Popular, Inc. (BPOP) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to Popular's 2020 Virtual Annual Meeting of Shareholders. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host for today, Mr. Richard Carrión. Sir, the floor is yours.

Thank you. Good morning, ladies and gentlemen. I am Richard Carrión, Chairman of the Board of Directors of Popular, Inc. and I would like to welcome you to our 2020 Annual Meeting of Shareholders. Being 9:01 a.m. and in accordance with the Notice of the Annual Meeting of Shareholders and proxy statement provided prior to this meeting to shareholders of record as of the close of business on the record date of March 13, 2020, in accordance with Article 2.3 of the amended and restated bylaws of Popular, Inc., I hereby call this meeting to order. The meeting materials that will be used during this meeting are available in the virtual meeting web page. There, you will find the agenda and the rules of conduct for the meeting. We will conduct this meeting following the agenda and the rules of conduct and ask shareholders to follow the same. Now I will ask Mr. Javier Ferrer, Secretary of the Board of Directors, to provide us with a report of the number and percentage of shares of common stock of the corporation present and represented at this meeting and if these shares constitute the necessary quorum for the meeting.

Good morning, and thank you, Mr. Chairman. There are 78,837,977 shares of common stock of the corporation present or represented by proxy at this meeting, which constitute 88.91% of the total of 88,665,638 shares of common stock of the corporation issued and outstanding on March 13, 2020, the record date for determining shareholders entitled to vote at this meeting. As a result, we have the necessary quorum to proceed with this meeting of shareholders.

Before we begin, I would like to welcome the members of the Board of Directors who are attending this meeting, Ignacio Alvarez, who is also President and CEO; Joaquín Bacardí III; Alejandro Ballester; Robert Carrady; John Diercksen; María Luisa Ferré; Kim Goodwin; Myrna Soto; and Carlos Unanue. We now present the minutes of the Popular, Inc. 2019 Annual Meeting of Shareholders held on May 7, 2019. A copy of the minutes is included as part of the meeting materials in the virtual meeting web page. If there are any questions regarding the minutes of the 2019 Annual Meeting of Shareholders, please submit them now. Pertinent questions that are not related to the minutes of 2019 Annual Meeting of Shareholders will be answered, time permitting, later in the meeting after management reports on the corporation's 2019 annual report. While we see if there are any questions, I will introduce the inspector of election. To guarantee that the results of the votes cast today are valid and correct, the Board of Directors has appointed Broadridge Financial Solutions, an independent company, to act as the inspector of elections for the meeting. Mr. Romir Robles, representative of Broadridge Financial Solutions, is present today at this meeting.

Mr. Chairman, we have not received questions regarding the minutes. You may proceed.

