Popular announces Q2 results

SAN JUAN, Puerto Rico---Popular, Inc. (the "Corporation," "Popular," "we," "us," "our") (NASDAQ:BPOP) reported a net income of $279.8 million and an adjusted net income of $121.3 million for the second quarter ended June 30, 2018, compared to a net income of $91.3 million for the quarter ended March 31, 2018.

Ignacio Alvarez, President and Chief Executive Officer, said: "We are very pleased with the results for the second quarter. In addition to achieving a successful termination of our shared-loss agreements with the FDIC, we produced excellent financial results. These results were primarily driven by strong top line revenue growth in our Puerto Rico franchise, where the economy continues to recover from the impact of Hurricane Maria. We look forward to closing the acquisition of Wells Fargo's auto loan business in Puerto Rico in the third quarter, which will contribute favorably to our earnings in the second half of the year."

Significant Events

Early Termination of FDIC Shared-Loss Agreements

On May 22, 2018, Banco Popular de Puerto Rico, ("Banco Popular" or "BPPR"), Popular's Puerto Rico banking subsidiary, entered into a Termination Agreement (the "Termination Agreement") with the Federal Deposit Insurance Corporation (the "FDIC") to terminate all Shared-Loss Agreements in connection with the acquisition of certain assets and assumption of certain liabilities of Westernbank Puerto Rico through an FDIC-assisted transaction in 2010 (the "FDIC Transaction").

As a result of the Termination Agreement, assets that were covered by the Shared-Loss Agreements, including covered loans in the amount of approximately $514.6 million and covered real estate owned assets in the amount of approximately $15.3 million as of March 31, 2018, were reclassified as non-covered. Banco Popular now recognizes entirely all credit losses, expenses, gains, and recoveries related to the formerly covered assets with no offset due to or from the FDIC.

As of March 31, 2018, the Corporation had an FDIC Loss Share Asset in its financial statements of $44.5 million related to the covered assets. Additionally, as part of the Shared-Loss Agreements, Banco Popular also had agreed to make a true-up payment to the FDIC on the date that is 45 days following the last day of the final shared-loss month, or upon the final disposition of all covered assets under the Shared-Loss Agreements, in the event losses on the Shared-Loss Agreements failed to reach expected levels. The estimated fair value of such true-up payment obligation at March 31, 2018 was approximately $171.0 million.

Under the terms of the Termination Agreement, Banco Popular made a payment of approximately $23.7 million, (the "Termination Payment") to the FDIC as consideration for the termination of the Shared-Loss Agreements. Popular recorded a pre-tax gain of approximately $94.6 million, calculated based on the difference between the Termination Payment and the net amount of the true-up payment obligation and the FDIC Loss Share Asset, less related professional and advisory fees associated with the Termination Agreement. Net of income tax expense of $45.0 million, the Termination Agreement contributed $49.6 million to net income.

In June 2012, the Puerto Rico Department of the Treasury and the Corporation entered into a Tax Closing Agreement (the "Tax Closing Agreement") to clarify the tax treatment related to the loans acquired in the FDIC Transaction in accordance with the provisions of the Puerto Rico Tax Code. The Tax Closing Agreement provides that these loans are capital assets and any principal amount collected in excess of the amount paid for such loans will be taxed as a capital gain. The Tax Closing Agreement further provides that the Corporation's tax liability upon the termination of the Shared-Loss Agreements be calculated based on the "deemed sale" of the underlying loans. As a result, the Corporation recognized an income tax benefit of $108.9 million during the second quarter of 2018. This income tax benefit is composed of an increase in the deferred tax asset balance of $158.7 million related to the increase in tax basis as a result of the "deemed sale", net of the additional income tax expense of $49.8 million associated with the "deemed sale" incremental tax liability at the capital gains rate per the Tax Closing Agreement.

The combined effect of the Termination Agreement and the Tax Closing Agreement was a contribution of $158.5 million to net income for the quarter ended June 30, 2018.

Acquisition of Wells Fargo's Auto Finance Business in Puerto Rico

On February 14, 2018, Popular announced that Banco Popular agreed to acquire certain assets and liabilities related to Wells Fargo's auto finance business in Puerto Rico. On May 31, 2018 Popular filed a notice with the Board of Governors of the Federal Reserve System in order for Popular Auto, LLC, BPPR's direct, wholly-owned subsidiary, to be permitted to consummate the transaction. On July 5, 2018, Popular announced the completion of such regulatory clearance process. Popular also announced that the parties have agreed to close the transaction on August 1, 2018, subject to the satisfaction or waiver of customary closing conditions..