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Allowance for loan losses
 12 Months Ended
Dec. 31, 2018
Receivables  
Allowance for loan losses

Note 9 – Allowance for loan losses

The Corporation follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan losses (“ALLL”) to provide for inherent losses in the loan portfolio. This methodology includes the consideration of factors such as current economic conditions, portfolio risk characteristics, prior loss experience and results of periodic credit reviews of individual loans. The provision for loan losses charged to current operations is based on this methodology. Loan losses are charged and recoveries are credited to the ALLL.

The Corporation’s assessment of the ALLL is determined in accordance with the guidance of loss contingencies in ASC Subtopic 450-20 and loan impairment guidance in ASC Section 310-10-35. Also, the Corporation determines the ALLL on purchased impaired loans and purchased loans accounted for under ASC Subtopic 310-30, by evaluating decreases in expected cash flows after the acquisition date. 

The accounting guidance provides for the recognition of a loss allowance for groups of homogeneous loans. The determination of the general ALLL includes the following principal factors:

  • Base net loss rates, which are based on the moving average of annualized net loss rates computed over a 5-year historical loss period for the commercial and construction loan portfolios, and an 18-month period for the consumer and mortgage loan portfolios.  The base net loss rates are applied by loan type and by legal entity.
  • Recent loss trend adjustment, which replaces the base loss rate with a 12-month average loss rate, when these trends are higher than the respective base loss rates. The objective of this adjustment is to allow for a more recent loss trend to be captured and reflected in the ALLL estimation process.   

For the period ended December 31, 2018, 26% (December 31, 2017 - 69%) of the ALLL for the BPPR segment loan portfolios utilized the recent loss trend adjustment instead of the base loss. The recent loss trends were impacted by charge-off activity related to the impact of Hurricanes Irma and Maria. The effect of replacing the base loss with the recent loss trend adjustment was mainly concentrated in the commercial, mortgage and overall consumer portfolios for 2018 and in the leasing, credit cards, personal, auto and mortgage loan portfolios for 2017.

For the period ended December 31, 2018, 28% (December 31, 2017 - 3 %) of the Popular U.S. segment loan portfolios utilized the recent loss trend adjustment instead of the base loss. The effect of replacing the base loss with the recent loss trend adjustment was concentrated in the consumer portfolio for 2018 and 2017.

  • Environmental factors, which include credit and macroeconomic indicators such as unemployment rate, economic activity index and delinquency rates, adopted to account for current market conditions that are likely to cause estimated credit losses to differ from historical losses. The Corporation reflects the effect of these environmental factors on each loan group as an adjustment that, as appropriate, increases the historical loss rate applied to each group. Environmental factors provide updated perspective on credit and economic conditions. Regression analysis is used to select these indicators and quantify the effect on the general ALLL. The Corporation’s methodology also includes qualitative judgmental reserves based on stressed credit quality assumptions to provide for probable losses in the loan portfolios not embedded in the historical loss rates.

During the third quarter of 2018, management completed the annual review of the components of the ALLL models. As part of this review, management updated core metrics related to the estimation process for evaluating the adequacy of the general ALLL. These updates to the ALLL models, which are described in the paragraph below, were implemented as of September 30, 2018 and resulted in a net decrease to the ALLL of $6.1 million.

Management made the following revisions to the ALLL models during the third quarter of 2018:

  • Annual review and recalibration of the environmental factors adjustments. The environmental factors adjustments are developed by performing regression analyses on selected credit and economic indicators for each applicable loan segment. During the third quarter of 2018, the environmental factor models used to account for changes in current credit and macroeconomic conditions were reviewed and recalibrated based on the latest applicable trends.

The effect of the recalibration to the environmental factors adjustments resulted in a decrease to the ALLL of $5.9 million and $0.2 million at the BPPR and Popular U.S. segments, respectively.

The following tables present the changes in the allowance for loan losses, loan ending balances and whether such loans and the allowance pertain to loans individually or collectively evaluated for impairment for the years ended December 31, 2018 and 2017.

For the year ended December 31, 2018
Puerto Rico - Non-covered loans
(In thousands)CommercialConstructionMortgageLeasingConsumerTotal
Allowance for credit losses:
Beginning balance$171,531$1,286$159,081$11,991$174,215$518,104
Provision (reversal of provision)101,614(1,754)15,2975,52575,779196,461
Charge-offs(82,352)(9)(69,393)(8,297)(138,161)(298,212)
Recoveries16,4211,3634,5712,26732,57357,195
Allowance transferred from covered loans [1]--33,422-18833,610
Ending balance$207,214$886$142,978$11,486$144,594$507,158
Specific ALLL$52,190$56$38,760$320$24,083$115,409
General ALLL$155,024$830$104,218$11,166$120,511$391,749
Loans held-in-portfolio:
Impaired non-covered loans$398,518$1,788$509,468$1,099$104,235$1,015,108
Non-covered loans held-in-portfolio
excluding impaired loans6,974,12584,1675,923,855933,6744,952,54318,868,364
Total non-covered loans held-in-portfolio$7,372,643$85,955$6,433,323$934,773$5,056,778$19,883,472
[1] Represents the allowance transferred from covered to non-covered loans at June 30, 2018, due to the Termination Agreement with the FDIC.

