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1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended
December 31, 2022
Or
[ ]
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number:
001-34084
POPULAR, INC.
Incorporated in the Commonwealth of
Puerto Rico
IRS Employer Identification No.
66-0667416
Principal Executive Offices
209 Muñoz Rivera Avenue
Hato Rey
,
Puerto Rico
00918
Telephone Number: (
787
)
765-9800
Securities registered pursuant to Section 12(b)
of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which
registered
Common Stock ($0.01 par value)
BPOP
The
Nasdaq Global Select Stock Market
6.125% Cumulative Monthly Income Trust Preferred
Securities
BPOPM
The
Nasdaq Global Select Stock Market
SECURITIES REGISTERED PURSUANT TO SECTION 12(g)
OF THE ACT:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
X No
.
Indicate by check mark if the registrant is not required
to file reports pursuant to Section 13 or Section
15(d) of the Act. Yes
No
X.
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by
Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the
registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past 90 days.
Yes
X No
.
Indicate by check mark whether the registrant has
submitted electronically every Interactive Data File required
to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such
shorter period that the registrant was
required to submit such files).
Yes
X No
.
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting
company”
and “emerging growth company” in Rule 12b-2
of the Exchange Act.
Large accelerated filer
[X]
Accelerated filer [
]
Non-accelerated filer [
]
Smaller reporting company
[ ]
Emerging growth company
[ ]
If an emerging growth company, indicate by check mark if the registrant
has elected not to use the extended
transition period for
complying with any new or revised financial accounting
standards provided pursuant to Section 13(a)
of the Exchange Act.
☐
Indicate by check mark whether the registrant has filed a report on
and attestation to its management’s assessment of the effectiveness of
its internal
control over
financial reporting
under Section
404(b) of
the Sarbanes-Oxley Act
(15 U.S.C.
7262(b)) by
the registered
public
accounting firm that prepared or issued its audit
report. [
X
]
If securities are registered
pursuant to Section 12(b)
of the Act, indicate
by check mark whether
the financial statements of
the registrant
included in the filing reflect the correction of an
error to previously issued financial statements.
☐
Indicate
by
check
mark
whether any
of
those
error
corrections
are
restatements
that
required
a
recovery
analysis
of
incentive-based
compensation received by any of the registrant’s executive
officers during the relevant recovery period pursuant to
§240.10D-1(b).
☐
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the
Act). Yes
No
X
As of June 30, 2022, the aggregate market
value of the Common Stock held by non-affiliates of
Popular, Inc. was approximately $
5.8
billion based upon the reported closing price of $76.93
on the Nasdaq Global Select Market on that
date.
As of February 24, 2023, there were
71,867,263
shares of Popular, Inc.’s Common Stock outstanding.
2
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Popular,
Inc.’s definitive proxy
statement relating to the
2023 Annual Meeting
of Stockholders of Popular,
Inc. (the “Proxy
Statement”) are incorporated herein by reference in response to Items 10 through
14 of Part III. The Proxy Statement will be
filed with
the Securities and Exchange Commission (the “SEC”)
on or about March 29, 2023.
3
Forward-Looking Statements
This
Form
10-K contains
“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
●
adverse
economic conditions,
including high
levels
of
and
ongoing increases
in
inflation
rates,
that
adversely
affect
housing prices, the job market, consumer confidence
and spending habits which may affect in turn, among
other things,
our level of non-performing assets, charge-offs and provision
expense;
●
changes in interest rates and market liquidity,
which may reduce interest margins, impact funding sources, reduce loan
originations,
affect our
ability to
originate and
distribute financial
products in
the primary
and secondary
markets and
impact the value of our investment portfolio and
our ability to return capital to our shareholders;
●
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 hurricane recovery assistance and the rate of expenditure
of
such
funds,
as
well
as
the
financial
condition,
liquidity
and
cash
management
practices
of
the
Puerto
Rico
Government and its instrumentalities;
●
unforeseen
or
catastrophic
events,
including
extreme
weather
events,
including
hurricanes,
other
natural
disasters,
man-made disasters,
acts of
violence or
war or
pandemics, epidemics
and other
health-related crises,
including any
resurgence of COVID-19, or the fear of any
such event occurring, any of which could cause adverse consequences for
our business, including, but not limited to, disruptions
in our operations;
●
our
ability
to
achieve
the
expected
benefits
from
our
transformation
initiative,
including
our
ability
to
achieve
our
targeted sustainable return on tangible common equity
of 14% by the end of 2025;
4
●
risks related to Popular’s acquisition of certain information technology and related assets formerly used by Evertec, Inc.
to
service certain
of Banco
Popular de
Puerto Rico’s
key channels,
as well
as the
entry into
amended and
restated
commercial
agreements
(the
“Evertec
Business
Acquisition
Transaction”),
including
Popular’s
ability
to
successfully
transition and integrate the assets
acquired as part of the
Evertec Business Acquisition 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 Evertec Business
Acquisition Transaction or
that are not
subject to indemnification or
reimbursement by Evertec, Inc.;
and business and
other risks arising from the extension of Popular’s
current commercial agreements with Evertec,
Inc.;
●
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;
●
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
our borrowers are located;
●
the performance of the stock and bond markets;
●
competition in the financial services industry;
●
possible legislative, tax or regulatory changes;
●
a failure
in or
breach of
our operational
or security
systems or
infrastructure or
those of
Evertec, Inc.,
our provider
of
core financial
transaction processing and
information technology services,
or of
third parties
providing services
to us,
including
as
a
result
of
cyberattacks, e-fraud,
denial-of-services and
computer intrusion,
that
might result
in,
among
other
things,
loss
or
breach
of
customer
data,
disruption
of
services,
reputational
damage
or
additional
costs
to
Popular;
●
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 branches or business
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,”
is
inherently
uncertain and depends on judicial interpretations of law and the findings of regulators, judges and/or juries. Investors should refer to
“Part I, Item 1A” of this Form 10-K for a discussion
of certain risks and uncertainties to which
the Corporation is subject.
5
All forward-looking
statements included
in this
Form 10-K
are based
upon information
available to
Popular as
of the
date of
this
Form 10- K, 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.
6
TABLE OF CONTENTS
PART I
Page
Item 1
Business
7
Item 1A
Risk Factors
23
Item 1B
Unresolved Staff Comments
37
Item 2
Properties
37
Item 3
Legal Proceedings
37
Item 4
Mine Safety Disclosures
37
PART II
Item 5
Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
38
Item 6
[Reserved]
40
Item 7
Management’s Discussion and Analysis of Financial Condition
and Results of
Operations
40
Item 7A
Quantitative and Qualitative Disclosures About Market
Risk
40
Item 8
Financial Statements and Supplementary Data
41
Item 9
Changes in and Disagreements with Accountants
on Accounting and Financial
Disclosure
41
Item 9A
Controls and Procedures
41
Item 9B
Other Information
41
Item 9C
Disclosure Regarding Foreign Jurisdictions that Prevent
Inspections
41
PART III
Item 10
Directors, Executive Officers and Corporate Governance
41
Item 11
Executive Compensation
42
Item 12
Security Ownership of Certain Beneficial Owners
and Management and
Related Stockholder Matters
42
Item 13
Certain Relationships and Related Transactions, and Director
Independence
42
Item 14
Principal Accountant Fees and Services
42
PART IV
Item 15
Exhibits and Financial Statement Schedules
42
Item 16
Form 10-K Summary
43
7
PART I POPULAR, INC.
ITEM 1. BUSINESS
General
Popular
is
a diversified,
publicly-owned financial
holding company,
registered under
the Bank
Holding Company
Act
of
1956, as
amended (the “BHC Act”), and subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the
“Federal Reserve Board”). Popular was incorporated in 1984 under the laws of the Commonwealth of Puerto Rico and is the
largest
financial institution
based in Puerto
Rico, with
consolidated assets of
$67.6 billion, total
deposits of
$61.2 billion
and stockholders’
equity of $4.1 billion at
December 31, 2022. At December 31,
2022, we ranked among the
50 largest U.S. bank holding companies
based on total assets according to information gathered
and disclosed by the Federal Reserve Board.
We operate in two principal markets:
●
Puerto Rico:
We
provide retail,
mortgage and
commercial banking
services through
our principal
banking subsidiary,
Banco
Popular
de
Puerto
Rico
(“Banco
Popular”
or
“BPPR”),
as
well
as
auto
and
equipment
leasing
and
financing,
investment
banking,
broker-dealer
and
insurance
services
through
specialized
subsidiaries.
BPPR’s
deposits
are
insured
under
the
Deposit Insurance
Fund (“DIF”)
of the
Federal Deposit
Insurance Corporation (“FDIC”).
The banking
operations of
BPPR are
primarily based in Puerto Rico, where BPPR has the
largest retail banking franchise.
●
Mainland
United
States:
We
provide
retail,
mortgage
and
commercial
banking
services
through
our
New
York-chartered
banking subsidiary,
Popular Bank (“PB” or
“Popular U.S.”), which has
branches in New York,
New Jersey and Florida;
as well
as commercial
direct financing
leases through
a specialized
subsidiary,
Popular Equipment
Finance LLC
in Minnesota.
PB’s
deposits are insured under the DIF of the FDIC.
●
BPPR
also
conducts
banking
operations
in
the
U.S.
Virgin
Islands,
the
British
Virgin
Islands
and
New
York.
In
addition
to
BPPR’s commercial
banking operations
in New
York
that include
direct loan
origination and
participating loans
originated by
PB,
BPPR
offers
or
holds
financial
products
on
a
National
scale
in
the
U.S.
market,
including
personal
loans
previously
originated
under
the
E-Loan
brand,
purchased
personal
loans
originated
by
third
parties,
issuing
co-branded
credit
cards
offerings
and
gathering
insured
institutional
deposits
via
online
deposit
gathering
platforms.
In
the
U.S.
and
British
Virgin
Islands, BPPR offers a range of banking products,
including loans and deposits to both retail
and commercial customers.
For further information about the Corporation’s results segregated by
its reportable segments, see “Reportable Segment Results” in
the Management’s Discussion
and Analysis of
Financial Condition and Results
of Operations section
(“MD&A”) and Note
37 to the
Consolidated Financial Statements included in this Form
10-K.
Transformation Initiative:
The
Corporation
launched
a
significant,
multi-year,
broad-based
technological
and
business
process
transformation
during
the
second half of 2022.
The needs and expectations of our clients, as well
as the competitive landscape, have evolved, compelling us
to make important investments in our technological infrastructure and adopt more agile practices. We
believe these investments will
result in an enhanced digital experience for our clients, as
well as better technology and more efficient processes for our employees,
and make us a more efficient and
profitable company, allowing us to
achieve a 14% return on tangible common equity target by
the
end of 2025.
Our technology and business transformation
will be a significant
priority for the Corporation over
the next three years
and beyond. Refer to the Overview section
of Management’s Discussion and Analysis included in
this Form 10-K for information on
this transformation initiative and other recent significant
events that have impacted or will impact
our current and future operations.
Lending Activities
We concentrate our lending activities in the following areas:
8
(1) Commercial.
Commercial loans are comprised of (i) commercial and industrial (“C&I”) loans and leases to commercial customers
for
use
in
normal
business
operations
and
to
finance
working
capital
needs,
equipment
purchases
or
other
projects,
and
(ii)
commercial real
estate (“CRE”) loans
(excluding construction loans)
for income-producing real
estate properties as
well as
owner-
occupied properties. C&I
loans are underwritten
individually and usually
secured with the
assets of the
company and the
personal
guarantee
of
the
business
owners. CRE
loans consist
of
loans
for
income-producing real
estate
properties and
the financing
of
owner-occupied facilities
if there
is real
estate as
collateral. Non-owner-occupied
CRE loans
are generally
made to
finance office
and
industrial buildings,
healthcare facilities,
multifamily buildings
and
retail shopping
centers
and are
repaid through
cash
flows
related to the operation, sale or refinancing of the
property.
(2) Mortgage. Mortgage
loans include residential
mortgage loans to
consumers for the
purchase or refinancing
of a
residence and
also include residential construction loans made
to individuals for the construction of refurbishment
of their residence.
(3) Consumer.
Consumer loans are mainly
comprised of personal loans,
credit cards, and automobile
loans, and to
a lesser extent
home equity lines of credit (“HELOCs”) and other
loans made by banks to individual borrowers.
(4)
Construction.
Construction
loans
are
CRE
loans
to
companies
or
developers
used
for
the
construction
of
a
commercial
or
residential property for which repayment will be generated by the sale
or permanent financing of the property.
Our construction loan
portfolio primarily consists of retail, residential (land and
condominiums), office and warehouse product types.
(5) Lease Financings.
Lease financings are offered by BPPR and are
primarily comprised of automobile loans/leases made through
automotive dealerships and equipment lease financings.
Business Concentration
Since our
business activities
are currently concentrated
primarily in
Puerto Rico,
our 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 our
operations in Puerto Rico exposes us
to greater risk than other
banking companies with a
wider
geographic
base.
Our
asset
and
revenue
composition
by
geographical
area
is
presented
in
“Financial
Information
about
Geographic Areas” below and in Note 37 to the Consolidated
Financial Statements included in this Form 10-K.
Our loan portfolio is diversified by loan category.
However, approximately 57% of our loan portfolio at December 31, 2022 consisted
of real estate-related
loans, including residential
mortgage loans, construction
loans and commercial
loans secured by
commercial
real estate. The table below presents the distribution
of our loan portfolio by loan category at
December 31, 2022.
Loan category
(Dollars in millions)
BPPR
%
PB
%
POPULAR
%
C&I
$3,796
17
$2,043
21
$5,839
18
CRE
4,627
20
5,273
55
9,900
31
Construction
147
1
611
7
758
2
Leasing
1,586
7
-
-
1,586
5
Consumer
6,281
28
317
3
6,598
21
Mortgage
6,110
27
1,287
14
7,397
23
Total
$22,547
100
$9,531
100
$32,078
100
Except for
the Corporation’s
exposure to
the Puerto
Rico Government
sector,
no individual
or single
group of
related accounts
is
considered material
in relation
to our
total assets
or deposits,
or in
relation to
our overall
business.
For a
discussion of
our loan
portfolio, our
deposits portfolio
and our
exposure to
the Government
of Puerto
Rico, see
“Financial Condition
– Loans”,
“Financial
Condition
–
Deposits”
and
“Credit
Risk
–
Geographical and
Government
Risk” in
the
MD&A
and
to
Note
24
-
Commitment and
Contingencies to the Consolidated Financial Statements
included in this
Form 10-K.
Credit
Administration
and
Credit
Policies
9
Interest
from our
loan portfolios
is our
principal source
of revenue.
Whenever we
make loans,
we expose
ourselves
to
credit
risk.
Credit
risk
is
controlled
and
monitored
through
active
asset
quality
management,
including
the
use
of
lending
standards,
thorough
review
of
potential
borrowers
and through
active
asset quality
administration.
Business
activities
that
expose
us to
credit
risk are
managed
within
the
Board
of Director’s
Risk Management policy,
and the Credit Risk Tolerance
Limits policy,
which establishe
s
limits
that
consider
factors
such
as maintainin
g
a prudent
balance
of risk-taking
across
diversified
risk types
and business
units,
compliance
with regulator
y
guidance,
and
controlling
the
exposure
to lower
credit
quality
assets.
We maintain
comprehensive
credit policies
for all lines of
business in order
to mitigate credit
risk. Our credit
policies
are
approved by
our Board
of Directors.
These policies set
forth,
among
other
things,
the objectives, scope and
responsibilities of the
credit
management cycle.
Our
internal
written
procedures
establish
underwriting
standards
and
procedures
for
monitoring
and
evaluating
loan
portfolio
quality
and
require
prompt
identificatio
n
and
quantificatio
n
of
asset
quality
deterioration
or
potential
loss
to
ensure
the
adequacy
of
the
allowance
for
credit
losses.
These
written
procedures
establish
various
approval
and
lending
limit
levels,
ranging
from
bank
branch
or
department
officers
to
managerial
and
senior
management
levels.
Approval
levels are
primarily
determined
by the
amount,
type
of loan
and risk
characteristics
of the credit
facility.
Our
credit
policies
and
procedures
establish
documentation
requirements
for
each
loan
and
related
collateral
type,
when
applicable,
during
the
underwriting,
closing
and
monitoring
phases.
For
commercial
and
construction
loans,
during
the
initial
loan
underwriting
process,
the
credit
policies
require,
at
a
minimum,
historical
financial
statements
or
tax
returns
of
the
borrower,
an analysis
of financial
information
contained
in
a
credit
approval
package,
a
risk
rating
determination
and
reports
from
credit
agencies
and appraisal
s
for
real
estate-related
loans when applicable
.
The credit
policies
also
set
forth
the
required
closing
documentation
depending
on the
loan
and the
collateral
type.
Although
we originat
e
most
of our
loans
internally
in both
the
Puerto
Rico
and mainlan
d
United
States
markets,
we
occasionally
purchase
or
participate
in
loans
originated
by
other
financial
institutions.
When
we
purchase
or
participate
in
loans
originated
by
others,
we
conduct
the
same
underwriting
analysis
of
the borrower
s
and apply
the
same
criteria
as we do
for
loans
originated
by us. This also
includes
a review
of the
applicable
legal
documentation.
Refer
to
the
Credit
Risk
section
of
the
MD&A
included
in
this
Form
10-K
for
information
related
to
management
committees and divisions with responsibilities for establishing
policies and monitoring the Corporation’s credit risk.
Loan
extensions
,
renewals
and restructurings
Loans with
satisfactory
credit
profiles
can be
extended,
renewed
or restructured
.
Many commercia
l
loan facilities
are
structured
as lines
of credit, which
are mainly
one year
in term
and therefore
are required
to be renewed
annually.
Other
facilities
may be restructure
d
or extended
from time
to time based
upon changes
in the
borrower’s
business
needs,
use
of
funds,
timing
of
completion
of
projects
and
other
factors.
If
the
borrower
is
not
deemed
to
have
financial
difficulties
,
extensions,
renewals
and restructuring
s
are done
in the
normal
course
of busines
s
and the
loans
continue
to be recorde
d
as performing.
We
evaluate
various
factors
to
determine
if
a
borrower
is
experiencing
financial
difficulties.
Indicators
that
the
borrower
is
experiencing
financial difficultie
s
include,
for example:
(i)
the borrower
is currently
in default on
any of its debt
or it is
probable tha
t
the borrower
would be
in payment
default on
any of
its debt
in th
e
foreseeable
future
without
the modificatio
n;
(ii)
the
borrower
has declare
d
or is in
the
process
of declarin
g
bankruptcy;
(iii)
there
is significan
t
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 threa
t
of bein
g
delisted
from
an exchange
;
(v) based
on estimate
s
and projection
s
that
only
encompass
the
current
business
capabilities
,
the
borrower
forecasts
that
its
entity-specifi
c
cash
flows
will
be
insufficien
t
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-trouble
d
debtor.
We
have
specialized
workout
officers
who
handle
the majority
of
commercial
loans
that
are
past
due
90
days
and
over,
borrowers
experiencing
financial
difficulties
,
and loans
that
are considere
d
problem
loans
based
on their
risk profile
.
As a
10
general
policy,
we
do
not
advance
additional
money
to
borrowers
who
have
loans
that
are
90
days
past
due
or
over.
In
commercial
and
construction
loans,
certain
exceptions
may
be approve
d
under
certain
circumstances,
including
(i) when
past
due
status
is administrativ
e
in nature,
such
as expiration
of a loan
facility
before
the
new documentatio
n
is executed,
and not as
a result
of paymen
t
or credit
issues;
(ii) to
improve
our collateral
position
or
otherwise
maximize
recovery
or
mitigate
potential
future
losses;
and
(iii)
with
respect
to
certain
entities
that,
although
related
through
common
ownership
,
are
not
cross
defaulted
nor
cross-collateralized
and
are
performing
satisfactorily
under
their
respective
loan
facilities.
Such
advances
are
underwritten
and
approved
following
our
credit
policy
guidelines
and
limits,
which
are
dependent
on
the
borrower’s
financial
condition,
collateral
and guarantee,
among
others.
In addition
to the legal
lending limit
established under
applicable
state banking
law, discusse
d
in detail
below,
business
activities
that
expose the
Corporation to
credit
risk
are managed
within
guidelines described
in the
Credit
Risk Tolerance
Limits
policy.
Limits are defined for
loss and credit
performance metrics, portfolio composition and
concentration, and industry and
name-
level,
which
monitors
lending
concentration
to
a
single
borrower
or
a
group
of
related
borrowers,
including
specific
lending
limits
based
on industr
y
or other
criteria,
such
as a percentage
of the
banks’
capital.
Refer to Note 2 and Note 9 to the Consolidated Financial Statements included
in this Form 10-K, for additional information
on troubled debt restructuring (“TDRs”).
Competition
The
financial
services
industry
in
which
we
operate
is
highly
competitive.
In
Puerto
Rico,
our
primary
market,
the
banking
business
is
highly
competitive
with
respect
to
originatin
g
loans,
acquiring
deposits
and
providing
other
banking
services.
Most
of
our
direct
competitio
n
for
our
products
and
services
comes
from
commercial
banks and
credit unions.
The
principal
competitors
for
BPPR
include
locally
based
commercial
banks
and
a
few
large
U.S.
and
foreign
banks
with
operations
in Puerto
Rico.
While
the
number
of
banking
competitors
in
Puerto
Rico
has
been
reduced
in
recent
years
as
a
result
of
consolidations,
these
transactions
have
allowed
some
of
our
competitors
to
gain
greater
resources,
such
as
a
broader
range of
products
and services.
We
also
compete
with
specialized
players
in th
e
local
financial
industry
that
are
not subje
ct
to
the
same
regulatory
restrictions
as domestic
banks
and bank holdin
g
companies.
Those
competitors
include
brokerage
firms,
mortgage
companies,
insurance
companies,
automobile
and
equipment
finance
companies,
local
and
federal
credit
unions
(locally
known
as
“cooperativas”
),
credit car
d
companies,
consumer
finance
companies,
institutional
lenders
and other
financial
and non-financia
l
institutions
and
entities.
Credit
unions
generally
provide
basic
consumer
financial
services.
These
competitors
collectively
represent a significant
portion of the
market and have
a lower cost structure
and fewer regulatory
constraints.
