EX-13.1 3 d192149dex131.htm EX-13.1

Exhibit 13.1

2021 Annual Report Informe Anual POPULAR®

Contents Índice Letter From The President & Chief Executive Officer 3 25-Year Historical Financial Summary 6 Management & Board Of Directors 8 Carta Dél Presidente y Principal Oficial Ejecutivo 11 Resumen Financiero Histórico (25 Años) 14 Gerencia y Junta de Directores 16 Popular, Inc. (NASDAQ: BPOP) is the leading financial institution by both assets and deposits in Puerto Rico and ranks among the top 50 U.S. bank holding companies by assets. Founded in 1893, Banco Popular de Puerto Rico, Popular’s principal subsidiary, provides retail, mortgage and commercial banking services in Puerto Rico and the U.S. Virgin Islands. Popular also offers in Puerto Rico auto and equipment leasing and financing, investment banking, broker-dealer and insurance services through specialized subsidiaries. In the mainland United States, Popular provides retail, mortgage and commercial banking services through its New York-chartered banking subsidiary, Popular Bank, which has branches located in New York, New Jersey and Florida. Corporate Information Independent Registered Public Accounting Firm: PricewaterhouseCoopers LLP. The company’s Form 10-K, proxy statement and any other financial information is available on popular.com/en/investor-relations/annual-reports/Popular, Inc. (NASDAQ: BPOP) es la institución bancaria líder en depósitos y activos en Puerto Rico y se encuentra entre las primeras 50 entidades tenedoras de instituciones bancarias por número de activos. Fundado en 1893, Banco Popular de Puerto Rico, la principal subsidiaria de Popular, brinda servicios de banca individual, hipotecas y banca comercial en Puerto Rico e Islas Vírgenes estadounidenses. Popular también ofrece en Puerto Rico servicios de financiamiento de autos y equipo, inversiones y seguros a través de subsidiarias especializadas. En Estados Unidos, Popular provee servicios de banca individual, hipotecas y banca comercial a través de su filial bancaria en Nueva York, Popular Bank, la cual cuenta con sucursales localizadas en Nueva York, Nueva Jersey y Florida. Información Corporativa Firma registrada de Contabilidad Pública Independiente: PricewaterhouseCoopers LLP El Formulario 10-K, el proxy y otra información financiera están disponibles en popular.com/accionistas/informe-anual/ Annual Meeting The Annual Stockholders’ Meeting of Popular, Inc. will be held on Thursday, May 12, 2022, at 9:00 a.m. AST by means of remote communication, in a virtual format only through www.virtualshareholdermeeting.com/BPOP2022. Reunión Anual La Reunión Anual de Accionistas de Popular, Inc. se celebrará el jueves 12 de mayo de 2022 a las 9:00 a.m. AST exclusivamente vía comunicación remota, mediante formato virtual a través de www.virtualshareholdermeeting.com/BPOP2022. 2 | Popular, Inc.

Popular, Inc. Year In Review Dear Shareholders: 2021 was an outstanding year for Popular, driven by record earnings, solid credit quality, increased deposit levels, continued customer growth and the successful execution of capital actions. Our results reflect the continued recovery in economic activity in the markets in which we do business, our diversified sources of revenue and prudent risk management. Financial Results, Capital and Stock Performance Our net income for the year reached $935 million, $428 million or 84% higher than the previous year. The increase was largely driven by a lower expense in the provision for loan losses. In 2021, we reported a provision benefit of $193 million, compared to a provision expense of $293 million in 2020. The provision benefit was driven by the current economic recovery and positive outlook, coupled with solid credit quality metrics. Higher net interest income and fees also contributed to the positive results. Capital levels remained strong, closing the year with a Common Equity Tier 1 ratio of 17.4% and a tangible book value of $65.26, both higher than 2020. During the year, we executed important capital actions, including an increase in the quarterly common stock dividend from $0.40 to $0.45 per share, a $350 million common stock buyback and the redemption of $187 million of outstanding trust preferred securities. Early in 2022, we announced our capital plan for the year, which includes an increase in the quarterly common stock dividend from $0.45 to $0.55 per share and common stock repurchases of up to $500 million. Our capital actions underscore the strength of Popular’s financial performance and capital position, which allow us to deliver value for shareholders while continuing to invest in our franchise. Our shares performed well during 2021, closing the year at $82.04, 46% higher than 2020. This performance compares favorably against the KBW Nasdaq Regional Bank Index, which increased by 34%, and aligned with our U.S. peer banks which increased by 52%. 2020 $507 MILLION 2021 $935 MILLION NET INCOME STOCK PRICE 46% HIGHER THAN YEAR-END 2020 $82.04 CLOSING PRICE FOR 2021 POPULAR, INC. SHARES (BPOP) 2021 was an outstanding year for Popular, driven by record earnings, improved credit quality, record deposit levels, continued customer growth and the successful execution of our capital actions. 2021 Annual Report | 3

Business Highlights We continued to execute our business strategy, structured around four strategic pillars Sustainable and Profitable Growth Increased deposits by approximately $10 billion. Funded approximately $675 million in loans in the second round of the SBA Paycheck Protection Program (PPP), reaching a program total of $2.1 billion. Grew total loans, excluding the PPP portfolio, by $810 million. The increase was driven by auto loans in Puerto Rico and our commercial niche businesses in the United States, including community association banking and health care lending. Acquired the assets of K2 Capital Group, a national healthcare equipment leasing business, with $119 million in assets, which complements and expands our existing healthcare lending business in the mainland United States. Simplicity Successfully completed the strategic realignment of our New York Metro branch network, and achieved positive momentum in refocusing remaining branches towards small and medium businesses. Continued efforts to digitize and automate operational processes to increase efficiency and improve customer satisfaction. Customer Focus Deployed a new customer experience management platform that provides businesses and delivery channels with more frequent and timelier customer feedback. Launched various digital applications to streamline our commercial credit card and small business loan applications. Fit for the Future Executed various initiatives related to compensation, including merit increases and market adjustments. Announced increases in minimum base salaries in all our markets, beginning in 2022. Launched the first Employee Resource Group for the LGBTQ+ community and its allies. Continued strengthening our compliance and cybersecurity programs. Management and Board of Directors During the past two years, our colleagues have demonstrated remarkable resilience and agility, adapting to rapidly evolving conditions. The way we work and how our customers interact with us changed abruptly and we are aware that the pace of change will keep accelerating. Late in 2021 we announced certain organizational changes designed to meet our customers’ evolving needs and allow us to compete more effectively. Javier D. Ferrer was appointed as the Corporation’s Executive Vice President, Chief Operating Officer and Head of Business Strategy, reporting directly to me. Javier joined Popular in 2015 as General Counsel and has also overseen our corporate strategic planning function since 2019. He has provided us with invaluable counsel through periods of significant change and challenges, earning the trust and respect of our leadership and key stakeholders. José R. Coleman was appointed Executive Vice President, Chief Legal Officer and General Counsel of Popular, succeeding Javier. José served as Popular’s Senior Vice President, Deputy General Counsel and Assistant Secretary since 2017, playing a vital role in transforming the Corporation’s Legal function and building a strong track record in delivering results. I am confident this new leadership structure strengthens Popular as we strive to serve our customers in today’s exciting and ever-changing environment. We were also fortunate to bring in two new Directors to our Board. Betty DeVita, who has extensive experience in the banking and payments industry, is currently the Chief Business Officer and a member of the board of directors of FinConecta, a global technology company focused on the digitalization of finance and open banking. Betty’s record of delivering strong growth and innovation in diverse financial services contexts is invaluable as we navigate our constantly evolving industry. José R. Rodríguez, an experienced certified public accountant, was an audit partner at KPMG LLP from 1995 until his retirement in April 2021. Over more than 25 years with KPMG, José held diverse leadership positions at national and global levels. José provides Popular with vital insights and judgment, drawn from his vast knowledge and expertise in the accounting, auditing, and financial sectors, as well as his many roles as a trusted advisor. 4 | Popular, Inc.

Our Board of Directors is a group of highly talented and committed individuals, who provide invaluable counsel to me and the entire management team. We are grateful for their guidance and support. We are also fortunate to have a team of more than 8,500 dedicated colleagues. Once again, they showed their resilience, facing challenges with resolve and a positive attitude. They continue to be, without a doubt, our most valuable asset, and we are committed to their professional, financial and general wellbeing. Looking Ahead The year 2022 will bring its own set of challenges and opportunities. As we have seen in the first months, the pandemic will continue to require patience, flexibility and agility from all of us for some time. We have demonstrated our capacity to adapt to changing conditions and will continue to do so with energy and determination. We are optimistic about the economic outlook for Puerto Rico. In addition to the unprecedented level of federal stimulus received to counter the effects of the COVID-19 pandemic, Puerto Rico still has a significant amount of hurricane recovery funds that have yet to be disbursed. The recovery funds have now begun to flow at a faster pace. Also, the recent court approval of the plan of adjustment for the Commonwealth of Puerto Rico under Title III of the Puerto Rico Oversight, Management and Economic Stability Act is a key step in the process to end Puerto Rico’s public debt crisis and allows it to make necessary investments towards sustainable economic growth. A significant amount of time and effort has been invested to get to this point, and we look forward for these resources to be refocused on the island’s long-term economic development. The combined impact of these factors should generate considerable economic activity in Puerto Rico for the coming years and we are ideally positioned to benefit from such activity. We stand ready to build on our leadership position and leverage the momentum achieved to make 2022 another great year for your company, as we continue to serve our customers, care for our colleagues, support our communities and deliver value to our shareholders. IGNACIO ALVAREZ President and Chief Executive Officer Popular, Inc. ESG Our business provides a powerful platform to make a difference in the lives of our customers, colleagues, communities, and shareholders, a privilege and responsibility we take very seriously. During 2021, we advanced our environmental, social and governance (ESG) strategy. An important milestone was publishing our first Corporate Sustainability Report aligned with external sustainability reporting standards, such as SASB and GRI. Equal access to banking services closely aligns with the core values of our organization and is one of the key focus areas of our ESG strategy. We are committed to improving access to financial services for members of our communities that have, for numerous reasons, remained outside of the traditional banking system. We are proud that Banco Popular de Puerto Rico and Popular Bank are now offering Bank On certified accounts. This certification is granted by the national nonprofit Cities for Financial Empowerment Fund to promote financial inclusion through standard account features that ensure low costs while offering robust transaction capabilities. We are also proud to be included, for the first time, in the Bloomberg Gender-Equality Index (GEI) as we continue to make important strides in gender parity at Popular. Our commitment to fostering a workplace that values inclusion, respect and accountability doesn’t just make us a better employer, it makes us a stronger organization. 2021 Annual Report | 5

25-Year Historical Financial Summary (Dollars in millions, except per share data) 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Selected Financial Information Net Income (Loss) $209.6 $232.3 $257.6 $276.1 $304.5 $351.9 $470.9 $489.9 $540.7 $357.7 $(64.5) Assets 19,300.5 23,160.4 25,460.5 28,057.1 30,744.7 33,660.4 36,434.7 44,401.6 48,623.7 47,404.0 44,411.4 Gross Loans 11,376.6 13,078.8 14,907.8 16,057.1 18,168.6 19,582.1 22,602.2 28,742.3 31,710.2 32,736.9 29,911.0 Deposits 11,749.6 13,672.2 14,173.7 14,804.9 16,370.0 17,614.7 18,097.8 20,593.2 22,638.0 24,438.3 28,334.4 Stockholders’ Equity 1,503.1 1,709.1 1,661.0 1,993.6 2,272.8 2,410.9 2,754.4 3,104.6 3,449.2 3,620.3 3,581.9 Market Capitalization $3,350.3 $4,611.7 $3,790.2 $3,578.1 $3,965.4 $4,476.4 $5,960.2 $7,685.6 $5,836.5 $5,003.4 $2,968.3 Return on Average Assets (ROAA) 1.14% 1.14% 1.08% 1.04% 1.09% 1.11% 1.36% 1.23% 1.17% 0.74% -0.14% Return on Average Common Equity (ROACE) 15.83% 15.41% 15.45% 15.00% 14.84% 16.29% 19.30% 17.60% 17.12% 9.73% -2.08% Per Common Share1 Net Income (Loss) - Basic $7.51 $8.26 $9.19 $9.85 $10.87 $13.05 $17.36 $17.95 $19.78 $12.41 $(2.73) Net Income (Loss) - Diluted 7.51 8.26 9.19 9.85 10.87 13.05 17.36 17.92 19.74 12.41 (2.73) Dividends (Declared) 2.00 2.50 3.00 3.20 3.80 4.00 5.05 6.20 6.40 6.40 6.40 Book Value 51.83 59.32 57.54 69.62 79.67 91.02 96.60 109.45 118.22 123.18 121.24 Market Price 123.75 170.00 139.69 131.56 145.40 169.00 224.25 288.30 211.50 179.50 106.00 Assets by Geographical Area Puerto Rico 74% 71% 71% 72% 68% 66% 62% 55% 53% 52% 59% United States 23% 25% 25% 26% 30% 32% 36% 43% 45% 45% 38% Caribbean and Latin America 3% 4% 4% 2% 2% 2% 2% 2% 2% 3% 3% Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Traditional Delivery System Banking Branches Puerto Rico 201 198 199 199 196 195 193 192 194 191 196 Virgin Islands 8 8 8 8 8 8 8 8 8 8 8 United States2 63 89 91 95 96 96 97 128 136 142 147 Subtotal 272 295 298 302 300 299 298 328 338 341 351 Non-Banking Offices Popular Financial Holdings 117 128 137 136 149 153 181 183 212 158 134 Popular Cash Express 51 102 132 154 195 129 114 4 Popular Finance 44 48 47 61 55 36 43 43 49 52 51 Popular Auto (including Reliable) 10 10 12 12 20 18 18 18 17 15 12 Popular Leasing, U.S.A. 7 8 10 11 13 13 11 15 14 11 24 Popular Mortgage 3 11 13 21 25 29 32 30 33 32 32 Popular Securities 2 2 2 3 4 7 8 9 12 12 13 Popular One Popular Insurance and Popular Risk Services 2 2 2 2 2 2 2 2 Popular Insurance Agency, U.S.A. 1 1 1 1 1 1 1 Popular Insurance V.I. 1 1 1 1 1 1 E-LOAN 1 1 1 Popular Equipment Finance EVERTEC 4 4 4 5 5 5 5 7 9 Subtotal 183 258 327 382 427 460 431 421 351 292 280 Total 455 553 625 684 727 759 729 749 689 633 631 Electronic Delivery System ATMs Owned Puerto Rico 391 421 442 478 524 539 557 568 583 605 615 Virgin Islands 17 59 68 37 39 53 57 59 61 65 69 United States 71 94 99 109 118 131 129 163 181 192 187 Total 479 574 609 624 681 723 743 790 825 862 871 Employees (full-time equivalent) 8,854 10,549 11,501 10,651 11,334 11,037 11,474 12,139 13,210 12,508 12,303 6 | Popular, Inc.

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 $(1,243.9) $(573.9) $137.4 $151.3 $245.3 $599.3 $(313.5) $895.3 $216.7 $107.7 $618.2 $671.1 $506.6 $934.9 38,882.8 34,736.3 38,815.0 37,348.4 36,506.9 35,748.8 33,086.8 35,761.7 38,661.6 44,277.3 47,604.6 52,115.3 65,926.0 75,097.9 26,268.9 23,803.9 26,458.9 25,314.4 25,093.6 24,706.7 22,053.2 23,129.2 23,435.4 24,942.5 26,559.3 27,466.1 29,484.7 29,299.7 27,550.2 25,924.9 26,762.2 27,942.1 27,000.6 26,711.1 24,807.5 27,209.7 30,496.2 35,453.5 39,710.0 43,758.6 56,866.3 67,005.1 3,268.4 2,538.8 3,800.5 3,918.8 4,110.0 4,626.2 4,267.4 5,105.3 5,198.0 5,103.9 5,435.1 6,016.8 6,028.7 5,969.4 $1,455.1 $1,445.4 $3,211.4 $1,426.0 $2,144.9 $2,970.6 $3,523.4 $2,936.6 $4,548.1 $3,622.4 $4,719.3 $5,615.9 $4,744.6 $6,551.0 -3.04% -1.57% 0.36% 0.40% 0.68% 1.65% -0.89% 2.54% 0.58% 0.26% 1.33% 1.33% 0.85% 1.31% -44.47% -32.95% 4.37% 4.01% 6.37% 14.43% -7.04% 19.16% 4.07% 1.96% 11.39% 11.78% 9.36% 16.22% $(45.51) $2.39 $(0.62) $1.44 $2.36 $5.80 $(3.08) $8.66 $2.06 $1.02 $6.07 $6.89 $5.88 $11.49 (45.51) 2.39 (0.62) 1.44 2.35 5.78 (3.08) 8.65 2.06 1.02 6.06 6.88 5.87 11.46 4.80 0.20 - - - - - 0.30 0.60 1.00 1.00 1.20 1.60 1.75 63.29 38.91 36.67 37.71 39.35 44.26 40.76 48.79 49.60 49.51 53.88 62.42 71.30 74.48 51.60 22.60 31.40 13.90 20.79 28.73 34.05 28.34 43.82 35.49 47.22 58.75 56.32 82.04 64% 65% 74% 74% 73% 72% 80% 75% 75% 76% 77% 78% 82% 84% 33% 32% 23% 23% 24% 25% 17% 22% 23% 22% 21% 20% 17% 15% 3% 3% 3% 3% 3% 3% 3% 3% 2% 2% 2% 2% 1% 1% 100%100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 179 173 185 183 175 171 168 173 171 168 163 164 162 159 8 8 8 9 9 9 9 9 9 9 9 10 10 10 139 101 96 94 92 90 47 50 51 51 51 51 50 39 326 282 289 286 276 270 224 232 231 228 223 225 222 208 2 9 12 10 10 10 10 9 9 9 9 9 12 12 11 11 22 32 33 36 37 37 38 25 24 17 14 14 14 15 15 7 6 6 4 4 3 3 3 2 2 2 2 2 2 4 5 6 6 6 5 5 5 5 6 7 1 1 1 1 1 1 1 2 2 2 2 2 2 2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 9 9 97 61 55 58 59 59 46 46 37 34 36 36 37 39 423 343 344 344 335 329 270 278 268 262 259 261 259 247 605 571 624 613 597 599 602 622 635 633 619 622 619 616 74 77 17 20 20 22 21 21 20 22 22 23 23 23 176 136 138 135 134 132 83 87 101 110 115 119 118 91 855 784 779 768 751 753 706 730 756 765 756 764 760 730 10,587 9,407 8,277 8,329 8,072 8,059 7,752 7,810 7,828 7,784 8,474 8,560 8,522 8,351 1 Per common share data adjusted for stock splits and reverse stock split executed in May 2012. 2 Excludes a Banco Popular de Puerto Rico branch operating in New York. 2021 Annual Report | 7

Popular, Inc. Management & Board Of Directors Senior Management Team IGNACIO ALVAREZ President & Chief Executive Officer Popular, Inc. CAMILLE BURCKHART Executive Vice President Chief Information & Digital Officer Innovation, Technology & Operations Group Popular, Inc. BEATRIZ CASTELLVÍ Executive Vice President & Chief Security Officer Corporate Security Group Popular, Inc. LUIS E. CESTERO Executive Vice President Retail Banking Group Banco Popular de Puerto Rico MANUEL CHINEA Executive Vice President Popular, Inc. Chief Operating Officer Popular Bank JOSÉ R. COLEMAN TIÓ Executive Vice President & Chief Legal Officer General Counsel & Corporate Matters Group Popular, Inc. JAVIER D. FERRER Executive Vice President, Chief Operating Officer, Head of Business Strategy & Corporate Secretary Popular, Inc. MARÍA CRISTINA (MC) GONZÁLEZ Executive Vice President Chief Communications and Public Affairs Officer Corporate Communications & Public Affairs Group Popular, Inc. JUAN O. GUERRERO Executive Vice President Financial & Insurance Services Group Banco Popular de Puerto Rico GILBERTO MONZÓN Executive Vice President Individual Credit Group Banco Popular de Puerto Rico EDUARDO J. NEGRÓN Executive Vice President & Chief Administration Officer Administration Group Popular, Inc. ELI S. SEPÚLVEDA Executive Vice President Commercial Credit Group Banco Popular de Puerto Rico LIDIO V. SORIANO Executive Vice President & Chief Risk Officer Corporate Risk Management Group Popular, Inc. CARLOS J. VÁZQUEZ Executive Vice President & Chief Financial Officer Corporate Finance Group Popular, Inc. 8 | Popular, Inc.

Board of Directors RICHARD L. CARRIÓN Chairman of the Board of Directors Popular, Inc. IGNACIO ALVAREZ President & Chief Executive Officer Popular, Inc. JOAQUÍN E. BACARDÍ, III President and Chairman Edmundo B. Fernández, Inc. ALEJANDRO M. BALLESTER President Ballester Hermanos, Inc. ROBERT CARRADY President Caribbean Cinemas BETTY DEVITA Chief Business Officer FinConecta JOHN W. DIERCKSEN Principal Greycrest, LLC MARÍA LUISA FERRÉ RANGEL Chief Executive Officer FRG, LLC C. C. KIM GOODWIN Private Investor JOSÉ R. RODRIGUEZ Chairman of the Board of Directors CareMax, Inc. MYRNA M. SOTO Chief Executive Officer & Founder Apogee Executive Advisors, LLC CARLOS A. UNANUE President Goya de Puerto Rico, Inc. 2021 Annual Report | 9

Popular, Inc. Resumen del año Estimados Accionistas: El 2021 fue un año excepcional para Popular, impulsado por ganancias récord, calidad crediticia sólida, aumento en los depósitos, crecimiento continuo de clientes y la ejecución exitosa de acciones de capital. Nuestros resultados reflejan la continua recuperacin econmica en los mercados en los que operamos, nuestras fuentes diversificadas de ingresos y una gestin prudente del riesgo. Resultados financieros, capital y desempeo de la accin Nuestro ingreso neto para el año alcanzó $935 millones, $428 millones o 84% más que el año anterior. El aumento fue impulsado en gran medida por un menor gasto de provisión para pérdidas de crédito. En 2021, reportamos un beneficio de provisión de $193 millones, en comparación con un gasto de provisión de $293 millones en 2020. El beneficio de la provisión fue impulsado por la recuperación económica actual y las perspectivas positivas, junto con métricas sólidas de calidad de crédito. El aumento en ingresos por intereses y comisiones también contribuyó a los resultados positivos. Los niveles de capital se mantuvieron sólidos, cerrando el año con una relación de capital “Tier 1 Common” de 17.4% y un valor tangible en libros de $65.26 dólares, ambos superiores a los del 2020. Durante el año, ejecutamos importantes acciones de capital, incluyendo un aumento en el dividendo trimestral de acciones comunes de $0.40 a $ 0.45 por acción, la recompra de $350 millones de acciones comunes en el mercado y la redención de $187 millones de acciones preferidas. A principios de 2022, anunciamos nuestro plan de capital para el año, que incluye un aumento en el dividendo trimestral de acciones comunes de $0.45 a $ 0.55 por acción y recompras de acciones comunes de hasta $500 millones. Nuestras acciones de capital reflejan la fortaleza del desempeño financiero y la posición de capital de Popular, que nos permiten ofrecer valor a los accionistas mientras continuamos invirtiendo en nuestra franquicia. Nuestras acciones tuvieron un buen desempeño durante 2021, cerrando el año en $82.04, un 46% más alto que en 2020. Este desempeño compara favorablemente con el Índice KBW Nasdaq Regional Banking, que aumentó 34%, y estuvo en lĺnea con nuestros bancos pares en los Estados Unidos, que aumentaron 52%. 2020 $507 MILLONES 2021 $935 MILLONES INGRESO NETO PRECIO DE LA ACCIÓN 46% MÁS ALTO QUE EL CIERRE DEL AÑO 2020 $82.04 PRECIO AL CIERRE DE 2021 ACCIONES DE POPULAR, INC. (BPOP) El 2021 fue un año excepcional para Popular, impulsado por ganancias récord, calidad crediticia sólida, aumento en los depósitos, crecimiento continuo de clientes y la ejecución exitosa de acciones de capital. Informe Anual 2021 | 11

Aspectos destacados del negocio Continuamos ejecutando nuestra estrategia de negocio, estructurada en torno a cuatro pilares estratégicos. Crecimiento rentable y sostenible Aumentamos los depósitos por aproximadamente $10 mil millones. Procesamos aproximadamente $675 millones en préstamos en la segunda ronda del Programa de Protección de Nómina (PPP), de la Administración de Pequeños Negocios, alcanzando un total de $2.1 mil millones en el programa. Aumentamos el total de préstamos por $810 millones, excluyendo la cartera de PPP. El aumento fue impulsado por los préstamos para automóviles en Puerto Rico y nuestros negocios especializados en los Estados Unidos, principalmente servicios a asociaciones de condominios y préstamos al sector de la salud. Adquirimos los activos de K2 Capital Group, un negocio nacional de arrendamiento de equipos médicos, con $119 millones en activos, que complementa y expande nuestro negocio de préstamos al sector de salud en los Estados Unidos. Simplicidad Completamos exitosamente la reorganización estratégica de nuestra red de sucursales del área metropolitana de Nueva York, y logramos un impulso positivo en el reenfoque de los recursos hacia las pequeñas y medianas empresas. Continuamos los esfuerzos para digitalizar y automatizar procesos operacionales para aumentar la eficiencia y mejorar la satisfacción del cliente. Enfoque al cliente Implementamos una nueva plataforma de manejo de la experiencia del cliente, la cual provee a los negocios el sentir de los clientes de manera más frecuente y oportuna. Lanzamos varias aplicaciones digitales para agilizar las solicitudes de tarjetas de crédito comerciales y préstamos para pequeñas empresas. Preparados para el futuro Ejecutamos diversas iniciativas relacionadas con la compensación, incluyendo aumentos de mérito y ajustes de mercado. Anunciamos aumentos en los salarios base mínimos en todos nuestros mercados, a partir de 2022. Lanzamos el primer Grupo de Recursos para Empleados para la comunidad LGBTQ+ y sus aliados. Continuamos fortaleciendo nuestros programas de cumplimiento y ciberseguridad. Gerencia y Junta de Directores Durante los últimos dos años, nuestros colegas han demostrado una notable resiliencia y agilidad, adaptándose a condiciones que evolucionan rápidamente. La forma en que trabajamos y cómo nuestros clientes interactúan con nosotros cambió abruptamente y sabemos que el ritmo del cambio seguirá acelerándose. A finales de 2021 anunciamos ciertos cambios organizacionales diseñados para satisfacer las necesidades cambiantes de nuestros clientes y permitirnos competir de manera más efectiva. Javier D. Ferrer fue nombrado vicepresidente ejecutivo, director de operaciones y jefe de estrategia de negocio de la Corporación, reportando directamente a mí. Javier se unió a Popular en 2015 como asesor general y también ha supervisado nuestra función corporativa de planificación estratégica desde 2019. Nos ha brindado un asesoramiento invaluable durante períodos de cambios y desafíos significativos, ganándose la confianza y el respeto de nuestro liderazgo y grupos claves. José R. Coleman fue nombrado vicepresidente ejecutivo, director jurídico y consejero general de Popular, como sucesor de Javier. José se desempeñó como primer vicepresidente, asesor general y secretario de Popular desde 2017, desempeñando un papel vital en la transformación de la función legal de la Corporación y alcanzando excelentes resultados en una gran variedad de proyectos. Estoy seguro de que esta nueva estructura de liderazgo fortalece a Popular a medida que nos esforzamos por servir a nuestros clientes en el entorno dinámico de hoy. Además, somos afortunados de contar con dos nuevos directores en nuestra Junta. Betty DeVita, que tiene una amplia experiencia en la industria bancaria y de pagos, es actualmente la directora de Negocios y miembro de la junta directiva de FinConecta, una compañía de tecnología global centrada en la digitalización de las finanzas y la banca abierta. El historial de Betty de propiciar crecimiento e innovación en diversos contextos de servicios financieros es invaluable mientras navegamos por una industria en constante evolución. José R. Rodríguez, un experimentado contador público certificado, fue socio auditor en KPMG LLP desde 1995 hasta su jubilación en abril de 2021. Durante más de 25 años con KPMG, José ocupó diversos puestos de liderazgo a nivel nacional y mundial. José proporciona a Popular ideas y consejos vitales, extraídos de su vasto conocimiento y experiencia en los sectores de contabilidad, auditoría y finanzas, así como de sus muchos roles como asesor. Nuestra Junta de Directores es un grupo de personas altamente talentosas y comprometidas, que nos 12 | Popular, Inc.

brindan un asesoramiento invaluable a mí y a todo el equipo de gerencial. Estamos agradecidos por su orientación y apoyo. También, somos dichosos de tener un equipo de más de 8,500 compañeros dedicados. Una vez más, mostraron su resiliencia, enfrentando los desafíos con determinación y una actitud positiva. Ellos continúan siendo, sin duda, nuestro activo más valioso, y estamos comprometidos con su bienestar profesional, financiero y general. Mirando hacia el futuro El año 2022 traerá su propio conjunto de desafíos y oportunidades. Como hemos visto en los primeros meses, la pandemia seguirá requiriendo paciencia, flexibilidad y agilidad de todos nosotros durante algún tiempo. Hemos demostrado nuestra capacidad de adaptación a las condiciones cambiantes y continuaremos haciéndolo con energía y determinación. Nos sentimos optimistas sobre las perspectivas económicas para Puerto Rico. Además del nivel sin precedentes de estímulo federal recibido para contrarrestar los efectos de la pandemia de COVID-19, Puerto Rico todavía cuenta con una cantidad significativa de fondos de recuperación de huracanes que aún no se han desembolsado. Estos fondos ahora han comenzado a fluir a un ritmo más acelerado. Además, la reciente aprobación judicial del plan de ajuste bajo el Título III de la Ley de Supervisión, Administración y Estabilidad Económica de Puerto Rico es un paso clave en el proceso para poner fin a la crisis de deuda pública del país y le permite realizar las inversiones necesarias para el crecimiento económico sostenible. Se ha invertido una cantidad significativa de tiempo y esfuerzo para llegar a este punto, y esperamos que estos recursos se vuelvan a enfocar en el desarrollo económico a largo plazo de la isla. El impacto combinado de estos factores debería generar un movimiento económico considerable en Puerto Rico durante los próximos años y estamos en una posición ideal para beneficiarnos de dicha actividad. Nos encontramos listos para construir sobre nuestra posición de liderazgo y aprovechar el impulso logrado para hacer de 2022 otro gran año para nuestra organización, a medida que continuamos sirviendo a nuestros clientes, cuidando a nuestros compañeros, apoyando a nuestras comunidades y aportando valor a nuestros accionistas. IGNACIO ÁLVAREZ Presidente y Principal Oficial Ejecutivo Popular, Inc. ESG Nuestro negocio proporciona una plataforma poderosa para hacer una diferencia en la vida de nuestros clientes, compañeros, comunidades y accionistas, un privilegio y una responsabilidad que nos tomamos muy en serio. Durante 2021, avanzamos en nuestra estrategia ambiental, social y de gobernanza (ESG, por sus siglas en inglés). Un hito importante fue la publicación de nuestro primer Informe de Sustentabilidad Corporativa alineado con los estándares externos de informes de sustentabilidad, como SASB y GRI. El acceso a servicios bancarios se alinea estrechamente con los valores de nuestra organización y es una de las áreas de enfoque clave de nuestra estrategia ESG. Estamos comprometidos a mejorar el acceso a los servicios financieros para los miembros de nuestras comunidades que, por numerosas razones, han permanecido fuera del sistema bancario tradicional. Estamos orgullosos de que Banco Popular de Puerto Rico y Popular Bank ahora ofrecen cuentas certificadas de Bank On. Esta certificación la otorga la organización nacional sin fines de lucro Cities for Financial Empowerment Fund para promover la inclusión financiera a través cuentas con características que aseguran bajos costos, a la vez que ofrecen una capacidad transaccional robusta. También estamos orgullosos de ser incluidos, por primera vez, en el Índice de Igualdad de Género (GEI) de Bloomberg, a medida que continuamos haciendo importantes avances en la paridad de género en Popular. Nuestro compromiso de fomentar un lugar de trabajo que valore la inclusión, el respeto y la responsabilidad no solo nos convierte en un mejor patrono, sino que nos hace una organización más fuerte. Informe Anual 2021 | 13

25 Años Resumen Financiero Histórico (Dólares en millones, excepto información por acción) 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Información Financiera Seleccionada Ingreso neto (Pérdida Neta) $209.6 $232.3 $257.6 $276.1 $304.5 $351.9 $470.9 $489.9 $540.7 $357.7 $(64.5) Activos 19,300.5 23,160.4 25,460.5 28,057.1 30,744.7 33,660.4 36,434.7 44,401.6 48,623.7 47,404.0 44,411.4 Préstamos Brutos 11,376.6 13,078.8 14,907.8 16,057.1 18,168.6 19,582.1 22,602.2 28,742.3 31,710.2 32,736.9 29,911.0 Depósitos 11,749.6 13,672.2 14,173.7 14,804.9 16,370.0 17,614.7 18,097.8 20,593.2 22,638.0 24,438.3 28,334.4 Capital de Accionistas 1,503.1 1,709.1 1,661.0 1,993.6 2,272.8 2,410.9 2,754.4 3,104.6 3,449.2 3,620.3 3,581.9 Valor agregado en el mercado $3,350.3 $4,611.7 $3,790.2 $3,578.1 $3,965.4 $4,476.4 $5,960.2 $7,685.6 $5,836.5 $5,003.4 $2,968.3 Rendimiento de Activos Promedio (ROAA) 1.14% 1.14% 1.08% 1.04% 1.09% 1.11% 1.36% 1.23% 1.17% 0.74% -0.14% Rendimiento de Capital Común Promedio (ROACE) 15.83% 15.41% 15.45% 15.00% 14.84% 16.29% 19.30% 17.60% 17.12% 9.73% -2.08% Por Acción Común1 Ingreso neto (Pérdida Neta) - Básico $7.51 $8.26 $9.19 $9.85 $10.87 $13.05 $17.36 $17.95 $19.78 $12.41 $(2.73) Ingreso neto (Pérdida Neta) - Diluido 7.51 8.26 9.19 9.85 10.87 13.05 17.36 17.92 19.74 12.41 (2.73) Dividendos (Declarados) 2.00 2.50 3.00 3.20 3.80 4.00 5.05 6.20 6.40 6.40 6.40 Valor en los Libros 51.83 59.32 57.54 69.62 79.67 91.02 96.60 109.45 118.22 123.18 121.24 Precio en el Mercado 123.75 170.00 139.69 131.56 145.40 169.00 224.25 288.30 211.50 179.50 106.00 Activos por Área Geográfica Puerto Rico 74% 71% 71% 72% 68% 66% 62% 55% 53% 52% 59% Estados Unidos 23% 25% 25% 26% 30% 32% 36% 43% 45% 45% 38% Caribe y Latinoamérica 3% 4% 4% 2% 2% 2% 2% 2% 2% 3% 3% Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Sistema de Distribución Tradicional Sucursales Bancarias Puerto Rico 201 198 199 199 196 195 193 192 194 191 196 Islas Vírgenes 8 8 8 8 8 8 8 8 8 8 8 Estados Unidos2 63 89 91 95 96 96 97 128 136 142 147 Subtotal 272 295 298 302 300 299 298 328 338 341 351 Oficinas No Bancarias Popular Financial Holdings 117 128 137 136 149 153 181 183 212 158 134 Popular Cash Express 51 102 132 154 195 129 114 4 Popular Finance 44 48 47 61 55 36 43 43 49 52 51 Popular Auto (incluyendo Reliable) 10 10 12 12 20 18 18 18 17 15 12 Popular Leasing, U.S.A. 7 8 10 11 13 13 11 15 14 11 24 Popular Mortgage 3 11 13 21 25 29 32 30 33 32 32 Popular Securities 2 2 2 3 4 7 8 9 12 12 13 Popular One Popular Insurance y Popular Risk Services 2 2 2 2 2 2 2 2 Popular Insurance Agency, U.S.A. 1 1 1 1 1 1 1 Popular Insurance V.I. 1 1 1 1 1 1 E-LOAN 1 1 1 Popular Equipment Finance EVERTEC 4 4 4 5 5 5 5 7 9 Subtotal 183 258 327 382 427 460 431 421 351 292 280 Total 455 553 625 684 727 759 729 749 689 633 631 Sistema Electrónico de Distribución Cajeros Automáticos Propios y Administrados Puerto Rico 391 421 442 478 524 539 557 568 583 605 615 Islas Virgenes 17 59 68 37 39 53 57 59 61 65 69 Estados Unidos 71 94 99 109 118 131 129 163 181 192 187 Total 479 574 609 624 681 723 743 790 825 862 871 Empleados (equivalente a tiempo completo) 8,854 10,549 11,501 10,651 11,334 11,037 11,474 12,139 13,210 12,508 12,303 14 | Popular, Inc.

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 $(1,243.9) $(573.9) $137.4 $151.3 $245.3 $599.3 $(313.5) $895.3 $216.7 $107.7 $618.2 $671.1 $506.6 $934.9 38,882.8 34,736.3 38,815.0 37,348.4 36,506.9 35,748.8 33,086.8 35,761.7 38,661.6 44,277.3 47,604.6 52,115.3 65,926.0 75,097.9 26,268.9 23,803.9 26,458.9 25,314.4 25,093.6 24,706.7 22,053.2 23,129.2 23,435.4 24,942.5 26,559.3 27,466.1 29,484.7 29,299.7 27,550.2 25,924.9 26,762.2 27,942.1 27,000.6 26,711.1 24,807.5 27,209.7 30,496.2 35,453.5 39,710.0 43,758.6 56,866.3 67,005.1 3,268.4 2,538.8 3,800.5 3,918.8 4,110.0 4,626.2 4,267.4 5,105.3 5,198.0 5,103.9 5,435.1 6,016.8 6,028.7 5,969.4 $1,455.1 $1,445.4 $3,211.4 $1,426.0 $2,144.9 $2,970.6 $3,523.4 $2,936.6 $4,548.1 $3,622.4 $4,719.3 $5,615.9 $4,744.6 $6,551.0 -3.04% -1.57% 0.36% 0.40% 0.68% 1.65% -0.89% 2.54% 0.58% 0.26% 1.33% 1.33% 0.85% 1.31% -44.47% -32.95% 4.37% 4.01% 6.37% 14.43% -7.04% 19.16% 4.07% 1.96% 11.39% 11.78% 9.36% 16.22% $(45.51) $2.39 $(0.62) $1.44 $2.36 $5.80 $(3.08) $8.66 $2.06 $1.02 $6.07 $6.89 $5.88 $11.49 (45.51) 2.39 (0.62) 1.44 2.35 5.78 (3.08) 8.65 2.06 1.02 6.06 6.88 5.87 11.46 4.80 0.20 ----- 0.30 0.60 1.00 1.00 1.20 1.60 1.75 63.29 38.91 36.67 37.71 39.35 44.26 40.76 48.79 49.60 49.51 53.88 62.42 71.30 74.48 51.60 22.60 31.40 13.90 20.79 28.73 34.05 28.34 43.82 35.49 47.22 58.75 56.32 82.04 64% 65% 74% 74% 73% 72% 80% 75% 75% 76% 77% 78% 82% 84% 33% 32% 23% 23% 24% 25% 17% 22% 23% 22% 21% 20% 17% 15% 3% 3% 3% 3% 3% 3% 3% 3% 2% 2% 2% 2% 1% 1% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 179 173 185 183 175 171 168 173 171 168 163 164 162 159 8 8 8 9 9 9 9 9 9 9 9 10 10 10 139 101 96 94 92 90 47 50 51 51 51 51 50 39 326 282 289 286 276 270 224 232 231 228 223 225 222 208 2 9 12 10 10 10 10 9 9 9 9 9 12 12 11 11 22 32 33 36 37 37 38 25 24 17 14 14 14 15 15 7 6 6 4 4 3 3 3 2 2 2 2 2 2 4 5 6 6 6 5 5 5 5 6 7 1 1 1 1 1 1 1 2 2 2 2 2 2 2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 9 9 97 61 55 58 59 59 46 46 37 34 36 36 37 39 423 343 344 344 335 329 270 278 268 262 259 261 259 247 605 571 624 613 597 599 602 622 635 633 619 622 619 616 74 77 17 20 20 22 21 21 20 22 22 23 23 23 176 136 138 135 134 132 83 87 101 110 115 119 118 91 855 784 779 768 751 753 706 730 756 765 756 764 760 730 10,587 9,407 8,277 8,329 8,072 8,059 7,752 7,810 7,828 7,784 8,474 8,560 8,522 8,351 1 Los datos de las acciones comunes han sido ajustados por las divisiones en acciones y la división de acciones a la inversa realizada en mayo 2012. 2 Excluye una sucursal de Banco Popular de Puerto Rico en Nueva York. Informe Anual 2021 | 15

Popular, Inc. Gerencia y Junta de Directores Gerencia IGNACIO ÁLVAREZ Presidente y Principal Oficial Ejecutivo Popular, Inc. CAMILLE BURCKHART Vicepresidenta Ejecutiva Principal Oficial de Informática y Tecnología Digital Grupo de Innovación, Tecnología y Operaciones Popular, Inc. BEATRIZ CASTELLVÍ Vicepresidenta Ejecutiva y Principal Oficial de Seguridad Grupo de Seguridad Corporativa Popular, Inc. LUIS E. CESTERO Vicepresidente Ejecutivo Grupo de Banca Individual Banco Popular de Puerto Rico MANUEL CHINEA Vicepresidente Ejecutivo Popular, Inc. Principal Oficial de Operaciones Popular Bank JOSÉ R. COLEMAN TIÓ Vicepresidente Ejecutivo y Principal Oficial Legal Grupo del Asesor General y Asuntos Corporativos Popular, Inc. JAVIER D. FERRER Vicepresidente Ejecutivo Principal Oficial de Operaciones Principal Oficial de Estrategia y Secretario Corporativo Popular, Inc. MARÍA CRISTINA (MC) GONZÁLEZ Vicepresidenta Ejecutiva y Principal Oficial de Comunicaciones y Asuntos Públicos Grupo de Comunicaciones Corporativas y Asuntos Públicos Popular, Inc. JUAN O. GUERRERO Vicepresidente Ejecutivo Grupo de Servicios Financieros y Seguros Banco Popular de Puerto Rico GILBERTO MONZÓN Vicepresidente Ejecutivo Grupo de Crédito a Individuo Banco Popular de Puerto Rico EDUARDO J. NEGRÓN Vicepresidente Ejecutivo y Principal Oficial de Administración Grupo de Administración Popular, Inc. ELI S. SEPÚLVEDA Vicepresidente Ejecutivo Grupo de Crédito Comercial Banco Popular de Puerto Rico LIDIO V. SORIANO Vicepresidente Ejecutivo y Principal Oficial de Riesgo Grupo Corporativo de Manejo de Riesgo Popular, Inc. CARLOS J. VÁZQUEZ Vicepresidente Ejecutivo y Principal Oficial Financiero Grupo de Finanzas Corporativas Popular, Inc. 16 | POPULAR, INC.

Junta De Directores RICHARD L. CARRIÓN Presidente de la Junta de Directores Popular, Inc. IGNACIO ÁLVAREZ Presidente y Principal Oficial Ejecutivo Popular, Inc. JOAQUÍN E. BACARDÍ, III Presidente Edmundo B. Fernández, Inc. ALEJANDRO M. BALLESTER Presidente Ballester Hermanos, Inc. ROBERT CARRADY Presidente Caribbean Cinemas BETTY DEVITA Principal Oficial de Negocios FinConecta JOHN W. DIERCKSEN Principal Greycrest, LLC MARÍA LUISA FERRÉ RANGEL Principal Oficial Ejecutiva FRG, LLC C. KIM GOODWIN Inversionista Privada JOSÉ R. RODRÍGUEZ Presidente de la Junta de Directores CareMax, Inc. MYRNA M. SOTO Principal Oficial Ejecutiva y Fundadora Apogee Executive Advisors, LLC CARLOS A. UNANUE Presidente Goya de Puerto Rico, Inc. Informe Anual 2021 | 17