For the year ended December 31, 2018
Puerto Rico - Covered loans
(In thousands)CommercialConstructionMortgageLeasingConsumerTotal
Allowance for credit losses:
Beginning balance$-$-$32,521$-$723$33,244
Provision (reversal of provision)--2,265-(535)1,730
Charge-offs--(1,446)-(2)(1,448)
Recoveries--82-284
Allowance transferred to non-covered loans--(33,422)-(188)(33,610)
Ending balance$-$-$-$-$-$-
Specific ALLL$-$-$-$-$-$-
General ALLL$-$-$-$-$-$-
Loans held-in-portfolio:
Impaired covered loans$-$-$-$-$-$-
Covered loans held-in-portfolio
excluding impaired loans------
Total covered loans held-in-portfolio$-$-$-$-$-$-

For the year ended December 31, 2018
Popular U.S.
(In thousands)CommercialConstructionMortgageLegacyConsumerTotal
Allowance for credit losses:
Beginning balance$44,134$7,076$4,541$798$15,529$72,078
Provision (reversal of provision)7,5515,268(478)(1,861)19,40129,881
Charge-offs(24,920)(5,806)(232)114(22,118)(52,962)
Recoveries5,136-6031,9185,53613,193
Ending balance$31,901$6,538$4,434$969$18,348$62,190
Specific ALLL$-$-$2,451$-$1,810$4,261
General ALLL$31,901$6,538$1,983$969$16,538$57,929
Loans held-in-portfolio:
Impaired loans$-$12,060$9,420$-$8,507$29,987
Loans held-in-portfolio
excluding impaired loans4,670,376681,434792,51525,949424,1566,594,430
Total loans held-in-portfolio$4,670,376$693,494$801,935$25,949$432,663$6,624,417

For the year ended December 31, 2018
Popular, Inc.
(In thousands)CommercialConstructionMortgageLegacyLeasingConsumerTotal
Allowance for credit losses:
Beginning balance$215,665$8,362$196,143$798$11,991$190,467$623,426
Provision (reversal of provision)109,1653,51417,084(1,861)5,52594,645228,072
Charge-offs(107,272)(5,815)(71,071)114(8,297)(160,281)(352,622)
Recoveries21,5571,3635,2561,9182,26738,11170,472
Ending balance$239,115$7,424$147,412$969$11,486$162,942$569,348
Specific ALLL$52,190$56$41,211$-$320$25,893$119,670
General ALLL$186,925$7,368$106,201$969$11,166$137,049$449,678
Loans held-in-portfolio:
Impaired loans$398,518$13,848$518,888$-$1,099$112,742$1,045,095
Loans held-in-portfolio
excluding impaired loans11,644,501765,6016,716,37025,949933,6745,376,69925,462,794
Total loans held-in-portfolio$12,043,019$779,449$7,235,258$25,949$934,773$5,489,441$26,507,889

For the year ended December 31, 2017
Puerto Rico - Non-covered loans
(In thousands)CommercialConstructionMortgageLeasingConsumerTotal
Allowance for credit losses:
Beginning balance$189,686$1,353$143,320$7,662$125,963$467,984
Provision (reversal of provision)4,240(2,690)90,70511,099138,385241,739
Charge-offs(49,591)(3,588)(78,121)(8,407)(109,252)(248,959)
Recoveries27,1966,2113,1771,63719,11957,340
Ending balance$171,531$1,286$159,081$11,991$174,215$518,104
Specific ALLL$36,982$-$46,354$475$21,849$105,660
General ALLL$134,549$1,286$112,727$11,516$152,366$412,444
Loans held-in-portfolio:
Impaired non-covered loans$323,455$-$509,033$1,456$99,180$933,124
Non-covered loans held-in-portfolio
excluding impaired loans6,942,44495,3696,067,746808,5343,230,84117,144,934
Total non-covered loans held-in-portfolio$7,265,899$95,369$6,576,779$809,990$3,330,021$18,078,058

For the year ended December 31, 2017
Puerto Rico - Covered Loans
(In thousands)CommercialConstructionMortgageLeasingConsumerTotal
Allowance for credit losses:
Beginning balance$-$-$30,159$-$191$30,350
Provision--5,098-6445,742
Charge-offs--(4,049)-(122)(4,171)
Recoveries--1,313-101,323
Ending balance$-$-$32,521$-$723$33,244
Specific ALLL$-$-$-$-$-$-
General ALLL$-$-$32,521$-$723$33,244
Loans held-in-portfolio:
Impaired covered loans$-$-$-$-$-$-
Covered loans held-in-portfolio
excluding impaired loans--502,929-14,345517,274
Total covered loans held-in-portfolio$-$-$502,929$-$14,345$517,274