Okay. There being no questions, the minutes of the Popular, Inc. 2019 Annual Meeting of Shareholders held on May 7, 2019, are hereby approved. The matters to be considered at this meeting in accordance with the Notice of the Annual Meeting and proxy statement are the following: number one, to elect 3 directors assigned to Class III of the Board of Directors of the corporation for a 3-year term; number two, to authorize and approve an amendment to Article 7th of the corporation's restated certificate of incorporation to declassify the Board of Directors by the 2023 Annual Meeting of Shareholders; number three, to authorize and approve an amendment to the first sentence of Article 7th of the corporation's restated certificate of incorporation to reduce the minimum and maximum amount of members comprising the Board of Directors; number four, to authorize and approve an amendment to Article 9th of the corporation's restated certificate of incorporation to eliminate the supermajority Board requirement; number five, to approve the adoption of the Popular, Inc. 2020 omnibus incentive plan; number six, to approve on an advisory basis the corporation's executive compensation; number seven, to ratify the appointment of PricewaterhouseCoopers LLP as the independent registered public accounting firm of the corporation for 2020; number eight, to approve and authorize the adjournment or postponement of the meeting, if necessary or appropriate, to solicit additional proxies in the event that there are not sufficient votes to approve proposals 2, 3, 4 or 5; and number nine, to consider such other business as may be properly brought before the meeting or any adjournments thereof. We will now proceed to present and discuss each of the proposals included in the agenda. Any shareholder who has not yet voted or may wish to change their vote may do so by clicking the Vote Here button on your screen. Those shareholders who have already voted either through the mail and ballot, by phone or online, and who do not wish to change their vote do not have to vote again. The voting platform will remain open throughout the discussion of these proposals. After the discussion of all proposals, we will answer questions submitted by our shareholders regarding the proposal. Shareholders may submit questions by typing their questions into the Ask a Question field on the virtual meeting web page and clicking submit. Please submit your questions through the virtual meeting web page while the proposals are being discussed. Pertinent questions that are not related to the proposal will be answered, time permitting, later in the meeting after management reports on the corporation's 2019 annual report. First proposal, the director nominees to serve for a 3-year term as members of the Board of Directors of the corporation assigned to Class III are Ignacio Alvarez, María Luisa Ferré and C. Kim Goodwin. For the election of these directors, each nominee must receive a majority of the votes cast by shareholders participating or representing -- represented by proxy in this meeting. Second proposal is the amendment to Article 7th of corporation's restated certificate of incorporation to declassify the Board of Directors by the 2023 Annual Meeting of Shareholders. For this amendment to be approved, the affirmative vote of 2/3 of the corporation's outstanding shares of common stock is necessary. The third proposal is the amendment to the first sentence of Article 7th of the corporation's restated certificate of incorporation to reduce the minimum and maximum number of members comprising the Board of Directors from the current range of 9 to 25 to a range of 7 to 15. For this amendment to be approved, the affirmative vote of 2/3 of the corporation's outstanding shares of common stock is necessary. The fourth proposal is the amendment to Article 9th of the corporation's restated certificate of incorporation to eliminate the supermajority vote requirements to approve amendments to the corporation's restated certificate of incorporation, business combinations and the voluntary dissolution of the corporation. For this amendment to be approved, the affirmative vote of 75% of the corporation's outstanding shares of common stock is necessary. The fifth proposal is the approval of the Popular, Inc. 2020 omnibus incentive plan. For this proposal to be approved, the affirmative vote of a majority of the shares participating or represented by proxy in this meeting is necessary. The sixth proposal is the advisory vote to approve the corporation's executive compensation. Because this is an advisory vote, the results of this vote will not bind the Board of Directors and will not overrule any decisions made by the Board on this matter. However, the Talent and Compensation Committee of the Board will consider the outcome of the vote when evaluating the effectiveness of our compensation policies and practice in connection with its future determination on executive compensation. For this proposal to be approved, the affirmative vote of a majority of the shares participating or represented by proxy in this meeting is necessary. The seventh proposal is the ratification of the appointment of PricewaterhouseCoopers as the independent registered public accounting firm of the corporation for 2020. Representatives from PricewaterhouseCoopers are present in this meeting and available to answer questions from shareholders. For this proposal to be approved, the affirmative vote of a majority of the shares participating or represented by proxy in this meeting is necessary. The eighth proposal is the approval of the adjournment or postponement of this meeting, if necessary or appropriate, to solicit additional proxies in the event that there are not sufficient votes to approve proposals 2, 3, 4 or 5. For this proposal to be approved, the affirmative vote of a majority of the shares participating or represented by proxy in this meeting is necessary. We will now answer any questions regarding the proposals.

Mr. Chairman, we have not received any questions regarding the proposals. You may proceed.

Thank you. There being no questions regarding the proposals, any shareholders that have not voted, please do so now. The polls will close momentarily. [Voting]

While the vote results are being counted, we will proceed with the presentation and discussion of the corporation's annual report for 2019 by our President and Chief Executive Officer, Ignacio Alvarez. The annual report for 2019 was made available to shareholders, along with the proxy statement, and is also available in the virtual meeting web page. After the discussion on the annual report, we will address general questions from shareholders. If you have any questions, please submit them through the virtual meeting web page during the presentation. Please follow the rules of conduct when submitting your questions. So Ignacio, I will turn over the floor to you now.