1
Financial Review and
Supplementary Information
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
3
Statistical Summaries
56
Report of Management on Internal Control Over Financial
Reporting
59
Report of Independent Registered Public
Accounting Firm
60
Consolidated Statements of Financial Condition as of
December 31, 2021 and 2020
64
Consolidated Statements of Operations for the
years ended December 31, 2021, 2020 and
2019
65
Consolidated Statements of Comprehensive
Income for the years ended December 31, 2021,
2020 and
2019
66
Consolidated Statements of Changes in Stockholders’
Equity for the years ended December 31, 2021,
2020 and
2019
67
Consolidated Statements of Cash Flows for the
years ended December 31, 2021, 2020 and
2019
68
Notes to Consolidated Financial Statements
70
2
Management’s Discussion and
Analysis of Financial Condition
and Results of Operations
Forward-Looking Statements
3
Overview
4
Critical Accounting Policies / Estimates
9
Statement of Operations Analysis
15
Net Interest Income
15
Provision for Credit Losses
18
Non-Interest Income
18
Operating Expenses
19
Income Taxes
20
Fourth Quarter Results
20
Reportable Segment Results
21
Statement of Financial Condition Analysis
23
Assets
23
Liabilities
24
Stockholders’ Equity
25
Regulatory Capital
25
Risk Management
28
Market / Interest Rate Risk
28
Liquidity
33
Enterprise Risk Management
53
Adoption of New Accounting Standards and Issued
but
Not Yet Effective Accounting Standards
55
Statistical Summaries
Statements of Financial Condition
56
Statements of Operations
57
Average Balance Sheet and Summary of Net Interest
Income
58
3
FORWARD-LOOKING STATEMENTS
The information included in this report contains
certain forward-looking statements within the meaning of the U.S.
Private Securities
Litigation Reform Act of
1995, including, without limitation, statements about
Popular Inc.’s (the “Corporation,”
“Popular,” “we,” “us,”
“our”)
business,
financial
condition,
results
of
operations,
plans,
objectives
and
future
performance.
These
statements
are
not
guarantees
of
future
performance,
are
based
on
management’s
current
expectations
and,
by
their
nature,
involve
risks,
uncertainties, estimates and assumptions. Potential factors, some of which are beyond the Corporation’s control, could cause actual
results to differ
materially from those
expressed in, or implied
by, such
forward-looking statements. Risks and
uncertainties include
without limitation the effect of competitive and economic factors, and our
reaction to those factors, the adequacy of the allowance for
loan losses,
delinquency trends, market
risk and
the impact
of interest
rate changes,
capital markets
conditions, capital
adequacy
and
liquidity,
and
the
effect
of
legal
and
regulatory
proceedings
and
new
accounting
standards
on
the
Corporation’s
financial
condition and results of
operations. All statements contained herein that
are not clearly historical
in nature are forward-looking, and
the
words
“anticipate,”
“believe,”
“continues,”
“expect,”
“estimate,”
“intend,”
“project”
and
similar
expressions
and
future
or
conditional verbs
such
as
“will,”
“would,”
“should,”
“could,” “might,”
“can,”
“may”
or similar
expressions are
generally
intended to
identify forward-looking statements.
Various factors, some of which
are beyond Popular’s control, could cause actual results to differ materially from those expressed in,
or implied by, such forward-looking statements. Factors that might cause such a difference
include, but are not limited to, the rate of
growth or
decline in the
economy and employment
levels, as well
as general
business and economic
conditions in the
geographic
areas we serve and,
in particular, in
the Commonwealth of Puerto Rico
(the “Commonwealth” or “Puerto Rico”), where
a significant
portion of our
business is concentrated; the impact
of the current fiscal
and economic challenges of Puerto
Rico and the
measures
taken and to be taken by the Puerto Rico Government and the Federally-appointed oversight board on the
economy, our customers
and
our
business;
the
impact
of
the
pending
debt
restructuring
proceedings
under
Title
III
of
the
Puerto
Rico
Oversight,
Management and
Economic Stability
Act (“PROMESA”)
and of
other actions
taken or
to be
taken to
address Puerto
Rico’s fiscal
challenges
on
the
value
of
our
portfolio
of
Puerto
Rico
government
securities
and
loans
to
governmental
entities
and
of
our
commercial, mortgage and consumer loan portfolios where
private borrowers could be directly affected
by governmental action; the
amount of
Puerto Rico
public sector
deposits held
at the
Corporation, whose
future balances
are uncertain
and difficult
to predict
and
may
be
impacted by
factors such
as
the
amount of
Federal funds
received by
the
P.R.
Government in
connection with
the
COVID-19 pandemic and the rate of expenditure of
such funds, as well as the timeline and implementation
of the Plan of Adjustment
for
the
Puerto
Rico
debt
restructuring
under
Title
III
of
PROMESA;
risks
related
to
Popular’s
planned
acquisition
of
certain
information technology
and related
assets currently
used by
EVERTEC, Inc.
to service
certain of
Banco Popular
de Puerto
Rico’s
key channels, as well as the planned entry into amended and restated commercial agreements and the sale or conversion into
non-
voting
of
Popular’s ownership
stake
in
Evertec
(the
“Transaction”),
including:
the
length
of
time
necessary
to
consummate
the
Transaction; the ability to satisfy the conditions to the closing thereof; the receipt of any regulatory approvals necessary to effect
the
Transaction and
the contemplated return to
shareholders of net
gains resulting from
a sale of
EVERTEC, Inc. shares;
the ability to
successfully transition
and integrate
the assets
acquired as
part of
the Transaction,
as well
as related
operations, employees
and
third party contractors;
unexpected costs, including,
without limitation, costs due
to exposure to
any unrecorded liabilities or
issues
not identified
during due
diligence investigation
of the
Transaction or
that are
not subject
to indemnification
or reimbursement
by
EVERTEC, Inc.; risks that Popular may be affected by operational
and other risks arising from the acquisition of
the acquired assets,
including
the
transition
and
integration
thereof,
or
by
adverse
effects
on
relationships
with
customers,
employees
and
service
providers; and
business and
other risks
arising from
the
extension of
Popular’s current
commercial agreements
with EVERTEC,
Inc.,
as
well
as
the
sale
or
conversion
of
EVERTEC,
Inc.
shares
owned
by
Popular;
the
scope
and
duration
of
the
COVID-19
pandemic
(including
the
appearance
of
new
strains
of
the
virus),
actions
taken
by
governmental
authorities
in
response
to
the
pandemic, and the direct
and indirect impact of
the pandemic on us,
our customers, service providers and
third parties; changes in
interest rates and market liquidity,
which may reduce interest margins, impact funding sources
and affect our ability to originate and
distribute financial products
in the
primary and secondary
markets; the fiscal
and monetary policies
of the federal
government and
its
agencies;
changes
in
federal
bank
regulatory
and
supervisory
policies,
including
required
levels
of
capital
and
the
impact
of
proposed capital standards on our capital ratios; additional Federal
Deposit Insurance Corporation (“FDIC”) assessments; regulatory
approvals
that
may
be
necessary
to
undertake
certain
actions
or
consummate
strategic
transactions
such
as
acquisitions
and
dispositions;
unforeseen or
catastrophic
events, including
extreme weather
events,
other
natural
disasters, man-made
disasters,
acts of violence or war, or the emergence of pandemics epidemics and other health-related crises,
which could cause a disruption in
our operations or other adverse consequences for our business; the relative strength or weakness
of the consumer and commercial
credit sectors and of the
real estate markets in Puerto
Rico and the other markets in
which borrowers are located; the
performance
of the stock
and bond markets;
competition in the
financial services industry;
possible legislative, tax
or regulatory changes;
and a
failure in or breach of
our operational or security systems or infrastructure or
those of EVERTEC, Inc., our provider
of core financial
4
transaction processing and information technology services, or of other third parties providing services to us, including as a
result of
cyberattacks, e-fraud, denial-of-services
and computer intrusion,
that might
result in
loss or
breach of customer
data, disruption of
services,
reputational
damage
or
additional
costs
to
Popular.
Other
possible
events
or
factors
that
could
cause
results
or
performance to differ materially from
those expressed in these forward-looking statements
include the following: negative economic
conditions that adversely affect housing prices, the
job market, consumer confidence and spending habits which may
affect, among
other things, the level
of non-performing assets, charge-offs and provision
expense; changes in market rates and
prices which may
adversely impact
the value
of financial
assets and
liabilities; potential
judgments, claims,
damages, penalties,
fines, enforcement
actions and
reputational damage resulting
from pending
or future
litigation and regulatory
or government
investigations or
actions,
including as
a result
of our
participation in and
execution of government
programs related to
the COVID-19 pandemic;
changes in
accounting standards, rules and interpretations; our ability to grow our core businesses; decisions to downsize, sell or close
units or
otherwise change our business mix; and management’s ability to identify and manage these and other risks. Moreover, the outcome
of legal and regulatory proceedings, as discussed in
“Part I, Item 3. Legal Proceedings” of
the Corporation’s Form 10-K for the year
ended
December 31,
2021,
is
inherently uncertain
and
depends on
judicial
interpretations of
law and
the
findings
of
regulators,
judges
and/or
juries.
The
description
of
the
Corporation’s
business
and
risk
factors
contained
in
Part
I,
Items
1
and
1A
of
the
Corporation’s
Form
10-K
for
the
year
ended
December
31,
2021
discusses
additional
information
about
the
business
of
the
Corporation
and
the
material
risk
factors
and
uncertainties
to
which
the
Corporation
is
subject
that,
in
addition
to
the
other
information in this report, readers should consider.
All forward-looking statements included
in this report
are based upon information
available to the
Corporation as of the
date of this
report,
and
other
than
as
required by
law,
including the
requirements
of
applicable securities
laws,
we
assume
no
obligation to
update or revise any such forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date
of such statements.
OVERVIEW
The Corporation is a diversified,
publicly-owned financial holding company subject to the supervision
and regulation of the Board
of
Governors of the Federal Reserve System. The Corporation has operations in Puerto Rico, the United States (“U.S.”) mainland, and
the
U.S.
and
British
Virgin
Islands.
In
Puerto
Rico,
the
Corporation provides
retail,
mortgage,
and
commercial
banking services
through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as investment banking,
broker-dealer, auto
and
equipment
leasing
and
financing,
and
insurance
services
through
specialized
subsidiaries.
In
the
U.S.
mainland,
the
Corporation provides retail, mortgage and commercial banking services through its New York-chartered banking subsidiary,
Popular
Bank
(“PB”
or
“Popular
U.S.”)
which
has
branches
located
in
New
York,
New
Jersey
and
Florida.
Note
37
to
the
Consolidated
Financial Statements presents information about the
Corporation’s business segments.
The
Corporation
has
several
investments
which
it
accounts
for
under
the
equity
method.
These
include
the
16.19%
interest
in
EVERTEC, a 15.84%
interest in Centro Financiero BHD
Leon, S.A. (“BHD Leon”),
among other investments in
limited partnerships
which mainly
hold loans
and investment
securities. EVERTEC
provides transaction processing
services throughout
the Caribbean
and Latin America, and also provides to the Corporation core
banking and transaction processing and other
services. BHD León is a
diversified
financial
services
institution
operating
in
the
Dominican
Republic.
For
the
year
ended
December
31,
2021,
the
Corporation recorded approximately $58.3 million in earnings from these
investments on an aggregate basis. The carrying amounts
of these investments
as of December 31,
2021 were $299.0 million.
Refer to Note
27 to the
Consolidated Financial Statements for
additional information.
SIGNIFICANT EVENTS
Acquisition
of K2 Capital Group LLC
On
October
15,
2021,
Popular
Equipment
Finance
LLC
(“PEF”),
a
newly-formed
wholly-owned
subsidiary
of
PB,
completed
the
acquisition of certain
assets and the
assumption of certain
liabilities of Minnesota-based
K2 Capital Group
LLC’s (“K2”)
equipment
leasing
and
financing
business
(the
“Acquired
Business”).
PEF
made
a
payment
to
K2
of
approximately
$157
million
in
cash,
representing a premium of
$49 million over the
book value of K2’s
net assets, which has
been recorded as goodwill.
An additional
approximate $29 million in earnout payments could be payable to K2 over the next three years, contingent upon the achievement of
certain agreed-upon financial targets during such period.
5
Specializing in the healthcare
industry, the
Acquired Business provides a variety
of lease products, including
operating and finance
leases,
and
also
offers
private
label
vendor
finance
programs
to
equipment
manufacturers
and
healthcare
organizations.
The
acquisition provides PB with a national equipment
leasing platform that complements its existing healthcare
lending business.
As
part
of
the
transaction,
PEF
acquired
approximately
$115
million
in
net
assets
that
consisted
mainly
of
commercial
finance
leases. The transaction was accounted for as a business combination. Refer to Note 4
to the Consolidated Financial Statements for
additional information.
Capital Actions
2021 Increase in Common Stock Dividend
On May 6, 2021,
the Corporation’s Board of
Directors approved a quarterly cash
dividend of $0.45
per share, an increase
from the
previous
$0.40
per
share
quarterly
dividend, on
its
outstanding common
stock.
During
the
year
ended December
31,
2021,
the
Corporation declared cash dividend of $1.75 per common
share outstanding ($142.3 million in the aggregate).
Accelerated Share Repurchase
On
September
9,
2021,
the
Corporation
completed
its
previously
announced
accelerated
share
repurchase
program
for
the
repurchase
of
an
aggregate
$350
million
of
Popular’s
common
stock.
Under
the
terms
of
the
accelerated
share
repurchase
agreement (the “ASR Agreement”), on
May 4, 2021, the Corporation
made an initial payment of
$350 million and received an
initial
delivery
of 3,785,831
shares of
Popular’s Common
Stock (the
“Initial Shares”).
The transaction
was accounted
for
as a
treasury
stock transaction. As
a result
of the
receipt of
the Initial Shares,
the Corporation recognized
in shareholders’ equity
approximately
$280 million in treasury stock and $70 million as a reduction in
capital surplus. Upon the final settlement of the ASR Agreement, the
Corporation received an additional
828,965 shares of Popular’s common
stock and recognized $61
million as treasury stock
with a
corresponding
increase
in
its
capital
surplus
account.
The
Corporation
repurchased
a
total
of
4,614,796
shares
at
an
average
purchase price of $75.84 under the ASR Agreement.
Redemption of Trust Preferred Securities
On November 1, 2021, the Corporation redeemed all outstanding 6.70% Cumulative Monthly Income Trust Preferred Securities (the
“Trust Preferred Securities”) issued by the Popular Capital Trust I (the “Trust”) (liquidation amount of
$25 per security and amounting
to $186,663,800 (or
$181,063,250 after excluding the
Corporation’s participation in the
Trust of
$5,600,550) in the aggregate).
The
redemption price
for the
Trust Preferred
Securities was
equal to
$25 per
security plus
accrued and
unpaid distributions
up to
and
excluding
the
redemption
date
in
the
amount
of
$0.139583
per
security,
for
a
total
payment
per
security
in
the
amount
of
$25.139583. Upon redemption, Popular
delisted the Trust
Preferred Securities (NASDAQ: BPOPN) from
the Nasdaq Global
Select
Market.
2022 Capital Plan
On January 12, 2022 the Corporation announced
the following capital actions:
●
an increase in the
Corporation’s quarterly common stock
dividend from $0.45 per share
to $0.55 per share,
commencing
with the dividend
payable in the second
quarter of 2022, subject
to the approval
by the Corporation’s
Board of Directors;
and
●
common stock repurchases of up to $500 million
during 2022.
The Corporation’s planned common stock
repurchases may be executed in the
open market or in privately negotiated
transactions.
The
timing
and
exact
amount
of
such
repurchases
will
be
subject
to
various
factors,
including
market
conditions
and
the
Corporation’s capital position and financial performance.
Refer to Table 1 for selected financial data for the past three years.
6
Table 1 - Selected Financial Data
Years ended December
31,
(Dollars in thousands, except per common share data)
2021
2020
2019
CONDENSED STATEMENTS
OF OPERATIONS
Interest income
$
2,122,637
$
2,091,551
$
2,260,793
Interest expense
165,047
234,938
369,099
Net interest income
1,957,590
1,856,613
1,891,694
Provision for credit losses (benefit)
(193,464)
292,536
165,779
Non-interest income
642,128
512,312
569,883
Operating expenses
1,549,275
1,457,829
1,477,482
Income tax expense
309,018
111,938
147,181
Net income
$
934,889
$
506,622
$
671,135
Net income applicable to common stock
$
933,477
$
504,864
$
667,412
PER COMMON SHARE DATA
Net income per common share - basic
$
11.49
$
5.88
$
6.89
Net income per common share - diluted
11.46
5.87
6.88
Dividends declared
1.75
1.60
1.20
Common equity per share
74.48
71.30
62.42
Market value per common share
82.04
56.32
58.75
Outstanding shares:
Average - basic
81,263,027
85,882,371
96,848,835
Average - assuming dilution
81,420,154
85,975,259
96,997,800
End of period
79,851,169
84,244,235
95,589,629
AVERAGE BALANCES
Net loans
[1]
$
29,074,036
$
28,384,981
$
26,806,368
Earning assets
68,088,675
56,404,607
44,944,793
Total assets
71,168,650
59,583,455
50,341,827
Deposits
63,102,916
51,585,779
42,218,796
Borrowings
1,255,495
1,321,772
1,404,459
Total stockholders'
equity
5,777,652
5,419,938
5,713,517
PERIOD END BALANCE
Net loans
[1]
$
29,299,725
$
29,484,651
$
27,466,076
Allowance for credit losses - loans portfolio
695,366
896,250
477,708
Earning assets
72,103,862
62,989,715
48,674,705
Total assets
75,097,899
65,926,000
52,115,324
Deposits
67,005,088
56,866,340
43,758,606
Borrowings
1,155,166
1,346,284
1,294,986
Total stockholders'
equity
5,969,397
6,028,687
6,016,779
SELECTED RATIOS
Net interest margin (non-taxable equivalent basis)
2.88
%
3.29
%
4.03
%
Net interest margin (taxable equivalent basis) -Non-GAAP
3.19
3.62
4.43
Return on assets
1.31
0.85
1.33
Return on common equity
16.22
9.36
11.78
Tier I capital
17.49
16.33
17.76
Total capital
19.35
18.81
20.31
[1] Includes loans held-for-sale.
7
Non-GAAP financial measures
Net interest income on a taxable equivalent basis
Net
interest
income,
on
a
taxable
equivalent
basis,
is
presented
with
its
different
components
on
Table
3
for
the
year
ended
December 31,
2021
as compared
with
the
same
period in
2020, segregated
by
major categories
of
interest
earning assets
and
interest-bearing liabilities.
The interest earning assets include investment securities and loans that are exempt from income tax, principally in Puerto Rico. The
main
sources
of
tax-exempt
interest
income
are
certain
investments
in
obligations
of
the
U.S.
Government,
its
agencies
and
sponsored
entities,
and
certain
obligations
of
the
Commonwealth
of
Puerto
Rico
and
its
agencies
and
assets
held
by
the
Corporation’s international
banking entities.
To
facilitate the
comparison of
all interest
related to
these assets,
the interest
income
has
been
converted
to
a
taxable
equivalent
basis,
using
the
applicable
statutory
income
tax
rates
for
each
period.
The
taxable
equivalent computation
considers the
interest expense
and other
related expense
disallowances required
by the
Puerto Rico
tax
law. Under Puerto
Rico tax law, the
exempt interest can be deducted up
to the amount of taxable
income. Net interest income on a
taxable
equivalent
basis
is
a
non-GAAP
financial
measure.
Management
believes
that
this
presentation
provides
meaningful
information since it facilitates the comparison of revenues
arising from taxable and exempt sources.
Non-GAAP financial measures
used by the
Corporation may not
be comparable to
similarly named Non-GAAP
financial measures
used by other companies.
Financial highlights for the year ended December 31,
2021
The Corporation’s
net income
for the
year ended
December 31,
2021 amounted
to
$934.9 million,
compared to
a net
income of
$506.6 million for 2020.
The discussion
that follows
provides highlights
of the
Corporation’s results
of
operations for
the year
ended December
31, 2021
compared to the results of
operations of 2020. It also
provides some highlights with respect to
the Corporation’s financial condition,
credit
quality,
capital and
liquidity.
Table
2 presents
a three-year
summary of
the components
of
net income
as a
percentage of
average total assets.
8
Table 2 - Components of Net
Income as a Percentage of Average Total
Assets
2021
2020
2019
Net interest income
2.75
%
3.12
%
3.76
%
Provision for credit losses (benefit)
0.27
(0.49)
(0.33)
Mortgage banking activities
0.07
0.02
0.06
Net gain and valuation adjustments on investment securities
-
0.01
-
Other non-interest income
0.83
0.83
1.07
Total net interest
income and non-interest income, net of provision
for credit losses
3.92
3.49
4.56
Operating expenses
(2.18)
(2.45)
(2.94)
Income before income tax
1.74
1.04
1.62
Income tax expense
0.43
0.19
0.29
Net income
1.31
%
0.85
%
1.33
%
Net interest income for the
year ended December 31, 2021 was
$2.0 billion, an increase of $101.0
million when compared to 2020.
The increase in
net interest income
was mainly driven
by higher
interest income from
commercial loans due
to income from
loans
under
the
Small
Business
Administration
(“SBA”)
Paycheck
Protection
Program
(“PPP”),
and
higher
income
from
investment
securities. In addition, lower
interest expense on deposits, despite
the higher volume, contributed to
the higher net interest
income.
The net interest margin for the year ended December 31, 2021 was 2.88% compared to 3.29% for the same period in 2020 and was
impacted by
prolonged low interest
rates as
well as
the change
in the
earning assets composition.
On a
taxable equivalent
basis,
net
interest margin
was 3.19%
in 2021,
compared to
3.62%
in 2020.
Refer to
the Net
Interest Income
section
of this
MD&A for
additional information.
The
Corporation’s
total
provision
for
credit
losses
reflected
a
benefit
of
$193.5
million
for
the
year
ended
December
31,
2021,
compared to a provision expense of $292.5 million for 2020. The benefit for the year 2021 was due to improvements in credit quality
and
the
macroeconomic
outlook. The
Corporation continued
to
exhibit strong
credit
quality
trends and
low
credit
costs
with
low
levels
of
net
charge-offs
and
lower
non-performing
loans.
Non-performing
assets
totaled
$633
million
at
December
31,
2021,
reflecting a
decrease of
$191 million
when compared
to December
31, 2020.
Refer to
the Provision
for Credit
Losses and
Credit
Risk sections
of this
MD&A for information
on the
allowance for credit
losses, non-performing assets,
troubled debt restructurings,
net charge-offs and credit quality metrics.
Non-interest
income
for
the
year
ended
December
31,
2021
amounted
to
$642.1
million,
an
increase
of
$129.8
million,
when
compared
with
2020,
mostly
due
to:
higher
service
fees
and
service
charges
on
deposit
accounts
due
to
economic
disruptions
related to
the pandemic,
the waiver of
service charges and
late fees
during 2020,
higher income from
mortgage banking activities
and higher other operating income principally due to higher
net earnings from the combined portfolio of investments
under the equity
method. Refer
to the
Non-Interest Income
section of
this MD&A
for additional
information on
the major
variances of
the different
categories of non-interest income.
Total
operating expenses amounted to
$1.5 billion for the
year 2021, reflecting
an increase of
$91.4 million, when compared
to the
same period
in 2020,
mainly due
to higher
personnel costs.
Refer to
the Operating
Expenses section
of this
MD&A for
additional
information.
Income tax expense
amounted to $309.0 million
for the year
ended December 31, 2021,
compared with an
income tax expense of
$111.9
million for the previous year. The increase in income tax expense
for the year is mainly due to a higher pre-tax income.
Refer
to the Income Taxes section in this MD&A
and Note 35 to the consolidated financial statements for additional information on income
taxes.
At December
31, 2021,
the Corporation’s
total assets
were $75.1 billion,
compared with
$65.9 billion at
December 31,
2020. The
increase
of
$9.2
billion
is
mainly
driven
by
higher
money
market
investments
and
debt
securities
available-for-sale
due
to
the
additional funds
available to
invest resulting
from the
increase in
deposits across
various sectors,
partially offset
by paydowns
of
agency mortgage-backed securities.
Refer to the Statement of Condition Analysis
section of this MD&A for additional information.
9
Deposits amounted to $67.0
billion at December 31,
2021, compared with $56.9
billion at December 31,
2020. Table
7 presents a
breakdown of deposits
by major categories.
The increase in
deposits was mainly
due to
higher Puerto Rico
public sector deposits
and higher balances in retail and
commercial demand deposits accounts. The Corporation’s borrowings remained flat
at $1.2 billion
at
December 31,
2021. Refer
to Note
17
to
the
Consolidated Financial
Statements for
detailed information
on the
Corporation’s
borrowings.
Refer
to
Table
6
in
the
Statement
of
Financial
Condition
Analysis
section
of
this
MD&A
for
the
percentage
allocation
of
the
composition of the Corporation’s financing to total assets.
Stockholders’ equity remained flat at $6.0 billion
at December 31, 2021, compared with December 31,
2020. The net activity for the
year was mainly
due to
net income of
$934.9 million for
the year 2021
offset by
unrealized losses on
debt securities
available-for-
sale
and
by
capital
return
transactions,
including
an
accelerated
share
repurchase
transaction
completed
during
2021.
The
Corporation and its
banking subsidiaries continue to
be well-capitalized at December
31, 2021. The Common
Equity Tier
1 Capital
ratio at December 31, 2021 was 17.42%, compared
to 16.26% at December 31, 2020.
For further discussion of operating results, financial
condition and business risks refer to the narrative
and tables included
herein.
The shares of the Corporation’s common stock are traded
on the NASDAQ Global Select Market under the
symbol BPOP.
CRITICAL ACCOUNTING POLICIES / ESTIMATES
The accounting and
reporting policies followed by
the Corporation and its
subsidiaries conform with generally
accepted accounting
principles in
the United
States of America
(“GAAP”) and
general practices within
the financial services
industry. The
Corporation’s
significant
accounting policies
are described
in
detail in
Note 2
to the
Consolidated Financial
Statements and
should
be
read in
conjunction with this section.
Critical accounting policies
require management to
make estimates and
assumptions, which involve significant
judgment about the
effect of matters
that are inherently uncertain
and that involve a
high degree of subjectivity.
These estimates are made
under facts
and circumstances
at a
point in
time and
changes in
those facts
and circumstances
could produce
actual results
that differ
from
those
estimates. The
following MD&A
section is
a summary
of what
management considers
the Corporation’s
critical accounting
policies and estimates.
Fair Value Measurement of Financial Instruments
The Corporation
currently measures
at fair
value on
a recurring
basis its
trading debt
securities, debt
securities available-for-sale,
certain equity securities,
derivatives and mortgage
servicing rights. Occasionally,
the Corporation may
be required to
record at
fair
value other
assets on
a nonrecurring
basis, such
as loans
held-for-sale, loans
held-in-portfolio that
are collateral
dependent and
certain other
assets. These
nonrecurring fair
value adjustments
typically result
from
the application
of
lower of
cost
or fair
value
accounting or write-downs of individual assets.
The
Corporation categorizes
its
assets and
liabilities measured
at fair
value under
the three-level
hierarchy.
The level
within the
hierarchy is based on whether the inputs to
the valuation methodology used for fair value measurement
are observable.
The
Corporation
requires
the
use
of
observable
inputs
when
available,
in
order
to
minimize
the
use
of
unobservable
inputs
to
determine fair value. The inputs or methodologies used for valuing securities are
not necessarily an indication of the risk associated
with investing
in those
securities. The
amount of
judgment involved
in estimating
the fair
value of
a financial
instrument depends
upon the availability of
quoted market prices or observable market
parameters. In addition, it may
be affected by other
factors such
as the
type of instrument,
the liquidity of
the market for
the instrument, transparency
around the inputs
to the valuation,
as well
as
the contractual characteristics of the instrument.
Broker quotes
used for
fair value
measurements inherently
reflect any
lack of
liquidity in
the market
since they
represent an
exit
price from
the perspective
of the
market participants.
Financial assets
that were
fair valued
using broker
quotes amounted
to $6
million at December 31, 2021, of which $1
million were Level 3 assets and $5 million
were Level 2 assets. Level 3 assets consisted
10
principally of
tax-exempt GNMA
mortgage-backed securities.
Fair value
for these
securities was
based on
an internally-prepared
matrix derived
from local
broker quotes.
The main
input used
in the
matrix pricing
was non-binding
local broker
quotes obtained
from limited trade activity. Therefore, these securities were classified as Level
3.
Trading Debt Securities and Debt Securities Available-for-Sale
The
majority
of
the
values
for
trading
debt
securities
and
debt
securities
available-for-sale
are
obtained
from
third-party
pricing
services and
are validated
with alternate
pricing sources
when available.
Securities not
priced by
a secondary
pricing source
are
documented
and
validated
internally
according
to
their
significance
to
the
Corporation’s
financial
statements.
Management
has
established materiality thresholds according to the investment class to monitor and investigate material deviations in prices obtained
from the primary pricing service provider and the secondary pricing source used as support for the valuation results. During the year
ended December 31, 2021, the Corporation did
not adjust any prices obtained from pricing
service providers or broker dealers.
Inputs are evaluated to
ascertain that they consider current
market conditions, including the
relative liquidity of the
market. When a
market quote
for a
specific security
is not
available, the
pricing service
provider generally
uses observable
data to
derive an
exit
price
for
the
instrument,
such
as
benchmark
yield
curves
and
trade
data
for
similar
products.
To
the
extent
trading
data
is
not
available, the
pricing service provider
relies on
specific information including
dialogue with brokers,
buy side clients,
credit ratings,
spreads to
established benchmarks and
transactions on similar
securities, to
draw correlations based
on the
characteristics of
the
evaluated instrument. If
for any
reason the pricing
service provider cannot
observe data required
to feed
its model,
it discontinues
pricing the instrument. During the year
ended December 31, 2021, none of
the Corporation’s debt securities were subject
to pricing
discontinuance by the
pricing service providers.
The pricing
methodology and approach
of our
primary pricing service
providers is
concluded to be consistent with the fair value measurement
guidance.
Furthermore, management assesses the fair value of its
portfolio of investment securities at least on a
quarterly basis. Securities are
classified
in
the
fair
value
hierarchy
according
to
product
type,
characteristics
and
market
liquidity.
At
the
end
of
each
period,
management assesses the valuation hierarchy for each asset or liability measured. The fair
value measurement analysis performed
by
the
Corporation
includes
validation
procedures
and
review
of
market
changes,
pricing
methodology,
assumption
and
level
hierarchy changes, and evaluation of distressed transactions.
Refer to
Note 28
to the
Consolidated Financial Statements for
a description of
the Corporation’s
valuation methodologies used
for
the assets and liabilities measured at fair value.
Loans and Allowance for Credit Losses
Interest on loans is accrued and recorded as
interest income based upon the principal amount
outstanding.
Non-accrual loans are those loans on which the
accrual of interest is discontinued. When a loan is
placed on non-accrual status, all
previously
accrued
and
unpaid interest
is
charged against
interest
income
and
the
loan
is
accounted for
either
on
a cash-basis
method or
on the
cost-recovery method.
Loans designated
as non-accruing
are returned
to accrual
status when
the Corporation
expects repayment of the remaining contractual principal and interest.
The determination as to the ultimate collectability of the loan’s
balance may involve management’s judgment in the evaluation of
the borrower’s financial condition and
prospects for repayment.
Refer to
the MD&A
section titled
Credit Risk,
particularly the
Non-performing assets
sub-section, for
a detailed
description of
the
Corporation’s non-accruing and charge-off policies by major loan
categories.
One of
the most
critical and
complex accounting
estimates is
associated with
the determination
of the
allowance for
credit losses
(“ACL”).
The
Corporation
establishes
an
ACL
for
its
loan
portfolio
based
on
its
estimate
of
credit
losses
over
the
remaining
contractual term
of the
loans, adjusted
for expected
prepayments, in
accordance with
Accounting Standards
Codification (“ASC”)
Topic
326.
An
ACL
is
recognized
for
all
loans
including
originated
and
purchased
loans,
since
inception,
with
a
corresponding
charge
to
the
provision
for
credit
losses,
except
for
purchased
credit
deteriorated
(“PCD”)
loans
as
explained
below.
The
Corporation follows a methodology to establish the ACL which includes a
reasonable and supportable forecast period for estimating
credit
losses,
considering
quantitative
and
qualitative
factors
as
well
as
the
economic
outlook.
As
part
of
this
methodology,
management evaluates
various macroeconomic
scenarios provided
by third
parties. At
December 31,
2021, management
applied
probability weights to the outcome of the selected
scenarios.
The
Corporation
has
designated
as
collateral
dependent
loans
secured
by
collateral
when
foreclosure
is
probable
or
when
foreclosure is
not probable but
the practical
expedient is used.
The practical expedient
is used
when repayment is
expected to be
11
provided
substantially
by
the
sale
or
operation
of
the
collateral
and
the
borrower is
experiencing financial
difficulty.
The
ACL
of
collateral dependent loans
is measured based
on the fair
value of the
collateral less costs
to sell. The
fair value of
the collateral is
based on appraisals, which may be adjusted due to their age,
and the type, location, and condition of the property or
area or general
market conditions to reflect the expected change in value between the effective date of the appraisal and the measurement date.
In
addition, refer
to the
Credit Risk
section of
this MD&A
for detailed
information on
the Corporation’s
collateral value
estimation for
other real estate.
A restructuring constitutes a TDR when the Corporation
separately concludes that the restructuring constitutes a
concession and the
debtor
is
experiencing
financial
difficulties.
For
information
on
the
Corporation’s
TDR
policy,
refer
to
Note
2.
The
established
framework captures
the impact
of concessions
through discounting
modified contractual cash
flows, both
principal and
interest, at
the loan’s
original effective
rate. The
impact of
these concessions
is combined
with the
expected credit
losses generated
by the
quantitative loss models in order to arrive at the
ACL.
Loans Acquired with Deteriorated Credit Quality
PCD loans are defined as those with evidence of a more-than-insignificant
deterioration in credit quality since origination. PCD loans
are initially recorded
at its purchase
price plus an
estimated ACL. Upon
the acquisition of
a PCD loan,
the Corporation recognizes
the
estimate
of
the
expected
credit
losses
over
the
remaining
contractual
term
of
each
individual
loan
as
an
ACL
with
a
corresponding addition to the
loan purchase price. The
amount of the purchased
premium or discount which
is not related to
credit
risk
is
amortized
over
the
life
of
the
loan
through
net
interest
income
using
the
effective
interest
method
or
a
method
that
approximates the effective interest method. Changes in
expected credit losses are recorded as an
increase or decrease to the ACL
with
a
corresponding
charge
(reverse)
to
the
provision
for
credit
losses
in
the
Consolidated
Statements
of
Operations.
Upon
transition to the individual loan measurement,
these loans follow the same
nonaccrual policies as non-PCD loans and are
therefore
no longer
excluded from
non-performing status.
Modifications of
PCD loans
that meet
the definition
of
a TDR
subsequent to
the
adoption of ASC Topic 326 are accounted and reported as such following the same processes
as non-PCD loans.
Income Taxes
Income
taxes
are
accounted
for
using
the
asset
and
liability
method.
Under
this
method,
deferred
tax
assets
and
liabilities
are
recognized based
on the
future tax
consequences attributable
to temporary
differences
between the
financial statement
carrying
amounts
of
existing
assets
and
liabilities
and
their
respective
tax
basis,
and
attributable
to
operating
loss
and
tax
credit
carryforwards. Deferred tax assets
and liabilities are measured
using enacted tax rates
expected to apply in
the years in
which the
temporary differences are expected to be recovered or paid. The effect on deferred tax assets and liabilities of a change in tax
rates
is recognized in earnings in the period when
the changes are enacted.
The
calculation
of
periodic
income
taxes
is
complex
and
requires
the
use
of
estimates
and
judgments.
The
Corporation
has
recorded
two
accruals
for
income
taxes:
(i)
the
net
estimated
amount
currently
due
or
to
be
received
from
taxing
jurisdictions,
including
any
reserve
for
potential
examination
issues,
and
(ii)
a
deferred
income
tax
that
represents
the
estimated
impact
of
temporary differences between how the Corporation recognizes assets and
liabilities under accounting principles generally accepted
in
the
United
States
(GAAP),
and
how
such
assets
and
liabilities
are
recognized
under
the
tax
code.
Differences
in
the
actual
outcome of these future tax consequences could impact the Corporation’s financial position or its results of operations. In estimating
taxes, management assesses the relative
merits and risks of
the appropriate tax treatment
of transactions taking into consideration
statutory, judicial and regulatory guidance.
A deferred
tax asset
should be
reduced by
a valuation
allowance if based
on the
weight of
all available evidence,
it is
more likely
than
not
(a
likelihood
of
more
than
50%)
that
some
portion
or
the
entire
deferred
tax
asset
will
not
be
realized.
The
valuation
allowance
should
be
sufficient
to
reduce
the
deferred
tax
asset
to
the
amount
that
is
more
likely
than
not
to
be
realized.
The
determination of whether a deferred
tax asset is realizable is
based on weighting all
available evidence, including both positive and
negative evidence.
The realization
of deferred
tax assets,
including carryforwards
and deductible
temporary differences,
depends
upon the existence of sufficient taxable income of the same character during the carryback or carryforward period. The realization of
deferred tax assets requires
the consideration of all
sources of taxable income
available to realize the
deferred tax asset, including
12
the
future
reversal
of
existing
temporary
differences,
future
taxable
income
exclusive
of
reversing
temporary
differences
and
carryforwards, taxable income in carryback years and
tax-planning strategies.
Management evaluates the
realization of the
deferred tax asset
by taxing
jurisdiction. The U.S.
mainland operations are
evaluated
as
a whole
since a
consolidated income
tax return
is filed;
on the
other
hand, the
deferred tax
asset related
to the
Puerto
Rico
operations
is evaluated
on an
entity
by entity
basis, since
no consolidation
is
allowed in
the income
tax filing.
Accordingly,
this
evaluation
is
composed
of
three
major
components:
U.S.
mainland
operations,
Puerto
Rico
banking
operations
and
Holding
Company.
For the evaluation of the realization of the deferred
tax asset by taxing jurisdiction, refer to Note 35.
Under the Puerto Rico Internal Revenue Code, the
Corporation and its subsidiaries are treated as separate taxable
entities and are
not entitled to file
consolidated tax returns. The Code
provides a dividends-received deduction of 100%
on dividends received from
“controlled” subsidiaries subject to taxation in Puerto Rico
and 85% on dividends received from other
taxable domestic corporations.
Changes in
the Corporation’s
estimates can occur
due to changes
in tax
rates, new business
strategies, newly
enacted guidance,
and resolution
of issues
with taxing
authorities regarding
previously taken tax
positions. Such
changes could
affect the
amount of
accrued taxes. The Corporation has made
tax payments in accordance with
estimated tax payments rules. Any remaining
payment
will not have any significant impact on liquidity
and capital resources.
The valuation
of deferred
tax assets
requires judgment
in assessing
the likely
future tax
consequences of
events that
have been
recognized
in
the
financial
statements
or
tax
returns
and
future
profitability.
The
accounting
for
deferred
tax
consequences
represents management’s best
estimate of those
future events. Changes
in management’s current
estimates, due to
unanticipated
events, could have a material impact on the
Corporation’s financial condition and results of operations.
The Corporation establishes tax liabilities or
reduces tax assets for uncertain tax
positions when, despite its assessment that
its tax
return positions are appropriate and supportable under local tax law, the Corporation believes it may not succeed in realizing the tax
benefit of
certain positions if
challenged. In evaluating
a tax position,
the Corporation determines
whether it is
more-likely-than-not
that the position will be sustained upon examination, including resolution
of any related appeals or litigation processes, based on the
technical
merits
of
the
position.
The
Corporation’s
estimate
of
the
ultimate
tax
liability
contains
assumptions
based
on
past
experiences, and judgments
about potential actions
by taxing jurisdictions
as well as
judgments about the
likely outcome of
issues
that have been raised by taxing jurisdictions. The tax
position is measured as the largest amount of benefit that
is greater than 50%
likely of being
realized upon ultimate settlement.
The Corporation evaluates these
uncertain tax positions each
quarter and adjusts
the related tax liabilities or
assets in light of changing
facts and circumstances, such as the
progress of a tax audit
or the expiration
of a
statute of
limitations. The Corporation
believes the
estimates and assumptions
used to
support its
evaluation of
uncertain tax
positions are reasonable.
After consideration
of the
effect on
U.S. federal
tax of
unrecognized U.S.
state tax
benefits, the
total amount
of unrecognized
tax
benefits, including U.S.
and Puerto Rico
that, if recognized
through earnings, would
affect the Corporation’s
effective tax
rate, was
approximately $5.5
million at
December 31,
2021 and
$10.2 million
at December
31, 2020.
Refer to
Note 35
to the
Consolidated
Financial Statements
for further
information on
this subject
matter.
The Corporation
anticipates a
reduction in
the total
amount of
unrecognized tax benefits within the next 12 months, which
could amount to approximately $1.4 million, including
interest.
The amount of
unrecognized tax benefits
may increase or
decrease in the
future for various
reasons including adding amounts
for
current
tax
year
positions,
expiration
of
open
income
tax
returns
due
to
the
statutes
of
limitation,
changes
in
management’s
judgment about
the level
of uncertainty,
status of
examinations, litigation
and legislative
activity and
the addition
or elimination
of
uncertain tax
positions. Although
the
outcome of
tax audits
is uncertain,
the Corporation
believes that
adequate amounts
of tax,
interest and penalties
have been provided
for any adjustments
that are expected
to result from
open years. From
time to time,
the
Corporation is audited
by various federal, state
and local authorities regarding
income tax matters. Although
management believes
its
approach
in
determining the
appropriate
tax
treatment
is
supportable
and
in
accordance
with
the
accounting standards,
it
is
possible that the final tax
authority will take a tax position that
is different than the tax
position reflected in the Corporation’s income
tax provision and other tax reserves. As each audit is conducted, adjustments, if any,
are appropriately recorded in the consolidated
financial
statement
in
the
period
determined.
Such
differences
could
have
an
adverse
effect
on
the
Corporation’s
income
tax
provision or
benefit, or
other tax
reserves, in
the reporting
period in
which such
determination is
made and,
consequently,
on the
Corporation’s results of operations, financial position and
/ or cash flows for such period.
13
Goodwill and Other Intangible Assets
The
Corporation’s
goodwill
and
other
identifiable
intangible
assets
having
an
indefinite
useful
life
are
tested
for
impairment.
Intangibles
with
indefinite
lives
are
evaluated
for
impairment
at
least
annually,
and
on
a
more
frequent
basis,
if
events
or
circumstances indicate impairment could have taken place.
Such events could include, among others, a
significant adverse change
in the business climate, an adverse action by a regulator,
an unanticipated change in the competitive environment and a decision to
change
the
operations
or
dispose
of
a
reporting
unit.
Other
identifiable
intangible
assets
with
a
finite
useful
life
are
evaluated
periodically for impairment when events or changes
in circumstances indicate that the carrying amount
may not be recoverable.
Goodwill impairment is recognized when the carrying amount of any
of the reporting units exceeds its fair value
up to the amount of
the
goodwill.
The
Corporation
estimates
the
fair
value
of
each
reporting
unit,
consistent
with
the
requirements
of
the
fair
value
measurements
accounting
standard,
generally
using
a
combination
of
methods,
including
market
price
multiples
of
comparable
companies and
transactions, as
well as
discounted cash
flow analyses.
Subsequent reversal
of goodwill
impairment losses
is not
permitted under applicable accounting standards. No impairment was recognized by the
Corporation from the annual test as of July
31,
2021.For
a
detailed
description
of
the
annual
goodwill
impairment
evaluation
performed
by
the
Corporation
during
the
third
quarter of 2021, refer to Note 15.
At December 31, 2021,
goodwill amounted to $720 million.
During the year ended December
31, 2021, the Corporation recognized
an
impairment loss
of
$5.4
million
associated with
a
trademark.
Note
15
to
the
Consolidated Financial
Statements
provides the
assignment of goodwill by reportable segment.
Pension and Postretirement Benefit Obligations
The Corporation provides pension and
restoration benefit plans for certain employees
of various subsidiaries. The Corporation also
provides certain
health care
benefits for
retired employees of
BPPR. The
non-contributory defined pension
and benefit
restoration
plans (“the Pension Plans”) are frozen with regards
to all future benefit accruals.
The estimated
benefit costs
and obligations
of the
Pension Plans and
Postretirement Health
Care Benefit Plan
(“OPEB Plan”)
are
impacted by
the use
of subjective
assumptions, which can
materially affect
recorded amounts, including
expected returns on
plan
assets,
discount
rates,
termination
rates,
retirement
rates
and
health
care
trend
rates.
Management
applies
judgment
in
the
determination of these factors, which normally undergo evaluation against current industry practice and the
actual experience of the
Corporation.
The
Corporation
uses
an
independent
actuarial
firm
for
assistance
in
the
determination
of
the
Pension
Plans
and
OPEB Plan
costs and
obligations. Detailed information
on the Plans
and related valuation
assumptions are included
in Note
30 to
the Consolidated Financial Statements.
The Corporation periodically reviews its assumption for the long-term expected return on Pension Plans
assets. The Pension Plans’
assets
fair
value
at
December
31,
2021
was
$860.5
million.
The
expected
return
on
plan
assets
is
determined
by
considering
various factors, including a total fund return estimate based on a weighted-average
of estimated returns for each asset class in each
plan.
Asset
class
returns
are
estimated
using
current
and
projected
economic
and
market
factors
such
as
real
rates
of
return,
inflation, credit spreads, equity risk premiums and
excess return expectations.
As part of the review,
the Corporation’s independent consulting actuaries performed an analysis of expected
returns based on each
plan’s expected asset
allocation for the year
2022 using the
Willis Towers
Watson US Expected
Return Estimator.
This analysis is
reviewed by the Corporation
and used as a
tool to develop expected
rates of return, together
with other data. This
forecast reflects
the actuarial firm’s view of
expected long-term rates of return for each significant asset
class or economic indicator as of January
1,
2022;
for
example, 8.5%
for
large
cap
stocks,
8.8% for
small cap
stocks,
8.9% for
international stocks,
3.5% for
long
corporate
bonds
and
2.4%
for
long
Treasury
bonds.
A
range
of
expected
investment
returns
is
developed,
and
this
range
relies
both
on
forecasts and on broad-market historical benchmarks
for expected returns, correlations, and volatilities
for each asset class.
As a consequence of recent reviews, the Corporation decreased its expected return on plan assets for year 2022
to 4.3% and 5.4%
for the Pension
Plans.
Expected rates
of return of
4.6% and 5.5%
had been used
for 2021 and
5.0% and 5.8%
had been used
for
2020 for the Pension Plans. Since the expected return assumption is on a long-term basis, it is not materially impacted by the yearly
fluctuations (either positive or negative) in the actual
return on assets. The expected return can be
materially impacted by a change
in the plan’s asset allocation.
14
Net Periodic
Benefit Cost
(“pension expense”)
for the
Pension Plans
amounted to
a net
benefit of
$3.8 million
in 2021.
The total
pension expense included a benefit of $38.7 million
for the expected return on assets.
Pension expense is sensitive
to changes in the
expected return on assets.
For example, decreasing the expected
rate of return
for
2021 from
4.3% to
4.05% would
increase the
projected 2022
pension expense
for the
Banco Popular
de Puerto
Rico Retirement
Plan, the Corporation’s largest plan, by approximately $2.0
million.
If
the
projected
benefit
obligation
exceeds
the
fair
value
of
plan
assets,
the
Corporation
shall
recognize
a
liability
equal
to
the
unfunded projected
benefit obligation
and vice
versa, if
the fair
value of
plan assets
exceeds the
projected benefit
obligation, the
Corporation recognizes an asset equal to the overfunded projected
benefit obligation. This asset or liability may result in a
taxable or
deductible temporary difference and its
tax effect shall be
recognized as an income tax
expense or benefit which shall
be allocated
to various
components of
the financial
statements, including
other comprehensive
income.
The determination
of the
fair value
of
pension
plan
obligations
involves
judgment,
and
any
changes
in
those
estimates
could
impact
the
Corporation’s
Consolidated
Statements
of Financial Condition.
Management believes that
the fair value
estimates of the
Pension Plans assets
are reasonable
given the valuation methodologies used to measure the investments at fair value as
described in Note 28. Also, the compositions of
the plan assets
are primarily in
equity and debt
securities, which have
readily determinable quoted market
prices. The Corporation
had recorded a pension asset of $17.8 million
and a pension liability of $8.8 million at December
31, 2021.
The Corporation uses
the spot rate
yield curve from
the Willis Towers
Watson RATE:
Link (10/90) Model
to discount the
expected
projected
cash
flows
of
the
plans.
The
equivalent
single
weighted
average
discount
rate
ranged
from
2.79%
to
2.83%
for
the
Pension Plans and 2.94%
for the OPEB Plan to determine the benefit obligations
at December 31, 2021.
A 50
basis point
decrease to
each of
the rates
in the
December 31,
2021 Willis
Towers
Watson RATE:
Link (10/90)
Model would
increase the
projected 2022
expense for
the Banco
Popular de
Puerto Rico
Retirement Plan
by approximately
$2.6 million.
The
change would not affect the minimum required contribution
to the Pension Plans.
The OPEB Plan was unfunded (no assets were held by the plan) at December 31, 2021. The Corporation had recorded a liability for
the underfunded postretirement benefit obligation of $160.0
million at December 31, 2021.
15
STATEMENT
OF OPERATIONS ANALYSIS
Net Interest Income
Net interest income is the interest earned from loans, debt securities and money market investments, including loan fees, minus
the
interest cost of deposits and borrowings. Various risk factors affect net interest income including the economic environment in which
we
operate,
market
driven
events,
the
mix
and
size
of
the
earning
assets
and
related
funding,
changes
in
volumes,
repricing
characteristics, loans
fees collected,
moratoriums granted
on loan
payments and
delay charges,
interest collected
on nonaccrual
loans, as well as strategic decisions made by the Corporation’s management. Net interest income for the
year ended December 31,
2021 was $2.0
billion or $101.0
million higher than
in 2020. Net
interest income, on
a taxable equivalent
basis, for the
year ended
December 31, 2021 was $2.2 billion compared
to $2.0 billion in 2020.
Due
to
the
Corporation’s
current
asset
sensitive
position,
an
increase
in
interest
rates
should
have
a
favorable
impact
on
the
Corporation’s results. See
the Risk Management:
Market/Interest Rate Risk
section of this
MD&A for additional
information related
to the Corporation’s interest rate risk.
The average key index rates for the years 2021
and 2020 were as follows:
2021
2020
Prime rate………………………………………………………………………………………………….
3.25%
3.53%
Fed funds rate……………………………………………………………………………………………..
0.25
0.35
3-month LIBOR……………………………………………………………………………………………
0.16
0.65
3-month Treasury Bill…………………………………………………………………………………….
0.03
0.35
10-year Treasury………………………………………………………………………………………….
1.44
0.89
FNMA 30-year…………………………………………………………………………………………….
1.84
1.01
Average
outstanding securities
balances are
based
upon
amortized cost
excluding any
unrealized gains
or
losses
on
securities
available-for-sale.
Non-accrual
loans
have
been
included
in
the
respective
average
loans
and
leases
categories.
Loan
fees
collected, and
costs incurred
in the
origination of
loans are
deferred and
amortized over
the term
of the
loan as
an adjustment
to
interest yield. Prepayment penalties, late fees collected and the amortization of premiums /
discounts on purchased loans, including
the discount accretion on purchased credit deteriorated loans (“PCD”),
are also included as part of the loan yield. Interest income for
the
period
ended
December
31, 2021
included
a
favorable
impact of
$131.6
million,
related
to
those
items,
compared
to
$98.5
million for the
same period in
2020. The year
over year increase
is related to
higher amortized fees
resulting mainly from
the SBA
forgiveness of PPP
loans by
$53.9 million,
partially offset
by $15.4
million lower
amortization of the
fair value
discount of
the auto
and credit card portfolios acquired in previous
years.
Table
3 presents
the
different
components
of
the
Corporation’s
net
interest
income,
on
a
taxable
equivalent
basis,
for
the
year
ended December 31,
2021, as compared
with the same
period in 2020,
segregated by major
categories of interest
earning assets
and interest-bearing liabilities. Net interest margin was 2.88% in 2021 or 41 basis points lower than the 3.29% reported in 2020. The
lower net interest margin for the
year is driven by the
increase of $11.5
billion in average deposits which were mostly
redeployed in
overnight Fed
Funds and
U.S. Treasury
and agency
debt securities.
These assets,
although accretive
to net
interest income,
are
low yielding assets and have the effect of compressing the net interest margin.
Also impacting the net interest
margin was a full year
of low short-term
rates as the
Federal Reserve decreased
by 150 basis
points the Federal
Funds Rate in
the first quarter
of 2020.
On
a
taxable
equivalent
basis,
net
interest
margin
was 3.19% in
2021,
compared
to
3.62%
in
2020.
The
main
drivers
for
the
increase in net interest income on a taxable equivalent
basis were:
Positive variances:
●
Higher
interest
income
from
money
market
and
investment
securities
due
to
a
higher
volume
by
$11.0
billion,
which
resulted from an increase in deposits in most categories, partially
offset by lower yield by 39 basis points driven by a lower
interest rate environment. These larger balances resulted
from an increase in deposits in most categories;
16
●
Higher interest
income from
commercial loans
driven by
higher interest
and fees
from PPP
loans by
$54.0 million
when
compared to 2020, partially offset the repricing of adjustable
rates loans and origination in a low
interest rate environment;
●
The auto and
lease financing portfolios increased
by $478 million
or 12% driven
by continued demand for
automobiles in
Puerto Rico
after the
COVID-19 related
lockdown and
higher household
liquidity resulting
from COVID-19
relief federal
assistances;
●
Mortgage loans
interest income
increased 6%
when compared
to the
year 2020,
driven by
the $807.6
million bulk
loan
repurchases from our
GSE loan servicing
portfolios that occurred at
the end of
September 2020, partially offset
by lower
yields also related to the lower rates
of the repurchased portfolio; and
●
Lower interest expense on
deposits due to the
decrease in interest cost
by 21 basis points
resulting from the decrease in
market rates in March 2020, increased liquidity in the financial industry as a result of retail and
commercial federal support
programs
and
the
subsequent
effect
on
these
liabilities.
The
decrease in
the
cost
of
interest-bearing deposits
was
51
basis points
when compared
to the
year 2020
in the
U.S. segment
and 13
basis points
in P.R.
The impact
from lower
rates was partially offset by higher average balance of interest-bearing deposits by $8.4 billon when compared to the year
2020.
Partially offset by:
●
Lower interest
income from
consumer loans
due to
lower average
volume both
on the
installment loan
and credit
card
portfolios, resulting also from a higher household
liquidity in the market, as discussed above.
17
Table 3 – Analysis of Levels & Yields
on a Taxable Equivalent Basis
from Continuing Operations (Non-GAAP)
Year ended December 31,
Variance
Average Volume
Average Yields / Costs
Interest
Attributable to
2021
2020
Variance
2021
2020
Variance
2021
2020
Variance
Rate
Volume
(In millions)
(In thousands)
$
16,000
$
8,598
$
7,402
0.13
%
0.23
%
(0.10)
%
Money market investments
$
21,147
$
19,722
$
1,425
$
(10,745)
$
12,170
22,931
19,353
3,578
2.22
2.42
(0.20)
Investment securities [1]
508,131
467,994
40,137
(43,723)
83,860
84
69
15
5.16
6.00
(0.84)
Trading securities
4,339
4,165
174
(646)
820
Total money market,
investment and trading
39,015
28,020
10,995
1.37
1.76
(0.39)
securities
533,617
491,881
41,736
(55,114)
96,850
Loans:
13,455
13,245
210
5.39
5.23
0.16
Commercial
723,765
692,372
31,393
20,297
11,096
849
913
(64)
5.41
5.74
(0.33)
Construction
45,821
52,438
(6,617)
(3,059)
(3,558)
1,289
1,112
177
6.00
6.05
(0.05)
Leasing
77,356
67,247
10,109
(522)
10,631
7,696
7,255
441
5.09
5.23
(0.14)
Mortgage
392,047
379,794
12,253
(10,414)
22,667
2,463
2,839
(376)
11.17
11.34
(0.17)
Consumer
275,078
322,009
(46,931)
(5,612)
(41,319)
3,322
3,021
301
8.47
8.97
(0.50)
Auto
280,722
271,162
9,560
(16,500)
26,060
29,074
28,385
689
6.19
6.29
(0.10)
Total loans
1,794,789
1,785,022
9,767
(15,810)
25,577
$
68,089
$
56,405
$
11,684
3.43
%
4.04
%
(0.61)
%
Total earning assets
$
2,328,406
$
2,276,903
$
51,503
$
(70,924)
$
122,427
Interest bearing deposits:
$
25,959
$
19,678
$
6,281
0.12
%
0.28
%
(0.16)
%
NOW and money market [2]
$
31,911
$
54,652
$
(22,741)
$
(37,171)
$
14,430
15,429
12,399
3,030
0.18
0.30
(0.12)
Savings
27,123
37,765
(10,642)
(19,220)
8,578
7,028
7,971
(943)
0.75
1.05
(0.30)
Time deposits
52,587
83,438
(30,851)
(20,755)
(10,096)
48,416
40,048
8,368
0.23
0.44
(0.21)
Total interest bearing
deposits
111,621
175,855
(64,234)
(77,146)
12,912
92
166
(74)
0.35
1.48
(1.13)
Short-term borrowings
318
2,457
(2,139)
(1,411)
(728)
Other medium and
1,185
1,178
7
4.49
4.81
(0.32)
long-term debt
53,107
56,626
(3,519)
(2,927)
(592)
Total interest bearing
49,693
41,392
8,301
0.33
0.57
(0.24)
liabilities
165,046
234,938
(69,892)
(81,484)
11,592
14,687
11,538
3,149
Demand deposits
3,709
3,475
234
Other sources of funds
$
68,089
$
56,405
$
11,684
0.24
%
0.42
%
(0.18)
%
Total source of funds
165,046
234,938
(69,892)
(81,484)
11,592
3.19
%
3.62
%
(0.43)
%
Net interest margin/ income
on a taxable equivalent basis
(Non-GAAP)
2,163,360
2,041,965
121,395
$
10,560
$
110,835
3.10
%
3.47
%
(0.37)
%
Net interest spread
Taxable equivalent
adjustment
205,770
185,353
20,418
2.88
%
3.29
%
(0.41)
%
Net interest margin/ income
non-taxable equivalent basis
(GAAP)
$
1,957,590
$
1,856,612
$
100,977
Note: The changes that are not due solely to volume or
rate are allocated to volume and rate based on the
proportion of the change in each category.
[1] Average outstanding securities balances are based
upon amortized cost excluding any unrealized gains or losses
on securities available-for-sale.
[2] Includes interest bearing demand deposits corresponding
to certain government entities in Puerto Rico.
18
Provision for Credit Losses - Loans Held-in-Portfolio
and Unfunded Commitments
For the year ended December 31, 2021, the Corporation recorded a release of $191.3 million for its reserve for
credit losses related
to
loans
held-in-portfolio
and
unfunded
commitments,
compared
with
a
provision
expense
of
$294.9
million
for
the
year
ended
December 31, 2020. The
reserve release related to
the loans-held-in-portfolio for
the year 2021 was
$183.3 million, compared to
a
provision
expense of
$282.3 million
for
the year
2020.
The
decrease reflects
the
improvements in
credit
quality,
changes in
the
macroeconomic outlook, and changes in qualitative reserves. The provision for unfunded commitments for the year 2021 reflected a
benefit of $8.0 million, compared to a provision expense
of $12.6 million for the same period of 2020.
The reserve
release related to
loans held-in-portfolio
for the
BPPR segment
was $129.0
million for
the year
ended December
31,
2021, compared
to a
provision expense
of $205.9
million for
the year
ended December
31, 2020,
a favorable
variance of
$334.9
million. The
reserve release
related to
loans held-in-portfolio
for the
Popular U.S.
segment was
$54.3 million
for the
year 2021,
a
favorable variance of $130.8 million, compared to a provision
expense of $76.5 million for the year 2020.
At
December
31,
2021,
the
total
allowance
for
credit
losses
for
loans
held-in-portfolio amounted
to
$695.4
million,
compared
to
$896.3
million
as
of
December
31,
2020.
The
ratio
of
the
allowance
for
credit
losses
to
loans
held-in-portfolio
was
2.38%
at
December
31,
2021, compared
to
3.05%
at
December 31,
2020. Refer
to
Note
9
to
the
Consolidated Financial
Statements, for
additional information on the Corporation’s
methodology to estimate its allowance
for credit losses (“ACL”). Refer
to the Credit Risk
section of this MD&A
for a detailed analysis
of net charge-offs, non-performing assets, the
allowance for credit losses and
selected
loan losses statistics.
As
discussed
in
Note
9
to
the
Consolidated Financial
Statements, within
the
process
to
estimate its
allowance for
credit
losses
(“ACL”),
the
Corporation
applies
probability
weights
to
the
outcomes
of
simulations
using
Moody’s
Analytics’
Baseline,
S3
(pessimistic) and S1 (optimistic) scenarios.
Provision for Credit Losses – Investment Securities
The
Corporation’s
provision
for
credit
losses
related
to
its
investment
securities
held-to-maturity
is
related
to
the
portfolio
of
obligations
from
the
Government
of
Puerto
Rico,
states
and
political
subdivisions.
For
the
year
ended
December
31,
2021,
the
Corporation recorded a reserve release of
$2.2 million, compared to a reserve
release of $2.4 million for the
year ended December
31, 2020. At December 31,
2021, the total allowance for credit
losses for this portfolio amounted to
$8.1 million, compared to $10.3
million as of December 31, 2020. Refer to Note
7 for additional information on the ACL for this
portfolio.
Non-Interest Income
For the
year ended December
31, 2021, non-interest
income increased by
$129.8 million, when
compared with the
previous year,
primarily driven by:
●
higher
service
charges
on
deposit
accounts
by
$14.9
million
principally
due
to
higher
fees
on
transactional
cash
management services
at BPPR
in part
due to
the business
disruptions and
the waiver
of fees
related to
the COVID-19
pandemic
during 2020;
●
higher other
service fees
by $53.4
million, principally
at the
BPPR segment,
due to
higher credit
and debit
card fees
by
$43.4
million
mainly
in
interchange
income
resulting
from
higher
transactional
volumes
in
part
due
to
the
business
disruptions
and
the
waiver
of
service
charges
and
late
fees
related
to
the
COVID-19
pandemic
during
2020;
higher
insurance
fees
by
$5.8
million,
from
which
$3.0
million
were
related
to
contingent
insurance
commissions
recognized
during the fourth quarter;
and higher trust fees by $3.1 million;
●
higher income
from mortgage
banking activities
by $39.7
million mainly
due to
the impact
of the
bulk loan
repurchases
from the
Corporation’s GNMA,
FNMA and
FHLMC loan servicing
portfolio during
2020 which
resulted in
an unfavorable
adjustment
of
$8.8
million
and
$10.5
million
on
the
valuation
of
mortgage
servicing
rights
(“MSRs”)
and
servicing
advances losses,
respectively,
and an
offsetting positive
adjustment in
servicing fees
of $3.4
million; lower
unfavorable
fair value
adjustments on
MSRs by
$23.0 million
due to
changes in
assumptions; and
higher realized
gains on
closed
derivatives positions by $11.9 million also contributed to the year over year income improvements; partially offset by lower
gains from securitization transactions by $8.9 million;
and
19
●
higher
other
operating
income
by
$26.7
million
principally
due
to
higher
net
earnings
from
the
combined
portfolio
of
investments under the
equity method by
$15.1 million, the
gain of $7.0
million recognized in
the third quarter
of 2021 by
BPPR as a result of the sale and partial leaseback of two corporate office
buildings, and higher daily auto rental revenues
by $3.9 million;
partially offset by:
●
lower net gain on
equity securities
by $6.1 million mainly
related to a $4.1
million gain on sale
of certain equity securities
at PB during the third quarter of 2020.
Operating Expenses
Table 4 provides a breakdown of operating expenses by major categories.
Table 4 - Operating Expenses
Years ended December
31,
(In thousands)
2021
2020
2019
Personnel costs:
Salaries
$
371,644
$
370,179
$
351,788
Commissions, incentives and other bonuses
113,095
78,582
97,764
Pension, postretirement and medical insurance
52,077
44,123
41,804
Other personnel costs, including payroll taxes
94,986
71,321
99,269
Total personnel
costs
631,802
564,205
590,625
Net occupancy expenses
102,226
119,345
96,339
Equipment expenses
92,097
88,932
84,215
Other taxes
56,783
54,454
51,653
Professional fees:
Collections, appraisals and other credit related fees
13,199
12,588
16,300
Programming, processing and other technology services
272,386
253,565
247,332
Legal fees, excluding collections
10,712
10,611
12,877
Other professional fees
114,568
117,358
107,902
Total professional
fees
410,865
394,122
384,411
Communications
25,234
23,496
23,450
Business promotion
72,981
57,608
75,372
FDIC deposit insurance
25,579
23,868
18,179
Other real estate owned (OREO) (income) expenses
(14,414)
(3,480)
4,298
Other operating expenses:
Credit and debit card processing, volume, interchange and
other expenses
45,088
45,108
38,059
Operational losses
38,391
26,331
21,414
All other
53,509
57,443
80,097
Total other operating
expenses
136,988
128,882
139,570
Amortization of intangibles
9,134
6,397
9,370
Total operating
expenses
$
1,549,275
$
1,457,829
$
1,477,482
Personnel costs to average assets
0.89
%
0.95
%
1.17
%
Operating expenses to average assets
2.18
2.45
2.93
Employees (full-time equivalent)
8,351
8,522
8,560
Average assets per employee (in millions)
$8.52
$6.99
$5.88
20
Operating expenses for the year ended December 31, 2021 increased by $91.4 million, when compared with the previous year. The
increase in operating expenses was driven primarily
by:
●
Higher personnel cost
by $67.6
million mainly
due to
higher incentives related
to the
profit-sharing plan by
$29.1 million
and
higher
commission
and
performance-based incentives
by
$34.5
million
due
to
improved
performance metrics
and
salary
increases,
higher
fringe
benefit
expense,
mainly
medical
insurance
by
$8.0
million,
partially
offset
by
higher
deferred salaries as a result of higher
loan originations during 2021;
●
Higher equipment expense by $3.2 million due
to higher amortization of software costs;
●
Higher
professional
fees
by
$16.7
million
primarily
due
to
higher
processing
service
fees
due
to
higher
volume
of
transactions;
●
Higher business promotions by $15.4 million due to
higher customer reward program expense in our credit card
business
and higher advertising expense;
●
Higher other
operating expenses by
$8.1 million mainly
due higher sundry
losses by $12.1
million, including $3.7
million
related to the termination of
a white label credit card
contract and higher legal reserves; and
higher impairment losses on
undeveloped properties by $3.2 million; partially offset by lower
pension plan cost by $10.0 million due to annual changes
in actuarial assumptions and higher gain on
sale of repossess auto units by $2.8 million; and
●
Higher amortization of intangibles by $2.7 million due
to a write-down on impairment of a trademark.
These variances were partially offset by:
●
Lower net
occupancy expense
by $17.1
million due
to
$19.0 million
in costs
related to
the termination
of
real property
leases associated
with PB’s
New York
branch realignment,
including the
impairment of
the right-of-use
assets recorded
during 2020; and
●
Lower OREO expense by $10.9 million mainly due
to higher gains on sale of mortgage properties.
Income Taxes
For the
year ended
December 31,
2021, the
Corporation recorded an
income tax
expense of
$309.0 million,
compared to
$111.9
million for the
same period of
2020.
The income tax
expense for the
year ended December
31, 2021 reflects
the impact of
higher
pre-tax income, resulting
primarily from a
lower provision for
credit losses partially
offset by higher
net exempt interest
income and
higher income from U.S. operations subject to a
lower statutory tax rate.
At December 31, 2021,
the Corporation had a
net deferred tax asset
amounting to $0.7 billion, net
of a valuation allowance
of $0.5
billion. The net deferred tax asset related to the U.S.
operations was $0.2 billion, net of a valuation
allowance of $0.4 billion.
Refer to
Note 35
to the
Consolidated Financial
Statements for
a reconciliation
of the
statutory income
tax rate
to the
effective tax
rate and additional information on the income tax
expense and deferred tax asset balances.
Fourth Quarter Results
The Corporation recognized net income of $206.1 million for the
quarter ended December 31, 2021, compared with a net income
of
$176.3 million for the same quarter of 2020.
Net interest income for the fourth quarter of
2021 amounted to $501.3 million, compared with $471.6 million for the
fourth quarter of
2020, an increase
of $29.7 million.
The increase in
net interest income
was mainly due
to increase in
average balance of
earning
assets, mainly due
to increase in deposits.
The net interest
margin declined by 26
basis points to
2.78% due to
declines in market
rates and
the earning
assets mix, which
were concentrated in
overnight Fed Funds,
U.S. Treasuries
and agency securities,
which
are all lower yielding assets.
21
The provision for credit losses was a
benefit of $33.1 million compared to a provision
expense of $21.2 million for the fourth quarter
of
2020.
The
benefit
recorded
in
the
fourth
quarter
of
2021
was
reflective
of
improvements
in
the
credit
metrics
and
the
macroeconomic outlook as well as releases in
qualitative reserves.
Non-interest income
amounted to
$164.7 million
for the
quarter ended
December 31,
2020, compared
with $144.8
million for
the
same quarter in 2020. The increase of $19.9 million was mainly due to other service fees, due to higher volume of transactions, and
higher income from mortgage banking activities.
Operating expenses
totaled $417.4
million for
the quarter
ended December
31, 2021,
compared with
$375.9 million
for the
same
quarter
in
the
previous
year.
The
increase
of
$41.5
million
is
mainly
related
to
higher
personnel
costs
due
to
higher
salaries,
incentives and commissions, higher
business promotion expenses, and
higher other operating expenses
due to the
reclassification
during
the
fourth
quarter
in
2020
of
$10.0
million
in
provision
for
unfunded
commitments
from
the
other
expenses
line
to
the
provision for credit losses caption, partially offset by lower net occupancy expenses related to the termination of real property leases
associated with PB’s New York branch rationalization, amounting to $19.0 million, including the impairment
of the right-of-use assets
and related costs recorded in the last quarter of
2020.
Income tax
expense amounted
to $75.6
million for
the quarter
ended December
31, 2021,
compared with
income tax
expense of
$43.0 million for the same quarter of 2020. The increase is mainly due to higher pre-tax income during the quarter ended December
31, 2021, compared to the quarter ended December 31,
2020.
REPORTABLE SEGMENT RESULTS
The Corporation’s
reportable segments
for managerial
reporting purposes
consist of
Banco Popular
de Puerto
Rico and
Popular
U.S. A Corporate group has been defined to
support the reportable segments.
For
a
description
of
the
Corporation’s
reportable
segments,
including
additional
financial
information
and
the
underlying
management accounting process, refer to Note 37
to the Consolidated Financial Statements.
The Corporate
group reported a
net income of
$13.4 million for
the year ended
December 31, 2021,
compared to a
net income of
$8.5 million for the previous year. The increase in the net income was mainly attributed to lower net interest expense
by $1.4 million,
mainly
due
to
lower
interest
expense
after
the
redemption
on
November
1,
2021
of
the
trust
preferred securities
issued
by
the
Popular Capital Trust I;
higher non-interest income by $10.1 million mainly due
to higher income from the portfolio
of equity method
investments, partially offset by higher operating expenses by $6.4 million mainly due
to higher amortization of intangibles due to the
impairment
of a trademark.
Highlights on the earnings results for the reportable
segments are discussed below:
Banco Popular de Puerto Rico
The Banco Popular
de Puerto Rico
reportable segment’s net
income amounted to $787.5
million for the
year ended December 31,
2021, compared with $499.0 million for
the year ended December 31, 2020.
The results for 2021 included
reserve for credit losses
release
of
$136.4 million.
The
results for
2020
were impacted
by the
COVID-19 pandemic
as
well as
the implementation
of
the
CECL accounting pronouncement
under which provision
for credit
losses of $211.0
million was recorded
throughout the year.
The
principal factors that contributed to the variance in the
financial results included the following:
●
Higher net interest income by $81.0 million due to higher income from investment
securities by $35.2 million mainly due to
higher average balances, higher income
from loans by $15.3 million,
mainly from interest and fees
from commercial PPP
loans
and
higher volume
of
mortgage loans
and
leases,
partially offset
by
lower income
from
consumer loans,
mainly
credit cards;
and lower
interest expense
from deposits
by $29.2
million.
The BPPR
segment’s net
interest margin
was
2.86% for
2021 compared
with 3.40%
for the
same period
in 2020.
The decrease
was mainly
due to
the earning
asset
composition;
22
●
A reversal of $136.4 million
of the reserve for credit
losses, due to improved credit metrics
and improved macroeconomic
outlook, compared to a
provision expense of $211.0
million in 2020, which
reflected the implementation of CECL and
the
impact of the COVID-19 pandemic in the macroeconomic
outlook;
●
Higher non-interest income by $119.4 million mainly due to:
●
Higher service charges on deposit accounts by
$14.8 million due to the impact in
2020 of lower transactions and the
temporary waiver of fees in response to the COVID-19
pandemic;
●
Higher other service fees by
$51.7 million due to
higher debit and credit card
transactions and the temporary waiver
of fees in response to the COVID-19 pandemic in 2020
and higher contingent insurance revenues in 2021;
●
Higher mortgage
banking
activities by
$39.9 million
due
to
lower unfavorable
fair value
adjustments
on
mortgage
servicing
rights,
and
the
negative
net
impact
that
resulted
from
the
from
the
bulk
repurchase
of
loans
from
the
Corporation’s GNMA, FNMA and FHLMC loan servicing
portfolio in 2020; and
●
Higher other operating income by $10.7 million due to higher income from the portfolio
of equity method investments,
the gain from the sale of two corporate office buildings in 2021
and higher income from daily auto rental
activities.
●
Higher operating expenses by $112.0 million, mainly due to:
●
Higher personnel costs by $43.6 million mainly due
to higher salaries, incentives and profit-sharing plan
expense;
●
Higher professional
fees by $20.3 million mainly due to processing service
fees due to higher volume of transactions;
●
Higher business
promotions by
$13.6 million
mainly due
to higher
customer reward
program expense
in our
credit
card business and higher advertising expense;
●
Higher other
operating expenses
by $34.3
million due
to higher
sundry losses,
including $3.7
million related
to the
termination of
a white
label credit
card contract,
impairment losses
on long-lived
assets of
$5.3 million
recorded in
2021, higher legal reserves and higher corporate
expense allocations;
Partially offset by:
●
Lower OREO expenses by $11.1 million mainly due to higher gains
on sales of residential properties.
●
Higher income tax expense by $147.3 million mainly
due to higher income before tax.
Popular U.S.
For the
year ended
December 31, 2021, the
reportable segment of
Popular U.S.
reported net income
of $134.1
million, compared
with a
net loss
of $0.7
million for
the year
ended December
31, 2020.
The principal
factors that
contributed to
the variance
in the
financial results included the following:
●
Higher net
interest
income
by
$18.6 million
mainly
due to
lower
interest
expense on
deposits by
$36.5 million,
due to
lower
rates
and
lower
average
balance
of
certificates
of
deposits,
partially
offset
by
lower
income
from
loans
by
$9.8
million mainly from
consumer and construction loans,
and lower income
from investment securities by
$10.2 million. The
Popular U.S. reportable
segment’s net
interest margin was
3.39% for 2021
compared with 3.21%
for the same
period in
2020;
●
A
release of
$56.9 million
of the
reserve for
credit losses,
due to
improvements credit
metrics
and the
macroeconomic
outlook, compared
to a
provision expense
of $81.5
million in
2020, mainly
due to
the implementation
of CECL
and the
effects of the pandemic;
●
Lower operating expenses by $26.7 million mainly
due to:
23
●
Lower occupancy expenses
by $22.7 million
mainly due to
the impact of
the NY branch
rationalization in 2020
that resulted in $19.0 million in lease termination
costs, including the impairment of the right of use
assets;
and
●
Lower professional fees by $5.1 million mainly
due intersegment allocated services;
Partially offset by:
●
Higher personnel costs by $6.9 million due to higher
salaries, incentives and profit-sharing plan expenses.
●
Income taxes unfavorable variance of $49.1 million
mainly due to higher income before tax.
STATEMENT
OF FINANCIAL CONDITION ANALYSIS
Assets
The Corporation’s total
assets were $75.1 billion
at December 31, 2021,
compared to $65.9 billion
at December 31, 2020.
Refer to
the Corporation’s
Consolidated Statements
of Financial
Condition at
December 31,
2021 and
2020 included
in this
2021 Annual
Report
on
Form
10-K.
Also,
refer
to
the
Statistical
Summary
2021-2020
in
this
MD&A
for
Condensed
Statements
of
Financial
Condition.
Money market investments and debt securities available-for-sale
Money
market
investments
and
debt
securities
available-for-sale
increased
by
$5.9
billion
and
$3.4
billion,
respectively,
at
December 31, 2021. This was largely driven by the additional funds
available to invest resulting from the increase in deposits across
various sectors, partially
offset by
paydowns of agency
mortgage-backed securities. Refer
to Note
6 to
the Consolidated Financial
Statements for additional information with respect
to the Corporation’s debt securities available-for-sale.
Loans
Refer to Tab
le 5 for a
breakdown of the Corporation’s
loan portfolio. Also, refer
to Note 8 in
the Consolidated Financial Statements
for detailed information about the Corporation’s loan portfolio
composition and loan purchases and sales.
Loans held-in-portfolio
decreased by
$0.1 billion
to $29.2
billion at
December 31,
2021, mainly
due to
a decrease
in commercial
loans at
BPPR of
$0.6 billion
principally related
to
the repayment
of
PPP loans,
a decrease
in mortgage
loans
at BPPR
of $0.5
billion mainly
due to
paydowns and
a decrease
in construction
loans of
$0.2 billion,
partially offset
by an
increase in
commercial
loans at PB of $0.7
billion principally in the healthcare industry from which
$0.1 billion was related to the
acquisition by PEF of K2’s
lease financing business and growth in auto loans
and leases at BPPR by $0.5 billion.
The allowance for credit losses for
the loan portfolio decreased by $0.2
billion due to improvements in credit quality,
changes in the
macroeconomic
outlook,
and
changes
in
qualitative
reserves.
Refer
to
the
Credit
Quality
section
of
the
MD&A
for
additional
information on the Allowance for credit losses for
the loan portfolio.
24
Table 5 - Loans Ending Balances
At December 31,
(In thousands)
2021
2020
Loans held-in-portfolio:
Commercial
$
13,732,701
$
13,614,310
Construction
716,220
926,208
Leasing
1,381,319
1,197,661
Mortgage
7,427,196
7,890,680
Auto
3,412,187
3,132,228
Consumer
2,570,934
2,624,109
Total loans held-in
-portfolio
$
29,240,557
$
29,385,196
Loans held-for-sale:
Commercial
$
-
$
2,738
Mortgage
59,168
96,717
Total loans held-for-sale
$
59,168
$
99,455
Total loans
$
29,299,725
$
29,484,651
Other assets
Other assets
amounted to
$1.6 billion
at December
31, 2021,
a decrease
of $0.1
billion when
compared to
December 31,
2020.
Refer
to
Note
14
for
a
breakdown
of
the
principal
categories
that
comprise
the
caption
of
“Other
Assets”
in
the
Consolidated
Statements of Financial Condition at December
31, 2021 and 2020.
Liabilities
The Corporation’s
total liabilities were
$69.1 billion
at December
31, 2021,
an increase
of $9.2
billion compared to
$59.9 billion
at
December 31, 2020, mainly due to increases in deposits as discussed
below. Refer to the Corporation’s Consolidated Statements of
Financial Condition included in this Form 10-K.
Deposits and Borrowings
The composition of the Corporation’s financing to total assets
at December 31, 2021 and 2020 is included
in Table 6.
Table 6 - Financing to Total
Assets
December 31,
December 31,
% increase (decrease)
% of total assets
(In millions)
2021
2020
from 2020 to 2021
2021
2020
Non-interest bearing deposits
$
15,684
$
13,129
19.5
%
20.9
%
19.9
%
Interest-bearing core deposits
47,954
38,599
24.2
63.9
58.5
Other interest-bearing deposits
3,367
5,138
(34.5)
4.5
7.8
Repurchase agreements
92
121
(24.0)
0.1
0.2
Other short-term borrowings
75
-
N.M.
0.1
-
Notes payable
989
1,225
(19.3)
1.3
1.9
Other liabilities
968
1,685
(42.6)
1.3
2.6
Stockholders’ equity
5,969
6,029
(1.0)
7.9
9.1
Deposits
The
Corporation’s
deposits
totaled
$67.0
billion
at
December
31,
2021,
compared
to
$56.9
billion
at
December
31,
2020.The
deposits increase of
$10.1 billion was
mainly due
to higher Puerto
Rico public sector
deposits by $5.2
billion and higher
retail and
commercial demand
deposits by
$3.9 billion
at BPPR.
Public sector
deposit balances
amounted to
$20.3 billion
at December
31,
2021. A
significant portion
of Puerto
Rico public
sector deposits
are expected
to be
used by
Puerto Rico
pursuant to
the Plan
of
Adjustment for Puerto Rico confirmed by the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”)
Title III
25
Court,
which
is
expected
to
become
effective
on
or
about
March
15,
2022.
However,
the
receipt
by
the
P.R.
Government
of
additional COVID-19 and
hurricane recovery-related Federal assistance
and seasonal tax
collections could increase
public deposit
balances at BPPR
in the near term.
The rate at
which public deposit balances
will decline is
uncertain and difficult
to predict.
The
amount and
timing of
any such
reduction is
likely to
be impacted
by,
for
example, the
implementation of
the Plan
of Adjustment
under
Title
III
of
PROMESA
and
the
speed
at
which
the
COVID-19
federal
assistance
is
distributed.
Refer
to
Table
7
for
a
breakdown of the Corporation’s deposits at December 31,
2021 and 2020.
Table 7 - Deposits Ending Balances
(In thousands)
2021
2020
Demand deposits
$
25,889,732
$
22,532,729
Savings, NOW and money market deposits (non-brokered)
33,674,134
26,390,565
Savings, NOW and money market deposits (brokered)
729,073
635,198
Time deposits (non-brokered)
6,685,938
7,130,749
Time deposits (brokered CDs)
26,211
177,099
Total deposits
$
67,005,088
$
56,866,340
[1] Includes interest and non-interest bearing demand deposits.
Borrowings
The Corporation’s
borrowings amounted
to $1.2
billion at
December 31,
2021, compared
to $1.3
billion at
December 31,
2020.
Refer to
Note 17
to the
Consolidated Financial Statements
for detailed
information on
the Corporation’s
borrowings. Also,
refer to
the Liquidity section in this MD&A for additional information
on the Corporation’s funding sources.
Other liabilities
The
Corporation’s
other
liabilities amounted
to
$1.0
billion at
December 31,
2021,
a
decrease
of
$0.7
billion
when
compared to
December 31, 2020, mainly due to the settlement of
purchases of debt securities.
Stockholders’ Equity
Stockholders’ equity totaled $6.0 billion at December 31, 2021, a decrease of $59.3 million when compared to
December 31, 2020,
principally due to higher accumulated unrealized losses on
debt securities available-for-sale by $557.0 million and the impact
of the
$350.0 million
accelerated share
repurchase transaction,
offset
by net
income for
the year
ended December
31, 2021
of $934.9
million, less declared dividends of $142.3 million
on common stock and $1.4 million in
dividends on preferred stock and a
reduction
in the
adjustment of
pension and
postretirement benefit
plans of
$36.1 million.
Refer to
the Consolidated
Statements of
Financial
Condition,
Comprehensive
Income
and
of
Changes
in
Stockholders’
Equity
for
information
on
the
composition
of
stockholders’
equity. Also, refer to Note 22 for a detail
of accumulated other comprehensive loss (income), an integral component of stockholders’
equity.
REGULATORY CAPITAL
The Corporation and its bank subsidiaries are subject to capital adequacy
standards established by the Federal Reserve Board. The
risk-based capital standards
applicable to Popular,
Inc. and the
Banks, BPPR
and PB, are
based on the
final capital framework
of
Basel III. The
capital rules of
Basel III include
a “Common Equity Tier
1” (“CET1”) capital
measure and specifies
that Tier
1 capital
consist of
CET1 and
“Additional Tier
1 Capital”
instruments meeting
specified requirements.
Note 21
to the
consolidated financial
statements presents further
information on the
Corporation’s regulatory capital
requirements, including the
regulatory capital ratios
of its depository institutions, BPPR and PB.
An institution
is considered “well-capitalized”
if it
maintains a total
capital ratio
of 10%,
a Tier
1 capital ratio
of 8%,
a CET1 capital
ratio
of
6.5%
and
a
leverage
ratio
of
5%.
The
Corporation’s
ratios
presented
in
Table
8
show
that
the
Corporation
was
“well
26
capitalized” for
regulatory purposes,
the highest
classification, under
Basel III
for years
2021 and
2020. BPPR
and PB
were also
well-capitalized for all years presented.
The Basel III Capital Rules also require an additional 2.5% “capital conservation buffer”, composed entirely of CET1, on top of these
