Yahoo Finance Popular, Inc. (NASDAQ:BPOP) Q1 2024 Earnings Call Transcript
Popular, Inc. (NASDAQ:BPOP) Q1 2024 Earnings Call Transcript April 23, 2024
Popular, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello all. And welcome to Popular Inc.’s First Quarter Earnings Call. My name is Lydia, and I’ll be operator today. [Operator Instructions] I’ll now hand over to your host, Paul Cardillo, Investor Relations Officer to begin. Please go ahead.
Paul Cardillo: Good morning and thank you for joining us. With us on the call today is our CEO, Ignacio Alvarez; our COO, Javier Ferrer; our CFO, Carlos Vazquez; and our CRO, Lidio Soriano. They will review our results for the first quarter and then answer your questions. Other members of our management team will also be available during the Q&A session. Before we begin, I would like to remind you that on today’s call, we may make forward-looking statements regarding Popular, such as projections of revenue, earnings, expenses, taxes and capital structure as well as statements regarding Popular’s plans and objectives. These statements are based on management’s current expectations and are subject to risks and uncertainties.
Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today’s earnings release and our SEC filings. You may find today’s press release and our SEC filings on our webpage at popular.com. I will now turn the call over to our CEO, Ignacio Alvarez.
Ignacio Alvarez: Good morning, and thank you for joining the call. We are pleased to report a solid first quarter, net income totaled $103 million, which includes the impact of an additional accrual for the FDIC Special Assessment and a tax expense related to prior intercompany distribution. Excluding these items, net income would have been $135 million compared to adjusted net income of $140 million in the previous quarter. The results in the first quarter were driven by higher net interest income and a lower provision for credit losses offset in part by lower noninterest income and a slightly higher operating expense. Our ending loan balance is increased by $54 million during the quarter with large commercial payoffs impacting both banks.
Our average loan balances, however, increased by $612 driven by a substantial amount of loan activity toward the end of the fourth quarter. BPPR generated loan growth of $124 million, driven by growth in mortgage and auto, offset in part by decreases in personal and commercial loans. Popular Bank saw a $70 million decrease in loan balances driven by commercial loan payoffs that offset growth in construction loans. Deposit balances increased by approximately $191 million, driven primarily by a higher level of retail demand deposits in BPPR, which increased by $232 million, offset somewhat by lower Puerto Rico public deposits. Our net interest margin increased by 8 basis points to 3.16%, mainly driven by higher average loan balances and the repricing of loans and securities and a higher interest rate environment.
This was partially offset by higher deposit costs. Noninterest income remained solid at $164 million. Excluding the additional FDIC assessment and the expenses associated with the prior period tax expense operating expenses increased by $3 million. Credit quality trends remained generally favorable with slightly lower NPLs and delinquencies. We have continued to see credit normalization in the Puerto Rico unsecured consumer segments which began in the second half of last year, and we continue to be attentive to the evolving credit landscape. Tangible value per share increased by $0.32 as our quarterly net income was offset in part by dividends and an increase in unrealized losses in our investment portfolio. Please turn to Slide 4. Last year, we crossed a significant milestone in Puerto Rico and now serve more than 2 million unique customers.
We believe that there continues to be opportunity to deliver more value and services to our clients and deepen those relationships. For the past two years, we have been engaged in a companywide transformation and we are confident that these efforts will help us capitalize upon that opportunity. Consumer spending remained healthy. Combined credit and debit card sales increased by 2% compared to the first quarter of 2023. Our auto loan and lease balances increased by $80 million compared to the fourth quarter as demand for new cars continue to be strong in Puerto Rico. Mortgage on balances at BPPR increased by $92 million in the first quarter driven primarily by home purchase activity and our strategy to retain FHA loans in portfolio. The Puerto Rico economy performed well during the quarter.
Business activity is solid, as reflected in the positive trends in total employment and other economic data. The tourism hospitality sector continues to be a source of strength for the local economy. Passenger traffic at the San Juan International Airport increased by 12% in the first quarter compared to the first quarter of 2023. Additionally, in March, the hotel occupancy rate increased to 84% from 79% in March of 2023. The average daily rate and RevPAR increased by 10% and 17%, respectively, compared to the same month a year ago. There is a significant amount of committed federal funds that have yet to be dispersed. The pace of disbursement of these funds has accelerated, and we anticipate that they will support economic activity for several years.
We are encouraged by the performance of the Puerto Rico economy. We remain optimistic about the future of our primary market and are well positioned to support our clients during the coming years. In short, we are pleased with the results for the quarter, particularly in Puerto Rico, where continued loan growth and the strength of our deposit base helped contribute to our increase in net interest income and support our optimistic outlook for the balance of the year. On that note, I'll now turn the call over to Jorge for more details on our financial results.