In
the
United
States
we
continue
to
face
substantial
competitive
pressure
as
our
footprint
resides
in
the
two
large,
metropolitan markets of
New York
City / Northern
New Jersey and
the greater Miami
area.
There is a
large number of
community
and
regional
banks
along
with
national
banking
institutions
present
in
both
markets,
many
of
which
have
a
larger
amount
of
resources than us.
In both
Puerto Rico
and the
United States,
the primary
factors in
competing
for business
include
pricing,
convenience
of branch
locations
and other
delivery
methods,
range of
products offered,
and the
level of
service delivered.
We must
compete
effectively
along
all
these
parameters
to
be
successful.
We
experience
pricing
pressure
as
some
of
our
competitors
seek
to
increase
market
share
by
reducing
prices
for
services
or
the
rates
charged
on
loans,
increasing
the
interest
rates
offered
on
deposits
or offering
more flexible
terms. Increased
competition
could require
that we
increase
the rates
offered
on deposits
and
lower the rates
charged on loans,
which could adversely
affect our profitability.
Economic
factors,
along
with
legislative
and
technological
changes,
have
an
ongoing
impact
on
the
competitive
environment
within
the financia
l
services
industry.
We work
to anticipat
e
and adap
t
to dynamic
competitive
conditions
whether
through developing
and marketing
innovative
products
and services,
adopting
or developin
g
new technologie
s
that
differentiat
e
our product
s
and
services
,
cross-marketing
,
or
providing
personalized
banking
services.
We
strive
to
distinguish
ourselves
from
other
banks
and
financial
services
providers
in our
marketplace
by providin
g
a high
level
of service
to enhance
customer
loyalty
and to attrac
t
and retain
business.
However,
we can
provide
no assuranc
e
as
to
the
effectivenes
s
of
these
effort
s
on
our
future
busines
s
or
results
of
operations
,
and
as
to
our
continue
d
ability
to
anticipat
e
and
adapt
to
changing
11
conditions,
and
to
sufficientl
y
improve
our
services
and/or
banking
products,
in
order
to
successfully
compete
in
our
primary
service
areas.
Human Capital Management
Attracting, developing, and retaining top
talent in an environment that
promotes wellness, inclusion, learning, and transparency
is a
fundamental pillar of our long-term strategy.
As of December 31, 2022, Popular
employed approximately 8,900 employees, none of
whom are represented by a collective bargaining group
.
Employee Well-Being & Safety
We are
cognizant that
our journey
to become
a better
organization is
dependent on
fostering our
employees’ health
and financial
wellbeing. The health and wellness of our employees are the foundation of our ability to support our customers and the communities
we serve. The
Corporation offers our employees
a comprehensive benefits package, including,
but not limited to,
health insurance,
paid time off,
and wellness initiatives. Our full
and part-time employees have access
to affordable healthcare with Popular
covering
up
to
90%
of
the
premium. Additionally,
the
Corporation promotes
employee
health
by
encouraging annual
physical
exams and
maintaining
a
Health
and
Wellness
Center
at
its
Puerto
Rico-based
corporate
offices
staffed
with
healthcare
providers,
where
employees and eligible dependents can complete their physical exam,
receive acute care or visit a nutritionist or psychologist free of
charge. The
Health and
Wellness Center
received more
than 18,600
in-person and
virtual visits
from employees
during 2022
and
acted as a key component to effectively manage the
challenges imposed by the COVID-19 pandemic.
The
Corporation
also
provides
targeted
benefits
aimed
at
promoting
work-life
balance.
For
example,
the
Corporation’s
time
off
program includes
community service
leave, paid
parental leave
(including for
childbirth, adoption,
and bonding
time)
and flexible
work arrangements. In
addition, the Corporation
implemented a hybrid
work model, for
which 49%
of our
population is eligible.
To
support
our
employees’
emotional
well-being
during
the
pandemic,
we
have
continued
enhancing
our
Well-Being
Academy
by
adapting our Employee Assistance Program to offer virtual mental health sessions geared at managing work and
life challenges.
In
addition,
the
Corporation
offers
physical
fitness
events
and
breaks,
as
well
as
employee
workshops
on
personal
financial
management.
Popular also
offers a
401(k) savings and
investment plan. Popular
matches $0.50 for
every dollar the
employee contributes to
the
401(k) plan, up to 8%
of their salary.
Moreover, the organization offers
a profit-sharing plan, which depends on the
achievement of
certain
predetermined
financial
goals,
through
which
employees
may
receive
up
to
8%
of
eligible
compensation
(capped
at
$70,000), partially
in cash
and partially
as a
401(k) contribution.
Furthermore, since
2017 we
have invested
in our
compensation
strategy,
introducing a
job leveling
framework, adjusting
salaries to
better compete
with the
market, offering
merit increases,
and
raising our base salary to $13
per hour in Puerto Rico, $15
per hour in the Virgin Islands,
$17 per hour in Florida, and $20
per hour
in New York
and New Jersey.
During January 2023, there
was an additional
increase to $15
per hour for
Puerto Rico and
$16 per
hour in the Virgin Islands.
Talent Development
Popular strives
to develop
the skills
of its
employees and
leaders to
sustain the
Corporation’s competitive
advantage. Employees
are subject to
mandatory trainings in
connection with regulatory compliance
matters and other
key topics throughout
the year.
Our
40,000 square
foot Development
Center in
San Juan,
Puerto Rico
offers training
sessions, activities,
and workshops
year-round.
During
2022,
the
Corporation
continued
offering
virtual
training
after
effectively
transitioning
most
sessions
provided
in
the
Development Center to a virtual setting to continue impacting employee growth despite the pandemic. More than 300 sessions were
delivered,
with
around
6,500
participating
employees.
Our
English
Program
helps
employees
whose
first
language
is
Spanish
strengthen
their
English
language
skills
and
feel
confident
speaking,
reading,
and
writing
in
business
or
personal
settings.
Additionally, the
English Placement Test
revealed that in 2022
the number of
intermediate learners increased from 4%
to 17% and
advanced learners
from 45%
to 53%,
compared to
2021.
Popular also
continues to
promote the
use of
LinkedIn Learning,
which
features over 16,000 on-demand e-learning courses
available anytime and anywhere, to strengthen
and advance the Corporation’s
development
strategies
for
all
its
employees.The
organization’s
strong
training
and
development
framework
has
contributed
to
internal growth opportunities for our employees. As
a result, the Corporation’s internal mobility
rate in 2022 was 33%. This
included
employees who applied or were selected for
vacancies, were promoted, or had lateral movements.
12
Popular received
the BAI
Innovation in
Learning &
Development Award for
being a
Talent
Lab &
Skills Accelerator.
This year,
we
performed an internal talent
and skills inventory of
83% of employees to
reveal underutilized skills and
education. The organization
invested in
the development
of 126
practitioners who
went through
Accelerated Development
Programs focused
on data
science
and analytics, process excellence and program management,
among other topics.
Recognizing that leadership development is crucial to driving
results, keeping employees engaged, and achieving the Corporation’s
strategic
goals, Popular
has
implemented programs
aimed
at
strengthening and
developing leadership
skills
and
effective
talent
management. As part of the Corporation’s Executive Leadership Development
strategy, readiness courses are offered to employees
in topics such as change management, conscious inclusion, leading
hybrid teams, and better conversations focused on the return to
office scenarios.
Our
organizational
development
strategy
is
aimed
at
creating
organizational
and
leadership
effectiveness,
while
advancing
organizational readiness
to succeed
based on
our future
needs. There
were more
than 80
organizational development
and team
interventions
and
exercises
facilitated
during
2022,
spanning
the
areas
of
change
management,
team
alignment
and
leader
effectiveness.
Diversity, Equity, and Inclusion
At Popular,
we value our
differences and strive
to improve the
workplace experience for
all. As of
December 31, 2022, 65%
of the
Corporation’s employees
were female,
while 35%
were male.
Women accounted
for 64%
of first
and mid-level
management and
33%
of
executive-level management
as
of such
date. The
Corporation also
maintains
a multidisciplinary
council,
headed by
our
Corporate
Diversity
Officer,
which
helps
develop
and
implement
initiatives
to
support
the
Corporation’s
Diversity,
Equity,
and
Inclusion (DE&I)
policy and
strategy.
The Corporation’s
DE&I strategy
seeks to
broaden the
inclusion, employment
advancement
and development
of underrepresented
communities in
the workplace,
as well
as the
utilization of
suppliers owned,
controlled, or
operated by
women or
diverse racial
or ethnic
groups. In
addition, this
strategy seeks
to prepare
the Corporation’s
employees to
recognize and value the differences of those we
serve.
We are
committed to
fair pay
and conduct
analyses on
such matter
on an
annual basis.
The 2022
company-wide market
salary
adjustments resulted
in an
overall improvement
to our
gender gap
of +1.5
percentage points,
compared to
the end
of 2021.
Our
gender
pay
gap
continues
to
narrow
improving
3.1
percentage
points
over
the
last
five
years.
Additionally,
for
the
second
consecutive year (2022-2023), Popular was honored to
be included in the Bloomberg Gender Equality
Index (GEI).
The Corporation has
also expressed public
support for
movements advocating for
equality such as
Pride Month.
In 2021,
Popular
established its first Employee Resource Group (ERG) for
our LGBTQ+ employees to better serve the interests of
the community and
create awareness
and engagement
among employees.
During 2022, this
group was composed
of 245
members and
performed 6
activities
within
the
organization
and
community.
Furthermore,
during
2022
the
following
two
additional
ERGs
were
launched:
Women’s
and
Functional
Diversity.
Popular
also
supports
victims
of
gender-based
violence
and
has
a
Gender
and
Domestic
Violence Policy, which grants a paid 15-day leave due to gender or domestic
violence, stalking and sexual harassment.
Employee Experience
Popular aims to
provide an excellent
employee experience that
inspires its employees to
provide customers and
communities with
the best
service. To
understand its
employees’ experience, the
Corporation conducts
anonymous pulse
and engagement
surveys
(including the
Great Place
to
Work survey)
as well
as
an exit
survey to
identify areas
of
opportunity and
set
and monitor
action
plans.
The
2022
employee satisfaction
scores
increased 2
points from
2020
and
5
points
since
2016.
We
seek
to
continuously
measure and improve the employee experience with aims to increase employee productivity while contributing to enhance customer
satisfaction and improve business results.
The
Corporation
capitalizes
on
an
interactive
dashboard
that
encompasses
data
surrounding
different
people-related
topics
to
support
the
people
strategy,
data-driven
decision-making
and
environmental,
social
and
governance
(“ESG”)
monitoring.
The
dashboard provides
senior management
with visibility
over people
metrics such
as workforce
demographics, hiring,
turnover,
and
Diversity, Equity, and Inclusion.
13
As of year-end 2022, our turnover rate was 10.8%, improving 1.9 percentage points since 2021. Additionally, voluntary turnover rate
was 8.8%, improving 2.3 percentage points since 2021.Throughout 2022, the Corporation saw
a stabilization in turnover, which
had
been
increasing
for
the
past
seven
quarters.
The
dashboard
metrics,
such
as
turnover,
help
shape
our
attraction
and
retention
strategy.
Board Oversight
The Talent
and Compensation Committee
of the Corporation’s
Board of Directors
has oversight responsibility for
the Corporation’s
human
capital
management.
As
part
of
its
responsibilities,
the
Talent
and
Compensation
Committee
reviews
and
advises
management
on
the
Corporation’s
general
compensation
philosophy,
programs,
and
policies,
and
on
the
Corporation’s
talent
acquisition
and
development,
workforce
engagement,
succession
planning,
culture,
diversity,
equity
(including
pay
equity)
and
inclusion, among other human capital topics.
We
encourage
you
to
review
our
Corporate
Sustainability
Report
published
on
www.popular.com
for
more
detailed
information
regarding the
Corporation’s
human
capital
management
programs
and
initiatives.
The
information on
the
Corporation’s
website,
including
the
Corporation’s
Corporate
Sustainability
Report,
is
not,
and
will
not
be
deemed
to
be,
a
part
of
this
Form
10-K
or
incorporated into any of the Corporation’s filings with
the SEC
.
Regulation and Supervision
Described below are the material elements of selected laws and regulations applicable to Popular, Popular North America
(“PNA”)
and
their
respective
subsidiaries.
Such
laws
and
regulations
are
continually
under
review
by
Congress
and
state
legislatures
and
federal
and
state
regulatory
agencies.
Any
change
in
the
laws
and
regulations
applicable
to
Popular
and
its
subsidiaries could have a material effect on the
business of Popular and its subsidiaries. We will continue to
assess our businesses
and risk management and compliance practices
to conform to developments in the regulatory environment.
General
Popular and
PNA are
bank holding
companies subject
to consolidated
supervision and
regulation by
the Federal
Reserve Board
under
the
Bank
Holding
Company
Act
of
1956
(as
amended,
the
“BHC
Act”).
BPPR
and
PB
are
subject
to
supervision
and
examination by applicable
federal and state
banking agencies including,
in the
case of BPPR,
the Federal Reserve
Board and the
Office of
the Commissioner
of Financial
Institutions of
Puerto Rico
(the “Office
of the
Commissioner”), and, in
the case
of PB,
the
Federal
Reserve
Board
and
the
New
York
State
Department
of
Financial
Services
(the
“NYSDFS”).
Popular’s
broker-dealer
/
investment adviser
subsidiary,
Popular Securities,
LLC (“PS”)
and investment
advisor subsidiary
Popular Asset
Management LLC
(“PAM”)
are subject
to
regulation by
the SEC,
the Financial
Industry
Regulatory Authority
(“FINRA”), and
the Securities
Investor
Protection Corporation, among others. Other of our non-bank subsidiaries conduct reinsurance and
insurance producer and agency
activities, which are
subject to other
federal, state and
Puerto Rico laws
and regulations as
well as licensing
and regulation by
the
Puerto Rico Office of the Commissioner of Insurance and,
for one insurance agency subsidiary, the NYSDFS.
Enhanced Prudential Standards
Under
the
Dodd-Frank
Wall
Street
Reform
and
Consumer
Protection
Act
(the
“Dodd-Frank
Act”),
as
modified
by
the
Economic
Growth,
Regulatory
Relief,
and
Consumer
Protection
Act
and
the
federal
banking
regulators’
2019
“Tailoring
Rules,”
banking
organizations are
categorized based
on status
as
a U.S.
G-SIB,
size
and four
other risk-based
indicators. Among
bank
holding companies with $100
billion or more in
total consolidated assets, the
most stringent standards apply
to U.S. G-SIBs,
which
are subject to Category I standards and the
least stringent standards apply to Category IV organizations, which have between $100
billion and $250 billion in total consolidated assets and less than $75 billion in all four
other risk-based indicators and which are also
not U.S. G-SIBs. Bank holding companies with total consolidated assets of $50 billion or more are subject to risk committee and risk
management requirements. As of December 31, 2022, Popular
had total consolidated assets of $67.6 billion.
Transactions with Affiliates
BPPR and
PB are
subject to
restrictions that
limit the
amount of
extensions of
credit and
certain other
“covered transactions”
(as
defined in Section
23A of the
Federal Reserve Act)
between BPPR or PB,
on the one
hand, and Popular,
PNA or any
of our other
non-banking subsidiaries, on the other hand,
and that impose collateralization requirements on
such credit extensions. A bank
may
not engage
in any
covered transaction if
the aggregate amount
of the bank’s
covered transactions with
that affiliate
would exceed
14
10% of
the bank’s
capital stock
and surplus
or the
aggregate amount
of the
bank’s covered
transactions with
all affiliates
would
exceed
20%
of
the
bank’s
capital
stock
and
surplus.
In
addition,
any
transaction
between
BPPR
or
PB,
on
the
one
hand,
and
Popular, PNA or any of our other non-banking subsidiaries, on the
other, is required to be carried out on an arm’s length basis.
Source of Financial Strength
The
Dodd-Frank Act
requires bank
holding companies,
such
as Popular
and
PNA, to
act
as
a source
of
financial
and
managerial strength to their subsidiary banks. Popular
and PNA are expected to commit resources
to support their subsidiary banks,
including at times when Popular
and PNA may not be
in a financial position to
provide such resources. Any capital
loans by a bank
holding company
to any
of its
subsidiary depository
institutions are
subordinated in
right of
payment to
depositors and
to certain
other indebtedness of such subsidiary depository institution. In the
event of a bank holding company’s bankruptcy,
any commitment
by
the
bank
holding
company
to
a
federal
banking
agency
to
maintain
the
capital
of
a
subsidiary
depository
institution
will
be
assumed by
the bankruptcy
trustee and
entitled to
a priority
of payment.
BPPR and
PB are
currently the
only insured
depository
institution subsidiaries of Popular and PNA.
Resolution Planning
A
bank holding
company with
$250 billion
or more
in total
consolidated assets
(or that
is a
Category III
firm based
on
certain risk-based indicators described in the Tailoring
Rules) is required to report periodically to the
FDIC and the Federal Reserve
Board
such
company’s
plan
for
its
rapid
and
orderly
resolution
in
the
event
of
material
financial
distress
or
failure.
In
addition,
insured depository institutions with total
assets of $50 billion or
more are required to
submit to the FDIC
periodic contingency plans
for resolution
in the
event of
the institution’s
failure. In
June 2021,
the FDIC
issued a
Statement on
Resolution Plans
for Insured
Depository Institutions,
which, among
other things,
establishes a three-year
filing cycle
for banks
with $100
billion or
more in
total
assets and provides details regarding the content
that filers will be expected to prepare.
As of December 31, 2022, Popular,
PNA, BPPR and PB’s total assets were below
the thresholds for applicability of these
rules.
FDIC Insurance
Substantially all the deposits of BPPR and PB are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of
the
FDIC,
and
BPPR
and
PB
are
subject
to
FDIC
deposit
insurance
assessments
to
maintain
the
DIF.
Deposit
insurance
assessments are
based on
the average
consolidated total
assets of
the insured
depository institution
minus the
average tangible
equity of the institution during the assessment period. For larger
depository institutions with over $10 billion in assets,
such as BPPR
and PB, the FDIC uses a “scorecard” methodology, which considers CAMELS ratings, among other
measures, that seeks to capture
both the probability that an individual large institution will
fail and the magnitude of the impact on the DIF
if such a failure occurs. The
FDIC has the ability
to make discretionary adjustments to the
total score based upon significant
risk factors that are not
adequately
captured in the calculations. The initial base deposit insurance assessment rate for larger depository institutions ranges from 3 to 30
basis points on an annualized basis.
After the effect of
potential base-rate adjustments, the total base assessment rate could
range
from 1.5 to 40 basis points on an annualized
basis.
On October 18,
2022, the FDIC finalized
a rule that
would increase initial
base deposit insurance assessment
rates by 2
basis
points,
beginning
with
the
first
quarterly
assessment
period
of
2023.
The
FDIC,
as
required
under
the
Federal
Deposit
Insurance
Act
(“FDIA”),
established
a
plan
in
September
2020
to
restore
the
DIF
reserve
ratio
to
meet
or
exceed
the
statutory
minimum of
1.35 percent
within eight
years. The
increased assessment
is intended
to improve
the likelihood
that the
DIF reserve
ratio would reach the required minimum by the
statutory deadline of September 30, 2028.
As
of
December
31,
2022,
we
had
a
DIF
average
total
asset
less
average
tangible
equity
assessment
base
of
approximately $65 billion.
Brokered Deposits
The FDIA
and regulations
adopted thereunder
restrict the
use of
brokered deposits
and the
rate of
interest payable
on
deposits for
institutions that
are
less than
well capitalized.
There are
no such
restrictions on
a bank
that
is well
capitalized (see
“Prompt
Corrective
Action”
below
for
a
description
of
the
standard
of
“well
capitalized”).
Popular
does
not
believe
the
brokered
deposits regulations have had or will have a
material effect on the funding or liquidity of BPPR and PB.
Capital Adequacy
Popular, Popular,
BPPR and PB
are each required
to comply
with applicable capital
adequacy standards established
by
15
the
federal
banking
agencies
(the
“Capital
Rules”),
which
implement
the
Basel
III
framework
set
forth
by
Basel
Committee
on
Banking Supervision (the “Basel Committee”) as
well as certain provisions of the Dodd-Frank
Act.
Among other
matters, the
Capital Rules:
(i) impose
a capital
measure called
“Common Equity
Tier
1” (“CET1”)
and the
related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1
capital” instruments meeting
certain revised requirements;
and (iii) mandate
that most deductions/adjustments to
regulatory capital
measures be made
to CET1
and not to
the other components
of capital.
Under the Capital
Rules, for most
banking organizations,
including
Popular,
the
most
common
form
of
Additional
Tier
1
capital
is
non-cumulative
perpetual preferred
stock
and
the
most
common form of Tier
2 capital is subordinated notes and
a portion of the
allocation for loan and lease losses,
in each case, subject
to the Capital Rules’ specific requirements.
Pursuant to the Capital Rules, the minimum
capital ratios are:
4.5% CET1 to risk-weighted assets;
6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted
assets;
8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and
4% Tier 1 capital to average consolidated assets as reported
on consolidated financial statements (known
as the
“leverage ratio”).
The Capital Rules also impose
a “capital conservation buffer,”
composed entirely of CET1, on top
of these minimum risk-
weighted
asset
ratios. 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 and
eligible retained
income
(that is,
four quarter trailing
net income, net
of distributions
and tax
effects not
reflected in net
income). Thus, Popular,
BPPR and
PB are required to maintain such additional capital conservation buffer of 2.5% of CET1, effectively 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%.
In addition, under
prior risk-based capital rules,
the effects of
accumulated other comprehensive income
or loss (“AOCI”)
items included in stockholders’
equity (for example, marks-to-market of securities
held in the available
for sale portfolio) under
U.S.
GAAP were reversed
for the
purposes of determining
regulatory capital ratios.
Pursuant to the
Capital Rules, the
effects of certain
AOCI items
are not
excluded; however,
non-advanced approaches
banking organizations,
including Popular,
BPPR and
PB, may
make a one-time permanent election to continue to exclude these items. Popular,
BPPR and PB have made this election in order to
avoid significant
variations in
the level
of capital
depending upon
the impact
of interest
rate fluctuations
on the
fair value
of their
securities portfolios.