Thank you, Richard, and good morning, and thank you for all of you for joining us. Like many things in the post-COVID world, this meeting is a little bit different. We wish we could do it in person, but obviously, we're doing the best we can. But nonetheless, we are pleased to report on our results for 2019, and we'd also like to discuss on what our response to the COVID-19 pandemic. I know it seems a bit strange in the context of the world that we live in today to talk about 2019. It seems like a very long time ago. But nonetheless, it was a very important year for the corporation, a breakthrough year, and it put us in a very strong position for dealing with the challenges of the COVID-19. 2019 was an outstanding year. We achieved record earnings and other important milestones. And as I said, it put us in a very strong position to deal with the challenges of the present. If we go through some of the highlights for 2019, you can see that we recorded net income of $671 million. That's 38% higher than our adjusted net income for 2018. Our credit quality metrics continue to be positive in both Puerto Rico and the U.S. Our capital levels were very strong. We ended with common equity Tier 1 ratio of almost 18%, 17.8%. Our tangible book value increased by 17%, closing the year at $55.10. During 2019, we also completed several important capital actions. We increased our quarterly common stock dividend from $0.25 to $0.30 a share, and we repurchased $250 million in common stock. We achieved loan growth and deposit growth in both markets. And in Puerto Rico, we added 45,000 new customers during 2019. If we go to the balance sheet, we can see that our assets increased during the year by $4.5 billion. Most of that is reflected in the investment category, which increased by $4.4 million. This reflected our ability to reinvest the liquidity we obtained in these investments. Apart from investments, our loans went up by $907 million. We saw loan growth in both markets. In Puerto Rico, it was mostly in auto loans and credit cards. And in the U.S., it was mostly in the commercial and in the residential mortgage loan book. Deposits were up by $4 billion, reflecting an increase of $2.9 billion in Puerto Rico public sector deposits, but also, we had $900 million in retail deposits increase at Popular Bank mostly from our online platform. Our equity was up $582 million that reflected the net income of $671 million plus higher unrealized gains on debt securities by $266 million, which was offset by the $250 million common stock repurchase and declared dividends of $116 million on our common stock and $3.7 million on our preferred stock. If we drive into the income statement a little deeper, we can see that the positive variances were mostly related to net interest income. This reflects the full year of the loans acquired from Reliable and a higher volume of deposits that we were able to invest, as mentioned earlier. The provision expense was $62 million lower, which reflected credit quality improvements in Puerto Rico and also the fact that in the previous year, we had made certain incremental reserves for 2 large commercial borrowers. Noninterest income was up $20 million. We saw higher service charges on deposits, mainly fees on our transactional cash management services; higher other service fees, mainly credit card fees due to higher volume of transactions. We saw higher contingent insurance commissions and other service fees in our auto loan servicing fee income. This was partially offset by lower mortgage banking activities basically related to a negative valuation of our mortgage servicing rights. In terms of negative variances in our income statements, personnel costs were up $28 million. Obviously, that reflected the integration of Reliable, a full year integration of Reliable. But it also reflected higher incentives and other bonuses, including profit sharing, reflecting the positive results for the year. Other expenses were $36 million higher. That's reflecting mostly higher programming, processing costs and technology expenses, along with other advisory expenses. And this reflected our intent and continue to invest in the future. In terms of the COVID-19 situation, Popular, like everyone else, has been impacted. This is a global pandemic. So as opposed to other events like Maria, it has affected all of our markets that we serve simultaneously. Our management team has been working very hard, closely monitoring the situation and trying to respond the best we can. Basically, our strategy is designed around 3 components: customers, employees and community. In terms of our customers, we've made sure that we can continue to service their essential banking needs. Over 70% of our branches have been open throughout the crisis, and that will continue to increase. We've emphasized our digital services and increased the transaction limits to make it easier for people to use these digital services. We've waived ATM and other fees. And most importantly, we've offered our clients broad payment relief and have participated very, very actively in the SBA's PPP program for small businesses. In terms of our employees, we're working very hard to support their physical, emotional and financial health. We've continued to pay all our employees, including those who have reduced hours or unable to work from home. We made a special payment of $1,000 to our frontline employees. We've encouraged work-from-home and remote work arrangements. And we're leveraging our in-house clinic -- health clinic, to help to provide better health coverage to our employees. In terms of community, we established a $1 million commitment to help both small businesses and not-for-profit organizations in Puerto Rico. If we dive a little bit more into our customer support for COVID, it's important to say that we are trying to balance the health of our employees with the need to provide essential banking services to our clients. One area where we have been very active, I said before, is offering payment deferrals to our customers across all our product lines. Just in our consumer product lines, we have received over 100,000 requests for deferrals. We've also dedicated