Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
BPOP > SEC Filings for BPOP > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for POPULAR INC

Form 10-Q for POPULAR INC


12-Nov-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report includes management's discussion and analysis ("MD&A") of the consolidated financial position and financial performance of Popular, Inc. (the "Corporation" or "Popular"). All accompanying tables, financial statements and notes included elsewhere in this report should be considered an integral part of this analysis.

The Corporation is a diversified, publicly-owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation has operations in Puerto Rico, the United States ("U.S.") mainland, and the U.S. and British Virgin Islands. In Puerto Rico, the Corporation provides mortgage, retail and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico ("BPPR"), as well as investment banking, broker-dealer, auto and equipment leasing and financing, and insurance services through specialized subsidiaries. In the U.S. mainland, the Corporation operates Banco Popular North America ("BPNA"), including its wholly-owned subsidiary E-LOAN. BPNA focuses efforts and resources on the core community banking business. BPNA, under the name Popular Community Bank, operates branches in New York, California, Illinois, New Jersey and Florida. E-LOAN markets deposit accounts under its name for the benefit of BPNA. Note 33 to the consolidated financial statements presents information about the Corporation's business segments. As of September 30, 2013, the Corporation had a 21.3% interest in the holding company of EVERTEC, which provides transaction processing services throughout the Caribbean and Latin America, including servicing many of the Corporation's system infrastructures and transaction processing businesses. During the nine months ended September 30, 2013, the Corporation recorded $21.4 million in earnings from its investment in EVERTEC (including $36.6 million from increases in EVERTEC's capital as a result of their issuance of shares during the second and third quarter of 2013), which had a carrying amount of $42.4 million as of the end of the third quarter. Also, the Corporation had a 19.99% stake in BHD Financial Group ("BHD"), one of the largest banking and financial services groups in the Dominican Republic. During the nine months ended September 30, 2013, the Corporation recorded $15.6 million in earnings from its investment in BHD, which had a carrying amount of $79.7 million, as of the end of the third quarter.

Effective December 31, 2012, Popular Mortgage, which was a wholly-owned subsidiary of BPPR prior to that date, was merged with and into BPPR as part of an internal reorganization. Popular Mortgage currently operates as a division of BPPR.


Table of Contents

OVERVIEW

For the quarter ended September 30, 2013, the Corporation recorded net income of $229.1 million, compared with net income of $47.2 million for the same quarter of the previous year. The results for the third quarter of 2013 reflected an after-tax gain of $167.8 million resulting from the sale of EVERTEC's shares in connection with their secondary public offering ("SPO").

Recent significant events

On September 18, 2013, EVERTEC, Inc. ("EVERTEC") completed a secondary public offering of 20.0 million shares of common stock to the public at $22.50 per share. Apollo Global Management LLC ("Apollo") sold 10.8 million shares and Popular sold 9.1 million shares of EVERTEC, retaining respective stakes after the sale of 14.9% and 21.3%.

As a result of this transaction, Popular recognized an after-tax gain of $167.8 million during the third quarter of 2013 and received proceeds of $197 million. As of September 30, 2013, Popular's investment in EVERTEC had a remaining book value of $42.4 million.

Financial highlights for the quarter ended September 30, 2013

Taxable equivalent net interest income was $367.0 million for the third quarter of 2013, an increase of $12.1 million, or 3.4%, from the same quarter of the prior year. Net interest margin increased by 14 basis points from 4.51% to 4.65% mainly resulting from a reduction in the average cost of funds by 17 basis points primarily from time deposits, short-term borrowings and medium and long-term debt as a result of the Corporation's strategy to continue to reduce its funding costs. The net interest margin also benefited from a higher yield on covered loans by 201 basis points as a result of reductions in expected losses, which are recognized as part of the accretable yield over the average life of the loans. The yield from commercial and construction loans increased by 11 basis points and 228 basis points, respectively, due to lower level of non-performing loans and the partial prepayment of a large commercial relationship at BPNA. These positive variances were partially offset by the yield from the investment securities that decreased by 61 basis points due to reinvestments at lower prevailing rates and the yield in mortgage loans that decreased by 61 basis points due to strategic acquisition of loans at lower yielding rates and the reversal of interest income of $5.9 million from reverse mortgages which had been accrued in excess of the amounts insured by FHA. Refer to the Net Interest Income section of this MD&A for a discussion of the major variances in net interest income, including yields and costs.

