Popular, Inc. (BPOP)

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Popular Inc. (BPOP)

Q2 2011 Earnings Call

July 20, 2011, 2:00 pm ET


Jorge Junquera - CFO

Carlos Vazquez - SVP, President of Banco Popular North America

Enrique Martel - Manager, IR

Richard Carrion - President, Chairman and CEO

Vanessa Rodríguez - VP of Banco Popular North America


Joe Gladue - B Riley

Ken Zerbe - Morgan Stanley

Brett Scheiner - FBR Capital Markets

Derek Hewett - Keefe Bruyette & Woods Inc.



Good day, ladies and gentlemen, and welcome to the Second Quarter 2011, Popular Incorporated Earnings Conference Call. My name is Jonathan and I am your operator for today. At this time, all participants are in a listen-only mode. We will be conduct a question-and-answer session after the prepared remarks. (Operator Instructions). And as a reminder, this conference call is being recorded for replay purposes.

I would now like to hand the call of to, Mr. Enrique Martel, Manager of Corporate Communications. You may proceed, sir.

Enrique Martel

Good afternoon, and thank you for joining us on today's call. Our Chairman and CEO, Richard Carrion; and our CFO, Jorge Junquera will review our second quarter results and then answer your questions. They will be joined in the Q&A session by other members of our management team.

Before we start, I would like to remind you that in today's call, we may make forward-looking statements, which 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 press release and are detailed in our SEC filings, our financial quarterly release, and supplements. You may find today's press release and our SEC filings on our webpage, which you can visit by going to www.popular.com.

I will now turn the call over to Mr. Carrion.

Richard Carrion

Good afternoon, and thank you for joining the call. Please turn to the second slide. For the second quarter, we've reported net income of $111 million compared with net income of $10 million loss in the first quarter and a loss of $44 million in the second quarter of 2010.

Second quarter profit was mainly driven by higher net interest income and an extraordinary tax benefits of $60 million, which were partially offset by higher loan loss provision related to the non-covered loan portfolio.

This is our second consecutive profitable quarter and we continue producing strong and consistent levels of revenues. While the level of credit cost remained elevated we continue to make progress. The most telling sign is our top line revenues which remained steady despite the economic challenges we faced in our market.

Net interest income increased by $31 million to $375 million when compared with the previous quarter and our net interest margin remains well above 4%. We drew down the reserve for non-covered loan losses for the fourth consecutive quarter albeit at a reduced pace. Loan loss provision of $144 million includes $49 million related to the Westernbank covered assets, which represented higher recognized, credit losses in certain pools of loans. Keep in mind that an amount equal to 80% of the provision related to this covered loans flows back through net interest income due to the FDIC loss sharing agreement.

Excluding covered loans, held-in portfolio and non-performers increased by $17 million. While we would like to see this number down every quarter we are encouraged by the fact that NPL inflows in our commercial and construction loan portfolio at Banco Popular de Puerto Rico have declined in the last two quarters.

The FDIC assisted transaction has been instrumental in broadening and supporting our revenue streams amid the slowest economic environment. Each quarter we review expected losses and cash flows from the covered loans and results have consistently been positive. While quarterly variations in the loan loss provision related to Westernbank may occur, the performance of the covered loans continues to exceed our expectations. We continue to seek additional opportunities to raise our top line revenue.

During the second quarter we completed our second purchase of high quality Puerto Rico mortgages in the last six months adding an additional $282 million in mortgages to our loan book. The purchased mortgages including a $236 million we acquired in the first quarter have an average FICO of 718 and a loan to value of 81%.

As I said in the first quarter, the overarching scene here is that we have the machinery to add these assets with very little marginal cost from an operational point of view, so if potential asset purchases make sense we are going to go ahead and do them.

On a smaller scale we acquired certain assets and liabilities from the local retail branch of Well Fargo Advisors, which should strengthen our retail brokerage business. This transaction was closed in July, right after the end of the second quarter and should be immediately accretive.

The tax agreement was the main significant event that had an impact on second quarter results. There are number of significant items in the previous quarter widening the difference in pre-tax ncome.

So if you please turn to slide 3, we will review some of these items. We reached an agreement in June with Puerto Rico Treasury Department that reduced the tax expense we had recognized in previous quarters.

The tax reductions related to certain loan charge-offs recorded in the years 2009 and 2010 would be deferred until the year 2013 to 2016. As a result we made a payment of $89 million to the Puerto Rico Treasury and recorded a tax benefit of $54 million, for the recovery of the tax benefits we were then able to recognize under GAAP.

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