The
Capital
Rules
preclude certain
hybrid
securities, such
as
trust
preferred
securities, from
inclusion
in
bank
holding
companies’ Tier 1 capital. Trust preferred securities no
longer included in Popular’s Tier 1 capital may nonetheless be included as a
component of
Tier 2 capital.
Popular has
not issued
any trust
preferred securities since
May 19,
2010. As
of December
31, 2022,
Popular has
$193 million
of trust
preferred securities
outstanding which
no longer
qualify for
Tier
1 capital
treatment, but
instead
qualify for Tier 2 capital treatment.
The Capital
Rules also
provide for
a number
of deductions
from and
adjustments to
CET1.
Non-advanced approaches
banking organizations
are subject
to
rules that
provide for
simplified capital
requirements relating
to the
threshold deductions
for
certain
mortgage
servicing
assets,
deferred
tax
assets,
investments
in
the
capital
of
unconsolidated
financial
institutions
and
inclusion of minority interests in regulatory capital.
Failure
to
meet
capital
guidelines
could
subject
Popular
and
its
depository
institution
subsidiaries
to
a
variety
of
enforcement remedies, including the termination of deposit insurance by the FDIC
and to certain restrictions on our business. Refer
to “Prompt Corrective Action” below for further
discussion.
In
December 2017,
the Basel
Committee published
standards that
it
described as
the finalization
of the
Basel III
post-
crisis regulatory
reforms. Among other
things, these
standards revise
the Basel
Committee’s standardized approach
for credit
risk
(including
by
recalibrating
risk
weights
and
introducing
new
capital
requirements
for
certain
“unconditionally
cancellable
commitments,” such as unused credit card lines of credit) and provide a new standardized approach for operational risk capital. The
16
Basel framework
contemplates that
these standards
will generally be
effective on
January 1,
2023, with
an aggregate
output floor
phasing in through January 1, 2028. The federal
bank regulators have not yet proposed rules implementing these standards. Under
the
current
U.S.
capital
rules,
operational
risk
capital
requirements
and
a
capital
floor
apply
only
to
advanced
approaches
institutions, and
not to Popular,
BPPR and
PB. The impact
of these standards
on us
will depend on
the manner
in which they
are
implemented by the federal bank regulators.
In
December
2018,
the
federal
banking
agencies
approved
a
final
rule
modifying
their
regulatory
capital
rules
and
providing an
option to
phase in
over a
period of
three years
the day-one
regulatory capital
effects of
the Current
Expected Credit
Loss (“CECL”) model
of ASU 2016-13.
The final
rule also revised
the agencies’
other rules to
reflect the update
to the
accounting
standards. Popular has availed itself
of the option to
phase in over a period
of three years the
day one effects on
regulatory capital
from the
adoption of
CECL. In
2020, federal
bank regulators
adopted a
rule that
allowed banking
organizations to
elect to
delay
temporarily
the
estimated
effects
of
adopting
CECL
on
regulatory
capital
until
January
2022
and
subsequently
to
phase
in
the
effects through January 2025. Under the rule, during 2020 and
2021, the adjustment to CET1 capital reflects the change in retained
earnings upon
adoption of CECL
at January
1, 2020, plus
25% of the
increase in
the allowance for
credit losses since
January 1,
2020.
Refer to the Consolidated Financial Statements in this Form 10-K., Note 21 and Table 9 of
Management’s Discussion and
Analysis for the capital ratios of Popular, BPPR and PB under Basel III. Refer
to the Consolidated Financial Statements in this Form
10-K Note 3 for more information regarding CECL.
Prompt Corrective Action
The
FDIA
requires,
among
other
things,
the
federal
banking
agencies
to
take
prompt
corrective
action
in
respect
of
insured
depository
institutions
that
do
not
meet
minimum
capital
requirements.
The
FDIA
establishes
five
capital
tiers:
“well
capitalized,”
“adequately
capitalized,”
“undercapitalized,”
“significantly
undercapitalized,”
and
“critically
undercapitalized”.
A
depository institution’s capital tier will depend upon how its
capital levels compare with various relevant capital
measures and certain
other factors.
An insured
depository institution will
be deemed
to be
(i) “well
capitalized” if
the institution
has a
total risk-based
capital
ratio of 10.0% or greater, a CET1 capital ratio of 6.5%
or greater, a Tier 1
risk-based capital ratio of 8.0% or greater, and a leverage
ratio of 5.0% or
greater, and is
not subject to any order
or written directive by
any such regulatory authority to
meet and maintain a
specific capital level for any capital
measure; (ii) “adequately capitalized” if the institution
has a total risk-based capital ratio
of 8.0%
or greater, a
CET1 capital ratio of 4.5%
or greater, a
Tier 1 risk-based capital
ratio of 6.0% or greater,
and a leverage ratio of
4.0%
or greater
and is
not “well
capitalized”; (iii)
“undercapitalized” if
the institution
has a
total risk-based
capital ratio
that is
less than
8.0%, a CET1 capital
ratio less than 4.5%,
a Tier 1
risk-based capital ratio of
less than 6.0% or
a leverage ratio of
less than 4.0%;
(iv) “significantly
undercapitalized” if
the institution
has a
total risk-based
capital ratio
of less
than 6.0%,
a CET1
capital ratio
less
than 3%, a Tier
1 risk-based capital ratio of less than 4.0% or
a leverage ratio of less than 3.0%;
and (v) “critically undercapitalized”
if
the
institution’s
tangible
equity
is
equal
to
or
less
than
2.0%
of
average
quarterly
tangible
assets.
An
institution
may
be
downgraded to, or deemed
to be in, a
capital category that is
lower than indicated by
its capital ratios if
it is determined to
be in an
unsafe
or
unsound
condition
or
if
it
receives
an
unsatisfactory
examination
rating
with
respect
to
certain
matters.
An
insured
depository institution’s capital category is determined solely for the purpose of applying prompt corrective action
regulations, and the
capital category
may not
constitute an
accurate representation
of the
institution’s overall
financial condition
or prospects
for other
purposes.
The FDIC generally prohibits an insured depository institution from making any capital distribution (including payment of
a
dividend) or
paying any
management fee to
its holding
company, if
the depository
institution would thereafter
be undercapitalized.
Undercapitalized
depository
institutions
are
subject
to
restrictions
on
borrowing
from
the
Federal
Reserve
System.
In
addition,
undercapitalized
depository
institutions
are
subject
to
growth
limitations
and
are
required
to
submit
capital
restoration
plans.
A
depository institution’s
holding company must
guarantee the capital
restoration plan, up
to an
amount equal to
the lesser
of 5% of
the
depository
institution’s
assets
at
the
time
it
becomes
undercapitalized
or
the
amount
of
the
capital
deficiency,
when
the
institution fails to comply with the
plan. The federal banking agencies may
not accept a capital restoration plan without
determining,
among other things,
that the plan
is based
on realistic assumptions
and is
likely to succeed
in restoring the
depository institution’s
capital. If a depository institution fails to submit an
acceptable plan, it is treated as if it is
significantly undercapitalized.
Significantly
undercapitalized
depository
institutions
may
be
subject
to
a
number
of
requirements
and
restrictions,
17
including orders to
sell sufficient voting
stock to become
adequately capitalized, requirements to
reduce total assets
and cessation
of receipt
of deposits
from correspondent
banks. Critically
undercapitalized depository
institutions are
subject to
appointment of
a
receiver or conservator.
The capital-based prompt
corrective action provisions
of the FDIA
apply to
the FDIC-insured depository
institutions such
as
BPPR
and
PB,
but
they
are
not
directly
applicable
to
holding
companies
such
as
Popular
and
PNA,
which
control
such
institutions. As of December 31, 2022,
both BPPR and PB were well capitalized.
Restrictions on Dividends and Repurchases
The
principal
sources
of
funding
for
Popular
and
PNA
have
included
dividends
received
from
their
banking
and
non-
banking subsidiaries, asset sales
and proceeds from
the issuance of
debt and equity.
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, 2022, BPPR declared
cash dividends of $450 million,
a portion of which was
used by
Popular for
the payments
of the
cash dividends
on its
outstanding common
stock and
$231 million
in accelerated
stock
repurchases.
At
December
31,
2022,
BPPR
needed
to
obtain
prior
approval
of
the
Federal
Reserve
Board
before
declaring
a
dividend in excess of $53 million due to its declared
dividend activity and transfers to statutory reserves over the three year’s ended
December 31, 2022. 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.
It is Federal Reserve Board policy that bank holding companies generally should pay dividends on common
stock only out
of net
income available to
common shareholders
over the past
year and
only if
the prospective rate
of earnings retention
appears
consistent with the organization’s current and
expected future capital needs, asset quality
and overall financial condition. Moreover,
under Federal Reserve Board policy, a bank
holding company should not maintain dividend levels that place undue pressure on the
capital of depository
institution subsidiaries or that
may undermine the bank
holding company’s ability to
be a source
of strength to
its
banking subsidiaries.
Federal Reserve
policy
also
provides that
a
bank
holding company
should
inform
the
Federal
Reserve
reasonably in advance of declaring or paying a dividend that
exceeds earnings for the period for which the dividend is
being paid or
that could result in a material adverse change
to the bank holding company’s capital structure.
The
Federal Reserve
Board
also restricts
the
ability of
banking
organizations to
conduct stock
repurchases. In
certain
circumstances, a banking organization’s repurchases
of its common stock may
be subject to a
prior approval or notice
requirement
under other regulations or policies of the Federal Reserve. Any redemption or
repurchase of preferred stock or subordinated debt is
subject to the prior approval of the Federal Reserve.
Subject to compliance with certain conditions, distributions of U.S. sourced dividends to a corporation
organized under the
laws
of the
Commonwealth of
Puerto Rico
are subject
to
a withholding
tax
of 10%
instead of
the 30%
applied to
other “foreign”
corporations. Accordingly, dividends from current or accumulated earnings and profits paid
by PNA to Popular, Inc. sourced from the
U.S. operations of PB are subject to a 10%
tax withholding.
Refer to
Part II,
Item 5,
“Market for
Registrant’s Common
Equity,
Related Stockholder
Matters and
Issuer Purchases
of
Equity Securities” for further information on Popular’s
distribution of dividends and repurchases of equity
securities.
See
“Puerto
Rico
Regulation”
below
for
a
description
of
certain
restrictions
on
BPPR’s
ability
to
pay
dividends
under
Puerto Rico law.
Interstate Branching
The Dodd-Frank
Act amended
the Riegle-Neal
Interstate Banking
and Branching
Efficiency Act
of 1994
(the “Interstate
Banking
Act”)
to
authorize
national
banks
and
state
banks
to
branch
interstate
through
de
novo
branches. For
purposes
of
the
Interstate Banking Act, BPPR is treated as a state bank and is subject to the same restrictions on interstate branching as other state
banks.
18
Activities and Acquisitions
In general, the BHC Act limits the activities
permissible for bank holding companies to the business of banking, managing
or controlling banks and such other activities as the Federal Reserve Board has determined to be so closely related to banking as to
be
properly
incidental
thereto.
A
company
who
meets
management
and
capital
standards
and
whose
subsidiary
depository
institutions meet management,
capital and
Community Reinvestment Act
(“CRA”) standards may
elect to
be treated
as a
financial
holding company
and engage
in a
substantially broader
range of
nonbanking financial
activities, including
securities underwriting
and dealing, insurance underwriting and making merchant
banking investments in nonfinancial companies.
In order for a bank holding company to elect to be treated as a financial
holding company, (i) all of its depository institution
subsidiaries
must
be
well capitalized
(as described
above)
and
well managed
and
(ii)
it
must
file a
declaration with
the Federal
Reserve Board that it elects to be a “financial holding
company.” As noted above, a bank
holding company electing to be a financial
holding company must itself be and remain
well capitalized and well managed. The Federal Reserve Board’s
regulations applicable
to bank holding companies separately define
“well capitalized” for bank holding companies,
such as Popular,
to require maintaining
a tier 1 capital
ratio of at least
6% and a total capital
ratio of at least 10%.
Popular and PNA have elected
to be treated as
financial
holding
companies.
A
depository
institution
is
deemed
to
be
“well
managed”
if,
at
its
most
recent
inspection,
examination
or
subsequent review
by the
appropriate federal banking
agency (or
the appropriate state
banking agency), the
depository institution
received
at
least
a
“satisfactory”
composite
rating
and
at
least
a
“satisfactory”
rating
for
the
management
component
of
the
composite
rating.
If,
after
becoming
a
financial
holding
company,
the
company
fails
to
continue
to
meet
any
of
the
capital
or
management requirements
for financial
holding company
status, the
company
must
enter into
a confidential
agreement with
the
Federal
Reserve
Board
to
comply
with
all
applicable capital
and
management
requirements.
If
the
company
does
not
return
to
compliance
within
180
days,
the
Federal
Reserve
Board
may
extend
the
agreement
or
may
order
the
company
to
divest
its
subsidiary banks or the
company may discontinue, or
divest investments in companies
engaged in, activities permissible only
for a
bank holding company that has elected to be treated as a financial
holding company. In addition, if a depository institution subsidiary
controlled by a financial holding company does not
maintain a CRA rating of at least “satisfactory,” the financial holding company
will
be subject to restrictions on certain new activities
and acquisitions.
The Federal Reserve Board
may in certain circumstances limit
our ability to conduct
activities and make acquisitions that
would otherwise be permissible for
a financial holding company.
Furthermore, a financial holding company must obtain
prior written
approval from the Federal Reserve Board before acquiring a nonbank company with $10 billion or more in total consolidated assets.
In addition, we
are required to
obtain prior Federal
Reserve Board approval
before engaging in
certain banking and
other financial
activities both in the United States and abroad.
The “Volcker
Rule” adopted
as part
of the
Dodd-Frank Act
restricts the
ability of
Popular and
its subsidiaries,
including
BPPR and PB as
well as non-banking subsidiaries, to
sponsor or invest in
“covered funds,” including private funds,
or to engage in
certain types
of proprietary
trading. Popular
and its
subsidiaries generally
do not
engage in
the businesses
subject to
the Volcker
Rule; therefore, the Volcker Rule does not have a material effect on our
operations.
Anti-Money Laundering Initiative and the USA PATRIOT Act
A major focus of governmental policy relating to financial institutions in
recent years has been aimed at combating money
laundering and
terrorist financing.
The USA
PATRIOT
Act of
2001 (the
“USA PATRIOT
Act”) strengthened
the ability
of the
U.S.
government to help prevent, detect and prosecute international money
laundering and the financing of terrorism. Title
III of the USA
PATRIOT
Act imposed
significant compliance
and due
diligence obligations,
created new
crimes and
penalties and
expanded the
extra-territorial jurisdiction of the United States. Failure of a financial institution to comply with the USA PATRIOT Act’s requirements
could have serious legal and reputational consequences
for the institution.
The
Anti-Money
Laundering
Act
of
2020
(“AMLA”),
which
amended
the
Bank
Secrecy
Act
(the
“BSA”),
is
intended
to
comprehensively
reform
and
modernize
U.S.
anti-money
laundering
laws.
Among
other
things,
the
AMLA
codifies
a
risk-based
approach to anti-money laundering compliance for financial institutions; requires the U.S. Department of the Treasury to
promulgate
priorities
for
anti-money
laundering
and
countering
the
financing
of
terrorism
policy;
requires
the
development
of
standards
for
testing technology and
internal processes for BSA
compliance; expands enforcement-
and investigation-related authority,
including
a
significant
expansion
in
the
available
sanctions
for
certain
BSA
violations;
and
expands
BSA
whistleblower
incentives
and
protections. Many of
the statutory provisions
in the AMLA
will require additional
rulemakings, reports and
other measures, and
the
impact
of
the
AMLA
will
depend on,
among
other
things,
rulemaking and
implementation guidance.
In
June
2021,
the
Financial
19
Crimes Enforcement Network, a bureau of
the U.S. Department of the
Treasury,
issued the priorities for anti-money laundering
and
countering the
financing of
terrorism policy
required under AMLA.
The priorities
include: corruption, cybercrime,
terrorist financing,
fraud, transnational crime, drug trafficking, human trafficking and
proliferation financing.
Federal regulators
regularly examine BSA/Anti-Money
Laundering and sanctions
compliance to
enhance their
adequacy
and effectiveness, and the frequency and extent of such examinations
and related remedial actions have been
increasing.
Community Reinvestment Act
The
CRA
requires
banks
to
help
serve
the
credit
needs
of
their
communities,
including
extending
credit
to
low-
and
moderate-income individuals
and geographies.
Should
Popular
or our
bank
subsidiaries
fail
to
serve
adequately
the community,
potential penalties may include regulatory denials of applications to expand branches, relocate offices or branches, add subsidiaries
and affiliates, expand into
new financial activities and merge
with or purchase other financial
institutions. In May 2022, the
Office of
the Comptroller
of the
Currency (“OCC”),
the Federal
Reserve Board,
and the
FDIC jointly
issued a
proposed rule
to
modernize
federal banking
agencies’ CRA
regulations. The
proposed rule
would adjust
CRA evaluations
based on
bank size
and type,
with
many of the proposed changes applying only to banks
with over $2 billion in assets and several applying
only to banks with over $10
billion in assets,
such as Popular.
The effects on
Popular of any
potential change to the
CRA rules will
depend on the final
form of
any Federal Reserve rulemaking.
Interchange Fees Regulation
The Federal Reserve Board
has established standards for
debit card interchange fees
and prohibited network exclusivity
arrangements and routing restrictions. The
maximum permissible interchange fee that
an issuer may receive
for an electronic debit
transaction is
the sum
of
21 cents
per transaction
and 5
basis points
multiplied by
the value
of
the transaction.
Additionally,
the
Federal Reserve
Board allows
for an
upward adjustment
of
no more
than 1
cent
to
an issuer’s
debit card
interchange fee
if the
issuer develops and implements policies and procedures
reasonably designed to achieve certain fraud-prevention
standards.
Consumer Financial Protection Act of 2010
The Consumer
Financial Protection
Bureau (the
“CFPB”) supervises
“covered persons”
(broadly defined
to include
any
person offering or
providing a consumer financial
product or service and
any affiliated service
provider) for compliance with
federal
consumer financial laws. The CFPB
also has the broad power
to prescribe rules applicable to
a covered person or service
provider
identifying
as
unlawful,
unfair,
deceptive,
or
abusive
acts
or
practices
in
connection
with
any
transaction
with
a
consumer
for
a
consumer financial product or service, or the offering of
a consumer financial product or service. We are subject to examination and
regulation by the CFPB.
Office of Foreign Assets Control Regulation
The
U.S.
Treasury
Department
Office
of
Foreign
Assets
Control
(“OFAC”)
administers
economic
sanctions
that
affect
transactions
with
designated
foreign
countries,
nationals
and
others.
The
OFAC-administered
sanctions
targeting
countries
take
many
different
forms.
Generally,
however,
they
contain
one
or
more
of
the
following
elements:
(i)
restrictions
on
trade
with
or
investment in a sanctioned country; and (ii) a blocking
of assets in which the government of the
sanctioned country or other specially
designated nationals have an interest, by prohibiting
transfers of property subject to U.S. jurisdiction (including
property in the United
States or the possession or control of U.S.
persons outside of the United States). Blocked assets (e.g., property
and bank deposits)
cannot
be
paid
out,
withdrawn, set
off
or
transferred
in
any
manner without
a
license
from
OFAC.
Failure
to
comply
with these
sanctions could have serious legal and reputational
consequences.
Protection of Customer Personal Information and
Cybersecurity
The privacy
provisions of
the Gramm-Leach-Bliley Act
of 1999
generally prohibit financial
institutions, including
us, from
disclosing nonpublic personal financial information of consumer customers to
third parties for certain purposes (primarily marketing)
unless
customers
have
the
opportunity
to
opt
out
of
the
disclosure.
The
Fair
Credit
Reporting
Act
restricts
information
sharing
among affiliates for marketing purposes and governs
the use and provision of information to consumer
reporting agencies.
The federal
banking regulators have
also issued guidance
and proposed rules
regarding cybersecurity that
are intended
to
enhance cyber
risk management
standards among
financial institutions.
A
financial institution
is expected
to
establish lines
of
defense
and
to
maintain
risk
management
processes
that
are
designed
to
address
the
risk
posed
by
compromised
customer
credentials. A
financial institution’s
management is
expected to
maintain sufficient
business continuity
planning processes
for the
rapid
recovery,
resumption
and
maintenance
of
the
institution’s
operations
after
a
cyber-attack
involving
destructive
malware.
A
financial
institution
is
also
expected
to
develop
appropriate
processes
to
enable
recovery
of
data
and
business
operations
and
20
address rebuilding
network capabilities
and restoring
data if
the institution
or its
critical service
providers fall
victim to
this type
of
cyber-attack. If
we fail
to observe
the regulatory
guidance, we
could be
subject to
various regulatory
sanctions, including financial
penalties. In November 2021, the U.S. federal bank regulatory
agencies issued a final rule requiring banking
organizations, including
Popular,
PNA,
BPPR and
PB,
to
notify their
primary federal
banking regulator
within
36 hours
of
determining that
a “notification
incident”
has
occurred.
A
notification
incident
is
a
“computer-security
incident”
that
has
materially
disrupted
or
degraded,
or
is
reasonably likely
to materially
disrupt or
degrade, the
banking organization’s
ability to
deliver services
to
a material
portion of
its
customer base,
jeopardize the viability
of key
operations of the
banking organization, or
impact the stability
of the
financial sector.
The final rule also requires specific and immediate
notifications by bank service providers that
become aware of similar incidents.
State and foreign regulators
have also been increasingly active
in implementing privacy and cybersecurity
standards and
regulations. Several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs and
providing detailed requirements with respect to these
programs, including data encryption requirements. In New York,
the NYSDFS
requires
financial
institutions
regulated
by
the
NYSDFS,
including
PB,
to,
among
other
things,
(i)
establish
and
maintain
a
cybersecurity program designed
to enhance the
confidentiality, integrity
and availability of
their information systems;
(ii) implement
and maintain a written
cyber security policy setting forth
policies and procedures for the
protection of their information systems
and
nonpublic information; and (iii) designate a Chief
Information Security Officer.