The Corporation continued to make progress in credit quality during the quarter, reflective of key strategies executed to reduce non-performing loans and improvements in the underlying quality of the loan portfolios. Credit metrics showed improvements with reduced levels of non-performing assets and non-performing loans held-in portfolio, when compared to December 31, 2012. Non-covered, non-performing loans were down by $901.8 million, or 59%, when compared to December 31, 2012. These improvements were accelerated by the bulk sales of non-performing assets completed during the first two quarters of 2013. Excluding the impact of the bulk asset sales, total non-performing loans and non-performing assets declined by $121.0 million and $123.0 million, respectively, from December 31, 2012. The ratio of annualized net charge-offs to average non-covered loans held-in-portfolio decreased to 1.08% for the quarter. Also, non-covered OREO decreased by $131.3 million from December 31, 2012, primarily as a result of the bulk sale of assets during the quarter ended March 31, 2013.

The provision for loan losses for the quarter ended September 30, 2013 totaled $72.7 million, compared with $106.2 million for the same period of 2012, a decline of $33.5 million. The provision for the non-covered loan portfolio amounted to $55.2 million, compared to $83.6 million for the same period of 2012, a decrease of $28.4 million, reflecting improved credit quality at both BPPR and BPNA. The provision for loan losses for the covered loan portfolio amounted to $17.4 million, compared to $22.6 million for the quarter ended September 30, 2012, a decline of $5.2 million, reflecting lower impairment losses.

Refer to the Credit Risk Management and Loan Quality section of this MD&A for an explanation of the main factors impacting the provision for loan losses and a detailed analysis of net charge-offs, non-performing assets, the allowance for loan losses and selected loan losses statistics.


Table of Contents
Non-interest income increased by $160.6 million to $292.0 million for the quarter ended September 30, 2013, compared with $131.4 million for the same quarter in the previous year. This increase was mainly attributed to:

Higher other operating income by $175.0 million due to the gain of $175.9 million recognized in connection with EVERTEC's SPO

An increase of $4.7 million in net gain (loss) on sale of loans, driven by unfavorable valuation adjustments recorded at the BPPR segment during the third quarter of 2012 as a result of revised appraisals and market indicators and higher net gain on sale of loans at BPNA during the third quarter of 2013

Lower adjustments for indemnity reserves on loans sold by $6.3 million due to reserve releases at BPPR and BPNA

These favorable variances were partially offset by an increase of $12.1 million in trading losses, primarily at BPPR, an unfavorable variance of $8.2 million in FDIC loss share income (expense), lower service charges on deposits and lower income from mortgage banking activities

Refer to the Non-Interest Income section of this MD&A for additional information on the main variances that affected the non-interest income categories.

Operating expenses increased by $19.6 million when compared to the third quarter of 2012 due to the following main factors:

Higher personnel costs by $5.3 million due to higher headcount and incentive payments and the restoration of the Corporation's matching contribution to the 401k savings plan in April 2013

Higher other taxes by $5.1 million due to the impact of the gross receipts tax enacted earlier in the year in Puerto Rico

Higher loss on early extinguishment of debt due $3.4 million paid in connection with the repayment of $233.2 million in senior notes

Higher OREO expenses by $11.3 million due to fair value adjustments on commercial properties, consisting primarily of covered assets

The above variances were partially offset by a decrease of $8.1 million in the FDIC deposit premium insurance due to reduced level of higher risk assets as well as revisions to the calculation and the efficiencies from the merger of Popular Mortgage into BPPR, both completed during the fourth quarter of 2012.

Income tax expense amounted to $17.8 million for the quarter ended September 30, 2013, compared with an income tax expense of $15.4 million for the same quarter of 2012. The increase in income tax expense was primarily due to higher income before tax, driven by the gain on the sale of EVERTEC's shares, which is subject to a preferential tax rate and the increase in the statutory tax rate from 30% to 39% during the year 2013. The higher income tax provision was offset by a favorable adjustment of $7.7 million in connection with filing the tax returns for the year 2012 during this quarter, the reclassification of $3.3 million of income tax credit related to the gross receipts tax from the operating expenses line to income taxes and the reversal of $7.7 million of reserves for uncertain tax positions due to the expiration of the statute of limitations in the Puerto Rico operations.

