Although Popular Inc. reported a net loss applicable to common stock of $5.0 million for the fourth quarter of 2016, analysts on its conference call Jan. 24 hit the company with more questions on its capital plans than on the FDIC-related charges that drove its bottom line into the red.
The Hato Rey, Puerto Rico-based company recorded a $116.8 million pretax charge for the most recent quarter due to unreimbursed losses from its dispute with the FDIC over loss-share agreements in the acquisition of Westernbank Puerto Rico in 2010. Popular had previously disclosed the planned charge in December of last year. The company says there is still a $69 million FDIC receivable of which $6 million represents reimbursable losses still in dispute.
But analysts seemed more fixated on its capital distributions, prompted by Popular's same-day announcement of a quarterly dividend boost of 67% to 25 cents per share in addition to a $75 million common stock repurchase plan. In its third-quarter 2016 call, Popular had expressed some frustration at regulatory delays to approve the issuance of additional capital to shareholders. In an investor note from Morgan Stanley, analyst Ken Zerbe said the "long-awaited" announcement brings up questions over whether its buyback program is aggressive enough given its strong capitalization.
"The question, though, is whether its buyback program is enough," Zerbe wrote. "In our model, we had already assumed a $139 [million] buyback."
Compass Point had similar concerns, writing in a note that they had expected Popular to have a buyback plan of something closer to $130 million.
"It appears that [Popular] has favored allocating capital return towards the dividend versus the buyback," the note reads.
On the conference call, Compass Point analyst Manuel Bueno said he was sorry to "beat a dead horse" before asking about how the company's tangible book value factored into the decision to pursue dividends more than buybacks.
"Again, we wish we had this amount when the stock was in the 20s. We could buy it back below tangible, but you balance these things out," Chairman and CEO Richard Carrión said. "Again, this is what we've got, and we'll be looking as we move forward."
Speaking to the company's fourth-quarter performance irrespective of the FDIC charge, Carrión said Popular still sees progress in its U.S. operations and strength in its core Puerto Rico franchise. When adjusting for Popular's FDIC charge, S&P Capital IQ had a normalized actual EPS of 84 cents per share for the fourth quarter. The S&P Capital IQ consensus estimate for normalized EPS was 87 cents for the fourth quarter of 2016.
The company reported cleaner portfolios with fewer nonperforming loans quarter over quarter in addition to 9% growth in commercial loans in its U.S. operations. But Popular's core business still faced a quarter-over-quarter decline in its net interest margin, from 4.12% in the third quarter of 2016 to 4.02% in the most recent quarter. Popular CFO Carlos Vázquez blamed the decrease on an increased level of deposits, volatile yields in its Westernbank assets and a shift in Popular's asset mix to larger cash investment balances. Vázquez shrugged the conditions off as temporary concerns.
"[They] should not be as impactful in coming quarters," Vázquez said on the conference call. "These reduced effects together with the potential for higher rates should lead to stability in our margin."