For the year ended December 31, 2017
Popular U.S.
(In thousands)CommercialConstructionMortgageLegacyConsumerTotal
Allowance for credit losses:
Beginning balance$12,968$8,172$4,614$1,343$15,220$42,317
Provision (reversal of provision)65,323(1,103)167(2,275)15,83177,943
Charge-offs(36,399)-(1,223)(897)(19,926)(58,445)
Recoveries2,24279832,6274,40410,263
Ending balance$44,134$7,076$4,541$798$15,529$72,078
Specific ALLL$-$-$2,478$-$953$3,431
General ALLL$44,134$7,076$2,063$798$14,576$68,647
Loans held-in-portfolio:
Impaired loans$-$-$9,242$-$5,057$14,299
Loans held-in-portfolio
excluding impaired loans4,222,962784,660684,38632,980475,4496,200,437
Total loans held-in-portfolio$4,222,962$784,660$693,628$32,980$480,506$6,214,736

For the year ended December 31, 2017
Popular, Inc.
(In thousands)CommercialConstructionMortgageLegacyLeasingConsumerTotal
Allowance for credit losses:
Beginning balance$202,654$9,525$178,093$1,343$7,662$141,374$540,651
Provision (reversal of provision)69,563(3,793)95,970(2,275)11,099154,860325,424
Charge-offs(85,990)(3,588)(83,393)(897)(8,407)(129,300)(311,575)
Recoveries29,4386,2185,4732,6271,63723,53368,926
Ending balance$215,665$8,362$196,143$798$11,991$190,467$623,426
Specific ALLL$36,982$-$48,832$-$475$22,802$109,091
General ALLL$178,683$8,362$147,311$798$11,516$167,665$514,335
Loans held-in-portfolio:
Impaired loans$323,455$-$518,275$-$1,456$104,237$947,423
Loans held-in-portfolio
excluding impaired loans11,165,406880,0297,255,06132,980808,5343,720,63523,862,645
Total loans held-in-portfolio$11,488,861$880,029$7,773,336$32,980$809,990$3,824,872$24,810,068

The following table provides the activity in the allowance for loan losses related to loans accounted for pursuant to ASC Subtopic 310-30.

ASC 310-30
For the years ended
(In thousands)December 31, 2018December 31, 2017
Balance at beginning of period$119,505$91,308
Provision61,27081,877
Net charge-offs(58,640)(53,680)
Balance at end of period$122,135$119,505

Impaired loans

The following tables present loans individually evaluated for impairment at December 31, 2018 and 2017.

December 31, 2018
Puerto Rico
Impaired Loans – With an Impaired Loans
AllowanceWith No AllowanceImpaired Loans - Total
UnpaidUnpaidUnpaid
RecordedprincipalRelatedRecordedprincipalRecordedprincipalRelated
(In thousands)investmentbalanceallowanceinvestmentbalanceinvestmentbalanceallowance
Commercial multi-family$932$932$4$-$-$932$932$4
Commercial real estate non-owner occupied85,58386,28227,49496,005138,378181,588224,66027,494
Commercial real estate owner occupied113,592132,6777,85726,47460,485140,066193,1627,857
Commercial and industrial65,20867,09416,83510,72420,96875,93288,06216,835
Construction1,7881,78856--1,7881,78856
Mortgage408,767458,01038,760100,701135,084509,468593,09438,760
Leasing1,0991,099320--1,0991,099320
Consumer:
Credit cards28,82928,8294,571--28,82928,8294,571
Personal 72,98972,98919,098--72,98972,98919,098
Auto 1,1611,161228--1,1611,161228
Other1,2561,256186--1,2561,256186
Total Puerto Rico$781,204$852,117$115,409$233,904$354,915$1,015,108$1,207,032$115,409

December 31, 2018
Popular U.S.
Impaired Loans – With an Impaired Loans
AllowanceWith No AllowanceImpaired Loans - Total
UnpaidUnpaidUnpaid
RecordedprincipalRelatedRecordedprincipalRecordedprincipalRelated
(In thousands)investmentbalanceallowanceinvestmentbalanceinvestmentbalanceallowance
Construction$-$-$-$12,060$18,127$12,060$18,127$-
Mortgage7,2378,8992,4512,1833,1279,42012,0262,451
Consumer:
HELOCs6,2366,2851,5581,4981,5727,7347,8571,558
Personal631631252142143773774252
Total Popular U.S.$14,104$15,815$4,261$15,883$22,969$29,987$38,784$4,261