minimum risk-weighted asset ratios, which excludes the leverage ratio. The capital conservation buffer is
designed to absorb losses
during periods of
economic stress. Banking
institutions with a
ratio of CET1
to risk-weighted assets
above the minimum
but below
the capital conservation buffer will face constraints on dividends, equity repurchases, and compensation
based on the amount of the
shortfall. Popular,
BPPR and
PB are
required to
maintain this
additional capital
conservation buffer
of 2.5%
of CET1,
resulting in
minimum ratios
of (i) CET1
to risk-weighted
assets of
at least
7%, (ii) Tier
1 capital
to risk-weighted
assets of
at least
8.5%, and
(iii) Total capital to risk-weighted assets of at least 10.5%.
Table 8 presents the Corporation’s capital adequacy
information for the years 2021 and 2020.
Table 8 - Capital Adequacy
Data
At December 31,
(Dollars in thousands)
2021
2020
Risk-based capital:
Common Equity Tier 1 capital
$
5,476,031
$
4,992,096
Additional Tier 1 Capital
22,143
22,143
Tier 1 capital
$
5,498,174
$
5,014,239
Supplementary (Tier 2) capital
585,931
759,680
Total
capital
$
6,084,105
$
5,773,919
Total
risk-weighted assets
$
31,441,224
$
30,702,091
Adjusted average quarterly assets
$
74,238,367
$
64,305,022
Ratios:
Common Equity Tier 1 capital
17.42
%
16.26
%
Tier 1 capital
17.49
16.33
Total capital
19.35
18.81
Leverage ratio
7.41
7.80
Average equity to assets
8.12
9.10
Average tangible equity to assets
7.20
8.02
Average equity to loans
19.87
19.09
On April 1, 2020, the Corporation adopted the final rule issued by the federal banking regulatory agencies pursuant to the Economic
Growth and
Regulatory Paperwork
Reduction Act
of 1996
that simplified
several requirements
in the
agencies’ regulatory
capital
rules. These
rules simplified
the regulatory
capital requirement
for mortgage
servicing assets
(MSAs), deferred
tax assets
arising
from
temporary
differences
and
investments in
the
capital
of
unconsolidated financial
institutions
by
raising
the
CET1
deduction
threshold
from
10%
to
25%.
The
15%
CET1
deduction
threshold
which
applies
to
the
aggregate
amount
of
such
items
was
eliminated. The
rule also
requires, among
other changes,
increasing from
100% to
250% the
risk weight
to MSAs
and temporary
difference deferred
tax asset
not deducted
from capital.
For investments
in the
capital of
unconsolidated financial
institutions, the
risk weight would be based on the exposure category
of the investment.
The increase in the
CET1 capital ratio, Tier
1 capital ratio and,
total capital ratio as
of December 31, 2021, compared to
December
31, 2020,
was mostly
due to
the year
earnings,
partially offset
by the
accelerated share
repurchase agreement
to repurchase
an
aggregate of
$350 million
of Popular’s
common stock
and the
slight increase
in
risk weighted
assets.
The
decrease in
leverage
capital
ratio
was
mainly
due
to
the
increase
in
average
total
assets,
driven
by
investments
in
zero
or
low-risk
weighted
debt
securities and overnight Fed Funds that therefore did
not have a significant impact on the risk-weighted
assets.
Pursuant
to
the
adoption
of
CECL
on
January
1,
2020,
the
Corporation elected
to
use
the
five-year
transition
period
option
as
provided in the final
interim regulatory capital rules effective
March 31,2020. The five-year transition
period provision delays for two
years the
estimated impact
of
CECL on
regulatory capital,
followed by
a three-year
transition period
to
phase out
the aggregate
amount of the capital benefits provided during
the initial two-year delay.
27
On April 9,
2020, federal banking regulators
issued an interim final
rule to modify
the Basel III
regulatory capital rules applicable
to
banking organizations to allow
those organizations participating in
the Paycheck Protection Program
(“PPP”) established under the
Coronavirus Aid, Relief
and Economic Security
Act (the
“CARES Act”) to
neutralize the regulatory
capital effects
of participating in
the
program.
Specifically,
the
agencies
have
clarified
that
banking
organizations,
including
the
Corporation
and
its
Bank
subsidiaries, are permitted to
assign a zero
percent risk weight to
PPP loans for
purposes of determining risk-weighted
assets and
risk-based
capital
ratios.
Additionally,
in
order
to
facilitate
use
of
the
Paycheck
Protection
Program
Liquidity
Facility
(the
“PPPL
Facility”), which provides Federal Reserve Bank loans to eligible financial institutions such as the Corporation’s Bank subsidiaries to
fund PPP loans, the
agencies further clarified that,
for purposes of determining
leverage ratios, a banking
organization is permitted
to exclude from total average assets PPP loans that have been pledged as collateral for a
PPPL Facility. As of December 31,
2021,
the Corporation has $353 million in PPP loans
and no loans were pledged as collateral for
PPPL Facilities.
Table 9 reconciles the Corporation’s total common stockholders’ equity to common equity Tier 1 capital.
Table 9 - Reconciliation Common
Equity Tier 1 Capital
At December 31,
(In thousands)
2021
2020
Common stockholders’ equity
$
6,116,756
$
6,224,942
AOCI related adjustments due to opt-out election
257,762
(261,245)
Goodwill, net of associated deferred tax liability
(DTL)
(591,703)
(591,931)
Intangible assets, net of associated DTLs
(16,219)
(22,466)
Deferred tax assets and other deductions
(290,565)
(357,204)
Common equity tier 1 capital
$
5,476,031
$
4,992,096
Common equity tier 1 capital to risk-weighted assets
17.42
%
16.26
%
Non-GAAP financial measures
The tangible
common equity
ratio and
tangible book
value per
common share,
which are
presented in
the table
that follows,
are
non-GAAP measures.
Management and
many stock
analysts use
the tangible
common equity
ratio and
tangible book
value per
common share in conjunction with more traditional bank
capital ratios to compare the capital adequacy of banking
organizations with
significant amounts
of goodwill
or other
intangible assets,
typically stemming
from the
use of
the purchase
accounting method
of
accounting
for
mergers
and
acquisitions.
Neither
tangible
common
equity
nor
tangible
assets
or
related
measures
should
be
considered in
isolation or
as a
substitute for stockholders’
equity,
total assets
or any
other measure calculated
in accordance
with
generally accepted accounting principles in the United
States of America (“GAAP”). Moreover,
the manner in which the
Corporation
calculates
its
tangible
common
equity,
tangible
assets
and
any
other related
measures may
differ
from
that
of
other
companies
reporting
measures with similar names.
Table
10
provides
a
reconciliation of
total
stockholders’
equity
to
tangible
common
equity
and
total
assets
to
tangible
assets
at
December 31, 2021 and 2020.
28
Table 10 - Reconciliation
of Tangible Common Equity
and Tangible Assets
At December 31,
(In thousands, except share or per share information)
2021
2020
Total stockholders’
equity
$
5,969,397
$
6,028,687
Less: Preferred stock
(22,143)
(22,143)
Less: Goodwill
(720,293)
(671,122)
Less: Other intangibles
(16,219)
(22,466)
Total tangible common
equity
$
5,210,742
$
5,312,956
Total assets
$
75,097,899
$
65,926,000
Less: Goodwill
(720,293)
(671,122)
Less: Other intangibles
(16,219)
(22,466)
Total tangible assets
$
74,361,387
$
65,232,412
Tangible common
equity to tangible assets
7.01
%
8.14
%
Common shares outstanding at end of period
79,851,169
84,244,235
Tangible book value
per common share
$
65.26
$
63.07
Year-to-date average
Total stockholders’
equity [1]
$
5,777,652
$
5,419,938
Less: Preferred Stock
(22,143)
(26,277)
Less: Goodwill
(679,959)
(671,121)
Less: Other intangibles
(20,861)
(25,154)
Total tangible common
equity
$
5,054,689
$
4,697,386
Average return on tangible common equity
18.47
%
10.75
%
[1] Average balances exclude unrealized gains or losses
on debt securities available-for-sale.
RISK MANAGEMENT
Market / Interest Rate Risk
The financial results and capital levels of the
Corporation are constantly exposed to market, interest
rate and liquidity risks.
Market risk
refers to the
risk of a
reduction in the
Corporation’s capital due
to changes in
the market valuation
of its assets
and/or
liabilities.
Most of
the assets
subject to
market valuation
risk are
debt securities
classified as
available-for-sale. Refer
to Notes
6 and
7 for
further information on the debt securities available-for-sale and held-to-maturity portfolios. Debt securities classified as available-for-
sale
amounted to
$25.0
billion
as of
December 31,
2021. Other
assets subject
to
market
risk
include loans
held-for-sale,
which
amounted to $59
million, mortgage servicing
rights (“MSRs”) which
amounted to $122
million and securities
classified as “trading”,
which amounted to $30 million, as of December 31,
2021.
Interest Rate Risk (“IRR”)
The Corporation’s net interest income is subject
to various categories of interest rate
risk, including repricing, basis, yield curve and
option risks.
In managing
interest rate
risk, management may
alter the
mix of
floating and
fixed rate
assets and
liabilities, change
pricing
schedules,
adjust
maturities
through
sales
and
purchases
of
investment
securities,
and
enter
into
derivative
contracts,
among other alternatives.
Interest
rate
risk
management
is
an
active
process
that
encompasses
monitoring
loan
and
deposit
flows
complemented
by
investment and funding
activities. Effective management of
interest rate risk begins
with understanding the dynamic
characteristics
of assets and
liabilities and determining the
appropriate rate risk position
given line of
business forecasts, management objectives,
market expectations and policy constraints.
29
Management utilizes various tools to assess IRR, including Net Interest
Income (“NII”) simulation modeling, static gap analysis, and
Economic Value
of Equity
(“EVE”). The
three methodologies
complement each
other and
are used
jointly in
the evaluation
of the
Corporation’s IRR. NII
simulation modeling is
prepared for a
five-year period, which
in conjunction with
the EVE analysis,
provides
management a better view of long-term IRR.
Net interest
income simulation analysis
performed by legal
entity and on
a consolidated basis
is a
tool used
by the
Corporation in
estimating the
potential change
in net
interest income
resulting from
hypothetical changes
in interest
rates. Sensitivity
analysis is
calculated using a simulation model which incorporates actual
balance sheet figures detailed by maturity
and interest yields or costs.
Management assesses
interest rate
risk by
comparing various
NII simulations
under different
interest rate
scenarios that
differ in
direction of interest
rate changes, the
degree of change
and the projected
shape of the
yield curve. For
example, the types
of rate
scenarios processed during the
quarter include flat
rates, implied forwards, and
parallel and non-parallel rate shocks.
Management
also performs analyses to isolate and measure basis
and prepayment risk exposures.
The asset
and liability
management group
performs validation
procedures on
various assumptions
used as
part of
the simulation
analyses as well as validations
of results on a
monthly basis. In addition, the
model and processes used to
assess IRR are subject
to independent validations according to the guidelines
established in the Model Governance and Validation policy.
The Corporation processes NII
simulations under interest rate
scenarios in which the
yield curve is assumed
to rise and
decline by
the
same
amount
(parallel
shifts).
The
rate
scenarios
considered
in
these
market
risk
simulations
reflect
instantaneous
parallel
changes
of
-100,
-200,
+100,
+200
and
+400
basis
points
during the
succeeding
twelve-month period.
Simulation
analyses
are
based on many assumptions, including relative levels of market interest rates across all yield curve points
and indexes, interest rate
spreads, loan prepayments
and deposit elasticity.
Thus, they should
not be
relied upon as
indicative of actual
results. Further,
the
estimates do
not contemplate
actions that
management could
take to
respond to
changes in
interest rates.
By their
nature, these
forward-looking computations
are
only
estimates and
may
be
different
from
what may
actually occur
in
the
future. The
following
table presents the
results of the
simulations at December
31, 2021 and
December 31, 2020,
assuming a static
balance sheet and
parallel changes over flat spot rates over a one-year
time horizon:
Table 11
- Net Interest Income Sensitivity (One Year
Projection)
December 31, 2021
December 31, 2020
(Dollars in thousands)
Amount Change
Percent Change
Amount Change
Percent Change
Change in interest rate
+400 basis points
$
257,223
13.21
%
$
167,474
9.19
%
+200 basis points
197,354
10.14
81,690
4.49
+100 basis points
166,920
8.57
39,361
2.16
-100 basis points
(78,408)
(4.03)
(53,952)
(2.96)
-200 basis points
(120,661)
(6.20)
(71,517)
(3.93)
As of
December 31,
2021, NII
simulations show
the Corporation
maintains an
asset sensitive
position and
is expected
to benefit
from
an
overall rising
rate
environment. The
increases in
sensitivity
for
the
period are
primarily driven
by
the
significant
deposit
increases
seen
in
2021,
which
have
resulted
in
a
higher
level
of
short-term
investments
and
cash
reserves
maintained
at
the
Federal Reserve. These assets reprice immediately under the NII simulations, thus improving the NII benefit in rising rate scenarios.
The declining rate scenarios show a
smaller and asymmetric impact in sensitivity
as rates continue to be close
to their lower bound
and Popular does not allow rates to turn negative
in its IRR simulations.
The Corporation’s
loan and
investment portfolios
are subject
to
prepayment risk,
which results
from the
ability
of a
third-party to
repay debt
obligations prior
to maturity.
Prepayment risk
also could
have a
significant impact
on the
duration of
mortgage-backed
securities
and
collateralized
mortgage
obligations
since
prepayments
could
shorten
(or
lower
prepayments
could
extend)
the
weighted average life of these portfolios.
30
Table 12 - Interest Rate Sensitivity
At December 31, 2021
By repricing dates
(Dollars in thousands)
0-30 days
Within 31 -
90 days
After three
months but
within six
months
After six
months but
within nine
months
After nine
months but
within one
year
After one
year but
within two
years
After two
years
Non-interest
bearing
funds
Total
Assets:
Money market investments
$
17,536,719
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
17,536,719
Investment and trading securities
301,103
436,980
664,755
678,066
712,179
3,936,869
17,980,634
548,736
25,259,322
Loans
4,907,214
2,492,007
1,412,901
1,359,602
1,307,655
4,272,336
13,548,010
-
29,299,725
Other assets
-
-
-
-
-
-
-
3,002,133
3,002,133
Total
22,745,036
2,928,987
2,077,656
2,037,668
2,019,834
8,209,205
31,528,644
3,550,869
75,097,899
Liabilities and stockholders' equity:
Savings, NOW and money market and
other interest bearing demand deposits
23,065,038
809,349
1,137,611
1,053,198
976,622
3,260,426
14,306,213
-
44,608,457
Certificates of deposit
1,940,456
496,482
642,437
647,957
357,661
971,300
1,655,856
-
6,712,149
Federal funds purchased and assets
31,550
30,295
20,102
9,656
-
-
-
-
91,603
sold under agreements to repurchase
75,000
-
-
-
-
-
-
-
75,000
Notes payable
1,000
-
100,000
-
2,148
341,103
544,312
-
988,563
Non-interest bearing deposits
-
-
-
-
-
-
-
15,684,482
15,684,482
Other non-interest bearing liabilities
-
-
-
-
-
-
-
968,248
968,248
Stockholders' equity
-
-
-
-
-
-
-
5,969,397
5,969,397
Total
$
25,113,044
$
1,336,126
$
1,900,150
$
1,710,811
$
1,336,431
$
4,572,829
$
16,506,381
$
22,622,127
$
75,097,899
Interest rate sensitive gap
(2,368,008)
1,592,861
177,506
326,857
683,403
3,636,376
15,022,263
(19,071,258)
-
Cumulative interest rate sensitive gap
(2,368,008)
(775,147)
(597,641)
(270,784)
412,619
4,048,995
19,071,258
-
-
Cumulative interest rate sensitive gap
to earning assets
(3.31)
%
(1.08)
%
(0.84)
%
(0.38)
%
0.58
%
5.66
%
26.66
%
-
-
Table 13, which presents the maturity distribution of earning assets, takes into consideration
prepayment assumptions.
Table 13 - Maturity Distribution
of Earning Assets
As of December 31, 2021
Maturities
After one year
After five years
through five years
through fifteen years
After fifteen years
One year
Fixed
Variable
Fixed
Variable
Fixed
Variable
(In thousands)
or less
interest rates
interest rates
interest rates
interest rates
interest rates
interest rates
Total
Money market securities
$
17,536,719
$
-
$
-
$
-
$
-
$
-
$
-
$
17,536,719
Investment and trading
securities
2,714,995
14,688,701
14,430
7,164,229
4,952
482,039
-
25,069,345
Loans:
Commercial
5,067,977
4,223,468
2,631,141
910,162
735,828
80,071
84,054
13,732,701
Construction
497,519
32,857
149,412
4,693
31,739
-
-
716,220
Leasing
408,552
959,267
-
13,500
-
-
-
1,381,319
Consumer
1,640,359
3,292,532
268,033
182,496
527,827
71,873
-
5,983,121
Mortgage
787,698
2,623,120
121,010
3,381,618
26,056
546,863
-
7,486,364
Subtotal loans
8,402,106
11,131,244
3,169,597
4,492,468
1,321,449
698,807
84,054
29,299,725
Total earning assets
$
28,653,820
$
25,819,945
$
3,184,027
$
11,656,696
$
1,326,401
$
1,180,847
$
84,054
$
71,905,789
Note: Equity securities available-for-sale and other investment
securities, including Federal Reserve Bank stock and
Federal Home Loan Bank stock
held by the Corporation, are not included in this table.
Loans held-for-sale have been allocated according to the
expected sale date.
31
Trading
The Corporation
engages in
trading activities
in the
ordinary course
of business
at its
subsidiaries, BPPR
and Popular
Securities.
Popular Securities’
trading activities
consist primarily
of market-making
activities to
meet expected
customers’ needs
related to
its
retail brokerage business,
and purchases and sales of U.S. Government and
government sponsored securities with the objective of
realizing gains
from expected
short-term price
movements. BPPR’s
trading activities consist
primarily of
holding U.S.
Government
sponsored
mortgage-backed securities
classified
as
“trading” and
hedging
the
related
market
risk
with
“TBA”
(to-be-announced)
market
transactions.
The
objective
is
to
derive
spread
income
from
the
portfolio
and
not
to
benefit
from
short-term
market
movements. In
addition, BPPR
uses forward
contracts or
TBAs to
hedge its
securitization pipeline.
Risks related
to variations
in
interest rates
and market volatility
are hedged
with TBAs
that have
characteristics similar to
that of
the forecasted security
and its
conversion timeline.
At December 31, 2021,
the Corporation held trading securities
with a fair value
of $30 million, representing approximately 0.04%
of
the Corporation’s total assets,
compared with $37 million and 0.1%, respectively,
at December 31, 2020.
As shown in Table
14, the
trading portfolio
consists principally of
mortgage-backed securities which
at December 31,
2021 were investment
grade securities.
As
of
December
31,
2021
and
December
31,
2020,
the
trading
portfolio
also
included
$0.1
million
in
Puerto
Rico
government
obligations.
Trading instruments are recognized at fair value, with changes resulting from fluctuations in market prices, interest rates
or exchange rates reported in
current period earnings. The Corporation recognized
a net trading account loss
of $389 thousand for
the year ended December 31, 2021 and a net
trading account gain of $1 million for the year
ended December 31, 2020.
Table 14 - Trading
Portfolio
December 31, 2021
December 31, 2020
(Dollars in thousands)
Amount
Weighted
Average Yield
[1]
Amount
Weighted
Average Yield
[1]
Mortgage-backed securities
$
22,559
5.12
%
$
24,338
5.19
%
U.S. Treasury securities
6,530
0.03
11,506
0.04
Collateralized mortgage obligations
257
5.61
346
5.65
Puerto Rico government obligations
85
0.47
103
0.48
Interest-only strips
280
12.00
381
12.00
Total
$
29,711
4.06
%
$
36,674
3.64
%
[1] Not on a taxable equivalent basis.
The Corporation’s trading activities are
limited by internal policies. For each
of the two subsidiaries, the
market risk assumed under
trading
activities
is
measured
by
the
5-day
net
value-at-risk
(“VAR”),
with
a
confidence
level
of
99%.
The
VAR
measures
the
maximum estimated loss that may occur over a
5-day holding period, given a 99% probability.
The Corporation’s
trading portfolio
had a
5-day VAR
of approximately
$0.3 million
for the
last week
in December
31, 2021.
There
are numerous
assumptions and
estimates associated
with VAR
modeling, and
actual results
could differ
from these
assumptions
and estimates.
Backtesting is performed
to compare
actual results against
maximum estimated losses,
in order
to evaluate
model
and assumptions accuracy.
In the opinion of management, the size and composition
of the trading portfolio does not represent
a significant source of market risk
for the Corporation.
Derivatives
Derivatives may
be
used by
the Corporation
as
part
of
its
overall interest
rate risk
management strategy
to
minimize significant
unexpected
fluctuations
in
earnings
and
cash
flows
that
are
caused
by
interest
rate
volatility.
Derivative
instruments
that
the
Corporation may use
include, among others,
interest rate caps,
indexed options, and
forward contracts. The
Corporation does not
use highly leveraged derivative instruments in its interest rate risk management strategy. Credit risk embedded in these transactions
32
is
reduced
by
requiring
appropriate
collateral
from
counterparties
and
entering
into
netting
agreements
whenever
possible.
All
outstanding derivatives are
recognized in the
Corporation’s Consolidated Statements
of Condition at
their fair
value. Refer
to Note
26 for further information on the Corporation’s involvement
in derivative instruments and hedging activities.
Cash Flow Hedges
The
Corporation
manages
the
variability
of
cash
payments
due
to
interest
rate
fluctuations
by
the
effective
use
of
derivatives
designated
as
cash
flow
hedges
and
that
are
linked
to
specified
hedged
assets
and
liabilities.
The
cash
flow
hedges
relate
to
forward
contracts
or
TBA
mortgage-backed securities
that
are
sold
and
bought
for
future
settlement to
hedge
mortgage-backed
securities
and
loans
prior
to
securitization.
The
seller
agrees
to
deliver
on
a
specified
future
date
a
specified
instrument
at
a
specified price or
yield. These securities
are hedging a
forecasted transaction and
are designated for
cash flow hedge
accounting.
The notional amount
of derivatives designated as
cash flow hedges at
December 31, 2021 amounted
to $ 88
million (2020 - $
189
million). Refer to Note 26 for additional quantitative
information on these derivative contracts.
Fair Value Hedges
The
Corporation did
not
have
any
derivatives designated
as
fair value
hedges
during the
years
ended December
31,
2021
and
2020.
Trading and Non-Hedging Derivative Activities
The Corporation enters into derivative positions based on market expectations or to benefit from price differentials between financial
instruments
and
markets
mostly
to
economically
hedge
a
related
asset
or
liability.
The
Corporation
also
enters
into
various
derivatives to provide these
types of derivative products to
customers. These free-standing derivatives are carried
at fair value with
changes in fair value recorded as part of the results of
operations for the period.
Following
is
a
description
of
the
most
significant
of
the
Corporation’s
derivative
activities
that
are
not
designated
for
hedge
accounting.
The Corporation
has over-the-counter
option contracts
which are
utilized in
order to
limit the
Corporation’s exposure
on customer
deposits whose returns are tied
to the S&P 500
or to certain other
equity securities or commodity indexes. In
these certificates, the
customer’s
principal
is
guaranteed
by
the
Corporation
and
insured
by
the
FDIC
to
the
maximum
extent
permitted
by
law.
The
instruments pay a return based
on the increase of these
indexes, as applicable, during the term
of the instrument. Accordingly,
this
product
gives
customers
the
opportunity
to
invest
in
a
product
that
protects
the
principal
invested
but
allows
the
customer
the
potential to earn a return
based on the performance of the indexes. The
risk of issuing certificates of deposit
with returns tied to the
applicable indexes is economically hedged by the Corporation. Indexed
options are purchased from financial institutions with strong
credit standings, whose
return is designed
to match the
return payable on
the certificates of
deposit issued. By
hedging the risk
in
this manner,
the effective cost of
these deposits is fixed.
The contracts have a maturity
and an index equal to
the terms of the
pool
of retail deposits that they are economically hedging.
The purchased
indexed options
are used
to economically
hedge the
bifurcated embedded
option. These
option contracts
do not
qualify
for
hedge
accounting,
and
therefore,
cannot
be
designated
as
accounting
hedges.
At
December
31,
2021,
the
notional
amount of
the indexed
options on deposits
approximated $
79 million
(2020 -
$ 69
million) with
a fair
value of
$ 26
million (asset)
(2020 -
$ 21 million)
while the embedded
options had a
notional value of
$72 million (2020
- $ 63
million) with
a fair value
of $
23
million (liability) (2020 - $ 18 million).
Refer to Note 26 for a description of other non-hedging
derivative activities utilized by the Corporation
during 2021 and 2020.
Foreign Exchange
The Corporation holds
an interest in
BHD León
in the
Dominican Republic, which
is an investment
accounted for under
the equity
method. The
Corporation’s carrying value
of the
equity interest in
BHD León
approximated $
180.3 million at
December 31, 2021.
33
This business is conducted in
the country’s foreign currency.
The resulting foreign currency translation
adjustment, from operations
for
which
the
functional
currency
is
other
than
the
U.S.
dollar,
is
reported
in
accumulated
other
comprehensive
loss
in
the
consolidated
statements
of
condition,
except
for
highly-inflationary
environments
in
which
the
effects
would
be
included
in
the
consolidated statements
of
operations. At
December 31,
2021, the
Corporation had
approximately $
67 million in
an unfavorable
foreign currency translation
adjustment as part
of accumulated other
comprehensive income (loss),
compared with an
unfavorable
adjustment of $ 71 million at December 31,
2020 and $ 57 million at December 31,
2019.
Liquidity
The objective
of effective
liquidity management
is to
ensure that
the Corporation
has sufficient
liquidity to
meet all
of its
financial
obligations, finance
expected future
growth,
fund
planned capital
distributions and
maintain a
reasonable safety
margin for
cash
commitments
under
both
normal
and
stressed
market
conditions.
The
Board
of
Directors
is
responsible
for
establishing
the
Corporation’s tolerance for
liquidity risk, including
approving relevant risk
limits and policies.
The Board of
Directors has
delegated
the
monitoring
of
these
risks
to
the
Board’s
Risk
Management
Committee
and
the
Asset/Liability
Management
Committee.
The
management
of
liquidity
risk,
on
a
long-term
and
day-to-day
basis,
is
the
responsibility of
the
Corporate
Treasury
Division.
The
Corporation’s Corporate Treasurer
is responsible for implementing
the policies and
procedures approved by the
Board of Directors
and
for
monitoring
the
Corporation’s
liquidity
position
on
an
ongoing
basis.
Also,
the
Corporate
Treasury
Division
coordinates
corporate wide liquidity management strategies and activities with the reportable segments, oversees policy breaches and manages
the escalation process. The Financial and Operational Risk Management Division is responsible for the independent monitoring and
reporting of adherence with established policies.
An institution’s liquidity
may be pressured
if, for example,
it experiences a
sudden and unexpected
substantial cash outflow
due to
exogenous
events
such
as
the
current
COVID-19
pandemic,
its
credit
rating
is
downgraded,
or
some
other
event
causes
counterparties to
avoid exposure
to
the institution.
Factors that
the Corporation
does not
control, such
as the
economic outlook,
adverse ratings of its principal markets and regulatory
changes, could also affect its ability to obtain funding.
Liquidity is managed by the Corporation at the level of
the holding companies that own the banking and non-banking subsidiaries. It
is also managed at the
level of the banking and
non-banking subsidiaries. As further explained below,
a principal source of liquidity
for the
bank holding
companies (the
“BHCs”) are
dividends received
from banking
and non-banking subsidiaries.
The Corporation
has adopted
policies and limits
to monitor
more effectively
the Corporation’s
liquidity position
and that of
the banking subsidiaries.
Additionally, contingency funding
plans are used to
model various stress events
of different magnitudes and
affecting different time
horizons that assist
management in evaluating
the size of
the liquidity buffers
needed if those
stress events
occur. However,
such
models
may
not
predict
accurately
how
the
market
and
customers
might
react
to
every
event,
and
are
dependent
on
many
assumptions.
Deposits, including
customer deposits,
brokered deposits
and public
funds deposits,
continue to
be the
most significant
source of
funds for
the Corporation,
funding
89% of
the Corporation’s
total assets
at December
31, 2021
and 86%
at December
31, 2020.
The ratio of total ending loans to deposits was
44% at December 31, 2021, compared to 52% at December 31, 2020.
In addition to
traditional deposits, the Corporation maintains borrowing
arrangements,
which amounted to approximately $1.2 billion in
outstanding
balances at December 31, 2021 (December 31, 2020 - $1.3 billion). A detailed
description of the Corporation’s borrowings, including
their terms,
is included
in Note
17 to
the Consolidated
Financial Statements. Also,
the Consolidated Statements
of Cash
Flows in
the accompanying Consolidated Financial Statements provide
information on the Corporation’s cash inflows and outflows.
On September
9, 2021,
the Corporation
completed an
accelerated share
repurchase program for
the repurchase
of an
aggregate
$350 million of Popular’s common stock, refer
to Note 31 for additional information.
On
November
1,
2021,
the
Corporation
redeemed
all
outstanding 6.70%
Cumulative Monthly
Income
Trust
Preferred
Securities
issued by the Popular Capital Trust I, refer to Note 17
for additional information.
On January
12, 2022,
Popular,
Inc. announced
the plan
to increase
its quarterly
common stock
dividend from
$0.45 per
share to
$0.55
per
share,
commencing
with
the
dividend
payable
in
the
second
quarter
of
2022,
subject
to
the
approval
by
its
Board
of
Directors, and repurchase up to $500 million
of its common stock during 2022.
The
following
sections
provide
further
information
on
the
Corporation’s
major
funding
activities
and
needs,
as
well
as
the
risks
involved in these activities.
34
Banking Subsidiaries
Primary
sources of
funding
for the
Corporation’s
banking subsidiaries
(BPPR and
PB
or,
collectively,
“the banking
subsidiaries”)
include
retail,
commercial
and
public
sector
deposits,
brokered
deposits,
unpledged
investment
securities,
mortgage
loan
securitization and, to a lesser extent, loan sales. In
addition, the Corporation maintains borrowing facilities with the FHLB and at the
discount window
of the
Federal Reserve
Bank of
New York
(the “FRB”)
and has
a considerable
amount of
collateral pledged
that
can be used to raise funds under these facilities.
Refer
to
Note
17
to
the
Consolidated
Financial
Statements,
for
additional
information
of
the
Corporation’s
borrowing
facilities
available through its banking subsidiaries.
The principal
uses of
funds for
the banking
subsidiaries include
loan originations,
investment portfolio
purchases, loan
purchases
and repurchases, repayment of outstanding obligations (including deposits), advances on certain serviced portfolios and operational
expenses. Also, the
banking subsidiaries assume liquidity
risk related to collateral
posting requirements for certain
activities mainly
in connection with contractual
commitments, recourse provisions, servicing advances, derivatives, credit
card licensing agreements
and support to several mutual funds administered by BPPR.
The banking
subsidiaries maintain
sufficient funding
capacity to
address large
increases in
funding requirements
such as
deposit
outflows.
The
Corporation has
established
liquidity
guidelines
that
require
the
banking
subsidiaries
to
have
sufficient
liquidity
to
cover all short-term borrowings and a portion of deposits.
The Corporation’s ability to compete
successfully in the marketplace for
deposits, excluding brokered deposits, depends on
various
factors, including
pricing, service,
convenience and
financial stability
as reflected
by operating
results, credit
ratings (by
nationally
recognized
credit
rating
agencies),
and
importantly,
FDIC
deposit
insurance.
Although
a
downgrade
in
the
credit
ratings
of
the
Corporation’s banking
subsidiaries may
impact their
ability to
raise retail
and commercial
deposits or
the rate
that it
is required
to
pay on such deposits, management does not believe that the impact should be material. Deposits at all of the Corporation’s banking
subsidiaries are federally insured
(subject to FDIC
limits) and this is
expected to mitigate the
potential effect of
a downgrade in
the
credit ratings.
Deposits are a
key source of
funding as they
tend to be
less volatile than institutional
borrowings and their cost
is less sensitive
to
changes in
market rates.
Refer to
Table
7 for
a breakdown
of deposits
by major
types. Core
deposits are
generated from
a large
base of consumer, corporate and
public sector customers. Core deposits include all non-interest bearing deposits, savings
deposits
and certificates
of deposit
under $250,000,
excluding brokered
deposits
with denominations
under $250,000.
Core deposits
have
historically provided the Corporation with a sizable source of relatively stable and low-cost funds. Core deposits totaled $63.6 billion,
or
95% of total deposits, at December 31, 2021, compared with $51.7 billion, or 91% of
total deposits, at December 31, 2020. Core
deposits financed 88% of the Corporation’s earning assets
at December 31, 2021, compared with 82%
at December 31, 2020.
The distribution by maturity of
certificates of deposits with denominations of
$250,000 and over at December 31,
2021 is presented
in the table that follows:
Table 15 - Distribution by
Maturity of Certificate of Deposits of $250,000 and Over
(In thousands)
3 months or less
$
1,772,700
Over 3 to 12 months
500,200
Over 1 year to 3 years
219,395
Over 3 years
133,795
Total
$
2,626,090
Average deposits, including brokered deposits, for the year ended December
31, 2021 represented
93%
of average earning assets,
compared with 91% for the year ended December
31, 2020. Table 16 summarizes average deposits for the past three years.
35
Table 16 - Average
Total Deposits
For the years ended December 31,
(In thousands)
2021
2020
Non-interest bearing demand deposits
$
14,687,093
$
11,537,700
Savings accounts
15,753,630
12,620,755
NOW, money market and other interest
bearing demand accounts
25,648,707
19,466,357
Certificates of deposit
7,013,486
7,960,967
Total interest bearing
deposits
48,415,823
40,048,079
Total average deposits
$
63,102,916
$
51,585,779
The Corporation
had $0.8
billion in
brokered deposits
at December
31, 2021,
which financed
approximately 1%
of its
total assets
(December 31, 2020 -
$0.8 billion and 1%,
respectively).
In the event that
any of the Corporation’s
banking subsidiaries’ regulatory
capital
ratios fall
below those
required by
a well-capitalized
institution or
are subject
to capital
restrictions by
the regulators,
that
banking subsidiary faces
the risk of
not being able
to raise or
maintain brokered deposits
and faces limitations
on the rate
paid on
deposits, which
may hinder
the Corporation’s
ability to
effectively compete
in its
retail markets
and could
affect its
deposit raising
efforts.
Deposits from the
public sector represent
an important source
of funds for
the Corporation.
As of
December 31, 2021,
total public
sector deposits were $20.3 billion,
compared to $15.1 billion at December 31, 2020.
Generally, these deposits require that the bank
pledge high credit
quality securities as collateral;
therefore liquidity risks arising
from public sector deposit
outflows are lower given
that the bank
receives its collateral
in return. This,
now unpledged, collateral
can either be
financed via repurchase
agreements or
sold for cash. However, there are some
timing differences between the time the deposit outflow occurs and when the
bank receives
its collateral.
At December 31, 2021,
management believes that the
banking subsidiaries had sufficient current
and projected liquidity sources to
meet their anticipated cash flow obligations,
as well as special needs
and off-balance sheet commitments, in the
ordinary course of
business and have sufficient
liquidity resources to address a
stress event. Although the
banking subsidiaries have historically been
able to replace
maturing deposits and advances,
no assurance can
be given that
they would be
able to replace
those funds in
the
future if the
Corporation’s financial condition
or general market
conditions were to
deteriorate. The Corporation’s
financial flexibility
will
be
severely constrained
if
the
banking subsidiaries
are
unable to
maintain access
to
funding
or
if
adequate
financing is
not
available to accommodate future financing needs at acceptable interest rates. The
banking subsidiaries also are required to deposit
cash or qualifying securities to meet margin
requirements. To
the extent that the value
of securities previously pledged as collateral
declines because
of market
changes, the
Corporation will
be required
to
deposit additional
cash or
securities to
meet
its margin
requirements, thereby
adversely affecting
its liquidity.
Finally,
if management
is required
to
rely more
heavily on
more expensive
funding sources to meet its
future growth, revenues may not increase proportionately
to cover costs. In this case,
profitability would
be adversely affected.
Bank Holding Companies
The principal
sources of
funding for
the BHCs,
which are
Popular,
Inc.
(holding company
only) and
PNA, include
cash on
hand,
investment
securities,
dividends
received from
banking
and
non-banking subsidiaries,
asset sales,
credit
facilities
available from
affiliate banking subsidiaries and proceeds from potential securities offerings.
Dividends from banking and non-banking subsidiaries
are subject to various regulatory limits
and authorization requirements that are further described
below and that may limit the
ability
of those subsidiaries to act as a source of funding
to the BHCs.
The
principal
use
of
these
funds
includes
the
repayment
of
debt,
and
interest
payments
to
holders
of
senior
debt
and
junior
subordinated
deferrable
interest
(related
to
trust
preferred
securities),
the
payment
of
dividends
to
common
stockholders
and
capitalizing its banking subsidiaries.
The BHCs have in
the past borrowed in the
money markets and in the
corporate debt market primarily to
finance their non-banking
subsidiaries; however, the
cash needs of the
Corporation’s non-banking subsidiaries other than
to repay indebtedness and
interest
are now minimal. These
sources of funding are
more costly due to
the fact that
two out of
the three principal credit
rating agencies
rate the Corporation below “investment grade”, which
affects the Corporation’s cost and
ability to raise funds in
the capital markets.
36
The Corporation
has an
automatic shelf
registration statement
filed and
effective with
the Securities
and Exchange
Commission,
which permits the Corporation to issue an unspecified
amount of debt or equity securities.
The outstanding balance of notes payable at the BHCs
amounted to $496 million at December 31, 2021 and $682 at
December 31,
2020.
The contractual maturities of the BHCs notes payable
at December 31, 2021 are presented in
Table 17.
Table 17
- Distribution of BHC's Notes Payable by Contractual
Maturity
Year
(In thousands)
2023
$
297,842
Later years
198,292
Total
$
496,134
Annual debt service at
the BHCs is approximately
$32 million, and the
Corporation’s latest quarterly dividend
was $0.45 per share.
On February
23, 2022,
the Board
of Directors
of the
Corporation declared
a $0.55
cash dividend
per common
share, payable
on
April 1, 2022.
The BHCs liquidity position
continues to be
adequate with sufficient cash
on hand, investments and
other sources of
liquidity which are expected to be enough to meet all BHCs obligations during the foreseeable future. As of
December 31, 2021, the
BHCs had
cash and
money markets
investments totaling
$292 million,
borrowing potential
of $157
million from
its secured
facility
with BPPR.
In addition
to these
liquidity sources,
the stake
in EVERTEC
had a
market value
of $583
million as
of December
31,
2021 and it represents an additional source of
contingent liquidity.
Non-Banking Subsidiaries
The
principal
sources
of
funding
for
the
non-banking
subsidiaries
include
internally
generated
cash
flows
from
operations,
loan
sales, repurchase agreements, capital
injections and borrowed funds
from their direct
parent companies or the
holding companies.
The principal uses of funds for the non-banking
subsidiaries include repayment of maturing debt,
operational expenses and payment
of dividends to the
BHCs. The liquidity needs
of the non-banking subsidiaries
are minimal since most
of them are
funded internally
from
operating
cash
flows
or
from
intercompany
borrowings
or
capital
contributions
from
their
holding
companies.
Popular,
Inc.
made capital contributions
to its wholly
owned subsidiary Popular Securities
amounting to $9
million during the
year 2021 and
$10
million on February 24, 2022.
Dividends
During the year ended December 31, 2021, the Corporation
declared cash dividend of $1.75 per common share outstanding
$ 142.3
million
in the
aggregate.
The dividends
for the
Corporation’s Series
A
preferred stock
amounted to
$1.4 million.
During the
year
ended December
31, 2021,
the BHC’s
received dividends amounting
to $761
million from
BPPR, $4
million from
PIBI which
main
source of income is
derived from its investment in
BHD, $31 million in
dividends from its non-banking subsidiaries
and $2 million in
dividends from EVERTEC. Dividends from BPPR constitute
Popular, Inc.’s primary source of liquidity.
Other Funding Sources and Capital
The
debt
securities
portfolio
provides
an
additional
source
of
liquidity,
which
may
be
realized
through
either
securities
sales
or
repurchase agreements. The Corporation’s debt securities portfolio consists primarily of liquid U.S. government debt securities, U.S.
government
sponsored
agency
debt
securities,
U.S.
government
sponsored
agency
mortgage-backed
securities,
and
U.S.
government
sponsored
agency
collateralized
mortgage
obligations
that
can
be
used
to
raise
funds
in
the
repo
markets.
The
availability
of
the
repurchase
agreement
would
be
subject
to
having
sufficient
unpledged
collateral
available
at
the
time
the
transactions are to be consummated, in addition to overall liquidity and risk appetite of the various counterparties. The Corporation’s
unpledged debt
securities amounted
to
$3.0
billion at
December 31,
2021
and
$3.4 billion
at
December 31,
2020. A
substantial
portion of these debt securities could be used to
raise financing in the U.S. money markets or
from secured lending sources.
Additional liquidity may
be provided through
loan maturities, prepayments
and sales. The
loan portfolio can
also be used
to obtain
funding in the capital markets. In particular,
mortgage loans and some types of consumer loans, have
secondary markets which the
Corporation could use.
37
Off-Balance Sheet arrangements and other commitments
In the ordinary course
of business, the
Corporation engages in financial transactions
that are not recorded
on the balance sheet
or
may be recorded on the balance sheet in amounts that are different than the full contract or notional amount of the transaction. As a
provider of
financial services,
the Corporation
routinely enters
into commitments
with off-balance
sheet risk
to meet
the financial
needs of its
customers. These commitments may
include loan commitments
and standby letters
of credit. These
commitments are
subject
to
the
same
credit
policies
and
approval
process
used
for
on-balance
sheet
instruments.
These
instruments
involve,
to
varying degrees, elements
of credit and
interest rate risk
in excess of
the amount recognized
in the statement
of financial position.
Refer to
Note 24
to the
Consolidated Financial
Statements for
information on
the Corporation’s
commitments to
extent credit
and
other non-credit commitments.
Other types
of off-balance
sheet arrangements
that the
Corporation enters
in the
ordinary course
of business
include derivatives,
operating leases and provision of guarantees, indemnifications, and representation
and warranties. Refer to Note 33
for information
on
operating
leases
and
to
Note
23
for
a
detailed
discussion
related
to
the
Corporation’s
obligations under
credit
recourse
and
representation and warranties arrangements.
The Corporation monitors
its cash requirements,
including its contractual obligations
and debt commitments.
As discussed above,
liquidity
is
managed
by
the
Corporation in
order to
meet
its
short-
and
long-term cash
obligations. Note
17
to
the
Consolidated
Financial Statements has information on
the Corporation’s borrowings by maturity,
which amounted to $1.2 billion
at December 31,
2021.
Financial information of guarantor and issuers of registered
guaranteed securities
The Corporation (not
including any of
its subsidiaries, “PIHC”)
is the parent
holding company of
Popular North America
“PNA” and
has other subsidiaries through which it
conducts its financial services operations. PNA is
an operating, 100% subsidiary of Popular,
Inc.
Holding Company
(“PIHC”) and
is the
holding company
of its
wholly-owned subsidiaries:
Equity One,
Inc.
and PB,
including
PB’s wholly-owned subsidiaries Popular Equipment Finance,
LLC, Popular Insurance Agency, U.S.A., and E-LOAN, Inc.
PNA
has
issued
junior
subordinated
debentures
guaranteed
by
PIHC
(together
with
PNA,
the
“obligor
group”)
purchased
by
statutory trusts
established by
the Corporation.
These debentures
were purchased
by the
statutory trust
using the
proceeds from
trust preferred securities issued to the public (referred to as
“capital securities”), together with the proceeds of the related issuances
of common securities of the trusts.
PIHC
fully
and
unconditionally
guarantees
the
junior
subordinated
debentures
issued
by
PNA.
PIHC’s
obligation
to
make
a
guarantee payment may be satisfied by direct
payment of the required amounts to the
holders of the applicable capital securities or
by causing the applicable trust to pay such amounts to such holders. Each guarantee does not apply to any payment of distributions
by
the
applicable
trust
except
to
the
extent
such
trust
has
funds
available
for
such
payments.
If
PIHC
does
not
make
interest
payments on the
debentures held by such
trust, such trust
will not pay
distributions on the applicable
capital securities and
will not
have
funds
available
for
such
payments.
PIHC’s
guarantee
of
PNA’s
junior
subordinated
debentures
is
unsecured
and
ranks
subordinate and junior in
right of payment to
all the PIHC’s other
liabilities in the same manner
as the applicable debentures as
set
forth in the applicable indentures; and equally with all other guarantees
that the PIHC issues. The guarantee constitutes a guarantee
of
payment
and
not
of
collection,
which means
that
the
guaranteed party
may
sue
the
guarantor to
enforce its
rights
under the
respective guarantee without suing any other person
or entity.
The
principal
sources
of
funding
for
PIHC
and
PNA
have
included
dividends
received
from
their
banking
and
non-banking
subsidiaries, asset
sales and
proceeds from
the issuance
of debt
and equity.
As further
described below,
in the
Risk to
Liquidity
section, various statutory
provisions limit the
amount of dividends
an insured depository
institution may pay
to its holding
company
without regulatory approval.
The
following
summarized
financial
information
presents
the
financial
position
of
the
obligor
group,
on
a
combined
basis
at
December
31,
2021
and
December 31,
2020,
and
the
results
of
their
operations
for
the
period
ended December
31,
2021
and
December 31, 2020. Investments in and equity in the earnings from the other subsidiaries and affiliates
that are not members of the
obligor group have been excluded.
38
The
summarized
financial
information
of
the
obligor
group
is
presented
on
a
combined
basis
with
intercompany
balances
and
transactions
between
entities
in
the
obligor
group
eliminated.
The
obligor
group's
amounts
due
from,
amounts
due
to
and
transactions with
subsidiaries and
affiliates
have been
presented in
separate line
items, if
they are
material.
In
addition, related
parties transactions are presented separately.
Table 18 - Summarized Statement
of Condition
(In thousands)
December 31, 2021
December 31, 2020
Assets
Cash and money market investments
$
291,540
$
190,830
Investment securities
25,691
27,630
Accounts receivables from non-obligor subsidiaries
17,634
16,338
Other loans (net of allowance for credit losses of $96 (2020
- $311))
29,349
31,162
Investment in equity method investees
114,955
88,272
Other assets
42,251
46,547
Total assets
$
521,420
$
400,779
Liabilities and Stockholders' deficit
Accounts payable to non-obligor subsidiaries
$
6,481
$
3,946
Accounts payable to affiliates and related parties
1,254
977
Notes payable
496,134
681,503
Other liabilities
97,172
79,208
Stockholders' deficit
(79,621)
(364,855)
Total liabilities and
stockholders' deficit
$
521,420
$
400,779
Table 19 - Summarized Statement
of Operations
For the years ended
(In thousands)
December 31, 2021
December 31, 2020
Income:
Dividends from non-obligor subsidiaries
$
792,000
$
586,000
Interest income from non-obligor subsidiaries and affiliates
848
2,383
Earnings from investments in equity method investees
29,387
17,912
Other operating income
3,136
4,340
Total income
$
825,371
$
610,635
Expenses:
Services provided by non-obligor subsidiaries and affiliates
(net of
reimbursement by subsidiaries for services provided by parent
of
$162,019 (2020 - $138,729))
$
13,594
$
13,191
Other operating expenses
33,524
29,652
Total expenses
$
47,118
$
42,843
Net income
$
778,253
$
567,792
During the
year ended
December 31,
2021, the
Obligor
group recorded
$3.0 million
of
distribution from
its
direct equity
method
investees
(2020
-
$2.3
million),
of
which
$2.3
million
are
related
to
dividend
distributions (2020
-
$2.3
million).
During the year ended December 31, 2020, the
Obligor group received dividend distributions from a non-obligor subsidiary
amounting $12.5 million which was recorded as
a reduction to the investment.
39
Risks to Liquidity
Total lines of credit outstanding are not necessarily a measure of the total credit available on a continuing
basis. Some of these lines
could be subject to collateral requirements, standards of creditworthiness, leverage ratios and other regulatory requirements,
among
other factors.
Derivatives, such
as those
embedded in
long-term repurchase
transactions or
interest rate
swaps, and
off-balance
sheet exposures, such as recourse, performance bonds or credit card arrangements, are subject to collateral requirements. As their
fair value increases, the collateral requirements may increase,
thereby reducing the balance of unpledged
securities.
The importance of
the Puerto Rico
market for the
Corporation is an
additional risk factor
that could affect
its financing activities.
In
the case
of a
deterioration in economic
and fiscal conditions
in Puerto Rico,
the credit quality
of the
Corporation could be
affected
and result
in higher
credit costs.
Refer to
the Geographic
and Government
Risk section
of this
MD&A for
some highlights
on the
current status of the Puerto Rico economy and the ongoing
fiscal crisis.
Factors that the Corporation does not control, such as the economic
outlook and credit ratings of its principal markets and regulatory
changes,
could also
affect
its
ability to
obtain funding.
In
order to
prepare for
the
possibility of
such scenario,
management
has
adopted
contingency
plans
for
raising
financing
under
stress
scenarios
when
important
sources
of
funds
that
are
usually
fully
available
are
temporarily
unavailable. These
plans call
for
using
alternate
funding
mechanisms,
such
as
the
pledging
of
certain
asset classes and accessing secured credit lines
and loan facilities put in place with the
FHLB and the FRB.
The credit
ratings of
Popular’s debt
obligations are
a relevant
factor for
liquidity because
they impact
the Corporation’s
ability to
borrow
in
the
capital
markets,
its
cost
and
access
to
funding
sources.
Credit
ratings
are
based
on
the
financial
strength,
credit
quality and
concentrations in
the loan
portfolio, the
level and
volatility of
earnings, capital
adequacy,
the quality
of management,
geographic concentration
in Puerto
Rico, the
liquidity of
the balance
sheet, the
availability of
a significant
base of
core retail
and
commercial deposits, and the Corporation’s ability to access
a broad array of wholesale funding sources,
among other factors.
Furthermore,
various
statutory
provisions
limit
the
amount
of
dividends
an
insured
depository
institution
may
pay
to
its
holding
company without
regulatory approval. A
member bank must
obtain the
approval of
the Federal
Reserve Board
for any
dividend, if
the total
of all
dividends declared
by the
member bank
during the
calendar year
would exceed
the total
of its
net income
for that
year,
combined with
its retained
net income
for the
preceding two
years, after
considering those
years’ dividend
activity,
less any
required transfers to surplus or to a fund for the retirement of any preferred
stock. During the year ended December 31, 2021, BPPR
declared cash dividends
of $761 million.
At December 31,
2021, BPPR would
have needed to
obtain prior approval
of the Federal
Reserve Board
before declaring
a dividend
due to
its declared
dividend activity
and transfers
to statutory
reserves over
the three
year’s ended
December 31,
2021. In
addition, a
member bank
may not
declare or
pay
a dividend
in an
amount greater
than its
undivided
profits
as
reported
in
its
Report
of
Condition
and
Income,
unless
the
member
bank
has
received
the
approval
of
the
Federal
Reserve
Board.
A
member
bank
also
may
not
permit
any
portion
of
its
permanent
capital
to
be
withdrawn
unless
the
withdrawal
has
been
approved
by
the
Federal
Reserve
Board.
Pursuant
to
these
requirements,
PB
may
not
declare
or
pay
a
dividend without
the prior
approval of
the Federal
Reserve Board
and the
NYSDFS. The
ability of
a bank
subsidiary to
up-stream
dividends to its BHC
could thus be impacted
by its financial
performance, thus potentially limiting the
amount of cash
moving up to
the BHCs from the banking subsidiaries.
This could, in turn, affect the BHCs ability to declare dividends on its
outstanding common
and preferred stock, for example.
The Corporation’s banking subsidiaries have historically not
used unsecured capital market borrowings to finance
its operations, and
therefore are less sensitive to the level and
changes in the Corporation’s overall credit ratings.
Obligations Subject to Rating Triggers or Collateral Requirements
The
Corporation’s
banking
subsidiaries
currently
do
not
use
borrowings
that
are
rated
by
the
major
rating
agencies,
as
these
banking subsidiaries are funded primarily with deposits and secured borrowings. The banking subsidiaries had $9 million in deposits
at December 31, 2021 that are subject to
rating triggers.
In addition, certain
mortgage servicing and custodial
agreements that BPPR
has with third
parties include rating covenants.
In the
event of a credit rating downgrade, the third parties have the right to require the institution to engage a substitute cash custodian for
escrow
deposits
and/or
increase
collateral
levels
securing
the
recourse
obligations.
Also,
as
discussed
in
Note
23
to
the
Consolidated
Financial
Statements,
the
Corporation
services
residential
mortgage
loans
subject
to
credit
recourse
provisions.
Certain
contractual
agreements
require
the
Corporation
to
post
collateral
to
secure
such
recourse
obligations
if
the
institution’s
40
required
credit
ratings
are
not
maintained.
Collateral
pledged
by
the
Corporation
to
secure
recourse
obligations
amounted
to
approximately
$32
million
at
December
31,
2021.
The
Corporation
could
be
required
to
post
additional
collateral
under
the
agreements.
Management
expects
that
it
would
be
able
to
meet
additional
collateral
requirements
if
and
when
needed.
The
requirements
to
post
collateral under
certain
agreements or
the
loss
of
escrow deposits
could
reduce
the
Corporation’s liquidity
resources and impact its operating results.
Credit Risk
Geographic and Government Risk
The Corporation is exposed to geographic and government risk.
The Corporation’s assets and revenue composition by geographical
area and by business segment reporting are presented
in Note 33 to the Consolidated Financial Statements.
Commonwealth of Puerto Rico
A
significant
portion
of
our
financial
activities
and
credit
exposure
is
concentrated
in
the
Commonwealth
of
Puerto
Rico
(the
“Commonwealth” or “Puerto Rico”), which faces
severe economic and fiscal challenges.
COVID-19 Pandemic
On December
2019, a
novel strain
of coronavirus
(COVID-19) surfaced
in Wuhan,
China and
has since
spread globally
to
other
countries and
jurisdictions, including
the mainland
United States
and Puerto
Rico. In
March 2020,
the World
Health Organization
declared COVID-19 a
pandemic. The pandemic
has significantly disrupted
and negatively impacted
the global economy,
disrupted
global supply
chains, created
significant volatility
in financial
markets, and
increased unemployment
levels worldwide,
including in
the markets in which we do business.
In Puerto Rico, former
Governor Wanda Vázquez issued an
executive order in March 2020
declaring a health emergency,
ordering
residents to shelter in place, implementing a mandatory curfew,
and requiring the closure of non-essential businesses. Although the
most restrictive measures have been eased or lifted, allowing for the gradual reopening of the economy, certain measures remain in
place
and
additional measures
may
be
implemented in
the future
as
a
result
of
a
resurgence in
the spread
of
the
virus
or
new
strains
of
the virus.
Since the
beginning of
the
pandemic, most
businesses have
had
to
make significant
adjustments to
protect
customers and
employees, including
transitioning to
telework and
suspending or
modifying certain
operations in
compliance with
health and safety guidelines. The Puerto Rico Legislative Assembly
enacted legislation in April 2020 requiring financial institutions
to
offer
moratoriums
on
consumer
financial
products
to
clients
impacted
by
the
COVID-19
pandemic,
which
was
effective
through
August 2020. The Federal Government has
also approved several economic stimulus measures that seek
to cushion the economic
fallout
of
the
pandemic,
including
providing
direct
subsidies,
expanding
eligibility
for
and
increasing
unemployment
benefits
and
guaranteeing through the SBA PPP loans to small and medium
businesses.
The
COVID-19 pandemic
and the
restrictions imposed
to
curb the
spread
of the
disease have
had and
may continue
to
have a
material adverse effect
on economic activity
worldwide, including in
Puerto Rico. The
extent to which
the COVID-19 pandemic
will
continue to adversely affect economic activity will depend on future developments, which are highly uncertain and difficult to predict,
including the scope and duration of the pandemic (including the
appearance of new strains of the virus), the restrictions
imposed by
governmental authorities and other
third parties in
response to the
same, the pace
of global vaccination efforts,
and the amount
of
federal
and
local
assistance offered
to
offset
the
impact
of
the
pandemic. Pursuant
to
the
2022
Fiscal
Plan
(as
defined
below),
economic stimulus measures have more than offset the estimated income loss
due to reduced economic activity in Puerto Rico and
are estimated
to have
caused a
temporary increase in
personal income on
a net
basis. However,
there can
be no
assurance that
these measures will be sufficient to offset the pandemic’s economic impact
in the medium- and long-term.
Economic Performance
The Commonwealth’s economy entered
a recession in the
fourth quarter of fiscal
year 2006 and its
gross national product (“GNP”)
contracted (in
real terms)
every fiscal
year between
2007 and
2018, with
the exception
of fiscal
year 2012.
Pursuant to
the latest
Puerto Rico Planning Board (the “Planning Board”) estimates, dated
March 2021, the Commonwealth’s real GNP increased by 1.8%
41
in fiscal year
2019 due to
the influx
of federal funds
and private insurance
payments to repair
damage caused by
Hurricanes Irma
and María. However,
the Planning Board
estimates that the
Commonwealth’s real GNP
decreased by approximately 3.2%
in fiscal
year 2020 due primarily
to the adverse impact
of the COVID-19 pandemic and
the measures taken by
the government in response
to the same. The Planning Board projected that the negative effects of COVID-19 would continue through fiscal year 2021, resulting
in a contraction in real GNP of approximately -2%,
followed by 0.8% GNP growth in the current fiscal
year.
Fiscal Crisis
The Commonwealth’s central
government and many
of its instrumentalities,
public corporations and municipalities
continue to face
significant fiscal challenges, which have been primarily the
result of economic contraction, persistent and significant budget
deficits,
a high
debt burden,
unfunded legacy
obligations, and
lack of
access
to the
capital markets,
among other
factors. As
a result,
the
Commonwealth and certain of its instrumentalities have been unable
to make debt service payments on their outstanding bonds and
notes since 2016. The escalating fiscal and economic
crisis and imminent widespread defaults prompted
the U.S. Congress to enact
the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”) in June 2016. As further discussed below under
“Pending Title
III Proceedings,” the
Commonwealth and several
of its
instrumentalities are currently
in the
process of
restructuring
their debts through the debt restructuring mechanisms
provided by PROMESA.
PROMESA
PROMESA, among
other things,
created a
seven-member federally-appointed oversight
board (the
“Oversight Board”)
with ample
powers over
the fiscal and
economic affairs of
the Commonwealth, its
public corporations, instrumentalities
and municipalities and
established two
mechanisms for
the restructuring
of the
obligations of
such entities.
Pursuant to
PROMESA, the
Oversight Board
will
remain
in
place
until
market access
is
restored
and
balanced budgets,
in
accordance with
modified
accrual
accounting, are
produced for at least four consecutive years. In August
2016, President Obama appointed the seven original voting members of the
Oversight Board through the process established in PROMESA, which authorizes the President to select
the members from several
lists required
to be
submitted by
congressional leaders.
In 2020,
when President
Donald Trump
reappointed three
of the
original
members and appointed four new members to the Oversight
Board.
In
October
2016,
the
Oversight
Board
designated
the
Commonwealth and
all
of
its
public
corporations
and
instrumentalities
as
“covered entities” under
PROMESA. The only
Commonwealth government entities
that were not
subject to such
initial designation
were
the
Commonwealth’s
municipalities.
In
May
2019,
however,
the
Oversight
Board
designated
all
of
the
Commonwealth’s
municipalities as covered entities. At
the Oversight Board’s
request, covered entities are required
to submit fiscal
plans and annual
budgets
to
the
Oversight
Board
for
its
review
and
approval.
They
are
also
required to
seek
Oversight
Board
approval
to
issue,
guarantee or modify their
debts and to enter
into contracts with an
aggregate value of
$10 million or more.
Finally, covered
entities
are potentially eligible
to avail themselves
of the debt
restructuring processes provided by
PROMESA. For additional
discussion of
risk factors related to the Puerto Rico fiscal challenges,
see “Part I – Item 1A – Risk Factors” in this
Form 10-K.
Fiscal Plans
Commonwealth Fiscal
Plan
. The
Oversight Board
has certified
several fiscal
plans for
the Commonwealth
since 2017.
The most
recent fiscal plan for the Commonwealth certified by
the Oversight Board is dated January 27, 2022
(the “2022 Fiscal Plan”).
Pursuant to the 2022 Fiscal Plan, while the COVID-19 pandemic and the measures taken in response to the same severely reduced
economic
activity
and
caused
an
unprecedented
increase
in
unemployment
in
Puerto
Rico,
pandemic-related
federal
and
local
stimulus
funding
have more
than
offset
the
estimated income
loss
due
to
reduced economic
activity
and
are
estimated to
have
caused
a
temporary
increase
in
personal
income
on
a
net
basis.
The
2022
Fiscal
Plan’s
economic
projections
incorporate
adjustments
for
these
short-term
income
effects
for
purposes
of
estimating
tax
receipts.
For
example,
the
2022
Fiscal
Plan
estimates that, for fiscal years 2022 and 2023, real GNP will grow 2.6% and 0.9%, respectively, but projects that growth adjusted for
income effects for such years will be approximately 5.2% and
0.6%, respectively.
The 2022 Fiscal Plan
incorporates the debt service costs
of the Commonwealth’s restructured debt
as contemplated by the Plan
of
Adjustment (as defined and further explained below).
Therefore, it projects an unrestricted surplus after debt
service average of $1
billion annually between fiscal
years 2022 to
2031. This surplus declines
over time as federal
disaster relief funding slows,
nominal
GNP
growth declines,
revenues decline,
and
healthcare expenditures
rise.
The
2022
Fiscal
Plan estimates
that
fiscal
measures
42
could drive approximately $6.3
billion in savings and
extra revenue over fiscal
years 2022 through 2026
and that structural
reforms
could drive a cumulative 0.90% increase in growth
by fiscal year 2051 (equal to approximately
$33 billion).
The
2022
Fiscal
Plan
provides
for
the
gradual
reduction
and
the
ultimate
elimination
of
Commonwealth budgetary
subsidies
to
municipalities,
which
constitute
a
material
portion
of
the
operating
revenues
of
some
municipalities.
Since
fiscal
year
2017,
Commonwealth appropriations
to municipalities
have decreased
by approximately
64% (from
approximately $370
million in
fiscal
year 2017
to approximately
$132 million
in fiscal
year 2020).
In
response to
the COVID-19
crisis, reductions
in appropriations
to
municipalities were paused in fiscal
year 2021. Municipalities have also
received extraordinary appropriations and other
funds from
federally-funded
programs
during
the
current
fiscal
year,
which
has
helped
temporarily
offset
the
impact
of
the
reduced
Commonwealth
support.
However,
the
2022
Fiscal
Plan
contemplates
additional
reductions
in
appropriations
to
municipalities
starting in
fiscal year
2022, before
eventually phasing
out all
appropriations in
fiscal year
2025. Further,
while the
Commonwealth
had enacted legislation in 2019 suspending the municipality’s
obligations to contribute to the Commonwealth’s health
plan and pay-
as-you go
retirement system,
such legislation
was challenged
by the
Oversight Board
and eventually
declared null
by the
Title III
court in April
2020.
As a result,
municipalities are required to
cover their own
employees’ healthcare costs and
retirement benefits
and had to reimburse the
Commonwealth for such costs corresponding to the period during
which the law was in
effect. Finally, the
2022 Fiscal Plan notes
that municipalities have made
little or no progress
towards implementing fiscal discipline required to
reduce
reliance on
Commonwealth appropriations and
that this
lack of fiscal
management threatens the
ability of municipalities
to provide
necessary services,
such as
health, sanitation,
public safety,
and emergency
services to
their residents,
forcing them
to prioritize
expenditures.
Other
Fiscal
Plans.
Pursuant to
PROMESA, the
Oversight Board
has
also
requested and
certified fiscal
plans
for several
public
corporations and
instrumentalities. The
certified fiscal
plan for
the Puerto
Rico Electric
Power Authority
(“PREPA”),
Puerto Rico’s
electric
power
utility,
contemplated
the
transformation
of
Puerto
Rico’s
electric
system
through,
among
other
things,
the
establishment of a public-private partnership with respect to PREPA’s
transmission and distribution system (the “T&D System”), and
calls for significant structural reforms at PREPA.
The procurement process for the establishment of a public-private partnership with
respect
to
the
T&D
System
was
completed
in
June
2020.
The
selected
proponent,
LUMA
Energy
LLC
(“LUMA”),
and
PREPA
entered into a 15-year agreement whereby, since June 1, 2021, LUMA is responsible
for operating, maintaining and modernizing the
T&D System.
On
April
23,
2021,
the
Oversight
Board
certified
the
latest
version
of
the
fiscal
plan
(the
“CRIM
Fiscal
Plan”)
for
the
Municipal
Revenue Collection
Center (“CRIM”),
the government
entity responsible
for collecting
property taxes
and distributing
them among
the municipalities.
The CRIM
Fiscal Plan
outlines a
series of
measures centered
around improving
the competitiveness
of Puerto
Rico’s property tax
regime and the
enhancement of property
tax collections, including identifying
and appraising new
properties as
well as improvements to existing properties, and
implementing operational and technological initiatives.
Pending Title III Proceedings
On May
3, 2017, the
Oversight Board, on
behalf of
the Commonwealth, filed
a petition
in the
U.S. District Court
to restructure the
Commonwealth’s liabilities under Title
III of PROMESA. The Oversight Board
subsequently filed analogous petitions with respect to
the
Puerto
Rico
Sales
Tax
Financing
Corporation
(“COFINA”),
the
Employees
Retirement
System
of
the
Government
of
the
Commonwealth of Puerto Rico (“ERS”), the Puerto Rico Highways and Transportation Authority, PREPA
and the Puerto Rico Public
Buildings Authority (“PBA”). On February 12, 2019, the government completed a restructuring of COFINA’s debts
pursuant to a plan
of adjustment confirmed by the U.S. District Court.
On November 3, 2021, the Oversight Board filed the Eighth Amended
Title III Joint Plan of Adjustment for the Commonwealth, et. al.
(the “Plan of Adjustment”) in the pending debt restructuring proceedings under Title III
of PROMESA. The Plan of Adjustment seeks
to restructure
approximately $35 billion
of debt
and other claims
against the
Commonwealth, PBA and
ERS. In
October 2021, the
Commonwealth’s
government
enacted
legislation
establishing
the
framework
for
the
issuance
of
new
securities
by
the
Commonwealth
in
connection
with
the
Plan
of
Adjustment.
On
January
18,
2022,
the
U.S.
District
Court
confirmed
the
Plan
of
Adjustment,
which
is
expected
to
become
effective
on
or
about
March
15,
2022
upon
the
satisfaction
of
certain
conditions
to
effectiveness.
Exposure of the Corporation
43
The credit
quality of BPPR’s
loan portfolio
reflects, among other
things, the
general economic conditions
in Puerto
Rico and
other
adverse conditions affecting Puerto Rico consumers and
businesses. The effects of the prolonged recession
have been reflected in
limited loan
demand, an increase
in the
rate of foreclosures
and delinquencies on
loans granted in
Puerto Rico. While
PROMESA
provided a
process to address
the Commonwealth’s fiscal
crisis, the
complexity and
uncertainty of the
Title III
proceedings for the
Commonwealth and various of its instrumentalities and the
adjustment measures required by the fiscal plans still
present significant
economic risks. In addition, the COVID-19 outbreak has
affected many of our individual customers and customers’ businesses.
This,
when
added
to
Puerto
Rico’s
ongoing
fiscal
crisis
and
recession,
could
cause
credit
losses
that
adversely
affect
us
and
may
negatively
affect
consumer
confidence,
result
in
reductions
in
consumer
spending,
and
adversely
impact
our
interest
and
non-
interest revenues.
If global
or local
economic conditions
worsen or
the
Government of
Puerto Rico
and the
Oversight Board
are
unable
to
adequately
manage
the
Commonwealth’s
fiscal
and
economic
challenges,
including
by
controlling
the
COVID-19
pandemic and consummating an orderly restructuring
of the Commonwealth’s debt obligations while
continuing to provide essential
services, these adverse effects could continue or worsen
in ways that we are not able to predict.
At
December
31,
2021,
the
Corporation’s
direct
exposure
to
the
Puerto
Rico
government’s
instrumentalities
and
municipalities
totaled
$367
million
of
which
$349
million
were
outstanding,
compared
to
$377
million
at
December
31,
2020
which
was
fully
outstanding
on such
date.
Further
deterioration of
the
Commonwealth’s fiscal
and
economic situation
could
adversely affect
the
value of our Puerto Rico government obligations, resulting in losses to us. Of the amount outstanding, $319 million consists of loans
and
$30 million are
securities
($342 million and
$35 million, respectively,
at
December 31, 2020).
Substantially all
of
the
amount
outstanding at
December 31,
2021 were
obligations from
various Puerto
Rico municipalities.
In most
cases, these
were “general
obligations” of
a municipality,
to which
the applicable municipality
has pledged
its good
faith, credit
and unlimited taxing
power, or
“special obligations” of a municipality, to which the applicable municipality has pledged other revenues. At December 31, 2021, 75%
of
the
Corporation’s exposure
to
municipal
loans and
securities
was concentrated
in
the
municipalities of
San
Juan,
Guaynabo,
Carolina and
Bayamón.
On July
1,
2021,
the
Corporation received
scheduled
principal payments
amounting
to
$32
million
from
various obligations from Puerto Rico municipalities. For additional discussion of the Corporation’s direct exposure to the Puerto Rico
government and its instrumentalities and municipalities, refer
to Note 24 – Commitments and Contingencies.
In
addition,
at
December
31,
2021,
the
Corporation
had
$275 million
in
loans
insured
or
securities
issued
by
Puerto
Rico
governmental entities,
but for
which the
principal source
of repayment
is non-governmental
($317 million at
December 31, 2020).
These
included
$232
million
in
residential
mortgage
loans
insured
by
the
Puerto
Rico
Housing
Finance
Authority
(“HFA”),
a
governmental instrumentality that
has been
designated as a
covered entity under
PROMESA (December 31,
2020 -
$260 million).
These mortgage loans are secured by first mortgages on Puerto Rico residential properties and the HFA
insurance covers losses in
the event
of a
borrower default
and upon
the satisfaction
of certain
other conditions.
The Corporation
also had,
at December
31,
2021, $43 million
in bonds issued by
HFA which
are secured by second
mortgage loans on Puerto
Rico residential properties, and
for which HFA
also provides insurance to cover
losses in the event
of a borrower default,
and upon the satisfaction
of certain other
conditions (December
31, 2020
- $46
million). In
the event
that the
mortgage loans
insured by
HFA
and held
by the
Corporation
directly or those serving as collateral for the HFA
bonds default and the collateral is insufficient to satisfy the
outstanding balance of
these loans, HFA’s
ability to honor its insurance will depend, among other factors, on the financial condition of HFA
at the time such
obligations
become
due
and
payable. The
Corporation does
not consider
the
government guarantee
when
estimating the
credit
losses
associated
with
this
portfolio.
Although
the
Governor
is
currently
authorized
by
local
legislation
to
impose
a
temporary
moratorium on the financial obligations of the HFA, a moratorium on
such obligations has not been imposed as of
the date hereof.
BPPR’s
commercial loan
portfolio also
includes loans
to
private borrowers
who
are service
providers, lessors,
suppliers or
have
other relationships with the government. These
borrowers could be negatively affected by
the Commonwealth’s fiscal crisis and
the
ongoing Title III
proceedings under PROMESA described
above. Similarly,
BPPR’s mortgage and consumer
loan portfolios include
loans to government employees and
retirees,
which could also be
negatively affected by fiscal measures
such as employee layoffs
or furloughs or reductions in pension benefits.
BPPR also
has a
significant amount
of deposits
from the
Commonwealth, its
instrumentalities, and
municipalities. The
amount of
such deposits may
fluctuate depending on
the financial condition
and liquidity of
such entities, as
well as on
the ability of
BPPR to
maintain these customer relationships.
44
The
Corporation may
also have
direct
exposure with
regards to
avoidance and
other causes
of
action initiated
by the
Oversight
Board on behalf of the Commonwealth or other Title III debtors. For additional information regarding such exposure, refer to Note 24
of the Consolidated Financial Statements.
United States Virgin Islands
The
Corporation
has
operations
in
the
United
States
Virgin
Islands
(the
“USVI”)
and
has
credit
exposure
to
USVI
government
entities.
The USVI has been experiencing a number of fiscal and
economic challenges, which have been and maybe be further exacerbated
as
a
result
of
the
effects
of
the COVID-19
pandemic, and
which could
adversely affect
the
ability of
its
public
corporations
and
instrumentalities to service their outstanding debt obligations. PROMESA does not
apply to the USVI and, as such, there is currently
no federal legislation permitting the restructuring of
the debts of the USVI and its public corporations and
instrumentalities.
To
the extent that
the fiscal condition
of the USVI
continues to deteriorate, the
U.S. Congress or the
Government of the
USVI may
enact legislation allowing for the restructuring of the
financial obligations of USVI government entities or imposing a
stay on creditor
remedies, including by making PROMESA applicable
to the USVI.
At December 31,
2021, the Corporation has
operations in the United
States Virgin Islands
(the “USVI”) and
has approximately $70
million
in
direct
exposure to
USVI
government entities
(December 31,
2020
-
$105
million).
The
USVI
has
been
experiencing a
number of
fiscal and
economic challenges
that could
adversely affect
the ability
of its
public corporations
and instrumentalities
to
service their outstanding debt obligations.
British Virgin Islands
The Corporation has operations in the British Virgin Islands (“BVI”), which has been negatively affected by the COVID-19 pandemic,
particularly as
a reduction
in the
tourism activity
which accounts
for a
significant portion
of its
economy.
Although the
Corporation
has no significant exposure to a single borrower in the BVI, at December 31, 2021 it has a loan portfolio amounting to approximately
$221 million comprised of various retail
and commercial clients, compared to a loan
portfolio of $251 million at December 31,
2020,
which included a $19 million loan with the BVI
Government that was paid off during the second quarter
of 2021.
U.S. Government
As further detailed in Notes
6 and 7 to the
Consolidated Financial Statements, a substantial portion of the
Corporation’s investment
securities
represented exposure
to
the
U.S.
Government in
the
form
of
U.S. Government
sponsored entities,
as
well
as
agency
mortgage-backed and
U.S. Treasury
securities. In
addition, $1.6
billion of
residential mortgages,
$353 million
of SBA
loans under
the PPP
and $67 million
commercial loans
were insured
or guaranteed
by the
U.S. Government
or its
agencies at
December 31,
2021 (compared to $1.8 billion, $1.3 billion and
$60 million, respectively, at December 31, 2020).
Non-Performing Assets
Non-performing assets (“NPAs”)
include primarily past-due
loans that
are no
longer accruing interest,
renegotiated loans, and
real
estate property acquired through foreclosure. A summary, including certain credit quality
metrics, is presented in Table 20.
During 2021, the Corporation
continued to exhibit strong
credit quality and low
credit costs, with low
level of NCOs
and decreasing
NPLs, outperforming
pre-pandemic trends. These
improvements have
been aided
by the
significant government
stimulus and
the
rebound
of
the
economy,
as
well
as
payoffs
related
to
troubled
loan
resolutions.
We
continue
to
closely
monitor
COVID-19
pandemic
related
risks
on
borrower
performance
and
changes
in
the
pace
of
economic
recovery
as
new
variants
continue
to
emerge. However,
management believes that
the improvement
over the
last few
years in
the risk
profile of
the Corporation’s
loan
portfolios positions Popular to operate successfully
under the current environment.
Total
NPAs
decreased
by
$191
million
when
compared
with
December
31,
2020.
Total
non-performing
loans
held-in-portfolio
(“NPLs”) decreased
by
$190 million
from
December 31,
2020. BPPR’s
NPLs
decreased by
$186 million,
mainly
driven by
lower
45
commercial,
mortgage,
and
construction
NPLs
by
$84
million,
$80
million,
and
$21
million,
respectively.
The
commercial
and
construction
NPLs
decrease
reflects
payoffs
related
to
troubled loan
resolutions,
and
loans
that
were returned
to
accrual status
during the period. The mortgage NPLs
decrease was mainly due to the combined
effects of collection efforts, increased foreclosure
activity and the on-going low
levels of early delinquency compared with
pre-pandemic trends.
Popular U.S. NPLs decreased by
$4
million from
December 31,
2020, mostly
related to
a $7
million construction
loan sold
and lower
consumer NPLs
by $3
million, in
part offset by mortgage
NPLs increase by $7 million, mostly
driven by loans that
did not resume payment at
the end of the
COVID-
related deferral period.
At December 31,
2021, the ratio
of NPLs to
total loans held-in-portfolio
was 1.9% compared
to 2.5% in
the
fourth quarter
of 2020.
Other real
estate owned
loans (“OREOs”)
increased by
$2 million,
mostly related
to end
of the
foreclosure
moratorium period.
At
December 31,
2021, NPLs
secured by
real
estate amounted
to
$428 million
in the
Puerto Rico
operations and
$31 million
in
Popular U.S. These figures were $630 million and
$34 million, respectively, at December 31, 2020.
The Corporation’s commercial loan portfolio secured by real estate
(“CRE”) amounted to $8.4 billion at December 31,
2021, of which
$1.8 billion was secured
with owner occupied properties, compared
with $7.8 billion
and $1.9 billion, respectively,
at December 31,
2020. CRE NPLs amounted to $77 million at December 31,
2021, compared with $173 million at December
31, 2020. The CRE NPL
ratios for the BPPR and Popular U.S. segments were 1.95% and 0.04%, respectively,
at December 31, 2021, compared with 4.51%
and 0.07%, respectively, at December 31, 2020.
In addition to the NPLs included in Table 20, at December 31, 2021, there were $214 million of performing loans, mostly commercial
loans, which in management’s opinion, are currently subject to potential future classification as non-performing (December 31, 2020
- $228 million).
For
the
year
ended
December
31,
2021,
total
inflows
of
NPLs
held-in-portfolio,
excluding
consumer
loans,
decreased
by
approximately
$132
million,
when compared
to
the
inflows
for
the
same
period
in
2020.
Inflows
of
NPLs
held-in-portfolio at
the
BPPR segment decreased by $129 million compared to the
same period in 2020, driven by
lower mortgage inflows by $114
million.
Inflows of NPLs held-in-portfolio at the Popular U.S. segment
decreased by $3 million from the same period
in 2020.
46
Table 20 - Non-Performing
Assets
December 31, 2021
December 31, 2020
(Dollars in thousands)
BPPR
Popular
U.S.
Popular,
Inc.
BPPR
Popular
U.S.
Popular,
Inc.
Non-accrual loans:
Commercial
$
120,047
$
5,532
$
125,579
$
204,092
$
5,988
$
210,080
Construction
485
-
485
21,497
7,560
29,057
Leasing
3,102
-
3,102
3,441
-
3,441
Mortgage
333,887
21,969
355,856
414,343
14,864
429,207
Auto
23,085
-
23,085
15,736
-
15,736
Consumer
33,683
6,087
39,770
41,268
8,985
50,253
Total non-performing
loans held-in-portfolio
514,289
33,588
547,877
700,377
37,397
737,774
Non-performing loans held-for-sale
[1]
-
-
-
-
2,738
2,738
Other real estate owned ("OREO")
83,618
1,459
85,077
81,512
1,634
83,146
Total non-performing
assets
$
597,907
$
35,047
$
632,954
$
781,889
$
41,769
$
823,658
Accruing loans past-due 90 days or more
[2]
$
480,649
$
118
$
480,767
$
1,028,061
$
3
$
1,028,064
Non-performing loans to loans held-in-portfolio
1.87
%
2.51
%
Interest lost
$
38,123
$
45,040
[1] There were no non-performing loans held-for-sale
as of December 31, 2021 (December 31, 2020 - $3 million
in commercial loans).
[2] It is the Corporation’s policy to report delinquent
residential mortgage loans insured by FHA or guaranteed
by the VA as accruing
loans past due 90
days or more as opposed to non-performing since the
principal repayment is insured. The balance of these loans
includes $13 million at December 31,
2021 related to the rebooking of loans previously pooled into
GNMA securities, in which the Corporation had a buy-back
option as further described
below (December 31, 2020 - $57 million). Under the GNMA
program, issuers such as BPPR have the option
but not the obligation to repurchase loans
that are 90 days or more past due. For accounting purposes,
these loans subject to the repurchase option are required
to be reflected (rebooked) on
the financial statements of BPPR with an offsetting
liability. These balances include
$304 million of residential mortgage loans insured by
FHA or
guaranteed by the VA that
are no longer accruing interest as of December 31, 2021 (December
31, 2020 - $329 million).
Furthermore, the Corporation
has approximately $50 million in reverse mortgage loans which
are guaranteed by FHA, but which are currently not accruing
interest.
Due to the
guaranteed nature of the loans, it is the Corporation's
policy to exclude these balances from non-performing
assets (December 31, 2020 - $60 million).
47
Table 21 - Activity in Non
-Performing Loans Held-in-Portfolio (Excluding Consumer
Loans)
For the year ended December 31, 2021
(In thousands)
BPPR
Popular U.S.
Popular, Inc.
Beginning balance
$
639,932
$
28,412
$
668,344
Plus:
New non-performing loans
234,258
51,494
285,752
Advances on existing non-performing loans
-
84
84
Less:
Non-performing loans transferred to OREO
(34,419)
-
(34,419)
Non-performing loans charged-off
(35,963)
(1,592)
(37,555)
Loans returned to accrual status / loan collections
(349,389)
(42,124)
(391,513)
Loans transferred to held-for-sale
-
(8,773)
(8,773)
Ending balance NPLs
$
454,419
$
27,501
$
481,920
Table 22 - Activity in Non
-Performing Loans Held-in-Portfolio (Excluding Consumer
Loans)
For the year ended December 31, 2020
(In thousands)
BPPR
Popular U.S.
Popular, Inc.
Beginning balance
$
431,082
$
16,621
$
447,703
Transition of PCI to PCD loans under CECL
245,703
18,547
264,250
Plus:
New non-performing loans
362,786
54,092
416,878
Advances on existing non-performing loans
-
825
825
Less:
Non-performing loans transferred to OREO
(11,762)
-
(11,762)
Non-performing loans charged-off
(44,675)
(3,204)
(47,879)
Loans returned to accrual status / loan collections
(343,202)
(47,790)
(390,992)
Loans transferred to held-for-sale
-
(10,679)
(10,679)
Ending balance NPLs
$
639,932
$
28,412
$
668,344
48
Table 23 - Activity in Non
-Performing Commercial Loans Held-In-Portfolio
For the year ended December 31, 2021
(In thousands)
BPPR
Popular U.S.
Popular, Inc.
Beginning balance - NPLs
$204,092
$5,988
$210,080
Plus:
New non-performing loans
57,132
13,510
70,642
Advances on existing non-performing loans
-
52
52
Less:
Non-performing loans transferred to OREO
(9,261)
-
(9,261)
Non-performing loans charged-off
(14,935)
(1,042)
(15,977)
Loans returned to accrual status / loan collections
(116,981)
(11,203)
(128,184)
Loans transferred to held-for-sale
-
(1,773)
(1,773)
Ending balance - NPLs
$120,047
$5,532
$125,579
Table 24 - Activity in Non
-Performing Commercial Loans Held-in-Portfolio
For the year ended December 31, 2020
(In thousands)
BPPR
Popular U.S.
Popular, Inc.
Beginning balance - NPLs
$147,255
5,504
$152,759
Transition of PCI to PCD loans under CECL
112,517
18,547
131,064
Plus:
New non-performing loans
50,834
15,496
66,330
Advances on existing non-performing loans
-
633
633
Less:
Non-performing loans transferred to OREO
(2,304)
-
(2,304)
Non-performing loans charged-off
(23,755)
(1,646)
(25,401)
Loans returned to accrual status / loan collections
(80,455)
(21,867)
(102,322)
Loans transferred to held-for-sale
-
(10,679)
(10,679)
Ending balance - NPLs
$204,092
$5,988
$210,080
Table 25
-
Activity in Non-Performing Construction Loans Held-In
-Portfolio
For the year ended December 31, 2021
(In thousands)
BPPR
Popular U.S.
Popular, Inc.
Beginning balance - NPLs
$21,497
$7,560
$29,057
Plus:
New non-performing loans
481
12,141
12,622
Less:
Non-performing loans charged-off
(6,620)
(523)
(7,143)
Loans returned to accrual status / loan collections
(14,873)
(12,178)
(27,051)
Loans in accrual status transfer to held-for-sale
-
(7,000)
(7,000)
Ending balance - NPLs
$485
$-
$485
49
Table 26 -
Activity in Non-Performing Construction Loans Held-in
-Portfolio
For the year ended December 31, 2020
(In thousands)
BPPR
Popular U.S.
Popular, Inc.
Beginning balance - NPLs
$119
$26
$145
Plus:
New non-performing loans
21,514
9,069
30,583
Less:
Non-performing loans charged-off
-
(1,509)
(1,509)
Loans returned to accrual status / loan collections
(136)
(26)
(162)
Ending balance - NPLs
$21,497
$7,560
$29,057
Table 27 - Activity in Non
-Performing Mortgage Loans Held-in-Portfolio
For the year ended December 31,
2021
(In thousands)
BPPR
Popular U.S.
Popular, Inc.
Beginning balance - NPLs
$414,343
$14,864
$429,207
Plus:
New non-performing loans
176,645
25,843
202,488
Advances on existing non-performing loans
-
32
32
Less:
Non-performing loans transferred to OREO
(25,158)
-
(25,158)
Non-performing loans charged-off
(14,408)
(27)
(14,435)
Loans returned to accrual status / loan collections
(217,535)
(18,743)
(236,278)
Ending balance - NPLs
$333,887
$21,969
$355,856
Table 28 - Activity in Non
-Performing Mortgage Loans Held-in-Portfolio
For the year ended December 31,
