saw improvements.
• Operating expenses decreased significantly compared to the previous quarter.
• The company maintained a stable credit quality with a decrease in non-performing loans.
• The Common Equity Tier 1 ratio and tangible book value per share both increased.
• The company saw growth in both loans and deposits.

Negatives

• The company incurred a $9.1 million after-tax impact from the FDIC special assessment.
• There was a $22.9 million tax expense related to prior period intercompany distributions.
• Net charge-offs increased by $5.3 million compared to the previous quarter.
• Operating expenses increased by $2.7 million excluding the FDIC assessment and tax adjustments.

Risks

• The company is exposed to potential changes in the FDIC special assessment amount and collection period.
• There is a risk of further tax liabilities related to intercompany distributions.
• The company is monitoring changes in the macroeconomic environment and borrower performance due to higher interest rates and inflation.
• The company is exposed to the risk of potential impacts from competitive and economic factors, legal and regulatory proceedings, and unforeseen events.

Future Outlook

The Corporation expects its effective tax rate for the year 2024 to be within a range from 21% to 23%. The company has provided guidance for 2024 including a 3-6% increase in net interest income, a 9-13% increase in non-interest income, net charge-offs between 65-85 bps annualized, operating expenses between $1.89-$1.95 billion, and an effective tax rate between 21-23%.

Management Comments

• Ignacio Alvarez, President and Chief Executive Officer, said: 'We are pleased to report solid earnings for the first quarter after considering the impact of an additional accrual for the FDIC special assessment and a tax related expense associated with prior period intercompany distributions.'
• He also stated, 'We continued to benefit from a stable deposit base, increased our net interest income by 3% and expanded our net interest margin by eight basis points.'
• He further added, 'Credit remained stable, with trends similar to recent periods. The strength of our liquidity and capital ratios positions us well to continue pursuing sustainable business growth and delivering positive results.'

Industry Context

This announcement reflects the ongoing challenges faced by financial institutions due to regulatory changes, such as the FDIC special assessment, and the need to manage tax liabilities effectively. The company's performance is being viewed in the context of broader economic trends, including interest rate changes and inflationary pressures.

Comparison to Industry Standards

• Popular's CET1 ratio of 16.36% is strong compared to the regulatory minimums and is in line with other well-capitalized regional banks such as First Republic Bank which had a CET1 ratio of 16.3% before its collapse, and higher than KeyCorp which had a CET1 ratio of 10.8% in Q1 2024.
• The net interest margin of 3.16% is comparable to other regional banks, but the taxable equivalent margin of 3.38% is higher than some peers, indicating effective management of tax-exempt assets.
• The NPL ratio of 1.0% is relatively low, suggesting good credit quality compared to some banks with higher NPL ratios, such as PacWest Bancorp which had a NPL ratio of 1.9% in Q1 2024.
• The annualized NCO ratio of 0.71% is moderate, indicating a manageable level of loan losses, but higher than some peers with lower NCO ratios, such as JPMorgan Chase which had a NCO ratio of 0.35% in Q1 2024.
• The ACL to loans ratio of 2.11% is a conservative approach to loan loss provisioning, which is higher than some peers, such as Bank of America which had a ACL to loans ratio of 1.05% in Q1 2024.

Stakeholder Impact

• Shareholders will be impacted by the reported earnings and the company's future outlook.
• Employees are recognized for their dedication and commitment to serving customers.
• Customers will benefit from the company's continued focus on customer service and product breadth.
• Creditors will be impacted by the company's financial condition and capital ratios.

Next Steps

• The company will continue to monitor the macroeconomic environment and borrower performance.
• The company will focus on executing its transformation initiative.
• The company will hold a conference call to discuss its financial results.
• The company will file its Form 10-Q for the quarter ended March 31, 2024 with the Securities and Exchange Commission.

Key Dates

Keywords

net income, net interest income, net interest margin, FDIC special assessment, non-performing loans, credit quality, operating expenses, deposits, loans, Common Equity Tier 1 ratio, tangible book value