considerable human and technological resources to format the SBA's PPP program. As of May 9, we had processed more than $1.3 billion in these funds, benefiting over 19,000 businesses with over 240,000 employees. Small and medium-sized businesses are the heart of the community, and we are committed to supporting them particularly in these very difficult times. And the results demonstrate our commitment and our reach in this segment of the economy. If we turn to the first quarter, we could see that our net income for the quarter was $34 million compared to $167 million in the fourth quarter of 2019. The main driver here was the provision expense, which is a combination of the CECL impact and the recent macroeconomic forecast that obviously have turned negative as a result of the COVID pandemic. However, if you take away the impact of the provision, our operating results for the quarter were solid especially given the depth and the speed of the deceleration of the economy in the second half of March. We still have a very solid capital position, and our tangible book value continues to increase. During the quarter, we continued to implement important capital actions. We executed an accelerated share repurchase program, and we also increased our dividend from $0.30 to $0.40 per share. We continue to see positive -- excluding the impact of CECL, we continue to see positive credit quality trends, and we continue to see loan growth in both markets during the first quarter. In Puerto Rico, we added 6,500 new customers, notwithstanding the difficult situation, The pandemic, it has one bright spot. We can say that it has accelerated the adoption of digital channels across both markets, and we're seeing our clients adapting faster and faster to this. So we'll see the impact that will have in our future operations. If you look at -- a little bit deeper into the income statement for the first quarter, again, you can see that the basic situation and the basic difference between the fourth quarter was the provision expense, which was $143 million higher. Again, that was mostly due to the adoption of CECL. It requires us to take lifetime losses into account and the impact on our forecast of the COVID-19 pandemic. Our operating income was also $25 million lower. And this was mostly due to lower service fees mainly regarding debit and credit card fees, and that was impacted by the COVID-19 business interruption as transaction activity decreased. We also saw lower mortgage banking activities. We had a negative valuation on our mortgage servicing rights. As many of you know, Puerto Rico has been going through a very severe lockdown, and our mortgage activities have been severely limited. In terms of positive variances, I'm happy to say that our net interest income was actually higher during the first quarter. And that was mostly due to the growth of our auto and lease portfolio in Puerto Rico and our construction loan portfolio in Popular Bank. Obviously, this was also impacted by lower deposit costs, which helped us there. In terms of personnel costs, our personnel costs were $11 million lower. And that's basically due to lower incentive compensation due to the fact that we're not accruing profit sharing as we did in the fourth quarter. Other expenses were $6 million lower, mostly reflecting lower business promotion and seasonal advertising expenses that we're saving on. The income tax was $12 million lower. During our webcast recently, we announced that we have a plan to save -- to reduce our expenses by $55 million, and we're working hard to achieve that. If we turn to 2019 in our stock performance, you can see that we had a very strong stock performance during 2019. Our stock increased 24% during the year, which compares favorable to the KBW NASDAQ Regional Banking Index, which was up 20%. Year-to-date, we saw that our stock began to drop in late January. The decline accelerated in late February following the severity of the corona outbreak. We continue to see a more dramatic decline during the March 13 to 16 dates. And this was -- this coincides with the dates where Puerto Rico announced its strict lockdown measures. However, subsequently, we've regained much of the lost ground versus the index. But still, we remain 37% lower than at the close of 2019. Unfortunately, there's a lot of uncertainty regarding the future economic situation in all the markets we serve as well as the interest rate environment. We can't control the stock market nor do we try to predict its outcome. All we can do is work on running a good company, a solid bank and supporting our customers and employees. We stick to our guiding principles that have brought us to where we are, our strategic pillars. And we continue to follow them, and we are convinced, in the long run, this will pay dividends. In closing, it's obvious that the COVID-19 pandemic has exposed the fragility of our economic and social systems and the need for greater collaboration between all sectors. I am hopeful that it will also reveal what we can accomplish when we come together in pursuit of a common goal. At Popular, the well-being of our customers, employees and communities is and will always be our priority. We have acted decisively to help our employees stay safe while we continue to offer essential banking services to our customers and communities. I am deeply grateful to our colleagues for their efforts, commitment and bravery exhibited under very difficult circumstances. Despite the uncertainty we're all facing as we fight this pandemic, we are confident that we are all -- we are prepared to successfully manage through these current challenges. During our 126 years of existence, we have often operated in highly uncertain and volatile economic periods and have managed through them successfully. In fact, in the last 3 years, we have faced more challenges than most and have delivered favorable results even under these very difficult conditions. While each situation has unique challenges, I'm convinced that we have the team, the experience, the financial resources and the spirit to do so again, and I am very optimistic about the future of your company. I will now answer any questions.

