Popular Sees $161.2M Gain In Q2 On Early SLA Termination

Recently, Popular (NASDAQ:BPOP) announced an early termination of its loss-share agreement with the Federal Deposit Insurance Corporation (“FDIC”) and the Tax Closing Agreement it had entered with the Puerto Rico Department of the Treasury. On a combined basis, Popular expects a contribution of $161.2 million to its net income from both the terminations.

The loss-share agreement was related to Popular’s acquisition of selected assets and liabilities of Westernbank Puerto Rico. The company had entered into the agreement in 2010 through its subsidiary, Banco Popular de Puerto Rico.

Highlighting the benefits derived from the early termination, president and CEO of Popular, Ignacio Alvarez said, “We are now focused on realizing the expected benefits of this transaction, which include lower operating expenses, greater flexibility to manage these assets and simpler financial reporting.”

Benefit of Early Termination for Popular

Per the terms of the shared-loss agreement, Popular paid $23.7 million to the FDIC as consideration for the early termination. Also, henceforth, covered loans amounting to $514.6 million, along with covered real estate owned assets of about $15.3 million, both as of Mar 31, 2018, will be treated as non-covered.

Based on the difference between the termination consideration and the estimated net obligation due to the FDIC, Popular is expected to record a pre-tax gain of nearly $95.0 million. Net of income tax expense of $45.2 million, the transaction will contribute $49.8 million to net income.

The Tax Closing Agreement was entered in order to determine the tax calculation on loans acquired in the FDIC Transaction. Per the agreement, the principal amount, which Popular has collected in excess of the amount it paid for the loans acquired, will be taxed as a capital gain. The company’s tax liability, upon termination of the shared-loss agreement, will be calculated based on the deemed sale of the underlying loans.

Popular expects to recognize an income-tax benefit of about $111.4 million, from the closure of this agreement.

Premature termination of agreements is indicative of Popular’s sound financial health. Though the company’s performance was adversely impacted by the hurricane that hit Puerto Rico in late 2017, Popular remains well poised to grow on the back of its strong margins and capital position.

Shares of Popular have gained 26.1% in the past year, outperforming the industry’s rally of 21.3%.

Currently, the stock flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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