Total assets amounted to $36.1 billion at September 30, 2013, compared with $36.5 billion at December 31, 2012. The decrease in total assets was attributed to:

a decrease of $229.9 million in loans held for sale, due to the bulk sale of non-performing loans completed during the first quarter of 2013 and decreased activity in origination of mortgage loans for sale in the secondary market

a decrease in covered loans held-in-portfolio of $680.0 million due to resolutions and the run-off of the portfolio

a decrease in other real estate owned of $110.4 million due mainly to the bulk sale of non-performing assets completed during the first quarter and continued resolutions

a decrease in the FDIC loss share asset of $74.4 million due to amortization and collections


Table of Contents

The above decreases were offset by:

An increase in securities available-for-sale and held-to-maturity of $50.0 million due mainly to purchases of CMOs and agency securities at BPNA, offset by portfolio declines in market value, agency maturities, MBS prepayments and the prepayment of $22.8 million of EVERTEC's debentures held by the Corporation in connection with their IPO

An increase in non-covered loans-held-in-portfolio of $436.1 million driven by mortgage loan originations and purchases at BPPR and BPNA

An increase in the deferred tax asset, included within the other assets category, of $302.7 million, due mainly to the $215.6 million benefit related to the increase in corporate tax rate from 30% to 39% and the loss generated by the bulk sales of non performing assets completed during the first and second quarter of 2013

The Corporation's total deposits amounted to $26.4 billion compared to $27.0 billion at December 31, 2012. The decrease was mainly due to decreases in brokered and non-brokered time deposits due to the execution of funding strategies

The Corporation's borrowings amounted to $4.2 billion at September 30, 2013, compared with $4.4 billion at December 31, 2012. The decrease in borrowings was mainly driven by the prepayment of $233.2 million in senior notes and lower balance of repurchase agreements, offset by an increase in advances from the Federal Home Loan Bank of New York, as part of the Corporation's funding strategies. Refer to the Liquidity section in this MD&A for additional information on the Corporation's funding sources

Stockholders' equity totalled $4.4 billion at September 30, 2013, compared with $4.1 billion at December 31, 2012. This increase mainly resulted from the Corporation's net income of $436.3 million for the first nine months of 2013, partially offset by unrealized holding losses of $160.1 million in the portfolio of investment securities, reflected net of tax in accumulated other comprehensive loss. Capital ratios continued to be strong. The Corporation's Tier 1 risk-based capital ratio stood at 18.54% at September 30, 2013, while the tangible common equity ratio at September 30, 2013 was 10.32%. Refer to Table 20 for capital ratios and Tables 21 and 22 for Non-GAAP reconciliations.

Table 1 provides selected financial data and performance indicators for the quarters and nine months ended September 30, 2013 and 2012.

As a financial services company, the Corporation's earnings are significantly affected by general business and economic conditions. Lending and deposit activities and fee income generation are influenced by the level of business spending and investment, consumer income, spending and savings, capital market activities, competition, customer preferences, interest rate conditions and prevailing market rates on competing products.

The Corporation continuously monitors 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 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 could adversely affect its profitability.

The description of the Corporation's business contained in Item 1 of the Corporation's 2012 Annual Report, while not all inclusive, discusses additional information about the business of the Corporation and risk factors, many beyond the Corporation's control that, in addition to the other information in this Form 10-Q, readers should consider.

The Corporation's common stock is traded on the NASDAQ Global Select Market under the symbol BPOP.