In
March
2022,
the
SEC
proposed
new
rules
that
would
require
registrants,
such
as
Popular,
to
(i)
report
material
cybersecurity incidents on
Form 8-K,
(ii) include updated
disclosure in Forms
10-K and
10-Q of
previously disclosed cybersecurity
incidents,
and
disclose
previously
undisclosed,
individually
immaterial
incidents
when
a
determination
is
made
that
they
have
become material on an aggregated basis, (iii) disclose cybersecurity policies and procedures and governance practices, including at
the board and management levels, in Form 10-K
and (iv) disclose the board of directors’
cybersecurity expertise.
Many states and foreign
governments have also recently implemented or
modified their data breach notification
and data
privacy
requirements. The
California Consumer
Privacy Act
(“CCPA”)
imposes privacy
compliance obligations
with regard
to
the
collection,
use
and
disclosure of
personal
information of
California residents,
and the
November 2020
amendment to
the
CCPA
creates the California Privacy Protection Agency, a watchdog privacy agency, and further expands the scope of businesses covered
by the law
and certain rights relating
to personal information. The
substantive obligations under the
2020 amendment to the
CCPA
became effective
on January
1, 2023.
In European
Union, the
General Data
Protection Regulation heightens
privacy compliance
obligations
and
imposes
strict
standards
for
reporting
data
breaches.
We
expect
this
trend
to
continue
and
are
continually
monitoring developments in the jurisdictions in which
we operate.
See
“Puerto
Rico
Regulation”
below
for
a
description
of
legislations
and
regulations
on
information
privacy
and
cybersecurity in Puerto Rico.
Climate-Related Financial Risks
State
and
federal
banking
regulators
have
become
increasingly
focused
on
matters
regarding climate
change
and
its
associated risks.
In 2021, the
OCC proposed principles to
provide for a framework
for the management of
climate-related risks for
financial institutions and in 2022, the FDIC, the Federal Reserve Board and the NYSDFS each proposed principles or guidance with
respect to
the management
of climate-related
risks for
financial institutions. Additionally,
in 2022,
the SEC
proposed rule
changes
that
would
require
registrants,
such
as
Popular,
to
disclose
information
about
climate-related
risks
and
certain
climate-related
financial statement metrics.
Incentive Compensation
The Federal Reserve Board reviews, as
part of its regular,
risk-focused examination process, the incentive compensation
arrangements of
banking organizations, such
as Popular,
that are
not “large,
complex banking
organizations.” Deficiencies will
be
incorporated into
the
organization’s supervisory
ratings, which
can
affect
the
organization’s ability
to
make
acquisitions and
take
other
actions. Enforcement
actions may
be taken
against
a
banking
organization if
its
incentive compensation
arrangements, or
related
risk-management
control
or
governance
processes,
pose
a
risk
to
the
organization’s
safety
and
soundness
and
the
organization is not taking prompt and effective measures
to correct the deficiencies.
The
Federal
Reserve
Board,
OCC
and
FDIC
have
issued
comprehensive
final
guidance
on
incentive
compensation
policies intended to discourage excessive risk-taking in
the incentive compensation policies of banking organizations
in order to not
21
undermine
the
safety
and
soundness
of
such
organizations.
The
guidance,
which
covers
all
employees
that
have
the
ability
to
materially affect
the risk
profile of an
organization, either individually
or as
part of
a group,
is based
upon the key
principles that a
banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond
the
organization’s
ability
to
effectively
identify
and
manage
risks,
(ii)
be
compatible
with
effective
internal
controls
and
risk
management, and (iii)
be supported by
strong corporate governance,
including active and
effective oversight
by the
organization’s
board of directors.
The Dodd-Frank Act requires the U.S. financial regulators, including the Federal Reserve Board, the other federal banking
agencies
and
the
SEC,
to
adopt
rules
prohibiting
incentive-based
payment
arrangements that
encourage
inappropriate
risks
by
providing excessive
compensation or
that could
lead to
a material
financial loss
at specified
regulated entities
having at
least $1
billion in total
assets (including Popular,
PNA, BPPR and
PB). The U.S.
financial regulators proposed revised
rules in 2016,
which
have not been finalized.
In October
2022, the SEC
adopted a final
rule requiring securities
exchanges to adopt
rules mandating, in
the case of
a
restatement, the
recovery or
“clawback” of
excess incentive-based
compensation paid
to current
or former
executive officers
and
requiring listed
issuers to
disclose any
recovery analysis where
recovery is
triggered by
a restatement.
The excess
compensation
would be based
on the amount
the executive officer
would have received
had the incentive-based
compensation been determined
using the
restated financials. The
final rule
requires the securities
exchanges to propose
conforming listing standards
by February
26,
2023
and
requires
the
standards
to
become
effective
no
later
than
November
28,
2023.
Each
listed
issuer,
which
includes
Popular as a
listed issuer on
the Nasdaq Stock
Market, would then
be required to
adopt a clawback
policy within 60
days after
its
exchange’s
listing standard
has
become
effective.
Popular
will
work
to
implement these
new
requirements
as
the
rule
becomes
effective.
Regulation of Broker-Dealers
Our subsidiary,
PS, is a
registered broker-dealer with the
SEC and subject to
regulation and examination by
the SEC as
well
as
FINRA
and
other
self-regulatory
organizations.
These
regulations
cover
a
broad
range
of
issues,
including
capital
requirements;
sales
and
trading
practices;
use
of
client
funds
and
securities;
the
conduct
of
directors,
officers
and
employees;
record-keeping and recording;
supervisory procedures to
prevent improper trading
on material
non-public information; qualification
and
licensing
of
sales
personnel;
and
limitations
on
the
extension
of
credit
in
securities
transactions.
In
addition
to
federal
registration, state securities
commissions require the
registration of certain
broker-dealers. PS is
registered with 35
U.S. state and
territory securities commissions.
Regulation of Reinsurers, Insurance Producers and
Agents
Popular’s subsidiaries that are engaged in
insurance agency and producer activities are
subject to regulatory supervision
by the Puerto
Rico Office of
the Commissioner of Insurance
and to insurance laws
and regulations requiring licensing
of insurance
producers and
agents. Popular’s
reinsurance subsidiaries
are subject
to
licensure and
regulatory supervision
by the
Puerto Rico
Office of the Commissioner of Insurance and
to insurance laws and regulations requiring, among
other things, minimum capital and
solvency standards, financial reporting, restrictions on
the amount of dividends payable, record
keeping and examinations.
Puerto Rico Regulation
As
a
commercial
bank
organized
under
the
laws
of
Puerto
Rico,
BPPR
is
subject
to
supervision,
examination
and
regulation by the Office of the Commissioner of Financial Institutions, pursuant to the Puerto Rico Banking Act of 1933, as amended
(the “Banking Law”).
Section 27
of the
Banking Law
requires that
at
least ten
percent (10%)
of the
yearly net
income of
BPPR be
credited
annually to a reserve
fund. The apportionment must be
done every year until the
reserve fund is equal to
the total of paid-in
capital
on common and preferred stock. During 2022, $76.9
million was transferred to the statutory reserve
account.
Section
27
of
the
Banking
Law
also
provides that
when
the
expenditures
of
a
bank
are
greater
than
its
receipts, the
excess of the
former over the latter
must be charged
against the undistributed profits
of the bank, and
the balance, if
any, must
be
charged against
the reserve
fund.
If the
reserve fund
is
not sufficient
to
cover such
balance in
whole or
in part,
the outstanding
22
amount must be charged against
the capital account and no
dividend may be declared until capital
has been restored to its
original
amount and the reserve fund to 20% of the original
capital.
Section 16 of the
Banking Law requires every
bank to maintain a
legal reserve that, except
as otherwise provided by
the
Office of
the Commissioner,
may not be
less than 20%
of its
demand liabilities, excluding
government deposits (federal,
state and
municipal) that
are secured
by collateral.
If a
bank is
authorized to
establish one
or more
bank branches
in a
state of
the United
States or in a foreign country, where such branches are subject to the reserve requirements of that state
or country, the Office of the
Commissioner
may
exempt
said
branch
or
branches
from
the
reserve
requirements
of
Section
16.
Pursuant
to
an
order
of
the
Federal
Reserve
Board
dated
November
24,
1982,
BPPR
has
been
exempted
from
the
reserve
requirements
of
the
Federal
Reserve
System
with
respect
to
deposits
payable
in
Puerto
Rico.
Accordingly,
BPPR
is
subject
to
the
reserve
requirement
prescribed by the Banking Law. During 2022, BPPR was in compliance
with the statutory reserve requirement.
Section 17 of the Banking Law permits a bank to make loans to
any one person, firm, partnership or corporation, up to an
aggregate amount of
fifteen percent (15%)
of the paid-in
capital and reserve fund
of the bank.
As of December
31, 2022, the
legal
lending limit
for BPPR
under this
provision was
approximately $334
million. In
the case
of loans
which are
secured by
collateral
worth at
least 25% more
than the amount
of the
loan, the
maximum aggregate amount
of such secured
loans is
increased to
one
third of
the paid-in capital
of the bank,
plus its reserve
fund. In no
event may the
total of unsecured
and secured loans
to any one
person, firm, partnership or corporation exceed an aggregate amount of 33 1/3% of the paid-in capital and reserve fund of the bank.
If the institution is well capitalized and had been rated
1 in the last examination performed by the Office
of the Commissioner or any
regulatory agency,
its legal
lending limit
shall also
include 15%
of 50%
of its
undivided profits
and for
loans secured
by collateral
worth at
least 25%
more than
the amount
of the
loan, the
capital of
the bank
shall also
include 33
1/3% of
50% of
its undivided
profits. Institutions rated 2
in their last
regulatory examination may include this
additional component in their
legal lending limit
only
with the previous authorization of the Office of the Commissioner. There are no restrictions under Section 17 on the amount of loans
that are wholly secured
by bonds, securities and
other evidence of indebtedness
of the Government of
the United States or
Puerto
Rico,
or
by
current
debt
bonds,
not
in
default,
of
municipalities
or
instrumentalities
of
Puerto
Rico.
During
2022,
BPPR
was
in
compliance with the lending limit requirements of Section
17 of the Banking Law.
Section
14
of
the
Banking Law
authorizes a
bank to
conduct certain
financial
and
related
activities directly
or
through
subsidiaries, including finance leasing of personal property and originating and servicing
mortgage loans. BPPR engages in finance
leasing through
its wholly-owned
subsidiary,
Popular Auto,
LLC, which
is organized
and operates
in Puerto
Rico. The
origination
and servicing of mortgage loans is conducted by
Popular Mortgage, a division of BPPR.
With
respect to
information privacy,
Puerto
Rico
law
requires businesses
to
implement information
security
controls to
protect
consumers’
personal
information
from
breaches,
as
well
as
to
provide
notice
of
any
breach
to
affected
customers.
In
addition, as
noted above
in “Regulation
of
Reinsurers, Insurance
Producers and
Agents”, Popular’s
reinsurance subsidiaries
are
subject to
licensure and regulatory
supervision by the
Puerto Rico Office
of the
Commissioner of Insurance
and to insurance
laws
and regulations.
Available Information
We maintain an
Internet website at www.popular.com.
Via the “Investor
Relations” link at our
website, our annual reports
on
Form 10-K,
quarterly reports
on
Form 10-Q,
current
reports on
Form 8-K
and amendments
to
such
reports filed
or furnished
pursuant to Section 13(a) or
15(d) of the Securities Exchange Act
of 1934, as amended (the
“Exchange Act”), are available, free
of
charge, as
soon as
reasonably practicable
after such
forms are
electronically filed
with, or
furnished to,
the SEC.
The SEC
also
maintains an
internet website at
http://www.sec.gov that
contains reports, proxy
and information statements,
and other information
regarding issuers that file electronically with the SEC.
You may obtain copies of our filings on the SEC site.
We have
adopted a
written code
of ethics
that applies
to all
directors, officers
and employees
of Popular,
including our
principal executive officer
and senior financial
officers, in accordance
with Section 406
of the Sarbanes-Oxley
Act of 2002
and the
rules
of
the
SEC
promulgated
thereunder.
Our
Code
of
Ethics
is
available
on
our
corporate
website,
www.popular.com,
in
the
section entitled “Corporate Governance.” In the event that we make changes to, or provide waivers from, the provisions of this Code
of Ethics that
the SEC requires
us to disclose,
we intend to
disclose these events
on our corporate
website in such
section. In the
Corporate Governance
section
of our
corporate
website,
we
have also
posted the
charters
for
our Audit
Committee, Talent
and
Compensation
Committee,
Risk
Management
Committee,
Corporate
Governance
and
Nominating
Committee
and
Technology
23
Committee, as well as our Corporate Governance Guidelines. In addition, information concerning
purchases and sales of our equity
securities by our executive officers and directors is
posted on our website.
All
website
addresses
given
in
this
document
are
for
information
only
and
are
not
intended
to
be
active
links
or
to
incorporate any website information into this Form
10-K.
ITEM 1A. RISK FACTORS
We, like
other financial institutions,
face risks
inherent to
our business,
financial condition, liquidity,
results of
operations
and
capital
position.
These
risks
could
cause
our
actual
results
to
differ
materially
from
our
historical
results
or
the
results
contemplated by the forward-looking statements contained in this report.
The risks described in
this report are not the
only risks we face. Additional
risks and uncertainties not currently
known by
us
or
that
we
currently
deem
to
be
immaterial,
or
that
are
generally
applicable
to
all
financial
institutions,
may
also
materially
adversely affect our business, financial condition, liquidity, results of operations or capital position.
ECONOMIC AND MARKET RISKS
Weakness in
the economy,
particularly in
Puerto Rico,
where a
significant portion
of our
business is
concentrated, has
adversely impacted us in the past and may adversely
impact us in the future.
We have been, and will continue to be, impacted by global and local
economic and market conditions, including weakness
in
the
economy,
disruptions
and
volatility
in
the
financial
markets,
inflation,
changing
monetary
and
fiscal
policies,
geopolitical
conflicts, consumer and changes
in business sentiment and
unemployment. A significant portion of
our business is concentrated in
Puerto Rico, which
accounted for approximately 79% of
our assets and 84%
of our deposits
as of December 31,
2022 and 82%
of
our
revenues
for
the
year
ended
December
31,
2022.
As
a
result,
our
financial
condition
and
results
of
operations
are
highly
dependent
on
the
general
trends
of
the
Puerto
Rico
economy
and
other
conditions
affecting
Puerto
Rico
consumers
and
businesses. The
concentration of
our operations
in Puerto
Rico exposes
us to
greater risks
than other
banking companies
with a
wider geographic base.
Puerto Rico
has faced significant
economic and fiscal
challenges in the
past, including a
severe recession that
began in
2007 and
persisted for
over a
decade and
an acute
fiscal crisis
that led
the Puerto
Rico government
to file
for a
form
of federal
bankruptcy protection
in 2017.
Puerto Rico’s
fiscal and
economic challenges
have in
the past
adversely affected
our customers,
resulting
in
higher
delinquencies,
charge-offs
and
increased
losses
for
us.
While
Puerto
Rico’s
economy
has
been
gradually
recovering
and
the
Puerto
Rico
government
has
recently
emerged from
bankruptcy,
Puerto
Rico
still
faces
economic
and
fiscal
challenges and could face additional economic or fiscal challenges in the
future, including as a result of weakness or volatility in
the
global economy
and financial
markets. A
weakening of
the Puerto
Rico economy
or other
adverse economic
conditions affecting
Puerto Rico
consumers and
businesses could
result in
decreased demand
for our
products or
services, deterioration
in the
credit
quality
of
our
customers,
higher delinquencies,
charge-offs
or
increased losses,
all
of
which
could adversely
affect
our
financial
condition and results of operations.
We are also exposed to risks related to the state of the local economies of the other markets in which we do business, such as New
York
and Florida,
and to
the state
of the
global and
U.S. economy
and financial
markets. Global
financial markets
have recently
experienced periods of
extraordinary disruption and volatility,
exacerbated by the
COVID-19 pandemic, the war
in Ukraine, supply-
chain disruptions, high levels of, and rapid increases in, inflation,
and increasing and high interest rates. Inflationary pressures have
increased certain
of our
expenses (including
our personnel
expenses) and
adversely affected
consumer sentiment.
Central bank
responses to inflationary pressures have led to
higher market interest rates and, in turn,
lower activity levels across U.S. and global
financial markets. These circumstances have resulted in, and could continue to
result in, reductions in the value of
our investments.
If
these
conditions
persist
or
worsen,
our
results
of
operations, financial
position
and
liquidity could
be
materially
and
adversely
affected.
Changes
in
interest
rates
and
credit
spreads
can
adversely
impact
our
financial
condition,
including
our
investment
portfolio,
since
a
significant
portion
of
our
business involves
borrowing
and
lending
money,
and
investing in
financial
instruments.
Our business
and financial
performance are
impacted by
market interest
rates and
movements in
those rates.
Since a
high percentage of our assets and liabilities are interest bearing or otherwise sensitive in value to changes in interest rates, changes
in interest rates, in the shape of the yield curve or in spreads between different types of rates, have had and could in the future have
24
a material impact on our results
of operations and the values of our
assets and liabilities, including our investment portfolio.
Interest
rates are
highly sensitive
to many
factors over
which we
have no
control and
which we
may not
be able
to anticipate
adequately,
including general
economic conditions
and the
monetary and
tax policies
of various
governmental bodies,
particularly the
Federal
Reserve Board.
Increasing levels of inflation, driven
by pent-up demand and supply-chain disruptions caused
by the COVID-19 pandemic
and the war in Ukraine, led the Federal Reserve Board to execute a series of sharp benchmark interest rate increases over the past
year.
While the
pace at
which inflation
is increasing
has slowed
down in
recent months,
following a
mid-2022 peak,
the Federal
Reserve Board has signaled
that it may increase
interest rates further to
continue to control and
bring down inflation. If
the interest
rates we
pay on
our deposits and
other borrowings increase
at a
faster rate than
the interest rates
we receive on
loans and
other
investments, our net interest income, and, therefore, our earnings, could be adversely affected. Higher interest rates could also lead
to fewer originations of commercial and residential real
estate loans, loss of deposits, a misalignment in the
pricing of short-term and
long-term
borrowings,
less
liquidity
in
the
financial
markets
and
higher
funding
costs.
Furthermore,
higher
interest
rates
could
negatively affect
the payment
performance on
loans linked
to variable
interest rates
to the
extent borrowers
are unable
to afford
higher
interest
payments, which
could
result
in
higher
delinquencies. Additionally,
inflationary
pressure arising
from
increases in
interest rates may also affect borrowers’ financial condition and their ability to pay their debts when due. All of these outcomes could
adversely affect our earnings, liquidity and capital levels.
The
rapid
rise
in
interest
rates
in
2022
resulted
in
approximately
$2.5
billion
in
unrealized
mark-to-market
losses
on
available-for-sale securities held in our investment securities portfolio. In October 2022, we transferred U.S. Treasury securities with
a fair value of approximately $6.5 billion (par value of
$7.4 billion), and with accumulated unrealized losses of $873 million, from our
available-for-sale portfolio to our held-to-maturity portfolio to reduce the
impact of further increases in interest rates on
accumulated
other comprehensive
income and
tangible capital.
However,
if interest
rates continue
to rise
rapidly or
for a
prolonged period,
we
may accumulate significant additional mark-to-market losses
on other investment securities in
our available-for-sale portfolio, which
may adversely affect our tangible capital and impact our
ability to return capital to our stockholders.
We are
also subject
to risks
related to
the transition
away from
the London
Interbank Offered
Rate (“LIBOR”)
upon the
cessation in
the publication
of the
remaining principal
tenors of
U.S. dollar
LIBOR, which
is scheduled
for June
30, 2023. These
risks were significantly reduced following the enactment by the U.S.
Congress of the Adjustable Interest Rate (LIBOR) Act in the first
quarter
of
2022,
which
provides
a
framework
for
replacing
LIBOR
with
new
benchmark
rates
based
on
the
Secured
Overnight
Financing Rate (“SOFR”)
in loans that
do not have
effective alternate interest
rate provisions. However,
there is no
assurance that
the new SOFR-based benchmarks will be similar to,
or produce the economic equivalent of, LIBOR, and the
transition to these new
benchmark rates could result in operational, systems or
other practical challenges, litigation or
other adverse consequences.
For a discussion of the Corporation’s
interest rate sensitivity, please refer
to the “Risk Management” section of the MD&A
in this Form 10-K.
Fiscal challenges facing the U.S. government could negatively impact financial markets, which in turn could have
an adverse effect on our financial position or
results of operations.
In
January
2023,
the
outstanding
debt
of
the
U.S.
reached
its
statutory
limit
and
the
U.S.
Treasury
Department
commenced taking
extraordinary measures
to
prevent the
U.S. from
defaulting on
its obligations.
If Congress
does not
raise the
debt
ceiling,
the
U.S.
could
default
on
its
obligations,
including
U.S.
Treasury
securities,
which
play
an
integral
role
in
financial
markets. Many
of the
investment securities
held in
our portfolio
are issued
by the
U.S. government
and government
agencies. A
U.S.
government
debt
default,
threatened
debt
default
or
downgrade
of
the
sovereign
credit
ratings
of
the
U.S.
by
credit
rating
agencies
could
have
a
significant
adverse
impact
on
market
volatility
and
illiquidity,
lead
to
further
increases
in
interest
rates,
heighten
operational
risks
relating
to
the
clearance
and
settlement
of
transactions,
and
result
in
a
significant
deterioration
in
economic conditions in
the U.S. and
worldwide. Even if
the U.S. does
not default, continued
uncertainty relating to
the debt ceiling
could
result in
downgrades of
the U.S.
credit
rating, which
could adversely
affect
market conditions,
lead
to
further increases
in
interest rates
and borrowing
costs or
necessitate significant
operational changes
among market
participants if
the liquidity
or fair
value of U.S. Treasury and/or agency securities decreases. Further, the fair value, liquidity and credit ratings of securities issued by,
or other obligations of, agencies of the U.S.
government as well as municipal bonds could be
similarly adversely affected.
BUSINESS RISKS
Negative
changes
in
the
financial
condition
of
our
clients
have
adversely
impacted
us
in
the
past
and
may
adversely
impact us in the future.
25
A significant portion of
our business involves lending money,
which exposes us to
credit risk and
risk of loss if
borrowers
do
not
repay
their
loans,
leases, credit
cards
or
other
credit
obligations.