2020
(In thousands)
BPPR
Popular U.S.
Popular, Inc.
Beginning balance - NPLs
$283,708
$11,091
$294,799
Transition of PCI to PCD loans under CECL
133,186
-
133,186
Plus:
New non-performing loans
290,438
29,527
319,965
Advances on existing non-performing loans
-
192
192
Less:
Non-performing loans transferred to OREO
(9,458)
-
(9,458)
Non-performing loans charged-off
(20,920)
(49)
(20,969)
Loans returned to accrual status / loan collections
(262,611)
(25,897)
(288,508)
Ending balance - NPLs
$414,343
$14,864
$429,207
50
Loan Delinquencies
Another key measure used to evaluate and
monitor the Corporation’s asset quality is
loan delinquencies. Loans delinquent 30 days
or
more
and
delinquencies, as
a
percentage
of
their
related
portfolio
category
at
December
31,
2021
and
2020,
are
presented
below.
Table 29 - Loan Delinquencies
(Dollars in thousands)
2021
2020
Loans delinquent
30 days or more
Total loans
Total
delinquencies as a
percentage of total
loans
Loans delinquent
30 days or more
Total loans
Total
delinquencies as a
percentage of total
loans
Commercial
$
161,251
$
13,732,701
1.17
%
$
249,484
$
13,614,310
1.83
%
Construction
485
716,220
0.07
50,369
926,208
5.44
Leasing
14,379
1,381,319
1.04
14,009
1,197,661
1.17
Mortgage
[1]
1,141,082
7,427,196
15.36
1,775,902
7,890,680
22.51
Consumer
173,896
5,983,121
2.91
179,789
5,756,337
3.12
Loans held-for-sale
-
59,168
-
3,108
99,455
3.13
Total
$
1,491,093
$
29,299,725
5.09
%
$
2,272,661
$
29,484,651
7.71
%
[1]
Loans delinquent 30 days or more includes $0.6 billion of
residential mortgage loans insured by FHA or guaranteed
by the VA as of December
31,
2021 (December 31, 2020 - $1.1 billion). Refer to Note
8 to the Consolidated Financial Statements for additional
information of guaranteed loans.
Allowance for Credit Losses (“ACL”)
The Corporation adopted the new CECL accounting standard effective on January 1,
2020. The allowance for credit losses (“ACL”),
represents management’s estimate
of expected credit
losses through the
remaining contractual life
of the
different loan
segments,
impacted by expected
prepayments. The ACL
is maintained at
a sufficient
level to provide
for estimated credit
losses on collateral
dependent
loans
as
well
as
troubled
debt
restructurings
separately
from
the
remainder
of
the
loan
portfolio.
The
Corporation’s
management evaluates the adequacy of the ACL on a quarterly basis. In this evaluation, management considers current conditions,
macroeconomic
economic
expectations
through
a
reasonable
and
supportable
period,
historical
loss
experience,
portfolio
composition by loan type and
risk characteristics, results of periodic credit
reviews of individual loans, and
regulatory requirements,
amongst other factors.
The Corporation must rely on
estimates and exercise judgment regarding matters
where the ultimate outcome is
unknown, such as
economic developments affecting specific
customers, industries, or markets.
Other factors that can
affect management’s estimates
are
recalibration
of
statistical
models
used
to
calculate
lifetime
expected
losses,
changes
in
underwriting
standards,
financial
accounting standards and loan impairment measurements,
among others. Changes in the financial condition of
individual borrowers,
in economic
conditions, and
in the
condition of
the various
markets in
which collateral
may be
sold, may
also affect
the required
level of
the allowance
for credit
losses. Consequently,
the business
financial condition,
liquidity,
capital, and
results of
operations
could also be affected.
At December 31,
2021, the allowance for
credit losses amounted
to $695 million,
a decrease of
$201 million, when
compared with
December 31,
2020, mainly prompted
by improvements in
credit quality
and the macroeconomic
outlook. Since the
December 31,
2020,
scenarios,
updated
economic
assumptions
have
included
a
more
optimistic
view
of
the
economy,
prompting
substantial
reductions
in
reserves
across
different
portfolios,
also
contributing
to
lower
qualitative
reserves.
Given
that
any
one
economic
outlook is inherently uncertain, the Corporation leverages multiple scenarios to estimate its ACL. The baseline scenario continues to
be assigned
the highest
probability,
followed by
the pessimistic
scenario. During
the fourth
quarter of
2021, in
response to
recent
events that
impacted both epidemiological
and fiscal
assumptions, the weight
assigned to the
pessimistic scenario was
increased,
contributing to an increase of approximately $13
million in reserves.
The ACL
for BPPR
decreased
by $146
million to
$594 million,
when compared to
December 31,
2020. The
ACL for
Popular U.S.
decreased
by
$55
million
to
$101
million,
when
compared
to
December
31,
2020.
The
decrease
in
ACL
was
mainly
driven
by
51
continued borrower
performance and
improvements in
the macroeconomic
outlook, coupled
with releases
of qualitative
reserves.
The current
baseline forecast
continues to
show a
favorable economic
scenario. The
2022 expected
GDP growth
rate for
Puerto
Rico is
approximately 4%,
with the
unemployment rate
expected to
average around
7.4% for
the year.
In the
case of
the United
States, the
baseline scenario
expects GDP
growth for
2022 of
approximately 4.6%,
with unemployment
rate expected
to average
around 3.7%.
For 2023 both regions expect GDP growth with average unemployment rate levels remaining stable in
comparison to
2022.
The provision for credit losses for the year ended December 31, 2021, amounted to a benefit of $183.3 million, a
favorable variance
of $465.7 million from the same period in the prior
year, mainly driven by the abovementioned improvements in credit quality and
the
macroeconomic
outlook,
and
lower
NCOs.
Refer
to
Note
9
–
Allowance
for
credit
losses
–
loans
held-in-portfolio,
and
to
the
Provision for Credit Losses section of this MD&A
for additional information.
The following
table presents
net charge-offs
to average
loans held-in-portfolio
(“HIP”) ratios
by loan
category for
the years
ended
December 31, 2021 and 2020:
Table 30 - Net Charge-Offs
(Recoveries) to Average Loans HIP
December 31, 2021
December 31, 2020
BPPR
Popular U.S.
Popular Inc.
BPPR
Popular U.S.
Popular Inc.
Commercial
(0.24)
%
(0.02)
%
(0.15)
%
0.21
%
(0.04)
%
0.11
%
Construction
1.27
(0.02)
0.19
(0.57)
0.04
(0.07)
Mortgage
0.04
-
0.04
0.32
-
0.27
Leasing
0.11
-
0.11
0.66
-
0.66
Consumer
0.58
0.99
0.60
2.44
3.07
2.48
Total
0.09
%
0.01
%
0.07
%
0.85
%
0.13
%
0.66
%
NCOs for the year ended December 31, 2021 amounted to
$20.7 million, decreasing by $165.7 million when compared to the same
period
in
2020.
The
BPPR
segment
decreased
by
$156.9
million
mainly
driven
by
lower
consumer,
commercial,
and
mortgage
NCOs by
$101.5 million, $35.2
million and
$16.9 million, respectively.
The PB segment
decreased by 8.8
million, mainly driven
by
lower
consumer
NCOs by
$9.4 million.
The
decrease in
NCOs was
due
to
the
effect
of
a
favorable
economic
environment and
continued borrower performance, as reflected in the
ongoing low level of delinquencies and NPLs
when compared to pre-pandemic
trends.
52
Table 31 - Allowance for Credit
Losses - Loan Portfolios
December 31, 2021
(Dollars in thousands)
Commercial
Construction
Mortgage
Leasing
Consumer
Total
Total ACL
$
215,805
$
6,363
$
154,478
$
17,578
$
301,142
$
695,366
Total loans held-in
-portfolio
$
13,732,701
$
716,220
$
7,427,196
$
1,381,319
$
5,983,121
$
29,240,557
ACL to loans held-in-portfolio
1.57
%
0.89
%
2.08
%
1.27
%
5.03
%
2.38
%
Total Non-performing
loans held-in-portfolio
$
125,579
$
485
$
355,856
$
3,102
$
62,855
$
547,877
ACL to non-performing loans held-in-portfolio
171.85
%
N.M.
43.41
%
566.67
%
479.11
%
126.92
%
N.M. - Not meaningful.
Table 32 - Allowance for Credit
Losses - Loan Portfolios
December 31, 2020
(Dollars in thousands)
Commercial
Construction
Mortgage
Leasing
Consumer
Total
Total ACL
$
333,380
$
14,237
$
215,716
$
16,863
$
316,054
$
896,250
Total loans held-in
-portfolio
$
13,614,310
$
926,208
$
7,890,680
$
1,197,661
$
5,756,337
$
29,385,196
ACL to loans held-in-portfolio
2.45
%
1.54
%
2.73
%
1.41
%
5.49
%
3.05
%
Total Non-performing
loans held-in-portfolio
$
210,080
$
29,057
$
429,207
$
3,441
$
65,989
$
737,774
ACL to non-performing loans held-in-portfolio
158.69
%
49.00
%
50.26
%
490.06
%
478.95
%
121.48
%
Table
33
details
the
breakdown
of
the
allowance
for
credit
losses
by
loan
categories.
The
breakdown
is
made
for
analytical
purposes, and it is not necessarily indicative of
the categories in which future loan losses may occur.
53
Table 33 - Allocation of the
Allowance for Credit Losses - Loans
At December 31,
2021
2020
% of loans
% of loans
in each
in each
category to
category to
(Dollars in millions)
ACL
total loans
ACL
total loans
Commercial
$215.8
47.0
%
$333.4
46.3
%
Construction
6.4
2.4
14.3
3.2
Mortgage
154.5
25.4
215.7
26.8
Leasing
17.6
4.7
16.9
4.1
Consumer
301.1
20.5
316.0
19.6
Total
[1]
$695.4
100.0
%
$896.3
100.0
%
[1] Note: For purposes of this table the term loans refers to
loans held-in-portfolio excluding loans held-for-sale.
Troubled debt restructurings
The Corporation’s
troubled debt
restructurings (“TDRs”) loans
amounted to
$1.7 billion
at December
31, 2021,
decreasing by
$12
million,
from
December 31,
2020.
A
total
of
$716
million
of
these
TDRs
are
related
to
guaranteed
loans,
which
are
in
accruing
status. TDRs in the BPPR segment amounted to $1.6 billion, a decrease
of $9 million, mostly related to a combined decrease of $58
million in the commercial and
construction TDRs and lower consumer TDRs
by $11
million, in part offset
by higher mortgage TDRs
by $61 million, of which $61 million
were related to government guaranteed loans. The Popular U.S.
segment TDRs have remained
essentially flat since December 31, 2020. TDRs in accruing status increased by $74 million from December 31, 2020, mostly related
to an increase of $83 million in BPPR’s mortgage TDRs, in part
offset by a decrease of $10 million in BPPR’s consumer TDRs, while
non-accruing TDRs decreased by $86 million, of which
$60 million were related to commercial and
construction TDRs.
Refer to
Note 9
to the
Consolidated Financial
Statements for
additional information
on modifications
considered TDRs,
including
certain qualitative and quantitative data about TDRs
performed in the past twelve months.
Enterprise Risk Management
The Corporation’s
Board of
Directors has
established a
Risk Management
Committee (“RMC”)
to, among
other things,
assist the
Board in its (i) oversight of the Corporation’s overall risk framework and (ii) to monitor, review, and approve policies to measure, limit
and manage the Corporation’s risks.
The
Corporation
has
established
a
three
lines
of
defense
framework:
(a)
business
line
management constitutes
the
first
line
of
defense by identifying
and managing the
risks associated with
business activities, (b)
components of the
Risk Management Group
and
the
Corporate
Security
Group,
among
others,
act
as
the
second
line
of
defense
by,
among
other
things,
measuring
and
reporting on the Corporation’s risk activities, and (c) the Corporate Auditing Division
,
as the third line of defense, reporting directly to
the Audit Committee of the Board, by independently providing
assurance regarding the effectiveness of the risk
framework.
The Enterprise Risk Management Committee (the “ERM Committee”) is a
management committee whose purpose is to: (a) monitor
the
principal risks
as defined
in the
Risk Appetite
Statement (“RAS”)
of the
Risk Management
Policy
affecting
our
business and
within the Corporation’s Enterprise Risk Management (“ERM”) framework,
(b) review key risk indicators and related developments
at
the
business
level
consistent
with
the
RAS,
and
(c)
lead
the
incorporation
of
a
uniform
Governance,
Risk
and
Compliance
framework across
the Corporation.
The ERM
Committee and
the Market
Risk &
ERM Unit
in the
Financial and
Operational Risk
Management
Division
(the
“FORM
Division”),
in
coordination
with
the
Chief
Risk
Officer,
create
the
framework
to
identify
and
54
manage
multiple
and
cross-enterprise
risks,
and
to
articulate
the
RAS
and
supporting
metrics.
Our
risk
management
program
monitors
the
following
principal
risks:
credit,
interest
rate,
market,
liquidity,
operational,
cyber
and
information
security,
legal,
regulatory affairs, regulatory and financial compliance, BSA/
AML & sanctions, strategic and reputational.
The Market Risk & ERM Unit has
established a process to ensure that an
appropriate standard readiness assessment is performed
before we launch a new product or service. Similar
procedures are followed with the Treasury Division for
transactions involving the
purchase and sale of assets, and by the Mergers
and Acquisitions Division for acquisition transactions.
The Asset/Liability
Committee (“ALCO”),
composed of
senior management
representatives from
the business
lines and
corporate
functions, and the Corporate Finance Group, are responsible for planning and executing the
Corporation’s market, interest rate risk,
funding
activities
and
strategy,
as
well
as
for
implementing
approved
policies
and
procedures.
The
ALCO
also
reviews
the
Corporation’s
capital
policy
and
the
attainment
of
the
capital
management
objectives.
In
addition,
the
Market
Risk
Unit
independently measures, monitors and reports compliance with liquidity and market risk policies, and oversees controls surrounding
interest risk measurements.
The Corporate Compliance
Committee, comprised of
senior management team
members and representatives
from the Regulatory
and
Financial Compliance
Division,
the
Financial Crimes
Compliance Division
and
the
Corporate Risk
Services
Division, among
others,
are
responsible
for
overseeing
and
assessing
the
adequacy
of
the
risk
management
processes
that
underlie
Popular’s
compliance program for identifying, assessing, measuring, monitoring, testing, mitigating, and reporting compliance
risks. They also
supervise Popular’s reporting obligations under
the compliance program so
as to ensure the
adequacy, consistency
and timeliness
of the reporting of compliance-related risks across
the Corporation.
The Regulatory Affairs
team is
responsible for maintaining
an open dialog
with the banking
regulatory agencies in
order to
ensure
regulatory
risks
are
properly identified,
measured,
monitored,
as
well
as
communicated to
the
appropriate regulatory
agency
as
necessary to keep them apprised of material matters within
the purview of these agencies.
The
Credit
Strategy
Committee,
composed
of
senior
level
management
representatives
from
the
business
lines
and
corporate
functions,
and
the
Corporate
Credit
Risk
Management
Division,
are
responsible
for
managing
the
Corporation’s
overall
credit
exposure by establishing policies, standards and guidelines that define, quantify and monitor credit risk and assessing
the adequacy
of the allowance for credit losses.
The Corporation’s
Operational Risk
Committee (“ORCO”)
and the
Cyber Security
Committee, which are
composed of
senior level
management representatives from
the business
lines and corporate
functions, provide
executive oversight to
facilitate consistency
of effective
policies, best practices,
controls and
monitoring tools for
managing and
assessing all types
of operational
risks across
the Corporation. The
FORM Division, within
the Risk Management Group,
serves as ORCO’s
operating arm and
is responsible for
establishing baseline processes to measure, monitor, limit and manage
operational risk.
The Corporate Security Group (“CSG”), under the direction of the
Chief Security Officer, leads
all efforts pertaining to cybersecurity,
enterprise fraud and data
privacy, including
developing strategies and oversight processes with
policies and programs that mitigate
compliance, operational,
strategic, financial
and reputational
risks associated
with the
Corporation’s and
our customers’
data and
assets.
The CSG also leads the Cyber Security Committee.
The Corporate Legal Division, in this context, has the responsibility
of assessing, monitoring, managing and reporting with respect to
legal risks, including those related to litigation, investigations
and other material legal matters.
The
Corporation
has
also
established
an
Environmental,
Social
and
Governance
(“ESG”)
Committee
whose
purpose
and
responsibility is
to oversee
the Corporation’s
ESG strategies
and support
the development
and consistent
application of
policies,
processes and procedures that measure, limit and
manage ESG matters and risks.
The processes
of strategic
risk planning
and the
evaluation of
reputational risk
are on-going
processes through
which continuous
data gathering and
analysis are performed.
In order
to ensure strategic
risks are properly
identified and monitored,
the Corporate
Strategic
Planning
Division
performs
periodic
assessments
regarding
corporate
strategic
priority
initiatives
as
well
as
emerging
issues.
The Acquisitions and Corporate Investments Division
continuously assesses potential strategic transactions.
The Corporate
55
Communications
Division
is
responsible
for
the
monitoring,
management
and
implementation
of
action
plans
with
respect
to
reputational risk issues.
Popular’s capital planning process integrates the Corporation’s risk profile
as well as its strategic focus, operating
environment, and
other factors
that could
materially affect
capital adequacy
in hypothetical
highly-stressed business
scenarios. Capital
ratio targets
and triggers take into consideration the different risks evaluated
under Popular’s risk management framework.
In
addition to
establishing a
formal process
to manage
risk, our
corporate culture
is also
critical to
an effective
risk management
function.
Through our Code
of Ethics, the
Corporation provides a framework
for all our
employees to conduct themselves
with the
highest integrity.
ADOPTION OF NEW ACCOUNTING STANDARDS AND ISSUED BUT NOT
YET EFFECTIVE ACCOUNTING STANDARDS
Refer to Note 3, “New Accounting Pronouncements”
to the Consolidated Financial Statements.
56
Statistical Summary 2020-2021
Statements of Financial Condition
At December 31,
(In thousands)
2021
2020
Assets:
Cash and due from banks
$
428,433
$
491,065
Money market investments:
Time deposits with other banks
17,536,719
11,640,880
Total money market investments
17,536,719
11,640,880
Trading account debt securities, at fair value
29,711
36,674
Debt securities available-for-sale, at fair
value
24,968,269
21,561,152
Debt securities held-to-maturity, at amortized cost
79,461
92,621
Less – Allowance for credit losses
8,096
10,261
Debt securities held-to-maturity, net
71,365
82,360
Equity securities
189,977
173,737
Loans held-for-sale, at lower of cost or fair
value
59,168
99,455
Loans held-in-portfolio:
Loans held-in-portfolio
29,506,225
29,588,430
Less – Unearned income
265,668
203,234
Allowance for credit losses
695,366
896,250
Total loans held-in-portfolio, net
28,545,191
28,488,946
Premises and equipment, net
494,240
510,241
Other real estate
85,077
83,146
Accrued income receivable
203,096
209,320
Mortgage servicing rights, at fair value
121,570
118,395
Other assets
1,628,571
1,737,041
Goodwill
720,293
671,122
Other intangible assets
16,219
22,466
Total assets
$
75,097,899
$
65,926,000
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing
$
15,684,482
$
13,128,699
Interest bearing
51,320,606
43,737,641
Total deposits
67,005,088
56,866,340
Assets sold under agreements to repurchase
91,603
121,303
Other short-term borrowings
75,000
-
Notes payable
988,563
1,224,981
Other liabilities
968,248
1,684,689
Total liabilities
69,128,502
59,897,313
Stockholders’ equity:
Preferred stock
22,143
22,143
Common stock
1,046
1,045
Surplus
4,650,182
4,571,534
Retained earnings
2,973,745
2,260,928
Treasury stock – at cost
(1,352,650)
(1,016,954)
Accumulated other comprehensive (loss)
income, net of tax
(325,069)
189,991
Total stockholders’ equity
5,969,397
6,028,687
Total liabilities and stockholders’ equity
$
75,097,899
$
65,926,000
57
Statistical Summary 2019-2021
Statements of Operations
For the years ended December 31,
(In thousands)
2021
2020
2019
Interest income:
Loans
$
1,747,827
$
1,742,390
$
1,802,968
Money market investments
21,147
19,721
89,823
Investment securities
353,663
329,440
368,002
Total interest income
2,122,637
2,091,551
2,260,793
Less - Interest expense
165,047
234,938
369,099
Net interest income
1,957,590
1,856,613
1,891,694
Provision for credit losses (benefit)
(193,464)
292,536
165,779
Net interest income after provision for
credit losses (benefit)
2,151,054
1,564,077
1,725,915
Mortgage banking activities
50,133
10,401
32,093
Net gain (loss) on sale of debt securities
23
41
(20)
Net gain, including impairment on equity securities
131
6,279
2,506
Net (loss) profit on trading account debt securities
(389)
1,033
994
Net (loss) gain on sale of loans, including
valuation adjustments on loans held-for-sale
(73)
1,234
-
Adjustment (expense) to indemnity reserves
on loans sold
4,406
390
(343)
Other non-interest income
587,897
492,934
534,653
Total non-interest income
642,128
512,312
569,883
Operating expenses:
Personnel costs
631,802
564,205
590,625
All other operating expenses
917,473
893,624
886,857
Total operating expenses
1,549,275
1,457,829
1,477,482
Income before income tax
1,243,907
618,560
818,316
Income tax expense
309,018
111,938
147,181
Net Income
$
934,889
$
506,622
$
671,135
Net Income Applicable to Common Stock
$
933,477
$
504,864
$
667,412
58
Statistical Summary 2019-2021
Average Balance Sheet and Summary of
Net Interest Income
On a Taxable Equivalent
Basis*
2021
2020
2019
(Dollars in thousands)
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
Assets
Interest earning assets:
Money market investments
$
15,999,741
$
21,147
0.13
%
$
8,597,652
$
19,723
0.23
%
$
4,166,293
$
89,824
2.16
%
U.S.
Treasury securities
12,396,773
266,670
2.16
12,107,819
257,308
2.13
9,823,518
302,025
3.07
Obligations of U.S.
Government
sponsored entities
7,972
120
1.50
70,424
2,818
4.00
234,553
5,911
2.52
Obligations of Puerto Rico, States
and political subdivisions
75,607
7,608
10.06
82,051
5,705
6.95
93,313
6,394
6.85
Collateralized mortgage obligations and
mortgage-backed securities
10,255,525
224,706
2.19
6,913,416
194,794
2.82
5,582,051
178,964
3.21
Other
194,640
9,027
4.64
178,818
7,369
4.12
171,223
8,487
4.96
Total investment securities
22,930,517
508,131
2.22
19,352,528
467,994
2.42
15,904,658
501,781
3.15
Trading account securities
84,380
4,339
5.16
69,446
4,165
6.00
67,596
5,103
7.55
Loans (net of unearned income)
29,074,045
1,794,789
6.19
28,384,981
1,785,022
6.29
26,806,368
1,850,894
6.90
Total interest earning
assets/Interest
income
$
68,088,683
$
2,328,406
3.43
%
$
56,404,607
$
2,276,904
4.04
%
$
46,944,915
$
2,447,602
5.21
%
Total non-interest
earning assets
3,079,942
3,178,848
3,396,912
Total assets
$
71,168,625
$
59,583,455
$
50,341,827
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Savings, NOW,
money market and other
interest bearing demand accounts
$
41,387,504
$
59,034
0.15
%
$
32,077,578
$
92,417
0.29
%
$
25,575,455
$
192,200
0.75
%
Time deposits
7,028,334
52,587
0.75
7,970,474
83,438
1.05
7,770,430
112,658
1.45
Federal funds purchased
1
-
0.25
342
1
0.25
-
-
2.63
Securities purchased under agreement to
resell
91,394
317
0.35
143,718
2,336
1.63
222,565
5,882
2.64
Other short-term borrowings
343
1
0.35
21,557
120
0.56
8,703
217
2.50
Notes payable
1,184,737
53,107
4.49
1,178,169
56,626
4.81
1,194,119
58,142
4.77
Total interest bearing
liabilities/Interest
expense
49,692,313
165,046
0.33
41,391,838
234,938
0.57
34,771,272
369,099
1.06
Total non-interest
bearing liabilities
15,698,660
12,771,679
9,857,038
Total liabilities
65,390,973
54,163,517
44,628,310
Stockholders' equity
5,777,652
5,419,938
5,713,517
Total liabilities and
stockholders' equity
$
71,168,625
$
59,583,455
$
50,341,827
Net interest income on a taxable
equivalent basis
$
2,163,360
$
2,041,966
$
2,078,503
Cost of funding earning assets
0.24
%
0.42
%
0.78
%
Net interest margin
3.19
%
3.62
%
4.43
%
Effect of the taxable equivalent
205,770
185,353
186,809
Net interest income per books
$
1,957,590
$
1,856,613
$
1,891,694
*
Shows
the
effect
of
the
tax
exempt
status
of
some
loans
and
investments
on
their
yield,
using
the
applicable
statutory
income
tax
rates.
The
computation considers
the interest
expense disallowance
required by
the Puerto
Rico Internal
Revenue Code.
This adjustment
is shown
in order
to
compare the yields of the tax exempt and taxable assets
on a taxable basis.
Note: Average loan
balances include the
average balance of
non-accruing loans. No
interest income is
recognized for these
loans in accordance
with
the Corporation’s policy.
59
Report of Management on Internal Control Over Financial
Reporting
The management of
Popular, Inc.
(the “Corporation”) is responsible
for establishing and
maintaining adequate internal control
over
financial reporting as defined in Rules 13a - 15(f) and 15d -
15(f) under the Securities Exchange Act of 1934 and for our assessment
of internal control over financial reporting. The Corporation’s internal
control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in
accordance
with
accounting
principles
generally
accepted
in
the
United
States
of
America,
and
includes
controls
over
the
preparation of
financial statements
in accordance
with the
instructions to
the Consolidated
Financial Statements
for Bank
Holding
Companies (Form FR Y-9C)
to comply with the reporting requirements of Section 112
of the Federal Deposit Insurance Corporation
Improvement Act (FDICIA). The Corporation’s internal control
over financial reporting includes those policies
and procedures that:
(i)
pertain
to
the
maintenance
of
records
that,
in
reasonable
detail,
accurately
and
fairly
reflect
the
transactions
and
dispositions of the assets of the Corporation;
(ii)
provide
reasonable
assurance
that
transactions
are
recorded
as
necessary
to
permit
preparation
of
financial
statements in accordance with accounting principles generally accepted in the United States of America, and that receipts
and expenditures of the Corporation are being made only in accordance with authorizations of management and directors
of the Corporation; and
(iii) provide reasonable assurance regarding
prevention or timely detection of
unauthorized acquisition, use or disposition
of the Corporation’s assets that could have a material effect
on the financial statements.
Because
of
its
inherent
limitations,
internal
control
over
financial
reporting
may
not
prevent
or
detect
misstatements.
Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
The management of Popular,
Inc. has assessed the
effectiveness of the Corporation’s
internal control over financial reporting
as of
December
31,
2021.
In
making
this
assessment,
management
used
the
criteria
set
forth
in
the
Internal
Control-Integrated
Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
On October
15, 2021, Popular
Equipment Finance, LLC
(“PEF”), a newly
formed wholly-owned subsidiary
of Popular Bank
(“PB”),
completed the
acquisition of
certain assets
and
the
assumption of
certain
liabilities of
K2
Capital Group
LLC’s
(“K2”) equipment
leasing
and
financing
business
based
in
Minnesota
(the
“Acquired
Business”).
The
Acquired
Business’
total
assets
and
total
revenues represented approximately 0.2% and 0.2%, respectively, of
the related consolidated financial statements as of and for
the
period ended
December 31,
2021. The
Corporation has
excluded the
Acquired Business
from
its assessment
of the
design and
operating effectiveness of internal controls over financial reporting for the fiscal year 2021. The Corporation made this determination
in accordance with SEC’s
guidance which permits the exclusion of
a recently acquired business from
the scope of this
assessment
in the year of acquisition.
Based on our assessment, management concluded that the Corporation maintained effective internal control over financial reporting
as of December 31, 2021 based on the
criteria referred to above.
The Corporation’s
independent registered
public accounting
firm, PricewaterhouseCoopers
LLP,
has audited
the effectiveness
of
the Corporation’s
internal control
over financial
reporting as
of December
31, 2021,
as stated
in their
report dated
March 1,
2022
which appears herein.
Ignacio Alvarez
Carlos J. Vázquez
President and
Executive Vice President
Chief Executive Officer
and Chief Financial Officer
60
Report of Independent Registered Public Accounting Firm
To
the
Board of Directors and Stockholders of Popular, Inc.
Opinions on the Financial Statements and Internal
Control over Financial Reporting
We
have
audited
the
accompanying
consolidated
statements
of
financial
condition
of
Popular,
Inc.
and
its
subsidiaries
(the
“Corporation”)
as
of
December
31,
2021
and
2020,
and
the
related
consolidated
statements
of
operations, comprehensive income, changes
in stockholders’ equity and cash
flows for each of
the three years in
the
period
ended December
31, 2021,
including the
related notes
collectively
referred
to
as the
“consolidated
financial
statements”).
We
also
have
audited
the
Corporation's
internal
control
over
financial
reporting
as
of
December
31,
2021,
based
on
criteria
established
in
Internal
Control
-
Integrated
Framework
(2013)
issued
by
the
Committee
of
Sponsoring Organizations of the Treadway Commission (COSO).
In
our
opinion,
the
consolidated
financial
statements
referred
to
above
present
fairly,
in
all
material
respects,
the
financial position of the Corporation as of
December 31, 2021 and 2020, and the
results of its operations and its cash
flows
for
each
of
the
three
years
in
the
period
ended
December
31,
2021
in
conformity with
accounting
principles
generally accepted
in the
United States
of America.
Also, in
our opinion,
the Corporation
maintained, in
all material
respects, effective
internal control over
financial reporting
as of
December 31, 2021,
based on criteria
established in
Internal Control - Integrated Framework
(2013) issued by the COSO.
Change in Accounting Principle
As
discussed
in
Note
3
to
the
consolidated
financial
statements,
the
Corporation
changed
the
manner
in
which
it
accounts for its allowance for credit losses in 2020.
Basis for Opinions
The
Corporation's management
is responsible
for these
consolidated
financial statements,
for maintaining
effective
internal control
over financial
reporting, and
for its
assessment of
the effectiveness
of internal
control over
financial
reporting,
included
in
the
accompanying
Report
of
Management
on
Internal
Control
over
Financial
Reporting.
Our
responsibility is
to express opinions
on the
Corporation’s consolidated
financial statements and
on the
Corporation’s
internal
control
over
financial
reporting
based
on
our
audits.
We
are
a
public
accounting
firm
registered
with
the
Public
Company
Accounting
Oversight
Board
(United
States)
(PCAOB)
and
are
required
to
be
independent
with
respect
to
the
Corporation
in
accordance
with
the
U.S.
federal
securities
laws
and
the
applicable
rules
and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits
in accordance with the standards
of the PCAOB. Those standards
require that we plan and
perform
the audits
to obtain
reasonable assurance
about
whether the
consolidated financial
statements are
free of
material
misstatement,
whether due
to error
or
fraud, and
whether
effective
internal control
over financial
reporting
was maintained in all material respects.
Our
audits
of
the
consolidated
financial
statements
included
performing
procedures
to
assess
the
risks of
material
misstatement of the consolidated
financial statements, whether due
to error or fraud,
and performing procedures that
respond to
those risks.
Such procedures
included examining,
on a
test basis,
evidence regarding
the amounts
and
disclosures
in
the
consolidated
financial
statements.
Our
audits
also
included
evaluating
the
accounting
principles
used
and
significant
estimates
made
by
management,
as
well
as
evaluating
the
overall
presentation
of
the
consolidated
financial
statements.
Our
audit
of
internal
control
over
financial
reporting
included
obtaining
an
61
understanding
of
internal
control
over
financial
reporting,
assessing
the
risk
that
a
material
weakness
exists,
and
testing
and
evaluating
the
design
and
operating
effectiveness
of
internal
control
based
on
the
assessed
risk.
Our
audits also included performing such other procedures as we considered necessary in
the circumstances. We believe
that our audits provide a reasonable basis for our opinions.
As described in
the Report of
Management on Internal
Control Over Financial Reporting,
management has excluded
the business
acquired from
K2 Capital
Group LLC
(the "acquired
business") from
its assessment
of internal
control
over financial reporting as of December
31, 2021 because it was acquired
by the Corporation in a purchase
business
combination
during
2021.
We
have
also
excluded
the
acquired
business
from
our
audit
of
internal
control
over
financial reporting. The acquired
business' total assets and
total revenues excluded from
management’s assessment
and
our
audit
of
internal
control
over
financial
reporting
represent
.2%
and
.2%,
respectively,
of
the
related
consolidated financial statement amounts as of and for the year ended December 31, 2021.
Definition and Limitations of Internal Control over Financial Reporting
A
company’s
internal
control
over
financial
reporting
is
a
process
designed
to
provide
reasonable
assurance
regarding
the
reliability
of
financial
reporting
and
the
preparation
of
financial
statements
for
external
purposes
in
accordance
with
generally
accepted
accounting
principles.
Management's
assessment
and
our
audit
of
Popular,
Inc.'s
internal
control
over
financial
reporting
also
included
controls
over
the
preparation
of
financial
statements
in
accordance with the instructions
to the Consolidated Financial Statements
for Bank Holding Companies
(Form FR Y-
9C)
to
comply
with
the
reporting
requirements
of
Section
112
of
the
Federal
Deposit
Insurance
Corporation
Improvement
Act
(FDICIA).
A
company’s
internal
control
over
financial
reporting
includes
those
policies
and
procedures
that (i)
pertain to
the maintenance
of records
that, in
reasonable detail,
accurately
and fairly
reflect the
transactions and
dispositions of
the assets
of the
company; (ii)
provide reasonable
assurance that
transactions are
recorded
as
necessary
to
permit
preparation
of
financial
statements
in
accordance
with
generally
accepted
accounting
principles, and
that receipts
and expenditures
of the
company are
being made
only
in accordance
with
authorizations
of
management
and
directors
of
the
company;
and
(iii)
provide
reasonable
assurance
regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of
its inherent
limitations, internal
control over
financial reporting
may not
prevent or
detect misstatements.
Also, projections of
any evaluation of effectiveness
to future periods are
subject to the risk
that controls may become
inadequate because
of changes
in conditions,
or that
the degree
of compliance
with the
policies or
procedures may
deteriorate.
Critical Audit Matters
The critical
audit matters
communicated below
are matters
arising from
the current
period audit
of the
consolidated
financial
statements
that
were
communicated
or
required
to
be
communicated
to
the
audit
committee
and
that
(i)
relate
to
accounts
or
disclosures
that
are
material
to
the
consolidated
financial
statements
and
(ii)
involved
our
especially challenging,
subjective, or
complex judgments.
The communication
of critical
audit matters
does not
alter
in any way our opinion on the consolidated financial statements, taken as a whole, and
we are not, by communicating
the
critical
audit
matters
below,
providing
separate
opinions
on
the
critical
audit
matters
or
on
the
accounts
or
disclosures to which they relate.
Allowance
for
Credit
Losses
on
Loans
Held-in-Portfolio
-
Quantitative
Models,
and
Qualitative
Adjustments
to
the
Puerto Rico Portfolios
As described in
Notes 2 and
9 to the
consolidated financial statements,
the Corporation follows
the current expected
credit
loss
(“CECL”)
model,
to
establish
and
evaluate
the
adequacy
of
the
allowance
for
credit
losses
(“ACL”)
to
provide for expected
losses in the loan
portfolio. As of December
31, 2021, the allowance
for credit losses
was $695
million
on
total
loans
of
$29
billion.
This
CECL
model
establishes
a
forward-looking
methodology
that
reflects
the
expected credit losses over the lives of financial assets. The quantitative modeling framework includes competing risk
models
to
generate
lifetime
defaults
and
prepayments,
and
other
loan
level
modeling
techniques
to
estimate
loss
62
severity.
As
part
of
this
methodology,
management
evaluates
various
macroeconomic
scenarios,
and
may
apply
probability
weights
to
the
outcome
of
the
selected
scenarios.
The
ACL
also
includes
a
qualitative
framework
that
addresses losses
that are
expected but
not captured
within the
quantitative modeling
framework. In
order to
identify
potential
losses
that are
not captured
through the
models, management
evaluated model
limitations as
well as
the
different
risks covered
by the
variables used
in each
quantitative model.
To
complement the
analysis, management
also evaluated
sectors that
have low
levels of
historical defaults,
but current
conditions show
the potential
for future
losses.
The
principal
considerations
for
our
determination
that
performing
procedures
relating
to
the
allowance
for
credit
losses on
loans
held-in-portfolio quantitative
models, and
qualitative adjustments
to the
Puerto Rico
portfolios is
a
critical
audit
matter
are
(i)
the
significant
judgment
by
management
in
determining
the
allowance
for
credit
losses,
including
qualitative adjustments
to the
Puerto Rico
portfolios,
which in
turn led
to a
high degree
of auditor
effort,
judgment, and subjectivity in performing
procedures and evaluating audit evidence
relating to the allowance for
credit
losses,
including management’s
selection of
macroeconomic
scenarios and
probability
weights applied;
and (ii)
the
audit
effort
involved the
use of
professionals with
specialized skill
and knowledge.
Addressing the
matter
involved
performing
procedures
and
evaluating
audit
evidence
in
connection
with
forming
our
overall
opinion
on
the
consolidated
financial
statements.
These
procedures
included
testing
the
effectiveness
of
controls
relating
to
the
allowance for
credit losses
for loans
held-in-portfolio, including
qualitative adjustments
to the
Puerto Rico
portfolios.
These procedures also included, among others, testing management’s
process for estimating the allowance for credit
losses
by (i)
evaluating the
appropriateness of
the methodology,
including models
used for
estimating the
ACL; (ii)
evaluating
the reasonableness of management’s
selection of various macroeconomic
scenarios including probability
weights
applied
to
the
expected
loss
outcome
of
the
selected
macroeconomic
scenarios;
(iii)
evaluating
the
reasonableness of
the qualitative
adjustments to
Puerto Rico
portfolios allowance
for credit
losses;
and (iv)
testing
the
data
used
in
the
allowance
for
credit
losses.
Professionals
with
specialized
skill
and
knowledge
were
used
to
assist
in
evaluating
the
appropriateness
of
the
methodology
and
models,
the
reasonableness
of
management’s
selection
and
weighting
of
macroeconomic
scenarios
used
to
estimate
current
expected
credit
losses
and
reasonableness of the qualitative adjustments to Puerto Rico portfolios allowance for credit losses.
Goodwill Annual Impairment Assessment - Banco Popular de Puerto Rico and Popular Bank Reporting Units
As
described
in
Note
15
to
the
consolidated
financial
statements,
the
Corporation’s
consolidated
goodwill
balance
was $720 million as of December 31, 2021, of which a significant
portion relates to the Banco Popular de Puerto Rico
(“BPPR”) and
Popular Bank
(“PB”) reporting
units. Management
conducts an
impairment test
as of
July 31
of each
year
and
on
a
more
frequent
basis
if
events
or
circumstances
indicate
an
impairment
could
have
taken
place.
In
determining
the
fair
value
of each
reporting
unit,
management
generally
uses
a
combination
of
methods,
including
market
price
multiples
of
comparable
companies
and
transactions,
as
well
as
discounted
cash
flow
analysis.
Management evaluates the particular circumstances of
each reporting unit in order to determine
the most appropriate
valuation
methodology
and
the
weights
applied
to
each
valuation
methodology,
as
applicable.
The
computations
require
management
to
make
estimates,
assumptions
and
calculations
related
to:
(i)
a
selection
of
comparable
publicly
traded
companies,
based
on
the
nature
of
business,
location
and
size;
(ii)
a
selection
of
comparable
acquisitions, (iii)
calculation of average price multiples
of relevant value drivers from
a group of selected
comparable
companies
and
acquisitions;
(iv)
the
discount
rate
applied
to
future
earnings,
based
on
an
estimate
of
the
cost
of
equity;
(v)
the
potential
future
earnings
of
the
reporting
units;
and
(vi)
the
market
growth
and
new
business
assumptions.
Furthermore,
as
part
of
the
analyses,
management
performed
a
reconciliation
of
the
aggregate
fair
values determined for
the reporting units
to the market
capitalization of the
Corporation concluding that
the fair value
results determined for the reporting units were reasonable.
The principal
considerations for our
determination that performing
procedures relating to
goodwill annual
impairment
assessments of
the Banco
Popular de
Puerto Rico
and Popular
Bank reporting
units is
a critical
audit matter
are (i)
the significant judgment by
management when determining the
fair value measurements of
the reporting units, which
in
turn
led
to
a
high
degree
of
auditor
judgment,
subjectivity,
and
effort
in
performing
procedures
and
evaluating
evidence
relating
to
the
calculation
of
average
price
multiples
of
relevant
value
drivers
from
a
group
of
selected
comparable
companies
and
acquisitions;
the
potential
future
earnings
of
the
reporting
unit;
the
estimated
cost
of
equity;
and
the
market
growth
and
new
business
assumptions;
and
(ii)
the
audit
effort
involved
the
use
of
63
professionals
with
specialized
skill
and
knowledge.
Addressing
the
matter
involved
performing
procedures
and
evaluating
audit
evidence
in
connection
with
forming
our
overall
opinion
on
the
consolidated
financial
statements.
These
procedures
included
testing
the
effectiveness
of
controls
relating
to
management’s
goodwill
impairment
assessment
process,
including
controls
over
the
valuation
of
Banco
Popular
de
Puerto
Rico
and
Popular
Bank
reporting units. These procedures
also included, among others, (i) testing management’s process for determining the
fair
value
estimates
of
Banco
Popular
de
Puerto
Rico
and
Popular
Bank
reporting
units;
(ii)
evaluating
the
appropriateness of
the discounted cash
flow analyses and
guideline public companies
methodologies including
the
weights applied
to each
valuation method;
(iii) testing
the underlying
data used
in the
estimates;
(iv) evaluating
the
appropriateness
of
the
calculation
of
average
price
multiples
of
relevant
value
drivers
from
a
group
of
selected
comparable
companies
and acquisitions;
and (v)
evaluating the
potential
future
earnings of
the
reporting units;
the
estimated cost
of equity;
and the market
growth and
new business
assumptions, including
whether the
assumptions
used
by
management
were
reasonable
considering,
as
applicable,
(i)
the
current
and
past
performance
of
the
reporting units;
(ii) the
consistency with
external market and
industry data;
and (iii) whether
these assumptions
were
consistent with evidence obtained in other areas of the audit.
Professionals with specialized skill and knowledge were
used
to
assist
in
evaluating
the
appropriateness
of
the
methods
and
the
reasonableness
of
certain
significant
assumptions.
San Juan, Puerto Rico
March 1, 2022
We have served as the Corporation’s auditor since 1971, which includes periods before the Corporation became
subject to SEC reporting requirements.
CERTIFIED PUBLIC ACCOUNTANTS
(OF PUERTO RICO)
License No. LLP-216 Expires Dec. 1, 2022
Stamp E452193 of the P.R. Society of
Certified Public Accountants has been
affixed to the file copy of this report
64
POPULAR, INC.
CONSOLIDATED STATEMENTS
OF FINANCIAL CONDITION
December 31,
December 31,
(In thousands, except share information)
2021
2020
Assets:
Cash and due from banks
$
428,433
$
491,065
Money market investments:
Time deposits with other banks
17,536,719
11,640,880
Total money market investments
17,536,719
11,640,880
Trading account debt securities, at fair value:
Pledged securities with creditors’ right to repledge
-
241
Other trading account debt securities
29,711
36,433
Debt securities available-for-sale, at fair
value:
Pledged securities with creditors’ right to repledge
93,330
125,819
Other debt securities available-for-sale
24,874,939
21,435,333
Debt securities held-to-maturity, at amortized cost (fair value 2021
- $83,368; 2020 - $94,891)
79,461
92,621
Less – Allowance for credit losses
8,096
10,261
Debt securities held-to-maturity, net
71,365
82,360
Equity securities (realizable value 2021 -
$192,345; 2020 - $173,929)
189,977
173,737
Loans held-for-sale, at lower of cost or fair
value
59,168
99,455
Loans held-in-portfolio
29,506,225
29,588,430
Less – Unearned income
265,668
203,234
Allowance for credit losses
695,366
896,250
Total loans held-in-portfolio, net
28,545,191
28,488,946
Premises and equipment, net
494,240
510,241
Other real estate
85,077
83,146
Accrued income receivable
203,096
209,320
Mortgage servicing rights, at fair value
121,570
118,395
Other assets
1,628,571
1,737,041
Goodwill
720,293
671,122
Other intangible assets
16,219
22,466
Total assets
$
75,097,899
$
65,926,000
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing
$
15,684,482
$
13,128,699
Interest bearing
51,320,606
43,737,641
Total deposits
67,005,088
56,866,340
Assets sold under agreements to repurchase
91,603
121,303
Other short-term borrowings
75,000
-
Notes payable
988,563
1,224,981
Other liabilities
968,248
1,684,689
Total liabilities
69,128,502
59,897,313
Commitments and contingencies (Refer
to Note 24)
Stockholders’ equity:
Preferred stock, 30,000,000 shares authorized;
885,726 shares issued and outstanding (2020
-
885,726)
22,143
22,143
Common stock, $0.01 par value; 170,000,000
shares authorized;104,579,334 shares issued
(2020 -
104,508,290) and 79,851,169 shares outstanding
(2020 - 84,244,235)
1,046
1,045
Surplus
4,650,182
4,571,534
Retained earnings
2,973,745
2,260,928
Treasury stock - at cost, 24,728,165 shares (2020 -
20,264,055)
(1,352,650)
(1,016,954)
Accumulated other comprehensive (loss)
income, net of tax
(325,069)
189,991
Total stockholders’ equity
5,969,397
6,028,687
Total liabilities and stockholders’ equity
$
75,097,899
$
65,926,000
The accompanying notes are an integral part of
these Consolidated Financial Statements.
65
POPULAR, INC.
CONSOLIDATED STATEMENTS
OF OPERATIONS
Years ended December 31,
(In thousands, except per share information)
2021
2020
2019
Interest income:
Loans
$
1,747,827
$
1,742,390
$
1,802,968
Money market investments
21,147
19,721
89,823
Investment securities
353,663
329,440
368,002
Total interest income
2,122,637
2,091,551
2,260,793
Interest expense:
Deposits
111,621
175,855
304,858
Short-term borrowings
319
2,457
6,100
Long-term debt
53,107
56,626
58,141
Total interest expense
165,047
234,938
369,099
Net interest income
1,957,590
1,856,613
1,891,694
Provision for credit losses (benefit)
(193,464)
292,536
165,779
Net interest income after provision for credit losses
(benefit)
2,151,054
1,564,077
1,725,915
Service charges on deposit accounts
162,698
147,823
160,933
Other service fees
311,248
257,892
285,206
Mortgage banking activities (Refer to Note 10)
50,133
10,401
32,093
Net gain (loss) on sale of debt securities
23
41
(20)
Net gain, including impairment on equity securities
131
6,279
2,506
Net (loss) profit on trading account debt securities
(389)
1,033
994
Net (loss) gain on sale of loans, including
valuation adjustments on loans
held-for-sale
(73)
1,234
-
Adjustments (expense) to indemnity reserves on loans
sold
4,406
390
(343)
Other operating income
113,951
87,219
88,514
Total non-interest income
642,128
512,312
569,883
Operating expenses:
Personnel costs
631,802
564,205
590,625
Net occupancy expenses
102,226
119,345
96,339
Equipment expenses
92,097
88,932
84,215
Other taxes
56,783
54,454
51,653
Professional fees
410,865
394,122
384,411
Communications
25,234
23,496
23,450
Business promotion
72,981
57,608
75,372
FDIC deposit insurance
25,579
23,868
18,179
Other real estate owned (OREO) (income) expenses
(14,414)
(3,480)
4,298
Other operating expenses
136,988
128,882
139,570
Amortization of intangibles
9,134
6,397
9,370
Total operating expenses
1,549,275
1,457,829
1,477,482
Income before income tax
1,243,907
618,560
818,316
Income tax expense
309,018
111,938
147,181
Net Income
$
934,889
$
506,622
$
671,135
Net Income Applicable to Common Stock
$
933,477
$
504,864
$
667,412
Net Income per Common Share – Basic
$
11.49
$
5.88
$
6.89
Net Income per Common Share – Diluted
$
11.46
$
5.87
$
6.88
The accompanying notes are an integral part of
these consolidated financial statements.
66
POPULAR, INC.
CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME
Years ended December 31,
(In thousands)
2021
2020
2019
Net income
$
934,889
$
506,622
$
671,135
Reclassification to retained earnings
due to cumulative effect of accounting change
-
-
(50)
Other comprehensive income (loss) before
tax:
Foreign currency translation adjustment
3,947
(14,471)
(6,847)
Adjustment of pension and postretirement
benefit plans
36,950
(9,032)
(21,874)
Amortization of net losses
20,749
21,447
23,508
Unrealized net holding (losses) gains on debt
securities arising during the period
(619,470)
419,993
286,063
Reclassification adjustment for (gains) losses
included in net income
(23)
(41)
20
Unrealized net gains (losses) on cash flow hedges
539
(8,872)
(5,741)
Reclassification adjustment for net losses included
in net income
1,847
6,379
3,882
Other comprehensive (loss) income before
tax
(555,461)
415,403
278,961
Income tax benefit (expense)
40,401
(55,474)
(20,925)
Total other comprehensive (loss) income, net of tax
(515,060)
359,929
258,036
Comprehensive income, net of tax
$
419,829
$
866,551
$
929,171
Tax effect allocated to each component of other comprehensive
(loss) income:
Years ended December 31,
(In thousands)
2021
2020
2019
Adjustment of pension and postretirement
benefit plans
$
(13,856)
$
3,387
$
8,203
Amortization of net losses
(7,781)
(8,042)
(8,817)
Unrealized net holding (losses) gains on debt
securities arising during the period
62,468
(51,213)
(20,113)
Reclassification adjustment for (gains) losses
included in net income
5
6
(4)
Unrealized net gains (losses) on cash flow
hedges
(172)
2,472
1,302
Reclassification adjustment for net losses included
in net income
(263)
(2,084)
(1,496)
Income tax benefit (expense)
$
40,401
$
(55,474)
$
(20,925)
The accompanying notes are an integral
part of these consolidated financial statements.
67
POPULAR, INC.
CONSOLIDATED STATEMENTS
OF CHANGES IN STOCKHOLDERS’ EQUITY
Accumulated
other
Common
Preferred
Retained
Treasury
comprehensive
(In thousands)
stock
stock
Surplus
earnings
stock
(loss) income
Total
Balance at December 31, 2018
$
1,043
$
50,160
$
4,365,606
$
1,651,731
$
(205,509)
$
(427,974)
5,435,057
Cumulative effect of accounting change
4,905
4,905
Net income
671,135
671,135
Issuance of stock
1
3,496
3,497
Dividends declared:
Common stock
[1]
(116,022)
(116,022)
Preferred stock
(3,723)
(3,723)
Common stock purchases
[2]
15,740
(271,752)
(256,012)
Common stock reissuance
374
4,848
5,222
Stock based compensation
2,085
12,599
14,684
Other comprehensive income, net of tax
258,036
258,036
Transfer to statutory reserve
60,111
(60,111)
-
Balance at December 31, 2019
$
1,044
$
50,160
$
4,447,412
$
2,147,915
$
(459,814)
$
(169,938)
6,016,779
Cumulative effect of accounting change
(205,842)
(205,842)
Net income
506,622
506,622
Issuance of stock
1
4,262
4,263
Dividends declared:
Common stock
[1]
(136,561)
(136,561)
Preferred stock
(1,758)
(1,758)
Common stock purchases
[3]
76,335
(580,507)
(504,172)
Common stock reissuance
(1,192)
6,022
4,830
Preferred Stock, Redemption Amount
[4]
(28,017)
(28,017)
Stock based compensation
(4,731)
17,345
12,614
Other comprehensive income, net of tax
359,929
359,929
Transfer to statutory reserve
49,448
(49,448)
-
Balance at December 31, 2020
$
1,045
$
22,143
$
4,571,534
$
2,260,928
$
(1,016,954)
$
189,991
6,028,687
Net income
934,889
934,889
Issuance of stock
1
4,673
4,674
Dividends declared:
Common stock
[1]
(142,290)
(142,290)
Preferred stock
(1,412)
(1,412)
Common stock purchases
[5]
(8,557)
(347,093)
(355,650)
Stock based compensation
4,162
11,397
15,559
Other comprehensive loss, net of tax
(515,060)
(515,060)
Transfer
to statutory reserve
78,370
(78,370)
-
Balance at December 31, 2021
$
1,046
$
22,143
$
4,650,182
$
2,973,745
$
(1,352,650)
$
(325,069)
5,969,397
[1]
Dividends declared per common share during the year ended
December 31, 2021 - $1.75 (2020 - $1.60; 2019 -
$1.20).
[2]
During the year ended December 31, 2019, the Corporation
completed a $250 million accelerated share repurchase
transaction with respect to its
common stock, which was accounted for as a treasury stock
transaction. Refer to Note 20 for additional information.
[3]
During the year ended December 31, 2020, the Corporation
completed a $500 million accelerated share repurchase
transaction with respect to its
common stock, which was accounted for as a treasury stock
transaction. Refer to Note 20 for additional information.
[4]
On February 24, 2020, the Corporation redeemed all
the outstanding shares of 2008 Series B Preferred Stock.
Refer to Note 20 for additional
information.
[5]
During the year ended December 31, 2021, the Corporation
completed a $350 million accelerated share repurchase
transaction with respect to its
common stock, which was accounted for as a treasury stock
transaction. Refer to Note 20 for additional information.
Years ended December
31,
Disclosure of changes in number of shares:
2021
2020
2019
Preferred Stock:
Balance at beginning of year
885,726
2,006,391
2,006,391
Redemption of stocks
-
(1,120,665)
-
Balance at end of year
885,726
885,726
2,006,391
Common Stock:
Balance at beginning of year
104,508,290
104,392,222
104,320,303
Issuance of stock
71,044
116,068
71,919
Balance at end of year
104,579,334
104,508,290
104,392,222
Treasury stock
(24,728,165)
(20,264,055)
(8,802,593)
Common Stock – Outstanding
79,851,169
84,244,235
95,589,629
The accompanying notes are an integral part of these consolidated
financial statements.
68
POPULAR, INC.
CONSOLIDATED STATEMENTS
OF CASH FLOWS
Years ended December
31,
(In thousands)
2021
2020
2019
Cash flows from operating activities:
Net income
$
934,889
$
506,622
$
671,135
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for credit losses (benefit)
(193,464)
292,536
165,779
Amortization of intangibles
9,134
6,397
9,370
Depreciation and amortization of premises and equipment
55,104
58,452
58,067
Net accretion of discounts and amortization of premiums and
deferred fees
(21,962)
(63,300)
(158,070)
Interest capitalized on loans subject to the temporary payment
moratorium or loss mitigation
alternatives
(15,567)
(95,212)
-
Share-based compensation
17,774
8,254
12,303
Impairment losses on right-of-use and long-lived assets
5,320
18,004
2,591
Fair value adjustments on mortgage servicing rights
10,206
42,055
27,771
Adjustments (expense) to indemnity reserves on loans sold
(4,406)
(390)
343
Earnings from investments under the equity method, net
of dividends or distributions
(50,942)
(27,738)
(28,011)
Deferred income tax expense
229,371
75,044
141,332
(Gain) loss on:
Disposition of premises and equipment and other productive
assets
(18,393)
(11,561)
(6,666)
Proceeds from insurance claims
-
(366)
(1,205)
Sale of debt securities
(23)
(41)
20
Sale of loans, including valuation adjustments on loans
held-for-sale and mortgage banking
activities
(21,611)
(32,449)
(15,888)
Sale of foreclosed assets, including write-downs
(30,098)
(19,958)
(21,982)
Acquisitions of loans held-for-sale
(251,336)
(227,697)
(223,939)
Proceeds from sale of loans held-for-sale
95,100
83,456
71,075
Net originations on loans held-for-sale
(527,585)
(391,537)
(289,430)
Net decrease (increase) in:
Trading debt securities
741,465
493,993
460,969
Equity securities
(2,336)
(8,263)
(8,032)
Accrued income receivable
6,193
(35,616)
(8,369)
Other assets
25,022
114,329
(37,847)
Net (decrease) increase in:
Interest payable
(5,395)
(5,404)
(284)
Pension and other postretirement benefits obligation
(4,104)
5,898
778
Other liabilities
22,802
(106,736)
(116,443)
Total adjustments
70,269
172,150
34,232
Net cash provided by operating activities
1,005,158
678,772
705,367
Cash flows from investing activities:
Net (increase) decrease in money market investments
(5,895,789)
(8,378,577)
905,558
Purchases of investment securities:
Available-for-sale
(14,672,856)
(21,033,807)
(18,733,295)
Equity
(16,196)
(30,794)
(16,300)
Proceeds from calls, paydowns, maturities and redemptions
of investment securities:
Available-for-sale
9,602,430
18,224,362
14,650,440
Held-to-maturity
15,700
6,733
5,913
Proceeds from sale of investment securities:
Available-for-sale
235,992
5,103
99,445
Equity
2,904
25,206
20,030
Net repayments (disbursements) on loans
469,268
(875,941)
(641,029)
Proceeds from sale of loans
203,179
84,385
110,534
Acquisition of loan portfolios
(348,179)
(1,138,276)
(619,737)
Payments to acquire other intangible
(905)
(83)
(10,382)
Payments to acquire businesses, net of cash acquired
(155,828)
-
-
Return of capital from equity method investments
6,362
959
6,942
Payments to acquire equity method investments
(375)
(1,778)
-
Acquisition of premises and equipment
(72,781)
(60,073)
(75,665)
Proceeds from insurance claims
-
366
1,205
69
Proceeds from sale of:
Premises and equipment and other productive assets
21,482
26,548
18,608
Foreclosed assets
86,942
77,521
107,881
Net cash used in investing activities
(10,518,650)
(13,068,146)
(4,169,852)
Cash flows from financing activities:
Net increase (decrease) in:
Deposits
10,138,617
13,102,028
4,043,955
Assets sold under agreements to repurchase
(29,700)
(72,076)
(88,151)
Other short-term borrowings
75,000
-
(41)
Payments of notes payable
(237,713)
(139,920)
(210,377)
Principal payments of finance leases
(2,852)
(3,145)
(1,726)
Proceeds from issuance of notes payable
-
261,999
75,000
Proceeds from issuance of common stock
4,674
9,093
8,719
Payments for repurchase of redeemable preferred stock
-
(28,017)
-
Dividends paid
(141,466)
(133,645)
(115,810)
Net payments for repurchase of common stock
(350,535)
(500,479)
(250,581)
Payments related to tax withholding for share-based compensation
(5,115)
(3,693)
(5,431)
Net cash provided by financing activities
9,450,910
12,492,145
3,455,557
Net (decrease) increase in cash and due from banks, and
restricted cash
(62,582)
102,771
(8,928)
Cash and due from banks, and restricted cash at beginning
of period
497,094
394,323
403,251
Cash and due from banks, and restricted cash at end of period
$
434,512
$
497,094
$
394,323
The accompanying notes are an integral part of these consolidated
financial statements.
70
Notes to Consolidated Financial Statements
Note 1 -
Nature of Operations
71
Note 2 -
Summary of Significant Accounting
72
Note 3 -
New Accounting Pronouncements
82
Note 4 -
Business Combination
86
Note 5 -
Restrictions on Cash and Due from Banks
88
Note 6 -
Debt Securities Available-For-Sale
89
Note 7 -
Debt Securities Held-to-Maturity
93
Note 8 -
Loans
96
Note 9 -
Allowance for Credit Losses – Loans
105
Note 10 -
Mortgage Banking Activities
127
Note 11 -
Transfers of Financial Assets and
128
Note 12 -
Premises and Equipment
131
Note 13 -
Other Real Estate Owned
132
Note 14 -
Other Assets
133
Note 15 -
Goodwill and Other Intangible Assets
134
Note 16 -
Deposits
138
Note 17 -
Borrowings
139
Note 18 -
Trust Preferred Securities
142
Note 19 -
Other Liabilities
144
Note 20 -
Stockholders’ Equity
145
Note 21 -
Regulatory Capital Requirements
147
Note 22 -
Other Comprehensive (Loss) Income
150
Note 23 -
Guarantees
152
Note 24 -
Commitments and Contingencies
155
Note 25-
Non-consolidated Variable Interest
161
Note 26 -
Derivative Instruments and Hedging
163
Note 27 -
Related Party Transactions
166
Note 28 -
Fair Value Measurement
170
Note 29 -
Fair Value of Financial Instruments
179
Note 30 -
Employee Benefits
182
Note 31 -
Net Income per Common Share
190
Note 32 -
Revenue from Contracts with Customers
191
Note 33 -
Leases
193
Note 34 -
Stock-Based Compensation
195
Note 35 -
Income Taxes
198
Note 36 -
Supplemental Disclosure on the
203
Note 37 -
Segment Reporting
204
Note 38 -
Popular, Inc. (Holding company only)
209
Note 39 -
Subsequent Events
212
71
Note 1 – Nature of operations
Popular, Inc. (the “Corporation or “Popular”) is a diversified, publicly-owned financial holding
company subject to the supervision and
regulation of the Board
of Governors of the
Federal Reserve System. The Corporation has
operations in Puerto Rico, the
mainland
United
States
(“U.S.”)
and
the
U.S.
and
British
Virgin
Islands.
In
Puerto
Rico,
the
Corporation
provides
retail,
mortgage
and
commercial
banking
services,
through
its
principal
banking
subsidiary,
Banco
Popular
de
Puerto
Rico
(“BPPR”),
as
well
as
investment
banking,
broker-dealer,
auto
and
equipment
leasing
and
financing,
and
insurance
services
through
specialized
subsidiaries.
In
the
mainland
U.S.,
the
Corporation
provides
retail,
mortgage
and
commercial
banking
services
through
its
New
York-chartered
banking subsidiary,
Popular Bank
(“PB” or
“Popular U.S.”),
which has
branches located
in New
York,
New Jersey
and
Florida, and
equipment leasing
and
financing services
through Popular
Equipment Finance
(“PEF”), a
newly formed
wholly-
owned subsidiary of PB based in Minnesota.
72
Note 2 – Summary of significant accounting
policies
The
accounting
and
financial
reporting
policies
of
Popular,
Inc.
and
its
subsidiaries
(the
“Corporation”) conform
with
accounting
principles generally accepted in the United States
of America and with prevailing practices within
the financial services industry.
The following is a description of the most significant
of these policies:
Principles of consolidation
The
consolidated
financial
statements
include
the
accounts
of
Popular,
Inc.
and
its
subsidiaries.
Intercompany
accounts
and
transactions have been
eliminated in consolidation. In
accordance with the
consolidation guidance for variable
interest entities, the
Corporation
would
also
consolidate
any
variable
interest
entities
(“VIEs”)
for
which
it
has
a
controlling
financial
interest;
and
therefore, it is the primary beneficiary. Assets
held in a fiduciary capacity are not assets of the Corporation and, accordingly,
are not
included in the Consolidated Statements of Financial
Condition.
Unconsolidated investments, in
which there is
at least
20% ownership and
/ or
the Corporation exercises
significant influence, are
generally
accounted
for
by
the
equity
method
with
earnings
recorded
in
other
operating
income.
Limited
partnerships
are
also
accounted for by the equity method unless the investor’s
interest is so “minor” that the limited partner may have
virtually no influence
over
partnership
operating
and
financial
policies.
These
investments
are
included
in
other
assets
and
the
Corporation’s
proportionate share of income or loss is included
in other operating income.
Statutory business trusts that are wholly-owned by the Corporation and are
issuers of trust preferred securities are not consolidated
in the Corporation’s Consolidated Financial Statements.
Business combinations
Business combinations are accounted for under the acquisition method. Under this method, assets acquired, liabilities assumed and
any noncontrolling
interest in
the acquiree
at the
acquisition date
are measured
at their
fair values
as of
the acquisition
date. The
acquisition
date
is
the
date
the
acquirer
obtains
control.
Transaction
costs
are
expensed
as
incurred.
Contingent
consideration
classified as an asset
or a liability is remeasured to
fair value at each
reporting date until the contingency
is resolved. The changes
in fair
value of
the contingent
consideration are
recognized in
earnings unless
the arrangement
is a
hedging instrument
for which
changes are initially recognized in other comprehensive
income.
On October
15, 2021, Popular
Equipment Finance, LLC
(“PEF”), a newly
formed wholly-owned subsidiary
of Popular Bank
(“PB”),
completed the
acquisition of
certain assets
and
the
assumption of
certain
liabilities of
K2
Capital Group
LLC’s
(“K2”) equipment
leasing
and
financing
business
based
in
Minnesota
(the
“Acquired
Business”).
The
Corporation
determined that
this
acquisition
constituted
a
business
combination
as
defined
by
the
Financial
Accounting
Standards
Board
(“FASB”)
Accounting
Standards
Codification
(“ASC”)
Topic
805
“Business
Combinations”.
Refer
to
Note
4,
Business
combination,
for
further
details
on
the
K2
Transaction.
Use of estimates in the preparation of financial
statements
The preparation of financial
statements in conformity with
accounting principles generally accepted in
the United States
of America
requires management to make
estimates and assumptions that
affect the reported
amounts of assets and
liabilities and contingent
assets
and
liabilities
at
the
date
of
the
financial
statements,
and
the
reported
amounts
of
revenues
and
expenses
during
the
reporting period. Actual results could differ from those estimates.
Fair value measurements
The Corporation determines the fair values of its
financial instruments based on the fair value framework
established in the guidance
for
Fair
Value
Measurements
in
ASC
Subtopic
820-10,
which
requires
an
entity
to
maximize
the
use
of
observable
inputs
and
minimize
the
use
of
unobservable inputs
when
measuring fair
value.
Fair value
is
defined
as
the
exchange
price
that
would be
received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability
in an orderly
transaction between market participants
on the measurement date.
The standard describes three
levels of inputs
that
may
be
used
to
measure
fair
value
which
are
(1)
quoted
market
prices
for
identical
assets
or
liabilities
in
active
markets,
(2)
observable market-based inputs or unobservable inputs
that are corroborated by market
data, and (3) unobservable inputs
that are
not corroborated
by market
data. The fair
value hierarchy
ranks the
quality and
reliability of the
information used to
determine fair
values.
The
guidance
in
ASC
Subtopic
820-10
also
addresses
measuring
fair
value
in
situations
where
markets
are
inactive
and
transactions are
not orderly.
Transactions
or quoted
prices for
assets and
liabilities may
not be
determinative of
fair value
when
transactions are not
orderly, and
thus, may require
adjustments to estimate fair
value. Price quotes
based on transactions
that are
73
not orderly should be given
little, if any,
weight in measuring fair value. Price
quotes based on transactions that are
orderly shall be
considered
in
determining
fair
value,
and
the
weight
given
is
based
on
facts
and
circumstances.
If
sufficient
information
is
not
available to
determine if
price quotes
are based
on orderly
transactions, less
weight should
be given to
the price
quote relative
to
other transactions that are known to be orderly.
Investment securities
Investment securities are classified in four categories and
accounted for as follows:
●
Debt securities that
the Corporation has
the intent and
ability to hold
to maturity are
classified as debt
securities held-to-
maturity and reported
at amortized cost. An
ACL is established
for the expected credit
losses over the remaining
term of
debt securities held-to-maturity. The Corporation has established a methodology to estimate credit losses which
considers
qualitative factors,
including internal credit
ratings and
the underlying source
of repayment
in determining
the amount
of
expected
credit
losses.
Debt
securities
held-to-maturity
are
written-off
through
the
ACL
when
a
portion
or
the
entire
amount is deemed uncollectible, based on the information considered to develop expected credit losses through the life of
the
asset.
The
ACL
is
estimated
by
leveraging
the
expected
loss
framework
for
mortgages
in
the
case
of
securities
collateralized by
2
nd
lien loans
and the
commercial C&I
models for
municipal bonds.
As part
of this
framework, internal
factors are stressed,
as a qualitative
adjustment, to reflect current
conditions that are
not necessarily captured
within the
historical
loss
experience.
The
modeling
framework
includes
a
2-year
reasonable
and
supportable
period
gradually
reverting, over a 1-year horizon, to historical information at the model
input level. The Corporation may not sell or transfer
held-to-maturity
securities
without
calling
into
question
its
intent
to
hold
other
debt
securities
to
maturity,
unless
a
nonrecurring or unusual event that could not have
been reasonably anticipated has occurred.
●
Debt securities
classified as
trading securities
are reported
at fair
value, with
unrealized and
realized gains
and losses
included in non-interest income.
●
Debt
securities
classified
as
available-for-sale
are
reported
at
fair
value.
Declines
in
fair
value
below
the
securities’
amortized cost which are not related to estimated credit losses are recorded through other comprehensive income or loss,
net of
taxes. If
the Corporation intends
to sell
or believes
it is
more likely than
not that it
will be
required to sell
the debt
security,
it is
written down
to
fair value
through earnings.
Credit losses
relating to
available-for-sale debt
securities are
recorded through an
ACL, which are
limited to the
difference between
the amortized cost
and the fair
value of the
asset.
The ACL is established for the expected credit losses over the remaining term of debt security. The Corporation’s portfolio
of
available-for-sale securities
is comprised
mainly
of
U.S. Treasury
notes
and
obligations from
the
U.S.
Government.
These
securities
have
an
explicit
or
implicit
guarantee
from
the
U.S.
government,
are
highly
rated
by
major
rating
agencies, and have a
long history of no
credit losses. Accordingly,
the Corporation applies a
zero-credit loss assumption
and no
ACL for
these securities
has been
established. The Corporation
monitors its securities
portfolio composition and
credit performance on a
quarterly basis to determine if
any allowance is considered necessary.
Debt securities available-
for-sale are written-off when
a portion or
the entire amount is
deemed uncollectible, based on the
information considered
to
develop expected
credit losses
through the
life of
the asset.
The specific
identification method
is used
to
determine
realized
gains
and
losses
on
debt
securities
available-for-sale,
which
are
included
in
net
(loss)
gain
on
sale
of
debt
securities in the Consolidated Statements of Operations.
●
Equity securities that have readily available fair values are reported at fair value. Equity securities that do not have readily
available fair
values are
measured at
cost, less
any impairment,
plus or
minus changes
resulting from
observable price
changes in
orderly transactions
for the
identical or
a similar
investment of
the same
issuer.
Stock that
is owned
by the
Corporation
to
comply
with
regulatory
requirements,
such
as
Federal
Reserve
Bank
and
Federal
Home
Loan
Bank
(“FHLB”) stock, is included in this category, and their realizable value equals their cost. Unrealized and realized gains and
losses and any impairment on equity securities are included in net gain (loss), including impairment on equity securities in
the Consolidated Statements
of Operations. Dividend income
from investments in
equity securities is included
in interest
income.
The
amortization
of
premiums is
deducted
and
the
accretion of
discounts is
added to
net
interest income
based on
the
interest
method
over the
outstanding period
of
the
related
securities.
Purchases and
sales
of
securities
are
recognized
on
a
trade
date
basis.
Derivative financial instruments
All derivatives are recognized on the Statements of Financial Condition at
fair value. The Corporation’s policy is not to
offset the fair
value
amounts
recognized
for
multiple
derivative
instruments
executed
with
the
same
counterparty
under
a
master
netting
74
arrangement nor to offset the fair value amounts recognized for the
right to reclaim cash collateral (a receivable) or the obligation
to
return cash collateral (a payable) arising from the
same master netting arrangement as the derivative
instruments.
For
a
cash
flow
hedge,
changes
in
the
fair
value
of
the
derivative
instrument
are
recorded
net
of
taxes
in
accumulated
other
comprehensive income/(loss) and subsequently
reclassified to net
income (loss) in
the same period(s)
that the hedged
transaction
impacts earnings. For free-standing derivative instruments,
changes in fair values are reported in current period earnings.
Prior
to
entering
a
hedge
transaction,
the
Corporation
formally
documents
the
relationship
between
hedging
instruments
and
hedged
items,
as
well
as
the
risk
management objective
and
strategy for
undertaking various
hedge
transactions.
This
process
includes
linking all
derivative instruments
to
specific assets
and
liabilities
on the
Statements of
Financial Condition
or to
specific
forecasted transactions
or firm
commitments along
with a
formal assessment,
at both
inception of
the hedge
and on
an ongoing
basis,
as
to
the
effectiveness
of the
derivative instrument
in
offsetting
changes
in
fair
values
or
cash
flows
of
the
hedged item.
Hedge accounting
is discontinued
when the
derivative instrument
is not
highly effective
as a
hedge, a
derivative expires,
is sold,
terminated, when it is unlikely that a forecasted transaction will
occur or when it is determined that it
is no longer appropriate. When
hedge accounting is discontinued the derivative continues
to be carried at fair value with changes in fair
value included in earnings.
For non-exchange
traded contracts,
fair value
is based
on dealer
quotes, pricing
models, discounted
cash flow
methodologies or
similar techniques for which the determination of
fair value may require significant management judgment
or estimation.
The fair value of derivative instruments considers
the risk of non-performance by the counterparty
or the Corporation, as applicable.
The Corporation obtains or pledges collateral in
connection with its derivative activities when applicable
under the agreement.
Loans
Loans
are
classified
as
loans
held-in-portfolio when
management has
the
intent
and
ability
to
hold
the
loan
for
the
foreseeable
future, or
until maturity
or payoff.
The foreseeable
future is
a management
judgment which
is determined
based upon
the type
of
loan,
business strategies,
current market
conditions, balance
sheet
management and
liquidity needs.
Management’s view
of
the
foreseeable future may change based on changes in these conditions. When a decision is made to sell or securitize a loan that
was
not originated or
initially acquired with the
intent to sell
or securitize, the loan
is reclassified from held-in-portfolio
into held-for-sale.
Due to changing market conditions or other strategic
initiatives, management’s intent with respect to the disposition of
the loan may
change,
and
accordingly,
loans
previously classified
as
held-for-sale may
be
reclassified into
held-in-portfolio. Loans
transferred
between loans held-for-sale and held-in-portfolio
classifications are recorded at the lower of cost or
fair value at the date of transfer.
Purchased
loans
with
no
evidence
of
credit
deterioration
since
origination
are
recorded
at
fair
value
upon
acquisition.
Credit
discounts are included in the determination of fair
value.
Loans held-for-sale are stated
at the lower
of cost or
fair value, cost
being determined based on
the outstanding loan balance
less
unearned income, and fair value determined, generally
in the aggregate. Fair value is
measured based on current market prices for
similar loans,
outstanding investor
commitments, prices
of recent
sales or
discounted cash
flow analyses
which utilize
inputs and
assumptions
which
are
believed
to
be
consistent
with
market
participants’
views.
The
cost
basis
also
includes
consideration
of
deferred origination fees and costs, which are recognized in earnings
at the time of sale. Upon reclassification to held-for-sale,
credit
related
fair
value
adjustments are
recorded
as
a
reduction
in
the
ACL.
To
the
extent
that
the
loan's
reduction
in
value
has
not
already been provided for in the ACL, an additional provision for credit losses is recorded. Subsequent to reclassification to held-for-
sale, the amount,
by which cost exceeds
fair value, if any,
is accounted for as
a valuation allowance with
changes therein included
in the determination of net income (loss) for the
period in which the change occurs.
Loans held-in-portfolio
are reported
at their
outstanding principal
balances net
of any
unearned income,
charge-offs, unamortized
deferred fees and
costs on originated
loans, and premiums
or discounts on
purchased loans. Fees
collected and costs
incurred in
the
origination of
new
loans are
deferred and
amortized using
the interest
method or
a method
which approximates
the interest
method over the term of the loan as an adjustment
to interest yield.
The past due status of a loan is determined in accordance with its
contractual repayment terms. Furthermore, loans are reported as
past due when either interest or principal remains
unpaid for 30 days or more in accordance
with its contractual repayment terms.
Non-accrual loans are those loans on which the
accrual of interest is discontinued. When a loan is
placed on non-accrual status, all
previously
accrued
and
unpaid interest
is
charged against
interest
income
and
the
loan
is
accounted for
either
on
a cash-basis
method or
on the
cost-recovery method.
Loans designated
as non-accruing
are returned
to accrual
status when
the Corporation
expects repayment of the remaining contractual principal
and interest.
75
Recognition of interest income on commercial and construction loans is discontinued when the loans are 90 days or more in arrears
on payments of principal or interest or when other factors indicate that the collection of principal and interest is
doubtful. The portion
of
a
secured
loan
deemed
uncollectible
is
charged-off
no
later
than
365
days
past
due.
However,
in
the
case
of
a
collateral
dependent
loan,
the
excess
of
the
recorded
investment
over
the
fair
value
of
the
collateral
(portion
deemed
uncollectible)
is
generally
promptly charged-off,
but
in
any
event,
not
later
than
the
quarter
following
the
quarter
in
which
such
excess was
first
recognized.
Commercial
unsecured
loans
are
charged-off
no
later
than
180
days
past
due.
Recognition
of
interest
income
on
mortgage
loans
is
generally
discontinued
when
loans
are
90
days
or
more
in
arrears
on
payments
of
principal
or
interest.
The
portion of a
mortgage loan deemed
uncollectible is charged-off
when the loan
is 180 days
past due. The
Corporation discontinues
the recognition
of interest
on residential
mortgage loans
insured by
the Federal
Housing Administration
(“FHA”) or
guaranteed by
the U.S.
Department of Veterans
Affairs (“VA”)
when 15-months
delinquent as
to principal
or interest.
The principal
repayment on
these loans is insured. Recognition of interest income on closed-end consumer loans and home equity lines of credit is discontinued
when the
loans are
90 days
or more
in arrears
on payments
of principal
or interest.
Income is
generally recognized
on open-end
consumer loans,
except for
home equity
lines
of
credit,
until
the
loans
are
charged-off.
Recognition of
interest
income
for
lease
financing is ceased when
loans are 90 days
or more in arrears.
Closed-end consumer loans and leases
are charged-off when they
are 120
days in
arrears. Open-end
(revolving credit)
consumer loans
are charged-off
when 180
days in
arrears. Commercial
and
consumer overdrafts are generally charged-off no later than
60 days past their due date.
A loan classified
as a troubled
debt restructuring (“TDR”) is
typically in non-accrual status
at the time
of the modification.
The TDR
loan continues
in non-accrual
status
until the
borrower has
demonstrated a
willingness and
ability to
make the
restructured loan
payments (at least six months of sustained performance after the modification
(or one year for loans providing for quarterly or semi-
annual payments))
and management
has concluded
that
it is
probable that
the borrower
would not
be
in payment
default in
the
foreseeable future.
Lease financing
The
Corporation leases
passenger and
commercial
vehicles
and
equipment
to
individual
and
corporate
customers.
The
finance
method of accounting
is used to
recognize revenue on lease
contracts that meet
the criteria specified in
the guidance for leases
in
ASC Topic
842. Aggregate
rentals due
over the
term of
the leases
less unearned
income are
included in
finance lease
contracts
receivable.
Unearned
income
is
amortized
using
a
method
which
results
in
approximate
level
rates
of
return
on
the
principal
amounts outstanding. Finance lease origination
fees and costs
are deferred and amortized
over the average life
of the lease as
an
adjustment to the interest yield.
Revenue for other leases is recognized as it becomes
due under the terms of the agreement.
Loans acquired with deteriorated credit quality
Purchased credit
deteriorated (“PCD”) loans
are defined
as those
with evidence
of a
more-than-insignificant deterioration in
credit
quality since origination.
PCD loans are initially recorded at its purchase price plus an estimated
allowance for credit losses (“ACL”).
Upon the acquisition of a PCD loan, the Corporation makes an estimate
of the expected credit losses over the remaining contractual
term
of
each individual
loan. The
estimated credit
losses over
the life
of the
loan are
recorded as
an ACL
with a
corresponding
addition to the loan purchase price. The amount of the purchased
premium or discount which is not related to credit risk
is amortized
over the life of
the loan through net
interest income using the
effective interest method or
a method that approximates the
effective
interest
method.
Changes
in
expected
credit
losses
are
recorded as
an
increase
or
decrease
to
the
ACL
with
a
corresponding
charge (reverse) to the provision for credit losses in the Consolidated Statement of Operations. Upon transition to the individual loan
measurement, these loans
follow the same
nonaccrual policies as non-PCD
loans and are
therefore no longer
excluded from non-
performing status. Modifications
of PCD loans
that meet the
definition of a
TDR subsequent to
the adoption of
ASC Topic
326 are
accounted and reported as such following the same
processes as non-PCD loans.
Refer to Note 8
to the Consolidated Financial Statements
for additional information with respect
to loans acquired with
deteriorated
credit quality.
Accrued interest receivable
The
amortized
basis
for
loans
and
investments
in
debt
securities
is
presented
exclusive
of
accrued
interest
receivable.
The
Corporation has elected
not to establish
an ACL for
accrued interest receivable for
loans and investments
in debt securities,
given
the Corporation’s
non-accrual policies, in
which accrual
of interest is
discontinued and reversed
based on the
asset’s delinquency
status.
Allowance for credit losses – loans portfolio
76
The Corporation establishes an ACL
for its loan
portfolio based on its
estimate of credit losses
over the remaining contractual
term
of the loans, adjusted for expected prepayments. An ACL is recognized for all loans including originated and purchased loans, since
inception, with
a corresponding charge
to the
provision for
credit losses,
except for
PCD loans
for which
the ACL
at acquisition
is
recorded
as
an
addition
to
the
purchase
price
with
subsequent
changes
recorded
in
earnings.
Loan
losses
are
charged
and
recoveries are credited to the ACL.
The
Corporation
follows
a
methodology
to
estimate
the
ACL
which
includes
a
reasonable
and
supportable
forecast
period
for
estimating
credit
losses,
considering
quantitative
and
qualitative
factors
as
well
as
the
economic
outlook.
As
part
of
this
methodology,
management
evaluates
various
macroeconomic
scenarios
provided
by
third
parties.
At
December
31,
2021,
management
applied
probability
weights
to
the
outcome
of
the
selected
scenarios.
This
evaluation
includes
benchmarking
procedures
as
well
as
careful
analysis
of
the
underlying assumptions
used to
build the
scenarios. The
application of
probability
weights include baseline, optimistic and pessimistic scenarios. The weights applied are subject to evaluation on a quarterly basis as
part
of
the
ACL’s
governance
process.
The
Corporation considers
additional
macroeconomic scenarios
as
part
of
its
qualitative
adjustment framework.
The
macroeconomic variables
chosen
to
estimate credit
losses
were selected
by
combining
quantitative
procedures
with
expert
judgment.
These
variables
were
determined
to
be
the
best
predictors
of
expected
credit
losses
within
the
Corporation’s
loan
portfolios and
include drivers such
as unemployment rate,
different measures
of employment levels,
house prices,
gross domestic
product
and
measures
of
disposable
income,
amongst
others.
The
loss
estimation
framework
includes
a
reasonable
and
supportable period of
2 years for PR
portfolios, gradually reverting, over
a 1-year horizon, to
historical macroeconomic variables at
the
model
input
level.
For
the
US
portfolio
the
reasonable
and
supportable
period
considers
the
contractual
life
of
the
asset,
impacted
by
prepayments, except
for
the US
CRE portfolio.
The US
CRE portfolio
utilizes a
2-year reasonable
and supportable
period gradually reverting, over a 1-year horizon,
to historical information at the output level.
The
Corporation
developed
loan
level
quantitative
models
distributed
by
geography
and
loan
type.
This
segmentation
was
determined
by
evaluating
their
risk
characteristics,
which
include
default
patterns,
source
of
repayment,
type
of
collateral,
and
lending
channels,
amongst
others.
The
modeling
framework
includes
competing
risk
models
to
generate
lifetime
defaults
and
prepayments, and other loan
level modeling techniques to estimate
loss severity.
Recoveries on future losses
are contemplated as
part
of
the
loss
severity
modeling.
These
parameters
are
estimated
by
combining
internal
risk
factors
with
macroeconomic
expectations. In
order to
generate the
expected credit
losses, the
output of
these models
is combined
with loan
level repayment
information.
The
internal
risk
factors
contemplated
within
the
models
may
include
borrowers’
credit
scores,
loan-to-value,
delinquency status, risk ratings, interest rate, loan
term, loan age and type of collateral, amongst
others.
The ACL
also includes
a qualitative
framework that
addresses two
main components:
losses that
are expected
but not
captured
within the quantitative modeling framework, and model imprecision. In order to identify
potential losses that are not captured through
the
models,
management
evaluates
model
limitations
as
well
as
the
different
risks
covered
by
the
variables
used
in
each
quantitative model. The
Corporation considers additional macroeconomic
scenarios to address
these risks. This
assessment takes
into
consideration factors
listed
as
part
of
ASC
326-20-55-4. To
complement
the
analysis, management
also
evaluates
whether
there are sectors
that have low
levels of historical
defaults, but current
conditions show the
potential for future
losses. This type
of
qualitative
adjustment
is
more
prevalent
in
the
commercial
portfolios.
The
model
imprecision
component
of
the
qualitative
adjustments
is
determined
after
evaluating
model
performance
for
these
portfolios
through
different
time
periods.
This
type
of
qualitative adjustment mainly impacts consumer portfolios.
The
Corporation
has
designated
as
collateral
dependent
loans
secured
by
collateral
when
foreclosure
is
probable
or
when
foreclosure is
not probable but
the practical
expedient is used.
The practical expedient
is used
when repayment is
expected to be
provided
substantially
by
the
sale
or
operation
of
the
collateral
and
the
borrower is
experiencing financial
difficulty.
The
ACL
of
collateral dependent loans
is measured based
on the fair
value of the
collateral less costs
to sell. The
fair value of
the collateral is
based on appraisals, which may be adjusted due to their age,
and the type, location, and condition of the property
or area or general
market conditions to reflect the expected change in
value between the effective date of the appraisal and
the measurement date.
In
the
case
of
troubled
debt
restructurings
(“TDRs”),
the
established
framework
captures
the
impact
of
concessions
through
discounting
modified contractual
cash
flows,
both principal
and
interest, at
the
loan’s
original
effective rate.
The
impact of
these
concessions is combined with the expected credit losses generated by the quantitative loss models in order to arrive at
the ACL. As
a result, the ACL related to TDRs is impacted by
the expected macroeconomic conditions.
The Credit Cards
portfolio, due to
its revolving nature,
does not have
a specified maturity
date. To
estimate the average remaining
term
of
this
segment,
management
evaluated the
portfolios
payment
behavior
based
on
internal
historical data.
These payment
77
behaviors were
further classified
into sub-categories
that accounted
for
delinquency history
and differences
between transactors,
revolvers and customers that have exhibited mixed transactor/revolver behavior. Transactors are defined as active accounts without
any
finance
charge
in
the
last
6
months.
The
paydown
curves
generated
for
each
sub-category
are
applied
to
the
outstanding
exposure at
the measurement
date using
the first-in
first-out (FIFO)
methodology.
These amortization
patterns are
combined with
loan level default and loss severity modeling to arrive
at the ACL.
Troubled debt restructurings
A
restructuring constitutes
a
TDR
when
the
Corporation separately
concludes
that
both
of
the
following
conditions
exist:
1)
the
restructuring
constitute
a
concession
and
2)
the
debtor
is
experiencing
financial
difficulties.
The
concessions
stem
from
an
agreement between the Corporation and the
debtor or are imposed by
law or a court. These
concessions could include a reduction
in the