December 31, 2018
Popular, Inc.
Impaired Loans – With an Impaired Loans
AllowanceWith No AllowanceImpaired Loans - Total
UnpaidUnpaidUnpaid
RecordedprincipalRelatedRecordedprincipalRecordedprincipalRelated
(In thousands)investmentbalanceallowanceinvestmentbalanceinvestmentbalanceallowance
Commercial multi-family$932$932$4$-$-$932$932$4
Commercial real estate non-owner occupied85,58386,28227,49496,005138,378181,588224,66027,494
Commercial real estate owner occupied113,592132,6777,85726,47460,485140,066193,1627,857
Commercial and industrial65,20867,09416,83510,72420,96875,93288,06216,835
Construction1,7881,7885612,06018,12713,84819,91556
Mortgage416,004466,90941,211102,884138,211518,888605,12041,211
Leasing1,0991,099320--1,0991,099320
Consumer:
Credit Cards28,82928,8294,571--28,82928,8294,571
HELOCs6,2366,2851,5581,4981,5727,7347,8571,558
Personal73,62073,62019,35014214373,76273,76319,350
Auto 1,1611,161228--1,1611,161228
Other1,2561,256186--1,2561,256186
Total Popular, Inc.$795,308$867,932$119,670$249,787$377,884$1,045,095$1,245,816$119,670

December 31, 2017
Puerto Rico
Impaired Loans – With an Impaired Loans
AllowanceWith No AllowanceImpaired Loans - Total
UnpaidUnpaidUnpaid
RecordedprincipalRelatedRecordedprincipalRecordedprincipalRelated
(In thousands)investmentbalanceallowanceinvestmentbalanceinvestmentbalanceallowance
Commercial multi-family$206$206$32$-$-$206$206$32
Commercial real estate non-owner occupied101,485102,26223,74411,45427,522112,939129,78423,744
Commercial real estate owner occupied127,634153,49510,22124,63457,219152,268210,71410,221
Commercial and industrial43,49346,9182,98514,54923,97758,04270,8952,985
Mortgage450,226504,00646,35458,80775,228509,033579,23446,354
Leasing1,4561,456475--1,4561,456475
Consumer:
Credit cards33,67633,6765,569--33,67633,6765,569
Personal 62,48862,48815,690--62,48862,48815,690
Auto 2,0072,007425--2,0072,007425
Other1,0091,009165--1,0091,009165
Total Puerto Rico$823,680$907,523$105,660$109,444$183,946$933,124$1,091,469$105,660

December 31, 2017
Popular U.S.
Impaired Loans – With an Impaired Loans
AllowanceWith No AllowanceImpaired Loans - Total
UnpaidUnpaidUnpaid
RecordedprincipalRelatedRecordedprincipalRecordedprincipalRelated
(In thousands)investmentbalanceallowanceinvestmentbalanceinvestmentbalanceallowance
Mortgage$6,774$8,439$2,478$2,468$3,397$9,242$11,836$2,478
Consumer:
HELOCs3,5303,5427227617804,2914,322722
Personal542542231224224766766231
Total Popular U.S.$10,846$12,523$3,431$3,453$4,401$14,299$16,924$3,431

December 31, 2017
Popular, Inc.
Impaired Loans – With an Impaired Loans
AllowanceWith No AllowanceImpaired Loans - Total
UnpaidUnpaidUnpaid
RecordedprincipalRelatedRecordedprincipalRecordedprincipalRelated
(In thousands)investmentbalanceallowanceinvestmentbalanceinvestmentbalanceallowance
Commercial multi-family$206$206$32$-$-$206$206$32
Commercial real estate non-owner occupied101,485102,26223,74411,45427,522112,939129,78423,744
Commercial real estate owner occupied127,634153,49510,22124,63457,219152,268210,71410,221
Commercial and industrial43,49346,9182,98514,54923,97758,04270,8952,985
Mortgage457,000512,44548,83261,27578,625518,275591,07048,832
Leasing1,4561,456475--1,4561,456475
Consumer:
Credit Cards33,67633,6765,569--33,67633,6765,569
HELOCs3,5303,5427227617804,2914,322722
Personal63,03063,03015,92122422463,25463,25415,921
Auto 2,0072,007425--2,0072,007425
Other1,0091,009165--1,0091,009165
Total Popular, Inc.$834,526$920,046$109,091$112,897$188,347$947,423$1,108,393$109,091

The following tables present the average recorded investment and interest income recognized on impaired loans for the years ended December 31, 2018 and 2017.