Jorge Garcia: Thank you, Ignacio, and thank you all for joining the call today. As Ignacio stated in his remarks, we reported net income of $103 million in the first quarter. Excluding the effect of the FDIC assessment and the tax expenses related to prior period intercompany distributions, adjusted net income was $135 million, $5 million lower than the prior quarter's adjusted results. Although the quarter had some noise because of these two items, we are pleased with the core results, particularly the NII growth and the expansion of the NIM. Net interest income increased by $17 million in the quarter. Our net interest margin increased by 8 basis points on a GAAP basis and 12 basis points on a tax equivalent basis, driven by higher average loan balances and the repricing of loans and securities.
We should continue to see NIM expansion throughout the rest of 2024. Consistent with our previous guidance, we expect our 2024 NII to increase by approximately 9% to 13% from 2023 levels. Loan growth this quarter was lower than recent trends driven by the early repayment of two large loans totaling around $200 million and decreased loan demand in the U.S. mainland. The underlying economic activity in Puerto Rico remains strong and as such, we continue to expect loan growth of 3% to 6% in 2024. Noninterest income was $164 million, a decrease of $5 million from Q4, driven by lower contingent commissions in our insurance business, which are usually recognized in the second and fourth quarter of each year. We continue to expect noninterest income to be approximately $160 million to $165 million per quarter in 2024.
We were also pleased to see stable credit metrics and the early benefits of changes we implemented to address the credit losses that arose late last year in our consumer loan portfolio. The provision for credit losses was $73 million, compared to $79 million in the fourth quarter. Total operating expenses were $483 million, including the additional expense of $14 million related to the FDIC special assessment, and $6 million in expenses related to the late payment of taxes from prior period intercompany distributions. Excluding these two items, operating expenses were $462 million, an increase of $3 million from Q4's adjusted operating expenses. Other significant expense variances in the quarter were higher personnel costs by $21 million, mainly due to annual incentive awards and payroll taxes, which are traditionally higher during the first quarter of the year and higher credit card processing expenses by $6 million, mainly due to lower volume-driven rebates in the first quarter.
These expenses were offset in part by a decrease in professional fees by $10 million, mainly related to regulatory consulting fees and other advisory expenses. Business promotion expenses were also lower as these are typically higher in the fourth quarter. Notwithstanding the impact of the incremental FDIC expense and expenses related to the tax liabilities from the prior period distributions. We continue to expect annual expenses in the range of $1.89 billion to $1.95 billion for 2024. Our effective tax rate for the quarter was 35%, due mainly to having recorded $17 million in income tax expense related to prior period intercompany dividends from our U.S. subsidiary to the Puerto Rico Bank Holding Company. These dividends are subject to a 10% federal tax withholding and ordinary income tax in Puerto Rico that we failed to pay for several years.
Therefore, these results reflect the cumulative effect of correcting this oversight. Excluding the impact of the FDIC special assessment and the prior period tax matter, the effective tax rate would have been 25%. This adjusted effective tax rate in Q1 also reflects approximately $7 million in income tax expenses arising from a $50 million distribution from the U.S. sub completing during this quarter. We don't anticipate the tax treatment of U.S. source dividends to the bank holding company to impact liquidity or future capital action. On a GAAP basis, we now expect the effective tax rate for the year to be in a range of 21% to 23%. This includes the impact of the $17 million in income tax expense related to the prior period distribution. Please turn to slide 6.
Net interest margin increased by eight basis points. On a taxable equivalent basis, NIM was 3.38%, an increase of 12 basis points. The increase was driven by higher loan yields and average balances across most lending categories as well as higher yields in our investment portfolio. This was partially offset by higher interest expense on deposits due to increased average balance of public deposits at BPPR and high-cost online deposits at Popular Bank. Excluding Puerto Rico deposits, consolidated customer deposit balances increased by roughly $240 million, primarily in retail accounts. At the end of the first quarter, Puerto Rico public deposits were $18 billion, down slightly compared to Q4 and at the upper end of our guidance range. For the rest of 2024, we expect public deposits to be in the range of $15 billion to $18 billion.
As usual, normal seasonality should result in public deposit balances trending higher and peaking in Q2, mostly related to tax receipts. Our interest rate sensitivity remains relatively neutral, a higher for longer rate environment should not have a significant impact on our NII forecast for 2024. Except to the extent that such an environment increases pressure on deposit pricing, particularly in our U.S. operations due to changes in client or competitor behavior. Please turn to slide 7. Deposit betas in the current timing cycle are above the prior cycle. We have seen a total cumulative deposit beta of 35% to date, driven by public deposits in Puerto Rico and online deposits in the U.S. The rate of increase in deposit cost of the corporation continued to slow down in the quarter.