The
performance of
these
credit
portfolios
significantly
affects our
financial condition
and results
of operations.
We have
in the
past been
adversely affected
by negative
changes in
the
financial condition of our clients due to weakness in
the Puerto Rico and U.S. economy. If the current economic environment were to
deteriorate, more customers may have difficulty in repaying their credit obligations, which may result in higher levels
of credit losses
and reserves for credit losses.
We are exposed to
increased credit risks and credit losses
to the extent our clients are
concentrated by industry segment
or type of client.
Our credit risk and credit
losses can increase to the extent
our loans are concentrated in borrowers engaged in
the same
or similar
activities or
in borrowers
who as
a group
may be
uniquely or
disproportionately affected
by certain
economic or
market
conditions. We have significant
exposure to borrowers in certain
economic sectors, such as residential
and commercial real estate,
hospitality and healthcare. Challenging economic or market conditions that affect
the industries or types of clients to
which we have
significant exposure could result in higher credit
losses and adversely affect our financial condition
and results of operations.
We also
have direct
lending and
investment exposure
to Puerto
Rico government
entities, which
have faced
significant
fiscal challenges.
At December
31, 2022,
our exposure
to the
Puerto Rico
government consisted
of $374
million in
direct lending
exposure to Puerto
Rico municipalities and
$251 million in
loans insured or
securities issued by
Puerto Rico governmental
entities
but for
which the
principal source
of repayment
is non-governmental.
We also
have indirect
lending exposure
to the
Puerto Rico
government in the
form of loans
to private borrowers
who are service
providers, lessors, suppliers
or have other
relationships with
the Puerto Rico government. While the overall fiscal situation
of the Puerto Rico government has improved in recent years,
including
as
result
of
the
government
and
certain
of
its
instrumentalities
having
restructured
their
debt
obligations,
some
Puerto
Rico
government entities, including certain municipalities, still face significant
fiscal challenges. A deterioration in the fiscal situation of
the
Puerto Rico
government and its
instrumentalities, and in
particular in the
fiscal situation
of the
Puerto Rico
municipalities to
which
we have direct lending exposure, could result in
higher credit losses and reserves for credit losses. For
a discussion of risks related
to the Corporation’s credit exposure to the Puerto Rico
and USVI governments, see the Geographic and
Government Risk section in
the MD&A section of this Form 10-K.
Deterioration in the
values of real
properties securing our commercial, mortgage
loan and construction portfolios
have in
the past resulted, and may in the future result,
in increased credit losses and harm our results
of operations.
As of
December 31,
2022, approximately
56% of
our loan
portfolio consisted
of loans
secured by
real estate
collateral
(comprised of 29% in commercial loans, 25% in residential
mortgage loans and 2% in construction loans).
The value of the collateral
securing such loans is dependent upon economic conditions in the area in which the collateral is located. Weakness in the economy
of some of the
markets we serve has in
the past resulted in significant
declines in the value of
the real properties securing our loan
portfolio, leading to increased credit losses. If the value of
the real estate properties securing our loan portfolio declines again in the
future, we may be
required to increase our
provisions for loan losses
and allowance for loan
losses. Any such increase could
have
an adverse effect on
our financial condition and results of
operations. For more information on the credit
quality of our construction,
commercial and mortgage portfolio, see the Credit Risk
section of the MD&A included in this Form
10-K.
We
are
exposed
to
credit
risk
from
mortgage
loans
that
have
been
sold
or
are
being
serviced
subject
to
recourse
arrangements.
Popular
is
generally
at
risk
for
mortgage
loan
defaults
from
the
time
it
funds
a
loan
until
the
time
the
loan
is
sold
or
securitized into a
mortgage
-
backed security.
However, we
have retained part
of the credit
risk on sales
of mortgage loans
through
recourse
arrangements,
and
we
also
service
certain
mortgage
loan
portfolios
with
recourse.
At
December
31,
2022,
we
were
exposed to credit risk with respect to $0.6 billion in residential mortgage loans sold
or serviced subject to credit recourse provisions,
consisting principally of loans associated with the Fannie Mae and
Freddie Mac programs. Pursuant to such recourse provisions,
we
are required to repurchase the loan or reimburse the third-party investor for the incurred loss in the event of a customer default. The
maximum potential amount of future payments that
we 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. In
the
event of
nonperformance by
the
borrower,
we
have rights
to
the underlying
collateral
securing the
mortgage loan.
During 2022,
we repurchased
approximately $7
million in
mortgage loans
subject to
credit recourse
provisions. As
of December
31, 2022,
our liability
established
to cover
the estimated
credit loss
exposure related
to loans
sold or
serviced with credit recourse amounted
to $7 million. We may suffer losses on these loans if the proceeds from a foreclosure sale of
26
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 of
the related property.
Defective and repurchased
loans may harm our business and financial
condition.
In
connection
with
the
sale
and
securitization
of
mortgage
loans,
we
are
required
to
make
a
variety
of
customary
representations
and
warranties regarding
Popular
and
the
loans being
sold
or securitized.
Our
obligations with
respect to
these
representations and warranties are generally outstanding for the life
of the loan, and they relate
to, among other things, compliance
with
laws
and
regulations,
underwriting
standards,
the
accuracy
of
information
in
the
loan
documents
and
loan
file
and
the
characteristics
and
enforceability of
the
loan.
A
loan
that
does
not
comply
with
the
secondary
market’s
requirements
may
take
longer to
sell, impact
our ability
to securitize
the loans
or pledge
the loans
as collateral
for borrowings,
or be
unsalable or
salable
only
at
a
significant
discount.
Moreover,
if
any
such
loan
is
sold
before
we
detect
non-compliance,
we
may
be
obligated
to
repurchase the loan and bear any associated loss directly,
or we may be obligated to indemnify the purchaser against any loss.
We
seek to
minimize repurchases and
losses from defective
loans by correcting
flaws, if possible,
and selling or
re-selling such loans.
However,
if
we
were
to
suffer
significant
losses
from
defective
and
repurchased
loans,
our
results
of
operations
and
financial
condition could be materially impacted.
If we are
unable to maintain
or grow our
deposits, we may
be subject to
paying higher funding costs
and our net
interest
income may decrease.
We must maintain adequate liquidity and funding sources
to support our operations, comply with our financial
obligations,
finance our transformation initiative, fund
planned capital distributions and meet
regulatory requirements. We rely
primarily on bank
deposits
as
a
low cost
and stable
source
of
funding
for
our
lending activities
and
the
operation of
our
business.
Therefore,
our
funding costs
are largely
dependent on
our ability
to maintain
and grow
our deposits.
As our
competitors have
raised the
interest
rates they pay on deposits, our
funding costs have increased, as we have
needed to increase the rates we pay
to our depositors to
avoid losing
deposits. We
may also
need to
rely on
more expensive
sources of
funding if
deposits decrease. Rising
interest rates
have
also
led
customers
to
move
their
funds
to
alternative
investments
that
pay
higher
interest
rates.
Furthermore,
we
have
a
significant
amount
of
deposits
from
the
Puerto
Rico
government,
its
instrumentalities
and
municipalities
($15.2
billion,
or
approximately 25% of our
total deposits, as of
December 31, 2022), and
the amount of these
deposits may fluctuate depending on
the financial
condition and
liquidity of
these entities,
as well
as
on our
ability to
maintain these
customer relationships.
If we
are
unable to
maintain or
grow our
deposits for
any
reason, we
may be
subject to
paying higher
funding costs
and
our
net interest
income may decrease.
OPERATIONAL RISKS
We
and our
third-party providers
have been,
and expect
in the
future to
continue to
be, subject
to cyber
attacks, which
could cause substantial harm and have an adverse
effect on our business and results of operations.
Information security risks for large financial institutions such as Popular have increased significantly in recent years in part
because
of
the
proliferation
of
new
technologies,
such
as
Internet
and
mobile
banking
to
conduct
instant
financial
transactions
anywhere globally,
growing geo-political threats,
such as the
ongoing Russian conflict
in Ukraine, and
the increased sophistication
and activities of organized crime, hackers,
terrorists, nation-states, hacktivists and other parties. In
the ordinary course of business,
we rely on
electronic communications and
information systems to
conduct our operations
and to transmit
and store sensitive
data.
We employ
a layered
defensive approach
that employs
people, processes
and technology
to manage
and maintain
cybersecurity
controls through a variety of preventative and detective tools that monitor, block, and provide alerts regarding suspicious activity
and
identify suspected advanced persistent threats. Notwithstanding our defensive measures and the significant resources we devote to
protect the security of our systems, there is no assurance that all of our security measures will be effective at all times, especially as
the threats from cyber-attacks
are continuous and severe. The
risk of a
security breach due to
a cyber attack could
increase in the
future as
we continue
to expand
our mobile
banking and
other internet
based product
offerings, the
use
of the
cloud for
system
development and hosting and internal use of
internet-based products and applications.
We
continue to
detect and
identify attacks
that are
becoming more
sophisticated and
increasing in
volume, as
well as
attackers that
respond rapidly to
changes in
defensive countermeasures. The
most significant cyber-attack
risks that we
may face
are e-fraud, denial-of-service (DDoS), ransomware,
computer intrusion and the
exploitation of software zero-day
vulnerabilities that
might result
in disruption
of services
and in
the exposure
or loss
of customer
or proprietary
data. Loss
from e-fraud
occurs when
cybercriminals compromise
our systems
or the
systems of
our customers
and extract
funds from
customer’s credit
cards or
bank
accounts, including through
brute force, password
spraying and credential
stuffing attacks directed
at gaining unauthorized
access
to
individual
accounts.
Denial-of-service
attacks
intentionally
disrupt
the
ability
of
legitimate
users,
including
customers
and
27
employees,
to
access
networks,
websites
and
online
resources.
Computer
intrusion
attempts
either
direct
or
through
social
engineering, supply chain compromise, email, text or voice messages, including
using brand impersonation (regularly referred to as
phishing, vishing and smishing), might
result in the compromise
of sensitive customer data,
such as account numbers,
credit cards
and social security numbers, and could present
significant reputational, legal and regulatory costs
to Popular if successful.
We are
the target of
phishing, smishing and vishing
attacks targeting both
our customers and
employees through brand,
email, text and
voicemail impersonation, that
have compromised the
email accounts of
certain of our
customers and employees
or
have
resulted
in
our
customers
being
deceived
into
revealing
their
sensitive
information
to
threat
actors.
There
can
be
no
assurances that there will not be further compromises of sensitive customer information in the future. Our customer-facing platforms
are
also
routinely
attacked
by
threat
actors
aiming
to
gain
unauthorized
access
to
our
clients’
accounts.
Popular
has
recently
implemented certain defensive measures in response to
brute force attacks on one
of our platforms which
resulted in certain of our
customers
log-in
credentials
and
information
being
exposed.
As
a
result,
Popular
notified,
as
required
or
otherwise
deemed
appropriate, customers
identified as
affected by
the incident.
We have
to date
not experienced
material losses
in connection
with
these
attacks.
Cyber-security
risks
have
also
been
recently
exacerbated
by
the
discovery
of
zero-day
vulnerabilities
in
widely
distributed
third
party
software,
such
as
the
vulnerability
identified
in
December
2021
in
the
Apache
log4j,
which
could
affect
Popular’s or any of its service provider’s
systems.
The
increased
use
of
remote
access
and
third-party
video
conferencing
solutions
to
enable
work-from-home
arrangements for
employees
and
facilitating the
use
of
digital channels
by
our
customers,
has
increased
our
exposure to
cyber
attacks. In
addition, a
third party
could misappropriate
confidential information
obtained by
intercepting signals
or communications
from mobile devices used by Popular’s customers or employees. Recent events, including the Russian conflict in Ukraine, have also
illustrated
increased geo-political
factors
and the
risks related
to
supply-chain compromises
and
de-stabilizing activities
linked to
nation-state sponsored activity as an increasing trend
to monitor actively.
Risks and exposures related to cyber security
attacks are
expected to
remain high for
the foreseeable future
due to
the rapidly evolving
nature and sophistication
of these
threats, including
the rise in the use of cyber-attacks as geopolitical weapons. Although we are
regularly targeted by unauthorized threat-actor activity,
we have not, to date, experienced any material
losses as a result of any cyber-attacks.
A material compromise or circumvention of the security of our systems could
have serious negative consequences for us,
including
significant
disruption
of
our
operations
and
those
of
our
clients,
customers
and
counterparties,
misappropriation
of
confidential information
of us
or that
of our
clients, customers,
counterparties or
employees, or
damage to
computers or
systems
used
by
us
or
by
our
clients,
customers
and
counterparties,
and
could
result
in
violations
of
applicable
privacy
and
other
laws,
financial loss
to us
or to
our customers,
loss of
confidence in
our security
measures, customer
dissatisfaction, significant litigation
exposure and harm to
our reputation, all of
which could have a
material adverse effect
on us. For example,
if personal, non-public,
confidential
or
proprietary
information
in
our
possession
were
to
be
mishandled,
misused
or
stolen,
we
could
suffer
significant
regulatory consequences, reputational damage
and financial loss.
Such mishandling, misuse
or misappropriation could include,
for
example, if such information
were provided to parties
who are not permitted
to have the
information, either by fault
of our systems,
by our employees
or counterparties, or
where such information
is intercepted or
otherwise inappropriately taken by
our employees
or third parties.
The
extent
of
a
particular
cyber
attack
and
the
steps
that
we
may
need
to
take
to
investigate the
attack
may
not
be
immediately
clear,
and
it
may
take
a
significant
amount
of
time
before
such
an
investigation
can
be
completed.
While
such
an
investigation is ongoing, Popular may not necessarily know the full
extent of the harm caused by the cyber
attack, and that damage
may continue to spread.
These factors may inhibit
our ability to provide
rapid, full and reliable
information about the cyber
attack to
our clients,
customers, counterparties and
regulators, as well
as the public.
Moreover, potential
new regulations may
require us to
disclose information about
a cybersecurity event before
it has been
resolved or fully
investigated. Furthermore, it may
not be clear
how best to contain and remediate the potential harm caused by the cyber attack, and certain errors or actions could be repeated or
compounded before they are discovered and remediated. Cyber attacks could cause interruptions in our operations and result in the
incurrence
of
significant
costs,
including those
related
to
forensic analysis
and
legal counsel,
each of
which may
be
required to
ascertain the extent
of any potential
harm to our
customers, or employees, or
damage to our information
systems and any
legal or
regulatory obligations that
may result therefrom.
Any cyber incidents
could also result
in, among other
things, increased regulatory
scrutiny
and adverse
regulatory or
civil
litigation consequences.
For a
discussion of
the guidance
and rules
that federal
banking
regulators
have
released
or
proposed
regarding
cybersecurity
and
cyber
risk
management
standards,
see
“Regulation
and
Supervision” in
Part
I,
Item
1 —
Business,
included in
the
Form 10-K
for the
year
ended December
31,
2022. Any
or
all
of
the
foregoing factors could further increase the impact
of the incident and thereby the costs and consequences
of a cyber attack.
We also
rely on
third parties
for the
performance of
a significant
portion of
our information
technology functions and
the
28
provision of information security,
technology and business process services. As a result, a
successful compromise or circumvention
of
the security
of
the systems
of these
third-party service
providers could
have serious
negative consequences
for us,
including
misappropriation of
confidential information
of us
or that
of our
clients, customers,
counterparties or
employees, or
other negative
implications identified above with respect to a cyber-attack on our systems, which could have a material adverse effect on us. Cyber
attacks at third-party service
providers are also becoming
increasingly common, and, as
a result, cybersecurity risks
relating to our
vendors have
increased. The most
important of
these third-party service
providers for us
is Evertec, and
certain risks
particular to
Evertec are
discussed under
“Operational Risks
— We
are subject
to additional
risks relating
to the
Evertec Business
Acquisition
Transaction”. During 2021, we
determined that, as a result
of the widely reported breach of
Accellion, Inc.’s File Transfer
Appliance
tool, which
was being
used at
the time
of such
breach by
a U.S.-based
third-party advisory
services vendor
of Popular,
personal
information
of
certain
Popular
customers
was
compromised.
As
a
result,
Popular
notified,
as
required
or
otherwise
deemed
appropriate, customers identified as affected by the incident. Although we are not aware of fraudulent activity
in connection with this
incident,
Popular’s
networks
and
systems
were
not
impacted,
and
our
third-party
service
provider
agreed
to
cover
external
remediation costs associated with the incident. A compromise of the personal information of our
customers maintained by third party
vendors
could
result
in
significant
regulatory
consequences,
reputational
damage
and
financial
loss
to
us.
The
success
of
our
business depends
in part
on the
continuing ability
of these
(and other)
third parties
to perform
these functions
and services
in a
timely
and
satisfactory
manner,
which
performance
could
be
disrupted
or
otherwise
adversely
affected
due
to
failures
or
other
information security
events originating at
the third
parties or at
the third parties’
suppliers or vendors
(so-called “fourth party
risk”).
We
may
not
be
able
to
effectively
directly
monitor
or
mitigate
fourth-party
risk,
in
particular
as
it
relates
to
the
use
of
common
suppliers
or
vendors
by
the
third
parties that
perform
functions
and
services
for
us.
For
a
discussion of
the
risks
related
to
our
dependence
on
third
parties,
including
Evertec,
see
“We
rely
on
other
companies
to
provide
key
components
of
our
business
infrastructure, including certain of our core
financial transaction processing and information technology and
security services, which
exposes us to a number of operational risks that could have a material
adverse effect on us” in the Operational Risks section of Item
1A in this Form 10-K.
As
cyber
threats
continue
to
evolve,
we
expect
to
expend
significant
additional
resources
to
continue
to
modify
or
enhance our
layers of
defense or
to investigate
and remediate
additional information
security vulnerabilities
or incidents.
System
enhancements and
updates also
create risks
associated with
implementing new
systems and
integrating them
with existing
ones,
including risks associated with supply chain compromises
and the software development lifecycle of the
systems used by us and our
service providers. Due
to the complexity
and interconnectedness of information
technology systems, the
process of enhancing
our
layers
of
defense can
itself
create
a
risk
of
systems
disruptions
and
security
issues.
In
addition,
addressing
certain
information
security vulnerabilities, such as
hardware-based vulnerabilities, may affect
the performance of our
information technology systems.
The ability of our
hardware and software providers to deliver
patches and updates to mitigate vulnerabilities
in a timely manner
can
introduce additional risks, particularly when a vulnerability
is being actively exploited by threat
actors. Moreover, our ability
to timely
mitigate
vulnerabilities
and
manage
such
risks,
given
the
rise
in
number
of
required
patches
and
third-party
software,
including
“zero-day
vulnerabilities”,
as
well
as
the
obsolescence
in
some
of
our
hardware
and
software,
may
impact
our
day-to-day
operations, the availability of our systems and
delay the deployment of technology enhancements
and innovation.
If Popular’s operational systems,
or those of
external parties on which
Popular’s businesses depend, are
unable to meet
the requirements of our
businesses and operations or bank
regulatory standards, or if they
fail, have other significant
shortcomings
or are impacted by cyber attacks, Popular could be
materially and adversely affected.
Unforeseen or
catastrophic events,
including
extreme weather
events and
other natural
disasters, man-made
disasters,
acts of violence or
war, or the
emergence of pandemics or epidemics, could
cause a disruption in our
operations or other
consequences that could have a material adverse
effect on our financial condition and results
of operations.
A
significant
portion
of
our
operations
are
located
in
the
Caribbean
and
Florida,
a
region
susceptible
to
hurricanes,
earthquakes and other
similar events. In
2017, Puerto Rico,
USVI and BVI
were severely impacted
by Hurricanes Irma
and María,
which resulted in significant disruption to our operations and adversely affected
our clients in these markets, and in 2022, Hurricane
Fiona impacted the
southwest area of
Puerto Rico,
adversely affecting our
customers in
that region. Other
types of
unforeseen or
catastrophic events, including
pandemics, epidemics, man-made
disasters, or acts
of violence or
war, or
the fear that
such events
could
occur,
could
also
adversely
impact
our
operations
and
financial
results.
For
example,
in
2020,
the
COVID-19
pandemic
severely
impacted
global
health,
financial
markets,
consumer
spending
and
global
economic
conditions,
and
caused
significant
disruption
to
businesses worldwide,
including
our
business
and
those
of
our
customers, service
providers
and
suppliers.
Future
unforeseen
or
catastrophic
events,
including
the
appearance
of
new
strains
of
the
COVID-19
virus,
and
actions
taken
by
governmental
authorities and
other
third
parties in
response to
such
events,
could
again
adversely affect
our
operations, cause
economic
and
market disruption,
adversely
impact the
ability
of
borrowers to
timely
repay their
loans,
or
affect
the value
of
any
29
collateral held by us, any of
which could have a material adverse effect
on our business, financial condition or results
of operations.
The frequency,
severity and
impact of
future unforeseen
or catastrophic
events is
difficult to
predict. While
we maintain
insurance
against
natural
disasters
and
other
unforeseen
events,
including
coverage
for
business
interruption,
the
insurance
may
not
be
sufficient to cover all
of the damage from any such
event, and there is no insurance
against the disruption that a catastrophic event
could produce to the markets that we serve and
the potential negative impact to economic
activity.
Climate change could have a material adverse
impact on our business operations and that
of our clients and customers.
Our business and
the activities and
operations of our
clients and customers
may be disrupted
by global climate
change.
Potential physical risks
from climate change
include the increase
in the
frequency and severity
of weather
events, such as
storms
and
hurricanes,
and
long-term
shifts
in
climate
patterns, such
as
sustained
higher
and
lower
temperatures,
sea
level
rise,
heat
waves and
droughts, among
others. Additionally,
the impact
of climate
change in
the markets
that we
operate and
in other
global
markets may
have the
effect of
increasing the
costs or
reducing the
availability of
insurance needed
for our
business operations.
Climate change may also create transitional risks resulting from a shift to a low-carbon economy.
These transition risks may include
changes in the legal and regulatory landscape, technology, consumer sentiment and preferences, and market demands that seek to
mitigate the
effects
of climate
change. Changes
in the
legal
and regulatory
landscape may
additionally increase
our compliance
costs.