For the year ended December 31, 2018
Puerto RicoPopular U.S.Popular, Inc.
AverageInterestAverageInterestAverageInterest
recordedincomerecordedincomerecordedincome
(In thousands)investmentrecognizedinvestmentrecognizedinvestmentrecognized
Commercial multi-family$693$50$-$-$693$50
Commercial real estate non-owner occupied138,8325,742--138,8325,742
Commercial real estate owner occupied148,9676,528--148,9676,528
Commercial and industrial69,4064,097--69,4064,097
Construction2,094259,565-11,65925
Mortgage509,03817,6639,258165518,29617,828
Leasing1,195---1,195-
Consumer:
Credit cards31,953---31,953-
HELOCs--5,904-5,904-
Personal 68,237415770-69,007415
Auto 1,413---1,413-
Other1,248---1,248-
Total Popular, Inc.$973,076$34,520$25,497$165$998,573$34,685

For the year ended December 31, 2017
Puerto RicoPopular U.S.Popular, Inc.
AverageInterestAverageInterestAverageInterest
recordedincomerecordedincomerecordedincome
(In thousands)investmentrecognizedinvestmentrecognizedinvestmentrecognized
Commercial multi-family$130$4$-$-$130$4
Commercial real estate non-owner occupied117,1824,745--117,1824,745
Commercial real estate owner occupied156,8904,939--156,8904,939
Commercial and industrial60,4661,899--60,4661,899
Mortgage504,70912,6619,006200513,71512,861
Leasing1,642---1,642-
Consumer:
Credit cards36,109---36,109-
HELOCs--2,964-2,964-
Personal 64,467-505-64,972-
Auto 2,065---2,065-
Other915---915-
Total Popular, Inc.$944,575$24,248$12,475$200$957,050$24,448

Modifications

A modification of a loan constitutes a troubled debt restructuring when a borrower is experiencing financial difficulty and the modification constitutes a concession. For a summary of the accounting policy related to troubled debt restructurings (“TDRs’), refer to the Summary of Significant Accounting Policies included in Note 2 to these Consolidated Financial Statements.

TDRs amounted to $1.5 billion at December 31, 2018 (December 31, 2017 - $1.3 billion). The amount of outstanding commitments to lend additional funds to debtors owing receivables whose terms have been modified in TDRs amounted to $16 million related to the commercial loan portfolio at December 31, 2018 (December 31, 2017 - $8 million).

At December 31, 2018, the mortgage loan TDRs include $543 million guaranteed by U.S. sponsored entities at BPPR, compared to $449 million at December 31, 2017.

The following table presents the non-covered and covered loans classified as TDRs according to their accruing status and the related allowance at December 31, 2018 and 2017.

Popular, Inc.
December 31, 2018 December 31, 2017
(In thousands)AccruingNon-AccruingTotalRelated AllowanceAccruingNon-AccruingTotalRelated Allowance
Non-covered loans held-in-portfolio:
Commercial$229,758$130,921$360,679$46,889$161,220$59,626$220,846$32,472
Construction-1,7881,78856----
Mortgage906,712135,7581,042,47041,211803,278126,798930,07648,832
Leases6684401,1083208633931,256475
Consumer94,19315,651109,84424,52393,91612,233106,14922,802
Non-covered loans held-in-portfolio$1,231,331$284,558$1,515,889$112,999$1,059,277$199,050$1,258,327$104,581
Covered loans held-in-portfolio:
Mortgage$-$-$-$-$2,658$3,227$5,885$-
Covered loans held-in-portfolio$-$-$-$-$2,658$3,227$5,885$-

The following tables present the loan count by type of modification for those loans modified in a TDR during the years ended December 31, 2018 and 2017. Loans modified as TDRs for the U.S. operations are considered insignificant to the Corporation.

Popular, Inc.
For the year ended December 31, 2018
Reduction in interest rateExtension of maturity dateCombination of reduction in interest rate and extension of maturity dateOther
Commercial multi-family-2--
Commercial real estate non-owner occupied317--
Commercial real estate owner occupied464--
Commercial and industrial687--
Construction1---
Mortgage854935957
Leasing--4-
Consumer:
Credit cards579-4432
HELOCs-27111
Personal1,3566-2
Auto-73-
Other25-2-
Total2,059259383492

Popular, Inc.
For the year ended December 31, 2017
Reduction in interest rateExtension of maturity dateCombination of reduction in interest rate and extension of maturity dateOther
Commercial real estate non-owner occupied42--
Commercial real estate owner occupied417--
Commercial and industrial340--
Mortgage5539348125
Leasing-19-
Consumer:
Credit cards491-5537
HELOCs-1481
Personal757623
Auto-541
Other321-1
Total1,346125376668

The following tables present, by class, quantitative information related to loans modified as TDRs during the years ended December 31, 2018 and 2017.