interest rate
on the
loan, payment
extensions, forgiveness
of principal,
forbearance or
other actions
intended to
maximize
collection.
A
concession
has
been
granted
when,
as
a
result
of
the
restructuring,
the
Corporation does
not
expect
to
collect
all
amounts
due,
including
interest
accrued
at
the
original
contract
rate.
If
the
payment
of
principal
is
dependent
on
the
value
of
collateral,
the
current
value
of
the
collateral
is
taken
into
consideration
in
determining
the
amount
of
principal
to
be
collected;
therefore, all factors that changed are considered to determine if a concession was granted, including the change in the fair value of
the
underlying collateral
that
may
be
used
to
repay
the
loan.
Classification of
loan
modifications
as
TDRs
involves
a
degree
of
judgment. Indicators that the debtor is experiencing financial difficulties
which are considered include: (i) the borrower is currently in
default on any of its
debt or it is
probable that the borrower would be
in payment default on any
of its debt in the
foreseeable future
without the modification; (ii)
the borrower has declared or
is in the process
of declaring bankruptcy; (iii) there
is significant doubt as
to
whether the
borrower will
continue to
be a
going concern;
(iv) the
borrower has
securities that
have been
delisted, are
in the
process of being delisted,
or are under threat
of being delisted from an
exchange; (v) based on
estimates and projections that only
encompass
the
borrower’s current
business
capabilities,
it
is
forecasted
that
the
entity-specific
cash
flows
will
be
insufficient
to
service the
debt (both
interest and
principal) in
accordance with the
contractual terms
of the
existing agreement through
maturity;
and
(vi)
absent
the
current
modification,
the
borrower
cannot
obtain
funds
from
sources
other
than
the
existing
creditors
at
an
effective interest rate equal to the current market interest rate for similar debt for a non-troubled debtor. The identification of TDRs is
critical in the determination of the adequacy of the ACL.
A loan
may be
restructured in
a troubled
debt restructuring
into two
(or more)
loan agreements,
for example,
Note A
and Note
B.
Note
A
represents
the
portion
of
the
original
loan
principal
amount
that
is
expected
to
be
fully
collected
along
with
contractual
interest. Note B represents the portion of the original loan that may be considered uncollectible and charged-off, but the obligation is
not forgiven
to the
borrower.
Note A
may be
returned to
accrual status
provided all
of the
conditions for
a TDR
to be
returned to
accrual status are met. The modified loans are
considered TDRs.
Refer
to
Note
9
to
the
Consolidated
Financial
Statements
for
additional
qualitative
information
on
TDRs
and
the
Corporation’s
determination of the ACL.
Reserve for unfunded commitments
The Corporation
establishes a
reserve for
unfunded commitments,
based on
the estimated
losses over
the remaining
term of
the
facility.
An allowance
is not
established for
commitments that
are unconditionally
cancellable by
the Corporation.
Accordingly,
no
reserve
is
established
for
unfunded commitments
related to
its
credit
cards
portfolio.
Reserve for
the
unfunded
portion
of
credit
commitments
is
presented
within
other
liabilities
in
the
Consolidated Statements
of
Financial
Condition.
Net
adjustments
to
the
reserve for unfunded commitments are
reflected in the Consolidated Statements
of Operations as provision for
credit losses for the
years ended December 31, 2021 and 2020.
Transfers and servicing of financial assets
The transfer
of an
entire financial
asset, a
group of
entire financial
assets, or
a participating interest
in an
entire financial
asset in
which the Corporation surrenders control over the assets is accounted
for as a sale
if all of the following conditions set forth in
ASC
Topic
860 are met:
(1) the assets
must be isolated
from creditors of
the transferor,
(2) the transferee
must obtain the
right (free of
conditions that constrain it
from taking advantage
of that right)
to pledge or
exchange the transferred assets,
and (3) the
transferor
cannot maintain effective control over
the transferred assets through an agreement
to repurchase them before their
maturity. When
the
Corporation
transfers
financial
assets
and
the
transfer
fails
any
one
of
these
criteria,
the
Corporation
is
prevented
from
derecognizing the transferred financial
assets and the
transaction is accounted for
as a secured
borrowing. For federal and
Puerto
Rico income
tax purposes,
the Corporation
treats the
transfers of
loans which
do not
qualify as
“true sales”
under the
applicable
accounting guidance, as sales, recognizing a deferred
tax asset or liability on the transaction.
For transfers
of financial
assets that
satisfy the
conditions to
be accounted
for as
sales, the
Corporation derecognizes
all assets
sold; recognizes all
assets obtained and liabilities
incurred in consideration as
proceeds of the
sale, including servicing
assets and
78
servicing liabilities, if
applicable; initially measures
at fair
value assets obtained
and liabilities incurred
in a
sale; and
recognizes in
earnings any gain or loss on the sale.
The guidance
on transfer
of financial
assets requires a
true sale
analysis of
the treatment
of the
transfer under state
law as
if the
Corporation was a debtor under the bankruptcy code. A true sale legal analysis includes several legally relevant factors, such as the
nature and level of recourse to the transferor, and the nature of retained interests in the loans sold. The analytical conclusion as to a
true sale
is never
absolute and
unconditional, but
contains qualifications
based on
the inherent
equitable powers
of a
bankruptcy
court, as
well as
the unsettled
state of
the common
law.
Once the
legal isolation
test has
been met,
other factors
concerning the
nature
and
extent
of
the
transferor’s
control
over
the
transferred
assets
are
taken
into
account
in
order
to
determine
whether
derecognition of assets is warranted.
The Corporation sells mortgage loans to the Government National Mortgage Association (“GNMA”)
in the normal course of business
and retains the servicing rights. The GNMA programs under which the loans
are sold allow the Corporation to repurchase individual
delinquent loans that meet certain criteria. At the Corporation’s option, and without GNMA’s prior authorization, the Corporation may
repurchase the delinquent
loan for an
amount equal to
100% of the
remaining principal balance
of the loan.
Once the Corporation
has the
unconditional ability
to repurchase
the delinquent
loan, the
Corporation is
deemed to
have regained
effective control
over
the
loan
and
recognizes
the
loan
on
its
balance
sheet
as
well
as
an
offsetting
liability,
regardless of
the
Corporation’s
intent
to
repurchase the loan.
Servicing assets
The
Corporation
periodically
sells
or
securitizes
loans
while
retaining
the
obligation
to
perform
the
servicing
of
such
loans.
In
addition,
the
Corporation
may
purchase
or
assume
the
right
to
service
loans
originated
by
others.
Whenever
the
Corporation
undertakes an
obligation to
service a
loan, management
assesses whether
a servicing
asset or
liability should
be recognized.
A
servicing
asset
is
recognized
whenever
the
compensation
for
servicing
is
expected
to
more
than
adequately
compensate
the
servicer
for
performing
the
servicing.
Likewise,
a
servicing
liability
would
be
recognized
in
the
event
that
servicing
fees
to
be
received are not
expected to adequately
compensate the Corporation
for its
expected cost. Mortgage servicing
assets recorded at
fair value are separately presented on the Consolidated
Statements of Financial Condition.
All separately recognized servicing assets are initially recognized at fair value. For subsequent measurement of
servicing rights, the
Corporation
has
elected
the
fair
value
method
for
mortgage
loans
servicing
rights
(“MSRs”).
Under
the
fair
value
measurement
method,
MSRs
are
recorded
at
fair
value
each
reporting
period,
and
changes
in
fair
value
are
reported
in
mortgage
banking
activities in the Consolidated Statement of Operations. Contractual
servicing fees including ancillary income and late
fees, as well as
fair
value
adjustments, are
reported in
mortgage
banking
activities in
the
Consolidated Statement
of
Operations. Loan
servicing
fees, which are based on a percentage of the principal balances of the
loans serviced, are credited to income as loan payments are
collected.
The fair value
of servicing rights is
estimated by using a
cash flow valuation model
which calculates the present value
of estimated
future net servicing cash flows, taking into consideration actual and expected loan prepayment rates, discount rates, servicing
costs,
and other economic factors, which are determined
based on current market conditions.
Premises and equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed on a
straight-
line basis over the estimated useful life of each
type of asset. Amortization of leasehold improvements
is computed over the terms of
the respective
leases or
the estimated
useful lives
of the
improvements, whichever
is shorter.
Costs of
maintenance and
repairs
which do not
improve or extend
the life of
the respective assets
are expensed as
incurred. Costs of
renewals and betterments
are
capitalized. When assets are
disposed of, their cost
and related accumulated depreciation are removed
from the accounts and
any
gain or loss is reflected in earnings as realized
or incurred, respectively.
The Corporation
capitalizes interest
cost
incurred in
the construction
of
significant real
estate projects,
which consist
primarily of
facilities
for
its
own
use
or
intended for
lease.
The
amount
of
interest cost
capitalized is
to
be
an
allocation of
the
interest cost
incurred during the
period required to substantially
complete the asset.
The interest rate
for capitalization purposes is
to be based
on a weighted
average rate on
the Corporation’s outstanding
borrowings, unless there
is a specific
new borrowing associated
with
the asset. Interest cost capitalized for the years ended
December 31, 2021, 2020 and 2019 was not
significant.
The
Corporation
recognizes
right-of-use
assets
(“ROU
assets”)
and
lease
liabilities
relating
to
operating
and
finance
lease
arrangements in its Consolidated Statements of Financial Condition within other assets and other liabilities, respectively. For finance
leases, interest is recognized on the
lease liability separately from the amortization
of the ROU asset, whereas for
operating leases
a single lease cost
is recognized so that
the cost of the
lease is allocated over
the lease term on
a straight-line basis. Impairments
79
on ROU assets are evaluated under the guidance for impairment
or disposal of long-lived assets.
The Corporation recognizes gains
on sale and
leaseback transactions in earnings when
the transfer constitutes a
sale, and the transaction
was at fair value.
Refer to
Note 33 to the Consolidated Financial Statements
for additional information on operating and
finance lease arrangements.
Impairment of long-lived assets
The
Corporation
evaluates
for
impairment
its
long-lived
assets
to
be
held
and
used,
and
long-lived
assets
to
be
disposed
of,
whenever events or changes
in circumstances indicate that the
carrying amount of an
asset may not be recoverable
and records a
write down for the difference between the carrying amount
and the fair value less costs to sell.
Other real estate
Other
real
estate,
received
in
satisfaction
of
a
loan,
is
recorded
at
fair
value
less
estimated
costs
of
disposal.
The
difference
between the carrying amount of the loan and the fair value less cost to
sell is recorded as an adjustment to the ACL. Subsequent to
foreclosure, any
losses in
the carrying
value arising
from periodic
re-evaluations of the
properties, and any
gains or
losses on
the
sale of these properties are credited or charged to expense in the period incurred and are included as OREO expenses. The cost of
maintaining and operating such properties is expensed
as incurred.
Updated appraisals
are obtained
to adjust
the value
of the
other real
estate assets.
The frequency
depends on
the loan
type and
total credit exposure. The appraisal for a commercial or construction other real estate property with a book value
equal to or greater
than $1 million is updated annually and if lower
than $1 million it is updated every two years.
For residential mortgage properties, the
Corporation requests appraisals annually.
Appraisals
may
be
adjusted
due
to
age,
collateral
inspections,
property
profiles,
or
general
market
conditions.
The
adjustments
applied are based upon
internal information such
as other appraisals for
the type of
properties and/or loss severity
information that
can provide historical trends in the real estate market
and may change from time to time based
on market conditions.
Goodwill and other intangible assets
Goodwill is recognized when the purchase
price is higher than the fair
value of net assets acquired in
business combinations under
the purchase
method of
accounting. Goodwill
is not
amortized but
is tested
for impairment
at least
annually or
more frequently
if
events or circumstances indicate possible impairment. If the
carrying amount of any of the
reporting units exceeds its fair value, the
Corporation would be required to record an impairment
charge for the difference up to the amount of the goodwill. In determining
the
fair
value
of
each
reporting
unit,
the
Corporation
generally
uses
a
combination
of
methods,
including
market
price
multiples
of
comparable companies and transactions, as well as discounted cash flow analysis. Goodwill impairment losses are recorded
as part
of operating expenses in the Consolidated Statements
of Operations.
Other intangible assets deemed
to have an
indefinite life are
not amortized but are
tested for impairment using
a one-step process
which compares the fair value with the carrying amount of the asset.
In determining that an intangible asset has an indefinite life, the
Corporation
considers
expected
cash
inflows
and
legal,
regulatory,
contractual,
competitive,
economic
and
other
factors,
which
could limit the intangible asset’s useful life.
Other
identifiable
intangible
assets
with
a
finite
useful
life,
mainly
core
deposits,
are
amortized
using
various
methods
over
the
periods
benefited,
which
range
from
5
to
10
years.
These
intangibles are
evaluated
periodically for
impairment
when
events
or
changes in circumstances
indicate that the carrying
amount may not
be recoverable. Impairments on
intangible assets with
a finite
useful life are evaluated under the guidance for
impairment or disposal of long-lived assets.
Assets sold / purchased under agreements to repurchase
/ resell
Repurchase and resell agreements
are treated as collateralized
financing transactions and are
carried at the
amounts at which the
assets will be subsequently reacquired or resold as
specified in the respective agreements.
It is the
Corporation’s policy to take possession
of securities purchased under agreements
to resell. However, the
counterparties to
such
agreements
maintain
effective
control
over
such
securities,
and
accordingly
those
securities
are
not
reflected
in
the
Corporation’s Consolidated Statements
of Financial
Condition. The Corporation
monitors the
fair value of
the underlying
securities
as compared to the related receivable, including accrued
interest.
It
is
the
Corporation’s
policy
to
maintain
effective
control
over
assets
sold
under
agreements
to
repurchase;
accordingly,
such
securities continue to be carried on the Consolidated
Statements of Financial Condition.
The Corporation may require counterparties to deposit
additional collateral or return collateral pledged,
when appropriate.
Software
80
Capitalized
software
is
stated
at
cost,
less
accumulated
amortization.
Capitalized
software
includes
purchased
software
and
capitalizable application development costs associated with internally-developed software. Amortization, computed on a straight-line
method, is charged to operations
over the estimated useful life
of the software. Capitalized software is
included in “Other assets” in
the Consolidated Statement of Financial Condition.
Guarantees, including indirect guarantees of indebtedness
to others
The estimated losses to be absorbed under the credit
recourse arrangements are recorded as a liability when
the loans are sold and
are updated by
accruing or reversing expense
(categorized in the line
item “Adjustments (expense) to
indemnity reserves on loans
sold”
in
the
Consolidated
Statements
of
Operations)
throughout
the
life
of
the
loan,
as
necessary,
when
additional
relevant
information becomes
available. The
recourse liability
is
estimated using
loan level
statistical techniques.
Internal factors
that
are
evaluated
include
customer
credit
scores,
refreshed
loan-to-values,
loan
age,
and
outstanding
balance,
amongst
others.
The
methodology leverages the
expected loss framework
for mortgage loans
and includes macroeconomic
expectations based on
a 2-
year reasonable and supportable period, gradually reverting over a 1-year horizon to historical macroeconomic
variables at the input
level.
Estimated
future
defaults,
prepayments
and
loss
severity
are
combined
with
loan
level
repayment
information
in
order
to
estimate lifetime expected
losses for this
portfolio. The reserve
for the estimated
losses under the
credit recourse arrangements
is
presented
separately
within
other
liabilities
in
the
Consolidated
Statements
of
Financial
Condition.
Refer
to
Note
23
to
the
Consolidated Financial Statements for further disclosures
on guarantees.
Treasury stock
Treasury stock is
recorded at cost and
is carried as a
reduction of stockholders’ equity in
the Consolidated Statements of Financial
Condition.
At the
date of
retirement or
subsequent reissue,
the treasury
stock account
is reduced
by
the cost
of such
stock.
At
retirement, the excess of the cost of the treasury stock over
its par value is recorded entirely to surplus. At reissuance,
the difference
between the consideration received upon issuance
and the specific cost is charged or credited to
surplus.
Revenues from contract with customers
Refer
to
Note
32
for
a
detailed
description
of
the
Corporation’s
policies
on
the
recognition
and
presentation
of
revenues
from
contract with customers.
Foreign exchange
Assets and liabilities
denominated in foreign currencies
are translated to U.S.
dollars using prevailing rates
of exchange at
the end
of
the
period.
Revenues, expenses,
gains
and
losses
are
translated using
weighted
average
rates
for
the
period.
The
resulting
foreign currency translation adjustment
from operations for which
the functional currency is
other than the U.S.
dollar is reported in
accumulated
other
comprehensive
loss,
except
for
highly
inflationary
environments
in
which
the
effects
are
included
in
other
operating expenses.
The Corporation
holds interests
in Centro
Financiero BHD
León, S.A.
(“BHD León”)
in the
Dominican Republic.
The business
of
BHD León is
mainly conducted in their
country’s foreign currency.
The resulting foreign currency
translation adjustment from these
operations is reported in accumulated other comprehensive
loss.
Refer to the disclosure of accumulated other comprehensive
loss included in Note 22.
Income taxes
The Corporation
recognizes deferred tax
assets and
liabilities for
the expected
future tax
consequences of
events that
have been
recognized in
the Corporation’s
financial statements
or tax
returns. Deferred
income tax
assets and
liabilities are
determined for
differences between financial statement and tax bases of assets and liabilities that will result in taxable or deductible
amounts in the
future.
The
computation
is
based
on
enacted
tax
laws
and
rates
applicable
to
periods
in
which
the
temporary
differences
are
expected to be recovered or settled.
The
guidance for
income
taxes
requires a
reduction of
the
carrying
amounts
of
deferred tax
assets
by
a valuation
allowance if,
based on the available evidence, it is more likely
than not (defined as a likelihood of more
than 50 percent) that such assets will not
be
realized.
Accordingly,
the
need
to
establish
valuation
allowances
for
deferred
tax
assets
is
assessed
periodically
by
the
Corporation
based
on
the
more
likely
than
not
realization
threshold
criterion.
In
the
assessment
for
a
valuation
allowance,
appropriate consideration
is given
to all
positive and
negative evidence
related to
the realization
of the
deferred tax
assets. This
assessment considers, among others,
all sources of
taxable income available to
realize the deferred tax
asset, including the future
reversal of existing temporary differences, the future taxable income
exclusive of reversing temporary differences and carryforwards,
taxable income in carryback years and tax-planning strategies. In making such
assessments, significant weight is given to evidence
that can be objectively verified.
81
The valuation
of deferred
tax assets
requires judgment
in assessing
the likely
future tax
consequences of
events that
have been
recognized in the Corporation’s financial statements or tax returns and future profitability.
The Corporation’s accounting for deferred
tax consequences represents management’s best estimate
of those future events.
Positions taken in
the Corporation’s
tax returns may
be subject to
challenge by the
taxing authorities upon
examination. Uncertain
tax positions
are initially
recognized in the
financial statements when
it is
more likely than
not (greater than
50%) that
the position
will be sustained upon examination by the tax authorities, assuming full knowledge of the position and all relevant facts. The amount
of unrecognized tax benefit may increase or decrease in the
future for various reasons including adding amounts for
current tax year
positions,
expiration of open income tax returns due to the statute of limitations, changes in management’s judgment about the level
of
uncertainty,
including
addition
or
elimination
of
uncertain
tax
positions,
status
of
examinations, litigation,
settlements
with
tax
authorities and legislative activity.
The Corporation accounts for the taxes collected from customers
and remitted to governmental authorities on a net
basis (excluded
from revenues).
Income
tax
expense
or
benefit
for
the
year
is
allocated
among
continuing
operations,
discontinued
operations,
and
other
comprehensive income, as applicable. The
amount allocated to continuing operations is
the tax effect of
the pre-tax income or
loss
from
continuing operations
that
occurred during
the year,
plus
or minus
income tax
effects
of
(a) changes
in circumstances
that
cause
a
change
in
judgment
about
the
realization
of
deferred
tax
assets
in
future
years,
(b)
changes
in
tax
laws
or
rates,
(c)
changes in tax status, and (d) tax-deductible
dividends paid to shareholders, subject to certain
exceptions.
Employees’ retirement and other postretirement benefit
plans
Pension costs are
computed on the
basis of accepted
actuarial methods and are
charged to current
operations. Net pension costs
are based
on various actuarial
assumptions regarding future
experience under the
plan, which include
costs for services
rendered
during the
period, interest
costs and
return on
plan assets,
as well
as deferral
and amortization
of certain
items such
as actuarial
gains or losses.
The funding policy is
to contribute to the
plan, as necessary,
to provide for services
to date and for
those expected to be
earned in
the
future.
To
the
extent
that
these
requirements
are
fully
covered
by
assets
in
the
plan,
a
contribution
may
not
be
made
in
a
particular year.
The cost
of postretirement
benefits, which
is determined
based on
actuarial assumptions
and estimates
of the
costs of
providing
these benefits in the future, is accrued during
the years that the employee renders the required
service.
The guidance for compensation
retirement benefits of ASC
Topic
715 requires the recognition
of the funded status
of each defined
pension
benefit
plan,
retiree
health
care
and
other
postretirement
benefit
plans
on
the
Consolidated
Statements
of
Financial
Condition.
Stock-based compensation
The
Corporation
opted
to
use
the
fair
value
method
of
recording
stock-based
compensation
as
described
in
the
guidance
for
employee share plans in ASC Subtopic 718-50.
Comprehensive income
Comprehensive income
(loss) is
defined as
the change
in equity
of
a business
enterprise during
a period
from
transactions and
other events
and circumstances,
except those
resulting from
investments by
owners and
distributions to
owners. Comprehensive
income (loss) is separately presented in the Consolidated
Statements of Comprehensive Income.
Net income per common share
Basic income per common share is computed by dividing net income adjusted for preferred stock dividends, including undeclared or
unpaid dividends
if cumulative,
and charges
or credits
related to
the extinguishment
of preferred
stock or
induced conversions
of
preferred stock, by the weighted average number of
common shares outstanding during the year. Diluted income per common
share
takes into consideration the weighted average common shares adjusted for the effect of stock options, restricted stock, performance
shares and warrants, if any, using the treasury stock method.
Statement of cash flows
For purposes of reporting cash flows, cash includes
cash on hand and amounts due from banks, including
restricted cash.
82
Note 3 - New accounting pronouncements
Recently Adopted Accounting Standards Updates
Standard
Description
Date of adoption
Effect on the financial statements
FASB ASU 2021-06,
Presentation of Financial
Statements (Topic 205),
Financial Services –
Depository and Lending
(Topic 942), and Financial
Services – Investment
Companies (Topic 946):
Amendments to SEC
Paragraphs Pursuant to
SEC Financial Rule
Releases No. 33-10786,
Amendments to Financial
Disclosures about
Acquired and Disposed
Businesses, and No. 33-
10835, Update of
Statistical Disclosures for
Bank and Savings and
Loan Registrants
The
FASB
issued
ASU
2021-06
in
August
2021,
which
amends
certain
paragraphs
from the ASC in response to the issuance of
SEC
Final
Rules
Nos.
33-10786
and
33-
10835.
August 9, 2021
The
adoption
of
ASU
2021-06
during
2021
resulted
in
simplified
MD&A
disclosures.
FASB ASU 2020-10,
Codification Improvements
The FASB
issued ASU
2020-10 in
October
2020 which
moves all
disclosures guidance
to
the
appropriate
codification
section
and
makes
other
improvements
and
technical
corrections.
December 31, 2021
The
Corporation
was
not
impacted
by
the
adoption
of
ASU
2020-10
during
the fourth quarter of 2021.
FASB ASU 2020-08,
Codification Improvements
to Subtopic 310-20 –
Receivables –
Nonrefundable Fees and
Other Costs
The FASB
issued ASU
2020-08 in
October
2020
which
clarifies
that
a
reporting
entity
should
assess
whether
a
callable
debt
security
purchased
at
a
premium
is
within
the
scope
of
ASC
310-20-35-33
each
reporting
period,
which
impacts
the
amortization
period
for
nonrefundable
fees
and other costs.
January 1, 2021
The
Corporation
was
not
impacted
by
the
adoption
of
ASU
2020-08
during
the
first
quarter
of
2021
since
it
does
not
currently
hold
purchased
callable
debt securities at a premium.
FASB ASU 2020-04,
Reference Rate Reform
(Topic 848)
The
FASB
issued
ASU
2020-04
in
March
2020, which provides
accounting relief from
the
impact
of
the
cessation
of
LIBOR
by,
among
other
things,
providing
optional
expedients
to
treat
contract
modifications
resulting from such reference rate reform as
a
continuation
of
the
existing
contract
and
for
hedging
relationships
to
not
be
de-
designated
resulting
from
such
changes
provided certain criteria are met.
December 31, 2021
The
Corporation
identified
all
LIBOR-
based
contracts
that
will
be
impacted
by
the
cessation
of
LIBOR.
It
has
incorporated
fallback
language
in
new
contracts
and
is
in
the
process
of
completing
the
modification
of
existing
contracts
to
include
adequate
fallback
language.
The
Company
has
no
outstanding
hedge
accounting
relationships
tied
to
LIBOR-based
assets
or
liabilities.
Furthermore,
the
Company
stopped
originating
LIBOR-
based
contracts
in
December 2021
so
no
new
exposures
will
be
added
prospectively. The
election to apply
the
optional
expedients
did
not
have
a
material
impact
on
the
Consolidated
Financial Statements.
83
Standard
Description
Date of adoption
Effect on the financial statements
FASB ASU 2020-01,
Investments – Equity
Securities (Topic 321),
Investments – Equity
Method and Joint
Ventures (Topic 323), and
Derivatives and Hedging
(Topic 815): Clarifying the
Interactions between
Topic 321, Topic
323 and
Topic 815
The FASB
issued ASU
2020-01 in
January
2020,
which
clarifies
that
an
entity
should
consider
observable
transactions
that
require it
to
either
apply or
discontinue the
equity
method
of
accounting
for
the
purposes
of
applying
the
measurement
alternative
in
accordance
with
Topic
321
and
includes
scope
considerations
for
entities
that
hold
non-derivative
forward
contracts and
purchased options to
acquire
equity securities that, upon settlement of the
forward contract or exercise of the purchase
option,
would
be
accounted
for
under
the
equity method of accounting.
January 1, 2021
The
Corporation
was
not
impacted
by
the
adoption
of
ASU
2020-01
during
the
first
quarter
of
2021
since
it
does
not
hold
non-derivative
forward
contracts
and
purchased
options
to
acquire
equity
securities
that,
upon
settlement of the
forward or exercise of
the
purchase
option,
would
be
accounted for
under the
equity method
of
accounting.
Notwithstanding,
it
will
consider this guidance for the purposes
of
applying
the
measurement
alternative
in
ASC
Topic
321
immediately
before
applying
or
discontinuing
the
equity
method
of
accounting.
FASB ASU 2019-12,
Income Taxes (Topic
740):
Simplifying the Accounting
for Income Taxes
The
FASB
issued
ASU
2019-12
in
December
2019,
which
simplifies
the
accounting
for
income
taxes
by
removing
certain
exceptions such
as
the incremental
approach
for
intraperiod
tax
allocation
and
interim
period
income
tax
accounting
for
year-to-date losses
that
exceed anticipated
losses.
In
addition,
the
ASU
simplifies
GAAP in
a number
of areas
such as
when
separate
financial
statements
of
legal
entities
are
not
subject
to
tax
and
enacted
changes in tax laws in interim periods.
January 1, 2021
The Corporation adopted ASU
2019-12
during the
first quarter of
2021 but
was
not
materially
impacted
by
the
amendments
of
this
ASU.
It
will
consider
this
guidance
for
enacted
changes in
tax laws,
subsequent step-
ups
in
the
tax
basis
of
goodwill,
or
ownership changes in investments.
84
FASB ASUs Financial Instruments – Credit Losses (Topic 326)
The CECL
model applies
to financial
assets measured
at amortized
cost that
are subject
to credit
losses and
certain off-balance
sheet exposures. CECL establishes a forward-looking methodology that reflects the expected credit losses over the lives of financial
assets,
starting
when
such
assets
are
first
acquired
or
originated.
Under
the
revised
methodology,
credit
losses
are
measured
based on past
events, current conditions
and reasonable and
supportable forecasts that
affect the collectability
of financial assets.
CECL
also
revises
the
approach
to
recognizing
credit
losses
for
available-for-sale
securities
by
replacing
the
direct
write-down
approach with
the allowance
approach and
limiting the
allowance to
the amount
at which
the security’s
fair value
is less
than the
amortized
cost.
In
addition,
CECL
provides
that
the
initial
allowance
for
credit
losses
on
purchased
credit
deteriorated
(“PCD”)
financial assets
will be
recorded as
an increase
to the
purchase price,
with subsequent
changes to
the allowance
recorded as
a
credit loss
expense.
The standards
also expand credit
quality disclosures. These
accounting standards
updates were
effective on
January 1,
2020. Prior
to the
adoption of
CECL, the Corporation
followed a
systematic methodology to
establish and
evaluate the
adequacy of the allowance for credit losses to provide
for probable losses in the loan portfolio.
As a result of the adoption, the Corporation recorded an
increase in its allowance for credit losses related to its loan portfolio
of $315
million, and
a decrease
of $9
million in
the allowance
for credit
losses for
unfunded commitments and
credit recourse
guarantees
which is
recorded in Other
Liabilities. The
Corporation also recognized
an allowance
for credit
losses of
approximately $13 million
related
to
its
held-to-maturity
debt
securities
portfolio.
The
adoption
of
CECL
was
recognized
under
the
modified
retrospective
approach. Therefore, the
adjustments to record
the increase
in the
allowance for credit
losses was
recorded as
a decrease to
the
opening
balance
of
retained
earnings
of
the
year
of
implementation,
net
of
income
taxes,
except
for
approximately
$17
million
related to loans
previously accounted under ASC
Subtopic 310-30, which
resulted in a
reclassification between certain contra
loan
balance
accounts to
the
allowance for
credit
losses. The
total
impact to
retained earnings,
net of
tax,
related to
the adoption
of
CECL
was of
$205.8 million.
As part
of
the adoption
of
CECL, the
Corporation made
the election
to
break the
existing pools
of
purchased credit impaired (“PCI”) loans and, as such,
these loans are no longer excluded from non-performing
status.
85
Accounting Standards Updates Not Yet Adopted
Standard
Description
Date of adoption
Effect on the financial statements
FASB ASU 2021-08,
Business Combinations
(Topic 805) – Accounting
for Contract Assets and
Contract Liabilities from
Contracts with Customers
The FASB
issued ASU
2021-08 in
October
2021,
which
amends
ASC
Topic
805
by
requiring
contract
assets
and
contract
liabilities arising from revenue contracts with
customers
to
be
recognized
in
accordance
with ASC
Topic
606 on
the acquisition date
instead of fair value.
January 1, 2023
Upon
adoption
of
this
ASU,
the
Corporation will
consider this
guidance
for
revenue
contracts
with
customers
recognized
as
part
of
business
combinations
entered
into
on
or
after
the effective date.
FASB ASU 2021-05,
Leases (Topic 842),
Lessors – Certain Leases
with Variable Lease
Payments
The
FASB
issued
ASU
2021-05
in
July
2021, which amends ASC Topic
842 so that
lessors
can
classify
as
operating
leases
those
leases
with
variable
lease
payments
that,
prior
to
these
amendments,
would
have
been
classified
as
a
sales-type
or
direct
financing
lease
and
at
inception
a
loss would have been recognized.
January 1, 2022
The Corporation
does not
expect to
be
impacted
by
the
adoption
of
this
ASU
since
it
does
not
hold
direct
financing
leases with variable lease payments.
FASB ASU 2021-04,
Earnings per Share (Topic
260), Debt – Modifications
and Extinguishments
(Subtopic 470-50),
Compensation – Stock
Compensation (Topic
718), and Derivatives and
Hedging – Contracts in
Entity’s Own Equity
(Subtopic 815-40):
Issuer’s Accounting for
Certain Modifications or
Exchanges of
Freestanding Equity-
Classified Written Call
Options (a consensus of
the FASB Emerging
Issues Task Force)
The
FASB
issued
ASU
2021-04
in
May
2021,
which
clarifies
the
accounting
for
a
modification
or
an
exchange
of
a
freestanding
equity-classified
written
call
option that
remains equity
classified after
a
modification
or
exchange
and
the
related
EPS
effects
of
such
transaction
if
recognized as an adjustment to equity.
January 1, 2022
Upon
adoption
of
this
ASU,
the
Corporation will
consider this
guidance
for
modifications
or
exchanges
of
freestanding
equity-classified
written
call options.
FASB ASU 2020-06, Debt
– Debt with Conversion
and other Options
(Subtopic 470-20) and
Derivatives and Hedging –
Contracts in Entity’s Own
Equity (Subtopic 815-40):
Accounting for Convertible
Instruments and Contracts
in an Entity’s Own Equity
The
FASB
issued
ASU
2020-06
in
August
2020
which,
among
other
things,
simplifies
the
accounting
for
convertible
instruments
and contracts
in an
entity’s own
equity and
amends
the
diluted
EPS
computation
for
these instruments.
January 1, 2022
Upon
adoption
of
this
standard,
the
Corporation
will
consider
these
amendments
in
its
evaluation
of
contracts
in
its
own
equity,
including
accelerated
share
repurchase
transactions.
86
Note 4
–
Business combination
On October
15, 2021, Popular
Equipment Finance, LLC
(“PEF”), a newly
formed wholly-owned subsidiary
of Popular Bank
(“PB”),
completed the
acquisition of
certain assets
and
the
assumption of
certain
liabilities of
K2
Capital Group
LLC’s
(“K2”) equipment
leasing and
financing business
based in
Minnesota (the
“Acquired Business”).
Commercial loans
acquired by
PEF as
part of
this
transaction consisted of $105 million
in commercial direct financing leases
and $14 million in
working capital lines. Refer to
Note 2,
Summary of significant accounting policies, for further
details.
Specializing in the healthcare
industry, the
Acquired Business provides a variety
of lease products, including
operating and finance
leases,
and
also
offers
private
label
vendor
finance
programs
to
equipment
manufacturers
and
healthcare
organizations.
The
acquisition provides PB with a national equipment
leasing platform that complements its existing health
care lending business.
The
following
table
presents
the
fair
values
of
the
consideration
and
major
classes
of
identifiable
assets
acquired
and
liabilities
assumed by PEF as of October 15, 2021.
Book value prior to
purchase accounting
Fair value
As recorded by
(In thousands)
adjustments
adjustments
Popular, Inc.
Cash consideration
$
156,628
$
-
$
156,628
Contingent consideration
-
9,241
9,241
Total consideration
$
156,628
$
9,241
$
165,869
Assets:
Cash and due from banks
$
800
$
-
$
800
Commercial loans
118,907
(3,332)
115,575
Premises and equipment
6,987
2,009
8,996
Accrued income receivable
57
-
57
Other assets
2,822
-
2,822
Other intangible assets
-
2,887
2,887
Total assets
$
129,573
$
1,564
$
131,137
Liabilities:
Other liabilities
14,439
-
14,439
Total liabilities
$
14,439
$
-
$
14,439
Net assets acquired
$
115,134
$
1,564
$
116,698
Goodwill on acquisition
$
49,171
The fair values
initially assigned to the
assets acquired and liabilities
assumed are preliminary and
are subject to refinement
for up
to one year after the closing date of the acquisition as
new information relative to closing date fair values becomes available. As the
Corporation finalizes
its analyses, there
may continue
to be
adjustments to the
recorded carrying values,
and thus
the recognized
goodwill may increase or decrease.
Following is a description of
the methods used to determine
the fair values of significant
assets acquired and liabilities assumed
on
the K2 Transaction:
Commercial Loans
In determining the fair value
of commercial direct financing leases, the specific
terms and conditions of each lease
agreement were
considered.
The
fair
values
for
commercial
direct
financing
leases
were
calculated
based
on
the
fair
value
of
the
underlying
collateral, or from
the cash flows
expected to be
collected discounted at
a market rate
commensurate with the
credit risk profile
of
the
lessee at
origination in
instances where
there
was a
purchase option
at the
end of
the lease
term
with a
stated
guaranteed
residual value. Fair values for commercial working capital lines were calculated based on the present value of remaining contractual
payments discounted
at a
market rate
commensurate with
the credit
risk profile
of the
borrower at
origination. These
commercial
loans were
accounted for
under ASC
Subtopic 310-20.
As of
October 15,
2021, the
gross contractual
receivable for
commercial
loans amounted to $125 million. An allowance for credit losses of $1 million was recognized as of October 15, 2021 with an offset to
provision for credit losses, which represents the estimate
of contractual cash flows not expected to be
collected.
87
Goodwill
The
amount
of
goodwill
is
the
residual
difference
between
the
consideration
transferred
to
K2
and
the
fair
value
of
the
assets
acquired,
net
of
the
liabilities
assumed.
The
entire
amount
of
goodwill
is
deductible
for
income
tax
purposes
pursuant
to
U.S.
Internal Revenue Code (“IRC”) section 197 over
a 15-year period.
Contingent consideration
The fair value of the contingent consideration, which relates to approximately $29 million in earnout payments that could be payable
to K2 over a three-year period, was calculated based
on a Montecarlo Simulation model.
The Corporation believes that given the
amount of assets and liabilities assumed
and the size of the operations
acquired in relation
to
Popular’s operations,
the
historical results
of
K2
are
not significant
to
Popular’s results,
and thus
no
pro
forma
information is
presented.
88
Note 5 - Restrictions on cash and due from
banks and certain securities
BPPR is
required by
regulatory agencies
to maintain
average
reserve balances
with the
Federal Reserve
Bank of
New York
(the
“Fed”) or
other banks.
Those required
average reserve
balances amounted
to
$2.7 billion
at December
31, 2021
(December 31,
2020
-
$2.3
billion). Cash
and
due from
banks, as
well
as
other highly
liquid securities,
are
used to
cover
the required
average
reserve balances.
At
December
31,
2021
,
t
he
Corporation
held
$50
million
in
restricted
assets
in
the
form
of
funds
deposited
in
money
market
accounts, debt
securities available for
sale and
equity securities (December
31, 2020
- $39
million).
The restricted
assets held
in
debt securities available for
sale and equity securities
consist primarily of assets
held for the Corporation’s
non-qualified retirement
plans and fund deposits guaranteeing possible liens
or encumbrances over the title of insured
properties.
89
Note 6 – Debt securities available-for-sale
The following tables present
the amortized cost, gross
unrealized gains and losses,
approximate fair value, weighted average
yield
and contractual maturities of debt securities available-for-sale
at December 31, 2021 and December 31, 2020.
At December 31, 2021
Gross
Gross
Weighted
Amortized
unrealized
unrealized
Fair
average
(In thousands)
cost
gains
losses
value
yield
U.S. Treasury securities
Within 1 year
$
1,225,558
$
13,556
$
69
$
1,239,045
2.33
%
After 1 to 5 years
10,059,163
98,808
65,186
10,092,785
1.18
After 5 to 10 years
4,563,265
739
36,804
4,527,200
1.22
Total U.S. Treasury
securities
15,847,986
113,103
102,059
15,859,030
1.27
Obligations of U.S. Government sponsored entities
Within 1 year
70
-
-
70
5.63
Total obligations of
U.S. Government sponsored entities
70
-
-
70
5.63
Collateralized mortgage obligations - federal agencies
After 1 to 5 years
2,433
42
-
2,475
2.16
After 5 to 10 years
43,241
295
6
43,530
1.54
After 10 years
172,176
3,441
357
175,260
2.13
Total collateralized
mortgage obligations - federal agencies
217,850
3,778
363
221,265
2.01
Mortgage-backed securities
Within 1 year
11
1
-
12
4.79
After 1 to 5 years
65,749
2,380
11
68,118
2.23
After 5 to 10 years
665,600
17,998
5
683,593
1.97
After 10 years
8,263,835
68,128
195,910
8,136,053
1.67
Total mortgage-backed
securities
8,995,195
88,507
195,926
8,887,776
1.69
Other
After 1 to 5 years
123
5
-
128
3.62
Total other
123
5
-
128
3.62
Total debt securities
available-for-sale
[1]
$
25,061,224
$
205,393
$
298,348
$
24,968,269
1.42
%
[1]
Includes $22.0 billion pledged to secure government and
trust deposits, assets sold under agreements to repurchase,
credit facilities and loan
servicing agreements that the secured parties are not permitted
to sell or repledge the collateral, of which $20.9
billion serve as collateral for
public funds.
90
At December 31, 2020
Gross
Gross
Weighted
Amortized
unrealized
unrealized
Fair
average
(In thousands)
cost
gains
losses
value
yield
U.S. Treasury securities
Within 1 year
$
4,900,055
$
16,479
$
-
$
4,916,534
0.69
%
After 1 to 5 years
5,007,223
259,399
-
5,266,622
2.05
After 5 to 10 years
567,367
37,517
-
604,884
1.68
Total U.S. Treasury
securities
10,474,645
313,395
-
10,788,040
1.40
Obligations of U.S. Government sponsored entities
Within 1 year
59,993
101
-
60,094
1.46
After 1 to 5 years
90
-
-
90
5.64
Total obligations of
U.S. Government sponsored entities
60,083
101
-
60,184
1.47
Collateralized mortgage obligations - federal agencies
After 1 to 5 years
1,388
14
-
1,402
2.97
After 5 to 10 years
61,229
1,050
-
62,279
1.56
After 10 years
318,292
10,202
43
328,451
2.04
Total collateralized
mortgage obligations - federal agencies
380,909
11,266
43
392,132
1.97
Mortgage-backed securities
Within 1 year
5,616
56
-
5,672
2.83
After 1 to 5 years
50,393
1,735
-
52,128
2.35
After 5 to 10 years
454,880
20,022
6
474,896
1.91
After 10 years
9,608,860
180,844
1,839
9,787,865
1.94
Total mortgage-backed
securities
10,119,749
202,657
1,845
10,320,561
1.94
Other
After 1 to 5 years
224
11
-
235
3.62
Total other
224
11
-
235
3.62
Total debt securities
available-for-sale
[1]
$
21,035,610
$
527,430
$
1,888
$
21,561,152
1.66
%
[1]
Includes $18.2 billion pledged to secure government and trust
deposits, assets sold under agreements to repurchase, credit
facilities and loan
servicing agreements that the secured parties are not permitted
to sell or repledge the collateral, of which $16.9
billion serve as collateral for
public funds.
The weighted
average yield
on debt
securities available-for-sale
is based
on amortized
cost; therefore,
it
does not
give
effect to
changes in fair value.
Securities
not
due
on
a
single
contractual
maturity
date,
such
as
mortgage-backed
securities
and
collateralized
mortgage
obligations, are classified
in the period
of final contractual
maturity. The
expected maturities of
collateralized mortgage obligations,
mortgage-backed securities and certain other securities may
differ from their contractual maturities
because they may be subject to
prepayments or may be called by the issuer.
The following table presents the
aggregate amortized cost and fair value of
debt securities available-for-sale at December 31, 2021
by contractual maturity.
(In thousands)
Amortized cost
Fair value
Within 1 year
$
1,225,639
$
1,239,127
After 1 to 5 years
10,127,468
10,163,506
After 5 to 10 years
5,272,106
5,254,323
After 10 years
8,436,011
8,311,313
Total debt securities
available-for-sale
$
25,061,224
$
24,968,269
During the years
ended December 31,
2021 and 2020,
the Corporation sold
U.S. Treasury
Notes. The proceeds
from these sales
were $236
million and $5
million, respectively.
Gross realized gains
and losses on
the sale
of debt securities
available-for-sale for
the years ended December 31, 2021, 2020 and
2019 were as follows:
91
(In thousands)
2021
2020
2019
Gross realized gains
$
695
$
41
$
-
Gross realized losses
(672)
-
(20)
Net realized gains (losses) on sale of debt securities available
-for-sale
$
23
$
41
$
(20)
The
following
tables
present
the
Corporation’s
fair
value
and
gross
unrealized
losses
of
debt
securities
available-for-sale,
aggregated by investment category
and length of time
that individual securities have been
in a continuous unrealized loss
position,
at December 31, 2021 and 2020.
92
At December 31, 2021
Less than 12 months
12 months or more
Total
Gross
Gross
Gross
Fair
unrealized
Fair
unrealized
Fair
unrealized
(In thousands)
value
losses
value
losses
value
losses
U.S. Treasury securities
$
9,590,448
$
102,059
$
-
$
-
$
9,590,448
$
102,059
Collateralized mortgage obligations - federal agencies
35,533
334
1,084
29
36,617
363
Mortgage-backed securities
5,767,556
170,614
595,051
25,312
6,362,607
195,926
Total debt securities
available-for-sale in an unrealized loss position
$
15,393,537
$
273,007
$
596,135
$
25,341
$
15,989,672
$
298,348
At December 31, 2020
Less than 12 months
12 months or more
Total
Gross
Gross
Gross
Fair
unrealized
Fair
unrealized
Fair
unrealized
(In thousands)
value
losses
value
losses
value
losses
Collateralized mortgage obligations - federal agencies
$
4,029
$
43
$
-
$
-
$
4,029
$
43
Mortgage-backed securities
886,432
1,834
555
11
886,987
1,845
Total debt securities
available-for-sale in an unrealized loss position
$
890,461
$
1,877
$
555
$
11
$
891,016
$
1,888
As of
December 31, 2021,
the portfolio
of available-for-sale debt
securities reflects gross
unrealized losses of
approximately $298
million, driven mainly by U.S. Treasury Securities and mortgage-backed securities, which were impacted by increases in the interest
rate environment.
The following table states the name of issuers, and the
aggregate amortized cost and fair value of the debt securities of such
issuer
(includes available-for-sale and
held-to-maturity debt securities),
in which the
aggregate amortized cost
of such securities
exceeds
10% of
stockholders’ equity.
This information
excludes debt
securities backed
by the
full faith
and credit
of the
U.S. Government.
Investments in obligations issued
by a state
of the U.S.
and its political subdivisions
and agencies, which are
payable and secured
by the same source of revenue or taxing authority, other than the U.S. Government,
are considered securities of a single issuer.
2021
2020
(In thousands)
Amortized cost
Fair value
Amortized cost
Fair value
FNMA
$
1,533,637
$
1,587,127
$
2,242,121
$
2,338,897
Freddie Mac
3,228,543
3,176,197
3,616,238
3,675,679
93
Note 7 –Debt securities held-to-maturity
The following
tables present
the amortized
cost, allowance
for credit
losses, gross
unrealized gains
and losses,
approximate fair
value, weighted average yield and contractual
maturities of debt securities held-to-maturity at December
31, 2021 and 2020.
At December 31, 2021
Allowance
Gross
Gross
Weighted
Amortized
for Credit
Net of
unrealized
unrealized
Fair
average
(In thousands)
cost
Losses
Allowance
gains
losses
value
yield
Obligations of Puerto Rico, States and political
subdivisions
Within 1 year
$
4,240
$
7
$
4,233
$
4
$
-
$
4,237
6.07
%
After 1 to 5 years
14,395
148
14,247
149
-
14,396
6.23
After 5 to 10 years
11,280
122
11,158
104
-
11,262
2.18
After 10 years
43,561
7,819
35,742
11,746
-
47,488
1.50
Total obligations of
Puerto Rico, States and political
subdivisions
73,476
8,096
65,380
12,003
-
77,383
2.79
Collateralized mortgage obligations - federal agencies
After 1 to 5 years
25
-
25
-
-
25
6.44
Total collateralized
mortgage obligations - federal
25
-
25
-
-
25
6.44
Securities in wholly owned statutory business trusts
After 10 years
5,960
-
5,960
-
-
5,960
6.33
Total securities
in wholly owned statutory business
5,960
-
5,960
-
-
5,960
6.33
Total debt securities
held-to-maturity
$
79,461
$
8,096
$
71,365
$
12,003
$
-
$
83,368
3.06
%
At December 31, 2020
Allowance
Gross
Gross
Weighted
Amortized
for Credit
Net of
unrealized
unrealized
Fair
average
(In thousands)
cost
Losses
Allowance
gains
losses
value
yield
Obligations of Puerto Rico, States and political
subdivisions
Within 1 year
$
3,990
$
50
$
3,940
$
47
$
-
$
3,987
6.05
%
After 1 to 5 years
16,030
710
15,320
710
-
16,030
6.16
After 5 to 10 years
14,845
573
14,272
295
23
14,544
2.77
After 10 years
46,164
8,928
37,236
11,501
-
48,737
1.58
Total obligations of
Puerto Rico, States and political
subdivisions
81,029
10,261
70,768
12,553
23
83,298
2.93
Collateralized mortgage obligations - federal agencies
After 1 to 5 years
31
-
31
1
-
32
6.44
Total collateralized
mortgage obligations - federal
31
-
31
1
-
32
6.44
Securities in wholly owned statutory business trusts
After 10 years
11,561
-
11,561
-
-
11,561
6.51
Total securities
in wholly owned statutory business
11,561
-
11,561
-
-
11,561
6.51
Total debt securities
held-to-maturity
$
92,621
$
10,261
$
82,360
$
12,554
$
23
$
94,891
3.38
%
Securities not due
on a single
contractual maturity date,
such as collateralized
mortgage obligations, are classified
in the
period of
final contractual maturity. The
expected maturities of collateralized mortgage obligations and certain other securities may differ from
their contractual maturities because they may be
subject to prepayments or may be called by
the issuer.
The following
table presents the
aggregate amortized cost
and fair value
of debt securities
held-to-maturity at December
31, 2021
by contractual maturity.
94
(In thousands)
Amortized cost
Fair value
Within 1 year
$
4,240
$
4,237
After 1 to 5 years
14,420
14,421
After 5 to 10 years
11,280
11,262
After 10 years
49,521
53,448
Total debt securities
held-to-maturity
$
79,461
$
83,368
Credit Quality Indicators
The following describes the credit quality
indicators by major security type that
the Corporation considers in its’
estimate to develop
the allowance for credit losses for investment securities
held-to-maturity.
At December 31, 2021 and December 31, 2020, the “Obligations
of Puerto Rico, States and political subdivisions” classified
as held-
to-maturity,
includes securities
issued by
municipalities of
Puerto Rico
that are
generally not
rated by
a credit
rating agency.
This
includes $30 million of general and special obligation bonds issued by three municipalities of Puerto Rico, that
are payable primarily
from
certain
property
taxes
imposed
by
the
issuing
municipality
(December
31,
2020
-
$35
million).
In
the
case
of
general
obligations, they
also benefit
from a
pledge of
the full
faith, credit
and unlimited
taxing power
of the
issuing municipality,
which is
required by law to levy property taxes in an amount sufficient for the payment of
debt service on such general obligation bonds. The
Corporation performs periodic credit quality
reviews of these securities and
internally assigns standardized credit risk ratings
based
on its evaluation.
The Corporation considers these ratings
in its estimate to
develop the allowance for credit
losses associated with
these securities. For the definitions of the obligor risk
ratings, refer to the Credit Quality section
of Note 9.
The
following
presents
the
amortized
cost
basis
of
securities
held
by
the
Corporation
issued
by
municipalities
of
Puerto
Rico
aggregated by the internally assigned standardized
credit risk rating:
At December 31, 2021
At December 31, 2020
(In thousands)
Securities issued by Puerto Rico municipalities
Watch
$
16,345
$
35,315
Pass
13,800
-
Total
$
30,145
$
35,315
At December
31, 2021,
the portfolio
of “Obligations
of Puerto
Rico, States
and political
subdivisions” also
includes $43
million in
securities
issued
by
the
Puerto
Rico
Housing
Finance
Authority
(“HFA”),
a
government
instrumentality,
for
which
the
underlying
source of payment is second mortgage loans in Puerto Rico residential
properties (not the government), but for which HFA, provides
a guarantee
in the
event of default
and upon the
satisfaction of certain
other conditions (December
31, 2020 -
$46 million). These
securities
are
not
rated
by
a
credit
rating
agency.
The
Corporation assesses
the
credit
risk
associated
with
these
securities
by
evaluating the refreshed
FICO scores of
a representative sample of
the underlying borrowers.
At December 31,
2021, the average
refreshed FICO
score
for the
representative sample,
comprised of
64%
of
the
nominal value
of the
securities, used
for the
loss
estimate was
of
704 (compared
to
66% and
697, respectively,
at December
31, 2020).
The
loss estimates
for this
portfolio was
based on the methodology established under CECL
for similar loan obligations. The Corporation does not
consider the government
guarantee when estimating the credit losses associated
with this portfolio.
A
further
deterioration
of
the
Puerto
Rico
economy
or
of
the
fiscal
health
of
the
Government
of
Puerto
Rico
and/or
its
instrumentalities (including if any of
the issuing municipalities become subject to
a debt restructuring proceeding under PROMESA)
could further affect the value of these securities, resulting in losses
to the Corporation.
Refer to Note 24
for additional information on the Corporation’s exposure to
the Puerto Rico Government.
Delinquency status
At December 31, 2021 and December 31, 2020,
there were no securities held-to-maturity in
past due or non-performing status.
Allowance for credit losses on debt securities held-to-maturity
95
The following table provides the
activity in the allowance for
credit losses related to debt securities
held-to-maturity by security type
at December 31, 2021 and December 31, 2020:
For the year ended December 31,
2021
2020
(In thousands)
Obligations of Puerto Rico, States and political subdivisions
Allowance for credit losses:
Beginning balance
$
10,261
$
-
Impact of adopting CECL
-
12,654
Provision for credit losses (benefit)
(2,165)
(2,393)
Securities charged-off
-
-
Recoveries
-
-
Ending balance
$
8,096
$
10,261
The
allowance
for
credit
losses
for
the
Obligations
of
Puerto
Rico,
States
and
political
subdivisions
includes
$0.3
million
for
securities issued by municipalities of
Puerto Rico, and $7.8
million for bonds issued by
the Puerto Rico HFA
,
which are secured by
second mortgage loans on
Puerto Rico residential properties (compared to
$1.4 million and $8.9 million,
respectively, at
December
31, 2020).
96
Note 8 – Loans
For
a
summary
of the
accounting policies
related to
loans, interest
recognition
and
allowance for
credit
losses
refer to
Note
2
-
Summary of Significant Accounting Policies of this Form
10-K.
During
the
year
ended
December
31,
2021,
the
Corporation
recorded
purchases
(including
repurchases)
of
mortgage
loans
amounting to $393 million
including $14 million in
Purchased Credit Deteriorated (“PCD”) loans,
consumer loans of $61
million and
commercial loans of
$139 million; compared
to purchases (including
repurchases) of mortgage
loans of $1.3
billion including $160
million
in
PCD loans,
consumer loans
of
$56 million
and commercial
loans
of
$26
million, during
the year
ended December
31,
2020.
During 2020,
these mortgage
loan repurchases
included a
bulk
repurchase transaction
of
$688 million
in GNMA
loans, of
which
$684 million
were 90
days past
due
at
that
time,
including $324
million
which
were already
included
in
the
Corporation’s
ending portfolio balance at June 30, 2020, since due to the
delinquency status of the loans the Corporation had the right but not the
obligation
to
repurchase the
assets
and
is
required to
recognize
(rebook) these
loans
in
accordance with
U.S.
GAAP.
The
bulk
repurchase also included $120 million in loans from the FNMA and FHMLC servicing portfolio, subject to credit recourse which were
considered PCD loans.
The Corporation performed whole-loan sales involving
approximately $145 million of residential mortgage
loans and $131 million of
commercial and
construction loans
during the
year
ended December
31,
2021
(December 31,
2020 -
$150
million
of
residential
mortgage loans and $32 million of commercial loans).
Also, during the year ended December 31, 2021, the
Corporation securitized
approximately
$380
million
of
mortgage
loans
into
Government
National
Mortgage
Association
(“GNMA”)
mortgage-backed
securities
$330
million
of
mortgage
loans
into
Federal
National
Mortgage
Association
(“FNMA”)
mortgage-backed
securities,
compared
to
$332
million
and
$176
million,
respectively,
during
the
year
ended
December
31,
2020.
Also,
the
Corporation
securitized
approximately
$23
million
of
mortgage
loans
into
Federal
Home
Loan
Mortgage
Corporation
(“FHLMC”)
mortgage-
backed securities during the year ended December 31,
2021.
As
previously
disclosed
in
Note
4,
on
October
15,
2021
Popular
Equipment
Finance
LLC
acquired
$105
million
in
commercial
finance leases and
$14 million in
working capital lines
as a result
of the acquisition of
certain assets and
the assumption of certain
liabilities from the K2 Capital Group LLC. The portfolio of leases and loans
from the acquired business is included in the information
presented in this note.
Delinquency status
The following tables present the
amortized cost basis of loans
held-in-portfolio (“HIP”), net of unearned
income, by past due status,
and by loan class including those that are in non-performing status or that are accruing
interest but are past due 90 days or more at
December 31, 2021 and 2020.
97
December 31, 2021
Puerto Rico
Past due
Past due 90 days or more
30-59
60-89
90 days
Total
Non-accrual
Accruing
(In thousands)
days
days
or more
past due
Current
Loans HIP
loans
loans
Commercial multi-family
$
314
$
-
$
272
$
586
$
154,183
$
154,769
$
272
$
-
Commercial real estate:
Non-owner occupied
2,399
136
20,716
23,251
2,266,672
2,289,923
20,716
-
Owner occupied
3,329
278
54,335
57,942
1,365,787
1,423,729
54,335
-
Commercial and industrial
3,438
1,727
45,242
50,407
3,478,041
3,528,448
44,724
518
Construction
-
-
485
485
86,626
87,111
485
-
Mortgage
217,830
81,754
805,245
1,104,829
5,147,037
6,251,866
333,887
471,358
Leasing
9,240
2,037
3,102
14,379
1,366,940
1,381,319
3,102
-
Consumer:
Credit cards
5,768
3,520
8,577
17,865
901,986
919,851
-
8,577
Home equity lines of credit
46
-
23
69
3,502
3,571
-
23
Personal
10,027
6,072
21,235
37,334
1,250,726
1,288,060
21,235
-
Auto
59,128
15,019
23,085
97,232
3,314,955
3,412,187
23,085
-
Other
432
714
12,621
13,767
110,781
124,548
12,448
173
Total
$
311,951
$
111,257
$
994,938
$
1,418,146
$
19,447,236
$
20,865,382
$
514,289
$
480,649
December 31, 2021
Popular U.S.
Past due
Past due 90 days or more
30-59
60-89
90 days
Total
Non-accrual
Accruing
(In thousands)
days
days
or more
past due
Current
Loans HIP
loans
loans
Commercial multi-family
$
3,826
$
-
$
-
$
3,826
$
1,804,035
$
1,807,861
$
-
$
-
Commercial real estate:
Non-owner occupied
5,721
683
622
7,026
2,316,441
2,323,467
622
-
Owner occupied
1,095
-
1,013
2,108
392,265
394,373
1,013
-
Commercial and industrial
9,410
2,680
4,015
16,105
1,794,026
1,810,131
3,897
118
Construction
-
-
-
-
629,109
629,109
-
-
Mortgage
11,711
2,573
21,969
36,253
1,139,077
1,175,330
21,969
-
Consumer:
Credit cards
-
-
-
-
10
10
-
-
Home equity lines of credit
71
34
5,406
5,511
69,780
75,291
5,406
-
Personal
863
574
681
2,118
152,827
154,945
681
-
Other
-
-
-
-
4,658
4,658
-
-
Total
$
32,697
$
6,544
$
33,706
$
72,947
$
8,302,228
$
8,375,175
$
33,588
$
118
98
December 31, 2021
Popular, Inc.
Past due
Past due 90 days or more
30-59
60-89
90 days
Total
Non-accrual
Accruing
(In thousands)
days
days
or more
past due
Current
Loans HIP
[2] [3]
loans
loans
Commercial multi-family
$
4,140
$
-
$
272
$
4,412
$
1,958,218
$
1,962,630
$
272
$
-
Commercial real estate:
Non-owner occupied
8,120
819
21,338
30,277
4,583,113
4,613,390
21,338
-
Owner occupied
4,424
278
55,348
60,050
1,758,052
1,818,102
55,348
-
Commercial and industrial
12,848
4,407
49,257
66,512
5,272,067
5,338,579
48,621
636
Construction
-
-
485
485
715,735
716,220
485
-
Mortgage
[1]
229,541
84,327
827,214
1,141,082
6,286,114
7,427,196
355,856
471,358
Leasing
9,240
2,037
3,102
14,379
1,366,940
1,381,319
3,102
-
Consumer:
Credit cards
5,768
3,520
8,577
17,865
901,996
919,861
-
8,577
Home equity lines of credit
117
34
5,429
5,580
73,282
78,862
5,406
23
Personal
10,890
6,646
21,916
39,452
1,403,553
1,443,005
21,916
-
Auto
59,128
15,019
23,085
97,232
3,314,955
3,412,187
23,085
-
Other
432
714
12,621
13,767
115,439
129,206
12,448
173
Total
$
344,648
$
117,801
$
1,028,644
$
1,491,093
$
27,749,464
$
29,240,557
$
547,877
$
480,767
[1]
It is the Corporation’s policy to report delinquent residential
mortgage loans insured by Federal Housing Administration
(“FHA”) or guaranteed by
the U.S. Department of Veterans Affairs
(“VA”) as accruing loans past
due 90 days or more as opposed to non-performing
since the principal
repayment is insured.
The balance of these loans includes $13 million at
December 31, 2021 related to the rebooking of loans
previously pooled
into GNMA securities, in which the Corporation had a
buy-back option as further described below.
Under the GNMA program, issuers such as
BPPR have the option but not the obligation to repurchase
loans that are 90 days or more past due. For accounting
purposes, these loans subject
to repurchases option are required to be reflected (rebooked)
on the financial statements of BPPR with an offsetting
liability. These balances
include $304 million of residential mortgage loans insured
by FHA or guaranteed by the VA
that are no longer accruing interest as of December
31, 2021. Furthermore, the Corporation has approximately
$50 million in reverse mortgage loans which are guaranteed
by FHA, but which are
currently not accruing interest. Due to the guaranteed nature
of the loans, it is the Corporation’s policy to exclude
these balances from non-
performing assets.
[2]
Loans held-in-portfolio are net of $266 million in unearned income
and exclude $59 million in loans held-for-sale.
[3]
Includes $6.6 billion pledged to secure credit facilities and
public funds that the secured parties are not permitted to
sell or repledge the collateral,
of which $3.2 billion were pledged at the Federal Home
Loan Bank ("FHLB") as collateral for borrowings and
$1.7 billion at the Federal Reserve
Bank ("FRB") for discount window borrowings and $1.7
billion serve as collateral for public funds.
99
December 31, 2020
Puerto Rico
Past due
Past due 90 days or more
30-59
60-89
90 days
Total
Non-accrual
Accruing
(In thousands)
days
days
or more
past due
Current
Loans HIP
loans
loans
Commercial multi-family
$
796
$
-
$
505
$
1,301
$
150,979
$
152,280
$
505
$
-
Commercial real estate:
Non-owner occupied
2,189
3,503
77,137
82,829
1,924,504
2,007,333
77,137
-
Owner occupied
8,270
1,218
92,001
101,489
1,497,406
1,598,895
92,001
-
Commercial and industrial
10,223
775
35,012
46,010
4,183,098
4,229,108
34,449
563
Construction
-
-
21,497
21,497
135,609
157,106
21,497
-
Mortgage
[1]
195,602
87,726
1,428,824
1,712,152
5,057,991
6,770,143
414,343
1,014,481
Leasing
9,141
1,427
3,441
14,009
1,183,652
1,197,661
3,441
-
Consumer:
Credit cards
6,550
4,619
12,798
23,967
895,968
919,935
-
12,798
Home equity lines of credit
184
-
48
232
3,947
4,179
-
48
Personal
11,255
8,097
26,387
45,739
1,232,008
1,277,747
26,387
-
Auto
53,186
12,696
15,736
81,618
3,050,610
3,132,228
15,736
-
Other
304
483
15,052
15,839
110,826
126,665
14,881
171
Total
$
297,700
$
120,544
$
1,728,438
$
2,146,682
$
19,426,598
$
21,573,280
$
700,377
$
1,028,061
[1]
It is the Corporation’s policy to report delinquent residential
mortgage loans insured by FHA or guaranteed
by the VA as accruing loans
past due
90 days or more as opposed to non-performing since the
principal repayment is insured. These include $57 million
in loans rebooked under the
GNMA program at December 31, 2020, in which issuers such
as BPPR have the option but not the obligation to repurchase
loans that are 90
days or more past due.
December 31, 2020
Popular U.S.
Past due
Past due 90 days or more
30-59
60-89
90 days
Total
Non-accrual
Accruing
(In thousands)
days
days
or more
past due
Current
Loans HIP
loans
loans
Commercial multi-family
$
5,273
$
-
$
1,894
$
7,167
$
1,736,544
$
1,743,711
$
1,894
$
-
Commercial real estate:
Non-owner occupied
924
3,640
669
5,233
1,988,577
1,993,810
669
-
Owner occupied
191
650
334
1,175
343,205
344,380
334
-
Commercial and industrial
1,117
72
3,091
4,280
1,540,513
1,544,793
3,091
-
Construction
21,312
-
7,560
28,872
740,230
769,102
7,560
-
Mortgage
33,422
15,464
14,864
63,750
1,056,787
1,120,537
14,864
-
Consumer:
Credit cards
-
-
3
3
28
31
-
3
Home equity lines of credit
236
342
7,491
8,069
86,502
94,571
7,491
-
Personal
1,486
1,342
1,474
4,302
194,936
199,238
1,474
-
Other
-
-
20
20
1,723
1,743
20
-
Total
$
63,961
$
21,510
$
37,400
$
122,871
$
7,689,045
$
7,811,916
$
37,397
$
3
100
December 31, 2020
Popular, Inc.
Past due
Past due 90 days or more
30-59
60-89
90 days
Total
Non-accrual
Accruing
(In thousands)
days
days
or more
past due
Current
Loans HIP
[2]
[3]
loans
loans
Commercial multi-family
$
6,069
$
-
$
2,399
$
8,468
$
1,887,523
$
1,895,991
$
2,399
$
-
Commercial real estate:
Non-owner occupied
3,113
7,143
77,806
88,062
3,913,081
4,001,143
77,806
-
Owner occupied
8,461
1,868
92,335
102,664
1,840,611
1,943,275
92,335
-
Commercial and industrial
11,340
847
38,103
50,290
5,723,611
5,773,901
37,540
563
Construction
21,312
-
29,057
50,369
875,839
926,208
29,057
-
Mortgage
[1]
229,024
103,190
1,443,688
1,775,902
6,114,778
7,890,680
429,207
1,014,481
Leasing
9,141
1,427
3,441
14,009
1,183,652
1,197,661
3,441
-
Consumer:
Credit cards
6,550
4,619
12,801
23,970
895,996
919,966
-
12,801
Home equity lines of credit
420
342
7,539
8,301
90,449
98,750
7,491
48
Personal
12,741
9,439
27,861
50,041
1,426,944
1,476,985
27,861
-
Auto
53,186
12,696
15,736
81,618
3,050,610
3,132,228
15,736
-
Other
304
483
15,072
15,859
112,549
128,408
14,901
171
Total
$
361,661
$
142,054
$
1,765,838
$
2,269,553
$
27,115,643
$
29,385,196
$
737,774
$
1,028,064
[1]
It is the Corporation’s policy to report delinquent residential
mortgage loans insured by FHA or guaranteed
by the VA as accruing loans
past due
90 days or more as opposed to non-performing since the
principal repayment is insured.
The balance of these loans includes $57 million
at
December 31, 2020 related to the rebooking of loans
previously pooled into GNMA securities, in which the Corporation
had a buy-back option as
further described below. Under the
GNMA program, issuers such as BPPR have the
option but not the obligation to repurchase loans that are
90
days or more past due. For accounting purposes, these loans
subject to repurchases option are required to be reflected
(rebooked) on the
financial statements of BPPR with an offsetting liability.
These balances include $329 million of residential mortgage
loans insured by FHA or
guaranteed by the VA that
are no longer accruing interest as of December 31, 2020.
Furthermore, the Corporation has approximately $60
million
in reverse mortgage loans which are guaranteed by FHA,
but which are currently not accruing interest. Due to the
guaranteed nature of the loans,
it is the Corporation’s policy to exclude these balances
from non-performing assets.
[2]
Loans held-in-portfolio are net of $203 million in unearned income
and exclude $99 million in loans held-for-sale.
[3]
Includes $6.5 billion pledged to secure credit facilities and
public funds that the secured parties are not permitted to
sell or repledge the collateral,
of which $4.1 billion were pledged at the FHLB as collateral
for borrowings and $2.4 billion at the FRB for discount
window borrowings.
Recognition of interest income on mortgage loans is generally discontinued when loans are 90 days or more in arrears on payments
of principal or interest. The Corporation discontinues the recognition of interest income on residential mortgage loans insured by the
FHA or
guaranteed by
VA
when 15
months delinquent
as to
principal or
interest, since
the principal
repayment on
these loans
is
insured.
At December
31, 2021, mortgage
loans held-in-portfolio include
$1.9 billion (December
31, 2020 -
$2.1 billion) of
loans insured by
the FHA, or
guaranteed VA
of which $0.5 billion
(December 31, 2020 -
$1.0 billion) are 90
days or more past
due. These balances
include $716 million in
loans modified under a
TDR (December 31, 2020 -
$655 million), that are
presented as accruing loans. The
portfolio of guaranteed loans includes
$304 million of residential mortgage
loans in Puerto Rico
that are no longer
accruing interest
as of December
31, 2021 (December 31,
2020 - $329 million).
The Corporation has approximately $50
million in reverse mortgage
loans in Puerto Rico which
are guaranteed by FHA, but which
are currently not accruing interest at
December 31, 2021 (December
31, 2020 - $60 million).
Loans with
a delinquency status
of 90
days past due
as of
December 31, 2021
include $13 million
in loans
previously pooled into
GNMA securities (December 31, 2020 -
$57 million). Under the GNMA program,
issuers such as BPPR have
the option but not the
obligation to repurchase loans
that are 90
days or more
past due. For
accounting purposes, these loans
subject to the
repurchase
option
are
required to
be
reflected on
the
financial statements
of BPPR
with
an
offsetting
liability.
Loans
in
our
serviced
GNMA
portfolio benefit
from payment
forbearance programs
but continue
to reflect
the contractual
delinquency until
the borrower
repays
deferred payments or completes a payment deferral
modification
or other borrower assistance alternative.
The components of the net financing leases,
including finance leases within the C&I category,
receivable at December 31, 2021 and
2020 were as follows:
101
(In thousands)
2021
2020
Total minimum lease
payments
$
1,190,545
$
957,367
Estimated residual value of leased property
518,670
419,024
Deferred origination costs, net of fees
21,474
18,141
Less - Unearned financing income
257,738
196,788
Net minimum lease payments
1,472,951
1,197,744
Less - Allowance for credit losses
18,581
16,863
Net minimum lease payments, net of allowance for credit losses
$
1,454,370
$
1,180,881
At December 31, 2021, future minimum lease payments
are expected to be received as follows:
(In thousands)
2022
$
106,927
2023
123,654
2024
181,405
2025
216,577
2026
369,592
2027 and thereafter
192,390
Total
$
1,190,545
The following tables present the amortized cost basis
of non-accrual loans as of December 31, 2021
and 2020 by class of loans:
December 31, 2021
Puerto Rico
Popular U.S.
Popular, Inc.
(In thousands)
Non-accrual
with no
allowance
Non-accrual
with
allowance
Non-accrual
with no
allowance
Non-accrual
with
allowance
Non-accrual
with no
allowance
Non-accrual
with
allowance
Commercial multi-family
$
-
$
272
$
-
$
-
$
-
$
272
Commercial real estate non-owner occupied
15,819
4,897
-
622
15,819
5,519
Commercial real estate owner occupied
13,491
40,844
-
1,013
13,491
41,857
Commercial and industrial
30,177
14,547
-
3,897
30,177
18,444
Construction
-
485
-
-
-
485
Mortgage
169,827
164,060
29
21,940
169,856
186,000
Leasing
276
2,826
-
-
276
2,826
Consumer:
HELOCs
-
-
-
5,406
-
5,406
Personal
6,279
14,956
81
600
6,360
15,556
Auto
879
22,206
-
-
879
22,206
Other
-
12,448
-
-
-
12,448
Total
$
236,748
$
277,541
$
110
$
33,478
$
236,858
$
311,019
December 31, 2020
Puerto Rico
Popular U.S.
Popular, Inc.
(In thousands)
Non-accrual
with no
allowance
Non-accrual
with
allowance
Non-accrual
with no
allowance
Non-accrual
with
allowance
Non-accrual
with no
allowance
Non-accrual
with
allowance
Commercial multi-family
$
-
$
505
$
-
$
1,894
$
-
$
2,399
Commercial real estate non-owner occupied
35,968
41,169
-
669
35,968
41,838
Commercial real estate owner occupied
14,825
77,176
-
334
14,825
77,510
Commercial and industrial
1,148
33,301
-
3,091
1,148
36,392
Construction
-
21,497
-
7,560
-
29,057
Mortgage
141,737
272,606
517
14,347
142,254
286,953
Leasing
-
3,441
-
-
-
3,441
Consumer:
HELOCs
-
-
-
7,491
-
7,491
Personal
9,265
17,122
-
1,474
9,265
18,596
Auto
-
15,736
-
-
-
15,736
Other
-
14,881
-
20
-
14,901
Total
$
202,943
$
497,434
$
517
$
36,880
$
203,460
$
534,314
102
Loans in non-accrual status with no
allowance at December 31, 2021 include
$237 million in collateral dependent loans
(December
31,
2020
-
$203
million).
The
Corporation recognized
$3
million
in
interest
income
on
non-accrual loans
during
the
year
ended
December 31, 2021 (December 31, 2020 - $4
million).
The Corporation has
designated loans classified as
collateral dependent for
which the ACL
is measured based
on the fair
value of
the collateral less
cost to sell,
when foreclosure is
probable or when
the repayment is
expected to be
provided substantially by the
sale or
operation of
the collateral
and the
borrower is
experiencing financial
difficulty.
The fair
value of
the collateral
is based
on
appraisals, which may be
adjusted due to their
age, and the
type, location, and condition
of the property
or area or general
market
conditions to reflect the expected change in value between the effective date
of the appraisal and the measurement date. Appraisals
are updated every one to two years depending on the
type of loan and the total exposure of the
borrower.
The following tables present the amortized cost basis
of collateral-dependent loans, for which the ACL was measured
based on the
fair value of the collateral less cost to sell, by
class of loans and type of collateral as of December
31, 2021 and 2020:
103
December 31, 2021
(In thousands)
Real Estate
Auto
Equipment
Accounts
Receivables
Other
Total
Puerto Rico
Commercial multi-family
$
1,374
$
-
$
-
$
-
$
-
$
1,374
Commercial real estate:
Non-owner occupied
211,026
-
-
-
-
211,026
Owner occupied
47,268
-
-
-
-
47,268
Commercial and industrial
2,650
-
680
10,675
27,893
41,898
Mortgage
179,774
-
-
-
-
179,774
Leasing
-
574
-
-
-
574
Consumer:
Personal
6,165
-
-
-
-
6,165
Auto
-
8,983
-
-
-
8,983
Total Puerto Rico
$
448,257
$
9,557
$
680
$
10,675
$
27,893
$
497,062
Popular U.S.
Mortgage
926
-
-
-
-
926
Total Popular U.S.
$
926
$
-
$
-
$
-
$
-
$
926
Popular, Inc.
Commercial multi-family
$
1,374
$
-
$
-
$
-
$
-
$
1,374
Commercial real estate:
Non-owner occupied
211,026
-
-
-
-
211,026
Owner occupied
47,268
-
-
-
-
47,268
Commercial and industrial
2,650
-
680
10,675
27,893
41,898
Mortgage
180,700
-
-
-
-
180,700
Leasing
-
574
-
-
-
574
Consumer:
Personal
6,165
-
-
-
-
6,165
Auto
-
8,983
-
-
-
8,983
Total Popular,
Inc.
$
449,183
$
9,557
$
680
$
10,675
$
27,893
$
497,988
104
December 31, 2020
(In thousands)
Real Estate
Auto
Equipment
Taxi
Medallions
Accounts
Receivables
Other
Total
Puerto Rico
Commercial multi-family
$
1,301
$
-
$
-
$
-
$
-
$
-
$
1,301
Commercial real estate:
Non-owner occupied
299,223
-
-
-
-
-
299,223
Owner occupied
79,769
-
-
-
-
-
79,769
Commercial and industrial
7,577
-
1,438
-
10,989
12,046
32,050
Construction
21,497
-
-
-
-
-
21,497
Mortgage
181,648
-
-
-
-
-
181,648
Consumer:
Personal
7,414
-
-
-
-
-
7,414
Auto
-
4
-
-
-
-
4
Total Puerto Rico
$
598,429
$
4
$
1,438
$
-
$
10,989
$
12,046
$
622,906
Popular U.S.
Commercial multi-family
$
1,755
$
-
$
-
$
-
$
-
$
-
$
1,755
Commercial and industrial
-
-
-
1,545
-
-
1,545
Construction
7,560
-
-
-
-
-
7,560
Mortgage
855
-
-
-
-
-
855
Total Popular U.S.
$
10,170
$
-
$
-
$
1,545
$
-
$
-
$
11,715
Popular, Inc.
Commercial multi-family
$
3,056
$
-
$
-
$
-
$
-
$
-
$
3,056
Commercial real estate:
Non-owner occupied
299,223
-
-
-
-
-
299,223
Owner occupied
79,769
-
-
-
-
-
79,769
Commercial and industrial
7,577
-
1,438
1,545
10,989
12,046
33,595
Construction
29,057
-
-
-
-
-
29,057
Mortgage
182,503
-
-
-
-
-
182,503
Consumer:
Personal
7,414
-
-
-
-
-
7,414
Auto
-
4
-
-
-
-
4
Total Popular,
Inc.
$
608,599
$
4
$
1,438
$
1,545
$
10,989
$
12,046
$
634,621
Purchased Credit Deteriorated (PCD) Loans
The Corporation has purchased loans during the
year for which there was, at acquisition, evidence
of more than insignificant
deterioration of credit quality since origination. The
carrying amount of those loans is as follows:
(In thousands)
December 31, 2021
December 31, 2020
Purchase price of loans at acquisition
$
10,995
$
152,667
Allowance for credit losses at acquisition
3,142
7,512
Non-credit discount / (premium) at acquisition
446
(6,542)
Par value of acquired loans at acquisition
$
14,583
$
153,637
105
Note 9 – Allowance for credit losses – loans
held-in-portfolio
The
Corporation follows the current
expected credit loss (“CECL”)
model, to establish
and evaluate the adequacy
of the allowance
for credit losses
(“ACL”) to provide for
expected losses in the
loan portfolio. This model
establishes a forward-looking methodology
that reflects the expected credit losses over the lives of financial
assets, starting when such assets are first acquired or
originated.
In
addition, CECL provides that the initial ACL on purchased credit deteriorated (“PCD”) financial assets be recorded as an increase to
the purchase
price, with
subsequent changes
to the
allowance recorded
as a
credit loss
expense. The
provision for
credit losses
recorded in current operations is based on this methodology. Loan losses are
charged and recoveries are credited to the ACL.
At
December
31,
2021,
the
Corporation
estimated
the
ACL
by
weighting
the
outputs
of
optimistic,
baseline,
and
pessimistic
scenarios. Among
the three
scenarios used
to estimate
the ACL,
the baseline
is assigned
the highest
probability,
followed by
the
pessimistic
scenario
given
the
uncertainties
in
the
economic
outlook
and
downside
risk.
The
weights
applied
are
subject
to
evaluation
on
a
quarterly
basis
as
part
of
the
ACL’s
governance
process.
The
current
baseline
forecast
continues
to
show
a
favorable economic
scenario. The
2022 expected
GDP growth
rate for
Puerto Rico
is approximately
4%, with
the unemployment
rate expected to average around 7.4%
for the year.
In the case of the
United States, the baseline scenario expects GDP
growth for
2022 of approximately 4.6%, with unemployment rate expected
to average around 3.7%.
For 2023 both regions expect GDP growth
with average unemployment rate levels remaining
stable in comparison to 2022.
The
following
tables
present
the
changes
in
the
ACL
of
loans
held-in-portfolio
and
unfunded
commitments
for
the
years
ended
December 31, 2021 and 2020.
For the year ended December 31, 2021
Puerto Rico
(In thousands)
Commercial
Construction
Mortgage
Leasing
Consumer
Total
Allowance for credit losses - loans:
Beginning balance
$
225,323
$
4,871
$
195,557
$
16,863
$
297,136
$
739,750
Provision for credit losses (benefit)
(91,695)
(1,533)
(57,684)
2,094
19,800
(129,018)
Initial allowance for credit losses - PCD Loans
-
-
3,142
-
-
3,142
Charge-offs
(17,180)
(6,620)
(17,656)
(4,637)
(78,047)
(124,140)
Recoveries
35,480
4,923
14,927
3,258
45,840
104,428
Ending balance - loans
$
151,928
$
1,641
$
138,286
$
17,578
$
284,729
$
594,162
Allowance for credit losses - unfunded commitments:
Beginning balance
$
4,913
$
4,610
$
-
$
-
$
-
$
9,523
Provision for credit losses (benefit)
(3,162)
(2,222)
-
-
-
(5,384)
Ending balance - unfunded commitments [1]
$
1,751
$
2,388
$
-
$
-
$
-
$
4,139
[1]
Allowance for credit losses of unfunded commitments is
presented as part of Other Liabilities in the Consolidated
Statements of Financial Condition.
106
For the year ended December 31, 2021
Popular U.S.
(In thousands)
Commercial
Construction
Mortgage
Consumer
Total
Allowance for credit losses - loans:
Beginning balance
$
108,057
$
9,366
$
20,159
$
18,918
$
156,500
Provision for credit losses (benefit)
(45,427)
(4,764)
(3,949)
(187)
(54,327)
Charge-offs
(1,177)
(523)
(605)
(8,732)
(11,037)
Recoveries
2,424
643
587
6,414
10,068
Ending balance - loans
$
63,877
$
4,722
$
16,192
$
16,413
$
101,204
Allowance for credit losses - unfunded commitments:
Beginning balance
$
1,753
$
4,469
$
-
$
106
$
6,328
Provision for credit losses (benefit)
(369)
(2,132)
-
(69)
(2,570)
Ending balance - unfunded commitments [1]
$
1,384
$
2,337
$
-
$
37
$
3,758
[1]
Allowance for credit losses of unfunded commitments is
presented as part of Other Liabilities in the Consolidated
Statements of Financial Condition.
For the year ended December 31, 2021
Popular, Inc.
(In thousands)
Commercial
Construction
Mortgage
Leasing
Consumer
Total
Allowance for credit losses - loans:
Beginning balance
$
333,380
$
14,237
$
215,716
$
16,863
$
316,054
$
896,250
Provision for credit losses (benefit)
(137,122)
(6,297)
(61,633)
2,094
19,613
(183,345)
Initial allowance for credit losses - PCD Loans
-
-
3,142
-
-
3,142
Charge-offs
(18,357)
(7,143)
(18,261)
(4,637)
(86,779)
(135,177)
Recoveries
37,904
5,566
15,514
3,258
52,254
114,496
Ending balance - loans
$
215,805
$
6,363
$
154,478
$
17,578
$
301,142
$
695,366
Allowance for credit losses - unfunded commitments:
Beginning balance
$
6,666
$
9,079
$
-
$
-
$
106
$
15,851
Provision for credit losses (benefit)
(3,531)
(4,354)
-
-
(69)
(7,954)
Ending balance - unfunded commitments [1]
$
3,135
$
4,725
$
-
$
-
$
37
$
7,897
[1
Allowance for credit losses of unfunded commitments is
presented as part of Other Liabilities in the Consolidated
Statements of Financial Condition.
107
For the year ended December 31, 2020
Puerto Rico
(In thousands)
Commercial
Construction
Mortgage
Leasing
Consumer
Total
Allowance for credit losses - loans:
Beginning balance
$
131,063
$
574
$
116,281
$
10,768
$
173,965
$
432,651
Impact of adopting CECL
62,393
115
86,081
(713)
122,492
270,368
Provision for credit losses
48,756
3,228
5,318
14,172
134,391
205,865
Initial allowance for credit losses - PCD Loans
-
-
7,512
-
-
7,512
Charge-offs
(27,731)
-
(30,080)
(10,447)
(170,023)
(238,281)
Recoveries
10,842
954
10,445
3,083
36,311
61,635
Ending balance - loans
$
225,323
$
4,871
$
195,557
$
16,863
$
297,136
$
739,750
Allowance for credit losses - unfunded commitments:
Beginning balance
$
678
$
294
$
-
$
-
$
7,467
$
8,439
Impact of adopting CECL
1,158
(185)
-
-
(7,467)
(6,494)
Provision for credit losses
3,077
4,501
-
-
-
7,578
Ending balance - unfunded commitments [1]
$
4,913
$
4,610
$
-
$
-
$
-
$
9,523
[1]
Allowance for credit losses of unfunded commitments is
presented as part of Other Liabilities in the Consolidated
Statements of Financial Condition.
For the year ended December 31, 2020
Popular U.S.
(In thousands)
Commercial
Construction
Mortgage
Consumer
Total
Allowance for credit losses - loans:
Beginning balance
$
16,557
$
4,266
$
4,827
$
19,407
$
45,057
Impact of adopting CECL
29,537
(3,038)
10,431
7,809
44,739
Provision for credit losses
59,748
8,427
4,891
3,405
76,471
Charge-offs
(2,078)
(1,509)
(59)
(17,404)
(21,050)
Recoveries
4,293
1,220
69
5,701
11,283
Ending balance - loans
$
108,057
$
9,366
$
20,159
$
18,918
$
156,500
Allowance for credit losses - unfunded commitments:
Beginning balance
$
152
$
125
$
-
$
1
$
278
Impact of adopting CECL
453
582
-
(1)
1,034
Provision for credit losses
1,148
3,762
-
106
5,016
Ending balance - unfunded commitments [1]
$
1,753
$
4,469
$
-
$
106
$
6,328
[1]
Allowance for credit losses of unfunded commitments is
presented as part of Other Liabilities in the Consolidated
Statements of Financial Condition.
108
For the year ended December 31, 2020
Popular, Inc.
(In thousands)
Commercial
Construction
Mortgage
Leasing
Consumer
Total
Allowance for credit losses - loans:
Beginning balance
$
147,620
$
4,840
$
121,108
$
10,768
$
193,372
$
477,708
Impact of adopting CECL
91,930
(2,923)
96,512
(713)
130,301
315,107
Provision for credit losses
108,504
11,655
10,209
14,172
137,796
282,336
Initial allowance for credit losses - PCD Loans
-
-
7,512
-
-
7,512
Charge-offs
(29,809)
(1,509)
(30,139)
(10,447)
(187,427)
(259,331)
Recoveries
15,135
2,174
10,514
3,083
42,012
72,918
Ending balance - loans
$
333,380
$
14,237
$
215,716
$
16,863
$
316,054
$
896,250
Allowance for credit losses - unfunded commitments:
Beginning balance
$
830
$
419
$
-
$
-
$
7,468
$
8,717
Impact of adopting CECL
1,611
397
-
-
(7,468)
(5,460)
Provision for credit losses
4,225
8,263
-
-
106
12,594
Ending balance - unfunded commitments [1]
$
6,666
$
9,079
$
-
$
-
$
106
$
15,851
[1]
Allowance for credit losses of unfunded commitments is
presented as part of Other Liabilities in the Consolidated
Statements of Financial Condition.
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.
The outstanding
balance of
loans classified
as TDRs
amounted to
$1.7 billion
at December
31, 2021
(December 31,
2020 -
$1.7
billion).
The amount
of outstanding
commitments to
lend additional
funds to
debtors owing
receivables whose
terms have
been
modified in TDRs amounted to
$9 million related to the
commercial loan portfolio at December 31,
2021 (December 31, 2020 -
$14
million).
The following table presents
the outstanding balance of
loans classified as TDRs
according to their accruing
status and the related
allowance at December 31, 2021 and 2020.
December 31, 2021
December 31, 2020
(In thousands)
Accruing
Non-
Accruing
Total
Related
Allowance
Accruing
Non-
Accruing
Total
Related
Allowance
Loans held-in-portfolio:
Commercial
$
261,344
$
64,744
$
326,088
$
24,736
$
259,246
$
103,551
$
362,797
$
15,236
Construction
-
-
-
-
-
21,497
21,497
4,397
Mortgage
[1]
1,143,204
112,509
1,255,713
61,888
1,060,193
135,772
1,195,965
71,018
Leasing
325
47
372
42
392
218
610
150
Consumer
64,093
10,556
74,649
16,124
74,707
12,792
87,499
22,508
Loans held-in-portfolio
$
1,468,966
$
187,856
$
1,656,822
$
102,790
$
1,394,538
$
273,830
$
1,668,368
$
113,309
[1] At December 31, 2021, accruing mortgage loan TDRs include
$716 million guaranteed by U.S. sponsored entities
at BPPR, compared to $655
million at December 31, 2020.
The
following
tables
present
the
loan
count
by
type
of
modification
for
those
loans
modified
in
a
TDR
during
the
years
ended
December 31, 2021 and 2020. Loans modified
as TDRs for the U.S. operations are considered
insignificant to the Corporation.
109
For the year ended December 31, 2021
Reduction in
interest rate
Extension of
maturity date
Combination of
reduction in interest
rate and extension of
maturity date
Other
Commercial multi-family
-
1
1
-
Commercial real estate non-owner occupied
-
11
1
-
Commercial real estate owner occupied
4
23
4
12
Commercial and industrial
5
13
-
21
Mortgage
39
140
1,590
5
Leasing
-
-
2
-
Consumer:
Credit cards
134
-
1
43
HELOCs
-
1
1
-
Personal
183
117
1
2
Auto
-
7
3
-
Other
7
-
-
1
Total
372
313
1,604
84
For the year ended December 31, 2020
Reduction in
interest rate
Extension of
maturity date
Combination of
reduction in interest
rate and extension of
maturity date
Other
Commercial multi-family
-
2
-
-
Commercial real estate non-owner occupied
2
10
-
1
Commercial real estate owner occupied
-
37
-
-
Commercial and industrial
3
50
-
-
Construction
-
1
-
-
Mortgage
3
68
331
411
Leasing
-
-
5
17
Consumer:
Credit cards
659
-
-
93
HELOCs
-
2
1
-
Personal
355
5
1
1
Auto
-
2
2
38
Other
3
-
-
-
Total
1,025
177
340
561
110
The following tables present,
by class, quantitative information related
to loans modified as TDRs during the years
ended December
31, 2021 and 2020.
Popular, Inc.
For the year ended December 31, 2021
(Dollars in thousands)
Loan count
Pre-modification
outstanding recorded
investment
Post-modification
outstanding recorded
investment
Increase (decrease) in the
allowance for credit losses
as a result of modification
Commercial multi-family
2
$
246
$
211
$
26
Commercial real estate non-owner occupied
12
3,612
3,604
177
Commercial real estate owner occupied
43
95,354
90,096
1,577
Commercial and industrial
39
6,573
5,719
745
Mortgage
1,774
213,661
214,367
6,632
Leasing
2
40
38
5
Consumer:
Credit cards
178
2,223
2,136
42
HELOCs
2
176
228
54
Personal
303
4,222
4,217
899
Auto
10
199
206
65
Other
8
305
303
124
Total
2,373
$
326,611
$
321,125
$
10,346
Popular, Inc.
For the year ended December 31, 2020
(Dollars in thousands)
Loan count
Pre-modification
outstanding recorded
investment
Post-modification
outstanding recorded
investment
Increase (decrease) in the
allowance for credit losses
as a result of modification
Commercial multi-family
2
$
1,133
$
1,115
$
(18)
Commercial real estate non-owner occupied
13
25,217
22,065
(969)
Commercial real estate owner occupied
37
10,955
10,914
137