These
climate
driven
changes
could
have
a
material
adverse
impact
on
asset
values
and
on
our
business
and
financial
performance and those of our clients and customers.
We
rely
on
other
companies
to
provide
key
components
of
our
business
infrastructure,
including
certain
of
our
core
financial
transaction
processing
and
information
technology
and
security
services,
which
exposes
us
to
a
number
of
operational risks that could have a material
adverse effect on us.
Third parties provide key components of our business operations, such
as data processing, information security, recording
and monitoring transactions,
online banking interfaces and
services, Internet connections and
network access. The most
important
of these third-party
service providers for
us is Evertec.
Although the Evertec
Business Acquisition Transaction
narrowed the scope
of
services
which
we
are
dependent
on
Evertec to
obtain
and
released
us
from
exclusivity
restrictions
that
limited
our
ability
to
engage other third-party
providers of financial
technology services, we
are still dependent
on Evertec for
the provision of
essential
services
to
our
business,
including
certain
of
our
core
financial
transaction
processing
and
information
technology
and
security
services. As
a
result, we
are
particularly exposed
to
the operational
risks
of Evertec,
including those
relating to
a
breakdown or
failure of Evertec’s systems or internal controls environment. Over the course of
our relationship with Evertec, we have experienced
interruptions
and
delays
in
key
services
provided
by
Evertec,
as
well
as
cyber
breaches,
as
a
result
of
system
breakdowns,
misconfigurations
and
instances
of
application
obsolescence,
which
have
in
certain
cases
led
to
exposure
of
BPPR
customer
information.
For
a
discussion
of
the
Evertec
Business
Acquisition
Transaction,
please
refer
to
the
Year
2022
Significant Events
section of the MD&A.
While we
select third-party vendors
carefully and
have increased our
oversight of these
relationships, we do
not control
the
actions
of
our
vendors.
Any
problems
caused
by
these
vendors,
including
those
resulting
from
disruptions
in
the
services
provided, vulnerabilities in or breaches
of the vendor’s systems, failure of
the vendor to handle
current or higher volumes,
failure of
the vendor
to provide services
for any
reason or
poor performance of
services, or
failure of
the vendor to
notify us of
a reportable
event in a timely manner,
could adversely affect our ability to deliver products and services to
our customers and otherwise conduct
our
business,
result in
potential liability
to
clients
and customers,
result in
the
imposition of
fines,
penalties or
judgments by
our
regulators or
harm to
our reputation,
any of
which could
materially and
adversely affect
us. The
inability of
our third-party
service
providers to timely address
evolving cybersecurity threats may further
exacerbate these risks. Financial or
operational difficulties of
a third-party vendor could also
hurt our operations if those
difficulties interfere with the vendor’s ability to
serve us. Replacing these
third-party vendors, when possible, could also create significant
delay and expense. Accordingly,
the use of third parties
creates an
unavoidable inherent risk to our business operations.
30
The transition to new financial services technology providers, and the replacement of services currently provided
to us by
Evertec, will be lengthy and complex.
Switching from
one vendor
of core
bank processing
and related
technology and
security services
to
one
or more
new
vendors
is
a
complex
process
that
carries
business
and
financial
risks.
The
implementation
cycle
for
such
a
transition
can
be
lengthy and require significant financial and
management resources from us. Such
a transition can also expose us,
and our clients,
to
increased
costs
(including
conversion
costs),
business
disruption,
as
well
as
operational
and
cybersecurity
risks.
Upon
the
transition of all or
a portion of existing services
provided by Evertec to a
new financial services technology provider,
either (i) at the
end of the term of the Second Amended and Restated
Master Services Agreement (the “MSA”) and related
agreements or (ii) earlier
upon the
termination of any
service for
convenience under the
MSA, these transition
risks could result
in an
adverse effect
on our
business, financial condition and results of operations. Although Evertec
has agreed to provide certain transition assistance to
us in
connection with
the termination of
the MSA,
we are
ultimately dependent on
their ability
to provide
those services
in a
responsive
and competent manner. Furthermore, we
may require transition assistance from Evertec beyond the term of
the MSA, delaying and
lengthening any transition process away from Evertec
while increasing related costs.
Under the
MSA, we
are able
to terminate
services for
convenience with
180 days’
prior notice.
We expect
to exercise
during the
term of
the MSA
the right
to terminate
certain services
for convenience
and to
transition such
services to
other service
providers prior to the expiration
of the MSA, subject to
complying with the revenue minimums contemplated in
the MSA and certain
other conditions. In
practice, in order
to switch
to a
new provider for
a particular
service, we will
have to commence
procuring and
working on
a transition
process for
such service
significantly in
advance of
its termination
and, in
any case,
much earlier
than the
automatic renewal notice date or the expiration date of
the MSA, and such process may extend beyond the current
term of the MSA.
Furthermore, if
we
are
unsuccessful or
decide not
to
complete
the transition
after
expending significant
funds
and
management
resources, it could also result in an adverse
effect on our business, financial condition and results of
operations.
We are subject to additional risks relating to the
Evertec Business Acquisition Transaction.
There are numerous additional risks and uncertainties
associated with the Evertec Business Acquisition
Transaction, including:
●
unforeseen events may materially diminish the expected
benefits of the Evertec Business Acquisition Transaction;
●
we have devoted, and will continue to, devote significant attention and resources to post closing implementation efforts, which
will involve a significant degree of technological complexity
and reliance on Evertec and other third parties;
●
we may be
unable to retain the
employees and third-party contractors hired or
engaged by us in connection
with the Evertec
Business Acquisition
Transaction and who are
necessary to operate and integrate the
assets acquired as part of
the Evertec
Business Acquisition
Transaction (the “Acquired Assets”);
●
we may
be subject
to incremental
operational and
security risks
arising from
the transfer
of the
Acquired Assets
to BPPR,
including those risks arising from, among
other things, the activities required to
execute network segmentation, the possibility
of misconfiguration of access or security services during
the transition period and during the implementation
of new processes
or
security
controls,
the
possibility
of
mismanagement
of
security
services
during
the
transition
phase,
and
the
need
to
develop a robust internal control framework;
●
the anticipated benefits of the Evertec Business Acquisition
Transaction could be limited if Evertec fails to
deliver to BPPR, in
a timely manner and in a manner that meets BPPR’s requirements, the core
application programming interfaces (“Core APIs”)
that Evertec has committed
to develop in
order for BPPR to
connect future enhancements to the
Acquired Assets to existing
Evertec core applications;
●
we may be exposed to heightened business risks
as a result of the extension until
2035 of BPPR’s exclusivity with Evertec in
connection with
its merchant
acquiring business, as
well as
the extension
until 2030
of BPPR’s
commitment with respect
to
the ATH Network, in light of the pace of technology changes and competition
in the payments industry; and
●
Evertec’s strategy and investments after the
closing of the Evertec Business
Acquisition
Transaction may be refocused away
from Popular towards other strategic initiatives.
Any of the foregoing risks and uncertainties could have a
material adverse effect on our earnings, cash flows, financial
condition,
and/or stock price.
31
LEGAL AND REGULATORY RISKS
Our
businesses
are
highly
regulated,
and
the
laws
and
regulations
that
apply
to
us
have
a
significant
impact
on
our
business and operations.
We are
subject to
extensive regulation
under U.S.
federal, state
and Puerto
Rico laws
that govern
almost all
aspects of
our operations and limit the businesses
in which we may be
engaged, including regulation, supervision and examination by federal,
state and foreign banking
authorities. These laws and regulations
have expanded significantly over an
extended period of time
and
are primarily intended
for the protection
of consumers, borrowers and
depositors. Compliance with
these laws and
regulations has
resulted, and will continue to result, in significant
costs.
Additional
laws
and
regulations
may
be
enacted
or
adopted
in
the
future
that
could
significantly
affect
our
powers,
authority
and
operations and
which could
have a
material adverse
effect
on
our
financial condition
and
results
of
operations. In
particular,
we
could
be
adversely
impacted
by
changes
in
laws
and
regulations,
or
changes
in
the
application,
interpretation
or
enforcement of
laws and
regulations, that proscribe
or institute more
stringent restrictions on
certain financial
services activities or
impose new
requirements relating to
the impact of
business activities on
ESG concerns, the
management of
risks associated with
those
concerns
and
the
offering of
products
intended to
achieve ESG-related
objectives. If
we
do not
appropriately comply
with
current or
future laws
or regulations,
we may
be subject
to fines,
penalties or
judgements, or to
material regulatory restrictions
on
our business, which could also materially and adversely
affect our financial condition and results of operations.
Our participation
(or lack
of participation)
in certain
governmental programs,
such as
the Paycheck
Protection Program
(“PPP”) enacted
in response
to the
COVID-19 pandemic,
also exposes
us to
increased legal
and regulatory
risks. We
have also
been and could continue to
be exposed to adverse
action for the violation of
applicable legal requirements or the improper
conduct
of our employees in connection with such loans. For example, on January 24, 2023, Popular Bank consented to the imposition of an
order from
the Federal
Reserve Board
requiring it
to
pay a
$2.3 million
civil money
penalty to
settle certain
findings arising
from
Popular Bank’s approval of six (6) Payment Protection Program loans. We may also have credit risk with respect to PPP loans if the
SBA determines that
there have been
deficiencies in the
way a PPP
loan was originated,
funded, or serviced
by us and
denies its
liability under the guaranty,
reduces the amount of the
guaranty or, if
it has already paid
under the guaranty,
seeks recovery of any
loss related to the deficiency.
We
are from
time to
time subject
to information
requests, investigations
and other
regulatory enforcement
proceedings
from departments
of the
U.S. and
Puerto Rico
governments, including
those that
investigate compliance
with consumer
protection
laws
and
regulations, which
may
expose
us
to
significant penalties
and
collateral consequences,
and
could
result in higher compliance costs or restrictions
on our operations.
We from time-to-time self-report
compliance matters to, or receive
requests for information from, departments of
the U.S.
and Puerto
Rico governments,
including with
respect to
compliance with
consumer protection
laws and
regulations. For
example,
BPPR has
in the
past received
subpoenas and
other requests
for information
from the
departments of
the U.S.
government that
investigate
mortgage-related conduct,
mainly
concerning
real
estate
appraisals
and
residential
and
construction
loans
in
Puerto
Rico. BPPR
has also
self-identified and
reported to
applicable regulators compliance
matters related
to mortgage,
credit reporting
and other consumer lending practices.
Incidents of this nature and investigations or examinations by governmental authorities have resulted in the past, and may
in the
future result, in
judgments, settlements, fines,
enforcement actions, penalties
or other sanctions
adverse to the
Corporation,
which could materially and adversely affect the
Corporation’s business, financial condition or results of operations, or cause
serious
reputational
harm.
In
connection with
the
resolution
of
regulatory proceedings,
enforcement authorities
may
seek
admissions of
wrongdoing
and,
in
some
cases,
criminal
pleas,
which
could
lead
to
increased
exposure
to
private
litigation,
loss
of
clients
or
customers,
and
restrictions
on
offering
certain
products
or
services.
In
addition,
responding
to
information-gathering
requests,
investigations and
other regulatory
proceedings, regardless
of the
ultimate
outcome of
the matter,
could be
time-consuming and
expensive. Further, regulators in the performance of their supervisory and enforcement duties, have significant discretion and power
to
prevent
or
remedy
what
they
deem
to
be
unsafe
and
unsound
practices
or
violations
of
laws
by
banks
and
bank
holding
companies. The exercise of this regulatory discretion
and power could have a negative impact
on Popular.
Complying with economic and trade sanctions programs
and anti-money laundering laws and regulations
can increase our
operational
and
compliance
costs
and
risks.
If
we,
and
our
subsidiaries,
affiliates
or
third-party
service
providers,
are
found to
have failed
to comply
with applicable
economic and
trade sanctions
programs and
anti-money laundering
laws
and
regulations,
we
could
be
exposed
to
fines,
sanctions
and
penalties,
and
other
regulatory
actions,
as
well
as
governmental investigations.
32
As
a
federally
regulated
financial
institution,
we
must
comply
with
regulations
and
economic
and
trade
sanctions
and
embargo
programs
administered by
the
Office
of
Foreign
Assets
Control
(“OFAC”)
of
the
U.S.
Treasury,
as
well
as
anti-money
laundering laws and regulations, including those under
the Bank Secrecy Act.
Economic and trade sanctions regulations and programs administered by OFAC prohibit U.S.-based entities from entering
into or facilitating
unlicensed transactions with, for
the benefit of,
or in some
cases involving the
property and property interests
of,
persons,
governments or
countries
designated by
the
U.S.
government under
one
or
more
sanctions
regimes,
and
also
prohibit
transactions
that
provide
a
benefit
that
is
received in
a
country
designated
under
one
or
more
sanctions
regimes.
We
are
also
subject to
a variety
of reporting
and other
requirements under
the Bank
Secrecy Act,
including the
requirement to
file suspicious
activity and currency
transaction reports, that
are designed to
assist in
the detection
and prevention of
money laundering, terrorist
financing
and
other
criminal
activities.
In
addition,
as
a
financial
institution
we
are
required
to,
among
other
things,
identify
our
customers, adopt formal
and comprehensive anti-money
laundering programs, scrutinize
or altogether prohibit
certain transactions
of special concern, and be prepared to respond to inquiries from U.S.
law enforcement agencies concerning our customers and
their
transactions. Failure
by the
Corporation, its
subsidiaries, affiliates
or
third-party service
providers to
comply with
these
laws
and
regulations
could
have
serious
legal
and
reputational
consequences
for
the
Corporation,
including
the
possibility
of
regulatory
enforcement
or
other
legal
action,
including
significant
civil
and
criminal
penalties.
We
also
incur
higher
costs
and
face
greater
compliance risks in
structuring and operating
our businesses to comply
with these requirements. The
markets in which
we operate
heighten these costs and risks.
We have established risk-based policies and procedures designed to assist us
and our personnel in complying with these
applicable laws and
regulations. With respect
to OFAC
regulations and economic
and trade sanction
programs, these policies
and
procedures employ software to screen transactions for
evidence of sanctioned-country and person’s involvement. Consistent with
a
risk-based approach and the
difficulties in identifying and
where applicable, blocking and rejecting
transactions of our customers
or
our customers’ customers that may involve a sanctioned
person, government or country, there can be no assurance that our policies
and
procedures
will
prevent
us
from
violating
applicable
laws
and
regulations
in
transactions
in
which
we
engage,
and
such
violations could adversely affect our reputation, business,
financial condition and results of operations.
From time
to time
we have
identified and
voluntarily self-disclosed
to OFAC
transactions that
were not
timely identified,
blocked
or
rejected
by
our
policies,
controls
and
procedures
for
screening
transactions
that
might
violate
the
regulations
and
economic and
trade sanctions
programs administered
by OFAC.
For example,
during the
second quarter
of 2022,
BPPR entered
into
a
settlement
agreement
with
OFAC
with
respect
to
certain
transactions
processed
on
behalf
of
two
employees
of
the
Government
of
Venezuela,
in
apparent
violation
of
U.S.
sanctions
against
Venezuela.
Popular
agreed
to
pay
approximately
$256,000 to settle the
apparent violations, which had been
self disclosed to OFAC.
There can be no
assurances that any failure
to
comply with
U.S. sanctions
and embargoes,
or
with anti-money
laundering laws
and
regulations, will
not result
in material
fines,
sanctions or other penalties being imposed on us.
Furthermore, if
the policies,
controls, and
procedures of
one of
the Corporation’s
third-party service
providers, together
with our
third-party oversight
of such
providers, do
not prevent
it from
violating applicable
laws and
regulations in
transactions in
which it engages, such violations could adversely affect its
ability to provide services to us.
We
are
subject
to
regulatory
capital
adequacy
requirements,
and
if
we
fail
to
meet
these
requirements
our
business and financial condition will be adversely
affected.
Under regulatory capital adequacy requirements, and other
regulatory requirements, Popular and our banking subsidiaries
must
meet
requirements
that
include
quantitative
measures
of
assets,
liabilities
and
certain
off-balance
sheet
items,
subject
to
qualitative
judgments
by
regulators
regarding
components,
risk
weightings
and
other
factors.
If
we
fail
to
meet
these
minimum
capital
requirements
and
other
regulatory
requirements,
our
business
and
financial
condition
will
be
materially
and
adversely
affected. If
a financial
holding company
fails to
maintain well-capitalized
status under
the regulatory
framework, or
is deemed
not
well managed
under regulatory
exam procedures, or
if it
experiences certain
regulatory violations, its
status as
a financial
holding
company and its
related eligibility for
a streamlined review
process for acquisition
proposals, and its
ability to offer
certain financial
products, may be
compromised and its
financial condition and
results of operations
could be adversely
affected. The failure
of any
depository
institution
subsidiary
of
a
financial
holding
company
to
maintain
well-capitalized
or
well-managed
status
could
have
similar consequences.
In addition,
the Basel
Committee on
Banking Supervision
published a
set of
standards to
finalize Basel
III in
December
2017. These standards significantly revise the Basel capital framework, which could heighten regulatory capital standards if adopted
in the U.S. The federal bank regulators
have not yet proposed rules to implement these
revisions,
and the impact on us will depend
33
on the way
the revisions are implemented
in the U.S.
See the “Supervision and
Regulation – Capital Adequacy”
discussion in Item
1. Business of this Form 10-K for additional information
related to the Basel III Capital Rules and
Basel III finalization.
Increases in FDIC insurance premiums may
have a material adverse effect on our earnings.
Substantially all the deposits of BPPR and PB are subject to insurance up to applicable limits by the FDIC’s DIF and, as a
result, BPPR and PB are subject to FDIC deposit insurance assessments.
On October 18, 2022, the FDIC finalized a rule that would
increase initial
base deposit insurance
assessment rates by
2 basis
points, beginning with
the first
quarterly assessment period
of
2023.
We
are
generally
unable to
control the
amount
of
premiums that
we
are
required to
pay
for
FDIC
insurance. If
there
are
additional bank or financial institution failures, our level of non-performing assets increases, or our risk profile changes or our capital
position is
impaired, we
may be
required to
pay even
higher FDIC
premiums. Any
future increases
or special
assessments may
materially adversely
affect our
results of
operations. See
the “Supervision
and Regulation—FDIC Insurance”
discussion in
Item 1.
Business of this Form
10-K for additional information related to
the FDIC’s deposit insurance
assessments applicable to BPPR and
PB.
The
resolution
of
pending
litigation
and
regulatory
proceedings,
if
unfavorable,
could
have
material
adverse
financial
effects or cause significant reputational harm to
us, which, in turn, could seriously harm
our business prospects.
We
face
legal
risks
in
our
businesses,
and
the
volume
of
claims
and
amount
of
damages
and
penalties
claimed
in
litigation
and
regulatory
proceedings against
financial
institutions
remains
high.
Substantial
legal
liability
or
significant
regulatory
action
against
us
could
have
material adverse
financial
effects
or cause
significant
reputational harm
to
us,
which
in
turn
could
seriously
harm
our
business
prospects.
For
further
information
relating
to
our
legal
risk,
see
Note
24
-
“Commitments
&
Contingencies”, to the Consolidated Financial Statements in this Form 10-K.
LIQUIDITY RISKS
We are
subject to risks
related to our
own credit rating
and capital levels.
Actions by the
rating agencies or
decreases in
our capital
levels may
have adverse effects
on our
business, including by
raising the cost
of our
obligations or affecting
our ability to borrow.
Actions by the rating agencies
could raise the cost of
our borrowings, since lower rated securities
are usually required by
the market
to pay
higher rates
than obligations
of higher
credit quality.
Our credit
ratings were
reduced substantially in
2009 and,
although one of
the three major rating
agencies upgraded our senior
unsecured rating back to
“investment grade” during 2021,
the
remaining two rating agencies have not
upgraded their current “non-investment grade” rating. The
market for non-investment grade
securities is much smaller and less liquid than for investment grade securities. If we were to attempt to issue preferred stock or
debt
securities into the capital markets, it
is possible that there would not
be sufficient demand to complete
a transaction or that the
cost
could be substantially higher than for more highly
rated securities.
In
addition,
changes
in
our
ratings
and
capital
levels
could
affect
our
relationships
with
some
creditors
and
business
counterparties. For example, having
negative tangible capital may
impact our ability to
access some sources of
wholesale funding.
The Federal Housing Finance Agency
restricts the Federal Home
Loan Bank of New
York
(“FHLBNY”) from lending to members
of
the FHLBNY with negative
tangible capital unless the
member’s primary banking regulator makes a
written request to the
FHLBNY
to
maintain access
to
borrowings. Both
BPPR
and PB
have secured
borrowing facilities
with the
FHLBNY,
and
had
outstanding
exposures of $1.9
billion and $1.4 million
respectively as of December 31,
2022. Losing access to
the FHLBNY borrowing facilities
could adversely impact
liquidity at the
banking subsidiaries. Additionally,
if BPPR or
PB cease to
be well-capitalized, the
FDIA and
regulations
adopted thereunder
would
restrict
their
ability to
accept
brokered
deposits
and
limits
the
rate
of
interest
payable
on
deposits.
Our banking
subsidiaries also have
recourse obligations under
certain agreements with
third parties, including
servicing and
custodial agreements,
that include
ratings covenants.
Upon failure
to
maintain the
required credit
ratings, the
third
parties could
have the
right to
require us
to
engage a
substitute fund
custodian and
increase collateral
levels securing
recourse
obligations. Collateral pledged by
us to secure
recourse obligations approximated $29
million at December
31, 2022. Management
expects
that
we
would
be
able
to
meet
any
additional
collateral
requirements
if
and
when
needed.
The
requirements
to
post
collateral under
certain agreements
or the
loss of
custodian funds,
however,
could reduce
our liquidity
resources and
impact our
results of operations. The termination of those agreements or the
inability to realize servicing income for our businesses could have
an
adverse
effect
on
those
businesses.
Other
counterparties
are
also
sensitive
to
the
risk
of
a
ratings
downgrade
and
the
implications
for
our
businesses,
and
may
be
less
likely
to
engage
in
transactions
with
us,
or
may
only
engage
in
them
at
a
substantially higher cost, if our ratings remain below
investment grade.
34
As a holding company, we depend on dividends and distributions from
our subsidiaries for liquidity.