Popular, Inc.
For the year ended December 31, 2018
(Dollars in thousands)Loan countPre-modification outstanding recorded investmentPost-modification outstanding recorded investmentIncrease (decrease) in the allowance for loan losses as a result of modification
Commercial multi-family2$1,377$1,375$106
Commercial real estate non-owner occupied20109,08179,6956,230
Commercial real estate owner occupied6831,23329,9621,170
Commercial and industrial9352,65351,85513,981
Construction14,2104,293474
Mortgage55067,51859,9192,696
Leasing4989630
Consumer:
Credit cards1,01510,06510,6711,331
HELOCs393,9613,891935
Personal1,36421,97621,9796,320
Auto1017315226
Other2760159999
Total3,193$302,946$264,487$33,398

Popular, Inc.
For the year ended December 31, 2017
(Dollars in thousands)Loan countPre-modification outstanding recorded investmentPost-modification outstanding recorded investmentIncrease (decrease) in the allowance for loan losses as a result of modification
Commercial real estate non-owner occupied6$2,172$2,032$146
Commercial real estate owner occupied215,3565,346313
Commercial and industrial432,6554,786507
Mortgage56769,08464,5524,108
Leasing10347347101
Consumer:
Credit cards1,0339,28310,1961,241
HELOCs232,5042,421299
Personal76812,88412,9113,027
Auto102,0431,999362
Other342,0142,01472
Total2,515$108,342$106,604$10,176

During the year ended December 31, 2018, six loans with an aggregate unpaid principal balance of $82.1 million were restructured into multiple notes (“Note A / B split”). The Corporation recorded $29.6 million charge­offs as part of those loan restructurings. The post-modification outstanding recorded investment in the tables above is presented net of these charge-offs. The restructuring of those loans was made after analyzing the borrowers’ capacity to repay the debt, collateral and ability to perform under the modified terms. The recorded investment on those commercial TDRs amounted to approximately $52.5 million at December 31, 2018 with a related allowance for loan losses amounting to approximately $105 thousand.

The following tables present, by class, TDRs that were subject to payment default and that had been modified as a TDR during the twelve months preceding the default date. Payment default is defined as a restructured loan becoming 90 days past due after being modified, foreclosed or charged-off, whichever occurs first. The recorded investment as of period end is inclusive of all partial paydowns and charge-offs since the modification date. Loans modified as a TDR that were fully paid down, charged-off or foreclosed upon by period end are not reported.

Popular, Inc.
Defaulted during the year ended December 31, 2018
(Dollars in thousands)Loan countRecorded investment as of first default date
Commercial real estate non-owner occupied2$11,245
Commercial real estate owner occupied5480
Commercial and industrial87,208
Mortgage16112,362
Consumer:
Credit cards2362,098
HELOCs2205
Personal1072,300
Auto5115
Other17
Total527$36,020

Popular, Inc.
Defaulted during the year ended December 31, 2017
(Dollars in thousands)Loan countRecorded investment as of first default date
Commercial real estate non-owner occupied3$543
Commercial real estate owner occupied41,912
Commercial and industrial5636
Mortgage11010,112
Leasing4146
Consumer:
Credit cards3693,286
HELOCs197
Personal1393,461
Auto5103
Other19
Total641$20,305

Commercial, consumer and mortgage loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default.  If loans modified in a TDR subsequently default, the Corporation evaluates the loan for possible further impairment.  The allowance for loan losses may be increased or partial charge-offs may be taken to further write-down the carrying value of the loan.

Credit Quality

The Corporation has defined a risk rating system to assign a rating to all credit exposures, particularly for the commercial and construction loan portfolios. Risk ratings in the aggregate provide the Corporation’s management the asset quality profile for the loan portfolio. The risk rating system provides for the assignment of ratings at the obligor level based on the financial condition of the borrower. The Corporation’s consumer and mortgage loans are not subject to the risk rating system. Consumer and mortgage loans are classified substandard or loss based on their delinquency status. All other consumer and mortgage loans that are not classified as substandard or loss would be considered “unrated”.

The Corporation’s obligor risk rating scales range from rating 1 (Excellent) to rating 14 (Loss). The obligor risk rating reflects the risk of payment default of a borrower in the ordinary course of business.

Pass Credit Classifications:

Pass (Scales 1 through 8) – Loans classified as pass have a well defined primary source of repayment, with no apparent risk, strong financial position, minimal operating risk, profitability, liquidity and strong capitalization.

Watch (Scale 9) – Loans classified as watch have acceptable business credit, but borrower’s operations, cash flow or financial condition evidence more than average risk, requires above average levels of supervision and attention from Loan Officers.

Special Mention (Scale 10) - Loans classified as special mention have potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Corporation’s credit position at some future date. 

Adversely Classified Classifications:

Substandard (Scales 11 and 12) - Loans classified as substandard are deemed to be inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any.  Loans classified as such have well-defined weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful (Scale 13) - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the additional characteristic that the weaknesses make the collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. 

Loss (Scale 14) - Uncollectible and of such little value that continuance as a bankable asset is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be effected in the future.

Risk ratings scales 10 through 14 conform to regulatory ratings. The assignment of the obligor risk rating is based on relevant information about the ability of borrowers to service their debts such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.