Commercial and industrial
53
3,140
3,178
34
Construction
1
21,514
21,514
4,370
Mortgage
813
102,559
85,394
6,875
Leasing
22
720
732
65
Consumer:
Credit cards
752
7,048
7,097
286
HELOCs
3
510
396
33
Personal
362
6,194
6,188
1,043
Auto
42
836
838
131
Other
3
25
25
6
Total
2,103
$
179,851
$
159,456
$
11,993
111
During the year ended December 31, 2021, five loans with an aggregate
unpaid principal balance of $ 10.2 million were restructured
into multiple notes (“Note A / B
split”)
,
compared to ten loans with an aggregate unpaid
principal balance of $35.1 million during the
year
ended
December
31,
2020,
of
which
a
discounted
payoff
for
one
loan
with
an
aggregate
unpaid principal
balance
of
$1.7
million was completed after the restructuring.
The Corporation recorded $0.3 million in charge-offs as part of Note A / B splits during
2020.
The
recorded
investment
on
these
commercial
TDRs
amounted
to
approximately
$10.2
million
at
December
31,
2021,
compared to
$32.9 million
at December
31, 2020.
These loans
were restructured
after analyzing
the borrowers’
capacity to
repay
the debt, collateral and ability to perform under
the modified terms.
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.
Defaulted during the year ended December 31, 2021
(Dollars in thousands)
Loan count
Recorded investment as of first default date
Commercial real estate non-owner occupied
4
$
8,421
Commercial real estate owner occupied
4
4,500
Commercial and industrial
5
317
Mortgage
104
10,543
Consumer:
Credit cards
81
979
Personal
27
723
Total
225
$
25,483
Defaulted during the year ended December 31, 2020
(Dollars in thousands)
Loan count
Recorded investment as of first default date
Commercial real estate non-owner occupied
1
$
1,700
Commercial real estate owner occupied
6
933
Commercial and industrial
4
141
Construction
1
21,497
Mortgage
249
26,925
Consumer:
Credit cards
317
2,560
Personal
99
1,660
Other
2
1
Total
679
$
55,417
112
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 allowance for credit 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 risk rating analysis process is performed at least once a
year or more frequently if events or conditions change which
may
deteriorate
the
credit
quality.
In
the
case
of
consumer
and
mortgage
loans,
these
loans
are
classified
considering
their
delinquency status at the end of the reporting period.
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 following tables present the amortized cost basis, net of unearned income, of
loans held-in-portfolio based on the Corporation’s
assignment of obligor risk ratings as defined at
December 31, 2021 and 2020 by vintage year.
113
December 31, 2021
Term Loans
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted to
Term Loans
Amortized
Cost Basis
Amortized Cost Basis by Origination Year
(In thousands)
2021
2020
2019
2018
2017
Prior
Years
Total
Puerto Rico
Commercial:
Commercial multi-family
Watch
$
-
$
-
$
-
$
-
$
-
$
4,485
$
-
$
-
$
4,485
Special mention
-
-
-
-
-
3,025
-
-
3,025
Substandard
-
-
982
-
-
6,257
100
-
7,339
Pass
24,936
21,288
34,840
25,311
2,066
31,468
11
-
139,920
Total commercial
multi-family
$
24,936
$
21,288
$
35,822
$
25,311
$
2,066
$
45,235
$
111
$
-
$
154,769
Commercial real estate non-owner occupied
Watch
$
100,465
$
228,852
$
25,443
$
137,044
$
2,406
$
205,304
$
3,237
$
-
$
702,751
Special Mention
18,509
12,563
7,271
-
4,608
24,056
-
-
67,007
Substandard
30,155
27,790
24,200
25,456
2,770
72,407
-
-
182,778
Pass
513,087
88,662
88,353
37,999
42,522
557,052
9,712
-
1,337,387
Total commercial
real estate non-
owner occupied
$
662,216
$
357,867
$
145,267
$
200,499
$
52,306
$
858,819
$
12,949
$
-
$
2,289,923
Commercial real estate owner occupied
Watch
$
8,393
$
8,612
$
8,972
$
6,958
$
3,039
$
121,716
$
-
$
-
$
157,690
Special Mention
5,573
857
7,598
1,427
2,449
103,472
-
-
121,376
Substandard
6,960
1,028
1,646
35,529
1,869
113,288
-
-
160,320
Doubtful
-
-
-
-
76
612
-
-
688
Pass
238,533
198,442
44,943
23,112
32,585
429,651
16,389
-
983,655
Total commercial
real estate owner
occupied
$
259,459
$
208,939
$
63,159
$
67,026
$
40,018
$
768,739
$
16,389
$
-
$
1,423,729
Commercial and industrial
Watch
$
186,529
$
12,542
$
21,536
$
103,835
$
14,577
$
90,776
$
108,183
$
-
$
537,978
Special Mention
7,380
9,936
14,856
28,473
1,012
28,448
60,397
-
150,502
Substandard
2,190
1,091
3,041
35,826
66,771
45,168
38,003
-
192,090
Doubtful
-
-
-
-
-
62
-
-
62
Pass
843,661
335,369
275,357
84,084
72,580
333,869
702,896
-
2,647,816
Total commercial
and industrial
$
1,039,760
$
358,938
$
314,790
$
252,218
$
154,940
$
498,323
$
909,479
$
-
$
3,528,448
Construction
Substandard
$
-
$
-
$
485
$
-
$
-
$
-
$
-
$
-
$
485
Pass
21,596
41,622
1,148
-
-
-
22,260
-
86,626
Total construction
$
21,596
$
41,622
$
1,633
$
-
$
-
$
-
$
22,260
$
-
$
87,111
Mortgage
Substandard
$
-
$
954
$
5,212
$
5,613
$
4,310
$
122,690
$
-
$
-
$
138,779
Pass
463,742
304,780
223,464
265,239
194,982
4,660,880
-
-
6,113,087
Total mortgage
$
463,742
$
305,734
$
228,676
$
270,852
$
199,292
$
4,783,570
$
-
$
-
$
6,251,866
Leasing
Substandard
$
124
$
618
$
880
$
613
$
613
$
235
$
-
$
-
$
3,083
Loss
-
-
-
1
16
2
-
-
19
Pass
613,452
328,085
222,770
133,112
62,881
17,917
-
-
1,378,217
Total leasing
$
613,576
$
328,703
$
223,650
$
133,726
$
63,510
$
18,154
$
-
$
-
$
1,381,319
114
December 31, 2021
Term Loans
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted to
Term Loans
Amortized
Cost Basis
Amortized Cost Basis by Origination Year
(In thousands)
2021
2020
2019
2018
2017
Prior
Years
Total
Puerto Rico
Consumer:
Credit cards
Substandard
$
-
$
-
$
-
$
-
$
-
$
-
$
8,577
$
-
$
8,577
Pass
-
-
-
-
-
-
911,274
-
911,274
Total credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
919,851
$
-
$
919,851
HELOCs
Substandard
-
-
-
-
-
-
23
-
23
Pass
$
-
$
-
$
-
$
-
$
-
$
-
$
3,548
$
-
$
3,548
Total HELOCs
$
-
$
-
$
-
$
-
$
-
$
-
$
3,571
$
-
$
3,571
Personal
Substandard
$
426
$
610
$
2,105
$
866
$
936
$
15,680
$
-
$
1,385
$
22,008
Loss
30
2
3
-
-
3
-
-
38
Pass
539,604
197,652
227,328
91,341
53,630
120,065
-
36,394
1,266,014
Total Personal
$
540,060
$
198,264
$
229,436
$
92,207
$
54,566
$
135,748
$
-
$
37,779
$
1,288,060
Auto
Substandard
$
3,080
$
7,520
$
9,498
$
4,739
$
2,210
$
1,422
$
-
$
-
$
28,469
Loss
42
11
-
-
-
-
-
-
53
Pass
1,259,800
808,339
637,300
420,293
177,104
80,829
-
-
3,383,665
Total Auto
$
1,262,922
$
815,870
$
646,798
$
425,032
$
179,314
$
82,251
$
-
$
-
$
3,412,187
Other consumer
Substandard
$
-
$
114
$
21
$
487
$
-
$
135
$
11,250
$
-
$
12,007
Loss
-
-
-
579
-
34
-
-
613
Pass
24,845
9,781
9,348
5,610
3,914
947
57,483
-
111,928
Total Other
consumer
$
24,845
$
9,895
$
9,369
$
6,676
$
3,914
$
1,116
$
68,733
$
-
$
124,548
Total Puerto Rico
$
4,913,112
$
2,647,120
$
1,898,600
$
1,473,547
$
749,926
$
7,191,955
$
1,953,343
$
37,779
$
20,865,382
115
December 31, 2021
Term Loans
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted to
Term Loans
Amortized
Cost Basis
Amortized Cost Basis by Origination Year
(In thousands)
2021
2020
2019
2018
2017
Prior
Years
Total
Popular U.S.
Commercial:
Commercial multi-family
Watch
$
8,600
$
41,348
$
56,229
$
20,682
$
37,343
$
48,753
$
-
$
-
$
212,955
Special mention
-
3,752
9,013
30,244
11,071
28,297
-
-
82,377
Substandard
-
-
67,149
12,748
-
18,644
-
-
98,541
Pass
422,613
241,805
201,298
144,534
46,809
352,724
4,205
-
1,413,988
Total commercial
multi-family
$
431,213
$
286,905
$
333,689
$
208,208
$
95,223
$
448,418
$
4,205
$
-
$
1,807,861
Commercial real estate non-owner occupied
Watch
$
12,716
$
22,109
$
42,067
$
56,576
$
28,604
$
154,289
$
780
$
-
$
317,141
Special Mention
2,939
-
3,205
7,025
10,573
15,569
-
-
39,311
Substandard
-
756
6,405
14,544
11,384
60,323
-
-
93,412
Pass
543,667
356,071
156,925
211,432
250,516
346,606
8,386
-
1,873,603
Total commercial
real estate non-
owner occupied
$
559,322
$
378,936
$
208,602
$
289,577
$
301,077
$
576,787
$
9,166
$
-
$
2,323,467
Commercial real estate owner occupied
Watch
$
-
$
239
$
7,825
$
8,150
$
1,676
$
17,132
$
4,222
$
-
$
39,244
Special Mention
-
-
-
-
-
1,800
-
-
1,800
Substandard
-
-
1,148
2,878
-
20,841
-
-
24,867
Pass
129,898
46,737
34,355
23,845
26,236
63,463
3,928
-
328,462
Total commercial
real estate owner
occupied
$
129,898
$
46,976
$
43,328
$
34,873
$
27,912
$
103,236
$
8,150
$
-
$
394,373
Commercial and industrial
Watch
$
3,747
$
4,667
$
4,292
$
9,273
$
5
$
1,530
$
3,925
$
-
$
27,439
Special Mention
2,504
7,203
670
481
59
215
8,177
-
19,309
Substandard
537
97
4,559
495
168
1,890
159
-
7,905
Loss
262
58
108
17
51
191
-
-
687
Pass
273,254
339,564
211,695
191,086
115,146
339,336
284,710
-
1,754,791
Total commercial
and industrial
$
280,304
$
351,589
$
221,324
$
201,352
$
115,429
$
343,162
$
296,971
$
-
$
1,810,131
Construction
Watch
$
-
$
14,300
$
23,547
$
28,757
$
34,205
$
-
$
-
$
-
$
100,809
Special Mention
-
-
-
-
-
13,622
-
-
13,622
Substandard
-
-
-
15,438
10,231
-
-
-
25,669
Pass
130,587
136,045
165,105
13,634
36,500
7,138
-
-
489,009
Total construction
$
130,587
$
150,345
$
188,652
$
57,829
$
80,936
$
20,760
$
-
$
-
$
629,109
Mortgage
Substandard
$
-
$
4,338
$
3,894
$
967
$
217
$
12,680
$
-
$
-
$
22,096
Pass
326,641
266,212
215,071
61,986
6,376
276,948
-
-
1,153,234
Total mortgage
$
326,641
$
270,550
$
218,965
$
62,953
$
6,593
$
289,628
$
-
$
-
$
1,175,330
116
December 31, 2021
Term Loans
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted to
Term Loans
Amortized
Cost Basis
Amortized Cost Basis by Origination Year
(In thousands)
2021
2020
2019
2018
2017
Prior
Years
Total
Popular U.S.
Consumer:
Credit cards
Pass
$
-
$
-
$
-
$
-
$
-
$
-
$
10
$
-
$
10
Total credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
10
$
-
$
10
HELOCs
Substandard
$
-
$
-
$
-
$
-
$
-
$
3,006
$
-
$
935
$
3,941
Loss
-
-
-
-
-
207
-
1,258
1,465
Pass
-
-
-
-
-
11,423
38,267
20,195
69,885
Total HELOCs
$
-
$
-
$
-
$
-
$
-
$
14,636
$
38,267
$
22,388
$
75,291
Personal
Substandard
$
72
$
81
$
250
$
73
$
17
$
163
$
2
$
-
$
658
Loss
-
-
4
-
-
19
-
-
23
Pass
75,538
19,411
43,346
7,418
2,802
5,625
124
-
154,264
Total Personal
$
75,610
$
19,492
$
43,600
$
7,491
$
2,819
$
5,807
$
126
$
-
$
154,945
Other consumer
Pass
$
-
$
-
$
-
$
-
$
-
$
-
$
4,658
$
-
$
4,658
Total Other
consumer
$
-
$
-
$
-
$
-
$
-
$
-
$
4,658
$
-
$
4,658
Total Popular U.S.
$
1,933,575
$
1,504,793
$
1,258,160
$
862,283
$
629,989
$
1,802,434
$
361,553
$
22,388
$
8,375,175
117
December 31, 2021
Term Loans
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted to
Term Loans
Amortized
Cost Basis
Amortized Cost Basis by Origination Year
(In thousands)
2021
2020
2019
2018
2017
Prior
Years
Total
Popular, Inc.
Commercial:
Commercial multi-family
Watch
$
8,600
$
41,348
$
56,229
$
20,682
$
37,343
$
53,238
$
-
$
-
$
217,440
Special mention
-
3,752
9,013
30,244
11,071
31,322
-
-
85,402
Substandard
-
-
68,131
12,748
-
24,901
100
-
105,880
Pass
447,549
263,093
236,138
169,845
48,875
384,192
4,216
-
1,553,908
Total commercial
multi-family
$
456,149
$
308,193
$
369,511
$
233,519
$
97,289
$
493,653
$
4,316
$
-
$
1,962,630
Commercial real estate non-owner occupied
Watch
$
113,181
$
250,961
$
67,510
$
193,620
$
31,010
$
359,593
$
4,017
$
-
$
1,019,892
Special Mention
21,448
12,563
10,476
7,025
15,181
39,625
-
-
106,318
Substandard
30,155
28,546
30,605
40,000
14,154
132,730
-
-
276,190
Pass
1,056,754
444,733
245,278
249,431
293,038
903,658
18,098
-
3,210,990
Total commercial
real estate non-
owner occupied
$
1,221,538
$
736,803
$
353,869
$
490,076
$
353,383
$
1,435,606
$
22,115
$
-
$
4,613,390
Commercial real estate owner occupied
Watch
$
8,393
$
8,851
$
16,797
$
15,108
$
4,715
$
138,848
$
4,222
$
-
$
196,934
Special Mention
5,573
857
7,598
1,427
2,449
105,272
-
-
123,176
Substandard
6,960
1,028
2,794
38,407
1,869
134,129
-
-
185,187
Doubtful
-
-
-
-
76
612
-
-
688
Pass
368,431
245,179
79,298
46,957
58,821
493,114
20,317
-
1,312,117
Total commercial
real estate owner
occupied
$
389,357
$
255,915
$
106,487
$
101,899
$
67,930
$
871,975
$
24,539
$
-
$
1,818,102
Commercial and industrial
Watch
$
190,276
$
17,209
$
25,828
$
113,108
$
14,582
$
92,306
$
112,108
$
-
$
565,417
Special Mention
9,884
17,139
15,526
28,954
1,071
28,663
68,574
-
169,811
Substandard
2,727
1,188
7,600
36,321
66,939
47,058
38,162
-
199,995
Doubtful
-
-
-
-
-
62
-
-
62
Loss
262
58
108
17
51
191
-
-
687
Pass
1,116,915
674,933
487,052
275,170
187,726
673,205
987,606
-
4,402,607
Total commercial
and industrial
$
1,320,064
$
710,527
$
536,114
$
453,570
$
270,369
$
841,485
$
1,206,450
$
-
$
5,338,579
118
December 31, 2021
Term Loans
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted to
Term Loans
Amortized
Cost Basis
Amortized Cost Basis by Origination Year
(In thousands)
2021
2020
2019
2018
2017
Prior
Years
Total
Popular, Inc.
Construction
Watch
$
-
$
14,300
$
23,547
$
28,757
$
34,205
$
-
$
-
$
-
$
100,809
Special Mention
-
-
-
-
-
13,622
-
-
13,622
Substandard
-
-
485
15,438
10,231
-
-
-
26,154
Pass
152,183
177,667
166,253
13,634
36,500
7,138
22,260
-
575,635
Total construction
$
152,183
$
191,967
$
190,285
$
57,829
$
80,936
$
20,760
$
22,260
$
-
$
716,220
Mortgage
Substandard
$
-
$
5,292
$
9,106
$
6,580
$
4,527
$
135,370
$
-
$
-
$
160,875
Pass
790,383
570,992
438,535
327,225
201,358
4,937,828
-
-
7,266,321
Total mortgage
$
790,383
$
576,284
$
447,641
$
333,805
$
205,885
$
5,073,198
$
-
$
-
$
7,427,196
Leasing
Substandard
$
124
$
618
$
880
$
613
$
613
$
235
$
-
$
-
$
3,083
Loss
-
-
-
1
16
2
-
-
19
Pass
613,452
328,085
222,770
133,112
62,881
17,917
-
-
1,378,217
Total leasing
$
613,576
$
328,703
$
223,650
$
133,726
$
63,510
$
18,154
$
-
$
-
$
1,381,319
119
December 31, 2021
Term Loans
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted to
Term Loans
Amortized
Cost Basis
Amortized Cost Basis by Origination Year
(In thousands)
2021
2020
2019
2018
2017
Prior
Years
Total
Popular, Inc.
Consumer:
Credit cards
Substandard
$
-
$
-
$
-
$
-
$
-
$
-
$
8,577
$
-
$
8,577
Pass
-
-
-
-
-
-
911,284
-
911,284
Total credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
919,861
$
-
$
919,861
HELOCs
Substandard
$
-
$
-
$
-
$
-
$
-
$
3,006
$
23
$
935
$
3,964
Loss
-
-
-
-
-
207
-
1,258
1,465
Pass
-
-
-
-
-
11,423
41,815
20,195
73,433
Total HELOCs
$
-
$
-
$
-
$
-
$
-
$
14,636
$
41,838
$
22,388
$
78,862
Personal
Substandard
$
498
$
691
$
2,355
$
939
$
953
$
15,843
$
2
$
1,385
$
22,666
Loss
30
2
7
-
-
22
-
-
61
Pass
615,142
217,063
270,674
98,759
56,432
125,690
124
36,394
1,420,278
Total Personal
$
615,670
$
217,756
$
273,036
$
99,698
$
57,385
$
141,555
$
126
$
37,779
$
1,443,005
Auto
Substandard
$
3,080
$
7,520
$
9,498
$
4,739
$
2,210
$
1,422
$
-
$
-
$
28,469
Loss
42
11
-
-
-
-
-
-
53
Pass
1,259,800
808,339
637,300
420,293
177,104
80,829
-
-
3,383,665
Total Auto
$
1,262,922
$
815,870
$
646,798
$
425,032
$
179,314
$
82,251
$
-
$
-
$
3,412,187
Other consumer
Substandard
$
-
$
114
$
21
$
487
$
-
$
135
$
11,250
$
-
$
12,007
Loss
-
-
-
579
-
34
-
-
613
Pass
24,845
9,781
9,348
5,610
3,914
947
62,141
-
116,586
Total Other
consumer
$
24,845
$
9,895
$
9,369
$
6,676
$
3,914
$
1,116
$
73,391
$
-
$
129,206
Total Popular Inc.
$
6,846,687
$
4,151,913
$
3,156,760
$
2,335,830
$
1,379,915
$
8,994,389
$
2,314,896
$
60,167
$
29,240,557
120
December 31, 2020
Term Loans
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted to
Term Loans
Amortized
Cost Basis
Amortized Cost Basis by Origination Year
(In thousands)
2020
2019
2018
2017
2016
Prior
Years
Total
Puerto Rico
Commercial:
Commercial multi-family
Watch
$
-
$
-
$
-
$
-
$
-
$
460
$
-
$
-
$
460
Special mention
-
-
-
-
-
4,160
-
-
4,160
Substandard
-
-
-
-
-
400
100
-
500
Pass
5,216
36,433
26,051
2,106
2,563
74,791
-
-
147,160
Total commercial
multi-family
$
5,216
$
36,433
$
26,051
$
2,106
$
2,563
$
79,811
$
100
$
-
$
152,280
Commercial real estate non-owner occupied
Watch
$
160,960
$
73,561
$
27,592
$
40,654
$
33,277
$
197,912
$
2,100
$
-
$
536,056
Special Mention
-
26,331
124,560
29,711
19,895
62,839
836
-
264,172
Substandard
43,399
74,303
26,799
4,932
29,974
130,218
95
-
309,720
Pass
88,324
53,385
39,814
60,585
124,643
527,282
3,352
-
897,385
Total commercial
real estate non-
owner occupied
$
292,683
$
227,580
$
218,765
$
135,882
$
207,789
$
918,251
$
6,383
$
-
$
2,007,333
Commercial real estate owner occupied
Watch
$
96,046
$
10,319
$
14,412
$
9,760
$
9,584
$
146,445
$
2,627
$
-
$
289,193
Special Mention
850
6,638
249
6,571
282
172,078
-
-
186,668
Substandard
1,774
2,181
37,686
1,878
27,094
145,193
-
-
215,806
Doubtful
-
-
-
-
-
1,714
-
-
1,714
Pass
204,840
54,274
31,917
57,854
128,392
417,376
10,861
-
905,514
Total commercial
real estate owner
occupied
$
303,510
$
73,412
$
84,264
$
76,063
$
165,352
$
882,806
$
13,488
$
-
$
1,598,895
Commercial and industrial
Watch
$
131,556
$
77,821
$
182,776
$
40,318
$
63,968
$
267,856
$
243,335
$
-
$
1,007,630
Special Mention
28,310
10,297
19,220
45,861
910
28,507
86,263
-
219,368
Substandard
32,941
2,180
26,921
26,769
1,824
55,220
49,036
-
194,891
Doubtful
-
67
-
1
-
54
1
-
123
Loss
-
-
-
-
-
-
13
-
13
Pass
1,181,399
492,778
119,709
168,174
105,442
218,716
520,865
-
2,807,083
Total commercial
and industrial
$
1,374,206
$
583,143
$
348,626
$
281,123
$
172,144
$
570,353
$
899,513
$
-
$
4,229,108
Construction
Watch
$
-
$
105
$
4,895
$
-
$
-
$
-
$
960
$
-
$
5,960
Substandard
-
-
-
21,497
-
-
-
-
21,497
Pass
15,723
22,408
3,423
63,582
-
-
24,513
-
129,649
Total construction
$
15,723
$
22,513
$
8,318
$
85,079
$
-
$
-
$
25,473
$
-
$
157,106
Mortgage
Substandard
$
754
$
903
$
1,172
$
3,129
$
4,374
$
159,359
$
-
$
-
$
169,691
Pass
263,473
224,390
177,537
212,650
225,824
5,496,578
-
-
6,600,452
Total mortgage
$
264,227
$
225,293
$
178,709
$
215,779
$
230,198
$
5,655,937
$
-
$
-
$
6,770,143
Leasing
Substandard
$
200
$
822
$
748
$
913
$
617
$
136
$
-
$
-
$
3,436
Pass
480,964
315,022
209,340
109,708
63,955
15,236
-
-
1,194,225
Total leasing
$
481,164
$
315,844
$
210,088
$
110,621
$
64,572
$
15,372
$
-
$
-
$
1,197,661
121
December 31, 2020
Term Loans
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted to
Term Loans
Amortized
Cost Basis
Amortized Cost Basis by Origination Year
(In thousands)
2020
2019
2018
2017
2016
Prior
Years
Total
Puerto Rico
Consumer:
Credit cards
Substandard
$
-
$
-
$
-
$
-
$
-
$
-
$
12,798
$
-
$
12,798
Pass
-
-
-
-
-
-
907,137
-
907,137
Total credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
919,935
$
-
$
919,935
HELOCs
Pass
$
-
$
-
$
-
$
-
$
-
$
540
$
3,639
$
-
$
4,179
Total HELOCs
$
-
$
-
$
-
$
-
$
-
$
540
$
3,639
$
-
$
4,179
Personal
Substandard
$
1,288
$
4,782
$
1,741
$
1,022
$
971
$
18,647
$
152
$
1,545
$
30,148
Pass
323,170
413,973
168,142
99,768
57,319
137,693
2,144
45,390
1,247,599
Total Personal
$
324,458
$
418,755
$
169,883
$
100,790
$
58,290
$
156,340
$
2,296
$
46,935
$
1,277,747
Auto
Substandard
$
1,975
$
6,029
$
3,612
$
1,760
$
1,369
$
990
$
-
$
-
$
15,735
Pass
1,064,082
881,343
628,657
299,677
168,157
74,577
-
-
3,116,493
Total Auto
$
1,066,057
$
887,372
$
632,269
$
301,437
$
169,526
$
75,567
$
-
$
-
$
3,132,228
Other consumer
Substandard
$
-
$
16
$
1,376
$
240
$
174
$
13,075
$
-
$
-
$
14,881
Pass
16,912
15,698
13,158
4,966
2,828
3,785
54,437
-
111,784
Total Other
consumer
$
16,912
$
15,714
$
14,534
$
5,206
$
3,002
$
16,860
$
54,437
$
-
$
126,665
Total Puerto Rico
$
4,144,156
$
2,806,059
$
1,891,507
$
1,314,086
$
1,073,436
$
8,371,837
$
1,925,264
$
46,935
$
21,573,280
122
December 31, 2020
Term Loans
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted to
Term Loans
Amortized
Cost Basis
Amortized Cost Basis by Origination Year
(In thousands)
2020
2019
2018
2017
2016
Prior
Years
Total
Popular U.S.
Commercial:
Commercial multi-family
Watch
$
1,643
$
16,787
$
39,980
$
39,713
$
52,989
$
61,369
$
-
$
-
$
212,481
Special mention
3,122
30,708
4,380
19,593
37,745
20,463
-
-
116,011
Substandard
-
17,376
21,771
1,755
20,085
6,247
-
-
67,234
Pass
326,008
289,652
163,812
100,555
132,400
332,709
2,849
-
1,347,985
Total commercial
multi-family
$
330,773
$
354,523
$
229,943
$
161,616
$
243,219
$
420,788
$
2,849
$
-
$
1,743,711
Commercial real estate non-owner occupied
Watch
$
10,057
$
23,877
$
76,629
$
56,112
$
49,166
$
62,766
$
1,055
$
-
$
279,662
Special Mention
-
4,760
15,304
14,623
70,224
20,028
350
-
125,289
Substandard
771
18,642
36,495
11,007
40,528
28,984
-
-
136,427
Pass
397,686
231,904
224,256
236,008
142,432
214,495
5,651
-
1,452,432
Total commercial
real estate non-
owner occupied
$
408,514
$
279,183
$
352,684
$
317,750
$
302,350
$
326,273
$
7,056
$
-
$
1,993,810
Commercial real estate owner occupied
Watch
$
393
$
8,266
$
7,941
$
4,060
$
16,689
$
16,108
$
4,222
$
-
$
57,679
Special Mention
-
-
192
-
-
1,467
-
-
1,659
Substandard
-
1,152
2,361
-
1,348
20,305
-
-
25,166
Pass
48,684
47,484
47,451
28,761
18,296
68,739
461
-
259,876
Total commercial
real estate owner
occupied
$
49,077
$
56,902
$
57,945
$
32,821
$
36,333
$
106,619
$
4,683
$
-
$
344,380
Commercial and industrial
Watch
$
16,126
$
1,973
$
30
$
3,621
$
1,196
$
8,488
$
3,972
$
-
$
35,406
Special Mention
14,056
-
-
1,634
4,807
4,756
1,637
-
26,890
Substandard
2,029
6,568
-
-
-
5,980
2,394
-
16,971
Pass
410,349
196,958
198,249
132,993
123,762
300,846
102,369
-
1,465,526
Total commercial
and industrial
$
442,560
$
205,499
$
198,279
$
138,248
$
129,765
$
320,070
$
110,372
$
-
$
1,544,793
Construction
Watch
$
8,451
$
-
$
-
$
37,015
$
-
$
2,065
$
-
$
-
$
47,531
Special Mention
-
-
-
3,089
-
30,083
-
-
33,172
Substandard
-
-
20,655
9,372
7,560
-
-
-
37,587
Pass
79,489
288,865
168,411
99,814
8,392
5,841
-
-
650,812
Total construction
$
87,940
$
288,865
$
189,066
$
149,290
$
15,952
$
37,989
$
-
$
-
$
769,102
Mortgage
Substandard
$
29
$
-
$
1,221
$
-
$
328
$
13,287
$
-
$
-
$
14,865
Pass
356,839
275,289
103,160
9,337
9,530
351,517
-
-
1,105,672
Total mortgage
$
356,868
$
275,289
$
104,381
$
9,337
$
9,858
$
364,804
$
-
$
-
$
1,120,537
123
December 31, 2020
Term Loans
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted to
Term Loans
Amortized
Cost Basis
Amortized Cost Basis by Origination Year
(In thousands)
2020
2019
2018
2017
2016
Prior
Years
Total
Popular U.S.
Consumer:
Credit cards
Pass
$
-
$
-
$
-
$
-
$
-
$
-
$
31
$
-
$
31
Total credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
31
$
-
$
31
HELOCs
Substandard
$
-
$
-
$
-
$
-
$
-
$
112
$
-
$
357
$
469
Loss
-
-
-
-
-
156
-
6,867
7,023
Pass
-
-
-
-
-
11,907
39,366
35,806
87,079
Total HELOCs
$
-
$
-
$
-
$
-
$
-
$
12,175
$
39,366
$
43,030
$
94,571
Personal
Substandard
$
83
$
784
$
165
$
74
$
18
$
6
$
-
$
-
$
1,130
Loss
-
17
63
12
6
244
2
-
344
Pass
40,539
109,606
27,693
9,623
1,855
8,256
192
-
197,764
Total Personal
$
40,622
$
110,407
$
27,921
$
9,709
$
1,879
$
8,506
$
194
$
-
$
199,238
Other consumer
Substandard
$
-
$
-
$
-
$
-
$
-
$
-
$
20
$
-
$
20
Pass
-
-
-
-
-
-
1,723
-
1,723
Total Other
consumer
$
-
$
-
$
-
$
-
$
-
$
-
$
1,743
$
-
$
1,743
Total Popular U.S.
$
1,716,354
$
1,570,668
$
1,160,219
$
818,771
$
739,356
$
1,597,224
$
166,294
$
43,030
$
7,811,916
124
December 31, 2020
Term Loans
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted to
Term Loans
Amortized
Cost Basis
Amortized Cost Basis by Origination Year
(In thousands)
2020
2019
2018
2017
2016
Prior
Years
Total
Popular, Inc.
Commercial:
Commercial multi-family
Watch
$
1,643
$
16,787
$
39,980
$
39,713
$
52,989
$
61,829
$
-
$
-
$
212,941
Special mention
3,122
30,708
4,380
19,593
37,745
24,623
-
-
120,171
Substandard
-
17,376
21,771
1,755
20,085
6,647
100
-
67,734
Pass
331,224
326,085
189,863
102,661
134,963
407,500
2,849
-
1,495,145
Total commercial
multi-family
$
335,989
$
390,956
$
255,994
$
163,722
$
245,782
$
500,599
$
2,949
$
-
$
1,895,991
Commercial real estate non-owner occupied
Watch
$
171,017
$
97,438
$
104,221
$
96,766
$
82,443
$
260,678
$
3,155
$
-
$
815,718
Special Mention
-
31,091
139,864
44,334
90,119
82,867
1,186
-
389,461
Substandard
44,170
92,945
63,294
15,939
70,502
159,202
95
-
446,147
Pass
486,010
285,289
264,070
296,593
267,075
741,777
9,003
-
2,349,817
Total commercial
real estate non-
owner occupied
$
701,197
$
506,763
$
571,449
$
453,632
$
510,139
$
1,244,524
$
13,439
$
-
$
4,001,143
Commercial real estate owner occupied
Watch
$
96,439
$
18,585
$
22,353
$
13,820
$
26,273
$
162,553
$
6,849
$
-
$
346,872
Special Mention
850
6,638
441
6,571
282
173,545
-
-
188,327
Substandard
1,774
3,333
40,047
1,878
28,442
165,498
-
-
240,972
Doubtful
-
-
-
-
-
1,714
-
-
1,714
Pass
253,524
101,758
79,368
86,615
146,688
486,115
11,322
-
1,165,390
Total commercial
real estate owner
occupied
$
352,587
$
130,314
$
142,209
$
108,884
$
201,685
$
989,425
$
18,171
$
-
$
1,943,275
Commercial and industrial
Watch
$
147,682
$
79,794
$
182,806
$
43,939
$
65,164
$
276,344
$
247,307
$
-
$
1,043,036
Special Mention
42,366
10,297
19,220
47,495
5,717
33,263
87,900
-
246,258
Substandard
34,970
8,748
26,921
26,769
1,824
61,200
51,430
-
211,862
Doubtful
-
67
-
1
-
54
1
-
123
Loss
-
-
-
-
-
-
13
-
13
Pass
1,591,748
689,736
317,958
301,167
229,204
519,562
623,234
-
4,272,609
Total commercial
and industrial
$
1,816,766
$
788,642
$
546,905
$
419,371
$
301,909
$
890,423
$
1,009,885
$
-
$
5,773,901
125
December 31, 2020
Term Loans
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted to
Term Loans
Amortized
Cost Basis
Amortized Cost Basis by Origination Year
(In thousands)
2020
2019
2018
2017
2016
Prior
Years
Total
Popular, Inc.
Construction
Watch
$
8,451
$
105
$
4,895
$
37,015
$
-
$
2,065
$
960
$
-
$
53,491
Special Mention
-
-
-
3,089
-
30,083
-
-
33,172
Substandard
-
-
20,655
30,869
7,560
-
-
-
59,084
Pass
95,212
311,273
171,834
163,396
8,392
5,841
24,513
-
780,461
Total construction
$
103,663
$
311,378
$
197,384
$
234,369
$
15,952
$
37,989
$
25,473
$
-
$
926,208
Mortgage
Substandard
$
783
$
903
$
2,393
$
3,129
$
4,702
$
172,646
$
-
$
-
$
184,556
Pass
620,312
499,679
280,697
221,987
235,354
5,848,095
-
-
7,706,124
Total mortgage
$
621,095
$
500,582
$
283,090
$
225,116
$
240,056
$
6,020,741
$
-
$
-
$
7,890,680
Leasing
Substandard
$
200
$
822
$
748
$
913
$
617
$
136
$
-
$
-
$
3,436
Pass
480,964
315,022
209,340
109,708
63,955
15,236
-
-
1,194,225
Total leasing
$
481,164
$
315,844
$
210,088
$
110,621
$
64,572
$
15,372
$
-
$
-
$
1,197,661
126
December 31, 2020
Term Loans
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted to
Term Loans
Amortized
Cost Basis
Amortized Cost Basis by Origination Year
(In thousands)
2020
2019
2018
2017
2016
Prior
Years
Total
Popular, Inc.
Consumer:
Credit cards
Substandard
$
-
$
-
$
-
$
-
$
-
$
-
$
12,798
$
-
$
12,798
Pass
-
-
-
-
-
-
907,168
-
907,168
Total credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
919,966
$
-
$
919,966
HELOCs
Substandard
$
-
$
-
$
-
$
-
$
-
$
112
$
-
$
357
$
469
Loss
-
-
-
-
-
156
-
6,867
7,023
Pass
-
-
-
-
-
12,447
43,005
35,806
91,258
Total HELOCs
$
-
$
-
$
-
$
-
$
-
$
12,715
$
43,005
$
43,030
$
98,750
Personal
Substandard
$
1,371
$
5,566
$
1,906
$
1,096
$
989
$
18,653
$
152
$
1,545
$
31,278
Loss
-
17
63
12
6
244
2
-
344
Pass
363,709
523,579
195,835
109,391
59,174
145,949
2,336
45,390
1,445,363
Total Personal
$
365,080
$
529,162
$
197,804
$
110,499
$
60,169
$
164,846
$
2,490
$
46,935
$
1,476,985
Auto
Substandard
$
1,975
$
6,029
$
3,612
$
1,760
$
1,369
$
990
$
-
$
-
$
15,735
Pass
1,064,082
881,343
628,657
299,677
168,157
74,577
-
-
3,116,493
Total Auto
$
1,066,057
$
887,372
$
632,269
$
301,437
$
169,526
$
75,567
$
-
$
-
$
3,132,228
Other consumer
Substandard
$
-
$
16
$
1,376
$
240
$
174
$
13,075
$
20
$
-
$
14,901
Pass
16,912
15,698
13,158
4,966
2,828
3,785
56,160
-
113,507
Total Other
consumer
$
16,912
$
15,714
$
14,534
$
5,206
$
3,002
$
16,860
$
56,180
$
-
$
128,408
Total Popular Inc.
$
5,860,510
$
4,376,727
$
3,051,726
$
2,132,857
$
1,812,792
$
9,969,061
$
2,091,558
$
89,965
$
29,385,196
127
Note 10 – Mortgage banking activities
Income
from
mortgage
banking
activities
includes
mortgage
servicing
fees
earned
in
connection
with
administering
residential
mortgage
loans
and
valuation
adjustments
on
mortgage
servicing
rights.
It
also
includes
gain
on
sales
and
securitizations
of
residential mortgage
loans, losses
on repurchased
loans, including
interest advances,
and trading
gains and
losses on
derivative
contracts
used
to
hedge
the
Corporation’s
securitization
activities.
In
addition,
lower-of-cost-or-market
valuation
adjustments
to
residential mortgage loans held for sale, if any, are recorded as part
of the mortgage banking activities.
The following table presents the components of mortgage
banking activities:
Years ended December
31,
(In thousands)
2021
2020
2019
Mortgage servicing fees, net of fair value adjustments:
Mortgage servicing fees
$
38,105
$
43,234
$
46,952
Mortgage servicing rights fair value adjustments
(10,206)
(42,055)
(27,430)
Total mortgage
servicing fees, net of fair value adjustments
27,899
1,179
19,522
Net gain on sale of loans, including valuation on loans
held for sale
21,684
31,215
18,817
Trading account profit (loss):
Realized gains (losses) on closed derivative positions
1,323
(10,586)
(6,246)
Total trading account
profit (loss)
1,323
(10,586)
(6,246)
Losses on repurchased loans, including interest advances [1]
(773)
(11,407)
-
Total mortgage
banking activities
$
50,133
$
10,401
$
32,093
[1]
The Corporation, from time to time, repurchases delinquent
loans from its GNMA servicing portfolio, in compliance
with Guarantor guidelines, and
may incur in losses related to previously advanced interest
on delinquent loans. During the quarter ended September
30, 2020 the Corporation
repurchased $687.9 million of GNMA loans and recorded
a loss of $10.5 million for previously advanced interest
on delinquent loans. Effective for
the quarter ended September 30, 2020, the Corporation
has determined to present these losses as part of its
Mortgage Banking Activities, which
were previously presented within the indemnity reserves on loans
sold component of non-interest income. The amount
of these losses for prior
years were considered immaterial for reclassification.
128
Note 11 – Transfers of financial assets and mortgage servicing assets
The
Corporation
typically
transfers
conforming
residential
mortgage
loans
in
conjunction
with
GNMA,
FNMA
and
FHLMC
securitization transactions
whereby the
loans are
exchanged for
cash or
securities and
servicing rights.
As seller,
the Corporation
has made
certain representations
and warranties
with respect
to the
originally transferred
loans and,
in the
past,
has sold
certain
loans
with
credit
recourse
to
a
government-sponsored
entity,
namely
FNMA.
Refer
to
Note
23
to
the
Consolidated
Financial
Statements for a description of such arrangements.
No liabilities were
incurred as a
result of these
securitizations during the
years ended December
31, 2021 and
2020 because they
did
not
contain
any
credit
recourse
arrangements.
The
Corporation
recorded
a
net
gain
of
$18.4
million
and
$27.3
million,
respectively, during the years ended December 31, 2021 and 2020 related to the residential
mortgage loans securitized.
The
following tables
present the
initial fair
value of
the
assets obtained
as
proceeds from
residential mortgage
loans securitized
during the years ended December 31, 2021 and
2020:
Proceeds Obtained During the Year
Ended December 31, 2021
(In thousands)
Level 1
Level 2
Level 3
Initial fair value
Assets
Trading account debt securities:
Mortgage-backed securities - GNMA
$
-
$
380,228
$
-
$
380,228
Mortgage-backed securities - FNMA
-
329,617
-
329,617
Mortgage-backed securities - FHLMC
-
22,688
-
22,688
Total trading account
debt securities
$
-
$
732,533
$
-
$
732,533
Mortgage servicing rights
$
-
$
-
$
11,314
$
11,314
Total
$
-
$
732,533
$
11,314
$
743,847
Proceeds Obtained During the Year
Ended December 31, 2020
(In thousands)
Level 1
Level 2
Level 3
Initial fair value
Assets
Trading account debt securities:
Mortgage-backed securities - GNMA
$
-
$
332,207
$
-
$
332,207
Mortgage-backed securities - FNMA
-
175,864
-
175,864
Total trading account
debt securities
$
-
$
508,071
$
-
$
508,071
Mortgage servicing rights
$
-
$
-
$
7,236
$
7,236
Total
$
-
$
508,071
$
7,236
$
515,307
During the
year ended
December 31,
2021, the
Corporation retained
servicing rights
on whole
loan sales
involving approximately
$144 million in principal balance outstanding (2020 - $147 million), with net realized gains of
approximately $3.2 million (2020 - $3.9
million). All loan sales performed during the
years ended December 31, 2021 and 2020 were without
credit recourse agreements.
The Corporation recognizes as assets the rights to service loans for others,
whether these rights are purchased or result from asset
transfers such as sales and securitizations. These mortgage
servicing rights (“MSRs”) are measured at fair
value.
The
Corporation
uses
a
discounted
cash
flow
model
to
estimate
the
fair
value
of
MSRs.
The
discounted
cash
flow
model
incorporates
assumptions
that
market
participants
would
use
in
estimating
future
net
servicing
income,
including
estimates
of
prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, prepayment and late
fees, among other considerations. Prepayment speeds are
adjusted for the loans’ characteristics and portfolio behavior.
The following table
presents the changes
in MSRs measured
using the fair
value method for
the years ended
December 31, 2021
and 2020.
129
Residential MSRs
(In thousands)
December 31, 2021
December 31, 2020
Fair value at beginning of period
$
118,395
$
150,906
Additions
13,391
9,544
Changes due to payments on loans
[1]
(15,383)
(11,692)
Reduction due to loan repurchases
(1,233)
(11,060)
Changes in fair value due to changes in valuation model inputs
or assumptions
6,410
(19,327)
Other
(10)
24
Fair value at end of period
[2]
$
121,570
$
118,395
[1] Represents changes due to collection / realization
of expected cash flows over time.
[2] At December 31, 2021, PB had MSRs amounting to $1.6
million (December 31, 2020 - $0.7 million).
Residential mortgage loans serviced for others were $12.1
billion at December 31, 2021 (2020 - $12.9
billion).
Net mortgage servicing fees, a component of mortgage banking activities in the Consolidated Statements of Operations, include the
changes from period to period in the fair value of the MSRs, including changes due to collection / realization of expected cash flows.
The banking
subsidiaries receive servicing
fees based
on a
percentage of the
outstanding loan balance.
These servicing fees
are
credited to
income when they
are collected. At
December 31,
2021, those weighted
average mortgage servicing
fees were
0.30%
(2020 –
0.31%). Under these
servicing agreements, the
banking subsidiaries do
not generally earn
significant prepayment penalty
fees on the underlying loans serviced.
The section
below includes
information on
assumptions used
in the
valuation model
of the
MSRs, originated
and purchased.
Key
economic assumptions used
in measuring the
servicing rights derived
from loans securitized
or sold by
the Corporation during
the
years ended December 31, 2021 and 2020 were
as follows:
Years ended
December 31, 2021
December 31, 2020
BPPR
PB
BPPR
PB
Prepayment speed
6.8
%
19.0
%
7.6
%
21.9
%
Weighted average life (in years)
8.3
20.9
8.7
3.6
Discount rate (annual rate)
10.5
%
10.7
%
10.9
%
10.5
%
Key
economic
assumptions
used
to
estimate
the
fair
value
of
MSRs
derived
from
sales
and
securitizations
of
mortgage
loans
performed
by
the
banking
subsidiaries
and
servicing
rights
purchased
from
other
financial
institutions,
and
the
sensitivity
to
immediate changes in those assumptions,
were as follows as of the end of the periods
reported:
Originated MSRs
Purchased MSRs
December 31,
December 31,
December 31,
December 31,
(In thousands)
2021
2020
2021
2020
Fair value of servicing rights
$
40,058
$
44,129
$
81,512
$
74,266
Weighted average life (in years)
7.1
6.2
7.5
5.9
Weighted average prepayment speed (annual
rate)
7.7
%
6.6
%
7.6
%
7.1
%
Impact on fair value of 10% adverse change
$
(1,500)
$
(1,115)
$
(1,486)
$
(2,206)
Impact on fair value of 20% adverse change
$
(2,359)
$
(2,194)
$
(3,495)
$
(4,312)
Weighted average discount rate (annual rate)
11.2
%
11.3
%
11.0
%
11.1
%
Impact on fair value of 10% adverse change
$
(2,079)
$
(1,640)
$
(2,731)
$
(2,740)
Impact on fair value of 20% adverse change
$
(3,452)
$
(3,175)
$
(5,832)
$
(5,301)
130
The sensitivity analyses
presented in the
table above for
servicing rights are
hypothetical and should
be used with
caution. As the
figures
indicate, changes
in
fair value
based
on
a
10
and
20
percent
variation in
assumptions generally
cannot be
extrapolated
because the
relationship of
the change
in assumption
to the
change in
fair value
may not
be linear.
Also, in
the sensitivity
tables
included herein,
the effect
of a
variation in
a particular
assumption on
the fair
value of
the retained
interest is
calculated without
changing any other assumption. In reality, changes in one factor may result in changes
in another (for example, increases in market
interest rates may result in lower prepayments and
increased credit losses), which might magnify or
counteract the sensitivities.
At December 31, 2021, the Corporation serviced $0.7
billion (2020 - $0.9 billion) in residential mortgage
loans with credit recourse to
the Corporation,
from which $26 million was 60
days or more past due (2020
- $52 million). Also refer
to Note 23 for
information on
changes in the Corporation’s liability of estimated losses
related to loans serviced with credit recourse.
Under the GNMA
securitizations, the Corporation, as
servicer, has
the right to
repurchase (but not the
obligation), at its
option and
without
GNMA’s
prior
authorization,
any
loan
that
is
collateral
for
a
GNMA
guaranteed
mortgage-backed
security
when
certain
delinquency
criteria
are
met.
At
the
time
that
individual
loans
meet
GNMA’s
specified
delinquency
criteria
and
are
eligible
for
repurchase, the Corporation is deemed to have regained effective control over these loans if the Corporation was the pool issuer. At
December
31,
2021,
the
Corporation
had
recorded
$13
million
in
mortgage
loans
on
its
Consolidated
Statements
of
Financial
Condition related to this
buy-back option program (2020 -
$57 million). Loans in
our serviced GNMA portfolio
benefit from payment
forbearance programs but continue to reflect the contractual delinquency until
the borrower repays deferred payments or completes
a payment deferral modification
or other borrower assistance
alternative. As long as
the Corporation continues to service
the loans
that continue to be collateral in a GNMA guaranteed
mortgage-backed security, the MSR is recognized by the Corporation.
During
the
year
ended
December
31,
2021,
the
Corporation
repurchased
approximately
$94
million
of
mortgage
loans
from
its
GNMA servicing portfolio (2020 - $862 million). The determination to
repurchase these loans was based on the economic benefits
of
the transaction, which results in a reduction of the servicing costs for
these severely delinquent loans, mostly related to principal and
interest advances. The
risk associated with
the loans is
reduced due to
their guaranteed nature.
The Corporation may place
these
loans under COVID-19 modification programs offered
by FHA, VA
or United States Department of
Agriculture (USDA) or other loss
mitigation programs offered by the Corporation, and once brought back to current status, these may be either retained in portfolio or
re-sold in the secondary market.
131
Note 12 - Premises and equipment
Premises and equipment are stated at cost less accumulated
depreciation and amortization as follows:
(In thousands)
Useful life in years
2021
2020
Premises and equipment:
Land
$
94,246
$
109,780
Buildings
10-50
468,293
512,131
Equipment
2-10
374,192
350,014
Leasehold improvements
3-10
87,406
87,289
929,891
949,434
Less - Accumulated depreciation and amortization
559,234
574,835
Subtotal
370,657
374,599
Construction in progress
29,337
25,862
Premises and equipment, net
$
494,240
$
510,241
Depreciation and
amortization of
premises and
equipment for
the year
2021 was
$55.1 million
(2020 -$58.4
million; 2019
- $58.1
million), of
which $25.2
million (2020
- $27.2
million; 2019
- $27.3
million) was
charged to
occupancy expense
and $29.8
million
(2020 - $31.2
million; 2019 -
$30.8 million) was charged
to equipment, communications and
other operating expenses. Occupancy
expense
of
premises
and
equipment
is
net
of
rental
income
of
$13.4
million
(2020
-
$15.5
million;
2019
-
$19.3
million).
For
information related to the amortization expense of finance
leases, refer to Note 33 - Leases.
132
Note 13 – Other real estate owned
The following
tables present
the activity
related to
Other Real
Estate Owned
(“OREO”), for
the years
ended December
31, 2021,
2020 and 2019.
For the year ended December 31, 2021
OREO
OREO
(In thousands)
Commercial/Construction
Mortgage
Total
Balance at beginning of period
$
13,214
$
69,932
$
83,146
Write-downs in value
(1,058)
(2,161)
(3,219)
Additions
9,746
55,898
65,644
Sales
(7,282)
(52,666)
(59,948)
Other adjustments
397
(943)
(546)
Ending balance
$
15,017
$
70,060
$
85,077
For the year ended December 31, 2020
OREO
OREO
(In thousands)
Commercial/Construction
Mortgage
Total
Balance at beginning of period
$
16,959
$
105,113
$
122,072
Write-downs in value
(1,564)
(3,060)
(4,624)
Additions
2,223
17,785
20,008
Sales
(4,359)
(49,797)
(54,156)
Other adjustments
(45)
(109)
(154)
Ending balance
$
13,214
$
69,932
$
83,146
For the year ended December 31, 2019
OREO
OREO
(In thousands)
Commercial/ Construction
Mortgage
Total
Balance at beginning of period
$
21,794
$
114,911
$
136,705
Write-downs in value
(1,584)
(4,541)
(6,125)
Additions
6,801
62,630
69,431
Sales
(9,892)
(67,137)
(77,029)
Other adjustments
(160)
(750)
(910)
Ending balance
$
16,959
$
105,113
$
122,072
133
Note 14 − Other assets
The caption of other assets in the consolidated
statements of financial condition consists of the following
major categories:
(In thousands)
December 31, 2021
December 31, 2020
Net deferred tax assets (net of valuation allowance)
$
657,597
$
851,592
Investments under the equity method
298,988
250,467
Prepaid taxes
37,924
32,615
Other prepaid expenses
79,845
74,572
Derivative assets
26,093
20,785
Trades receivable from brokers and counterparties
65,460
65,429
Principal, interest and escrow servicing advances
53,942
65,671
Guaranteed mortgage loan claims receivable
98,001
80,477
Operating ROU assets (Note 33)
141,748
131,921
Finance ROU assets (Note 33)
13,459
15,464
Others
155,514
148,048
Total other assets
$
1,628,571
$
1,737,041
The Corporation enters
in the
ordinary course of
business into technology
hosting arrangements that
are service contracts.
These
arrangements can
include capitalizable
implementation costs
that are
amortized during
the term
of the
hosting arrangement.
The
Corporation recognizes capitalizable implementation costs
related to hosting arrangements
that are service
contracts within Others
in
the
table
above.
As
of
December
31,
2021,
the
total
capitalized
implementation
costs
amounted
to
$18.4
million
with
an
accumulated
amortization
of
$8.8
million
for
a
net
value
of
$9.6
million,
compared
to
total
capitalized
implementation
costs
amounting to
$17.4 million
with an
accumulated amortization
of $4.9
million for
a net
value of
$12.5 million
as of
December 31,
2020. Total
amortization expense for all capitalized implementation costs
of hosting arrangements that are service
contracts for the
year ended December 31, 2021 was $3.9 million
(December 31, 2020 - $2.2 million).
134
Note 15 – Goodwill and other intangible assets
The changes in the carrying
amount of goodwill for the year
ended December 31, 2021, allocated by
reportable segments, were as
follows (refer to Note 37 for the definition of
the Corporation’s reportable segments):
2021
Balance at
Goodwill on
Balance at
(In thousands)
January 1, 2021
acquisition
December 31,2021
Banco Popular de Puerto Rico
$
320,248
$
-
$
320,248
Popular U.S.
350,874
49,171
400,045
Total Popular,
Inc.
$
671,122
$
49,171
$
720,293
The goodwill
recognized during
the year
ended December
31, 2021
in the
reportable segment of
Popular U.S.
of $49
million was
related
to
the
K2
Transaction.
Refer
to
Note
4,
Business
combination,
for
additional
information
related
to
the
K2
Transaction,
including the goodwill and other intangible assets recognized.
There were no changes in the carrying amount
of goodwill for the year ended December 31,
2020.
At
December 31,
2021, the
Corporation had
$0.7 million
of identifiable
intangible assets
with indefinite
useful lives,
compared to
$6.1 million at December 31, 2020, due
to the recognition of an impairment loss of $5.4
million associated with a trademark.
The following table reflects the components of
other intangible assets subject to amortization:
Gross
Net
Carrying
Accumulated
Carrying
(In thousands)
Amount
Amortization
Value
December 31, 2021
Core deposits
$
12,810
$
8,754
$
4,056
Other customer relationships
14,286
2,883
11,403
Total other intangible
assets
$
27,096
$
11,637
$
15,459
December 31, 2020
Core deposits
$
12,810
$
7,473
$
5,337
Other customer relationships
26,397
15,684
10,713
Trademark
488
236
252
Total other intangible
assets
$
39,695
$
23,393
$
16,302
During the
year
ended December
31, 2021,
$15.0 million
in
other customer
relationships became
fully amortized
and thus
were
removed
from
the
Corporation’s
intangibles
assets,
from
which
$14.2
million
were
recognized
as
part
of
the
purchase
of
the
American Airlines co-branded credit card portfolio during
2011.
During
the
year
ended
December
31,
2021,
the
Corporation
recognized
$
9.1
million
in
amortization
expense
related
to
other
intangible
assets
with
definite
useful
lives,
which
includes
the
previously
mentioned
$5.4
million
impairment
loss
(2020
-
$
6.4
million; 2019 - $9.4 million).
The following
table presents
the estimated
amortization of
the intangible
assets with
definite useful
lives for
each of
the following
periods:
135
(In thousands)
Year 2022
$
3,299
Year 2023
3,179
Year 2024
2,938
Year 2025
1,750
Year 2026
1,416
Later years
2,877
Results of the Annual Goodwill Impairment Test
The Corporation’s goodwill and
other identifiable intangible assets having
an indefinite useful life
are tested for impairment, at
least
annually and
on a
more frequent basis
if events
or circumstances indicate
impairment could have
taken place. Such
events could
include,
among others,
a significant
adverse change
in the
business climate,
an adverse
action by
a regulator,
an unanticipated
change in the competitive environment and a decision
to change the operations or dispose of a
reporting unit.
Management
monitors
events
or
changes
in
circumstances
between
annual
tests
to
determine
if
these
events
or
changes
in
circumstances would more likely than not reduce
the fair value of its
reporting units below their carrying amounts.
The Corporation
performed the
annual goodwill
impairment evaluation
for the
entire organization
during the
third quarter
of 2021
using July 31, 2021 as the annual evaluation date. The reporting units
utilized for this evaluation were those that are one level below
the business segments,
which are the
legal entities within the
reportable segment. The Corporation
follows push-down accounting,
as such all goodwill is assigned to the reporting
units when carrying out a business combination.
In determining the fair value of each reporting unit, the Corporation generally uses a combination of methods, including market price
multiples
of
comparable
companies
and
transactions,
as
well
as
discounted
cash
flow
analysis.
Management
evaluates
the
particular circumstances
of each
reporting unit
in order
to determine
the most
appropriate valuation methodology
and the
weights
applied
to
each
valuation
methodology,
as
applicable.
The
Corporation
evaluates
the
results
obtained
under
each
valuation
methodology to
identify and
understand the
key
value drivers
in order
to
ascertain that
the
results obtained
are
reasonable and
appropriate
under
the
circumstances.
Elements
considered
include
current
market
and
economic
conditions,
developments
in
specific lines of business, and any particular features
in the individual reporting units.
The computations
require management
to make
estimates and
assumptions. Critical
assumptions that
are used
as part
of these
evaluations include:
●
a selection of comparable publicly traded companies,
based on nature of business, location and
size;
●
a selection of comparable acquisitions;
●
the discount rate applied to future earnings, based
on an estimate of the cost of equity;
●
the potential future earnings of the reporting unit; and
●
the market growth and new business assumptions.
For purposes of the market comparable companies’ approach, valuations were determined by calculating
average price multiples of
relevant value drivers from a group
of companies that are comparable to the
reporting unit being analyzed and applying those price
multiples
to
the
value
drivers
of
the
reporting
unit.
Management
uses
judgment
in
the
determination
of
which
value
drivers
are
considered more appropriate for each reporting unit.
Comparable companies’ price multiples represent minority-based multiples and
thus, a
control premium
adjustment is
added to
the comparable
companies’ market
multiples applied
to the
reporting unit’s
value
drivers.
For
purposes
of
the
market
comparable
transactions’
approach,
valuations
had
been
previously
determined
by
the
Corporation
by
calculating
average
price
multiples
of
relevant
value
drivers
from
a
group
of
transactions
for
which
the
target
companies
are
comparable
to
the
reporting
unit
being
analyzed
and
applying
those
price
multiples
to
the
value
drivers
of
the
reporting unit.
For purposes
of the
discounted cash flows
(“DCF”) approach, the
valuation is
based on
estimated future cash
flows. The
financial
projections
used
in
the
DCF
valuation
analysis
for
each
reporting
unit
are
based
on
the
most
recent
(as
of
the
valuation
date)
financial
projections presented
to
the
Corporation’s Asset
/
Liability Management
Committee (“ALCO”).
The
growth assumptions
included
in
these
projections
are
based
on
management’s
expectations
for
each
reporting
unit’s
financial
prospects
considering
136
economic and industry conditions as well
as particular plans of each entity
(i.e. restructuring plans, de-leveraging, etc.). The cost
of
equity used to
discount the cash flows
was calculated using the
Ibbotson Build-Up Method and
ranged from 11.34%
to 15.13% for
the 2021 analysis. The Ibbotson Build-Up Method
builds up a cost of equity
starting with the rate of
return of a “risk-free” asset (20-
year U.S. Treasury
note) and adds
to it additional
risk elements such as
equity risk premium, size
premium, industry risk
premium,
and a
specific geographic risk
premium (as applicable).
The resulting discount
rates were
analyzed in terms
of reasonability given
the current market conditions.
No impairment was recognized by the Corporation from
the annual test as of July 31, 2021. The results
of the BPPR annual goodwill
impairment
test
as
of
July
31,
2021
indicated that
the
average estimated
fair
value
using
all
valuation methodologies
exceeded
BPPR’s equity value
by approximately $1.5
billion or 50% compared
to $282 million
or 9%, for
the annual goodwill
impairment test
completed as of July
31, 2020. PB’s
annual goodwill impairment test results as
of such dates indicated that
the average estimated
fair value
using all
valuation methodologies exceeded
PB’s equity
value by
approximately $412 million
or 24%,
compared to
$215
million or
13%, for
the annual
goodwill impairment test
completed as
of July
31, 2020.
The goodwill balance
of BPPR
and PB,
as
legal entities, represented approximately 91% of the
Corporation’s total goodwill balance as of the July 31,
2021 valuation date.
Furthermore,
as
part
of
the
analyses,
management
performed
a
reconciliation
of
the
aggregate
fair
values
determined
for
the
reporting units to the market capitalization of the Corporation concluding that
the fair value results determined for the reporting units
in the July 31, 2021 annual assessment were reasonable.
The goodwill
impairment evaluation
process requires
the Corporation
to
make estimates
and assumptions
with regard
to the
fair
value
of
the
reporting
units.
Actual
values
may
differ
significantly
from
these
estimates.
Such
differences
could
result
in
future
impairment of goodwill that would, in turn, negatively
impact the Corporation’s results of operations and the reporting
units where the
goodwill is
recorded. Declines in
the Corporation’s
market capitalization and
adverse economic conditions
sustained over a
longer
period of time negatively affecting forecasted cash flows could
increase the risk of goodwill impairment in
the future.
The extent to
which the COVID-19 pandemic
further impacts our
business, results of
operations and financial condition,
as well as
the
operations
of
our
clients,
customers,
service
providers
and
suppliers,
will
depend
on
future
developments,
which
are
highly
uncertain and is difficult to
predict, including the scope and duration of
the pandemic and actions taken by
governmental authorities
and
other
third
parties
in
response
thereto.
A
decline
in
the
Corporation’s
stock
price
related
to
global
and/or
regional
macroeconomic
conditions,
the
continued
weakness
in
the
Puerto
Rico
economy
and
fiscal
situation,
reduced
future
earnings
estimates,
additional
expenses
and
higher
credit
losses,
and
the
continuance
of
the
current
interest
rate
environment
could,
individually or
in the
aggregate, have a
material impact on
the determination of
the fair value
of our reporting
units, which could
in
turn
result
in
an
impairment of
goodwill
in
the
future.
An
impairment of
goodwill would
result
in
a non-cash
expense,
net
of
tax
impact. A charge to earnings related to a goodwill
impairment would not impact regulatory capital
calculations.
The following tables present the gross amount of
goodwill and accumulated impairment losses by
reportable segments.
137
December 31, 2021
Balance at
Balance at
December 31,
Accumulated
December 31,
2021
impairment
2021
(In thousands)
(gross amounts)
losses
(net amounts)
Banco Popular de Puerto Rico
$
324,049
$
3,801
$
320,248
Popular U.S.
564,456
164,411
400,045
Total Popular,
Inc.
$
888,505
$
168,212
$
720,293
December 31, 2020
Balance at
Balance at
December 31,
Accumulated
December 31,
2020
impairment
2020
(In thousands)
(gross amounts)
losses
(net amounts)
Banco Popular de Puerto Rico
$
324,049
$
3,801
$
320,248
Popular U.S.
515,285
164,411
350,874
Total Popular,
Inc.
$
839,334
$
168,212
$
671,122
138
Note 16 – Deposits
Total interest bearing deposits as of the end of the periods presented consisted of:
(In thousands)
December 31, 2021
December 31, 2020
Savings accounts
$
15,871,998
$
14,031,736
NOW, money market and other interest
bearing demand deposits
28,736,459
22,398,057
Total savings, NOW,
money market and other interest bearing demand
deposits
44,608,457
36,429,793
Certificates of deposit:
Under $250,000
4,086,059
4,524,794
$250,000 and over
2,626,090
2,783,054
Total certificates
of deposit
6,712,149
7,307,848
Total interest bearing
deposits
$
51,320,606
$
43,737,641
A summary of certificates of deposits by maturity at
December 31, 2021 follows:
(In thousands)
2022
$
4,043,357
2023
864,315
2024
681,201
2025
511,710
2026
534,030
2027 and thereafter
77,536
Total certificates of
deposit
$
6,712,149
At December 31, 2021, the Corporation had brokered
deposits amounting to $ 0.8 billion (December
31, 2020 - $ 0.8 billion).
The aggregate
amount of
overdrafts in
demand deposit
accounts that
were reclassified
to loans
was $6
million at
December 31,
2021 (December 31, 2020 - $3 million)
At December 31,
2021, public sector
deposits amounted to
$20.3 billion. A significant
portion of Puerto
Rico public sector
deposits
are expected to be used by Puerto Rico pursuant to the Plan of Adjustment for Puerto Rico confirmed by the Puerto Rico Oversight,
Management, and Economic Stability Act
(PROMESA) Title III
Court, which is expected to
become effective on or
about March 15,
2022. However, the receipt by the P.R.
Government of additional COVID-19 and hurricane recovery related Federal assistance, and
seasonal
tax
collections,
could
increase
public
deposit
balances
at
BPPR
in
the
near
term.
The
rate
at
which
public
deposit
balances will decline is uncertain and difficult to predict.
The amount and timing of any such reduction
is likely to be impacted by, for
example, the implementation of PROMESA and
the speed at which COVID-19 federal assistance is
distributed.
139
Note 17 – Borrowings
Assets sold under agreements to repurchase
Assets sold under agreements to repurchase amounted
to $92 million at December 31, 2021 and $121
million December 31, 2020.
The Corporation’s
repurchase transactions are
overcollateralized with the
securities detailed in
the table
below.
The Corporation’s
repurchase
agreements
have
a
right
of
set-off
with
the
respective
counterparty
under
the
supplemental
terms
of
the
master
repurchase agreements.
In
an event
of
default each
party has
a right
of
set-off
against the
other party
for amounts
owed in
the
related
agreement
and
any
other
amount
or
obligation
owed
in
respect
of
any
other
agreement
or
transaction
between
them.
Pursuant to the
Corporation’s accounting policy,
the repurchase agreements
are not offset
with other repurchase
agreements held
with the same counterparty.
The following table
presents information related to
the Corporation’s repurchase
transactions accounted for as
secured borrowings
that
are collateralized
with debt
securities available-for-sale,
other assets
held-for-trading purposes
or which
have been
obtained
under
agreements
to
resell.
It
is
the
Corporation’s
policy
to
maintain
effective
control
over
assets
sold
under
agreements
to
repurchase; accordingly, such securities continue to be carried on the Consolidated
Statements of Financial Condition.
Repurchase agreements accounted for as secured borrowings
December 31, 2021
December 31, 2020
Repurchase liability
Repurchase liability
Repurchase
weighted average
Repurchase
weighted average
(Dollars in thousands)
liability
interest rate
liability
interest rate
U.S. Treasury securities
Within 30 days
$
19,538
0.30
%
$
67,157
1.16
%
After 30 to 90 days
30,295
0.21
39,318
1.20
After 90 days
29,036
0.29
9,979
0.33
Total U.S. Treasury
securities
78,869
0.26
116,454
1.10
Mortgage-backed securities
Within 30 days
11,733
0.26
3,778
0.28
After 30 to 90 days
-
-
268
1.50
After 90 days
722
0.16
-
-
Total mortgage-backed
securities
12,455
0.26
4,046
0.36
Collateralized mortgage obligations
Within 30 days
279
0.25
803
0.24
Total collateralized
mortgage obligations
279
0.25
803
0.24
Total
$
91,603
0.26
%
$
121,303
1.07
%
Repurchase agreements in this portfolio
are generally short-term, often overnight.
As such our risk
is very limited.
We manage the
liquidity risks arising from secured
funding by sourcing funding globally from
a diverse group of counterparties, providing
a range of
securities collateral and pursuing longer durations,
when appropriate.
140
(Dollars in thousands)
2021
2020
Maximum aggregate balance outstanding at any month-end
$
92,101
$
195,498
Average monthly aggregate balance outstanding
$
91,394
$
143,718
Weighted average interest rate:
For the year
0.35
%
1.63
%
At December 31
0.26
%
1.11
%
Other short-term borrowings
At December 31, 2021, other short-term borrowings
consisted of $75 million in FHLB Advances. There
were no other short-term
borrowings outstanding at December 31, 2020. The
following table presents additional information related
to the Corporation’s other
short-term borrowings for the years ended December
31, 2021 and December 31, 2020.
(Dollars in thousands)
2021
2020
Maximum aggregate balance outstanding at any month-end
$
75,000
$
100,000
Average monthly aggregate balance outstanding
$
343
$
21,557
Weighted average interest rate:
For the year
0.35
%
0.56
%
At December 31
0.35
%
0.73
%
Notes Payable
The following table presents the composition of notes
payable at December 31, 2021 and December
31, 2020.
(In thousands)
December 31, 2021
December 31, 2020
Advances with the FHLB with maturities ranging from
2022 through 2029 paying interest at monthly
fixed rates ranging from 0.39% to 3.18%
(2020 - 0.39% to 4.19%)
$
492,429
$
542,469
Advances with the FRB maturing on 2022 paying interest
at annual fixed rate of 0.35%
[1]
-
1,009
Unsecured senior debt securities maturing on 2023 paying interest
semiannually at a fixed rate of
6.125%, net of debt issuance costs of $2,158 (2020 - $3,426)
297,842
296,574
Junior subordinated deferrable interest debentures (related
to trust preferred securities) maturing on
2034 with fixed interest rates ranging from 6.125% to
6.564% (2020 - 6.125% to 6.70%), net of debt
issuance costs of $342 (2020 - $369)
198,292
384,929
Total notes payable
$
988,563
$
1,224,981
[1] During the second quarter of 2021, the Paycheck Protection
Program Liquidity Facility advance was prepaid.
Notes
payable
included junior
subordinated debentures
issued
by
the
Corporation that
were
associated to
capital
issued
by
the
Popular Capital Trust
I. On November 1,
2021, the Corporation redeemed
all outstanding 6.70%
Cumulative Monthly Income Trust
Preferred
Securities
(the
“Capital
Securities”)
issued
by
the
Popular
Capital
Trust
I
(liquidation
amount
of
$25
per
security
and
amounting
to
approximately
$187
million
(or
approximately
$181
million
after
excluding
Popular’s
participation
in
the
Trust
of
approximately
$6
million)
in
the
aggregate).
The
redemption
price
for
the
Capital
Securities
was
equal
to
$25
per
security
plus
accrued
and
unpaid
distributions up
to
and
excluding
the
redemption date
in
the
amount
of
$0.139583
per
security,
for
a
total
payment
per
security in
the
amount of
$25.139583. Upon
redemption, Popular
delisted the
Capital Securities
of Popular
Capital
Trust I (NASDAQ: BPOPN) from the Nasdaq Global Select
Market.
A breakdown of borrowings by contractual maturities
at December 31, 2021 is included in
the table below.
141
Assets sold under
Short-term
(In thousands)
agreements to repurchase
borrowings
Notes payable
Total
2022
$
91,603
75,000
$
103,148
$
269,751
2023
-
-
341,103
341,103
2024
-
-
91,943
91,943
2025
-
-
139,920
139,920
2026
-
-
74,500
74,500
Later years
-
-
237,949
237,949
Total borrowings
$
91,603
75,000
$
988,563
$
1,155,166
At December
31, 2021
and 2020, the
Corporation had FHLB
borrowing facilities whereby
the Corporation could
borrow up to
$3.0
billion, of which
$0.6 billion and
$0.5 billion, respectively,
were used. In
addition, at December 31,
2021 and 2020,
the Corporation
had placed $1.2
billion and $0.9 billion, respectively, of the available FHLB credit facility
as collateral for municipal letters of credit to
secure deposits.
The FHLB borrowing facilities are
collateralized with loans held-in-portfolio, and
do not have restrictive covenants
or callable features.
Also, at
December 31, 2021,
the Corporation has
a borrowing facility
at the discount
window of the
Federal Reserve Bank
of New
York amounting to $1.3 billion (2020 - $1.4 billion), which remained unused at
December 31, 2021 and December 31, 2020.
142
Note 18 – Trust preferred securities
Statutory trusts established
by the Corporation
(Popular Capital Trust
I, Popular North
America Capital Trust
I and Popular
Capital
Trust
II)
had
issued
trust
preferred
securities
(also
referred
to
as
“capital
securities”)
to
the
public.
The
proceeds
from
such
issuances, together with
the proceeds of
the related
issuances of common
securities of the
trusts (the
“common securities”), were
used by
the trusts to
purchase junior subordinated
deferrable interest debentures
(the “junior subordinated
debentures”) issued by
the Corporation.
The sole
assets of
the trusts
consisted of
the junior
subordinated debentures
of the
Corporation and
the related
accrued interest
receivable. These trusts are not consolidated
by the Corporation pursuant to accounting
principles generally accepted in the United
States of America.
The junior subordinated
debentures are included
by the Corporation
as notes payable
in the Consolidated
Statements of Financial
Condition, while
the common
securities issued
by the
issuer trusts
are included
as debt
securities held-to-maturity.
The common
securities of each trust are wholly-owned, or
indirectly wholly-owned, by the Corporation.
As disclosed
in Note
17, on
November 1,
2021, the
Corporation redeemed all
outstanding trust
preferred securities
issued by
the
Popular
Capital Trust
I
amounting to
approximately $187
million
(or approximately
$181 million
after excluding
the Corporation’s
participation in the Trust of approximately $6 million) in the aggregate.
The following tables presents financial data pertaining
to the different trusts at December 31, 2021 and
2020.
(Dollars in thousands)
December 31, 2021
Popular
North America
Popular
Issuer
Capital Trust I
Capital Trust Il
Capital securities
$
91,651
$
101,023
Distribution rate
6.564
%
6.125
%
Common securities
$
2,835
$
3,125
Junior subordinated debentures aggregate liquidation amount
$
94,486
$
104,148
Stated maturity date
September 2034
December 2034
Reference notes
[1],[3],[5]
[2],[4],[5]
[1] Statutory business trust that is wholly-owned by
PNA and indirectly wholly-owned by the Corporation.
[2] Statutory business trust that is wholly-owned by
the Corporation.
[3] The obligation of PNA under the junior subordinated
debenture and its guarantees of the capital securities under
the trust is fully and unconditionally
guaranteed on a subordinated basis by the Corporation
to the extent set forth in the guarantee agreement.
[4] These capital securities are fully and unconditionally guaranteed
on a subordinated basis by the Corporation to the extent
set forth in the guarantee
agreement.
[5] The Corporation has the right, subject to any required
prior approval from the Federal Reserve, to redeem
after certain dates or upon the
occurrence of certain events mentioned below,
the junior subordinated debentures at a redemption
price equal to 100% of the principal amount, plus
accrued and unpaid interest to the date of redemption. The
maturity of the junior subordinated debentures may
be shortened at the option of the
Corporation prior to their stated maturity dates (i) on or
after the stated optional redemption dates stipulated in
the agreements, in whole at any time or
in part from time to time, or (ii) in whole, but not in part,
at any time within 90 days following the occurrence
and during the continuation of a tax event,
an investment company event or a capital treatment event
as set forth in the indentures relating to the capital securities,
in each case subject to
regulatory approval.
143
(Dollars in thousands)
December 31, 2020
Popular
Popular
North America
Popular
Issuer
Capital Trust I
Capital Trust I
Capital Trust Il
Capital securities
$
181,063
$
91,651
$
101,023
Distribution rate
6.700
%
6.564
%
6.125
%
Common securities
$
5,601
$
2,835
$
3,125
Junior subordinated debentures aggregate liquidation amount
$
186,664
$
94,486
$
104,148
Stated maturity date
November 2033
September 2034
December 2034
Reference notes
[2],[4],[5]
[1],[3],[5]
[2],[4],[5]
[1] Statutory business trust that is wholly-owned by
PNA and indirectly wholly-owned by the Corporation.
[2] Statutory business trust that is wholly-owned by
the Corporation.
[3] The obligation of PNA under the junior subordinated
debenture and its guarantees of the capital securities under
the trust is fully and unconditionally
guaranteed on a subordinated basis by the Corporation
to the extent set forth in the guarantee agreement.
[4] These capital securities are fully and unconditionally guaranteed
on a subordinated basis by the Corporation to the extent
set forth in the applicable
guarantee agreement.
[5] The Corporation has the right, subject to any required
prior approval from the Federal Reserve, to redeem
after certain dates or upon the
occurrence of certain events mentioned below,
the junior subordinated debentures at a redemption
price equal to 100% of the principal amount, plus
accrued and unpaid interest to the date of redemption. The
maturity of the junior subordinated debentures may
be shortened at the option of the
Corporation prior to their stated maturity dates (i) on or
after the stated optional redemption dates stipulated in
the agreements, in whole at any time or
in part from time to time, or (ii) in whole, but not in part,
at any time within 90 days following the occurrence
and during the continuation of a tax event,
an investment company event or a capital treatment event
as set forth in the indentures relating to the capital securities,
in each case subject to
regulatory approval.
At
December
31,
2021,
the
Corporation’s
$193
million
in
trust
preferred
securities
outstanding
do
not
qualify
for
Tier
1
capital
treatment, but instead qualify for Tier 2 capital treatment
compared to $374 million at December 31,
2020.
144
Note 19 − Other liabilities
The caption of other liabilities in the consolidated
statements of financial condition consists of the following
major categories:
(In thousands)
December 31, 2021
December 31, 2020
Accrued expenses
$
308,594
$
235,449
Accrued interest payable
33,227
38,622
Accounts payable
91,804
69,784
Dividends payable
35,937
33,701
Trades payable
13,789
720,212
Liability for GNMA loans sold with an option to repurchase
12,806
57,189
Reserves for loan indemnifications
12,639
24,781
Reserve for operational losses
43,886
41,452
Operating lease liabilities (Note 33)
154,114
152,588
Finance lease liabilities (Note 33)
19,719
22,572
Pension benefit obligation
8,778
35,568
Postretirement benefit obligation
161,988
179,211
Others
70,967
73,560
Total other liabilities
$
968,248
$
1,684,689
145
Note 20 – Stockholders’ equity
The Corporation’s common stock ranks junior to all series
of preferred stock as to dividend rights and / or
as to rights on liquidation,
dissolution
or
winding
up
of
the
Corporation.
Dividends
on
preferred
stock
are
payable
if
declared.
The
Corporation’s
ability
to
declare or
pay dividends
on, or
purchase, redeem
or otherwise
acquire, its
common stock
is subject
to certain
restrictions in
the
event that the
Corporation fails to pay
or set aside
full dividends on the
preferred stock for the
latest dividend period. The
ability of
the Corporation to
pay dividends in
the future is
limited by regulatory
requirements, legal availability of
funds, recent and
projected
financial results, capital levels and liquidity of the Corporation, general
business conditions and other factors deemed relevant by the
Corporation’s Board of Directors.
The Corporation’s
common stock
trades on
the NASDAQ
Stock Market
LLC (the
“NASDAQ”) under
the symbol
BPOP.
The 2003
Series A Preferred Stock are not listed on NASDAQ.
Preferred stocks
The Corporation has
30,000,000 shares of authorized
preferred stock that may
be issued in
one or more
series, and the
shares of
each series shall have such rights and preferences as shall be fixed by the Board of Directors when authorizing the issuance of that
particular series. The Corporation’s shares of preferred stock at
December 31, 2021 consisted of:
●
6.375% non-cumulative monthly income preferred stock, 2003 Series
A, no par value, liquidation
preference value of $25
per share. Holders on record of the 2003 Series A Preferred Stock are entitled to
receive, when, as and if declared by the
Board of
Directors of
the Corporation
or an
authorized committee thereof,
out of
funds legally
available, non-cumulative
cash dividends at the
annual rate per share
of 6.375% of
their liquidation preference value,
or $0.1328125 per share
per
month.
These
shares
of
preferred
stock
are
perpetual,
nonconvertible,
have
no
preferential
rights
to
purchase
any
securities of the
Corporation and are redeemable solely
at the option of
the Corporation with the
consent of the Board
of
Governors
of
the
Federal
Reserve
System.
The
redemption
price
per
share
is
$25.00.
The
shares
of
2003
Series
A
Preferred Stock have no voting
rights, except for certain rights in
instances when the Corporation does not
pay dividends
for a defined period. These
shares are not subject to
any sinking fund requirement. Cash dividends declared
and paid on
the 2003
Series A
Preferred Stock
amounted to
$1.4 million
for the
years ended
December 31,
2021, 2020
and 2019.
Outstanding shares of 2003 Series A Preferred Stock amounted
to 885,726 at December 31, 2021, 2020
and 2019.
On February 24, 2020, the
Corporation redeemed all the outstanding shares of
the 2008 Series B Preferred Stock.
The redemption
price of
the 2008
Series B
Preferred Stock
was $25.00
per share,
plus $0.1375
(representing the
amount of
accrued and
unpaid
dividends for the current monthly dividend period to the redemption
date), for a total payment per share in the amount
of $25.1375.
At December 31, 2019 the Corporation had 1,120,665
outstanding shares of 2008 Series B Preferred
Stock, described as follows:
●
8.25% non-cumulative monthly
income preferred stock,
2008 Series B,
no par value,
liquidation preference value
of $25
per share. The shares of 2008 Series B Preferred Stock were issued in May 2008. Holders of
record of the 2008 Series B
Preferred
Stock
are
entitled
to
receive,
when,
as
and
if
declared
by
the
Board
of
Directors
of
the
Corporation
or
an
authorized committee thereof, out of funds legally available,
non-cumulative cash dividends at the annual
rate per share of
8.25% of their liquidation preferences, or
$0.171875 per share per month. These
shares of preferred stock are
perpetual,
nonconvertible, have no preferential rights to purchase any securities of the Corporation and are redeemable solely at the
option of
the Corporation
with the
consent of
the Board
of Governors of
the Federal
Reserve System beginning
on May
28, 2013. Cash dividends
declared and paid on the
2008 Series B Preferred Stock
amounted to $ 2.3 million
for the year
ended December 31, 2019.
Common stocks
Dividends
During
the
year
2021,
cash
dividends
of
$1.75
(2020
-
$1.60;
2019
-
$1.20)
per
common
share
outstanding
were
declared
amounting to
$142.3 million
(2020 -
$136.6 million;
2019 -
$116.0
million) of
which $35.9
million were
payable to
shareholders of
common
stock
at
December
31,
2021
(2020
-
$33.7
million;
2019
-
$29.0
million).
The
quarterly
dividend
of
$0.45
per
share
declared to shareholders of record as of the close
of business on December 7, 2021, was paid on January
3, 2022. On January 12,
2022, the Corporation announced as part of its capital
plan for 2022, an increase in its
quarterly common stock dividend from $0.45
to $0.55 per share, beginning in the second quarter
of 2022, subject to approval by its Board of Directors. On
February 23, 2022, the
146
Corporation’s Board of
Directors approved a
quarterly cash dividend
of $0.55 per
share on its
outstanding common stock, payable
on April 1, 2022 to shareholders of record at
the close of business on March 15,
2022.
Accelerated share repurchase transaction (“ASR”)
On
May
3,
2021,
the
Corporation
entered
into
a
$350
million
ASR
transaction
with
respect
to
its
common
stock,
which
was
accounted for as a treasury stock transaction. As a result of the receipt of the initial 3,785,831 shares, the Corporation recognized in
stockholders’ equity approximately $280
million in treasury stock
and $70 million
as a reduction
in capital surplus. The
Corporation
completed the
transaction on
September 9,
2021 and
received 828,965
additional shares
of
common stock
and
recognized $61
million in treasury
stock with a
corresponding increase in
capital surplus. In
total, the Corporation
repurchased a total
of 4,614,796
shares at an average price of $75.8430 under
the ASR Agreement.
On January
30, 2020,
the Corporation
entered into
a $500
million ASR
transaction with
respect to
its common
stock, which
was
accounted for as a treasury stock transaction. As a result of the receipt of the initial 7,055,919 shares, the Corporation recognized in
stockholders’ equity
approximately $400 million
in treasury
stock and
$100 million
as a
reduction in
capital surplus.
On March
19,
2020 (the
“early termination
date”), the
dealer counterparty
to the
ASR exercised
its right
to terminate
the ASR
as a
result of
the
trading price of the
Corporation’s common stock falling below
a specified level due to
the effects of the
COVID-19 pandemic on the
global markets. As a result of such early
termination, the final settlement of the ASR, which was
expected to occur during the fourth
quarter
of
2020,
occurred during
the
second
quarter
of
2020.
The
Corporation completed
the
transaction on
May
27,
2020
and
received
4,763,216
additional
shares
of
common
stock
after
the
early
termination
date.
In
total
the
Corporation
repurchased
11,819,135 shares at an average price per share of $42.3043 under the ASR.
During the fourth quarter of 2019, the
Corporation completed a $250 million ASR. In connection therewith, the
Corporation received
an initial delivery of
3,500,000 shares of common stock during
the first quarter of
2019 and received 1,165,607 additional shares
of
common stock during the fourth quarter of 2019. The final number of shares delivered at settlement was based on the average daily
volume
weighted
average
prince
(“VWAP”)
of
its
common
stock,
net
of
a
discount,
during
the
term
of
the
ASR
of
$53.58.
In
connection with the transaction, the Corporation recognized $266 million in treasury stock, offset by $16 million adjustment
to capital
surplus.
Statutory reserve
The
Banking
Act
of
the
Commonwealth of
Puerto
Rico
requires that
a
minimum
of
10%
of
BPPR’s
net
income
for
the
year
be
transferred to
a statutory
reserve account
until such
statutory reserve
equals
the total
of paid-in
capital on
common and
preferred
stock. Any losses
incurred by a
bank must first
be charged to
retained earnings and
then to the
reserve fund. Amounts
credited to
the
reserve
fund
may
not
be
used
to
pay
dividends
without
the
prior
consent
of
the
Puerto
Rico
Commissioner
of
Financial
Institutions.
The
failure
to
maintain
sufficient
statutory
reserves
would
preclude
BPPR
from
paying
dividends.
BPPR’s
statutory
reserve fund
amounted to $786
million at
December 31, 2021
(2020 - $708
million; 2019 -
$659 million). During
2021, $78 million
was transferred to the statutory reserve account (2020 - $49 million, 2019 -
$60 million). BPPR was in compliance with the statutory
reserve requirement in 2021, 2020 and 2019.
147
Note 21 – Regulatory capital requirements
The Corporation,
BPPR and
PB are
subject to
various regulatory
capital requirements
imposed by
the federal
banking agencies.
Failure to meet minimum capital requirements can
lead to certain mandatory and additional
discretionary actions by regulators that,
if undertaken,
could have
a direct
material effect
on the
Corporation’s consolidated financial
statements. Popular,
Inc., BPPR
and
PB are
subject to
Basel III
capital requirements,
including minimum
and well
capitalized regulatory
capital ratios
and compliance
with the standardized approach for determining
risk-weighted assets.
The Basel III Capital
Rules established a Common Equity
Tier I (“CET1”) capital
measure and related regulatory capital ratio
CET1
to risk-weighted assets.
The Basel III Capital Rules provide that a
depository institution will be deemed to be well capitalized if
it maintained a leverage ratio
of at
least 5%, a
CET1 ratio of
at least
6.5%, a Tier
1 risk-based capital
ratio of at
least 8% and
a total risk-based
ratio of
at least
10%.
Management
has
determined
that
at
December
31,
2021
and
2020,
the
Corporation
exceeded
all
capital
adequacy
requirements to which it is subject.
The Corporation
has
been designated
by the
Federal Reserve
Board as
a Financial
Holding Company
(“FHC”) and
is eligible
to
engage in certain financial activities permitted under
the Gramm-Leach-Bliley Act of 1999.
Pursuant to the adoption of the CECL accounting standard on
January 1, 2020, the Corporation elected to use a five-year
transition
period
option
as
permitted
in
the
final
interim
regulatory
capital
rules
effective
March
31,
2020.
The
five-year
transition
period
provision delays for two years the estimated impact of the adoption of the CECL accounting standard on regulatory capital, followed
by a three-year transition period to phase out
the aggregate amount of the capital benefit provided
during the initial two-year delay.
On April 9,
2020, federal banking regulators
issued an interim final
rule to modify
the Basel III
regulatory capital rules applicable
to
banking organizations to allow
those organizations participating in
the Paycheck Protection Program
(“PPP”) established under the
Coronavirus Aid, Relief
and Economic Security
Act (the
“CARES Act”) to
neutralize the regulatory
capital effects
of participating in
the
program.
Specifically,
the
agencies
have
clarified
that
banking
organizations,
including
the
Corporation
and
its
Bank
subsidiaries, are permitted to
assign a zero
percent risk weight to
PPP loans for
purposes of determining risk-weighted
assets and
risk-based
capital
ratios.
Additionally,
in
order
to
facilitate
use
of
the
Paycheck
Protection
Program
Liquidity
Facility
(the
“PPPL
Facility”), which provides Federal Reserve Bank loans to eligible financial institutions such as the Corporation’s Bank subsidiaries to
fund PPP loans, the
agencies further clarified that,
for purposes of determining
leverage ratios, a banking
organization is permitted
to exclude from total average assets PPP loans that have been pledged as collateral for a
PPPL Facility. As of December 31,
2021,
the Corporation has $353 million in PPP loans
and no loans were pledged as collateral for
PPPL Facilities.
At December 31, 2021 and 2020, BPPR and
PB were well-capitalized under the regulatory
framework for prompt corrective action.
The following
tables present
the Corporation’s
risk-based capital
and leverage
ratios at
December 31,
2021 and
2020 under
the
Basel III regulatory guidance.
148
Actual
Capital adequacy minimum
requirement (including
conservation capital buffer) [1]
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
2021
Total Capital (to Risk-Weighted
Assets):
Corporation
$
6,084,105
19.35
%
$
3,301,329
10.500
%
BPPR
4,281,930
18.92
2,376,184
10.500
PB
1,361,911
16.78
852,032
10.500
Common Equity Tier I Capital (to Risk-Weighted
Assets):
Corporation
$
5,476,031
17.42
%
$
2,200,886
7.000
%
BPPR
3,998,102
17.67
1,584,123
7.000
PB
1,309,398
16.14
568,021
7.000
Tier I Capital (to Risk-Weighted Assets):
Corporation
$
5,498,174
17.49
%
$
2,672,504
8.500
%
BPPR
3,998,102
17.67
1,923,577
8.500
PB
1,309,398
16.14
689,740
8.500
Tier I Capital (to Average Assets):
Corporation
$
5,498,174
7.41
%
$
2,969,535
4
%
BPPR
3,998,102
6.24
2,561,003
4
PB
1,309,398
13.44
389,736
4
[1] The conservation capital buffer included for these
ratios is 2.5%, except for the Tier I
to Average Asset ratio for which the buffer
is not applicable
and therefore the capital adequacy minimum of 4% is
presented.
149
Actual
Capital adequacy minimum
requirement (including
conservation capital buffer)
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
2020
Total Capital (to Risk-Weighted
Assets):
Corporation
$
5,773,919
18.81
%
$
3,223,720
10.500
%
BPPR
4,226,887
18.58
2,388,394
10.500
PB
1,283,332
17.34
776,975
10.500
Common Equity Tier I Capital (to Risk-Weighted
Assets):
Corporation
$
4,992,096
16.26
%
$
2,149,146
7.000
%
BPPR
3,940,385
17.32
1,592,262
7.000
PB
1,190,758
16.09
517,983
7.000
Tier I Capital (to Risk-Weighted Assets):
Corporation
$
5,014,239
16.33
%
$
2,609,678
8.500
%
BPPR
3,940,385
17.32
1,933,461
8.500
PB
1,190,758
16.09
628,980
8.500
Tier I Capital (to Average Assets):
Corporation
$
5,014,239
7.80
%
$
2,572,201
4
%
BPPR
3,940,385
7.26
2,169,835
4
PB
1,190,758
12.35
385,685
4
The following table presents the minimum amounts
and ratios for the Corporation’s banks to be
categorized as well-capitalized.
2021
2020
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
Total Capital (to Risk-Weighted
Assets):
BPPR
$
2,263,032
10
%
$
2,274,660
10
%
PB
811,459
10
739,976
10
Common Equity Tier I Capital (to Risk-Weighted
Assets):
BPPR
$
1,470,971
6.5
%
$
1,478,529
6.5
%
PB
527,448
6.5
480,985
6.5
Tier I Capital (to Risk-Weighted Assets):
BPPR
$
1,810,426
8
%
$
1,819,728
8
%
PB
649,167
8
591,981
8
Tier I Capital (to Average Assets):
BPPR
$
3,201,254
5
%
$
2,712,294
5
%
PB
487,171
5
482,106
5
150
Note 22 – Other comprehensive (loss) income
The
following
table
presents
changes
in
accumulated
other
comprehensive
(loss)
income
by
component
for
the
years
ended
December 31, 2021, 2020 and 2019.
Changes in Accumulated Other Comprehensive (Loss) Income
by Component [1]
Years ended December
31,
(In thousands)
2021
2020
2019
Foreign currency translation
Beginning Balance
$
(71,254)
$
(56,783)
$
(49,936)
Other comprehensive income (loss)
3,947
(14,471)
(6,847)
Net change
3,947
(14,471)
(6,847)
Ending balance
$
(67,307)
$
(71,254)
$
(56,783)
Adjustment of pension and
postretirement benefit plans
Beginning Balance
$
(195,056)
$
(202,816)
$
(203,836)
Other comprehensive income (loss) before reclassifications
23,094
(5,645)
(13,671)
Amounts reclassified from accumulated other comprehensive
loss for
amortization of net losses
12,968
13,405
14,691
Net change
36,062
7,760
1,020
Ending balance
$
(158,994)
$
(195,056)
$
(202,816)
Unrealized net holding
(losses) gains on debt
securities
Beginning Balance
$
460,900
$
92,155
$
(173,811)
Other comprehensive (loss) income before reclassifications
(557,002)
368,780
265,950
Amounts reclassified from accumulated other comprehensive income
(loss) for (gains) losses on securities
(18)
(35)
16
Net change
(557,020)
368,745
265,966
Ending balance
$
(96,120)
$
460,900
$
92,155
Unrealized net losses on cash
flow hedges
Beginning Balance
$
(4,599)
$
(2,494)
$
(391)
Reclassification to retained earnings due to cumulative effect
adjustment of accounting change
-
-
(50)
Other comprehensive income (loss) before reclassifications
367
(6,400)
(4,439)
Amounts reclassified from accumulated other comprehensive loss
1,584
4,295
2,386
Net change
1,951
(2,105)
(2,103)
Ending balance
$
(2,648)
$
(4,599)
$
(2,494)
Total
$
(325,069)
$
189,991
$
(169,938)
[1] All amounts presented are net of tax.
151
The following table presents the amounts reclassified out of each component of accumulated other comprehensive (loss) income for
the years ended December 31, 2021,
2020, and 2019.
Reclassifications Out of Accumulated Other Comprehensive
(Loss) Income
Affected Line Item in the
Years ended December
31,
(In thousands)
Consolidated Statements of Operations
2021
2020
2019
Adjustment of pension and postretirement benefit plans
Amortization of net losses
Other operating expenses
$
(20,749)
$
(21,447)
$
(23,508)
Total before tax
(20,749)
(21,447)
(23,508)
Income tax benefit
7,781
8,042
8,817
Total net of tax
$
(12,968)
$
(13,405)
$
(14,691)
Unrealized net holding (losses) gains on debt securities
Realized gain (loss) on sale of debt securities
Net gain (loss) on sale of debt securities
$
23
$
41
$
(20)
Total before tax
23
41
(20)
Income tax (expense) benefit
(5)
(6)
4
Total net of tax
$
18
$
35
$
(16)
Unrealized net losses on cash flow hedges
Forward contracts
Mortgage banking activities
$
(704)
$
(5,559)
$
(3,992)
Interest rate swaps
Other operating income
(1,143)
(820)
110
Total before tax
(1,847)
(6,379)
(3,882)
Income tax benefit
263
2,084
1,496
Total net of tax
$
(1,584)
$
(4,295)
$
(2,386)
Total reclassification
adjustments, net of tax
$
(14,534)
$
(17,665)
$
(17,093)
152
Note 23 – Guarantees
The Corporation
has obligations
upon the
occurrence of
certain events
under financial
guarantees provided
in certain
contractual
agreements as summarized below.
The
Corporation
issues
financial
standby
letters
of
credit
and
has
risk
participation
in
standby
letters
of
credit
issued
by
other
financial institutions, in each case to guarantee the performance of various
customers to third parties. If the customers failed to meet
its financial
or performance
obligation to
the third
party under
the terms
of the
contract, then,
upon their
request, the
Corporation
would be obligated to make the payment to the guaranteed party. At December 31, 2021, the Corporation recorded a liability of $0.2
million (December
31, 2020
- $0.2
million), which
represents the
unamortized balance of
the obligations undertaken
in issuing
the
guarantees under the standby
letters of credit.
In accordance with the
provisions of ASC Topic
460, the Corporation recognizes at
fair value the obligation at
inception of the standby letters
of credit. The fair value
approximates the fee received from the
customer
for issuing such commitments. These fees are deferred and are recognized over the commitment period. The contracted amounts
in
standby letters of
credit outstanding at
December 31, 2021
and 2020, shown
in Note 24,
represent the maximum
potential amount
of future
payments that
the Corporation
could be
required to
make under
the guarantees
in the
event of
nonperformance by
the
customers. These
standby letters
of credit
are used
by the
customers as
a credit
enhancement and
typically expire
without being
drawn
upon.
The
Corporation’s
standby
letters
of
credit
are
generally
secured,
and
in
the
event
of
nonperformance
by
the
customers, the Corporation has rights to the underlying
collateral provided, which normally includes cash,
marketable securities, real
estate, receivables, and others. Management does
not anticipate any material losses related to these instruments.
Also, from
time to
time, the
Corporation securitized mortgage
loans into
guaranteed mortgage-backed securities
subject in
certain
instances, to lifetime
credit recourse on
the loans that
serve as collateral
for the
mortgage-backed securities. The Corporation
has
not sold
any mortgage
loans subject
to credit
recourse since
2009. Also,
from time
to time,
the Corporation
may sell,
in bulk
sale
transactions, residential mortgage loans
and Small Business Administration
(“SBA”) commercial loans subject
to credit recourse
or
to certain representations
and warranties from the
Corporation to the purchaser.
These representations and warranties
may relate,
for example, to borrower creditworthiness, loan documentation, collateral, prepayment and early payment defaults.
The Corporation
may be required to repurchase the loans under
the credit recourse agreements or representation
and warranties.
At
December
31,
2021,
the
Corporation
serviced
$0.7
billion
(December
31,
2020
-
$0.9
billion)
in
residential
mortgage
loans
subject to
credit recourse
provisions, principally loans
associated with
FNMA and
FHLMC residential
mortgage loan
securitization
programs. In the event
of any customer default, pursuant to
