10-Q: Popular, Inc. Reports Third Quarter 2024 Results, Net Income Reaches $155.3 Million

Popular, Inc. announced its third quarter 2024 results, with net income reaching $155.3 million, driven by higher net interest income and a decrease in the provision for credit losses.

Summary

• Popular, Inc. reported a net income of $155.3 million for the third quarter of 2024, compared to $136.6 million for the same quarter of the previous year.
• Net interest income increased to $572.5 million, up from $534.0 million in the third quarter of 2023, driven by higher yields on investment securities and loans, partially offset by higher deposit costs.
• The provision for credit losses increased to $71.4 million, compared to $45.1 million in the same quarter of the previous year, mainly due to higher net charge-offs in the commercial loan portfolio.
• Non-interest income was $164.1 million, an increase of $4.5 million compared to the third quarter of 2023, driven by higher service fees, partially offset by lower mortgage banking income.
• Operating expenses were $467.3 million, a slight increase of $1.3 million compared to the third quarter of 2023, with higher technology and software expenses, personnel costs and regulatory examination fees, partially offset by lower professional fees and the absence of a goodwill impairment charge recorded in 2023.
• The Corporation's total assets were $71.3 billion at September 30, 2024, compared to $70.8 billion at December 31, 2023, with an increase in loans and available-for-sale securities, partially offset by a decrease in held-to-maturity securities.
• Total deposits increased slightly to $63.7 billion, with an increase in P.R. public sector deposits and higher interest-bearing deposits at PB.
• Stockholders equity increased to $5.8 billion, driven by net income, a decrease in net unrealized losses in the portfolio of AFS securities and the net accretion of the discount from securities previously reclassified to HTM, partially offset by common stock repurchases and dividends declared.
• The Corporation's common equity tier 1 capital ratio was 16.42%, the tier 1 leverage ratio was 8.67%, and the total capital ratio was 18.24%.

Sentiment

Score: 6

Explanation: The document presents a mixed picture with positive growth in net interest income and capital, but also an increase in credit losses and operating expenses. The overall sentiment is neutral to slightly positive, but with some concerns about the future economic outlook.

Positives

• Net interest income increased by $38.5 million compared to the same quarter of the previous year.
• The Corporation's net interest margin increased by 17 basis points compared to the same quarter of the previous year.
• The Corporation's stockholders equity increased by $643.6 million compared to December 31, 2023.
• The Corporation's regulatory capital ratios remain strong and exceed the minimum requirements for being well-capitalized.

Negatives

• The provision for credit losses increased by $26.3 million compared to the same quarter of the previous year.
• Operating expenses increased by $1.3 million compared to the same quarter of the previous year.
• The Corporation's net income decreased by $10.4 million for the nine months ended September 30, 2024, compared to the same period in 2023.

Risks

• The Corporation's financial results are significantly affected by general business and economic conditions in the markets it serves, particularly in Puerto Rico.
• The Corporation is exposed to interest rate risk, which could impact its net interest income and the value of its assets and liabilities.
• The Corporation is subject to credit risk, which could result in higher delinquencies, greater charge-offs and increased losses.
• The Corporation is exposed to liquidity risk, which could affect its ability to meet its financial obligations and fund its operations.
• The Corporation is subject to regulatory risk, which could result in changes in capital requirements and other regulations that could adversely affect its business.
• The Corporation is exposed to operational and security risks, including cyberattacks, e-fraud, and computer intrusion, which could result in loss or breach of customer data, disruption of services, reputational damage or additional costs.

Future Outlook

The Corporation is focused on achieving a targeted sustainable return on tangible common equity of 14% by the end of 2025.

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.

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, which are consistent with industry standards.
• The Corporation's net interest margin of 3.24% is within the range of other regional banks, but is subject to fluctuations based on the interest rate environment and the mix of assets and liabilities.
• The Corporation's loan portfolio is diversified across various sectors, including commercial, mortgage, and consumer loans, which is consistent with industry best practices for risk management.
• The Corporation's reliance on deposits as a primary source of funding is a common practice in the banking industry, but the high proportion of public sector deposits in Puerto Rico exposes the Corporation to unique risks.

Legal Proceedings

• The Corporation reached a settlement in principle on a class-wide basis in the Lipsett v. Popular, Inc. d/b/a Banco Popular class action, which was granted preliminary approval by the Court on July 26, 2024. The final approval hearing is scheduled for January 27, 2025.

Related Party Transactions

• The Corporation had a 15.84% equity interest in Centro Financiero BHD, S.A. and recorded $29.6 million in equity pickup from its investment in BHD during the nine months ended September 30, 2024.
• The Corporation, through its subsidiary Popular Asset Management LLC (PAM), provided investment 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 increase in net income and the strong capital ratios.
• Customers may be affected by changes in interest rates and fees.
• Employees may be affected by changes in personnel costs and compensation.
• The Corporation's performance is dependent on the economic conditions in Puerto Rico, which could impact all 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

Net Interest Income, Credit Losses, Financial Results, Capital Ratios, Puerto Rico, Loans, Deposits, Mortgage Banking, Operating Expenses, Regulatory Capital