The Corporation periodically reviews its loans classification to evaluate if they are properly classified, and to determine impairment, if any. The frequency of these reviews will depend on the amount of the aggregate outstanding debt, and the risk rating classification of the obligor. In addition, during the renewal and annual review process of applicable credit facilities, the Corporation evaluates the corresponding loan grades.

The Corporation has a Commercial Loan Review department within the Corporate Risk Reviews Division that reports directly to the Corporation’s Risk Management Committee and administratively to the Chief Risk Officer, which performs annual comprehensive credit process reviews of all lending groups in BPPR. This group evaluates the credit risk profile of each originating unit along with each unit’s credit administration effectiveness, including the assessment of the risk rating representative of the current credit quality of the loans, and the evaluation of collateral documentation. The monitoring performed by this group contributes to assess compliance with credit policies and underwriting standards, determine the current level of credit risk, evaluate the effectiveness of the credit management process and identify control deficiencies that may arise in the credit-granting process. Based on its findings, Commercial Loan Review recommends corrective actions, if necessary, that help in maintaining a sound credit process. The Loan Review Group reports the results of the credit process reviews to the Risk Management Committee of the Corporation’s Board of Directors.

The following tables present the outstanding balance, net of unearned income, of non-covered loans held-in-portfolio based on the Corporation’s assignment of obligor risk ratings as defined at December 31, 2018 and 2017.

December 31, 2018
SpecialPass/
(In thousands)WatchMentionSubstandardDoubtfulLossSub-totalUnratedTotal
Puerto Rico
Commercial multi-family$1,634$4,548$3,590$-$-$9,772$135,856$145,628
Commercial real estate non-owner occupied470,506233,173342,962--1,046,6411,275,9602,322,601
Commercial real estate owner occupied262,476174,510291,4682,078-730,532991,7211,722,253
Commercial and industrial655,092130,641156,51517773942,4982,239,6633,182,161
Total Commercial1,389,708542,872794,5352,255732,729,4434,643,2007,372,643
Construction1476341,788--2,56983,38685,955
Mortgage3,0572,182154,506--159,7456,273,5786,433,323
Leasing--3,301-123,313931,460934,773
Consumer:
Credit cards--16,035--16,0351,031,2381,047,273
HELOCs--165--1655,1865,351
Personal8491918,827--19,6951,230,9301,250,625
Auto--24,093-8424,1772,584,6082,608,785
Other --14,743-21514,958129,786144,744
Total Consumer8491973,863-29975,0304,981,7485,056,778
Total Puerto Rico$1,393,761$545,707$1,027,993$2,255$384$2,970,100$16,913,372$19,883,472
Popular U.S.
Commercial multi-family$85,901$7,123$6,979$-$-$100,003$1,301,537$1,401,540
Commercial real estate non-owner occupied152,6359,83946,555--209,0291,672,7151,881,744
Commercial real estate owner occupied49,41523,9632,394--75,772223,167298,939
Commercial and industrial5,8251,08476,459--83,3681,004,7851,088,153
Total Commercial293,77642,009132,387--468,1724,202,2044,670,376
Construction35,37537,74158,005--131,121562,373693,494
Mortgage--11,032--11,032790,903801,935
Legacy5342242,409--3,16722,78225,949
Consumer:
Credit cards------3838
HELOCs--2,615-10,96413,579129,473143,052
Personal--1,910-7012,611286,738289,349
Other --4--4220224
Total Consumer--4,529-11,66516,194416,469432,663
Total Popular U.S.$329,685$79,974$208,362$-$11,665$629,686$5,994,731$6,624,417
Popular, Inc.
Commercial multi-family$87,535$11,671$10,569$-$-$109,775$1,437,393$1,547,168
Commercial real estate non-owner occupied623,141243,012389,517--1,255,6702,948,6754,204,345
Commercial real estate owner occupied311,891198,473293,8622,078-806,3041,214,8882,021,192
Commercial and industrial660,917131,725232,974177731,025,8663,244,4484,270,314
Total Commercial1,683,484584,881926,9222,255733,197,6158,845,40412,043,019
Construction35,52238,37559,793--133,690645,759779,449
Mortgage3,0572,182165,538--170,7777,064,4817,235,258
Legacy5342242,409--3,16722,78225,949
Leasing--3,301-123,313931,460934,773
Consumer:
Credit cards--16,035--16,0351,031,2761,047,311
HELOCs--2,780-10,96413,744134,659148,403
Personal8491920,737-70122,3061,517,6681,539,974
Auto--24,093-8424,1772,584,6082,608,785
Other --14,747-21514,962130,006144,968
Total Consumer8491978,392-11,96491,2245,398,2175,489,441
Total Popular, Inc.$1,723,446$625,681$1,236,355$2,255$12,049$3,599,786$22,908,103$26,507,889
The following table presents the weighted average obligor risk rating at December 31, 2018 for those classifications that consider a range of rating scales.
Weighted average obligor risk rating(Scales 11 and 12)(Scales 1 through 8)
Puerto Rico:SubstandardPass
Commercial multi-family11.206.02
Commercial real estate non-owner occupied11.116.93
Commercial real estate owner occupied11.297.25
Commercial and industrial11.337.15
Total Commercial11.227.09
Construction12.007.64
Popular U.S. :SubstandardPass
Commercial multi-family11.007.39
Commercial real estate non-owner occupied11.016.82
Commercial real estate owner occupied11.167.55
Commercial and industrial11.967.26
Total Commercial11.567.14
Construction11.217.85
Legacy11.177.94