the credit recourse provided, the
Corporation is required to repurchase
the
loan
or
reimburse
the
third
party
investor
for
the
incurred
loss.
The
maximum
potential
amount of
future
payments
that
the
Corporation
would
be
required
to
make
under
the
recourse
arrangements
in
the
event
of
nonperformance
by
the
borrowers
is
equivalent
to
the
total
outstanding
balance
of
the
residential
mortgage
loans
serviced
with
recourse
and
interest,
if
applicable.
During 2021,
the Corporation
repurchased approximately $19
million of
unpaid principal
balance in
mortgage loans
subject to
the
credit recourse
provisions (2020
- $161
million, which
included $120
million as
part of
the bulk
loan repurchase
from FNMA
and
FHLMC
during
the
third
quarter
of
2020,
for
which
the
Corporation
recorded
a
release
of
$5.1
million
in
its
reserve
for
credit
recourse).
In
the
event
of
nonperformance by
the
borrower,
the
Corporation has
rights
to
the
underlying
collateral
securing
the
mortgage loan. The Corporation suffers losses on these loans when the proceeds from a foreclosure sale of the
property underlying
a defaulted
mortgage loan
are less
than the
outstanding principal balance
of the
loan plus
any uncollected
interest advanced
and
the costs of
holding and disposing
the related property.
At December 31,
2021, the Corporation’s
liability established to
cover the
estimated credit loss exposure related to
loans sold or serviced with credit
recourse amounted to $12 million (December 31,
2020 -
$22 million).
The following
table shows
the changes
in the
Corporation’s liability
of estimated
losses from
these credit
recourses
agreements, included in the consolidated statements of
financial condition during the years ended December
31, 2021 and 2020.
Years ended December
31,
(In thousands)
2021
2020
Balance as of beginning of period
$
22,484
$
34,862
Impact of adopting CECL
-
(3,831)
Provision (benefit) for recourse liability
(2,948)
(104)
Net charge-offs
(7,736)
(8,443)
Balance as of end of period
$
11,800
$
22,484
153
The estimated losses to be absorbed under the credit
recourse arrangements are recorded as a liability when
the loans are sold and
are updated by
accruing or reversing expense
(categorized in the
line item “Adjustments
(expense) to indemnity reserves
on loans
sold”
in
the
consolidated
statements
of
operations)
throughout
the
life
of
the
loan,
as
necessary,
when
additional
relevant
information becomes available. The
methodology used to
estimate the recourse
liability is a
function of the
recourse arrangements
given and
considers a
variety of
factors, which
include actual
defaults and
historical loss
experience, foreclosure
rate, estimated
future defaults
and the
probability that
a loan
would be
delinquent. Statistical
methods are
used to
estimate the
recourse liability.
Expected loss
rates are
applied to
different loan
segmentations. The
expected loss,
which represents
the amount
expected to
be
lost on a given loan, considers the
probability of default and loss severity.
The probability of default represents the probability that
a
loan in
good standing
would become
90 days
delinquent within
the following
twelve-month period.
Regression analysis
quantifies
the relationship
between the
default event
and loan-specific
characteristics, including
credit scores,
loan-to-value ratios,
and loan
aging, among others.
When the
Corporation sells or
securitizes mortgage loans,
it generally makes
customary representations and
warranties regarding
the characteristics
of the
loans sold. The
Corporation’s mortgage operations
in Puerto
Rico group conforming
mortgage loans into
pools which are
exchanged for FNMA and
GNMA mortgage-backed securities, which are
generally sold to
private investors, or are
sold directly
to FNMA
for cash.
As required
under the
government agency
programs, quality
review procedures
are performed
by
the Corporation to
ensure that asset
guideline qualifications are met.
To
the extent the
loans do not
meet specified characteristics,
the
Corporation may
be required
to
repurchase such
loans or
indemnify for
losses and
bear any
subsequent loss
related to
the
loans. There were no repurchases under BPPR’s
representation and warranty arrangements
during the years ended December 31,
2021
and
2020.
A
substantial
amount
of
these
loans
reinstate
to
performing
status
or
have
mortgage
insurance,
and
thus
the
ultimate losses on the loans are not deemed
significant.
The following table presents the
changes in the Corporation’s
liability for estimated losses associated
with the indemnifications and
representations and warranties related to loans
sold during the years ended December 31,
2021 and 2020.
Years ended December
31,
(In thousands)
2021
2020
Balance as of beginning of period
$
2,297
$
3,212
Provision (benefit) for representation and warranties
(1,458)
(915)
Balance as of end of period
$
839
$
2,297
154
Servicing agreements
relating to
the mortgage-backed
securities
programs of
FNMA and
GNMA, and
to
mortgage loans
sold
or
serviced to
certain other
investors, including
FHLMC, require
the Corporation
to
advance funds
to make
scheduled payments
of
principal, interest, taxes
and insurance,
if such
payments have not
been received
from the
borrowers. At December
31, 2021,
the
Corporation serviced
$12.1 billion
in mortgage
loans for
third-parties, including
the loans
serviced with
credit recourse
(December
31, 2020
- $12.9
billion). The
Corporation generally
recovers funds
advanced pursuant
to these
arrangements from
the mortgage
owner, from
liquidation proceeds when the
mortgage loan is foreclosed
or, in
the case of
FHA/VA loans,
under the applicable FHA
and
VA
insurance
and
guarantees
programs.
However,
in
the
meantime,
the
Corporation
must
absorb
the
cost
of
the
funds
it
advances
during
the
time
the
advance
is
outstanding.
The
Corporation
must
also
bear
the
costs
of
attempting
to
collect
on
delinquent and defaulted mortgage loans. In
addition, if a defaulted loan
is not cured, the mortgage
loan would be canceled as
part
of
the
foreclosure
proceedings
and
the
Corporation would
not
receive
any
future
servicing
income
with
respect
to
that
loan.
At
December
31,
2021,
the
outstanding
balance
of
funds
advanced
by
the
Corporation
under
such
mortgage
loan
servicing
agreements
was approximately
$54 million
(December 31,
2020
- $66
million).
To
the extent
the mortgage
loans underlying
the
Corporation’s servicing portfolio experience increased delinquencies, the
Corporation would be required to dedicate
additional cash
resources
to
comply
with
its
obligation to
advance
funds
as
well as
incur
additional
administrative costs
related
to
increases
in
collection efforts.
Popular,
Inc. Holding
Company (“PIHC”) fully
and unconditionally guarantees
certain borrowing
obligations issued by
certain of
its
100% owned consolidated subsidiaries amounting to $94
million at both December 31,
2021 and December 31, 2020, respectively.
In addition, at both December 31, 2021 and December 31, 2020, PIHC
fully and unconditionally guaranteed on a subordinated basis
$193
million
and
$374
million,
respectively,
of
capital
securities
(trust
preferred
securities)
issued
by
wholly-owned
issuing
trust
entities to the
extent set forth
in the applicable
guarantee agreement. Refer to
Note 18 to
the consolidated financial statements
for
further information on the trust preferred securities.
155
Note 24 – Commitments and contingencies
Off-balance sheet risk
The Corporation
is a
party to
financial instruments
with off-balance
sheet credit
risk in
the normal
course of
business to
meet the
financial needs of its customers. These financial instruments
include loan commitments, letters of credit and standby
letters of credit.
These instruments involve,
to varying
degrees, elements of
credit and
interest rate
risk in
excess of
the amount
recognized in
the
consolidated statements of financial condition.
The
Corporation’s
exposure
to
credit
loss
in
the
event
of
nonperformance
by
the
other
party
to
the
financial
instrument
for
commitments to extend credit, standby
letters of credit and financial
guarantees is represented by the
contractual notional amounts
of those instruments. The
Corporation uses the same
credit policies in
making these commitments and conditional
obligations as it
does for those reflected on the consolidated statements
of financial condition.
Financial instruments with
off-balance sheet credit
risk, whose contract
amounts represent potential credit
risk as of
the end of
the
periods presented were as follows:
(In thousands)
December 31, 2021
December 31, 2020
Commitments to extend credit:
Credit card lines
$
5,382,089
$
5,226,660
Commercial and construction lines of credit
3,830,601
3,805,459
Other consumer unused credit commitments
250,229
257,312
Commercial letters of credit
3,260
1,864
Standby letters of credit
27,848
22,266
Commitments to originate or fund mortgage loans
95,372
96,786
At
December 31,
2021
and
December 31,
2020,
the
Corporation maintained
a
reserve
of
approximately $7.9
million
and
$15.9
million,
respectively,
for
potential
losses
associated
with
unfunded
loan
commitments
related
to
commercial,
construction
and
consumer lines of credit.
Other commitments
At December 31,
2021, and December
31, 2020, the
Corporation also maintained
other non-credit commitments
for approximately
$1.0 million and $1.4 million, respectively, primarily for the acquisition
of other investments.
Business concentration
Since the Corporation’s business activities are concentrated primarily in Puerto Rico, its results of operations and financial condition
are dependent
upon the
general trends
of the
Puerto Rico
economy and,
in particular,
the residential
and commercial
real estate
markets. The concentration
of the Corporation’s
operations in Puerto Rico
exposes it to
greater risk than other
banking companies
with a wider geographic base. Its
asset and revenue composition by geographical area
is presented in Note 37
to the Consolidated
Financial Statements.
Puerto
Rico
has
faced
significant
fiscal
and
economic
challenges
for
over
a
decade.
In
response
to
such
challenges,
the
U.S.
Congress enacted the
Puerto Rico Oversight
Management and Economic Stability
Act (“PROMESA”) in
2016, which, among
other
things,
established a
Fiscal
Oversight
and
Management Board
for
Puerto
Rico
(the
“Oversight Board”)
and
a
framework
for
the
restructuring
of
the
debts
of
the
Commonwealth,
its
instrumentalities
and
municipalities.
The
Commonwealth
and
several
of
its
instrumentalities
have
commenced
debt
restructuring
proceedings
under
PROMESA.
As
of
the
date
of
this
report,
while
municipalities have been designated as covered entities under
PROMESA, no municipality has commenced, or has been authorized
by the Oversight Board to commence, any such debt
restructuring proceeding under PROMESA.
At December 31, 2021, the Corporation’s direct exposure to the
Puerto Rico government and its instrumentalities and municipalities
totaled $367
million, of
which $349 million
were outstanding, compared
to $377
million, which were
fully outstanding at
December
31, 2020. Of
the amount outstanding,
$319 million consists
of loans and
$30 million are
securities ($342 million
and $35 million
at
December 31,
2020). Substantially all
of the
amount outstanding at
December 31,
2021 and December
31, 2020
were obligations
from various
Puerto Rico
municipalities. In
most cases,
these were
“general obligations”
of a
municipality,
to which
the applicable
municipality
has
pledged its
good
faith, credit
and unlimited
taxing power,
or
“special obligations”
of
a municipality,
to
which the
applicable municipality has
pledged other revenues. At
December 31, 2021,
75% of the
Corporation’s exposure to
municipal loans
and
securities
was
concentrated
in
the
municipalities
of
San
Juan,
Guaynabo,
Carolina
and
Bayamón.
On
July
1,
2021,
the
156
Corporation
received
scheduled
principal
payments
amounting
to
$32
million
from
various
obligations
from
Puerto
Rico
municipalities.
The following table details the loans and investments representing the Corporation’s direct
exposure to the Puerto Rico government
according to their maturities as of December 31, 2021:
(In thousands)
Investment
Portfolio
Loans
Total Outstanding
Total Exposure
Central Government
After 1 to 5 years
$
14
$
-
$
14
$
14
After 5 to 10 years
1
-
1
1
After 10 years
38
-
38
38
Total Central
Government
53
-
53
53
Municipalities
Within 1 year
4,240
68,650
72,890
72,890
After 1 to 5 years
14,395
70,962
85,357
103,546
After 5 to 10 years
11,280
123,521
134,801
134,801
After 10 years
230
55,257
55,487
55,487
Total Municipalities
30,145
318,390
348,535
366,724
Total Direct Government
Exposure
$
30,198
$
318,390
$
348,588
$
366,777
In
addition,
at
December
31,
2021,
the
Corporation
had
$275
million
in
loans
insured
or
securities
issued
by
Puerto
Rico
governmental entities
but for
which the
principal source
of repayment
is non-governmental
($317 million
at December
31, 2020).
These
included
$232
million
in
residential
mortgage
loans
insured
by
the
Puerto
Rico
Housing
Finance
Authority
(“HFA”),
a
governmental instrumentality that
has been
designated as a
covered entity under
PROMESA (December 31,
2020 -
$260 million).
These mortgage loans are secured by first mortgages on Puerto Rico residential properties and the HFA
insurance covers losses in
the event
of a
borrower default
and upon
the satisfaction
of certain
other conditions.
The Corporation
also had
at December
31,
2021, $43 million
in bonds issued by
HFA which
are secured by second
mortgage loans on Puerto
Rico residential properties, and
for which HFA
also provides insurance to
cover losses in
the event of
a borrower default
and upon the
satisfaction of certain
other
conditions (December
31, 2020
- $46
million). In
the event
that the
mortgage loans
insured by
HFA
and held
by the
Corporation
directly or those serving as collateral for the HFA
bonds default and the collateral is insufficient to satisfy the
outstanding balance of
these loans, HFA’s
ability to honor its insurance will depend, among other factors, on the financial condition of HFA
at the time such
obligations
become
due
and
payable. The
Corporation does
not consider
the
government guarantee
when
estimating the
credit
losses
associated
with
this
portfolio.
Although
the
Governor
is
currently
authorized
by
local
legislation
to
impose
a
temporary
moratorium on the financial obligations of the HFA, a moratorium on
such obligations has not been imposed as of
the date hereof.
BPPR’s
commercial loan
portfolio also
includes loans
to
private borrowers
who
are service
providers, lessors,
suppliers or
have
other relationships with the government. These
borrowers could be negatively affected by
the Commonwealth’s fiscal crisis and
the
ongoing
Title
III
proceedings
under
PROMESA.
Similarly,
BPPR’s
mortgage
and
consumer
loan
portfolios
include
loans
to
government
employees
and
retirees,
which
could
also
be
negatively
affected
by
fiscal
measures
such
as
employee
layoffs
or
furloughs or reductions in pension benefits.
In addition,
$1.6 billion
of residential
mortgages, $353
million of
Small Business
Administration (“SBA”) loans
under the
Paycheck
Protection Program (“PPP”) and
$67
million commercial loans were
insured or guaranteed
by the U.S.
Government or its agencies
at December 31, 2021 (compared to $1.8 billion,
$1.3 billion and $60 million, respectively, at December 31, 2020).
At December 31,
2021, the Corporation has
operations in the United
States Virgin Islands
(the “USVI”) and
has approximately $70
million
in
direct
exposure to
USVI
government entities
(December 31,
2020
-
$105
million).
The
USVI
has
been
experiencing a
number of
fiscal and
economic challenges
that could
adversely affect
the ability
of its
public corporations
and instrumentalities
to
service their outstanding debt obligations.
At December
31, 2021, the
Corporation has
operations in the
British Virgin
Islands (“BVI”),
which has
been negatively affected
by
the COVID-19
pandemic, particularly
as a
reduction in
the tourism
activity which
accounts for
a significant
portion of
its economy.
Although
the
Corporation
has
no
significant
exposure
to
a
single
borrower
in
the
BVI,
it
has
a
loan
portfolio
amounting
to
157
approximately
$221
million
comprised
of
various
retail
and
commercial
clients,
compared
to
a
loan
portfolio
of
$251
million
at
December 31, 2020, which included a $19 million
loan with the BVI Government that was paid
off during the second quarter of 2021.
Legal Proceedings
The
nature
of
Popular’s
business
ordinarily
generates
claims,
litigation,
investigations,
and
legal
and
administrative
cases
and
proceedings (collectively,
“Legal Proceedings”).
When the
Corporation determines
that
it
has
meritorious
defenses to
the
claims
asserted, it vigorously defends itself. The Corporation will consider the settlement of cases (including cases where it has meritorious
defenses) when, in management’s judgment,
it is in the
best interest of the
Corporation and its stockholders to do
so. On at least
a
quarterly basis, Popular assesses its liabilities and contingencies relating
to outstanding Legal Proceedings utilizing the most current
information
available.
For
matters
where
it
is
probable
that
the
Corporation
will
incur
a
material
loss
and
the
amount
can
be
reasonably estimated,
the Corporation
establishes an
accrual for
the loss.
Once established,
the accrual
is adjusted
on at
least a
quarterly
basis
to
reflect
any
relevant
developments,
as
appropriate.
For
matters
where
a
material
loss
is
not
probable,
or
the
amount of the loss cannot be reasonably estimated,
no accrual is established.
In certain
cases, exposure
to loss
exists in
excess of
the accrual
to the
extent such
loss is
reasonably possible, but
not probable.
Management believes and
estimates that the
range of reasonably
possible losses (with
respect to those
matters where such
limits
may be determined, in excess of amounts
accrued) for current Legal Proceedings ranged from $0 to
approximately $33.9 million as
of
December
31,
2021.
In
certain
cases,
management cannot
reasonably
estimate
the
possible
loss
at
this
time.
Any
estimate
involves significant judgment, given the
varying stages of the
Legal Proceedings (including the fact
that many of them
are currently
in preliminary stages), the
existence of multiple
defendants in several of
the current Legal Proceedings
whose share of liability
has
yet to be determined, the numerous unresolved issues in many
of the Legal Proceedings, and the inherent uncertainty of
the various
potential
outcomes
of
such
Legal
Proceedings.
Accordingly,
management’s
estimate
will
change
from
time-to-time,
and
actual
losses may be more or less than the current estimate.
While the
outcome of
Legal Proceedings
is inherently
uncertain, based
on information
currently available,
advice of
counsel, and
available
insurance
coverage,
management
believes
that
the
amount
it
has
already
accrued
is
adequate
and
any
incremental
liability arising from
the Legal Proceedings
in matters in
which a loss
amount can be
reasonably estimated will not
have a material
adverse effect
on the Corporation’s
consolidated financial position.
However, in
the event
of unexpected future
developments, it is
possible that
the ultimate
resolution of
these matters
in a
reporting period, if
unfavorable, could have
a material
adverse effect
on
the Corporation’s consolidated financial position for that period.
Set forth below is a description of the Corporation’s significant
Legal Proceedings.
BANCO POPULAR DE PUERTO RICO
Hazard Insurance Commission-Related Litigation
Popular,
Inc.,
BPPR
and
Popular
Insurance,
LLC
(the
“Popular
Defendants”)
have
been
named
defendants
in
a
class
action
complaint captioned Pérez Díaz v.
Popular, Inc., et al,
filed before the Court of First
Instance, Arecibo Part. The complaint originally
sought damages and
preliminary and permanent
injunctive relief on
behalf of the
class against the
Popular Defendants, as
well as
Antilles Insurance
Company and
MAPFRE-PRAICO Insurance
Company (the
“Defendant Insurance Companies”).
Plaintiffs allege
that
the
Popular
Defendants
have
been
unjustly
enriched
by
failing
to
reimburse
them
for
commissions
paid
by
the
Defendant
Insurance
Companies to
the
insurance
agent
and/or
mortgagee for
policy
years
when no
claims
were filed
against
their
hazard
insurance policies. They demand the reimbursement to the purported “class”
of an estimated $400 million plus legal interest, for
the
“good experience” commissions
allegedly paid
by the
Defendant Insurance Companies
during the
relevant time
period, as
well as
injunctive relief seeking to
enjoin the Defendant Insurance
Companies from paying commissions to
the insurance agent/mortgagee
and ordering them
to pay
those fees
directly to the
insured. A motion
for dismissal
on the merits
filed by
the Defendant Insurance
Companies was denied with a right to replead following
limited targeted discovery. Each of the Puerto Rico Court of Appeals and the
Puerto Rico Supreme
Court denied the
Popular Defendants’ request
to review the
lower court’s
denial of the
motion to dismiss.
In
December 2017, plaintiffs amended the complaint and, in January
2018, defendants filed an answer thereto. Separately,
in October
2017, the Court entered an
order whereby it broadly certified
the class, after which the Popular
Defendants filed a certiorari petition
before the
Puerto Rico
Court of
Appeals in
relation to
the class
certification, which
the Court
declined to
entertain. In
November
2018 and
in January 2019,
plaintiffs filed
voluntary dismissal petitions
against MAPFRE-PRAICO Insurance
Company and Antilles
Insurance Company, respectively, leaving the Popular Defendants as the sole remaining defendants in the
action.
158
In April
2019, the Court
amended the class
definition to limit
it to
individual homeowners whose
residential units were
subject to
a
mortgage from BPPR
who, in turn,
obtained risk insurance
policies with Antilles
Insurance or MAPFRE
Insurance through Popular
Insurance from
2002 to
2015, and
who did
not make
insurance claims
against said
policies during
their effective
term. The
Court
approved in September 2020 the notice to the class, which
is yet to be published.
On May 7, 2021, the Popular
Defendants filed a motion for summary judgment with
respect to plaintiffs’ unjust enrichment theory of
liability, reserving the
right to file an additional
motion for summary judgment regarding
damages should the court deny
the Popular
Defendant’s pending
motion to
exclude an
economic expert
recently designated
by Plaintiffs.
On May
7, 2021,
Popular,
Inc. and
BPPR also filed
a separate motion for
summary judgment alleging that,
even taking as
true and correct Plaintiffs’
theory of liability,
Popular,
Inc. and
BPPR are
not liable
to Plaintiffs
since they
do not
receive—and are
legally prohibited
from receiving
insurance
commissions. On
September 27, 2021,
the Court
held an
oral hearing
to discuss
the pending
motions for
summary judgment.
At
such hearing, Plaintiffs
notified they did
not object the
dismissal of the
action with prejudice
as to Popular,
Inc. and BPPR,
leaving
Popular Insurance, LLC as
the sole remaining defendant
in the case. On
November 1, 2021, the Court
issued a resolution denying
Popular Insurance, LLC’s
motion for summary
judgment. On December
29, 2021, Popular
Insurance filed a
petition of
certiorari
to
the Puerto Rico
Court of Appeals,
seeking review from
the denial of
the motion for
summary judgment. This
petition of
certiorari
is
now fully briefed and pending resolution.
Mortgage-Related Litigation
BPPR was
named a
defendant in
a putative
class action
captioned Yiries
Josef Saad
Maura v.
Banco Popular,
et al.
on behalf
of
residential
customers
of
the
defendant
banks
who
have
allegedly
been
subject
to
illegal
foreclosures
and/or
loan
modifications
through
their
mortgage
servicers.
Plaintiffs
contend
that
when
they
sought
to
reduce
their
loan
payments,
defendants
failed
to
provide them with such reduced loan payments, instead subjecting them to lengthy loss mitigation processes while filing foreclosure
claims
against
them
in
parallel,
all
in
violation
of
the
Truth
In
Lending
Act
(“TILA”),
the
Real
Estate
Settlement
Procedures
Act
(“RESPA”),
the Equal
Credit Opportunity Act
(“ECOA”), the
Fair Credit
Reporting Act
(“FCRA”), the
Fair Debt
Collection Practices
Act (“FDCPA”)
and other consumer-protection laws
and regulations. Plaintiffs did
not include a specific
amount of damages in
their
complaint. After waiving service
of process, BPPR filed
a motion to
dismiss the complaint
(as did most
co-defendants, separately).
BPPR
further
filed
a
motion
to
oppose
class
certification,
which the
Court
granted
in
September
2018.
In
April
2019,
the
Court
entered an
Opinion and
Order granting
BPPR’s and
several other
defendants’ motions
to dismiss
with prejudice.
Plaintiffs filed
a
Motion for Reconsideration in April 2019, which Popular timely opposed. In September 2019, the Court issued an Amended Opinion
and Order dismissing plaintiffs’ claims against all
defendants, denying the reconsideration requests and other pending motions, and
issuing final
judgment.
In October
2019, plaintiffs
filed a
Motion for
Reconsideration of
the Court’s
Amended Opinion
and Order,
which was denied
in December 2019.
In January
2020, plaintiffs filed
a Notice
of Appeal to
the U.S. Court
of Appeals for
the First
Circuit.
Plaintiffs filed their
appeal brief in
July 2020, Appellees
filed their brief
in September 2020,
and Appellants filed
their reply
brief in January 2021. The appeal is now fully briefed
and pending resolution.
Insufficient Funds and Overdraft Fees Class Actions
In February
2020, BPPR
was served
with a
putative class
action complaint captioned
Soto-Melendez v.
Banco Popular
de Puerto
Rico, filed before the United States District
Court for the District of Puerto Rico.
The complaint alleges breach of contract, breach of
the covenant of good faith and fair dealing
and unjust enrichment due to BPPR’s purported practice of (a)
assessing more than one
insufficient
funds
fee
(“NSF
Fees”)
on
the
same
“item”
or
transaction
and
(b)
charging
both
NSF
Fees
and
overdraft fees
(“OD
Fees”) on
the same
item or transaction,
and is filed
on behalf
of all persons
who during the
applicable statute of
limitations period
were charged NSF
Fees and/or OD
Fees pursuant to
these purported practices.
In April 2020,
BPPR filed a
motion to dismiss
the
case.
On
April
21,
2021,
the
Court
issued
an
order
granting
in
part
and
denying
in
part
BPPR’s
motion
to
dismiss;
the
unjust
enrichment claim
was dismissed,
whereas the
breach of
contract and
covenant of
good faith
and fair
dealing claims
survived the
motion. Discovery is ongoing.
Popular has been also
named as a defendant
on a putative class
action complaint captioned Golden v.
Popular, Inc. filed
in March
2020 before the U.S. District
Court for the Southern District
of New York,
seeking damages, restitution and injunctive
relief. Plaintiff
alleges
breach of
contract, violation
of
the covenant
of
good
faith and
fair
dealing, unjust
enrichment and
violation of
New York
consumer protection law
due to Popular’s
purported practice of
charging OD
Fees on transactions
that, under plaintiffs’
theory,
do
not overdraw the
account. Plaintiff describes
Popular’s purported practice of
charging OD Fees
as “Authorize Positive, Purportedly
159
Settle
Negative”
(“APPSN”)
transactions
and
alleges
that
Popular
assesses
OD
Fees
over
authorized
transactions
for
which
sufficient funds
are held for
settlement.
In August 2020,
Popular filed a
Motion to Dismiss
on several grounds,
including failure to
state a
claim against Popular,
Inc. and improper
venue. In October
2020, Plaintiffs filed
a Notice of
Voluntary Dismissal
before the
U.S. District Court for the Southern District of New York and, simultaneously, filed an identical complaint in the U.S. District Court for
the
District
of
the
Virgin
Islands
against
Popular,
Inc.,
Popular
Bank
and
BPPR.
In
November
2020,
Plaintiffs
filed
a
Notice
of
Voluntary
Dismissal against
Popular,
Inc.
and Popular
Bank
following a
Motion to
Dismiss filed
on behalf
of
such
entities which
argued failure
to state
a claim
and lack
of minimum
contacts of
such parties
with the
U.S.V.I.
district court
jurisdiction. BPPR,
the
only defendant remaining in the case, was served
with process in November 2020 and filed
a Motion to Dismiss in January 2021.
On October
4, 2021,
the District
Court, notwithstanding
that BPPR’s
Motion to
Dismiss remains
pending resolution,
held an
initial
scheduling
conference
and,
thereafter,
issued
a
trial
management
order
where
it
scheduled
the
deadline
for
all
discovery
for
November 1, 2022, the deadline for the filing of a
joint pre-trial brief for June 1, 2023, and
the trial for June 20 to June 30, 2023.
On January
31, 2022,
Popular was
also named
as a
defendant on a
putative class
action complaint captioned
Lipsett v.
Popular,
Inc. d/b/a Banco Popular, filed before the U.S. District Court for the Southern District
of New York, seeking damages, restitution and
injunctive relief. Similar to the claims set forth in the
aforementioned
Golden
complaint, Plaintiff alleges breach of contract, including
violations of the covenant of good faith and
fair dealing, as a result of Popular’s purported practice of
charging OD Fees for APPSN
transactions.
The complaint further alleges
that Popular assesses OD
Fees over authorized transactions
for which sufficient
funds
are held for settlement. Popular waived service of process
and expects to file a responsive allegation
by April 4, 2022.
POPULAR BANK
Employment-Related Litigation
In July 2019, Popular Bank (“PB”) was served in a putative class complaint in which it was named as a defendant along with
five (5)
current PB employees (collectively,
the “AB Defendants”),
captioned Aileen Betances, et
al. v.
Popular Bank, et al.,
filed before the
Supreme Court of the State of New
York (the
“AB Action”).
The complaint, filed by five (5) current and former
PB employees, seeks
to
recover damages
for the
AB
Defendants' alleged
violation of
local and
state sexual
harassment, discrimination
and retaliation
laws. Additionally, in July 2019, PB was served in a putative class complaint in which it was named as a defendant along with six (6)
current PB
employees (collectively,
the “DR
Defendants”), captioned Damian
Reyes, et
al. v.
Popular Bank,
et al.,
filed before the
Supreme Court
of the
State of
New York
(the “DR
Action”). The
DR Action,
filed by
three (3)
current and
former PB
employees,
seeks to recover damages for the DR Defendants’
alleged violation of local and state discrimination and retaliation laws. Plaintiffs in
both complaints are represented by the same legal counsel, and five
of the six named individual defendants in the DR Action are
the
same named
individual
defendants in
the AB
Action. Both
complaints are
related,
among other
things, to
allegations of
purported
sexual harassment and/or misconduct by a former PB employee
as well as PB’s actions in connection thereto and seek no less than
$100 million
in damages
each. In October
2019, PB
and the
other defendants filed
several Motions
to Dismiss.
Plaintiffs opposed
the motions
in December
2019 and
PB and
the other
defendants replied
in January
2020. In
July 2020,
a hearing
to discuss
the
motions
to
dismiss filed
by
PB
in
both
actions
was
held, at
which
the
Court
dismissed one
of
the causes
of
action
included
by
plaintiffs in the AB Action.
In
June
2021,
the
Court
in the
AB
Action
entered a
judgment dismissing
all
claims
except those
regarding
the
principal
plaintiff
Aileen Betances against PB for retaliation, and Betances’ claim against
three (3) other AB Defendants for aiding/abetting the alleged
retaliation. Also, in July
2021, the Court
in the DR
action entered a partial
judgment dismissing all claims
against the individual DR
Defendants,
with
all
surviving
claims
being
against
PB
and
limited
to
local
retaliation
claims
and
local
and
state
discrimination
claims. Plaintiffs in
both the AB
Action and the
DR Action have
filed notices of
appeal of both
judgments. On August
11,
2021, PB
and the remaining
AB Defendants in
the AB Action,
as well as
PB in the
DR Action, answered
the respective complaints
as to the
surviving claims. Discovery is ongoing.
POPULAR SECURITIES
Puerto Rico
Bonds and Closed-End Investment Funds
The volatility
in prices
and declines
in value
that Puerto
Rico municipal
bonds and
closed-end investment
companies that
invest
primarily in Puerto Rico municipal bonds have experienced since August 2013 have led to regulatory inquiries, customer complaints
and
arbitrations
for
most
broker-dealers
in
Puerto
Rico,
including
Popular
Securities.
Popular
Securities
has
received
customer
complaints
and,
as
of
December 31,
2021,
was named
as
a
respondent (among
other
broker-dealers) in
65
pending arbitration
160
proceedings with
initial claimed
amounts of
approximately $62
million
in
the
aggregate. While
Popular
Securities
believes
it
has
meritorious defenses to the claims asserted in these proceedings, it
has often determined that it is in its best interest to settle certain
claims
rather
than
expend
the
money
and
resources required
to
see
such
cases
to
completion.
The
Puerto
Rico
Government’s
defaults and non-payment of its
various debt obligations, as well
as the Commonwealth’s and the
Financial Oversight Management
Board’s
(the
“Oversight
Board”)
decision
to
pursue
restructurings
under
Title
III
and
Title
VI
of
PROMESA,
have
impacted
the
number of customer complaints (and
claimed damages) filed against Popular
Securities concerning Puerto Rico bonds
and closed-
end investment
companies that
invest primarily
in Puerto
Rico bonds.
An
adverse result
in the
arbitration proceedings
described
above, or a significant increase in customer complaints,
could have a material adverse effect on Popular.
On
October
28,
2021,
a
panel
in
an
arbitration
proceeding
with
claimed
damages
arising
from
trading
losses
of
approximately
$30 million ordered
Popular Securities
to
pay claimants
approximately $6.9
million in
compensatory damages
and expenses.
On
November 4,
2021, the claimants
in such
arbitration proceeding filed
a complaint
captioned Trinidad
García v.
Popular, Inc.
et. al.
before
the
United
States
District
Court
for
the
District
of
Puerto
Rico
against
Popular,
Inc.,
BPPR
and
Popular
Securities
(the
“Popular
Defendants”)
alleging,
inter
alia,
that
they
sustained
monetary
losses
as
a
result
of
the
Popular
Defendants’
anticompetitive,
unfair,
and
predatory
practices,
including
tying
arrangements
prohibited
by
the
Bank
Holding
Company
Act.
Plaintiffs
claim
that
the
Popular
Defendants
caused
them
to
enter
a
tying
arrangement scheme
whereby BPPR
allegedly
would
extend secured
credit lines
to the
Plaintiffs on
the conditions
that they
transfer their
portfolios to
Popular Securities
to be
used as
pledged
collateral
and
obtain
additional
investment
services
and
products
solely
from
Popular
Securities,
not
from
any
of
its
competitors. Plaintiffs
also
invoke federal
court’s
supplemental jurisdiction
to
allege several
state law
claims
against the
Popular
Defendants,
including
contractual
fault,
fault
in
causing
losses
in
value
of
the
pledge
collateral,
breach
of
contract,
request
for
specific compliance
thereof, fault
in pre-contractual negotiations,
emotional distress, and
punitive damages. On
January 27,
2022,
Plaintiffs filed an Amended Complaint and the Popular Defendants were served with summons on that same date. Plaintiffs demand
no
less than
$390
million
in
damages,
plus
an
award for
costs
and
attorney's fees.
The
Popular
Defendants expect
to
file
their
response by March 21, 2022.
PROMESA Title III Proceedings
In
2017,
the
Oversight
Board
engaged
the
law
firm
of
Kobre &
Kim
to
carry
out
an
independent
investigation
on
behalf
of
the
Oversight Board
regarding, among
other things,
the causes
of the
Puerto Rico
financial crisis.
Popular,
Inc.,
BPPR and
Popular
Securities
(collectively,
the
“Popular Companies”)
were
served
by,
and
cooperated
with,
the
Oversight
Board
in
connection with
requests
for
the
preservation
and
voluntary
production
of
certain
documents
and
witnesses
with
respect
to
Kobre
&
Kim’s
independent investigation.
On August 20, 2018, Kobre & Kim
issued its Final Report, which
contained various references to the Popular
Companies, including
an allegation that Popular Securities participated as an underwriter in the
Commonwealth’s 2014 issuance of government obligation
bonds
notwithstanding
having
allegedly
advised
against
it.
The
report
noted
that
such
allegation
could
give
rise
to
an
unjust
enrichment claim against the Corporation and could also serve as a basis to equitably subordinate claims filed by the Corporation in
the Title III proceeding to other third-party claims.
After the publication of the Final Report, the Oversight Board created a special claims committee (“SCC”) and, before the end of the
applicable two-year statute of limitations for the filing of such claims
pursuant to the U.S. Bankruptcy Code, the SCC, along
with the
Commonwealth’s
Unsecured Creditors’
Committee (“UCC”),
filed
various
avoidance, fraudulent
transfer and
other claims
against
third parties, including government vendors
and financial institutions and other professionals involved
in bond issuances then being
challenged as
invalid by the
SCC and
the UCC.
The Popular
Companies, the SCC
and the
UCC entered into
a tolling
agreement
with respect to potential claims the SCC and the UCC,
on behalf of the Commonwealth or other Title III
debtors, may assert against
the Popular Companies for the avoidance and recovery of payments and/or transfers made to the Popular Companies or as a result
of any
role of the
Popular Companies in
the offering
of the
aforementioned challenged bond
issuances.
On January 12,
2022, the
SCC, the
UCC and
the Popular
Companies executed
a settlement
agreement as
to potential
claims related
to the
avoidance and
recovery of payments
and/or transfers made
to the Popular
Companies. The tolling
agreement as to
potential claims the
SCC and
the
UCC may
assert against
the Popular
Companies as
a result
of
any role
of the
Popular Companies
in the
offering
of certain
challenged bond issuances remains in effect.
161
Note 25 – Non-consolidated variable interest
entities
The Corporation
is involved
with three
statutory trusts
which it
established to
issue trust
preferred securities
to the
public. These
trusts
are
deemed to
be
variable
interest
entities (“VIEs”)
since
the
equity
investors at
risk
have no
substantial decision-making
rights. The
Corporation does
not hold
any variable
interest in
the trusts,
and therefore,
cannot be
the trusts’
primary beneficiary.
Furthermore, the Corporation
concluded that it
did not hold
a controlling financial
interest in these
trusts since the
decisions of the
trusts
are
predetermined
through
the
trust
documents
and
the
guarantee
of
the
trust
preferred
securities
is
irrelevant
since
in
substance the sponsor is guaranteeing its own debt.
Also, the
Corporation is
involved with
various special
purpose entities
mainly in
guaranteed mortgage
securitization transactions,
including GNMA and FNMA. These special
purpose entities are deemed to be
VIEs since they lack equity investments
at risk.
The
Corporation’s
continuing
involvement
in
these
guaranteed
loan
securitizations
includes
owning
certain
beneficial
interests
in
the
form of
securities as well
as the servicing
rights retained. The
Corporation is not
required to provide
additional financial support
to
any of
the variable
interest entities
to which
it has
transferred the
financial assets.
The mortgage-backed
securities, to
the extent
retained,
are
classified
in
the
Corporation’s
Consolidated
Statements
of
Financial
Condition
as
available-for-sale
or
trading
securities. The Corporation concluded that, essentially, these entities (FNMA and GNMA)
control the design of their respective VIEs,
dictate the quality and nature of
the collateral, require the underlying insurance, set the
servicing standards via the servicing guides
and can
change them
at will,
and can
remove a
primary servicer
with cause,
and without
cause in
the case
of FNMA.
Moreover,
through
their
guarantee
obligations, agencies
(FNMA
and
GNMA) have
the
obligation to
absorb
losses
that
could
be
potentially
significant to the VIE.
The
Corporation
holds
variable
interests
in
these
VIEs
in
the
form
of
agency
mortgage-backed
securities
and
collateralized
mortgage obligations, including those securities originated by the Corporation and those acquired from
third parties. Additionally, the
Corporation holds agency mortgage-backed securities
and agency collateralized mortgage obligations
issued by third party
VIEs in
which
it
has
no
other
form
of
continuing
involvement.
Refer
to
Note
28
to
the
Consolidated
Financial
Statements
for
additional
information
on
the
debt
securities
outstanding
at
December
31,
2021
and
2020,
which
are
classified
as
available-for-sale
and
trading securities
in the
Corporation’s Consolidated
Statements of
Financial Condition.
In addition,
the Corporation
holds variable
interests
in
the
form
of
servicing fees,
since
it
retains
the
right
to
service
the
transferred
loans
in
those
government-sponsored
special purpose entities (“SPEs”) and
may also purchase the
right to service loans
in other government-sponsored SPEs that
were
transferred to those SPEs by a third-party.
The following
table presents
the carrying
amount and
classification of
the assets
related to
the Corporation’s
variable interests
in
non-consolidated VIEs
and the
maximum exposure
to loss
as a
result of
the Corporation’s
involvement as
servicer of
GNMA and
FNMA loans at December 31, 2021 and 2020.
162
(In thousands)
December 31, 2021
December 31, 2020
Assets
Servicing assets:
Mortgage servicing rights
$
94,464
$
90,273
Total servicing
assets
$
94,464
$
90,273
Other assets:
Servicing advances
$
7,968
$
8,769
Total other assets
$
7,968
$
8,769
Total assets
$
102,432
$
99,042
Maximum exposure to loss
$
102,432
$
99,042
The size of
the non-consolidated VIEs,
in which the
Corporation has a
variable interest in
the form
of servicing fees,
measured as
the total unpaid principal balance of the loans,
amounted to $8.3 billion at December 31, 2021
(December 31, 2020 - $8.7 billion).
The Corporation
determined that
the maximum
exposure to
loss includes
the fair
value of
the MSRs
and the
assumption that
the
servicing advances
at December 31,
2021 and
2020 will
not be
recovered. The agency
debt securities are
not included as
part of
the maximum exposure to loss since they are guaranteed
by the related agencies.
ASU 2009-17 requires that an ongoing primary beneficiary assessment should be made to determine whether the Corporation is the
primary beneficiary of any of the VIEs it is
involved with. The conclusion on the assessment of these non-consolidated VIEs has not
changed
since
their
initial
evaluation.
The
Corporation
concluded
that
it
is
still
not
the
primary
beneficiary
of
these
VIEs,
and
therefore, these VIEs are not required to be consolidated
in the Corporation’s financial statements at December 31, 2021.
163
Note 26 – Derivative instruments and hedging
activities
The
use
of
derivatives
is
incorporated
as
part
of
the
Corporation’s
overall
interest
rate
risk
management
strategy
to
minimize
significant unplanned fluctuations in
earnings and cash flows
that are caused
by interest rate volatility.
The Corporation’s goal
is to
manage interest
rate sensitivity by
modifying the repricing
or maturity characteristics
of certain
balance sheet assets
and liabilities
so
that the
net interest
income is
not materially
affected
by movements
in interest
rates. The
Corporation uses
derivatives in
its
trading activities
to facilitate
customer transactions,
and as
a means
of risk
management. As
a result
of interest
rate fluctuations,
hedged fixed and
variable interest rate
assets and liabilities
will appreciate or
depreciate in fair
value. The effect
of this
unrealized
appreciation or depreciation is expected to be
substantially offset by the Corporation’s
gains or losses on the derivative instruments
that are linked to these hedged assets and liabilities. As a matter of policy,
the Corporation does not use highly leveraged derivative
instruments for interest rate risk management.
The credit
risk attributed to
the counterparty’s
nonperformance risk is
incorporated in the
fair value
of the
derivatives. Additionally,
the
fair value
of
the
Corporation’s own
credit
standing is
considered in
the fair
value
of the
derivative liabilities.
During the
year
ended December
31, 2021, inclusion
of the
credit risk
in the
fair value
of the
derivatives resulted in
a loss
of $0.3
million from the
Corporation’s credit
standing adjustment
and a
loss of
$0.1 million
from the
counterparty’s
nonperformance risk.
During the
years
ended
December
31,
2020
and
2019,
the
Corporation recognized
a
gain
of
$0.7
million
and
$0.2 million,
respectively,
from
the
Corporation’s credit standing adjustment.
The Corporation’s derivatives are subject to agreements which allow a right of set-off with each respective counterparty.
In an event
of default each party has a
right of set-off against the
other party for amounts owed in the
related agreement and any other amount
or obligation owed in respect of any
other agreement or transaction between them. Pursuant to the Corporation’s
accounting policy,
the
fair
value
of
derivatives
is
not
offset
with
the
fair
value
of
other
derivatives
held
with
the
same
counterparty
even
if
these
agreements allow
a right
of set-off.
In
addition,
the fair
value of
derivatives is
not offset
with the
amounts for
the right
to
reclaim
financial collateral or the obligation to return financial
collateral.
Financial
instruments
designated as
cash
flow
hedges
or
non-hedging derivatives
outstanding at
December 31,
2021
and
2020
were as follows:
164
Notional amount
Derivative assets
Derivative liabilities
Statement of
Fair value at
Statement of
Fair value at
At December 31,
condition
December 31,
condition
December 31,
(In thousands)
2021
2020
classification
2021
2020
classification
2021
2020
Derivatives designated as
hedging instruments:
Forward contracts
$
87,900
$
188,800
Other assets
$
18
$
-
Other liabilities
$
125
$
1,267
Total derivatives designated
as hedging instruments
$
87,900
$
188,800
$
18
$
-
$
125
$
1,267
Derivatives not designated
as hedging instruments:
Interest rate caps
$
27,866
$
29,248
Other assets
$
-
$
-
Other liabilities
$
-
$
-
Indexed options on deposits
79,114
69,054
Other assets
26,075
20,785
-
-
-
Bifurcated embedded options
72,352
63,121
-
-
-
Interest
bearing
deposits
22,753
17,658
Total derivatives not
designated as
hedging instruments
$
179,332
$
161,423
$
26,075
$
20,785
$
22,753
$
17,658
Total derivative assets
and liabilities
$
267,232
$
350,223
$
26,093
$
20,785
$
22,878
$
18,925
Cash Flow Hedges
The Corporation
utilizes forward
contracts to
hedge the
sale
of mortgage-backed
securities with
duration terms
over one
month.
Interest rate forwards are contracts for the delayed delivery of securities,
which the seller agrees to deliver on a specified future date
at
a specified
price or
yield.
These forward
contracts are
hedging a
forecasted transaction
and thus
qualify for
cash flow
hedge
accounting. Changes in the fair value of the derivatives are recorded in other comprehensive (loss)
income.
The amount included in
accumulated other comprehensive (loss) income corresponding to these forward contracts is expected to be reclassified to earnings
in the next twelve months. These contracts have
a maximum remaining maturity of 76 days at
December 31, 2021.
For cash flow hedges,
net gains (losses) on
derivative contracts that are
reclassified from accumulated other comprehensive
(loss)
income to current period
earnings are included in the
line item in which the
hedged item is recorded and
during the period in
which
the forecasted transaction impacts earnings, as
presented in the tables below.
Year ended December
31, 2021
(In thousands)
Amount of net gain (loss)
recognized in OCI on
derivatives (effective
portion)
Classification in the statement of
operations of the net gain (loss)
reclassified from AOCI into income
(effective portion and ineffective
portion)
Amount of net gain
(loss) reclassified from
AOCI into income
(effective portion)
Amount of net gain
(loss) recognized in
income on derivatives
(ineffective portion)
Forward contracts
$
456
Mortgage banking activities
$
(704)
$
-
Total
$
456
$
(704)
$
-
165
Year ended December
31, 2020
(In thousands)
Amount of net gain (loss)
recognized in OCI on
derivatives (effective
portion)
Classification in the statement of
operations of the net gain (loss)
reclassified from AOCI into income
(effective portion and ineffective
portion)
Amount of net gain
(loss) reclassified from
AOCI into income
(effective portion)
Amount of net gain
(loss) recognized in
income on derivatives
(ineffective portion)
Forward contracts
$
(6,594)
Mortgage banking activities
$
(5,559)
$
-
Total
$
(6,594)
$
(5,559)
$
-
Year ended December
31, 2019
(In thousands)
Amount of net gain (loss)
recognized in OCI on
derivatives (effective
portion)
Classification in the statement of
operations of the net gain (loss)
reclassified from AOCI into income
(effective portion and ineffective
portion)
Amount of net gain
(loss) reclassified from
AOCI into income
(effective portion)
Amount of net gain
(loss) recognized in
income on derivatives
(ineffective portion)
Forward contracts
$
(3,502)
Mortgage banking activities
$
(3,992)
$
-
Total
$
(3,502)
$
(3,992)
$
-
Fair Value Hedges
At December 31, 2021 and 2020, there were
no derivatives designated as fair value hedges.
Non-Hedging Activities
For the year ended
December 31, 2021, the
Corporation recognized a gain
of $2.3 million (2020
– loss of $3.0
million; 2019 – loss
of $ 1.2 million) related to its non-hedging
derivatives, as detailed in the table below.
Amount of Net Gain (Loss) Recognized in Income on Derivatives
Year ended
Year ended
Year ended
Classification of Net Gain (Loss)
December 31,
December 31,
December 31,
(In thousands)
Recognized in Income on Derivatives
2021
2020
2019
Forward contracts
Mortgage banking activities
$
2,027
$
(5,027)
$
(2,254)
Interest rate caps
Other operating income
-
-
(5)
Indexed options on deposits
Interest expense
6,824
5,462
7,898
Bifurcated embedded options
Interest expense
(6,538)
(3,417)
(6,883)
Total
$
2,313
$
(2,982)
$
(1,244)
Forward Contracts
The Corporation has forward contracts to sell
mortgage-backed securities, which are accounted for as trading
derivatives. Changes
in their fair value are recognized in mortgage banking
activities.
Interest Rate Caps
The
Corporation enters
into
interest rate
caps as
an intermediary
on
behalf of
its customers
and simultaneously
takes offsetting
positions under the same terms and conditions, thus minimizing
its market and credit risks.
Indexed and Embedded Options
The Corporation offers certain customers’ deposits whose
return are tied to the performance of the Standard
and Poor’s (“S&P 500”)
stock
market
indexes,
and
other
deposits
whose
returns
are
tied
to
other
stock
market
indexes
or
other
equity
securities
performance. The
Corporation bifurcated the
related options embedded
within these
customers’ deposits from
the host
contract in
accordance with
ASC Subtopic
815-15. In
order to
limit the
Corporation’s exposure
to changes
in these
indexes, the
Corporation
purchases indexed options which
returns are tied to
the same indexes from
major broker dealer companies
in the over the
counter
market. Accordingly, the embedded options and the related indexed options are marked-to-market
through earnings.
166
Note 27 – Related party transactions
The Corporation grants loans to its directors, executive officers, including
certain related individuals or organizations, and affiliates in
the ordinary course of business. The activity and
balance of these loans were as follows:
(In thousands)
Balance at December 31, 2019
$
133,054
New loans
8,360
Payments
(16,839)
Other changes, including existing loans to new related parties
316
Balance at December 31, 2020
$
124,891
New loans
3,182
Payments
(28,208)
Other changes, including existing loans to new related parties
2,714
Balance at December 31, 2021
$
102,579
New loans and payments include disbursements and collections
from existing lines of credit.
The Corporation has had loan transactions with the Corporation’s
directors, executive officers, including certain related individuals
or
organizations, and affiliates, and
proposes to continue such
transactions in the ordinary
course of its business,
on substantially the
same terms, including interest rates and collateral, as those prevailing for comparable loan transactions with third parties. Except as
discussed
below,
the extensions
of
credit
have not
involved and
do not
currently
involve more
than normal
risks of
collection or
present
other
unfavorable
features.
In
addition,
during
2020,
in
response
to
the
coronavirus
(COVID-19)
pandemic,
BPPR
implemented loan payment moratorium programs with respect to
consumer and commercial loans which were made
available to all
qualifying
customers
to
provide
financial
relief
during
the
pandemic.
Certain
Related
Parties
participated
in
this
moratorium
programs under the same terms and conditions
offered to other unrelated third parties.
In 2010,
as part
of the
Westernbank FDIC
assisted transaction,
BPPR acquired
five commercial
loans made
to entities
that were
wholly
owned
by
one
brother-in-law
of
a
director
of
the
Corporation.
The
loans
were
secured
by
real
estate
and
personally
guaranteed
by
the
director’s
brother-in-law.
The
loans
were
originated
by
Westernbank
between
2001
and
2005
and
had
an
aggregate outstanding principal
balance of approximately
$33.5 million when
they were acquired
by BPPR in
2010. Between 2011
and 2014,
the loans
were restructured to
consist of
(i) five
notes with
an aggregate
outstanding principal
balance of
$19.8 million
with
a
6%
annual interest
rate
(“Notes A”)
and
(ii)
five
notes
with
an
aggregate outstanding
balance
of
$13.5
million
with a
1%
annual interest
rate, to
be paid
upon maturity
(“Notes B”).
The restructured
notes had
an original
maturity of
September 30,
2016
and, thereafter,
various interim renewals were
approved to allow
for the re-negotiation of
a longer-term extension. The
most recent
of these interim renewals
were approved on February,
April and August 2020.
These renewals, among other things,
decreased the
interest
rate
applicable
to
the
Notes
A
to
4.25%
and
maintained
the
Notes
B
at
an
interest
rate
of
1%.
During
2020,
the
Audit
Committee also authorized two separate 90-day principal and interest moratoriums, from March to May and from June to August, as
financial
relief in
response to
the coronavirus
(COVID-19) pandemic.
On September
2020, in
accordance with
the Related
Party
Transaction Policy and after being approved by the Audit Committee, the
maturity date of the credit facilities was extended until April
2022, fixing the
interest rate at 4.25%
for Notes A
and at 1% for
Notes B during such
term. The aggregate outstanding
balance on
the loans as of December 31, 2021
was approximately $30.6 million, of which approximately $17.1 million corresponded to Notes A
and $13.5 million to Notes B.
In April 2010, in
connection with the acquisition of
the Westernbank assets from
the FDIC, as receiver,
BPPR acquired a term loan
to a
corporate borrower
partially owned
by an
investment corporation
in which
the Corporation’s
Chairman, at
that time
the Chief
Executive Officer, as well as certain of
his family members, are the owners. In addition, the Chairman’s sister and brother-in-law are
owners of an
entity that holds
an ownership interest
in the borrower.
At the time
the loan was
acquired by BPPR,
it had an
unpaid
principal balance of $40.2 million. In
May 2017, this loan was sold by
BPPR to Popular, Inc.,
holding company (“PIHC”). At the time
of sale, the loan had an unpaid principal balance of $37.9
million. PIHC paid $37.9 million to BPPR for the loan,
of which $6.0 million
was recognized by BPPR as a capital contribution representing the difference
between the fair value and the book value of the
loan
at the
time of
transfer.
Immediately upon
being acquired
by PIHC,
the loan’s
maturity was
extended by
90 days
(under the
same
terms as
originally contracted) to
provide the PIHC
additional time to
evaluate a
refinancing or long-term
extension of the
loan.
In
167
August 2017, the credit
facility was refinanced with
a stated maturity in
February 2019.
During 2017, the facility
was subject to the
loan payment moratorium offered as part of the hurricane relief efforts. As such,
interest payments amounting to approximately $0.5
million
were
deferred
and
capitalized
as
part
of
the
loan
balance.
In
February
2019,
the
Audit
Committee
approved,
under
the
Related Party Policy, a 36-month renewal of the loan at an interest rate of 5.75% and a 30-year
amortization schedule. In
December
2021, the Corporation refinanced the then-current $36.0 million
principal balance of the loan at
an interest rate of 4.50%, a
maturity
date of December 2026
and a 20-year amortization schedule.
As of December 31,
2021, the unpaid principal
balance amounted to
$34.8 million.
In April
2010, a private
trust and a
sister-in-law of a
director, as
co-borrowers, obtained a
$0.2 million mortgage
loan from Popular
Mortgage, then a subsidiary of BPPR, secured by a residential property. The loan was a fully amortizing 40-year mortgage loan with
a
fixed
annual
rate
of
2.99%
for
the
first
5
years,
and
thereafter
an
annual
rate
of
5.875%.
From
March
to
August
2020,
the
borrowers participated in the COVID-19 forbearance program offered by BPPR to
qualifying mortgage customers in response to the
coronavirus (COVID-19) pandemic. After the expiration of such moratorium period, borrowers did not make any payments under the
loan during the months of September and October 2020,
thereby defaulting on the indebtedness. On November 2020,
the borrowers
requested and
were granted,
an additional
3-month loan
payment moratorium
pursuant to
BPPR’s ordinary
course loss
mitigation
program, which expired
in January 2021.
Since the expiration
of this 3-month
loan payment forbearance the
borrowers have failed
to make
the monthly
loan payments
when due. The
outstanding balance of
the loan
as of
December 31,
2021 was
approximately
$0.2 million. BPPR is currently evaluating borrowers’ application
in connection with this loan under BPPR’s loss mitigation
program.
At
December
31,
2021,
the
Corporation’s
banking
subsidiaries
held
deposits
from
related
parties,
excluding
EVERTEC,
Inc.
(“EVERTEC”) amounting to approximately $700 million (2020
- $851 million).
From
time
to
time,
the
Corporation,
in
the
ordinary
course
of
business,
obtains
services
from
related
parties
that
have
some
association with the
Corporation. Management believes the
terms of such
arrangements are consistent with
arrangements entered
into with independent third parties.
For
the
year
ended
December
31,
2021,
the
Corporation made
contributions
of
approximately
$4.5
million
to
Fundación
Banco
Popular and
Popular Bank
Foundation, which
are not-for-profit
corporations dedicated
to philanthropic
work (2020
- $1.6
million).
The Corporation also provided
human and operational resources
to support the
activities of the Fundación
Banco Popular which in
2021 amounted to approximately $1.3 million (2020- $1.4
million).
Related party transactions with EVERTEC, as an affiliate
The Corporation has an investment in EVERTEC, Inc. (“EVERTEC”), which provides various processing and information technology
services to the Corporation and its subsidiaries and gives BPPR
access to the ATH
network owned and operated by EVERTEC. As
of December 31,
2021, the Corporation’s
stake in EVERTEC
was 16.19%. The
Corporation continues to
have significant influence
over EVERTEC. Accordingly, the investment in EVERTEC is accounted for under the equity method and is evaluated
for impairment
if events or circumstances indicate that a decrease
in value of the investment has occurred that
is other than temporary.
The Corporation
recorded $2.3
million in
dividend distributions
during the
year ended
December 31,
2021 from
its investments
in
EVERTEC’s holding company
(December 31, 2020
- $2.3 million).
The Corporation’s equity
in EVERTEC
is presented in
the table
which follows and is included as part of “other
assets” in the consolidated statement of financial
condition.
(In thousands)
December 31, 2021
December 31, 2020
Equity investment in EVERTEC
$
110,299
$
86,158
The Corporation
had the
following financial
condition balances
outstanding with
EVERTEC at
December 31,
2021 and
December
31, 2020.
Items that represent liabilities to the Corporation
are presented with parenthesis.
168
(In thousands)
December 31, 2021
December 31, 2020
Accounts receivable (Other assets)
$
5,668
$
5,678
Deposits
(150,737)
(125,361)
Accounts payable (Other liabilities)
(3,431)
(2,395)
Net total
$
(148,500)
$
(122,078)
The
Corporation’s
proportionate
share
of
income
from
EVERTEC
is
included
in
other
operating
income
in
the
consolidated
statements of operations. The following table presents the Corporation’s proportionate share of EVERTEC’s income and changes in
stockholders’ equity for the years ended December
31, 2021, 2020 and 2019.
Years ended December
31,
(In thousands)
2021
2020
2019
Share of income from
investment in EVERTEC
$
26,096
$
16,936
$
16,749
Share of other changes in EVERTEC's stockholders'
equity
53
865
516
Share of EVERTEC's changes in equity recognized
in income
$
26,149
$
17,801
$
17,265
The
following
tables
present
the
impact
of
transactions
and
service
payments
between
the
Corporation
and
EVERTEC
(as
an
affiliate) and their impact on the
results of operations for the years ended December
31, 2021, 2020 and 2019. Items that represent
expenses to the Corporation are presented with
parenthesis.
169
Years ended December
31,
(In thousands)
2021
2020
2019
Category
Interest expense on deposits
$
(388)
$
(315)
$
(106)
Interest expense
ATH and credit cards interchange
income from services to EVERTEC
27,384
22,406
29,224
Other service fees
Rental income charged to EVERTEC
6,593
7,305
7,418
Net occupancy
Fees on services provided by EVERTEC
(245,945)
(223,069)
(219,992)
Professional fees
Other services provided to EVERTEC
740
1,002
1,118
Other operating expenses
Total
$
(211,616)
$
(192,671)
$
(182,338)
Centro Financiero BHD León
At December 31, 2021, the Corporation had a 15.84% equity interest in Centro Financiero BHD León, S.A. (“BHD León”), one of the
largest
banking
and
financial
services
groups
in
the
Dominican
Republic.
During
the
year
ended
December
31,
2021,
the
Corporation recorded $27.7
million in earnings
from its investment
in BHD León
(December 31, 2020
- $27.0 million),
which had a
carrying
amount
of
$180.3
million
at
December 31,
2021
(December 31,
2020
-
$153.1
million).
The
Corporation received
$4.3
million in dividends distributions during the year ended December 31, 2021,
from its investment in BHD León (December 31, 2020
-
$13.2 million).
Investment Companies
The Corporation,
through its subsidiary Popular
Asset Management LLC (“PAM”),
provides advisory services to
several investment
companies registered
under the
Investment Company
Act of
1940 in
exchange for
a fee.
The Corporation,
through its
subsidiary
BPPR,
also
provides
administrative,
custody
and
transfer
agency
services
to
these
investment
companies.
These
fees
are
calculated
at
an
annual
rate
of
the
average
net
assets
of
the
investment
company,
as
defined
in
each
agreement.
Due
to
its
advisory role, the Corporation considers these investment
companies as related parties.
For
the
year
ended
December
31,
2021
administrative
fees
charged
to
these
investment
companies
amounted
to
$4.1
million
(December 31,
2020 -
$6.3 million)
and waived
fees amounted to
$1.5 million
(December 31, 2020
- $2.8
million), for
a net
fee of
$2.6 million (December 31, 2020 - $3.5 million).
The
Corporation,
through
its
subsidiary
BPPR,
had
also
entered
into
certain
uncommitted credit
facilities
with
those
investment
companies.
The
available
lines
of
credit
facilities
amounted
to
$275
million
at
December
31,
2020.
The
aggregate
sum
of
all
outstanding
balances
under
all
credit
facilities
that
could
be
made
available
by
BPPR,
from
time
to
time,
to
those
investment
companies for which PAM acted as investment advisor or co-investment advisor, could have never exceed the lesser
of $200 million
or 10% of BPPR’s
capital. During the year
ended December 31, 2021,
these credit facilities expired and
the investment companies
entered into credit facilities with a third party.
170
Note 28 – Fair value measurement
ASC Subtopic
820-10 “Fair
Value
Measurements and
Disclosures” establishes
a fair
value hierarchy
that prioritizes
the inputs
to
valuation techniques
used to
measure fair
value into
three levels
in order
to increase
consistency and
comparability in
fair value
measurements and disclosures. The hierarchy is broken
down into three levels based on the reliability
of inputs as follows:
●
Level 1
- Unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to
access at
the measurement date.
Valuation
on these
instruments does not
necessitate a
significant degree of
judgment
since valuations are based on quoted prices that
are readily available in an active market.
●
Level 2
- Quoted prices other than those included in Level 1 that are observable either directly or indirectly.
Level 2 inputs
include
quoted
prices
for
similar
assets
or
liabilities
in
active
markets,
quoted
prices
for
identical
or
similar
assets
or
liabilities in
markets that
are
not active,
or other
inputs that
are
observable or
that can
be corroborated
by
observable
market data for substantially the full term of the
financial instrument.
●
Level
3
-
Inputs
are
unobservable
and
significant
to
the
fair
value
measurement.
Unobservable
inputs
reflect
the
Corporation’s own judgements about assumptions that
market participants would use in pricing the asset
or liability.
The
Corporation
maximizes
the
use
of
observable
inputs
and
minimizes
the
use
of
unobservable
inputs
by
requiring
that
the
observable inputs be used when
available. Fair value is
based upon quoted market prices
when available. If listed prices
or quotes
are
not
available,
the
Corporation
employs
internally-developed
models
that
primarily
use
market-based
inputs
including
yield
curves, interest rates,
volatilities, and credit
curves, among others.
Valuation
adjustments are limited
to those necessary
to ensure
that the financial instrument’s
fair value is adequately representative of
the price that would
be received or paid
in the marketplace.
These adjustments include amounts that reflect counterparty credit quality,
the Corporation’s credit standing, constraints on liquidity
and unobservable parameters that are applied consistently.
The estimated fair
value may
be subjective in
nature and may
involve uncertainties and
matters of
significant judgment for
certain
financial instruments. Changes in the underlying assumptions
used in calculating fair value could significantly
affect the results.
Fair Value on a Recurring and Nonrecurring Basis
The following fair value hierarchy tables
present information about the Corporation’s
assets and liabilities measured at fair
value on
a recurring basis at December 31, 2021 and
2020:
171
At December 31, 2021
(In thousands)
Level 1
Level 2
Level 3
Measured at NAV
Total
RECURRING FAIR VALUE
MEASUREMENTS
Assets
Debt securities available-for-sale:
U.S. Treasury securities
$
-
$
15,859,030
$
-
$
-
$
15,859,030
Obligations of U.S. Government
sponsored
entities
-
70
-
-
70
Collateralized mortgage obligations - federal
agencies
-
221,265
-
-
221,265
Mortgage-backed securities
-
8,886,950
826
-
8,887,776
Other
-
128
-
-
128
Total debt securities
available-for-sale
$
-
$
24,967,443
$
826
$
-
$
24,968,269
Trading account debt securities, excluding
derivatives:
U.S. Treasury securities
$
6,530
$
-
$
-
$
-
$
6,530
Obligations of Puerto Rico, States and political
subdivisions
-
85
-
-
85
Collateralized mortgage obligations
-
59
198
-
257
Mortgage-backed securities
-
22,559
-
-
22,559
Other
-
-
280
-
280
Total trading account
debt securities, excluding
derivatives
$
6,530
$
22,703
$
478
$
-
$
29,711
Equity securities
$
-
$
32,429
$
-
$
77
$
32,506
Mortgage servicing rights
-
-
121,570
-
121,570
Derivatives
-
26,093
-
-
26,093
Total assets measured
at fair value on a
recurring basis
$
6,530
$
25,048,668
$
122,874
$
77
$
25,178,149
Liabilities
Derivatives
$
-
$
(22,878)
$
-
$
-
$
(22,878)
Contingent consideration
-
-
(9,241)
-
(9,241)
Total liabilities measured
at fair value on a
recurring basis
$
-
$
(22,878)
$
(9,241)
$
-
$
(32,119)
172
At December 31, 2020
(In thousands)
Level 1
Level 2
Level 3
Total
RECURRING FAIR VALUE
MEASUREMENTS
Assets
Debt securities available-for-sale:
U.S. Treasury securities
$
3,499,781
$
7,288,259
$
-
$
10,788,040
Obligations of U.S. Government
sponsored entities
-
60,184
-
60,184
Collateralized mortgage obligations - federal agencies
-
392,132
-
392,132
Mortgage-backed securities
-
10,319,547
1,014
10,320,561
Other
-
235
-
235
Total debt securities
available-for-sale
$
3,499,781
$
18,060,357
$
1,014
$
21,561,152
Trading account debt securities, excluding
derivatives:
U.S. Treasury securities
$
11,506
$
-
$
-
$
11,506
Obligations of Puerto Rico, States and political subdivisions
-
103
-
103
Collateralized mortgage obligations
-
68
278
346
Mortgage-backed securities
-
24,338
-
24,338
Other
-
-
381
381
Total trading account
debt securities, excluding derivatives
$
11,506
$
24,509
$
659
$
36,674
Equity securities
$
-
$
29,590
$
-
$
29,590
Mortgage servicing rights
-
-
118,395
118,395
Derivatives
-
20,785
-
20,785
Total assets measured
at fair value on a recurring basis
$
3,511,287
$
18,135,241
$
120,068
$
21,766,596
Liabilities
Derivatives
$
-
$
(18,925)
$
-
$
(18,925)
Total liabilities measured
at fair value on a recurring basis
$
-
$
(18,925)
$
-
$
(18,925)
The fair value information included in the following
tables is not as of period end, but as
of the date that the fair value measurement
was recorded during the years ended December 31, 2021,
2020 and 2019
and excludes nonrecurring fair value measurements
of
assets no longer outstanding
as of the reporting date.
173
Year ended December
31, 2021
(In thousands)
Level 1
Level 2
Level 3
Total
NONRECURRING FAIR VALUE
MEASUREMENTS
Assets
Write-downs
Loans
[1]
$
-
$
-
$
21,167
$
21,167
$
(3,721)
Other real estate owned
[2]
-
-
7,727
7,727
(1,579)
Other foreclosed assets
[2]
-
-
68
68
(33)
Long-lived assets held-for-sale
[3]
-
-
9,007
9,007
(5,320)
Trademark
[4]
-
-
156
156
(5,404)
Total assets measured
at fair value on a nonrecurring basis
$
-
$
-
$
38,125
$
38,125
$
(16,057)
[1] Relates mostly to certain impaired collateral dependent loans.
The impairment was measured based on the fair value
of the collateral, which is
derived from appraisals that take into consideration prices
in observed transactions involving similar assets in similar
locations. Costs to sell are
excluded from the reported fair value amount.
[2] Represents the fair value of foreclosed real estate and
other collateral owned that were written down to their fair
value. Costs to sell are
excluded from the reported fair value amount.
[3] Represents the fair value of long-lived assets held-for-sale
that were written down to their fair value.
[4] Represents the fair value of a trademark due to a write-down
on impairment.
Year ended December
31, 2020
(In thousands)
Level 1
Level 2
Level 3
Total
NONRECURRING FAIR VALUE
MEASUREMENTS
Assets
Write-downs
Loans
[1]
$
-
$
-
$
74,511
$
74,511
$
(15,290)
Loans held-for-sale
[2]
-
-
2,738
2,738
(1,311)
Other real estate owned
[3]
-
-
20,123
20,123
(3,325)
Other foreclosed assets
[3]
-
-
116
116
(148)
ROU assets
[4]
-
-
446
446
(15,920)
Leasehold improvements
[4]
-
-
126
126
(2,084)
Total assets measured
at fair value on a nonrecurring basis
$
-
$
-
$
98,060
$
98,060
$
(38,078)
[1] Relates mostly to certain impaired collateral dependent loans.
The impairment was measured based on the fair value
of the collateral, which is
derived from appraisals that take into consideration prices
in observed transactions involving similar assets in
similar locations. Costs to sell are
excluded from the reported fair value amount.
[2] Relates to a quarterly valuation on loans held-for-sale.
Costs to sell are excluded from the reported fair value amount.
[3] Represents the fair value of foreclosed real estate and
other collateral owned that were written down to their fair
value. Costs to sell are
excluded from the reported fair value amount.
[4] The impairment was measured based on the sublease
rental value of the branches that were subject to the
strategic realignment of PB's New
Metro Branch network.
174
Year ended December
31, 2019
(In thousands)
Level 1
Level 2
Level 3
Total
NONRECURRING FAIR VALUE
MEASUREMENTS
Assets
Write-downs
Loans
[1]
$
-
$
-
$
35,363
$
35,363
$
(13,533)
Other real estate owned
[2]
-
-
18,132
18,132
(3,526)
Other foreclosed assets
[2]
-
-
1,213
1,213
(156)
Long-lived assets held-for-sale
[3]
-
-
2,500
2,500
(2,591)
Total assets measured
at fair value on a nonrecurring basis
$
-
$
-
$
57,208
$
57,208
$
(19,806)
[1] Relates mostly to certain impaired collateral dependent loans.
The impairment was measured based on the fair value
of the collateral, which
is derived from appraisals that take into consideration
prices in observed transactions involving similar assets
in similar locations. Costs to sell are
excluded from the reported fair value amount.
[2] Represents the fair value of foreclosed real estate and
other collateral owned that were written down to their fair
value. Costs to sell are
excluded from the reported fair value amount.
[3] Represents the fair value of long-lived assets held-for-sale
that were written down to their fair value.
The following tables present the changes in Level
3 assets and liabilities measured at fair
value on a recurring basis for the years
ended December 31, 2021, 2020, and 2019.
Year ended December
31, 2021
MBS
Other
classified
CMOs
securities
as debt
classified
classified
securities
as trading
as trading
Mortgage
available-
account debt
account debt
servicing
Total
Contingent
Total
(In thousands)
for-sale
securities
securities
rights
assets
Consideration
liabilities
Balance at January 1,
2021
$
1,014
$
278
$
381
$
118,395
$
120,068
$
-
$
-
Gains (losses) included in earnings
-
(1)
(101)
(10,216)
(10,318)
-
-
Gains (losses) included in OCI
(13)
-
-
-
(13)
-
-
Additions
-
29
-
13,391
13,419
9,241
9,241
Settlements
(175)
(107)
-
-
(282)
-
-
Balance at December 31, 2021
$
826
$
198
$
280
$
121,570
$
122,874
$
9,241
$
9,241
Changes in unrealized gains (losses) included in
earnings relating to assets still held at December
31, 2021
$
-
$
(1)
$
(45)
$
6,410
$
6,364
$
-
-
175
Year ended December
31, 2020
MBS
Other
classified
CMOs
securities
as debt
classified
classified
securities
as trading
as trading
Mortgage
available-
account debt
account debt
servicing
Total
(In thousands)
for-sale
securities
securities
rights
assets
Balance at January 1, 2020
$
1,182
$
530
$
440
$
150,906
$
153,058
Gains (losses) included in earnings
-
(1)
(59)
(42,055)
(42,115)
Gains (losses) included in OCI
(18)
-
-
-
(18)
Additions
-
4
-
9,544
9,548
Settlements
(150)
(255)
-
-
(405)
Balance at December 31, 2020
$
1,014
$
278
$
381
$
118,395
$
120,068
Changes in unrealized gains (losses) included in earnings
relating to assets still
held at December 31, 2020
$
-
$
-
$
27
$
(19,327)
$
(19,300)
Year ended December
31, 2019
MBS
Other
classified
CMOs
securities
as debt
classified
MBS
classified
securities
as trading
classified as
as trading
Mortgage
available-
account debt
trading account
account debt
servicing
Total
(In thousands)
for-sale
securities
debt securities
securities
rights
assets
Balance at January 1,
2019
$
1,233
$
611
$
43
$
485
$
169,777
$
172,149
Gains (losses) included in earnings
-
(1)
(1)
(45)
(27,516)
(27,563)
Gains (losses) included in OCI
(1)
-
-
-
-
(1)
Additions
-
71
25
-
9,143
9,239
Settlements
(50)
(151)
(41)
-
(498)
(740)
Transfers out of Level 3
-
-
(26)
-
-
(26)
Balance at December 31, 2019
$
1,182
$
530
$
-
$
440
$
150,906
$
153,058
Changes in unrealized gains (losses) included in earnings
relating to assets still held at December 31, 2019
$
-
$
1
$
-
$
20
$
(14,190)
$
(14,169)
During the
year ended
December 31,
2019, certain
MBS were
transferred from
Level 3
to
Level 2
due to
a change
in valuation
technique from an internally prepared pricing matrix
to a bond’s theoretical value.
Gains and losses (realized and
unrealized) included in earnings for the
years ended December 31, 2021,
2020, and 2019 for Level
3 assets and liabilities included in the previous
tables are reported in the consolidated statement
of operations as follows:
2021
2020
2019
Total
Changes in unrealized
Total
Changes in unrealized
Total
Changes in
unrealized
gains (losses)
gains (losses)
gains (losses)
gains (losses)
gains (losses)
gains (losses)
included
relating to assets still
included
relating to assets still
included
relating to assets
still
(In thousands)
in earnings
held at reporting date
in earnings
held at reporting date
in earnings
held at reporting
date
Mortgage banking activities
$
(10,216)
$
6,410
$
(42,055)
$
(19,327)
$
(27,516)
$
(14,190)
Trading account (loss) profit
(102)
(46)
(60)
27
(47)
21
Total
$
(10,318)
$
6,364
$
(42,115)
$
(19,300)
$
(27,563)
$
(14,169)
The following
tables include
quantitative information
about significant
unobservable inputs
used to
derive the
fair value
of Level
3
instruments, excluding those instruments
for which the
unobservable inputs were not
developed by the
Corporation such as
prices
of prior transactions and/or unadjusted third-party pricing
sources at December 31, 2021 and 2020.
176
Fair value at
December 31,
(In thousands)
2021
Valuation technique
Unobservable inputs
Weighted average (range) [1]
CMO's - trading
$
198
Discounted cash flow model
Weighted average life
0.8 years (0.04 - 1.0 years)
Yield
3.6% (3.6% - 4.1%)
Prepayment speed
11.4% (10.1% - 17.2%)
Other - trading
$
280
Discounted cash flow model
Weighted average life
2.9 years
Yield
12.0%
Prepayment speed
10.8%
Loans held-in-portfolio
$
20,041
[
External appraisal
Haircut applied on
external appraisals
5.0%
Other real estate owned
$
3,631
[
External appraisal
Haircut applied on
external appraisals
22.3% (5.0% - 35.0%)
[1]
Weighted average of significant unobservable inputs
used to develop Level 3 fair value measurements
were calculated by relative fair value.
[2]
Loans held-in-portfolio in which haircuts were not applied
to external appraisals were excluded from this table.
[3]
Other real estate owned in which haircuts were not applied
to external appraisals were excluded from this table.
Fair value at
December 31,
(In thousands)
2020
Valuation technique
Unobservable inputs
Weighted average (range) [1]
CMO's - trading
$
278
Discounted cash flow model
Weighted average life
1.2 years (0.6 - 1.4 years)
Yield
3.6% (3.6% - 4.1%)
Prepayment speed
17.7% (13.8% - 18.3%)
Other - trading
$
381
Discounted cash flow model
Weighted average life
3.6 years
Yield
12.0%
Prepayment speed
10.8%
Mortgage servicing rights
$
118,395
Discounted cash flow model
Prepayment speed
6.9% (0.3% - 24.6%)
Weighted average life
6.0 years (0.3 - 12.3 years)
Discount rate
11.1% (9.5% - 14.7%)
Loans held-in-portfolio
$
74,347
[
External appraisal
Haircut applied on
external appraisals
20.9% (10.0% - 40.0%)
Other real estate owned
$
14,926
[
External appraisal
Haircut applied on
external appraisals
22.1% (5.0% - 30.0%)
[1]
Weighted average of significant unobservable inputs
used to develop Level 3 fair value measurements
were calculated by relative fair value.
[2]
Loans held-in-portfolio in which haircuts were not applied
to external appraisals were excluded from this table.
[3]
Other real estate owned in which haircuts were not applied
to external appraisals were excluded from this table.
Effective the fourth quarter 2021, the mortgage
servicing rights fair value was provided by
a third-party valuation specialist. Refer to
Note 11 for additional information on MSRs.
The significant unobservable inputs used in the fair value measurement of the Corporation’s collateralized mortgage obligations and
interest-only
collateralized
mortgage
obligation
(reported
as
“other”),
which
are
classified
in
the
“trading”
category,
are
yield,
constant
prepayment rate,
and
weighted average
life. Significant
increases (decreases)
in
any
of
those
inputs in
isolation would
result
in
significantly
lower
(higher)
fair
value
measurement.
Generally,
a
change
in
the
assumption
used
for
the
constant
prepayment
rate
will
generate
a
directionally
opposite
change
in
the
weighted
average
life.
For
example,
as
the
average life
is
reduced
by
a
higher
constant
prepayment
rate,
a
lower
yield
will
be
realized,
and
when
there
is
a
reduction
in
the
constant
prepayment
rate,
the
average
life
of
these
collateralized
mortgage
obligations
will
extend,
thus
resulting
in
a
higher
yield.
The
significant
unobservable
inputs
used
in
the
fair
value
measurement
of
the
Corporation’s
mortgage
servicing
rights
are
constant
prepayment rates and discount rates.
Increases in interest rates may result in lower prepayments. Discount rates vary
according to
products and / or portfolios depending on the
perceived risk. Increases in discount rates result
in a lower fair value measurement.
Following is
a description
of the
Corporation’s valuation
methodologies used
for assets
and liabilities
measured at
fair value.
The
disclosure requirements exclude certain financial instruments and all
non-financial instruments. Accordingly, the aggregate fair value
amounts of the financial instruments disclosed do
not represent management’s estimate of the underlying
value of the Corporation.
Trading account debt securities and debt securities available-for-sale
●
U.S. Treasury securities:
The fair value
of U.S. Treasury
notes is based
on yields that
are interpolated from the
constant
maturity treasury curve.
These securities are classified
as Level 2.
U.S. Treasury
bills are classified as
Level 1 given the
high volume of trades and pricing based on those
trades.
177
●
Obligations of U.S.
Government sponsored entities: The
Obligations of U.S. Government
sponsored entities include U.S.
agency
securities,
which
fair
value
is
based
on
an
active
exchange
market
and
on
quoted
market
prices
for
similar
securities. The U.S. agency securities are classified as Level
2.
●
Obligations of Puerto
Rico, States and
political subdivisions: Obligations of
Puerto Rico, States
and political subdivisions
include
municipal
bonds.
The
bonds
are
segregated
and
the
like
characteristics
divided
into
specific
sectors.
Market
inputs used in the
evaluation process include all or
some of the following:
trades, bid price or
spread, two sided markets,
quotes, benchmark curves including but not
limited to Treasury benchmarks, LIBOR
and swap curves, market data feeds
such
as those
obtained from
municipal market
sources,
discount and
capital
rates,
and trustee
reports. The
municipal
bonds are classified as Level 2.
●
Mortgage-backed securities: Certain agency mortgage-backed
securities (“MBS”) are priced based on a bond’s theoretical
value
derived
from
similar
bonds
defined
by
credit
quality
and
market
sector.
Their
fair
value
incorporates
an
option
adjusted spread. The
agency MBS are classified
as Level 2.
Other agency MBS
such as GNMA
Puerto Rico Serials
are
priced using an internally-prepared pricing matrix with quoted prices from local brokers dealers. These particular MBS are
classified as Level 3.
●
Collateralized mortgage
obligations: Agency
collateralized mortgage
obligations (“CMOs”)
are priced
based on
a bond’s
theoretical
value
derived
from
similar
bonds
defined
by
credit
quality
and
market
sector
and
for
which
fair
value
incorporates
an
option
adjusted
spread.
The
option
adjusted
spread
model
includes
prepayment
and
volatility
assumptions,
ratings
(whole
loans
collateral)
and
spread
adjustments.
These
CMOs
are
classified
as
Level
2.
Other
CMOs, due
to their
limited liquidity,
are classified
as Level
3 due
to the
insufficiency of
inputs such
as executed
trades,
credit information and cash flows.
●
Corporate securities (included
as “other” in
the “available-for-sale” category):
Given that the
quoted prices are
for similar
instruments, these securities are classified as Level
2.
●
Corporate securities
and
interest-only strips
(included as
“other” in
the
“trading account
debt securities”
category): For
corporate securities, quoted prices for these security types are obtained from broker dealers. Given that the quoted prices
are for similar instruments or do not trade in highly liquid markets,
these securities are classified as Level 2. Given that the
fair
value
was
estimated
based
on
a
discounted
cash
flow
model
using
unobservable
inputs,
interest-only
strips
are
classified as Level 3.
Equity securities
Equity
securities
are
comprised principally
of
shares
in
closed-ended and
open-ended mutual
funds
and
other
equity
securities.
Closed-end funds are
traded on the
secondary market at
the shares’ market value.
Open-ended funds are considered
to be liquid,
as investors can sell their shares continually to the fund and are priced at NAV.
Mutual funds are classified as Level 2. Other equity
securities that
do not
trade in
highly liquid
markets are
also classified
as Level
2, except
for one
equity security
that do
not have
readily determinable fair value and is under an investment
company is measured at NAV.
Mortgage servicing rights
Mortgage
servicing
rights
(“MSRs”)
do
not
trade
in
an
active
market
with
readily
observable
prices.
MSRs
are
priced
using
a
discounted cash
flow model
valuation performed
by a
third party.
The discounted
cash flow
model incorporates
assumptions that
market
participants
would
use
in
estimating
future
net
servicing
income,
including
portfolio
characteristics,
prepayments
assumptions, discount
rates, delinquency
and foreclosure
rates, late
charges, other
ancillary revenues,
cost to
service and
other
economic factors.
Prepayment speeds
are adjusted
for the
loans’ characteristics
and portfolio
behavior.
Due to
the unobservable
nature of certain valuation inputs, the MSRs are
classified as Level 3.
Derivatives
Interest
rate
caps
and
indexed
options
are
traded
in
over-the-counter
active
markets.
These
derivatives
are
indexed
to
an
observable interest rate benchmark, such
as LIBOR or equity indexes,
and are priced using an
income approach based on present
value
and
option
pricing
models
using
observable
inputs.
Other
derivatives
are
liquid
and
have
quoted
prices,
such
as
forward
contracts or
“to be
announced securities”
(“TBAs”). All
of these
derivatives are
classified as
Level 2.
The non-performance
risk is
determined using internally-developed models that
consider the collateral
held, the remaining
term, and the
creditworthiness of the
entity that
bears the
risk, and
uses available
public data
or internally-developed
data related
to current
spreads that
denote their
probability of default.
Contingent consideration liability
178
The fair
value of
the contingent
consideration, which
relates to
earnout payments
that could
be payable
to
K2 over
a three-year
period, was
calculated based
on a
discounted cash
flow technique
using the
probability-weighted average
from
likely scenarios.
This contingent consideration is classified as Level
3.
Loans held-in-portfolio that are collateral dependent
The impairment is
measured based on
the fair value
of the collateral,
which is derived
from appraisals that
take into consideration
prices
in
observed
transactions
involving
similar
assets
in
similar
locations
and
which
could
be
subject
to
internal
adjustments.
These collateral dependent loans are classified as Level
3.
Loans measured at fair value pursuant to lower
of cost or fair value adjustments
Loans measured at fair value on a nonrecurring basis pursuant to lower
of cost or fair value were priced based on secondary market
prices
and
discounted
cash
flow
models
which
incorporate
internally-developed
assumptions
for
prepayments
and
credit
loss
estimates. These loans are classified as Level 3.
Other real estate owned and other foreclosed assets
Other
real
estate
owned
includes
real
estate
properties
securing
mortgage,
consumer,
and
commercial
loans.
Other
foreclosed
assets include primarily automobiles
securing auto loans. The
fair value of
foreclosed assets may be
determined using an external
appraisal, broker price opinion, or an
internal valuation.
These foreclosed assets are classified as Level
3 since they are subject
to
internal adjustments.
ROU assets and leasehold improvements
The impairment was measured based on the sublease rental value of
the branches that were subject to the strategic realignment
of
PB’s New York Metro Branch network.
These ROU assets and leasehold improvements are
classified as Level 3.
Long-lived assets held-for-sale
The
Corporation
evaluates
for
impairment
its
long-lived
assets,
whenever
events
or
changes
in
circumstances
indicate
that
the
carrying amount of
an asset may not
be recoverable and records
a write down for
the difference between the
carrying amount and
the fair value less cost to sell. These long-lived
assets held-for-sale are classified as Level
3.
Trademark
The write-down on impairment of a trademark was based on the
discontinuance of origination thru e-loan platform. This
trademark is
classified as Level 3.
179
Note 29 – Fair value of financial instruments
The fair
value of
financial instruments
is the
amount at
which an
asset or
obligation could
be exchanged
in a
current transaction
between
willing
parties,
other
than
in
a
forced
or
liquidation
sale.
For
those
financial
instruments
with
no
quoted
market
prices
available, fair values have been estimated using present
value calculations or other valuation techniques, as well
as management’s
best judgment with respect to current economic conditions, including discount rates, estimates of future cash flows, and prepayment
assumptions. Many of these
estimates involve various assumptions and
may vary significantly from
amounts that could be
realized
in actual transactions.
The
fair
values
reflected
herein
have
been
determined
based