Thank you, Ignacio. Now we will proceed to answer questions submitted by shareholders. Please note, we will attempt to answer as many questions as time allows. Any pertinent questions we are unable to address during the meeting will be posted and answered on the corporation's website.

Mr. Chairman, we have not received questions regarding the 2019 annual report. You may proceed.

Thank you. There being no questions, we will proceed with the preliminary vote results. Broadridge's representative is ready to present his report. Mr. Robles, please proceed to notify us of the preliminary vote results.

Thank you, Mr. Chairman. Good morning, ladies and gentlemen. My name is Romir Robles Yepez, and I represent Broadridge Financial Solutions, the entity authorized by Popular, Inc. to count the votes cast at today's meeting and serve as inspector of election of this 2020 Annual Meeting of Shareholders. I certify the following preliminary results. Number one, the 3 nominees to serve as Class 3 of the Board of Directors: Ignacio Alvarez, María Luisa Ferré and C. Kim Goodwin, have all been elected with 99.20%, 98.09% and 99.16%, respectively, of the votes cast by shareholders present or represented by proxy and entitled to vote. Number two, the amendment to Article 7th of the corporation's restated certificate to incorporation to declassify the Board of Directors by 2023 Annual Meeting of Shareholders has been approved with affirmative votes of 82.54% of the corporation's outstanding shares of common stock. Number three, the amendment of the first sentence of Article 7th of the corporation's restated certificate of incorporation to reduce the minimum and maximum amount of members comprising the Board of Directors has been approved with affirmative vote of 82.53% of the corporation's outstanding shares of common stock. The amendment to Article 9th of the corporation's restated certificate of incorporation to eliminate supermajority vote requirements has been approved with the affirmative vote of 82.57% of the corporation's outstanding shares of common stock. Number five, the adoption of the Popular, Inc. 2020 omnibus incentive plan has been approved with 93.50% of the share present or represented by proxy and entitled to vote. Number six, the approval on an advisory basis of the compensation of the corporation's executive officers has been approved with 94.90% of the shares present or represented by proxy and entitled to vote. Number seven, the ratification of the appointment of PricewaterhouseCoopers LLP as the corporation's independent registered public accounting firm for 2020 has been approved with 95.03% of the shares present or represented by proxy and entitled to vote. Finally, number eight, the approval of the adjournment or postponement of the meeting, if necessary or appropriate, to solicit additional proxies in the event that there are not sufficient votes to approve proposals 2, 3, 4 and 5 has been approved with 88.33% of the shares present or represented by proxy and entitled to vote. The final results will be included in the final report of the inspector of election. Thank you.

Thank you, Mr. Robles. We have received the preliminary vote results. All matters presented before this Annual Meeting of Shareholders have been properly approved by the required votes. There being no further business before this meeting, the 2020 Annual Meeting of Shareholders is hereby adjourned at 9:29 a.m. I would like to thank all shareholders who attended today's meeting as well as those who participated by submitting their proxy. Have a good day, and we hope to see you next year or sooner. Thank you.

Thank you. Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect at this time, and have a great day.