Table of Contents

Table 1 - Financial Highlights



Financial Condition Highlights
                                                                                                            Average for the nine months ended
                                           September 30,       December 31,                         September 30,        September 30,
(In thousands)                                 2013                2012            Variance             2013                 2012             Variance
Money market investments                  $       961,788      $   1,085,580      $ (123,792 )     $     1,029,161      $     1,053,633      $  (24,472 )
Investment and trading securities               5,814,685          5,726,986          87,699             5,879,279            5,681,022         198,257
Loans                                          24,627,724         25,093,632        (465,908 )          24,801,157           24,806,342          (5,185 )
Earning assets                                 31,404,197         31,906,198        (502,001 )          31,709,597           31,540,978         168,619
Total assets                                   36,052,116         36,507,535        (455,419 )          36,345,049           36,251,754          93,295
Deposits*                                      26,395,054         27,000,613        (605,559 )          26,785,190           27,008,008        (222,818 )
Borrowings                                      4,164,104          4,430,673        (266,569 )           4,460,690            4,318,718         141,972
Stockholders' equity                            4,393,885          4,110,000         283,885             4,081,257            3,812,486         268,771

* Average deposits exclude average derivatives.

Operating Highlights                                      Quarter ended September 30,                    Nine months ended September 30,
(In thousands, except per share information)          2013           2012         Variance           2013              2012            Variance
Net interest income                                 $ 354,206      $ 344,439      $   9,767       $ 1,056,238       $ 1,025,216       $   31,022
Provision for loan losses - non-covered loans          55,230         83,589        (28,359 )         485,438           247,846          237,592
Provision for loan losses - covered loans              17,433         22,619         (5,186 )          60,489            78,284          (17,795 )
Non-interest income                                   291,959        131,374        160,585           619,379           380,732          238,647
Operating expenses                                    326,599        307,033         19,566           969,883           964,800            5,083

Income before income tax                              246,903         62,572        184,331           159,807           115,018           44,789
Income tax expense (benefit)                           17,768         15,384          2,384          (276,489 )         (46,317 )       (230,172 )

Net income                                          $ 229,135      $  47,188      $ 181,947       $   436,296       $   161,335       $  274,961

Net income applicable to common stock               $ 228,204      $  46,257      $ 181,947       $   433,504       $   158,543       $  274,961

Net income per common share - Basic                 $    2.22      $    0.45      $    1.77       $      4.22       $      1.55       $     2.67

Net income per common share - Diluted               $    2.22      $    0.45      $    1.77       $      4.21       $      1.55       $     2.66

                                                      Quarter ended September 30,                  Nine months ended September 30,
Selected Statistical Information                      2013                   2012                  2013                       2012
Common Stock Data
Market price
High                                              $      34.20           $      18.74         $         34.20            $         23.00
Low                                                      26.25                  13.55                   21.70                      13.55
End                                                      26.25                  17.45                   26.25                      17.45
Book value per common share at period end                42.04                  38.98                   42.04                      38.98
Profitability Ratios
Return on assets                                          2.51 %                 0.52 %                  1.60 %                     0.59 %
Return on common equity                                  21.64                   4.81                   14.38                       5.63
Net interest spread (taxable equivalent)                  4.40                   4.25                    4.40                       4.19
Net interest margin (taxable equivalent)                  4.65                   4.51                    4.65                       4.45
Capitalization Ratios
Average equity to average assets                         11.71 %                10.77 %                 11.23 %                    10.52 %
Tier I capital to risk-weighted assets                   18.54                  16.81                   18.54                      16.81
Total capital to risk-weighted assets                    19.82                  18.09                   19.82                      18.09
Leverage ratio                                           12.26                  11.40                   12.26                      11.40


Table of Contents

CRITICAL ACCOUNTING POLICIES / ESTIMATES

The accounting and reporting policies followed by the Corporation and its subsidiaries conform to generally accepted accounting principles in the United States of America and general practices within the financial services industry. Various elements of the Corporation's accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. These estimates are made under facts and circumstances at a point in time and changes in those facts and circumstances could produce actual results that differ from those estimates.

Management has discussed the development and selection of the critical accounting policies and estimates with the Corporation's Audit Committee. The Corporation has identified as critical accounting policies those related to:
(i) Fair Value Measurement of Financial Instruments; (ii) Loans and Allowance for Loan Losses; (iii) Acquisition Accounting for Loans and Related Indemnification Asset; (iv) Income Taxes; (v) Goodwill, and (vi) Pension and Postretirement Benefit Obligations. For a summary of these critical accounting policies and estimates, refer to that particular section in the MD&A included in Popular, Inc.'s 2012 Financial Review and Supplementary Information to Stockholders, incorporated by reference in Popular, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2012 (the "2012 Annual Report"). Also, refer to Note 2 to the consolidated financial statements included in the 2012 Annual Report for a summary of the Corporation's significant accounting policies.