on
the
prevailing
rate
environment
at
December
31,
2021
and
December 31, 2020, as
applicable. In different interest
rate environments, fair value
estimates can differ significantly,
especially for
certain
fixed
rate
financial
instruments.
In
addition,
the
fair
values
presented
do
not
attempt
to
estimate
the
value
of
the
Corporation’s fee
generating businesses and
anticipated future business
activities, that
is, they
do not
represent the
Corporation’s
value as
a going concern.
There have been
no changes in
the Corporation’s valuation
methodologies and inputs
used to estimate
the fair values for each class of financial assets and
liabilities not measured at fair value.
The following tables present the
carrying amount and estimated fair
values of financial instruments with their
corresponding level in
the fair
value hierarchy.
The aggregate
fair value
amounts of
the financial
instruments disclosed
do not
represent management’s
estimate of the underlying value of the Corporation.
180
December 31, 2021
Carrying
Measured
(In thousands)
amount
Level 1
Level 2
Level 3
at NAV
Fair value
Financial Assets:
Cash and due from banks
$
428,433
$
428,433
$
-
$
-
$
-
$
428,433
Money market investments
17,536,719
17,530,640
6,079
-
-
17,536,719
Trading account debt securities, excluding
derivatives
[1]
29,711
6,530
22,703
478
-
29,711
Debt securities available-for-sale
[1]
24,968,269
-
24,967,443
826
-
24,968,269
Debt securities held-to-maturity:
Obligations of Puerto Rico, States and political
subdivisions
$
65,380
$
-
$
-
$
77,383
$
-
$
77,383
Collateralized mortgage obligation-federal agency
25
-
-
25
-
25
Securities in wholly owned statutory business trusts
5,960
-
5,960
-
-
5,960
Total debt securities
held-to-maturity
$
71,365
$
-
$
5,960
$
77,408
$
-
$
83,368
Equity securities:
FHLB stock
$
59,918
$
-
$
59,918
$
-
$
-
$
59,918
FRB stock
96,217
-
96,217
-
-
96,217
Other investments
33,842
-
32,429
3,704
77
36,210
Total equity securities
$
189,977
$
-
$
188,564
$
3,704
$
77
$
192,345
Loans held-for-sale
$
59,168
$
-
$
-
$
59,885
$
-
$
59,885
Loans held-in-portfolio
28,545,191
-
-
27,489,583
-
27,489,583
Mortgage servicing rights
121,570
-
-
121,570
-
121,570
Derivatives
26,093
-
26,093
-
-
26,093
December 31, 2021
Carrying
Measured
(In thousands)
amount
Level 1
Level 2
Level 3
at NAV
Fair value
Financial Liabilities:
Deposits:
Demand deposits
$
60,292,939
$
-
$
60,292,939
$
-
$
-
$
60,292,939
Time deposits
6,712,149
-
6,647,301
-
-
6,647,301
Total deposits
$
67,005,088
$
-
$
66,940,240
$
-
$
-
$
66,940,240
Assets sold under agreements to repurchase
$
91,603
$
-
$
91,602
$
-
$
-
$
91,602
Other short-term borrowings
[2]
$
75,000
$
-
$
75,000
$
-
$
-
$
75,000
Notes payable:
FHLB advances
$
492,429
$
-
$
496,091
$
-
$
-
$
496,091
Unsecured senior debt securities
297,842
-
319,296
-
-
319,296
Junior subordinated deferrable interest debentures
(related to trust preferred securities)
198,292
-
201,879
-
-
201,879
Total notes payable
$
988,563
$
-
$
1,017,266
$
-
$
-
$
1,017,266
Derivatives
$
22,878
$
-
$
22,878
$
-
$
-
$
22,878
Contingent consideration
$
9,241
$
-
$
-
$
9,241
$
-
$
9,241
[1]
Refer to Note 28 to the Consolidated Financial Statements
for the fair value by class of financial asset and its hierarchy
level.
[2]
Refer to Note 17 to the Consolidated Financial Statements
for the composition of other short-term borrowings.
181
December 31, 2020
Carrying
(In thousands)
amount
Level 1
Level 2
Level 3
Fair value
Financial Assets:
Cash and due from banks
$
491,065
$
491,065
$
-
$
-
$
491,065
Money market investments
11,640,880
11,634,851
6,029
-
11,640,880
Trading account debt securities, excluding
derivatives
[1]
36,674
11,506
24,509
659
36,674
Debt securities available-for-sale
[1]
21,561,152
3,499,781
18,060,357
1,014
21,561,152
Debt securities held-to-maturity:
Obligations of Puerto Rico, States and political subdivisions
$
70,768
$
-
$
-
$
83,298
$
83,298
Collateralized mortgage
obligation-federal agency
31
-
-
32
32
Securities in wholly owned statutory business trusts
11,561
-
11,561
-
11,561
Total debt securities
held-to-maturity
$
82,360
$
-
$
11,561
$
83,330
$
94,891
Equity securities:
FHLB stock
$
49,799
$
-
$
49,799
$
-
$
49,799
FRB stock
93,045
-
93,045
-
93,045
Other investments
30,893
-
29,590
1,495
31,085
Total equity securities
$
173,737
$
-
$
172,434
$
1,495
$
173,929
Loans held-for-sale
$
99,455
$
-
$
-
$
102,189
$
102,189
Loans held-in-portfolio
28,488,946
-
-
27,098,297
27,098,297
Mortgage servicing rights
118,395
-
-
118,395
118,395
Derivatives
20,785
-
20,785
-
20,785
December 31, 2020
Carrying
(In thousands)
amount
Level 1
Level 2
Level 3
Fair value
Financial Liabilities:
Deposits:
Demand deposits
$
49,558,492
$
-
$
49,558,492
$
-
$
49,558,492
Time deposits
7,307,848
-
7,319,963
-
7,319,963
Total deposits
$
56,866,340
$
-
$
56,878,455
$
-
$
56,878,455
Assets sold under agreements to repurchase
$
121,303
$
-
$
121,257
$
-
$
121,257
Notes payable:
FHLB advances
$
542,469
$
-
$
561,977
$
-
$
561,977
Unsecured senior debt securities
296,574
-
321,078
-
321,078
Junior subordinated deferrable interest debentures (related to
trust preferred securities)
384,929
-
395,078
-
395,078
FRB advances
1,009
-
1,009
-
1,009
Total notes payable
$
1,224,981
$
-
$
1,279,142
$
-
$
1,279,142
Derivatives
$
18,925
$
-
$
18,925
$
-
$
18,925
[1]
Refer to Note 28 to the Consolidated Financial Statements
for the fair value by class of financial asset and its hierarchy
level.
The notional amount of commitments to extend credit at December 31, 2021
and December 31, 2020 is $ 9.5 billion and $9.3 billion,
respectively,
and represents the
unused portion of
credit facilities
granted to customers.
The notional amount
of letters of
credit at
December 31,
2021 and
December 31,
2020 is
$ 31
million and
$ 24
million respectively,
and represents
the contractual
amount
that is required to be paid in the event of nonperformance. The fair
value of commitments to extend credit and letters of credit, which
are based on the fees charged to enter into those
agreements, are not material to Popular’s
financial statements.
182
Note 30 – Employee benefits
Certain employees of BPPR are covered by three
non-contributory defined benefit pension plans,
the Banco Popular de Puerto Rico
Retirement Plan and two Restoration Plans (the
“Pension Plans”).
Pension benefits are based on age, years of
credited service,
and final average compensation.
The Pension
Plans are
currently closed to
new hires
and the
accrual of
benefits are
frozen to
all participants. The
Pension Plans’
benefit formula
is based
on a
percentage of
average final
compensation and
years of
service as
of the
plan freeze
date. Normal
retirement age under
the retirement plan
is age 65
with 5 years
of service. Pension
costs are funded
in accordance with
minimum
funding standards
under the
Employee Retirement
Income Security
Act of
1974 (“ERISA”).
Benefits under
the Pension
Plans are
subject to
the U.S.
and Puerto
Rico Internal Revenue
Code limits
on compensation
and benefits.
Benefits under restoration
plans
restore benefits
to selected
employees that are
limited under
the Banco
Popular de
Puerto Rico
Retirement Plan
due to
U.S. and
Puerto Rico
Internal Revenue
Code limits
and a
compensation definition
that excludes
amounts deferred pursuant
to nonqualified
arrangements.
In
addition
to
providing
pension
benefits,
BPPR
provides
certain
health
care
benefits
for
certain
retired
employees
(the
“OPEB
Plan”).
Regular employees
of BPPR,
hired before
February 1,
2000, may
become eligible
for health
care benefits,
provided they
reach retirement age while working for BPPR.
The Corporation’s funding policy is to make annual contributions to the plans, when necessary, in amounts which fully provide for all
benefits as they become due under the plans.
The Corporation’s pension fund investment strategy
is to invest in a
prudent manner for the exclusive
purpose of providing benefits
to participants. A well defined internal structure has
been established to develop and implement
a risk-controlled investment strategy
that is targeted to
produce a total return that,
when combined with BPPR contributions to
the fund, will maintain the
fund’s ability to
meet all
required benefit obligations.
Risk is controlled
through diversification of
asset types, such
as investments in
domestic and
international equities and fixed income.
Equity investments include various types of stock and index funds. Also, this category
includes Popular, Inc.’s common stock. Fixed
income
investments include
U.S. Government
securities
and
other U.S.
agencies’ obligations,
corporate
bonds, mortgage
loans,
mortgage-backed securities
and index
funds, among
others. A
designated committee
periodically reviews
the performance
of the
pension
plans’
investments
and
assets
allocation.
The
Trustee
and
the
money
managers
are
allowed
to
exercise
investment
discretion, subject
to limitations
established by
the pension
plans’ investment
policies. The
plans forbid
money managers
to enter
into derivative transactions, unless approved by the
Trustee.
The
overall
expected
long-term
rate-of-return-on-assets assumption
reflects
the
average rate
of
earnings
expected
on
the funds
invested or
to
be invested
to provide
for the
benefits included
in the
benefit obligation.
The assumption
has been
determined by
reflecting
expectations
regarding
future
rates
of
return
for
the
plan
assets,
with
consideration
given
to
the
distribution
of
the
investments by asset
class and
historical rates of
return for each
individual asset class.
This process is
reevaluated at least
on an
annual basis and if market, actuarial and economic
conditions change, adjustments to the rate of return
may come into place.
The
Pension
Plans
weighted
average
asset
allocation
as
of
December
31,
2021
and
2020
and
the
approved
asset
allocation
ranges, by asset category, are summarized in the table below.
Minimum allotment
Maximum allotment
2021
2020
Equity
0
%
70
%
30
%
38
%
Debt securities
0
%
100
%
67
%
60
%
Popular related securities
0
%
5
%
2
%
1
%
Cash and cash equivalents
0
%
100
%
1
%
1
%
183
The following table sets
forth by level, within
the fair value hierarchy,
the Pension Plans’ assets at
fair value at December
31, 2021
and 2020. Investments
measured at net
asset value per share
(“NAV”) as
a practical expedient have
not been classified
in the fair
value hierarchy,
but are presented in order to
permit reconciliation of the plans’ assets.
During the year ended December 31, 2021
investments in certain government
obligations classified as Level
2 were substituted by
proprietary funds of a
money manager that
invest in government obligations that are measured
at NAV.
2021
2020
(In thousands)
Level 1
Level 2
Level 3
Measured
at NAV
Total
Level 1
Level 2
Level 3
Measured
at NAV
Total
Obligations of the U.S.
Government, its agencies,
states and political
subdivisions
$
-
$
9,259
$
-
$
188,377
$
197,636
$
-
$
187,065
$
-
$
7,377
$
194,442
Corporate bonds and
debentures
-
375,875
-
8,485
384,360
-
326,344
-
8,180
334,524
Equity securities - Common
Stocks
41,414
-
-
-
41,414
101,081
-
-
-
101,081
Equity securities - ETF's
111,365
25,446
-
-
136,811
94,009
38,229
-
-
132,238
Foreign commingled trust
funds
-
-
-
82,912
82,912
-
-
-
98,431
98,431
Mutual fund
-
5,262
-
-
5,262
-
4,526
-
-
4,526
Private equity investments
-
-
56
-
56
-
-
70
-
70
Cash and cash equivalents
7,523
-
-
-
7,523
9,626
-
-
-
9,626
Accrued investment income
-
-
4,510
-
4,510
-
-
3,847
-
3,847
Total assets
$
160,302
$
415,842
$
4,566
$
279,774
$
860,484
$
204,716
$
556,164
$
3,917
$
113,988
$
878,785
184
The closing prices reported in the active markets
in which the securities are traded are used
to value the investments.
Following is a description of the valuation methodologies
used for investments measured at fair value:
●
Obligations
of
U.S.
Government,
its
agencies,
states
and
political
subdivisions
-
The
fair
value
of
Obligations
of
U.S.
Government and its agencies obligations are based on
an active exchange market and on quoted market prices
for similar
securities. U.S.
agency structured
notes
are
priced based
on
a bond’s
theoretical value
from similar
bonds
defined by
credit quality
and market sector
and for
which the
fair value
incorporates an
option adjusted spread
in deriving
their fair
value.
The fair value
of municipal bonds
are based on
trade data on
these instruments reported on
Municipal Securities
Rulemaking Board (“MSRB”)
transaction reporting system
or comparable bonds
from the same
issuer and credit
quality.
These securities are classified as Level 2, except for
the governmental index funds that are measured
at NAV.
●
Corporate bonds and debentures -
Corporate bonds and debentures are
valued at fair value at
the closing price reported
in the active market in
which the bond is traded. These
securities are classified as Level
2, except for the
c
orporate bond
funds that are measured at NAV.
●
Equity securities – common stocks - Equity securities with quoted market prices obtained from an active exchange market
and high liquidity are classified as Level 1.
●
Equity securities – ETF’s
– Exchange Traded Funds
shares with quoted market prices
obtained from an active exchange
market. Highly liquid ETF’s are classified as Level 1 while
less liquid ETF’s are classified as Level 2.
●
Foreign commingled trust fund- Collective investment
funds are valued at the NAV of shares held by the plan at year end.
●
Mutual funds – Mutual funds are valued at
the NAV of
shares held by the plan at year
end. Mutual funds are classified as
Level 2.
●
Mortgage-backed securities
–
The fair
value is
based on
trade data
from brokers
and exchange
platforms where
these
instruments regularly trade.
Certain agency mortgage
and other asset
backed securities (“MBS”)
are priced
based on a
bond’s theoretical
value from
similar bonds
defined by
credit quality
and market
sector.
Their fair
value incorporates
an
option adjusted spread and prepayment projections.
The agency MBS are classified as Level 2.
●
Private equity
investments - Private
equity investments include
an investment in
a private
equity fund. The
fund value is
recorded at its net realizable value which is affected by the changes in the fair market value of the investments held in the
fund. This fund is classified as Level 3.
●
Cash and cash equivalents - The carrying amount of
cash and cash equivalents is a reasonable estimate of the
fair value
since it is available on demand or due
to their short-term maturity. Cash and cash equivalents are classified as Level
1.
●
Accrued investment income – Given the
short-term nature of these assets, their carrying
amount approximates fair value.
Since there is a lack of observable inputs
related to instrument specific attributes,
these are reported as Level 3.
The preceding valuation methods may produce a fair value calculation that may not be indicative of net realizable value or
reflective
of future fair values. Furthermore, although the plan believes its valuation methods are appropriate and consistent with other market
participants, the
use
of
different
methodologies
or
assumptions to
determine
the
fair value
of
certain financial
instruments could
result in a different fair value measurement at the reporting
date.
The following table presents the change in Level
3 assets measured at fair value.
185
(In thousands)
2021
2020
Balance at beginning of year
$
3,917
$
4,670
Purchases, sales, issuance and settlements (net)
649
(753)
Balance at end of year
$
4,566
$
3,917
There were
no transfers
in and/or
out of
Level 3
for financial
instruments measured
at fair
value on
a recurring
basis during
the
years ended
December 31,
2021 and
2020. There
were no
transfers in
and/or out
of Level
1 and
Level 2
during the
years ended
December 31, 2021 and 2020.
Information on the shares of common stock held by
the pension plans is provided in the table that
follows.
(In thousands, except number of shares information)
2021
2020
Shares of Popular, Inc. common stock
167,182
162,936
Fair value of shares of Popular, Inc. common
stock
$
13,716
$
9,177
Dividends paid on shares of Popular,
Inc. common stock held by the plan
$
280
$
238
The following table presents the components of net
periodic benefit cost for the years ended
December 31, 2021, 2020 and 2019.
Pension Plans
OPEB Plan
(In thousands)
2021
2020
2019
2021
2020
2019
Personnel costs:
Service cost
$
-
$
-
$
-
$
642
$
713
$
759
Other operating expenses:
Interest cost
15,993
23,389
28,439
3,573
4,913
5,955
Expected return on plan assets
(38,679)
(38,104)
(32,388)
-
-
-
Recognized net actuarial loss
18,876
20,880
23,508
1,873
567
-
Net periodic benefit cost
$
(3,810)
$
6,165
$
19,559
$
6,088
$
6,193
$
6,714
Total benefit cost
$
(3,810)
$
6,165
$
19,559
$
6,088
$
6,193
$
6,714
186
The following table sets forth the aggregate status of the plans and the amounts recognized in the consolidated financial statements
at December 31, 2021 and 2020.
Pension Plans
OPEB Plan
(In thousands)
2021
2020
2021
2020
Change in benefit obligation:
Benefit obligation at beginning of year
$
914,353
$
852,551
$
179,210
$
168,681
Service cost
-
-
642
713
Interest cost
15,993
23,389
3,573
4,913
Actuarial (gain)/loss
[1]
(34,297)
83,277
(17,286)
11,247
Benefits paid
(44,578)
(44,864)
(6,181)
(6,344)
Benefit obligation at end of year
$
851,471
$
914,353
$
159,958
$
179,210
Change in fair value of plan assets:
Fair value of plan assets at beginning of year
$
878,785
$
799,935
$
-
$
-
Actual return on plan assets
26,049
123,484
-
-
Employer contributions
228
230
6,181
6,344
Benefits paid
(44,578)
(44,864)
(6,181)
(6,344)
Fair value of plan assets at end of year
$
860,484
$
878,785
$
-
$
-
Funded status of the plan:
Benefit obligation at end of year
$
(851,471)
$
(914,353)
$
(159,958)
$
(179,210)
Fair value of plan assets at end of year
860,484
878,785
-
-
Funded status at year end
$
9,013
$
(35,568)
$
(159,958)
$
(179,210)
Amounts recognized in accumulated other comprehensive
loss:
Net loss
225,356
265,899
12,993
32,152
Accumulated other comprehensive loss (AOCL)
$
225,356
$
265,899
$
12,993
$
32,152
Reconciliation of net (liabilities) assets:
Net liabilities at beginning of year
$
(35,568)
$
(52,616)
$
(179,210)
$
(168,681)
Amount recognized in AOCL at beginning of year,
pre-tax
265,899
288,882
32,152
21,472
Amount prepaid at beginning of year
230,331
236,266
(147,058)
(147,209)
Net periodic benefit
cost
3,810
(6,165)
(6,088)
(6,193)
Contributions
228
230
6,181
6,344
Amount prepaid at end of year
234,369
230,331
(146,965)
(147,058)
Amount recognized in AOCL
(225,356)
(265,899)
(12,993)
(32,152)
Net asset/(liabilities) at end of year
$
9,013
$
(35,568)
$
(159,958)
$
(179,210)
[1]
For 2021, significant components of the Pension Plans
actuarial gain that changed the benefit obligation were
mainly related to an increase in the
single weighted-average discount rates partially offset
by a lower return on the fair value of plan assets. For OPEB
Plans significant components of
the actuarial gain that change the benefit obligation were
mainly related to an increase in discount rates and
the per capita claim assumption at year-
end which was lower than expected.
The per capita claim methodology for the fully insured Medicare
Advantage plans changed from age-based per
capita cost to cost that
do not vary by age.
For 2020, significant components of the Pension Plans
actuarial loss that changed the benefit obligation
were mainly related to a decrease in discount rates partially
offset by a greater return on the fair value of plan
assets. For OPEB Plans significant
components of the actuarial loss that change the benefit
obligation were mainly related to a decrease in discount
rates partially offset by the per
capita claim assumption at year-end which was lower than
expected and the healthcare trend rate assumption which
was updated at year-end.
187
The following table presents the change in accumulated other
comprehensive loss (“AOCL”), pre-tax, for the years ended December
31, 2021 and 2020.
(In thousands)
Pension Plans
OPEB Plan
2021
2020
2021
2020
Accumulated other comprehensive loss at beginning of year
$
265,899
$
288,882
$
32,152
$
21,472
Increase (decrease) in AOCL:
Recognized during the year:
Amortization of actuarial losses
(18,876)
(20,880)
(1,873)
(567)
Occurring during the year:
Net actuarial (gains)/losses
(21,667)
(2,103)
(17,286)
11,247
Total (decrease) increase
in AOCL
(40,543)
(22,983)
(19,159)
10,680
Accumulated other comprehensive loss at end of year
$
225,356
$
265,899
$
12,993
$
32,152
The Corporation estimates
the service
and interest cost
components utilizing a
full yield curve
approach in the
estimation of these
components
by
applying the
specific spot
rates
along
the yield
curve
used in
the
determination of
the
benefit obligation
to
their
underlying projected cash flows.
To
determine
benefit
obligation
at
year
end,
the
Corporation
used
a
weighted
average
of
annual
spot
rates
applied
to
future
expected cash flows for years ended December 31, 2021
and 2020.
The following
table presents
the discount
rate and
assumed health
care cost
trend rates
used to
determine the
benefit obligation
and net periodic benefit cost for the plans:
Pension Plans
OPEB Plan
Weighted average assumptions used to
determine net periodic benefit cost for the
years ended December 31:
2021
2020
2019
2021
2020
2019
Discount rate for benefit obligation
2.41 - 2.48
%
3.22 - 3.27
%
4.20 - 4.23
%
2.65
%
3.38
%
4.30
%
Discount rate for service cost
N/A
N/A
N/A
3.09
%
3.72
%
4.49
%
Discount rate for interest cost
1.76 - 1.80
%
2.81 - 2.83
%
3.87 - 3.90
%
2.03
%
2.98
%
3.99
%
Expected return on plan assets
4.60 - 5.50
%
5.00 - 5.80
%
5.30 - 6.00
%
N/A
N/A
N/A
Initial health care cost trend rate
N/A
N/A
N/A
5.00
%
5.00
%
5.00
%
Ultimate health care cost trend rate
N/A
N/A
N/A
4.50
%
5.00
%
5.00
%
Year that the ultimate trend
rate is reached
N/A
N/A
N/A
2023
2020
2019
Pension Plans
OPEB Plan
Weighted average assumptions used to determine
benefit obligation at
December 31:
2021
2020
2021
2020
Discount rate for benefit obligation
2.79-2.83
%
2.41-2.48
%
2.94
%
2.65
%
Initial health care cost trend rate
N/A
N/A
4.75
%
5.00
%
Ultimate health care cost trend rate
N/A
N/A
4.50
%
4.50
%
Year that the ultimate trend
rate is reached
N/A
N/A
2023
2023
188
The following table presents information for plans with a projected benefit obligation and accumulated benefit obligation in excess of
plan assets for the years ended December 31,
2021 and 2020.
Pension Plans
OPEB Plan
(In thousands)
2021
2020
2021
2020
Projected benefit obligation
$
851,471
$
914,353
$
159,958
$
179,210
Accumulated benefit obligation
851,471
914,353
159,958
179,210
Fair value of plan assets
860,484
878,785
-
-
The Corporation expects to pay the following contributions
to the plans during the year ended December
31, 2022.
(In thousands)
2022
Pension Plans
$
227
OPEB Plan
$
5,971
Benefit payments projected to be made from the
plans during the next ten years are presented
in the table below.
(In thousands)
Pension Plans
OPEB Plan
2022
$
48,339
$
5,971
2023
45,409
6,117
2024
45,598
6,293
2025
45,742
6,458
2026
45,824
6,667
2027 - 2031
226,642
35,807
189
The table below presents a breakdown of the
plans’ assets and liabilities at December
31, 2021 and 2020.
Pension Plans
OPEB Plan
(In thousands)
2021
2020
2021
2020
Non-current assets
$
17,792
$
-
$
-
$
-
Current liabilities
227
229
5,959
6,328
Non-current liabilities
8,552
35,339
153,999
172,882
Savings plans
The
Corporation
also
provides
defined
contribution
savings
plans
pursuant
to
Section
1081.01(d)
of
the
Puerto
Rico
Internal
Revenue
Code
and
Section
401(k)
of
the
U.S.
Internal
Revenue Code,
as
applicable, for
substantially
all
the
employees
of
the
Corporation. Investments
in the
plans are
participant-directed, and employer
matching contributions
are determined
based on
the
specific provisions
of each
plan. Employees
are fully
vested in
the employer’s
contribution after
five years
of service.
The cost
of
providing these benefits in the year ended
December 31, 2021 was $13.3 million (2020 - $14.0
million, 2019 - $15.1 million).
The plans held 1,279,982 (2020 – 1,362,593)
shares of common stock of the Corporation with a market
value of approximately $105
million at December 31, 2021 (2020 - $77 million).
190
Note 31 – Net income per common share
The
following table
sets
forth the
computation of
net
income per
common share
(“EPS”), basic
and diluted,
for the
years
ended
December 31, 2021, 2020 and 2019:
(In thousands, except per share information)
2021
2020
2019
Net income
$
934,889
$
506,622
$
671,135
Preferred stock dividends
(1,412)
(1,758)
(3,723)
Net income applicable to common stock
$
933,477
$
504,864
$
667,412
Average common shares outstanding
81,263,027
85,882,371
96,848,835
Average potential dilutive common shares
157,127
92,888
148,965
Average common shares outstanding - assuming dilution
81,420,154
85,975,259
96,997,800
Basic EPS
$
11.49
$
5.88
$
6.89
Diluted EPS
$
11.46
$
5.87
$
6.88
As
disclosed
in
Note
20,
as
of
September
30,
2021,
the
Corporation completed
its
$350
million
accelerated
share
repurchase
transaction (“ASR”) and, in connection therewith, received
an initial delivery of 3,785,831 shares of common stock during
the second
quarter
of
2021
and
828,965
additional
shares
of
common
stock
during
the
third
quarter
of
2021.
The
final
number
of
shares
delivered was based in the average daily volume
weighted average price (“VWAP”) of its common stock,
net of discount, during the
term of the ASR, which amounted to $75.84.
Potential common shares consist of shares of common stock issuable under the assumed exercise of stock options, restricted stock
and
performance
share
awards
using
the
treasury
stock
method.
This
method
assumes
that
the
potential
common
shares
are
issued and
the proceeds
from exercise,
in addition
to the
amount of
compensation cost
attributed to
future services,
are used
to
purchase shares of common stock at the exercise date. The difference between the number of potential common shares issued and
the shares
of common
stock
purchased is
added as
incremental shares
to
the actual
number of
shares outstanding
to
compute
diluted
earnings
per
share.
Warrants,
stock
options,
restricted
stock
and
performance share
awards,
if
any,
that
result
in
lower
potential common shares
issued than shares
of common stock
purchased under the treasury
stock method are
not included in
the
computation of dilutive earnings per share
since their inclusion would have an antidilutive effect in earnings
per common share.
191
Note 32 – Revenue from contracts with customers
The following table presents
the Corporation’s revenue streams
from contracts with customers
by reportable segment for the
years
ended December 31, 2021, 2020 and 2019.
Years ended December
31,
(In thousands)
2021
2020
2019
BPPR
Popular U.S.
BPPR
Popular U.S.
BPPR
Popular U.S.
Service charges on deposit accounts
$
151,453
$
11,245
$
136,703
$
11,120
$
146,384
$
14,549
Other service fees:
Debit card fees
47,681
956
38,685
967
46,066
1,076
Insurance fees, excluding reinsurance
40,929
3,798
35,799
2,484
42,995
3,803
Credit card fees, excluding late fees and membership
fees
117,418
1,052
88,091
831
86,884
866
Sale and administration of investment products
23,634
-
21,755
-
23,072
-
Trust fees
24,855
-
21,700
-
21,198
-
Total revenue from
contracts with customers
[1]
$
405,970
$
17,051
$
342,733
$
15,402
$
366,599
$
20,294
[1] The amounts include intersegment transactions of $4.1 million,
$4.3 million and $3.8 million, respectively,
for the years ended December 31, 2021,
2020 and 2019.
Revenue from contracts with
customers is recognized when,
or as, the performance
obligations are satisfied by
the Corporation by
transferring the
promised services
to
the customers.
A
service is
transferred to
the customer
when, or
as, the
customer obtains
control
of
that
service.
A
performance obligation
may
be
satisfied over
time
or
at
a
point
in
time.
Revenue from
a
performance
obligation satisfied
over time
is recognized
based on
the services
that have
been rendered
to date.
Revenue from
a performance
obligation satisfied at a point in time
is recognized when the customer obtains control over the
service. The transaction price, or the
amount of revenue
recognized, reflects the
consideration the Corporation expects
to be entitled
to in exchange
for those promised
services. In determining the transaction price, the Corporation considers the effects of variable consideration. Variable consideration
is included
in the
transaction price
only to
the extent
it is
probable that a
significant reversal
in the
amount of
cumulative revenue
recognized will
not occur.
The Corporation
is the
principal in
a transaction
if it
obtains control
of the
specified goods
or services
before they
are transferred
to
the customer.
If the
Corporation acts
as principal,
revenues are
presented in
the gross
amount of
consideration to which it expects to
be entitled and are not
netted with any related expenses. On the
other hand, the Corporation is
an agent if it does not control
the specified goods or services before they are
transferred to the customer. If
the Corporation acts as
an agent, revenues are presented in the amount
of consideration to which it expects to be entitled,
net of related expenses.
Following is a description of the nature and timing
of revenue streams from contracts with customers:
Service charges on deposit accounts
Service
charges
on
deposit
accounts
are
earned
on
retail
and
commercial
deposit
activities
and
include,
but
are
not
limited
to,
nonsufficient fund
fees, overdraft
fees and
checks stop
payment fees.
These transaction-based
fees are
recognized at
a point
in
time,
upon
occurrence
of
an
activity
or
event
or
upon
the
occurrence
of
a
condition
which
triggers
the
fee
assessment.
The
Corporation is acting as principal in these transactions.
Debit card fees
Debit card fees include, but are not limited to, interchange
fees, surcharging income and foreign transaction
fees.
These transaction-
based fees
are recognized at
a point in
time, upon
occurrence of an
activity or
event or upon
the occurrence of
a condition which
triggers
the
fee
assessment.
Interchange
fees
are
recognized
upon
settlement
of
the
debit
card
payment
transactions.
The
Corporation is acting as principal in these transactions.
Insurance fees
Insurance fees
include, but
are
not limited
to, commissions
and contingent
commissions.
Commissions and
fees
are
recognized
when related
policies are effective
since the Corporation
does not
have an enforceable
right to
payment for services
completed to
date.
An
allowance
is
created
for
expected
adjustments
to
commissions
earned
related
to
policy
cancellations.
Contingent
commissions
are
recorded
on
an
accrual
basis
when
the
amount
to
be
received
is
notified
by
the
insurance
company.
The
192
Corporation is acting
as an
agent since it
arranges for the
sale of
the policies and
receives commissions if,
and when, it
achieves
the sale.
Credit card fees
Credit card
fees include,
but are
not limited
to, interchange
fees, additional
card fees,
cash advance
fees, balance
transfer fees,
foreign transaction fees, and returned payments
fees. Credit card fees are
recognized at a point in
time, upon the occurrence of an
activity or
an event.
Interchange fees
are recognized
upon settlement
of the
credit card
payment transactions. The
Corporation is
acting as principal in these transactions.
Sale and administration of investment products
Fees from
the sale
and administration
of investment
products include,
but are
not limited
to, commission
income from
the sale
of
investment products, asset management fees, underwriting
fees, and mutual fund fees.
Commission income from investment products is recognized on the trade date since clearing, trade execution, and custody services
are satisfied when
the customer acquires
or disposes of
the rights to
obtain the economic
benefits of the
investment products and
brokerage contracts have no fixed duration and
are terminable at will by
either party. The
Corporation is acting as principal in these
transactions since it
performs the service
of providing the
customer with the
ability to acquire
or dispose of
the rights to
obtain the
economic benefits of investment products.
Asset
management
fees
are
satisfied
over
time
and
are
recognized
in
arrears.
At
contract
inception,
the
estimate
of
the
asset
management fee
is constrained
from the
inclusion in
the transaction
price since
the promised
consideration is
dependent on
the
market and thus
is highly susceptible
to factors
outside the manager’s
influence. As advisor,
the broker-dealer subsidiary
is acting
as principal.
Underwriting fees are
recognized at a point
in time, when
the investment products
are sold in
the open market at
a markup. When
the broker-dealer subsidiary is lead
underwriter, it is
acting as an agent. In
turn, when it is
a participating underwriter, it
is acting as
principal.
Mutual fund fees,
such as distribution fees,
are considered variable consideration
and are recognized over
time, as the
uncertainty
of the fees to be
received is resolved as NAV
is determined and investor activity occurs. The
promise to provide distribution-related
services
is
considered
a
single
performance
obligation
as
it
requires
the
provision
of
a
series
of
distinct
services
that
are
substantially the same and have the same pattern of
transfer. When the broker-dealer subsidiary is acting as a distributor, it is acting
as principal. In turn, when it acts as third-party dealer, it is acting
as an agent.
Trust fees
Trust fees
are recognized from
retirement plan, mutual fund
administration, investment management, trustee, escrow,
and custody
and
safekeeping services.
These
asset
management services
are
considered
a
single
performance obligation
as
it
requires the
provision of
a series
of distinct
services that
are substantially
the same
and have
the same
pattern of
transfer.
The performance
obligation
is
satisfied
over
time,
except
for
optional
services
and
certain
other
services
that
are
satisfied
at
a
point
in
time.
Revenues are recognized in
arrears,
when, or as,
the services are rendered.
The Corporation is
acting as principal since,
as asset
manager, it has the obligation to provide the specified service to the customer and
has the ultimate discretion in establishing the fee
paid by the customer for the specified services.
193
Note 33 – Leases
The
Corporation enters
in
the
ordinary course
of
business
into
operating and
finance
leases
for
land,
buildings
and
equipment.
These contracts generally do
not include purchase options
or residual value guarantees.
The remaining lease terms
of 0.1 to
32.0
years considers
options to
extend the
leases for
up to
20.0 years.
The Corporation
identifies leases
when it
has both
the right
to
obtain substantially all of the economic benefits from
the use of the asset and the right to direct
the use of the asset.
The Corporation
recognizes right-of-use
assets (“ROU
assets”) and
lease liabilities
related to
operating and
finance leases
in its
Consolidated Statements of Financial Condition under the caption of other assets and other liabilities, respectively. Refer to Note 14
and Note 19, respectively,
for information on the balances of these
lease assets and liabilities.
The Corporation uses the
incremental borrowing rate for
purposes of discounting lease payments
for operating and finance leases,
since it
does not have
enough information to
determine the rates
implicit in the
leases. The discount
rates are based
on fixed-rate
and
fully
amortizing
borrowing
facilities
of
its
banking
subsidiaries
that
are
collateralized.
For
leases
held
by
non-banking
subsidiaries, a credit spread is added to this rate
based on financing transactions with a
similar credit risk profile.
On October
27, 2020, PB,
the United
States mainland banking
subsidiary of the
Corporation, authorized and
approved a strategic
realignment of
its New
York
Metro branch
network that
resulted in
eleven branch
closures, of
which nine
were leased
properties.
The
branch
closures
were completed
on
January
29,
2021.
An
impairment loss
of
ROU
assets
amounting to
$15.9
million
was
recognized in connection with this transaction during
the fourth quarter of 2020.
The following table presents the undiscounted
cash flows of operating and finance leases for
each of the following periods:
December 31, 2021
(In thousands)
2022
2023
2024
2025
2026
Later
Years
Total Lease
Payments
Less:
Imputed
Interest
Total
Operating Leases
$
30,044
$
27,956
$
26,550
$
23,619
$
15,187
$
50,912
$
174,268
$
(20,154)
$
154,114
Finance Leases
3,402
3,491
3,589
3,701
3,350
5,501
23,034
(3,315)
19,719
The following table presents the lease cost recognized
by the Corporation in the Consolidated
Statements of Operations as follows:
Years ended December
31,
(In thousands)
2021
2020
2019
Finance lease cost:
Amortization of ROU assets
$
2,006
$
2,215
$
1,701
Interest on lease liabilities
1,044
1,185
1,194
Operating lease cost
29,970
31,674
30,664
Short-term lease cost
647
214
252
Variable lease cost
93
51
97
Sublease income
(70)
(113)
(113)
Net gain recognized from sale and leaseback transaction
[1]
(7,007)
(5,550)
-
Impairment of operating ROU assets
[2]
-
14,805
-
Impairment of finance ROU assets
[2]
-
1,115
-
Total lease cost
[3]
$
26,683
$
45,596
$
33,795
[1]
During the quarter ended September 30, 2021, the Corporation
recognized the transfer of two corporate office
buildings as a sale. During the
quarter ended June 30, 2020, the Corporation recognized the
transfer of the Caparra Center as a sale. Since these
sale and partial leaseback
transactions were considered to be at fair value, no portion
of the gain on sale was deferred.
[2]
Impairment loss recognized during the fourth quarter of
2020 in connection with the closure of nine branches as
a result of the strategic
realignment of PB’s New York
Metro branch network.
[3]
Total lease cost
is recognized as part of net occupancy expense, except
for the net gain recognized from sale and leaseback
transactions which
was included as part of other operating income.
194
The
following
table
presents
supplemental
cash
flow
information
and
other
related
information
related
to
operating
and
finance
leases.
Years ended December
31,
(Dollars in thousands)
2021
2020
2019
Cash paid for amounts included in the measurement of
lease liabilities:
Operating cash flows from operating leases
[1]
$
38,288
$
41,650
$
30,073
Operating cash flows from finance leases
1,044
1,185
1,200
Financing cash flows from finance leases
[1]
2,852
3,145
1,726
ROU assets obtained in exchange for new lease obligations:
Operating leases
[2]
$
24,136
$
14,975
$
28,430
Finance leases
-
4,510
661
Weighted-average remaining lease term:
Operating leases
7.9
years
8.0
years
8.7
years
Finance leases
8.3
years
8.9
years
7.3
years
Weighted-average discount rate:
Operating leases
2.7
%
3.0
%
3.4
%
Finance leases
5.0
%
5.0
%
5.9
%
[1]
During the quarter ended March 31, 2021, the Corporation made
base lease termination payments amounting to $7.8 million
in connection with
the closure of nine branches as a result of the strategic realignment
of PB’s New York
Metro branch network.
[2]
During the quarter ended September 30, 2021, the Corporation
recognized a lease liability of $16.8 million and
a corresponding ROU asset for
the same amount as a result of the partial leaseback of
two corporate office buildings.
As
of
December
31,
2021,
the
Corporation
has
an
additional
operating
lease
contract
that
has
not
yet
commenced
with
an
undiscounted contract amount of $2.3 million, which
will have a lease term of 20 years.
195
Note 34 - Stock-based compensation
Incentive Plan
On May 12, 2020, the shareholders of the Corporation approved the Popular, Inc. 2020 Omnibus Incentive Plan, which permits
the Corporation to issue several types of stock-based compensation to employees and directors
of the Corporation and/or any of its
subsidiaries (the
“2020 Incentive
Plan”). The
2020 Incentive
Plan replaced
the Popular,
Inc. 2004
Omnibus Incentive
Plan, which
was in effect
prior to the adoption of
the 2020 Incentive Plan (the
“2004 Incentive Plan” and,
together with the 2020 Incentive
Plan,
the
“Incentive
Plan”).
Participants
under
the
Incentive
Plan
are
designated
by
the
Compensation
Committee
of
the
Board
of
Directors (or
its delegate,
as determined by
the Board).
Under the Incentive
Plan, the
Corporation has issued
restricted stock
and
performance shares for its employees and restricted
stock and restricted stock units (“RSUs”) to its directors.
The restricted
stock granted
under the
Incentive Plan
to employees
becomes vested
based on
the employees’
continued service
with Popular.
Unless otherwise
stated in
an agreement,
the compensation
cost
associated with
the shares
of
restricted stock
is
determined based on a two-prong vesting
schedule. The first part is vested
ratably over five years commencing at the
date of grant
(the “graduated vesting portion”) and
the second part is vested
at termination of employment after attaining
55 years of age
and 10
years of service
(the “retirement vesting
portion”).
The graduated vesting
portion is accelerated
at termination of
employment after
attaining 55 years
of age and
10 years of
service. The vesting
schedule for restricted
shares granted on
or after
2014 and prior
to
2021 was modified
as follows:
the graduated vesting
portion is vested
ratably over four
years commencing at
the date of
the grant
and the retirement vesting portion is
vested at termination of employment
after attaining the earlier of 55
years of age and 10
years
of service
or 60
years of
age and
5 years
of service.
The graduated
vesting portion
is accelerated
at termination
of employment
after attaining
the earlier
of 55
years of
age and
10 years
of service
or 60
years of
age and
5 years
of service.
Restricted stock
granted
on
or
after
2021
will
vest
ratably
in
equal
annual
installments
over
a
period
of
4
years
or
3
years,
depending
in
the
classification of the employee.
The
performance
share
award
granted
under
the
Incentive
Plan
consist
of
the
opportunity
to
receive
shares
of
Popular,
Inc.’s
common stock provided that the Corporation achieves certain goals during a three-year performance cycle.
The goals will be based
on two metrics weighted equally: the Relative Total Shareholder Return (“TSR”) and the Absolute Earnings per Share (“EPS”) goals.
For grants issued
on 2020 and
2021, the EPS
goal is substituted by
the Absolute Return
on Average Assets
(“ROA”) goal and the
Absolute
Return on
Average
Tangible
Common Equity
(“ROATCE”)
respectively.
The
TSR metric
is
considered to
be
a market
condition under ASC 718.
For equity settled awards
based on a market
condition, the fair value
is determined as of
the grant date
and
is
not
subsequently
revised
based
on
actual
performance.
The
EPS,
ROA
and
ROATCE
metrics
are
considered
to
be
a
performance condition under ASC 718.
The fair value is determined based on the probability of achieving the EPS,
ROA goal as of
each reporting period.
The TSR and EPS, ROA or ROATCE
metrics are equally weighted and work independently.
The number of
shares that will ultimately vest ranges from 50%
to a 150% of target based
on both market (TSR) and performance (EPS, ROA and
ROATCE)
conditions.
The
performance
shares
vest
at
the
end
of
the
three-year
performance cycle.
If
a
participant
terminates
employment after
attaining the
earlier of
55 years
of age
and 10
years of
service or
60 years
of age
and 5
years of
service,
the
performance shares shall continue outstanding and vest
at the end of the performance cycle.
The
following
table
summarizes
the
restricted
stock
and
performance
shares
activity
under
the
Incentive
Plan
for
members
of
management.
196
(Not in thousands)
Shares
Weighted-average
grant date fair value
Non-vested at January 1, 2019
382,186
$
36.41
Granted
218,169
55.55
Performance Shares Quantity Adjustment
15,061
55.72
Vested
(270,051)
44.73
Non-vested at December 31, 2019
345,365
$
41.68
Granted
253,943
42.49
Performance Shares Quantity Adjustment
(7)
48.79
Vested
(234,421)
42.64
Forfeited
(6,368)
44.26
Non-vested at December 31, 2020
358,512
$
41.23
Granted
191,479
69.38
Performance Shares Quantity Adjustment
54,306
54.21
Vested
(273,974)
55.11
Forfeited
(8,440)
43.48
Non-vested at December 31, 2021
321,883
$
47.98
During
the
year
ended
December
31,
2021,
120,105
shares
of
restricted
stock
(2020
-
213,511
;
2
019
-
152,773)
and
71,374
performance shares (2020 - 40,432;
2019 - 65,396)
were awarded to management under the
Incentive Plan.
During
the
year
ended
December
31,
2021,
the
Corporation
recognized
$8.6
million
of
restricted
stock
expense
related
to
management incentive awards,
with a tax
benefit of $1.6
million (2020 -
$7.6 million, with
a tax benefit
of $1.3 million;
2019 - $7.7
million, with
a tax
benefit of
$1.2 million).
During the
year ended
December 31,
2021, the
fair market
value of
the restricted
stock
vested was $11.6 million
at grant date and $18.6 million at vesting date. This
triggers a windfall of $2.5 million that was recorded as
a
reduction
on
income
tax
expense.
During
the
year
ended
December
31,
2021
the
Corporation
recognized
$5.8
million
of
performance shares
expense, with
a tax
benefit of
$0.5 million
(2020 -
$2.3 million,
with a
tax benefit
of $0.2
million; 2019
- $4.6
million, with a
tax benefit of
$0.3 million).
The total unrecognized compensation cost
related to non-vested restricted
stock awards
to members
of management
at December
31, 2021
was $8.9
million and
is expected
to
be recognized
over a
weighted-average
period of 2.1 years.
The following table summarizes the restricted stock
activity under the Incentive Plan for members of
the Board of Directors:
(Not in thousands)
Restricted stock
Weighted-average
grant date fair value
RSU
Weighted-average
grant date fair value
Non-vested at January 1, 2019
-
-
-
-
Granted
1,052
$
49.25
27,449
$
57.64
Vested
(1,052)
49.25
(27,449)
57.64
Forfeited
-
-
-
-
Non-vested at December 31, 2019
-
-
-
-
Granted
-
$
-
43,866
$
35.47
Vested
-
-
(43,866)
35.47
Forfeited
-
-
-
-
Non-vested at December 31, 2020
-
-
-
-
Granted
-
$
-
20,638
$
78.20
Vested
-
-
(20,638)
78.20
Forfeited
-
-
-
-
Non-vested at December 31, 2021
-
-
-
-
197
The
equity
awards
granted
to
members
of
the
Board
of
Directors
of
Popular,
Inc.
(the
“Directors”)
will
vest
and
become
non-
forfeitable on the
grant date of
such award. Effective
in May 2019,
all equity awards
granted to the
Directors may be
paid in either
restricted
stock
or
RSUs
at
each
Directors
election.
If
RSUs
are
elected,
the
Directors
may
defer
the
delivery
of
the
shares
of
common
stock underlying
the
RSU award
until
their
retirement. To
the
extent that
cash
dividends are
paid
on
the
Corporation’s
outstanding common stock, the Directors holding RSUs will receive an
additional number of RSUs that reflect a
reinvested dividend
equivalent.
For 2019, Directors
elected shares of
restricted stock and
RSUs and for
2020 and 2021,
all Directors elected
RSUs.
For the year
ended December 31, 2021, 20,638 RSUs were granted to the Directors (2020 - 43,866; 2019 -
1,052; shares of restricted stock and
27,449
RSUs).
For
the
year
ended
December
31,
2021,
$1.9
million
of
restricted
stock
expense
related
to
these
RSUs
was
recognized, with a
tax benefit
of $0.4
million (2020
- $1.6 million
with a
tax benefit of
$0.3 million; 2019
- $52
thousand with a
tax
benefit of $6
thousand for shares
of restricted stock
and $1.6 million
with a tax
benefit of $0.2
million for RSUs).
The fair value
at
vesting date of the RSUs vested during the
year ended December 31, 2021 for the Directors was
$1.6 million.
198
Note 35 – Income taxes
The components of income tax expense for the years
ended December 31, are summarized in the
following table.
(In thousands)
2021
2020
2019
Current income tax (benefit) expense:
Puerto Rico
$
69,415
$
33,281
$
2,251
Federal and States
10,232
3,613
3,598
Subtotal
79,647
36,894
5,849
Deferred income tax expense (benefit):
Puerto Rico
179,688
69,300
123,337
Federal and States
49,683
5,744
17,995
Subtotal
229,371
75,044
141,332
Total income tax
expense
$
309,018
$
111,938
$
147,181
The reasons
for the
difference between
the income
tax expense
applicable to
income before
provision for
income taxes
and the
amount computed by applying the statutory tax rate
in Puerto Rico were as follows:
2021
2020
2019
(In thousands)
Amount
% of pre-tax
income
Amount
% of pre-tax
income
Amount
% of pre-tax
income
Computed income tax at statutory rates
$
466,465
38
%
$
231,960
38
%
$
306,869
38
%
Benefit of net tax exempt interest income
(139,426)
(12)
(126,232)
(20)
(145,597)
(18)
Effect of income subject to preferential tax rate
(11,981)
(1)
(10,141)
(2)
(9,562)
(1)
Deferred tax asset valuation allowance
20,932
2
15,276
2
16,992
2
Difference in tax rates due to multiple jurisdictions
(30,719)
(3)
(1,903)
-
(12,888)
(2)
Adjustment in net deferred tax due to change in the
applicable tax rate
-
-
-
-
(6,559)
(1)
Unrecognized tax benefits
(5,484)
-
(2,163)
-
-
-
State and local taxes
14,629
1
4,350
-
4,749
1
Others
(5,398)
-
791
-
(6,823)
(1)
Income tax expense
$
309,018
25
%
$
111,938
18
%
$
147,181
18
%
For the year ended December 31, 2021, the Corporation
recorded income tax expense of $309.0 million,
compared to $111.9 million
for
the
previous
year.
The
increase
in
income
tax
expense
was
mainly
due
to
higher
pre-tax
income
during
the
year
2021
as
compared
to
year
2020
resulting
primarily
from
a
lower
provision
for
credit
losses
partially
offset
by
higher
net
exempt
interest
income and higher income from the U.S. operations
subject to lower statutory tax rate.
The results for the year
2019 include an additional income tax
benefit of $26 million related to
the revision of the amount
of exempt
income earned in prior years,
that resulted in the amendment of
income tax returns for Banco Popular
de Puerto Rico for the
years
2015 to 2017 and certain adjustments pertaining
to tax periods for which the statute of limitations had
expired.
Deferred income taxes reflect the
net tax effects
of temporary differences between the
carrying amounts of assets and
liabilities for
financial reporting
purposes and
their tax
bases. Significant
components of
the Corporation’s
deferred tax
assets and
liabilities at
December 31 were as follows:
199
December 31, 2021
(In thousands)
PR
US
Total
Deferred tax assets:
Tax credits available
for carryforward
$
261
$
2,781
$
3,042
Net operating loss and other carryforward available
112,331
665,164
777,495
Postretirement and pension benefits
57,002
-
57,002
Deferred loan origination fees/cost
2,788
-
2,788
Allowance for credit losses
233,500
31,872
265,372
Deferred gains
1,642
-
1,642
Accelerated depreciation
5,246
7,422
12,668
FDIC-assisted transaction
152,665
-
152,665
Lease liability
31,211
23,894
55,105
Difference in outside basis from pass-through entities
54,781
-
54,781
Other temporary differences
38,512
8,418
46,930
Total gross deferred
tax assets
689,939
739,551
1,429,490
Deferred tax liabilities:
Indefinite-lived intangibles
76,635
51,150
127,785
Unrealized net gain (loss) on trading and available-for-sale securities
4,329
2,817
7,146
Right of use assets
29,025
20,282
49,307
Deferred loan origination fees/cost
-
3,567
3,567
Other temporary differences
43,856
1,530
45,386
Total gross deferred
tax liabilities
153,845
79,346
233,191
Valuation allowance
128,557
410,970
539,527
Net deferred tax asset
$
407,537
$
249,235
$
656,772
December 31, 2020
(In thousands)
PR
US
Total
Deferred tax assets:
Tax credits available
for carryforward
$
3,003
$
5,269
$
8,272
Net operating loss and other carryforward available
124,355
698,842
823,197
Postretirement and pension benefits
80,179
-
80,179
Deferred loan origination fees
12,079
(2,652)
9,427
Allowance for credit losses
373,010
38,606
411,616
Accelerated depreciation
3,439
5,390
8,829
FDIC-assisted transaction
152,665
-
152,665
Intercompany deferred gains
1,728
-
1,728
Lease liability
22,790
18,850
41,640
Difference in outside basis from pass-through entities
61,222
-
61,222
Other temporary differences
38,954
7,344
46,298
Total gross deferred
tax assets
873,424
771,649
1,645,073
Deferred tax liabilities:
Indefinite-lived intangibles
73,305
37,745
111,050
Unrealized net gain (loss) on trading and available-for-sale securities
67,003
8,595
75,598
Right of use assets
20,708
15,510
36,218
Other temporary differences
50,247
1,169
51,416
Total gross deferred
tax liabilities
211,263
63,019
274,282
Valuation allowance
112,871
407,225
520,096
Net deferred tax asset
$
549,290
$
301,405
$
850,695
200
The net deferred
tax asset shown
in the
table above at
December 31, 2021
is reflected in
the consolidated statements
of financial
condition as
$0.7 billion
in net
deferred tax
assets (in
the “other
assets” caption)
(2020 -
$0.9 billion
in deferred
tax asset
in the
“other
assets”
caption)
and
$825
thousand
in
deferred
tax
liabilities
(in
the
“other
liabilities”
caption)
(2020
-
$897
thousand
in
deferred
tax
liabilities
in
the
“other
liabilities”
caption),
reflecting the
aggregate
deferred
tax
assets or
liabilities
of
individual tax-
paying subsidiaries of the Corporation.
The deferred tax asset related to the NOLs outstanding
at December 31, 2021 expires as follows:
(In thousands)
2022
$
396
2023
1,363
2024
9,310
2025
13,516
2026
13,367
2027
15,202
2028
288,395
2029
119,297
2030
120,255
2031
117,210
2032
22,758
2033
10,749
2034
44,473
2035
1,079
2036
125
$
777,495
At December
31, 2021
the net
deferred tax
asset of
the U.S.
operations amounted
to $660
million with
a valuation
allowance of
approximately $411
million, for
a net
deferred tax
asset after
valuation allowance
of approximately
$249 million.
The Corporation
evaluates the
realization of
the deferred
tax asset
by taxing
jurisdiction. The
U.S. operation
is not
in a
cumulative three-year
loss
position
and
had
sustained
profitability
for
the
three-year
period
ended
December
31,
2021.
Years
2020
and
2021
have
been
impacted by the COVID-19 pandemic and other events. Year
2020 was unfavorably impacted by the ACL reserve build-ups and the
impairment
of
expenses
on
the
branch
closures
in
the
New
York
region.
Year
2021
has
been
favorably
impacted
by
a
strong
economic recovery that
resulted in ACL
reserve releases,
reversing the
year 2020
build-up.
The financial
results for year
2021 is
objectively verifiable positive evidence, evaluated together with
the positive evidence of stable credit metrics, in combination with the
length of
the expiration
of the
NOLs. On
the other
hand, the
Corporation evaluated
the negative
evidence accumulated
over the
years, including financial results lower than expectations and the uncertainty created by new variants of COVID-19. As of December
31,
2021,
after
weighting
all
positive
and
negative
evidence,
the
Corporation
concluded
that
it
is
more
likely
than
not
that
approximately $249
million
of the
deferred tax
asset from
the
U.S. operations,
comprised mainly
of net
operating losses,
will
be
realized.
The
Corporation
based
this
determination
on
its
estimated
earnings
available
to
realize
the
deferred
tax
asset
for
the
remaining carryforward
period, together
with the
historical level
of book
income adjusted
by permanent
differences. Management
will continue to monitor and
review the U.S. operation’s results
and the pre-tax earnings forecast
on a quarterly basis to
assess the
future realization of the deferred tax asset. Management
will closely monitor factors, including, net income versus forecast, targeted
loan growth, net interest
income margin, allowance for credit
losses, charge offs,
NPLs inflows and NPA
balances. Strong financial
results during year
2022 together with the
additional income expected from
the recent acquisition of
K2 assets, along
with new tax
initiatives
could
be
considered
additional
positive
evidence
that,
in
the
future,
could
overcome
totally
or
partially
the
negative
evidence evaluated as of December 31, 2021,
that could result in future adjustments to the
valuation allowance.
At December 31, 2021, the Corporation’s net deferred
tax assets related to its Puerto Rico operations
amounted to $408 million.
201
The Corporation’s
Puerto Rico
Banking operation
is not
in a
cumulative loss
position and
has sustained
profitability for
the three
year period ended December 31, 2021. This
is considered a strong piece of
objectively verifiable positive evidence that out weights
any
negative evidence
considered by
management in
the
evaluation of
the
realization of
the
deferred tax
asset.
Based
on
this
evidence and
management’s estimate
of future
taxable income,
the Corporation
has concluded
that it
is more
likely than
not that
such net deferred tax asset of the Puerto Rico
Banking operations will be realized.
The
Holding
Company
operation
is
in
a
cumulative
loss
position,
taking
into
account
taxable
income
exclusive
of
reversing
temporary differences, for
the three
years period ending
December 31, 2021.
Management expects these
losses will be
a trend in
future
years.
This
objectively
verifiable
negative
evidence
is
considered
by
management
a
strong
negative
evidence
that
will
suggest
that
income
in
future
years
will
be
insufficient
to
support
the
realization
of
all
deferred
tax
asset.
After
weighting
of
all
positive
and
negative evidence
management concluded,
as
of
the reporting
date,
that
it
is
more
likely
than
not that
the
Holding
Company will not
be able to
realize any portion
of the deferred tax
assets, considering the criteria
of ASC Topic
740.
Accordingly,
the Corporation has maintained a full valuation allowance
on the deferred tax asset of $129 million
as of December 2021.
Under the Puerto Rico Internal Revenue Code, the
Corporation and its subsidiaries are treated as separate taxable
entities and are
not
entitled to
file consolidated
tax returns.
However,
certain subsidiaries
that
are organized
as limited
liability companies
with a
partnership
election
are
treated
as
pass-through entities
for
Puerto
Rico
tax
purposes. The
Code
provides
a
dividends-received
deduction of
100% on
dividends received
from “controlled”
subsidiaries subject
to taxation
in Puerto
Rico and
85% on
dividends
received from other taxable domestic corporations.
The Corporation’s
subsidiaries in
the United
States file
a consolidated
federal income
tax return.
The intercompany
settlement of
taxes paid is based on tax sharing agreements
which generally allocate taxes to each
entity based on a separate return basis.
The following table presents a reconciliation of
unrecognized tax benefits.
(In millions)
Balance at January 1, 2020
$
16.3
Reduction as a result of lapse of statute of limitations
(1.5)
Balance at December 31, 2020
$
14.8
Reduction as a result of lapse of statute of limitations
(11.3)
Balance at December 31, 2021
$
3.5
202
At
December 31,
2021, the
total amount
of
interest recognized
in the
statement of
financial condition
approximated
$2.8
million
(2020 - $4.8 million). The total interest expense recognized during 2021 was $892 thousand net of a reduction of $2.9 million due to
the expiration of the statute
of limitation (2020 - $2.0 million
net of a reduction of
$645 thousand). Management determined that, as
of December
31, 2021
and 2020,
there was
no need
to accrue
for the
payment of
penalties. The
Corporation’s policy
is to
report
interest
related
to
unrecognized tax
benefits
in
income
tax
expense,
while
the
penalties,
if
any,
are
reported
in
other
operating
expenses in the consolidated statements of operations.
After consideration
of the
effect on
U.S. federal
tax of
unrecognized U.S.
state tax
benefits, the
total amount
of unrecognized
tax
benefits, including U.S.
and Puerto Rico
that, if recognized
through earnings, would
affect the Corporation’s
effective tax rate,
was
approximately $5.5 million at December 31, 2021
(2020 - $10.2 million).
The amount of
unrecognized tax benefits
may increase or
decrease in the
future for various
reasons including adding amounts
for
current
tax
year
positions,
expiration
of
open
income
tax
returns
due
to
the
statute
of
limitations,
changes
in
management’s
judgment about
the level
of uncertainty,
status of
examinations, litigation
and legislative
activity,
and the
addition or
elimination of
uncertain tax positions.
The
Corporation and
its subsidiaries
file
income tax
returns in
Puerto
Rico, the
U.S. federal
jurisdiction, various
U.S. states
and
political subdivisions, and
foreign jurisdictions. As
of December 31,
2021, the
following years remain
subject to
examination in the
U.S.
Federal
jurisdiction
–
2018
and
thereafter
and
in
the
Puerto
Rico
jurisdiction
–
2017
and
thereafter.
The
Corporation
anticipates
a
reduction
in
the
total
amount
of
unrecognized
tax
benefits
within
the
next
12
months,
which
could
amount
to
approximately $1.4 million, including interest.
203
Note 36 – Supplemental disclosure on the consolidated
statements of cash flows
Additional disclosures on cash flow information and
non-cash activities for the years ended December
31, 2021, 2020 and 2019 are
listed in the following table:
(In thousands)
2021
2020
2019
Income taxes paid
$
64,997
$
13,045
$
14,461
Interest paid
170,442
240,342
369,383
Non-cash activities:
Loans transferred to other real estate
57,638
14,464
67,056
Loans transferred to other property
45,144
48,614
53,286
Total loans transferred
to foreclosed assets
102,782
63,078
120,342
Loans transferred to other assets
7,219
7,117
16,503
Financed sales of other real estate assets
13,014
15,606
15,907
Financed sales of other foreclosed assets
43,060
34,492
30,840
Total financed sales
of foreclosed assets
56,074
50,098
46,747
Financed sale of premises and equipment
31,085
31,350
-
Transfers from premises and equipment to
long-lived assets held-for-sale
32,103
-
-
Transfers from loans held-in-portfolio to
loans held-for-sale
69,890
82,299
-
Transfers from loans held-for-sale to loans
held-in-portfolio
9,762
20,153
7,829
Loans securitized into investment securities
[1]
732,533
508,071
458,758
Trades receivables from brokers and
counterparties
64,824
64,092
39,364
Trades payable to brokers and counterparties
13,789
720,212
4,084
Recognition of mortgage servicing rights on securitizations
or asset transfers
13,391
9,544
9,143
Loans booked under the GNMA buy-back option
19,798
24,244
72,480
Capitalization of Right of Use Assets
35,683
29,692
189,097
[1]
Includes loans securitized into trading securities and subsequently
sold before year end.
The following table provides a reconciliation of
cash and due from banks, and restricted cash
reported within the Consolidated
Statement of Financial Condition that sum to the total of
the same such amounts shown in the Consolidated
Statement of Cash
Flows.
(In thousands)
December 31, 2021
December 31, 2020
December 31, 2019
Cash and due from banks
$
411,346
$
484,859
$
361,705
Restricted cash and due from banks
17,087
6,206
26,606
Restricted cash in money market investments
6,079
6,029
6,012
Total cash and due
from banks, and restricted cash
[2]
$
434,512
$
497,094
$
394,323
[2]
Refer to Note 5 - Restrictions on cash and due from banks
and certain securities for nature of restrictions.
204
Note 37 – Segment reporting
The
Corporation’s
corporate
structure
consists
of
two
reportable
segments
–
Banco
Popular
de
Puerto
Rico
and
Popular
U.S.
Management
determined the
reportable
segments
based
on
the
internal
reporting
used
to
evaluate
performance and
to
assess
where to allocate
resources. The segments were
determined based on the
organizational structure, which focuses
primarily on the
markets the segments serve, as well as on the products
and services offered by the segments.
Banco Popular de Puerto Rico:
Given that Banco Popular de
Puerto Rico constitutes a significant portion of
the Corporation’s results of operations
and total assets
at December 31, 2021, additional disclosures are provided for
the business areas included in this reportable segment, as described
below:
●
Commercial
banking
represents
the
Corporation’s
banking
operations
conducted
at
BPPR,
which
are
targeted
mainly
to
corporate, small
and middle
size businesses.
It includes
aspects of
the lending
and depository
businesses, as
well as
other
finance
and
advisory services.
BPPR
allocates funds
across
business areas
based on
duration matched
transfer pricing
at
market rates. This area also incorporates income related with the investment of excess funds,
as well as a proportionate share
of the investment function of BPPR.
●
Consumer and
retail banking
represents the
branch banking operations
of BPPR
which focus
on retail clients.
It includes
the
consumer lending
business
operations of
BPPR, as
well as
the
lending operations
of
Popular
Auto
and
Popular
Mortgage.
Popular Auto
focuses on
auto and
lease financing,
while Popular
Mortgage focuses
principally on
residential mortgage
loan
originations.
The consumer and retail banking
area also incorporates income related
with the investment of excess funds
from
the branch network, as well as a proportionate
share of the investment function of BPPR.
●
Other financial
services include
the trust
service units
of BPPR,
asset management
services of
Popular Asset
Management,
the brokerage and investment banking operations of Popular
Securities, and the insurance agency and reinsurance businesses
of Popular Insurance, Popular Risk Services, and Popular Life Re. Most of
the services that are provided by these subsidiaries
generate profits based on fee income.
Popular U.S.:
Popular U.S. reportable segment
consists of the
banking operations of Popular
Bank (PB), Popular Insurance
Agency, U.S.A.,
and
Popular Equipment
Finance (PEF). PB
operates through a
retail branch network
in the
U.S. mainland under
the name
of Popular,
and
equipment
leasing
and
financing services
through PEF.
Popular
Insurance Agency,
U.S.A. offers
investment
and
insurance
services across the PB branch network.
The Corporate group
consists primarily of
the holding companies
Popular, Inc.,
Popular North America,
Popular International Bank
and certain
of the
Corporation’s investments
accounted for
under the
equity method,
including EVERTEC
and Centro
Financiero
BHD, León.
The
accounting
policies
of
the
individual
operating
segments
are
the
same
as
those
of
the
Corporation.
Transactions
between
reportable segments are primarily conducted at market rates, resulting
in profits that are eliminated for reporting consolidated results
of operations.
The tables that follow present the results of operations
and total assets by reportable segments:
205
December 31, 2021
Banco Popular
Intersegment
(In thousands)
de Puerto Rico
Popular U.S.
Eliminations
Net interest income
$
1,674,589
$
321,154
$
6
Provision for credit losses (benefit)
(136,352)
(56,897)
-
Non-interest income
565,310
24,518
(548)
Amortization of intangibles
2,813
665
-
Depreciation expense
46,539
7,415
-
Other operating expenses
1,285,959
203,892
(544)
Income tax expense
253,479
56,538
-
Net income
$
787,461
$
134,059
$
2
Segment assets
$
64,336,681
$
10,399,066
$
(31,528)
December 31, 2021
Reportable
Total
(In thousands)
Segments
Corporate
Eliminations
Popular, Inc.
Net interest income (expense)
$
1,995,749
$
(38,159)
$
-
$
1,957,590
Provision for credit losses (benefit)
(193,249)
(215)
-
(193,464)
Non-interest income
589,280
56,535
(3,687)
642,128
Amortization of intangibles
3,478
5,656
-
9,134
Depreciation expense
53,954
1,150
-
55,104
Other operating expenses
1,489,307
(545)
(3,725)
1,485,037
Income tax expense (benefit)
310,017
(1,085)
86
309,018
Net income
$
921,522
$
13,415
$
(48)
$
934,889
Segment assets
$
74,704,219
$
5,458,718
$
(5,065,038)
$
75,097,899
December 31, 2020
Banco Popular
Intersegment
(In thousands)
de Puerto Rico
Popular U.S.
Eliminations
Net interest income
$
1,593,599
$
302,517
$
11
Provision for credit losses
210,955
81,486
-
Non-interest income
445,893
24,285
(553)
Amortization of intangibles
5,634
665
-
Depreciation expense
47,890
9,558
-
Other operating expenses
1,169,816
228,406
(544)
Income tax expense
106,211
7,411
-
Net income (loss)
$
498,986
$
(724)
$
2
Segment assets
$
55,353,626
$
10,255,954
$
(33,935)
December 31, 2020
Reportable
Total
(In thousands)
Segments
Corporate
Eliminations
Popular, Inc.
Net interest income (expense)
$
1,896,127
$
(39,514)
$
-
$
1,856,613
Provision for credit losses
292,441
95
-
292,536
Non-interest income
469,625
46,442
(3,755)
512,312
Amortization of intangibles
6,299
98
-
6,397
Depreciation expense
57,448
1,004
-
58,452
Other operating expenses
1,397,678
(1,212)
(3,486)
1,392,980
Income tax expense (benefit)
113,622
(1,560)
(124)
111,938
Net income
$
498,264
$
8,503
$
(145)
$
506,622
Segment assets
$
65,575,645
$
5,214,439
$
(4,864,084)
$
65,926,000
206
December 31, 2019
Banco Popular
Intersegment
(In thousands)
de Puerto Rico
Popular U.S.
Eliminations
Net interest income
$
1,633,950
$
295,470
$
(51)
Provision for credit losses
135,495
30,028
-
Non-interest income
506,739
23,160
(561)
Amortization of intangibles
8,610
664
-
Depreciation expense
49,058
8,263
-
Other operating expenses
1,208,458
205,219
(547)
Income tax expense
129,145
19,164
-
Net income
$
609,923
$
55,292
$
(65)
Segment assets
$
41,756,864
$
10,056,316
$
(18,576)
December 31, 2019
Reportable
Total
(In thousands)
Segments
Corporate
Eliminations
Popular, Inc.
Net interest income (expense)
$
1,929,369
$
(37,675)
$
-
$
1,891,694
Provision for credit losses
165,523
256
-
165,779
Non-interest income
529,338
43,901
(3,356)
569,883
Amortization of intangibles
9,274
96
-
9,370
Depreciation expense
57,321
746
-
58,067
Other operating expenses
1,413,130
55
(3,140)
1,410,045
Income tax expense (benefit)
148,309
(1,041)
(87)
147,181
Net income
$
665,150
$
6,114
$
(129)
$
671,135
Segment assets
$
51,794,604
$
5,228,276
$
(4,907,556)
$
52,115,324
Additional disclosures with respect to the Banco
Popular de Puerto Rico reportable segment are
as follows:
December 31, 2021
Banco Popular de Puerto Rico
Consumer
Other
Total Banco
Commercial
and Retail
Financial
Popular de
(In thousands)
Banking
Banking
Services
Eliminations
Puerto Rico
Net interest income
$
734,501
$
934,611
$
5,477
$
-
$
1,674,589
Provision for credit losses (benefit)
(85,990)
(50,362)
-
-
(136,352)
Non-interest income
118,126
343,125
109,018
(4,959)
565,310
Amortization of intangibles
290
2,110
609
(196)
2,813
Depreciation expense
20,512
25,386
641
-
46,539
Other operating expenses
377,563
818,503
91,652
(1,759)
1,285,959
Income tax expense
180,874
66,616
5,989
-
253,479
Net income
$
359,378
$
415,483
$
15,604
$
(3,004)
$
787,461
Segment assets
$
64,994,081
$
31,313,708
$
2,038,402
$
(34,009,510)
$
64,336,681
December 31, 2020
Banco Popular de Puerto Rico
Consumer
Other
Total Banco
Commercial
and Retail
Financial
Popular de
(In thousands)
Banking
Banking
Services
Eliminations
Puerto Rico
Net interest income
$
653,091
$
927,165
$
13,343
$
-
$
1,593,599
Provision for credit losses
47,905
163,050
-
-
210,955
Non-interest income
100,329
249,464
97,443
(1,343)
445,893
Amortization of intangibles
197
3,609
1,828
-
5,634
Depreciation expense
20,488
26,746
656
-
47,890
Other operating expenses
303,534
782,521
85,122
(1,361)
1,169,816
Income tax expense (benefit)
104,617
(5,934)
7,528
-
106,211
Net income
$
276,679
$
206,637
$
15,652
$
18
$
498,986
Segment assets
$
49,806,766
$
29,000,270
$
2,218,444
$
(25,671,854)
$
55,353,626
207
December 31, 2019
Banco Popular de Puerto Rico
Consumer
Other
Eliminations
Total Banco
Commercial
and Retail
Financial
and Other
Popular de
(In thousands)
Banking
Banking
Services
Adjustments
Puerto Rico
Net interest income
$
619,926
$
1,009,196
$
4,828
$
-
$
1,633,950
Provision for credit losses (benefit)
(46,099)
181,594
-
-
135,495
Non-interest income
99,758
303,268
106,218
(2,505)
506,739
Amortization of intangibles
195
4,294
4,121
-
8,610
Depreciation expense
20,024
28,411
623
-
49,058
Other operating expenses
309,762
835,582
65,631
(2,517)
1,208,458
Income tax expense
104,636
11,999
12,510
-
129,145
Net income
$
331,166
$
250,584
$
28,161
$
12
$
609,923
Segment assets
$
34,340,842
$
23,976,004
$
380,557
$
(16,940,539)
$
41,756,864
Geographic Information
The following information presents selected
financial information based on the
geographic location where the Corporation conducts
its business. The
banking operations of BPPR
are primarily based in
Puerto Rico, where it
has the largest retail
banking franchise.
BPPR
also
conducts
banking
operations
in
the
U.S.
Virgin
Islands,
the
British
Virgin
Islands
and
New
York.
BPPR’s
banking
operations in
the United
States include
E-loan, an
online platform
used to
offer personal
loans, co-branded
credit cards
offerings
and
an
online
deposit
gathering platform.
In
the Virgin
Islands,
the BPPR
segment
offers
banking products,
including loans
and
deposits.
During
the
year
ended
December
31,
2021,
the
BPPR
segment
generated
approximately $50.6
million
(2020
-
$55.3
million, 2019 - $55.7
million) in revenues from
its operations in the
United States, including net
interest income, service charges on
deposit accounts and other
service fees. In addition,
the BPPR segment generated $45.4
million in revenues (2020
- $44.2 million,
2019 -
$47.6 million)
from its
operations in
the U.S.
and British
Virgin Islands.
At December
31, 2021,
total assets
for the
BPPR
segment related to its operations in the United States
amounted to $589 million (2020 - $627
million).
(In thousands)
2021
2020
2019
Revenues:
[1]
Puerto Rico
$
2,136,481
$
1,921,207
$
2,016,089
United States
390,201
376,529
371,368
Other
73,036
71,189
74,120
Total consolidated
revenues
$
2,599,718
$
2,368,925
$
2,461,577
[1]
Total revenues include
net interest income, service charges on deposit accounts,
other service fees, mortgage banking activities, net
gain (loss) on
sale of debt securities, net gain, including impairment on equity
securities, net (loss) profit on trading account debt
securities, net (loss) gain on
sale of loans, including valuation adjustments on loans held-for-sale,
adjustments (expense) to indemnity reserves on loans sold,
and other
operating income.
208
Selected Balance Sheet Information
(In thousands)
2021
2020
2019
Puerto Rico
Total assets
$
63,221,282
$
54,143,954
$
40,544,255
Loans
19,770,118
20,413,112
18,989,286
Deposits
57,211,608
47,586,880
34,664,243
United States
Total assets
$
10,986,055
$
10,878,030
$
10,693,536
Loans
8,903,493
8,396,983
7,819,187
Deposits
7,777,232
7,672,549
7,664,792
Other
Total assets
$
890,562
$
904,016
$
877,533
Loans
626,115
674,556
657,603
Deposits
[1]
2,016,248
1,606,911
1,429,571
[1]
Represents deposits from BPPR operations located in the
U.S. and British Virgin Islands.
209
Note 38 - Popular, Inc. (holding company only) financial information
The following
condensed financial
information presents
the financial
position of
Popular,
Inc. Holding
Company only
at December
31, 2021 and 2020, and the results of its
operations and cash flows for the years ended
December 31, 2021, 2020 and 2019.
Condensed Statements of Condition
December 31,
(In thousands)
2021
2020
ASSETS
Cash and due from banks (includes $79,660 due from bank
subsidiary (2020 - $69,299))
$
79,660
$
69,299
Money market investments
205,646
111,596
Debt securities held-to-maturity,
at amortized cost (includes $3,125 in common
securities from statutory trusts (2020 - $8,726))
[1]
3,125
8,726
Equity securities, at lower of cost or realizable value
19,711
16,049
Investment in BPPR and subsidiaries, at equity
3,858,701
4,327,188
Investment in Popular North America and subsidiaries,
at equity
1,834,931
1,733,411
Investment in other non-bank subsidiaries, at equity
288,736
271,129
Other loans
29,445
31,473
Less - Allowance for credit losses
96
311
Premises and equipment
5,684
5,322
Investment in equity method investees
114,955
88,272
Other assets (includes $6,802 due from subsidiaries and affiliate
(2020 - $5,518))
32,810
35,002
Total assets
$
6,473,308
$
6,697,156
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable
$
401,990
$
587,386
Other liabilities (includes $6,591 due to subsidiaries
and affiliate (2020 - $3,779))
101,923
81,148
Stockholders’ equity
5,969,395
6,028,622
Total liabilities and
stockholders’ equity
$
6,473,308
$
6,697,156
[1] Refer to Note 18 to the consolidated financial statements
for information on the statutory trusts.
Condensed Statements of Operations
Years ended December 31,
(In thousands)
2021
2020
2019
Income:
Dividends from subsidiaries
$
792,000
$
586,000
$
408,000
Interest income (includes $828 due from subsidiaries and
affiliates (2020 - $2,290; 2019 -
$4,237))
4,303
4,949
6,669
Earnings from investments in equity method investees
29,387
17,841
17,279
Other operating income
-
1
1
Net (loss) gain, including impairment, on equity securities
(525)
1,494
988
Total income
825,165
610,285
432,937
Expenses:
Interest expense
36,444
38,528
38,528
Provision for credit losses (benefit)
(215)
95
256
Operating expense (income) (includes expenses for services
provided by subsidiaries and
affiliate of $13,546 (2020 - $13,140 ; 2019 - $14,400)),
net of reimbursement by subsidiaries
for services provided by parent of $162,019 (2020
- $138,729 ; 2019 - $106,725)
5,432
(921)
80
Total expenses
41,661
37,702
38,864
Income before income taxes and equity in undistributed
earnings (losses) of subsidiaries
783,504
572,583
394,073
Income tax expense
352
17
-
Income before equity in undistributed earnings (losses) of subsidiaries
783,152
572,566
394,073
Equity in undistributed earnings (losses) of subsidiaries
151,737
(65,944)
277,062
Net income
$
934,889
$
506,622
$
671,135
Comprehensive income, net of tax
$
419,829
$
866,551
$
929,171
210
Condensed Statements of Cash Flows
Years ended December 31,
(In thousands)
2021
2020
2019
Cash flows from operating activities:
Net income
$
934,889
$
506,622
$
671,135
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in (earnings) losses of subsidiaries, net of dividends
or distributions
(151,737)
65,944
(277,062)
Provision for credit losses (benefit)
(215)
95
256
Amortization of intangibles
5,656
98
96
Net accretion of discounts and amortization of premiums and
deferred fees
1,241
1,233
1,240
Share-based compensation
8,895
5,770
7,927
Earnings from investments under the equity method, net
of dividends or distributions
(26,360)
(15,510)
(14,948)
Sale of foreclosed assets, including write-downs
59
-
-
Net (increase) decrease
in:
Equity securities
(3,662)
(5,305)
(4,051)
Other assets
(1,970)
(8,327)
1,134
Net (decrease) increase in:
Interest payable
(1,042)
-
-
Other liabilities
19,095
2,470
2,508
Total adjustments
(150,040)
46,468
(282,900)
Net cash provided by operating activities
784,849
553,090
388,235
Cash flows from investing activities:
Net (increase) decrease in money market investments
(94,000)
110,000
(45,000)
Proceeds from calls, paydowns, maturities and redemptions
of investment securities held-to-maturity
5,601
-
-
Net repayments on other loans
1,879
587
677
Capital contribution to subsidiaries
(12,900)
(10,000)
(9,000)
Return of capital from wholly owned subsidiaries
-
12,500
13,000
Return of capital from equity method investments
-
131
-
Acquisition of premises and equipment
(1,788)
(2,667)
(1,289)
Proceeds from sale of premises and equipment
83
285
3
Proceeds from sale of foreclosed assets
87
-
-
Net cash (used in) provided by investing activities
(101,038)
110,836
(41,609)
Cash flows from financing activities:
Payments of notes payable
(186,664)
-
-
Proceeds from issuance of common stock
10,493
15,175
13,451
Payments for repurchase of redeemable preferred stock
-
(28,017)
-
Dividends paid
(141,466)
(133,645)
(115,810)
Net payments for repurchase of common stock
(350,656)
(500,705)
(250,571)
Payments related to tax withholding for share-based compensation
(5,107)
(3,394)
(5,420)
Net cash used in financing activities
(673,400)
(650,586)
(358,350)
Net increase (decrease) in cash and due from banks, and
restricted cash
10,411
13,340
(11,724)
Cash and due from banks, and restricted cash at beginning
of period
69,894
56,554
68,278
Cash and due from banks, and restricted cash at end of period
$
80,305
$
69,894
$
56,554
211
Popular, Inc.
(parent company only)
received distributions from
its direct equity
method investees amounting to
$3.0 million for
the
year ended December
31, 2021 (2020
- $2.3 million;
2019 - $2.3
million), of which
$2.3 million are
related to dividend
distributions
(2020 -
$2.3 million;
2019 -
$2.3 million). There
were no
dividend distributions from
PIBI for
the year
ended Dec
31, 2021
(2020 -
$12.5 million; 2019 - $13.0 million).
PIBI main source of income is derived from its
investment in BHD.
Notes payable include junior
subordinated debentures issued by
the Corporation that are
associated to capital securities
issued by
the
Popular Capital
Trust
II
and medium-term
notes. Refer
to
Note 18
for
a description
of
significant provisions
related to
these
junior subordinated
debentures. The following
table presents
the aggregate amounts
by contractual maturities
of notes
payable at
December 31, 2021:
Year
(In thousands)
2022
$
-
2023
297,842
2024
-
2025
-
2026
-
Later years
104,148
Total
$
401,990
212
Note 39 ─ Subsequent events
Accelerated Share Repurchase Transaction
On February 28,
2022, the Corporation entered into
an accelerated share repurchase transaction
of $400 million with
respect to its
common
stock,
which
will
be
accounted
for
as
a
treasury
stock
transaction.
Accordingly,
as
a
result
of
the
receipt
of
the
initial
shares,
the
Corporation will
recognize in
shareholders’ equity
approximately $320
million
in
treasury
stock
and
$80
million
as
a
reduction of capital
surplus. The Corporation
expects to
further adjust its
treasury stock
and capital surplus
accounts to
reflect the
delivery or
receipt of
cash or
shares upon
the termination
of the
ASR agreement,
which will
depend on
the average
price of
the
Corporation’s shares during the term of the ASR, less
a discount. The final settlement of the ASR is
expected to occur no later than
the third quarter of 2022.
Entry into Asset Purchase Agreement with Evertec;
Renegotiation and Extension of Commercial Agreements
On February 24,
2022, the Corporation and
BPPR, entered into
an Asset Purchase Agreement
(the “Purchase Agreement”), dated
as of
February 24,
2022, with
EVERTEC and
Evertec Group,
LLC, a
wholly owned
subsidiary of
EVERTEC (“EVERTEC
Group”),
pursuant to
which BPPR
will purchase
from EVERTEC
Group certain information
technology and related
assets currently
used by
EVERTEC
to
service certain
of
BPPR’s
key channels
(the “Acquired
Assets”) under
the Amended
and
Restated Master
Service
Agreement (the “MSA”), dated September 30, 2010, among Popular,
BPPR and EVERTEC.
In connection with the purchase of the
Acquired Assets,
BPPR will
assume certain
liabilities relating
to the
Acquired Assets
(together with
the purchase
of the
Acquired
Assets, the
“Transaction”).
The Transaction
is expected
to close
on or
about June
30, 2022,
subject to
the satisfaction
of certain
closing conditions.
In
connection
with
the
consummation
of
the
Transaction
(the
“Closing”),
Popular
or
BPPR
will
transfer
to
EVERTEC
Group,
as
consideration for
the Transaction,
shares of
EVERTEC’s common
stock (“EVERTEC
Common Stock”)
having an
aggregate value
equal to $197 million, subject to certain purchase price adjustments, calculated on the basis that each share of EVERTEC Common
Stock is valued
at $42.84 per
share.
As a result
of this transfer,
Popular expects that
its percentage ownership
of the outstanding
shares of
EVERTEC Common Stock
will be
reduced from its
current level,
which is approximately
16.2%, to
approximately 10.5%
immediately following the Closing.
In
connection
with the
Closing, Popular
and
BPPR
will
also
enter with
EVERTEC
into,
among
other
commercial
agreements,
a
Second Amended
and
Restated Master
Services Agreement
(the “Second
A&R
MSA”), pursuant
to
which EVERTEC
Group will
continue
to
provide various
key
information technology
and
various
transaction
processing services
to
Popular,
BPPR
and
their
respective subsidiaries, which services are provided
under the currently effective MSA.
Under the Second
A&R MSA, Popular
and BPPR would
no longer be
subject to exclusivity
provisions under the currently
effective
MSA
that
require Popular
and
BPPR
to
obtain certain
services
from
EVERTEC
Group,
nor
will
they
be
subject
to
rights
of
first
refusal
that
EVERTEC
Group
currently
has
under
the
currently
effective
MSA
with
respect
to
certain
technology
projects.
In
connection
with
the
elimination
of
exclusivity
provisions
under
the
currently
effective
MSA,
EVERTEC
Group
will
be
entitled
to
receive monthly payments from Popular and BPPR to the
extent that EVERTEC Group’s revenues under the Second
A&R MSA fall
below certain agreed
minimum amounts on
an annualized basis
(each, an “Annual
Minimum”).
The Annual Minimum
will equal (i)
$170 million for each one-year period from the effective date of the Second A&R MSA through September 30, 2025; (ii) $165 million
for each
one-year period
from October
1, 2025
through September
30, 2026;
and (iii)
$160 million
for each
one-year period
from
October 1, 2026 through September 30, 2028 (in
each case, pro-rated for any partial one-year period).
Under the currently effective
MSA, EVERTEC Group is entitled
to increase annually the fees
charged under the MSA based
on the
annual increases in the Consumer Price
Index (the “Annual MSA CPI
Escalation”), subject to an annual cap
of 5%.
At the Closing,
the Annual MSA CPI Escalation
that became effective as
of October 1, 2021
will be retroactively eliminated, and BPPR
will receive
a credit against fees payable under the
Second A&R MSA equal to the amount
by which the fees paid by BPPR
for the period from
October 1,
2021 through the
Closing were increased
as a
result of the
most recent
Annual MSA CPI
Escalation.
Additionally, the
cap on the Annual MSA CPI Escalation will be reduced relative
to the currently effective MSA and will be capped (i) at 1.5% for each
one-year period beginning on the effective
date of the Second A&R MSA
through September 30, 2025, and (ii) at
2% for each one-
year period from October
1, 2025 through September 30,
2028 (or if lower,
at the percentage by
which the CPI increase during
the
213
prior
one-year period
exceeded 2%).
In
addition, beginning
in
October 2025,
BPPR will
receive a
10% fee
discount for
services
provided under the Second A&R MSA.
At the Closing, EVERTEC and Popular will
also enter into a Registration Rights and Sell-Down Agreement
(the “Registration Rights
Agreement”)
pursuant
to
which
Popular
may
sell
to
third
parties
during the
90-day
period
following
the
Closing
(the
“Sell-Down
Period”) a sufficient number of its shares of EVERTEC Common Stock so as
to reduce Popular’s ownership of shares of EVERTEC
Common Stock to no
more than 4.99%
of the total number
of shares of EVERTEC
Common Stock issued and outstanding.
At the
end of the Sell-Down Period, if there are any shares of EVERTEC Common Stock beneficially owned, owned of record or controlled
by Popular in excess of 4.5% of the total number of shares of EVERTEC Common Stock issued and outstanding (“Excess Common
Stock”),
EVERTEC
shall
cause
all
the
shares
of
Excess
Common
Stock
to
be
exchanged
for
shares
of
EVERTEC
non-voting
preferred stock (the “Non-Voting Preferred Stock”, and such
conversion, the “Share Conversion”).
Following the Share Conversion,
if Popular at any point would
beneficially own, own of record or control
shares of Excess Common Stock, EVERTEC
shall cause all
such Excess Common
Stock to be
exchanged for Non-Voting
Preferred Stock.
The Non-Voting Preferred
Stock will have
identical
rights and privileges as EVERTEC Common Stock,
except that the Non-Voting Preferred
Stock will be non-voting other than
limited
protective voting rights
and will automatically
convert into shares
of EVERTEC Common
Stock in the
hands of
a transferee after
a
transfer
(i)
in
a
widespread public
distribution, (ii)
to
EVERTEC,
(iii)
in
which
no
transferee
(or
group
of
associated transferees)
would receive
2% or
more of
the outstanding
securities of
any class
of voting
securities of
EVERTEC or
(iv) to
a transferee
that
would control more than 50% of every class of
voting securities of EVERTEC without any such transfer.
The Registration Rights
Agreement contains customary
registration rights with
respect to the
shares of EVERTEC
Common Stock
and Non-Voting
Preferred Stock
held by
Popular,
including customary
indemnification provisions,
similar to
the
registration rights
provided for in the Stockholder Agreement
(the “Stockholder Agreement”), dated April 17, 2012,
among Carib Latam Holdings, Inc.,
and each
of the
holders of
Carib Latam
Holdings, Inc.,
as amended
on March
27, 2013,
June 30,
2013 and
November 13,
2013.
Under
the
Stockholder
Agreement,
which
will
be
terminated
at
Closing,
Popular
is
currently
entitled
to,
among
other
things,
(1)
nominate two directors for election to EVERTEC’s board of directors, (2) limited pre-emptive rights and (3) various registration rights
with respect to EVERTEC Common Stock.
At the Closing, certain other commercial agreements will be entered into by and between Popular or BPPR (or both) and EVERTEC
or
EVERTEC
Group,
Inc.,
including
(i)
a
Second
Amended
and
Restated
Independent
Sales
Organization
Sponsorship
and
Services Agreement, pursuant to which BPPR will continue to sponsor
EVERTEC Group as an independent sales organization with
various
credit
card
associations
and
will
receive
revenue
sharing
on
a
percentage
of
the
net
revenues
of
EVERTEC
Group’s
merchant acquiring business and person-to-business merchant services business, for an initial term
commencing on the date of the
Closing and ending on December 31, 2035 (a ten-year extension of the term of the currently effective agreement), and (ii) a Second
Amended and Restated ATH
Network Participation Agreement, pursuant to
which BPPR will continue
to be required to
issue ATH-
branded debit cards
and may issue
dual-branded debit cards
having certain enhanced
functionalities and will
continue to have
the
ability to access the ATH
Network and BPPR’s customers will continue
to be able to
access EVERTEC Group’s ATH
Movil person-
to-person and person-to-business services, for an initial term commencing
on the date of the Closing and
ending on September 30,
2030 (a five-year extension of the term of the
currently effective agreement).

Mix Paper from responsible sources FSC www.fsc.org FSC C132107 POPULAR P.O. Box 362708 | San Juan, Puerto Rico 00936-2708