As a bank holding company,
we depend primarily on dividends from
our banking and other operating subsidiaries
to fund
our cash needs, including to capitalize our subsidiaries. Our banking subsidiaries, BPPR and PB, are limited by law in their ability to
make dividend
payments and other
distributions to
us based
on their earnings,
dividend history,
and capital
position. Based
on its
current financial condition,
PB may
not declare or
pay a
dividend without the
prior approval of
the Federal Reserve
Board and
the
NYSDFS. A
failure by
our banking subsidiaries
to generate
sufficient income
and free
cash flow to
make dividend
payments to
us
may
affect
our
ability to
fund
our cash
needs, which
could have
a negative
impact on
our financial
condition, liquidity,
results
of
operation or capital position. Such failure could also affect
our ability to pay dividends to our stockholders and to
repurchase shares
of our common stock. We have in the past suspended dividend payments
on our common stock and preferred stock during times of
economic uncertainty,
and there
can be
no assurance
that we
will be
able to
continue to
declare dividends to
our stockholders
in
any future periods.
An
impact
on
the
tangible
capital
levels
of
our
operating
subsidiaries,
could
also
limit
the
amount
of
capital
we
may
upstream to the holding company.
Tangible
capital levels have, and may continue to
be, adversely affected by the impact
of rapidly
rising interest rates on investment securities in our available-for-sale portfolio. For a discussion
of risks related to changes in interest
rates,
see
“Changes
in
interest
rates
and
credit
spreads
can
adversely
impact
our
financial
condition,
including
our
investment
portfolio, since a significant portion of our
business involves borrowing and lending money,
and investing in financial instruments”
in
Item 1A of this Form 10-K.
We also depend
on dividends from our
banking and other operating subsidiaries
to pay debt service
on outstanding debt
and to
repay maturing
debt. We
have $300
million of
notes that
mature on
September 14,
2023. If
we were
unable to
refinance
these
notes, we
could
have to
declare extraordinary
dividends from
our
banking
and
other
operating subsidiaries
to
repay such
notes. Our ability to
declare such dividends would be
subject to regulatory requirements and
could require the prior
approval of the
Federal Reserve Board.
STRATEGIC RISKS
Potential acquisitions of businesses or
loan portfolios could increase some
of the risks that
we face, and may
be delayed
or prohibited due to regulatory constraints.
To
the extent
permitted by
our applicable
regulators, we
may pursue
strategic acquisition
opportunities. Acquiring
other
businesses, however, involves various risks,
including potential exposure to unknown or contingent liabilities of the
target company,
exposure
to
potential
asset
quality
issues
of
the
target
company,
potential
disruption
to
our
business,
the
possible
loss
of
key
employees and customers of
the target company,
and difficulty in
estimating the value of
the target company.
If we pay
a premium
over book or
market value in
connection with an
acquisition, some dilution of
our tangible book
value and net
income per common
share
may
occur
in
connection with
any
future
transaction. Furthermore,
failure
to
realize the
expected
revenue increases,
cost
savings, increases in geographic or product presence, or other projected benefits from an acquisition could have a material adverse
effect on our business, financial condition and results of
operations.
Similarly,
acquiring
loan
portfolios
involves
various
risks.
When
acquiring
loan
portfolios,
management
makes
assumptions and
judgments about
the collectability
of the
loans, including
the creditworthiness
of borrowers
and the
value of
the
real
estate and
other assets
serving
as collateral
for the
repayment of
secured loans.
In
estimating the
extent of
the losses,
we
analyze
the
loan
portfolio
based
on
historical
loss
experience,
volume
and
classification
of
loans,
volume
and
trends
in
delinquencies
and
nonaccruals,
local
economic
conditions,
and
other
pertinent
information.
If
our
assumptions
are
incorrect,
however,
our actual
losses could
be higher
than estimated
and increased
loss reserves
may be
required, which
would negatively
affect our results of operations.
Finally, certain
acquisitions by financial institutions,
including us, are
subject to approval
by a variety
of federal and
state
regulatory agencies.
Regulatory approvals
could be
delayed, impeded,
restrictively conditioned
or denied.
We may
fail to
pursue,
evaluate
or
complete
strategic
and
competitively
significant
acquisition
opportunities
as
a
result
of
our
inability,
or
perceived
or
anticipated inability,
to obtain regulatory
approvals in a
timely manner,
under reasonable conditions or
at all. Difficulties
associated
with
potential
acquisitions
that
may
result
from
these
factors
could
have
a
material
adverse
effect
on
our
business,
financial
condition and results of operations.
We
have
embarked
on
a
broad-based
multi-year,
technological
and
business
process
transformation.
The
failure
to
achieve
the
goals
of
the
transformation
project,
the
inability
to
maintain
project
expenses
within
current
estimates
or
delays in
executing our plans
to implement the
transformation project, may
materially and adversely
affect our business,
35
financial condition, results of operations, or
cause reputational harm.
The
Corporation
has
embarked
on
a
broad-based
multi-year,
technological
and
business
process
transformation. Our
technology and
business transformation will
be a significant
priority for the
Corporation over the
next three years
and beyond.
We
expect the
expenses tied
to this
transformation project,
which will
continue through
at least
2025, to
result in
an enhanced
digital
experience for our clients, as well as better technology
and more efficient processes for our employees.
To
execute the
transformation project,
we plan
to expand
our digital
capabilities, modernize
our technology
foundation,
and
implement
agile
and
efficient
business
processes
across
the
entire
company.
We
may
not
succeed
in
executing
the
transformation project, may fail
to properly estimate cost
of the same, or
may experience delays in
executing our plans, which
may
in turn
cause the
Corporation to
incur costs
exceeding our
current estimates
or disrupt
our operations,
including our
technological
services to our customers, or fall short
of our projected earnings targets driven by these
efforts. To
the extent that these disruptions
persist over time and/or recur, this could negatively impact our competitive
position, require additional expenditures, and/or harm
our
relationships
with
our
customers
and
thus
may
materially
and
adversely
affect
our
business,
financial
condition,
results
of
operations, or cause reputational harm.
We face significant and increasing competition in the
rapidly evolving financial services industry.
We
operate
in
a
highly competitive
environment, in
which
we
compete
on
the
basis
of
a
number of
factors,
including
customer service,
quality and variety
of products
and services,
price, interest rates
on loans
and deposits,
innovation, technology,
ease of use, reputation, and transaction execution. While our main competition
continues to come from other Puerto Rico banks and
financial
institutions,
we
may
face
increased
competition
from
other
institutions
in
the
future
as
emerging
technologies
and
the
growth of e-commerce have significantly reduced geographic barriers, made it easier for non-depositary institutions to offer products
and
services
that
traditionally
were
banking
products
and
allowed
non-traditional
financial
service
providers
and
technology
companies to provide electronic and internet-based financial solutions and services. Increased competition could create
pressure to
lower
prices,
fees,
commissions
or
credit
standards
on
our
products
and
services,
which
could
adversely
affect
our
financial
condition and results of operations. Increased competition could also
create pressure to raise interest rates on deposits, which could
also impact our financial condition and results of operations.
If we are unable to
meet constant technological changes and react quickly to
meet new industry standards, including as a
result
of our
continued dependence
on
Evertec, we
may
be unable
to enhance
our
current services
and introduce
new
products and
services in
a timely
and cost-effective
manner,
placing us
at a
competitive disadvantage
and significantly
affecting our business, financial condition and results
of operations.
To compete effectively,
we need to constantly enhance and modify our products and services and introduce new products
and
services
to
attract
and
retain
clients
or
to
match
products
and
services
offered
by
our
competitors,
including
technology
companies and
other nonbank
firms that
are engaged
in providing
similar products
and services.
Although the
Evertec Business
Acquisition Transaction eliminated certain
provisions of a previous Master Services
Agreement with Evertec that required
us to use
Evertec exclusively to develop and implement new or
enhanced products and services, and is expected to
improve Popular’s ability
to manage
and control
the development
of the
customer channels
supported by
the Acquired
Assets, Popular
expects that
it will
continue to depend
on Evertec’s technology services
to operate and
control current products and
services and to
implement future
products and
services, making
our success
dependent on
Evertec’s ability
to timely
complete and
introduce these
enhancements
and
new
products
and
services
in
a
cost-effective
manner.
Our
ability
to
enhance our
customer channels
is
also
dependent
on
Evertec timely delivering Core
APIs that meet BPPR’s
requirements, which Evertec has committed
to develop under the
MSA. The
Core APIs are necessary for BPPR to connect
future enhancements to the Acquired Assets to existing
Evertec core applications.
Some
of
our
competitors
rely
on
financial
services
technology
and
outsourcing
companies
that
are
much
larger
than
Evertec, serve a
greater number of
clients than Evertec,
and may have
better technological capabilities and
product offerings than
Evertec.
Furthermore,
financial
services
technology
companies
typically
make
capital
investments
to
develop
and
modify
their
product
and
service
offerings
to
facilitate
their
customers’
compliance
with
the
extensive
and
evolving
regulatory
and
industry
requirements,
and
in
most cases
such
costs
are
borne
by
the
technology provider.
Because
of
our
contractual
relationship with
Evertec, and because Popular is the
sole customer of certain of
Evertec’s services and products, we
have in the past borne
the full
cost of such developments and modifications and
may be required to do so in the future, subject
to the terms of the MSA.
Moreover,
the terms,
speed, scalability,
and functionality
of certain
of Evertec’s
technology services
are not
competitive
when compared
to offerings
from its
competitors. Evertec’s
failure to
sufficiently invest
in and
upscale its
technology and
services
infrastructure to
meet the
rapidly changing
technology demands
of our
industry may
result in
us being
unable to
meet
customer
expectations and attract
or retain customers.
Any such impact
could, in turn,
reduce Popular’s revenues, place
us in a
competitive
36
disadvantage and
significantly affect
our
business, financial
condition and
results of
operations. While
the closing
of
the Evertec
Business Acquisition
Transaction narrowed
the scope
of services
which we
are dependent
on Evertec
to obtain
and released
us
from
exclusivity
restrictions
that
limited
our
ability
to
engage
other
third-party
providers
of
financial
technology
services,
it
also
resulted in extensions
of certain existing
commercial agreements with Evertec
and, as a
result, have prolonged
the duration of
our
exposure to
the risks
presented by
Evertec’s technological
capabilities and
its failures
to
enhance its
products and
services
and
otherwise meet evolving demands.
The ability to attract and retain qualified employees
is critical to our success.
Our
success
depends,
in
large
part,
on
our
ability
to
attract
and
retain
qualified
employees. Competition
for
qualified
candidates is intense and has
increased recently as a result
of a tighter labor market. Increased competition
may lead to difficulties
in
attracting
or
retaining qualified
employees, which
may,
in turn,
lead to
significant challenges
in the
execution
of
our
business
strategies and
have an
adverse effect
on the
quality of the
service we
provide to
the customers
and communities we
serve. Such
challenges could
adversely affect
our business,
operations and
financial condition.
In addition,
increased competition
may lead
to
higher compensation
packages and
more flexible
work arrangements.
We may
also be
required to
hire employees
outside of
our
market
areas
for
certain
positions
that
require
specific
expertise,
which
could
result
in
employment
and
tax
compliance-related
expenses, challenges and
risks. In
addition, flexible
work arrangements, such
as remote
or hybrid
work models, have
led to
other
workplace
challenges,
including fewer
opportunities
for
face-to-face interactions
or
to
promote
a
cohesive
corporate
culture
and
heightened cybersecurity, information security and other operational risks.
Our
ability
to
attract
and
retain
qualified
employees
is
also
impacted
by
regulatory
limitations
on
our
compensation
practices, such a s clawback requirements of incentive compensation,
which may not affect other institutions with which we compete
for talent. The
scope and
content of
regulators’ policies
on executive
compensation continue to
develop and
are likely
to continue
evolving. Such policies and limitations on our compensation
practices could adversely affect our ability to attract, retain and motivate
talented senior leaders in support of our long-term
strategy.
OTHER RISKS
An impairment
of our
goodwill, deferred
tax assets
or amortizable
intangible assets
could adversely
affect our
financial
condition and results of operations.
As of December 31,
2022, we had approximately $827
million, $954 million and
$94 million, respectively,
of goodwill, net
deferred tax assets and amortizable intangible assets
recorded on our balance sheet.
Under
GAAP,
goodwill
is
tested
for
impairment
at
least
annually
and
amortizable
intangible
assets
are
tested
for
impairment
when
events
or
changes
in
circumstances indicate
the
carrying value
may
not
be
recoverable. Factors
that
may
be
considered a change in circumstances, indicating that the carrying value of the goodwill or amortizable intangible assets may not be
recoverable, include
a decline in
Popular’s stock price
related to
a deterioration in
global or
local economic conditions,
declines in
our market capitalization, reduced future earnings estimates, and interest rate changes. The goodwill impairment evaluation process
requires
us
to
make
estimates
and
assumptions
with
regards
to
the
fair
value
of
our
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 our results of operations and the reporting
unit where the goodwill is recorded.
The
determination
of
whether
a
deferred
tax
asset
is
realizable
is
based
on
weighting
all
available
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
analysis considers all
sources of
taxable income
available to
realize the
deferred tax
asset, including
the future
reversal of
existing taxable
temporary differences,
future taxable income
exclusive of reversing temporary
differences and carryforwards,
taxable income in
prior carryback years and
tax-planning strategies. Changes in these
factors may affect
the realizability of our
deferred tax assets in
our Puerto Rico and
U.S.
operations.
If our
goodwill, deferred
tax assets
or amortizable
intangible assets
become impaired,
we may
be required
to record
a
significant charge to earnings, which could adversely
affect our financial condition and results of operations.
We could experience unexpected
losses if the estimates
or assumptions we use
in preparing our financial
statements are
incorrect or differ materially from actual results.
In preparing
our financial
statements pursuant
to U.S.
GAAP,
we are
required to
make estimates
and assumptions
that
are often based
on subjective and
complex judgments about
matters that are
inherently uncertain. For example,
we use estimates
37
and assumptions to determine our allowance for credit losses, our
liability for contingent litigation losses, and the fair value of certain
of our
assets and
liabilities, such
as debt
securities, loans
held for
sale, MSRs,
intangible assets
and deferred
tax assets.
If such
estimates
or
assumptions are
incorrect
or
differ
materially
from
actual
results,
we
could
experience
unexpected
losses
or
other
adverse impacts, some of which could be significant.
For further information of other risks faced by
Popular please refer to the MD&A section of
this Form 10-K.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of
December 31,
2022, BPPR operated
168 branches,
of which 65
were owned and
103 were
leased premises, and
PB operated 39 branches of
which 3 were owned and
36 were on leased premises. Also,
the Corporation had 584 ATMs
operating
in
Puerto
Rico,
23
in
the
Virgin
Islands
and
94
in
the
U.S.
Mainland.
The
principal
properties
owned
by
Popular
for
banking
operations
and
other services
are
described
below.
Our
management believes
that
each
of
our
facilities
is
well
maintained
and
suitable for its purpose.
Puerto Rico
Popular Center, the twenty-story Popular and BPPR headquarters building, located
at 209 Muñoz Rivera Avenue, Hato Rey,
Puerto
Rico.
Popular Center North Building, a three-story building, on
the same block as Popular Center.
Popular Street Building, a parking and office building located
at Ponce de León Avenue and Popular Street, Hato Rey, Puerto Rico.
Cupey Center
Complex,
one building, three-stories
high, two
buildings, two-stories high
each, and
two buildings three-stories
high
each located in Cupey, Río Piedras, Puerto Rico.
Old San Juan Building, a twelve-story structure
located in Old San Juan, Puerto Rico.
Guaynabo Corporate Office Park Building, a two-story building
located in Guaynabo, Puerto Rico.
Altamira Building,
a nine-story office building located in Guaynabo,
Puerto Rico.
El Señorial Center, a four-story office building and a two-story branch building
located in Río Piedras, Puerto Rico.
Ponce de León 167 Building, a five-story office building
located in Hato Rey, Puerto Rico.
U.S. & British Virgin Islands
BPPR Virgin Islands Center, a three-story building located in St. Thomas,
U.S. Virgin Islands.
Popular Center -Tortola,
a four-story building located in Tortola, British Virgin Islands.
ITEM 3. LEGAL PROCEEDINGS
For a discussion
of Legal proceedings,
see Note 24,
“Commitments and Contingencies”, to
the Consolidated Financial Statements
in this Form 10-K.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
38
PART II
ITEM
5.
MARKET
FOR
REGISTRANT’S
COMMON
EQUITY,
RELATED
STOCKHOLDER
MATTERS
AND
ISSUER
PURCHASES OF EQUITY SECURITIES
Common Stock
Popular’s Common Stock is traded on
the Nasdaq Global Select Market under the symbol “BPOP”.
During 2022, the Corporation declared cash dividends in the
total amount of $2.20 per common share outstanding,
for an
aggregate amount of $163.7
million. The Common Stock ranks junior to all series of Preferred Stock as
to dividend rights and rights
on liquidation,
dissolution or
winding up
of Popular.
Our ability
to declare
or pay
dividends on,
or purchase,
redeem or
otherwise
acquire, the Common
Stock is subject
to certain restrictions
in the event
that Popular fails
to pay or
set aside full
dividends on the
Preferred Stock for the latest dividend period.
On July 12, 2022, the Corporation completed an accelerated share repurchase (“ASR”) program for the repurchase of an
aggregate $400
million of
Popular’s common stock
for which
an initial
delivery of
3,483,942 shares
were delivered
in March
2022
(the
“March
ASR
Agreement”).
Upon
the
final
settlement
of
the
March
ASR
Agreement,
the
Corporation
received
an
additional
1,582,922
shares
of
common
stock.
The
Corporation
repurchased a
total
of
5,066,864 shares
at
an
average
purchase
price
of
$78.9443, which were recorded as treasury
stock by $440 million under the March ASR
Agreement.
On December
7, 2022
the Corporation
completed the
settlement of
another ASR
Agreement for
the repurchase
of an
aggregate $231
million of
Popular’s common stock,
for which
an initial
2,339,241 shares
were delivered
on August
26, 2022
(the
“August ASR Agreement”). Upon the final settlement of the ASR Agreement, the Corporation received an additional 840,024 shares
of common
stock. The
Corporation repurchased
a total
of 3,179,265
shares at
an average
purchase price
of $72.66,
which were
recorded as treasury stock by $245 million under
the August ASR Agreement.
On September 9, 2021, the Corporation completed an accelerated share repurchase (“ASR”) 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 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.
Additional information concerning legal or
regulatory restrictions on the payment
of dividends by Popular,
BPPR and PB
is contained under the caption “Regulation and Supervision”
in Item 1 herein.
As
of
February
24,
2023,
Popular
had
6,612
stockholders
of
record
of
the
Common
Stock,
not
including
beneficial
owners whose shares
are held in
record names
of brokers
or other
nominees. The last
sales price
for the
Common Stock
on that
date was $71.27 per share.
Preferred Stock
Popular 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. Popular’s Preferred Stock
issued and outstanding at December 31, 2022
consisted of:
●
885,726 shares of 6.375% non-cumulative monthly income Preferred Stock, Series A, no par value, liquidation preference
value of $25 per share.
39
All series of
Preferred Stock are pari
passu. Dividends on each
series of Preferred Stock
are payable if declared
by our
Board
of
Directors.
Our
ability
to
declare
and
pay
dividends
on
the
Preferred
Stock
is
dependent
on
certain
Federal
regulatory
considerations,
including
the
guidelines
of
the
Federal
Reserve
Board
regarding
capital
adequacy
and
dividends.
The
Board
of
Directors is not obligated to declare dividends and
dividends do not accumulate in the event
they are not paid.
Monthly
dividends
on
the
Preferred
Stock
amounted
to
a
total
of
$1.4
million
for
the
year
2022.
There
can
be
no
assurance that any dividends will be declared on
the Preferred Stock in any future periods.
Dividend Reinvestment and Stock Purchase Plan
Popular offers
a dividend
reinvestment and
stock purchase
plan for
our stockholders
that allows
them to
reinvest their
dividends in
shares of
the Common Stock
at a
5% discount
from the
average market
price at
the time
of the
issuance, as well
as
purchase shares of Common Stock directly from Popular
by making optional cash payments at prevailing
market prices.
Equity Based Plans
On May
12, 2020, the
stockholders 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.
As of December 31,
2022, the maximum number
of shares of
common stock remaining available for future issuance under this plan was 3,444,778. For information about
the securities remaining
available for issuance under our equity-based plans,
refer to Part III, Item 12.
Purchases of Equity Securities
The following table sets forth the details of purchases of Common Stock by the Corporation during the quarter ended December 31,
2022:
Issuer Purchases of Equity Securities
Not in thousands
Period
Total Number of
Shares Purchased [1]
Average Price Paid
per Share
Total Number of
Shares
Purchased as Part of Publicly
Announced Plans or Programs [2]
Maximum Number of
Shares that May Yet be
Purchased Under the
Plans or Programs
October 1 – October 31
-
$-
-
-
November 1 – November 30
-
-
-
-
December 1 – December 31
840,064
70.80
840,024
-
Total December 31, 2022
840,064
$70.80
840,024
-
[1] Includes 40 shares of common stock acquired
by the Corporation during December 2022,
in connection with the satisfaction of tax
withholding obligations on vested awards of restricted
stock or restricted stock units granted to directors
and certain employees under
the Corporation’s Omnibus Incentive Plan. The acquired
shares of common stock were added back to
treasury stock.
[2] On August 24, 2022, the Corporation entered into
an accelerated repurchase program for the repurchase
of an aggregate $231
million of Popular's common stock, which was completed
on December 7, 2022. Upon the final
settlement, the Corporation received
840,024 shares of common stock.
Equity Compensation Plans
For information about our equity compensation plans,
refer to Part III, Item 12.
Stock Performance Graph (1)
40
The graph
below compares
the cumulative
total stockholder
return during
the measurement
period with
the cumulative
total return, assuming reinvestment of dividends, of
the Nasdaq Bank Index and the Nasdaq Composite
Index.
The
cumulative
total
stockholder
return
was
obtained
by
dividing
(i)
the
cumulative
amount
of
dividends
per
share,
assuming dividend reinvestment since the measurement point, December 31, 2017, plus (ii) the change
in the per share price since
the measurement date, by the share price at
the measurement date.