During the second quarter of 2013, management enhanced the estimation process for evaluating the adequacy of the general reserve component of the allowance for loan losses. The enhancements to the ALLL methodology, which are described in the paragraphs below, were implemented as of June 30, 2013 and resulted in a net increase to the allowance for loan losses of $11.8 million for the non-covered portfolio and $7.5 million for the covered portfolio.

Management made the following principal changes to the methodology during the second quarter of 2013:

Incorporated risk ratings to establish a more granular stratification of the commercial, construction and legacy loan portfolios to enhance the homogeneity of the loan classes. Prior to the second quarter enhancements, the Corporation's loan segmentation was based on product type, line of business and legal entity. During the second quarter of 2013, lines of business were simplified and a regulatory risk classification level was added. These changes increase the homogeneity of each portfolio and capture the higher potential for loan loss in the criticized and substandard accruing categories.

These enhancements resulted in a decrease to the allowance for loan losses of $42.9 million at June 30, 2013, which consisted of a $35.7 million decrease in the non-covered BPPR segment and a $7.2 million reduction in the BPNA segment.

Recalibration and enhancements of the environmental factors adjustment. The environmental factor adjustments are developed by performing regression analyses on selected credit and economic indicators for each applicable loan segment. Prior to the second quarter enhancements, these adjustments were applied in the form of a set of multipliers and weights assigned to credit and economic indicators. During the second quarter of 2013, the environmental factor models used to account for changes in current credit and macroeconomic conditions, were enhanced and recalibrated based on the latest applicable trends. Also, as part of these enhancements, environmental factors are directly applied to the adjusted base loss rates using regression models based on particular credit data for the segment and relevant economic factors. These enhancements result in a more precise adjustment by having recalibrated models with improved statistical analysis and eliminating the multiplier concept that ensures that environmental factors are sufficiently sensitive to changing economic conditions.

The combined effect of the aforementioned changes to the environmental factors adjustment resulted in an increase to the allowance for loan losses of $52.5 million at June 30, 2013, of which $56.1 million related to the non-covered BPPR segment, offset in part by a $3.6 million reduction in the BPNA segment.

There were additional enhancements to the allowance for loan losses methodology which accounted for an increase of $9.7 million at June 30, 2013 at the BPPR segment. These enhancements included the elimination of the use of a cap for the commercial recent loss adjustment (12-month average), the incorporation of a minimum general reserve assumption for the commercial, construction and legacy portfolios with minimal or zero loss history, and the application of the enhanced ALLL framework to the covered loan portfolio.


Table of Contents

NET INTEREST INCOME

Net interest income, on a taxable equivalent basis, is presented with its different components on Tables 2 and 3 for the quarter and nine months ended September 30, 2013 as compared with the same periods in 2012, segregated by major categories of interest earning assets and interest bearing liabilities.

The interest earning assets include the investment securities and loans that are exempt from income tax, principally in Puerto Rico. The main sources of tax-exempt interest income are certain investments in obligations of the U.S. Government, its agencies and sponsored entities, and certain obligations of the Commonwealth of Puerto Rico and its agencies. To facilitate the comparison of all interest related to these assets, the interest income has been converted to a taxable equivalent basis, using the applicable statutory income tax rates for each quarter. The taxable equivalent computation considers the interest expense disallowance required by the Puerto Rico tax law. The increase in the taxable equivalent adjustment in Tables 2 and 3 can be explained by three main items:

During the quarter ended June 30, 2013 the Puerto Rico Government amended the Commonwealth's Internal Revenue Code. The changes that were implemented included an increase in the corporate income tax rate from 30% to 39%. The effect of this change represented an increase of $4.2 million and $15.1 million in the taxable equivalent adjustment for the quarter and nine months ended September 30, 2013.

Additional exempt loan volume resulting from consumer loans purchased during 2012 resulted in an increase in the taxable equivalent . . .

  Add BPOP to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for BPOP - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.