December 31, 2017
SpecialPass/
(In thousands)WatchMentionSubstandardDoubtfulLossSub-totalUnratedTotal
Puerto Rico[1]
Commercial multi-family$1,387$1,708$6,831$-$-$9,926$136,473$146,399
Commercial real estate non-owner occupied327,811335,011307,579--970,4011,434,1582,404,559
Commercial real estate owner occupied243,966215,652354,9902,124-816,7321,006,8821,823,614
Commercial and industrial453,546108,554241,695471126804,3922,086,9352,891,327
Total Commercial1,026,710660,925911,0952,5951262,601,4514,664,4487,265,899
Construction1104,1221,545--5,77789,59295,369
Mortgage2,7483,564155,074--161,3866,415,3936,576,779
Leasing--1,926-1,0482,974807,016809,990
Consumer:
Credit cards--18,227--18,2271,074,9941,093,221
HELOCs--257--2575,8306,087
Personal42965920,790--21,8781,200,4341,222,312
Auto--5,446-205,466845,347850,813
Other --16,324-44016,764140,824157,588
Total Consumer42965961,044-46062,5923,267,4293,330,021
Total Puerto Rico$1,029,997$669,270$1,130,684$2,595$1,634$2,834,180$15,243,878$18,078,058
Popular U.S.
Commercial multi-family$11,808$6,345$7,936$-$-$26,089$1,184,604$1,210,693
Commercial real estate non-owner occupied46,52316,56137,178--100,2621,588,0491,688,311
Commercial real estate owner occupied28,18330,8938,590--67,666251,309318,975
Commercial and industrial4,019603123,935--128,557876,4261,004,983
Total Commercial90,53354,402177,639--322,5743,900,3884,222,962
Construction36,8588,29454,276--99,428685,232784,660
Mortgage--14,852--14,852678,776693,628
Legacy6884263,302--4,41628,56432,980
Consumer:
Credit cards--11--1189100
HELOCs--6,084-8,91414,998167,087182,085
Personal--2,069-7042,773295,229298,002
Other ------319319
Total Consumer--8,164-9,61817,782462,724480,506
Total Popular U.S.$128,079$63,122$258,233$-$9,618$459,052$5,755,684$6,214,736
Popular, Inc.
Commercial multi-family$13,195$8,053$14,767$-$-$36,015$1,321,077$1,357,092
Commercial real estate non-owner occupied374,334351,572344,757--1,070,6633,022,2074,092,870
Commercial real estate owner occupied272,149246,545363,5802,124-884,3981,258,1912,142,589
Commercial and industrial457,565109,157365,630471126932,9492,963,3613,896,310
Total Commercial1,117,243715,3271,088,7342,5951262,924,0258,564,83611,488,861
Construction36,96812,41655,821--105,205774,824880,029
Mortgage2,7483,564169,926--176,2387,094,1697,270,407
Legacy6884263,302--4,41628,56432,980
Leasing--1,926-1,0482,974807,016809,990
Consumer:
Credit cards--18,238--18,2381,075,0831,093,321
HELOCs--6,341-8,91415,255172,917188,172
Personal42965922,859-70424,6511,495,6631,520,314
Auto--5,446-205,466845,347850,813
Other --16,324-44016,764141,143157,907
Total Consumer42965969,208-10,07880,3743,730,1533,810,527
Total Popular, Inc.$1,158,076$732,392$1,388,917$2,595$11,252$3,293,232$20,999,562$24,292,794
The following table presents the weighted average obligor risk rating at December 31, 2017 for those classifications that consider a range of rating scales.
Weighted average obligor risk rating(Scales 11 and 12)(Scales 1 through 8)
Puerto Rico:[1]SubstandardPass
Commercial multi-family11.165.89
Commercial real estate non-owner occupied11.066.99
Commercial real estate owner occupied11.287.14
Commercial and industrial11.167.11
Total Commercial11.177.06
Construction11.007.76
Popular U.S.:SubstandardPass
Commercial multi-family11.007.28
Commercial real estate non-owner occupied11.046.74
Commercial real estate owner occupied11.107.14
Commercial and industrial11.826.17
Total Commercial11.596.80
Construction11.007.70
Legacy11.117.93

[1] Excludes covered loans acquired in the Westernbank FDIC-assisted transaction.