Popular (BPOP) Q4 2010 earnings summary

Executive summary

• 2010 net income was $137.4 million versus a $573.9 million net loss in 2009; the result included a $531.0 million after-tax gain from the EVERTEC sale and was partly offset by $176 million of loan-sale reclassification charges.

• A $1.15 billion capital raise and the EVERTEC transaction strengthened capital, enabling the Westernbank FDIC-assisted acquisition and portfolio-risk reduction actions.

• Credit remained the central pressure: Puerto Rico’s prolonged recession drove elevated commercial and construction losses, while U.S. credit trends improved and BPNA’s loss narrowed.

Financial highlights

• Net interest income rose to $1.295 billion from $1.101 billion; taxable-equivalent net interest income increased $123.0 million, mainly from acquired covered loans and lower deposit costs.

• Provision for loan losses was $1.012 billion versus $1.406 billion; excluding the $176 million held-for-sale reclassification charge, provision declined $570 million YoY.

• Non-interest income increased 44% to $1.288 billion, including a $640.8 million pretax gain on the EVERTEC sale; 2009 included $219.5 million in securities gains.

• Operating expenses rose 15% to $1.326 billion, including $38.8 million in debt prepayment penalties and higher professional fees; lower personnel and equipment costs partly offset increases.

• Total assets rose 11% to $38.7 billion; deposits were $26.8 billion and stockholders’ equity increased to $3.8 billion, principally from the common-stock issuance.

Outlook and guidance

• Management expected operational profitability in 2011, while anticipating limited economic growth in principal markets, new banking regulations and increased competition during Puerto Rico’s banking-market recovery.

• Puerto Rico credit metrics were expected to remain pressured in 2011, particularly mortgage-related assets; planned loan sales and credit-management efforts were expected to ease pressure on results.

• The BPPR sale of roughly $500 million book value of loans was expected to close in Q1 2011, subject to due diligence and closing conditions; the BPNA sale of $288 million book value of non-conventional mortgages closed February 28, 2011.

• Puerto Rico’s new tax code was expected to produce a $103.3 million tax expense in Q1 2011 from deferred-tax-asset remeasurement after the marginal corporate tax rate fell from 39% to 30%.