In BPPR total deposit costs increased by two basis points compared to an increase of 11 basis points in Q4, led by higher average balances of public deposits. The cost of public deposits decreased by one basis point. At Popular Bank deposit costs increased by 23 basis points compared to an increase of 33 basis points in Q4, driven by deposits gathered primarily through our online channel. Please turn to slide 8. We continue to target a sustainable 14% return on tangible common equity by the end of 2025. Regulatory capital levels remained strong. Our CET1 ratio of 16.4% increased by six basis points from Q4. Tangible book value per share at quarter end was $60.06, an increase of $0.32 per share from Q4. Our long-term outlook on capital return has not changed.
Over time, we expect our regulatory capital ratios to gravitate towards the levels of our mainland peers plus a buffer driven by our geographic concentration in Puerto Rico. We continue working towards announcing new capital actions in the second half of 2024. The size and nature of any future capital actions will depend on the outlook of the interest rate environment, including the impact on our TCE ratio. With that, I turn the call over to Lidio.
Lidio Soriano: Thank you, Jorge, and good morning. Credit quality metrics were stable from the fourth quarter as trends remain consistent with recent performance. The corporation's mortgage and commercial portfolios continue to reflect credit metrics significantly below pre-pandemic levels, but credit quality metrics continue to normalize for Puerto Rico's unsecured personal loans, credit cards and auto and lease finance loans. We continue to closely monitor changes in the macroeconomic environment and on borrower performance. Given higher rates, higher interest rates and inflationary pressure and have made changes to underwriting criteria to decrease exposure to higher-risk segments. We believe that the improvements over recent years in risk management practices and the risk profile of the corporation loans portfolios was just popular to continue to operate successfully on the current environment.
Turning to slide 9. Nonperforming assets and nonperforming loans decreased slightly driven by the Puerto Rico region. NPLs in Puerto Rico decreased by $30 million, reflecting improvements in most loan categories. NPLs in the U.S. increased by $27 million related to higher mortgage NPLs by $17 million impacted by a single loan and higher commercial NPLs by $10 million. Inflows of NPLs increased by $8 million, driven by the previously mentioned increase in NPLs in the U.S. mortgage and commercial portfolios. In Puerto Rico, total inflows decreased by $19 million, driven by an $18 million relationship that enter NPL in the fourth quarter of 2023. The ratio of NPLs to total loans held in portfolio remained flat at 1%. Turning to slide 10. Net charge-offs amounted to $62 million, or annualized 71 basis points of publish loans held in portfolio compared to $57 million or 66 basis points in the prior quarter.
The increase in net charge-off was driven by a $5 million charge-off related to a previously reserved loan. Excluding this, the charge-offs were flat. In Puerto Rico, net charge-off increased by $5 million, mainly driven by higher commercial and consumer net charge-offs. The charge-off in the U.S. were flat quarter-over-quarter. We continue to expect net charge-offs for the full year to be between 65 to 85 basis points due to the ongoing credit normalization and general economic environment. Please turn to slide 11. The allowance for credit losses increased by $10 million to $740 million. In Puerto Rico, the ACL increased by $4 million, driven by the consumer portfolio due to changes in credit quality. In the U.S., the ACL increased by $6 million driven by higher commercial reserves due to rate and migration.
The corporation ratio of ACL to loans held in portfolio remained flat at 2.1%, while the ratio of ACL to NPL stood at 209% compared to 204% in the previous quarter. The provision for credit losses was $72 million compared to $75 million in the prior quarter. In Puerto Rico, the provision was $61 million compared to $67 million, while in the U.S., the provision was $11 million versus $8 million. To summarize, credit quality remains stable during the first quarter, consistent with recent performance. We are attentive to evolving environment, we remain encouraged by the performance of our loan book. With that, I would like to turn the call over to Ignacio for his concluding remarks.
Ignacio Alvarez: Thank you, Lidio and Jorge for your updates. Popular started off 2024 with a solid first quarter building on the positive momentum seen in 2023. Our results were driven by strong net interest income and expanding net interest margin, stable credit quality and continued customer growth. The strength of our franchise is once again reflected in the increase experienced during the quarter in retail demand deposits in Puerto Rico. Last week, we launched our new institutional marketing campaign in Puerto Rico, titled say Seguimos Tu Ritmo or we follow your rhythm. This campaign includes a custom composed audio brand and focuses on our unmatched omnichannel offering, highlighting our wide range of financial services through digital and traditional channels as well as our convenience and accessibility.
We have also made great progress in our transformation efforts, and some of those initiatives are already producing encouraging results. We will continue these efforts to ensure our organization success for many years to come. This entails meeting the rapidly changing needs of our customers, providing our colleagues a workplace where they can thrive, promoting progress in the communities we serve and generating sustainable value for our shareholders. I am optimistic about our prospects for the remainder of 2024. Economic trends in Puerto Rico continue to be positive and we are well positioned to participate in the economic activity that is expected to be generated in the coming years. I want to thank our colleagues for their continued dedication and commitment to serve our customers and contribute to popular success.
We are now ready to answer your questions.
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