Comparison of Five-Year Cumulative Total Return (TSR)
Assumes all dividends were reinvested
Base Year:
December 31,
2017 = $100
(1) Unless Popular specifically states otherwise, this Stock Performance Graph shall not be deemed to be incorporated by
reference
and
shall
not
constitute
soliciting
material
or
otherwise
be
considered
filed
under
the
Securities
Act
of
1933
or
the
Securities Exchange Act of 1934.
ITEM 6. [RESERVED]
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information required by this item is included in
this Form 10-K, commencing on page 50.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The information regarding the
market risk of our
investments appears under the caption
“Risk Management”, on page
80
within Management’s Discussion and Analysis of Financial
Condition and Results of Operations in this
Form 10-K.
41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item appears under the caption “Statistical Summaries” on pages 106 to 108 of this Form
10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our
management,
with
the
participation
of
our
Chief
Executive
Officer
and
Chief
Financial
Officer,
has
evaluated
the
effectiveness
of
our
disclosure
controls
and
procedures
(as
such
term
is
defined
in
Rules
13a-15(e)
and
15d-15(e)
under
the
Exchange Act) as
of the end
of the period covered
by this report.
Based on such
evaluation, our Chief Executive
Officer and Chief
Financial
Officer
have
concluded
that,
as
of
the
end
of
such
period,
our
disclosure
controls
and
procedures
are
effective
in
recording, processing, summarizing and
reporting, on a timely
basis, information required to
be disclosed by Popular
in the reports
that
we
file
or
submit
under
the
Exchange
Act
and
such
information
is
accumulated
and
communicated
to
management,
as
appropriate, to allow timely decisions regarding required
disclosures.
Assessment on Internal Control over Financial Reporting
Information relating to our assessment on
internal control over financial reporting is presented under the
captions “Report
of
Management
on
Internal
Control
Over
Financial
Reporting”
and
“Report
of
Independent
Registered
Public
Accounting
Firm”
located on pages 109 and 110 of this Form 10-K.
Changes in Internal Control over Financial Reporting
There have
been no
changes in
our internal
control over
financial reporting
(as such
term is
defined in
Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2022, that have materially affected, or
are reasonably likely to materially affect, our internal control
over financial reporting.
ITEM 9B. OTHER INFORMATION
None
ITEM 9C. DISCLOSURE REGARDING FOREIGN
JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
information
contained
under
the
captions
“Security
Ownership
of
Certain
Beneficial
Owners
and
Management”,
“Delinquent Section
16(a) Reports”,
“Corporate Governance”, “Nominees
for Election
as Directors”
and “Executive
Officers” in
the
42
Proxy Statement
are incorporated herein
by reference.
Information about our
Code of
Ethics, which
applies to
our senior
financial
officers, is included in “Business — Available Information” in Part
I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The
information
in
the
Proxy
Statement
under
the
caption
“Executive
and
Director
Compensation,”
including
the
“Compensation
Discussion
and
Analysis,”
the
“2022
Executive
Compensation
Tables
and
Compensation
Information”
and
the
“Compensation
of
Non-Employee
Directors,”
and
under
the
caption
“Committees
of
the
Board
–
Talent
and
Compensation
Committee – Talent and Compensation Committee Interlocks and Insider Participation” is
incorporated herein by reference.
ITEM
12.
SECURITY
OWNERSHIP
OF
CERTAIN
BENEFICIAL
OWNERS
AND
MANAGEMENT
AND
RELATED
STOCKHOLDERS MATTERS
The information
under the captions
“Principal Stockholders” and
“Shares Beneficially Owned
by Directors and
Executive
Officers” in the Proxy Statement is incorporated herein by
reference.
The following tables sets forth information as
of December 31, 2022 regarding securities remaining available for issuance
to directors and eligible employees under our
equity-based compensation plans.
Plan Category
Plan
Number of Securities
Remaining Available
for Future Issuance
Under Equity Compensation
Plan
Equity compensation plan approved by security holders
2020 Omnibus Incentive Plan
3,444,778
Total
3,444,778
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information under the caption “Board of Directors’ Independence” and “Certain Relationships and Transactions” in the
Proxy Statement is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding principal accountant fees and services is set forth under Proposal 3 – Ratification of Appointment of
Independent Registered Public Accounting Firm in
the Proxy Statement, which is incorporated herein
by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a). The following financial statements and reports are
included on pages 110 through 260 in this Form10K.
(1)
Financial Statements
Report of Independent Registered Public Accounting
Firm (
PCAOB ID
238
)
Consolidated Statements of Financial Condition as of
December 31, 2022 and 2021
43
Consolidated Statements of Operations for each of
the years in the three-year period ended December 31, 2022
Consolidated Statements of Cash Flows for each of
the years in the three-year period ended December
31, 2022
Consolidated
Statements
of
Changes
in
Stockholders’
Equity
for
each
of
the
years
in
the
three-year
period
ended
December 31, 2022
Consolidated Statements of
Comprehensive Income for
each of
the years
in the
three-year period
ended December 31,
2022
Notes to Consolidated Financial Statements
(2)
Financial
Statement
Schedules:
No
schedules
are
presented
because
the
information
is
not
applicable
or
is
included
in
the
Consolidated Financial Statements described in (a) (1)
above or in the notes thereto.
(3) Exhibits
ITEM 16. FORM 10-K SUMMARY
None.
The exhibits listed on the Exhibits Index below are
filed herewith or are incorporated herein by
reference.
44
Exhibit Index
3.1
Restated Certificate of Incorporation of Popular, Inc. (incorporated by reference to Exhibit 3.1 of the Corporation’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2020).
3.2
Amended and Restated Bylaws of Popular, Inc. (incorporated by reference to Exhibit 3.1 of Popular, Inc.’s Current
Report on Form 8-K dated and filed on January 2, 2020).
4.1
Specimen of Physical Common Stock Certificate of Popular, Inc. (incorporated by reference to Exhibit 4.1 of Popular,
Inc.’s Current Report on Form 8-K dated May 29, 2012 and filed on May 30, 2012).
4.2
Certificate of Designation of Popular, Inc.’s 6.375% Non-Cumulative Monthly Income Preferred Stock, 2003 Series A
(incorporated by reference to Exhibit 3.3 of Popular, Inc.’s Form 8-A filed on February 25, 2003).
4.3
Form of certificate representing Popular, Inc.’s 6.375% Non-Cumulative Monthly Income Preferred Stock, 2003 Series A
(incorporated by reference to Exhibit 4.1 of Popular, Inc.’s Form 8-A filed on February 25, 2003).
4.4
Senior Indenture of Popular, Inc., dated as of February 15, 1995, as supplemented by the First Supplemental Indenture
thereto, dated as of May 8, 1997, each between Popular, Inc. and The Bank of New York Mellon, as successor trustee
(incorporated by reference to Exhibit 4(d) to the Registration Statement on Form S-3, File No. 333-26941, of Popular,
Inc., Popular International Bank, Inc., and Popular North America, Inc., filed on May 12, 1997).
4.5
Second Supplemental Indenture of Popular, Inc., dated as of August 5, 1999, between Popular, Inc. and The Bank of
New York Mellon, as successor trustee (incorporated by reference to Exhibit 4(e) to Popular, Inc.’s Current Report on
Form 8-K dated August 5, 1999 and filed on August 17, 1999).
4.6
Subordinated Indenture of Popular, Inc., dated as of November 30, 1995, between Popular, Inc. and The Bank of New
York Mellon, as successor trustee (incorporated by reference to Exhibit 4(e) to the Registration Statement on Form S-3,
File No. 333- 26941, of Popular, Inc., Popular International Bank, Inc. and Popular North America, Inc., filed on May 12,
1997).
4.7
Senior Indenture of Popular North America, Inc., dated as of October 1, 1991, as supplemented by the First
Supplemental Indenture thereto, dated as of February 28, 1995, and by the Second Supplemental Indenture thereto,
dated as of May 8, 1997, each among Popular North America, Inc., Popular, Inc., as guarantor, and The Bank of New
York Mellon, as successor trustee (incorporated by reference to Exhibit 4(f) to the Registration Statement on Form S-3,
File No. 333-26941, of Popular, Inc., Popular International Bank, Inc. and Popular North America, Inc., filed on May 12,
1997).
4.8
Third Supplemental Indenture of Popular North America, Inc., dated as of August 5, 1999, among Popular North
America, Inc., Popular, Inc., as guarantor, and The Bank of New York Mellon, as successor trustee (incorporated by
reference to Exhibit 4(h) to Popular, Inc.’s Current Report on Form 8-K, dated August 5, 1999, as filed on August 17,
1999).
4.9
Junior Subordinated Indenture of Popular, Inc., dated as of October 31, 2003, between Popular, Inc. and The Bank of
New York Mellon, as successor trustee (incorporated by reference to Exhibit 4.2 of Popular, Inc.’s Current Report on
Form 8-K, dated October 31,2003 and filed on November 4, 2003).
4.10
Description of Popular, Inc.’s securities registered pursuant to Section 12 of the Securities Exchange Act. (1)
45
10.1
Popular, Inc. 2020 Omnibus Incentive Plan (incorporated by reference to Exhibit 4.4 of Popular, Inc.’s Form S-8 filed on
May 12, 2020). *
10.2
Form of Compensation Agreement for Directors Elected Chairman of a Committee (incorporated by reference to Exhibit
10.1 of Popular, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004). *
10.3
Form of Compensation Agreement for Directors not Elected Chairman of a Committee (incorporated by reference to
Exhibit 10.2 of Popular, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004). *
10.4
Compensation Agreement for Alejandro M. Ballester as director of Popular, Inc., dated January 28, 2010 (incorporated
by reference to Exhibit 10.9 of Popular, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2009). *
10.5
Compensation Agreement for Carlos A. Unanue as director of Popular, Inc., dated January 28, 2010 (incorporated by
reference to Exhibit 10.10 of Popular, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2009). *
10.6
Compensation Agreement for C. Kim Goodwin as director of Popular, Inc., dated May 10, 2011 (incorporated by
reference to Exhibit 10.1 of Popular, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011). *
10.7
Compensation Agreement for Joaquin E. Bacardi, III as director of Popular, Inc., dated April 30, 2013 (incorporated by
reference to Exhibit 10.2 of Popular, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013). *
10.8
Compensation Agreement for John. W. Diercksen as director of Popular, Inc., dated October 18, 2013 (incorporated by
reference to Exhibit 10.13 of Popular, Inc.’s Annual Report on 10-K for the year ended December 31, 2013). *
10.9
Form of 2015 Long-Term Equity Incentive Award and Agreement (incorporated by reference to Exhibit 10.1 of Popular,
Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015). *
10.10
Form of 2016 Long-Term Equity Incentive Award and Agreement (incorporated by reference to Exhibit 10.27 of Popular,
Inc.’s Annual Report on Form 10-K for the year ended December 31, 2015). *
10.11
Form of Director Compensation Letter, Election Form and Restricted Stock Agreement, effective April 26, 2016
(incorporated by reference to Exhibit 10.1 of Popular, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March
31, 2016). *
10.12
Form of 2017 Long-Term Equity Incentive Award and Agreement (incorporated by reference to Exhibit 10.1 of Popular,
Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017). *
10.13
Long-Term Equity Incentive Award and Agreement for Ignacio Alvarez, dated as of June 22, 2017 (incorporated by
reference to Exhibit 10.1 of Popular, Inc.’s Quarterly report on Form 10-Q for the quarter ended June 30, 2017). *
10.14
Form of Popular, Inc. 2018 Long-Term Equity Incentive Award and Agreement (incorporated by reference to Exhibit
10.1 of Popular, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018). *
46
10.15
Director Compensation Letter, Election Form and Restricted Stock Agreement for Myrna M. Soto, dated June 22, 2018
(incorporated by reference to Exhibit 10.1 of Popular, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June
30, 2018). *
10.16
Director Compensation Letter, Election Form and Restricted Stock Agreement for Robert Carrady, dated December 29,
2018 (incorporated by reference to Exhibit 10.25 of Popular, Inc.’s Annual Report on Form 10-K for the year ended
December 31, 2018). *
10.17
Form of Director Compensation Letter, Election Form and Restricted Stock Unit Award Agreement, effective May 7,
2019 (incorporated by reference to Exhibit 10.26 of Popular, Inc.’s Annual Report on Form 10-K for the year ended
December 31, 2018). *
10.18
Form of Popular, Inc. 2019 Long-Term Equity Incentive Award and Agreement (incorporated by reference to Exhibit
10.1 of Popular, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019). *
10.19
Director Compensation Letter, Election Form and Restricted Stock Unit Award Agreement for Richard L. Carrión, dated
July 1, 2019 (incorporated by reference to Exhibit 10.1 of Popular, Inc.’s Annual Report on Form 10-Q for the quarter
ended September 30, 2019). *
10.20
Form of Popular, Inc. 2020 Long-Term Equity Incentive Award and Agreement (incorporated by reference to Exhibit
10.1 of Popular, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020). *
10.21
Form of Director Compensation Election Form and Restricted Stock Unit Award Agreement, effective May 12, 2020
(incorporated by reference to Exhibit 10.2 of Popular, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June
30, 2020). *
10.22
Form of Popular, Inc. 2021 Long-Term Equity Incentive Award and Agreement (incorporated by reference to Exhibit
10.1 of Popular, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021). *
10.23
Form of Director Compensation Letter, Election Form and Restricted Stock Unit Award Agreement for Betty DeVita and
José R. Rodriguez, effective June 25, 2021 (incorporated by reference to Exhibit 10.1 of Popular, Inc.’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2021). *
10.24
Form of Popular, Inc. 2022 Long-Term Equity Incentive Award and Agreement (incorporated by reference to Exhibit
10.1 of Popular, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022). *
47
10.25
Asset Purchase Agreement, dated as of February 24, 2022, among Evertec, Inc. and Evertec Group, LLC, Popular,
Inc. and Banco Popular de Puerto Rico (incorporated by reference to Exhibit 2.1 of Popular, Inc.’s Current Report on
Form 8-K dated and filed on February 24, 2022).
10.26
Second Amended and Restated Master Service Agreement, dated as of July 1, 2022, among Popular, Inc., Banco
Popular de Puerto Rico, and Evertec Group, LLC and its Subsidiaries (Incorporated by reference to Exhibit 99.1 on
Form 8-K filed on July 1, 2022.)
21.1
Schedule of Subsidiaries of Popular, Inc. (1)
22.1
Issuers of Guaranteed Securities (1)
23.1
Consent of Independent Registered Public Accounting Firm. (1)
31.1
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)
31.2
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)
32.1
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. (1)(2)
32.2
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. (1)(2)
101.INS
XBRL Instance
Document -
the instance
document does not
appear in the
Interactive Data File
because its XBRL
tags are embedded within the Inline Document. (1)
101.SCH
Inline XBRL Taxonomy Extension Schema Document (1)
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document (1)
101.DEF
Inline XBRL Taxonomy Extension Definitions Linkbase Document (1)
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document (1)
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document (1)
104
The cover page of Popular, Inc. Annual Report on Form 10-K for the
year ended December 31, 2022, formatted in
Inline XBRL (included within the Exhibit 101 attachments)
(1)
(1)
Included herewith
(2)
Furnished herewith. This
exhibit shall not
be deemed “filed”
for purposes of
Section 18 of
the Securities Exchange
Act of 1934, or otherwise subject
to the liability of that Section,
and shall not be deemed incorporated into
any filing
under the Securities Act of 1933 or the
Securities Exchange Act of 1934.
*
This exhibit is a management contract or compensatory
plan or arrangement.
Popular,
Inc. has
not filed
as exhibits
certain instruments
defining the rights
of holders
of debt
of Popular,
Inc. not
exceeding 10% of the
total assets of Popular,
Inc. and its consolidated
subsidiaries. Popular, Inc.
hereby agrees to
furnish
upon
request
to
the
Commission
a
copy
of
each
instrument
defining
the
rights
of
holders
of
senior
and
subordinated debt of Popular, Inc., or of any of its consolidated
subsidiaries.
48
Financial Review and
Supplementary Information
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
50
Statistical Summaries
106
Report of Management on Internal Control Over Financial
Reporting
109
Report of Independent Registered Public
Accounting Firm
110
Consolidated Statements of Financial Condition as of
December 31, 2022 and 2021
114
Consolidated Statements of Operations for the
years ended December 31, 2022, 2021 and
2020
115
Consolidated Statements of Comprehensive
Income for the years ended December 31, 2022,
2021 and
2020
116
Consolidated Statements of Changes in Stockholders’
Equity for the years ended December 31, 2022,
2021 and
2020
117
Consolidated Statements of Cash Flows for the
years ended December 31, 2022, 2021 and
2020
118
Notes to Consolidated Financial Statements
120
Signatures
261
49
Management’s Discussion and
Analysis of Financial Condition
and Results of Operations
Forward-Looking Statements
50
Overview
51
Critical Accounting Policies / Estimates
57
Statement of Operations Analysis
63
Net Interest Income
63
Provision for Credit Losses
66
Non-Interest Income
66
Operating Expenses
67
Income Taxes
69
Fourth Quarter Results
70
Reportable Segment Results
70
Statement of Financial Condition Analysis
72
Assets
72
Liabilities
74
Stockholders’ Equity
75
Regulatory Capital
76
Risk Management
80
Market / Interest Rate Risk
80
Liquidity
85
Enterprise Risk Management
104
Adoption of New Accounting Standards and Issued
but
Not Yet Effective Accounting Standards
105
Statistical Summaries
Statements of Financial Condition
106
Statements of Operations
107
Average Balance Sheet and Summary of Net Interest
Income
108
50
FORWARD-LOOKING STATEMENTS
This
Form
10-K contains
“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;
adverse economic
conditions, including
high levels
of
and ongoing
increases in
inflation
rates,
that
adversely
affect
housing prices,
the
job
market,
consumer
confidence
and
spending
habits
which
may
affect
in
turn,
among other
things, our
level of
non-performing assets,
charge-offs and
provision expense;
changes in
interest rates
and market
liquidity,
which may
reduce
interest margins,
impact funding
sources,
reduce
loan
originations,
affect
our
ability to
originate
and
distribute financial products in the primary and secondary markets and impact the value
of our investment portfolio and our ability to
return capital to our shareholders; 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
hurricane
recovery
assistance
and
the
rate
of
expenditure
of
such
funds,
as
well
as
the
financial
condition,
liquidity
and
cash
management
practices
of
the
Puerto
Rico
Government
and
its
instrumentalities;
unforeseen
or
catastrophic
events,
including
extreme weather
events, including hurricanes,
other natural
disasters, man-made disasters,
acts of
violence or
war or
pandemics,
epidemics and
other health-related crises,
including any
resurgence of
COVID-19, or
the fear
of any
such event
occurring, any
of
which could cause adverse
consequences for our business,
including, but not limited
to, disruptions in our
operations; our ability to
achieve the
expected benefits
from our
transformation initiative,
including our
ability to
achieve our
targeted sustainable
return on
tangible
common
equity
of
14% by
the
end
of
2025;
risks
related
to
Popular’s acquisition
of
certain
information technology
and
related assets formerly used by Evertec, Inc. to service certain of Banco Popular
de Puerto Rico’s key channels, as well as the entry
into amended
and restated
commercial agreements (the
“Evertec Business Acquisition
Transaction”), including
Popular’s ability to
successfully transition and integrate the assets
acquired as part of the
Evertec Business Acquisition 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
Evertec Business
Acquisition Transaction
or
that are not subject to indemnification or reimbursement by Evertec, Inc.;
and business and other risks arising from the extension of
Popular’s current
commercial
agreements
with
Evertec,
Inc.;
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; 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
our borrowers are located; the performance of the stock and bond
markets; competition
in the financial services
industry; possible legislative, tax
or regulatory changes; a
failure in or breach
of our operational
or security
systems or infrastructure
or those of
Evertec, Inc., our
provider of core
financial transaction processing and
information technology
services, or of
third parties providing
services to us,
including as a
result of cyberattacks,
e-fraud, denial-of-services and computer
intrusion, that
might result
in, among other
things, loss
or breach
of customer
data, disruption
of services,
reputational damage or
51
additional
costs
to
Popular;
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 branches
or business
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,”
is
inherently
uncertain and depends on judicial interpretations of law and the findings of regulators, judges and/or juries. Investors should refer to
“Part I, Item 1A” of this Form 10-K for a discussion
of certain risks and uncertainties to which
the Corporation is subject.
All forward-looking
statements included
in this
Form 10-K
are based
upon information
available to
Popular as
of the
date of
this
Form 10- K, 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,
commercial banking
services,
as well
as equipment
leasing and
financing, 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.
YEAR 2022 SIGNIFICANT EVENTS
Acquisition of Key Customer Channels and Amendments
to Commercial Contracts with Evertec
On July 1, 2022, BPPR completed the announced acquisition of certain assets from Evertec Group, LLC (“Evertec Group”), a wholly
owned
subsidiary
of
Evertec,
Inc.
(“Evertec”)
(NYSE:
EVTC),
to
service
certain
BPPR
channels
(the
“Business
Acquisition
Transaction”).
As
a
result
of
the closing
of
the Business
Acquisition Transaction,
BPPR
acquired
from
Evertec Group
certain critical
channels,
including
BPPR’s
retail
and
business
digital
banking
and
commercial
cash
management
applications.
In
connection
with
the
Business Acquisition Transaction, BPPR
also entered into amended and
restated service agreements with Evertec Group
pursuant
to
which
Evertec
Group
will
continue
to
provide
various
information
technology
and
transaction
processing
services
to
Popular,
BPPR and their respective subsidiaries.
Under the
amended service
agreements, Evertec
Group no
longer has
exclusive rights
to provide
certain of
Popular’s technology
services. The
amended service
agreements include
discounted pricing
and lowered
caps on
contractual pricing
escalators tied
to
the Consumer Price Index. As
part of the transaction, BPPR and Evertec
also entered into a revenue sharing
structure for BPPR in
connection
with
its
merchant
acquiring
relationship
with
Evertec.
Under
the
terms
of
the
amended
and
restated
Master
Service
Agreement (“MSA”), Evertec will be entitled to receive monthly payments
from the Corporation to the extent that Evertec’s revenues,
covered under the MSA, fall below certain agreed
annualized minimum amounts.
As consideration for the
Business Acquisition Transaction, BPPR delivered
to Evertec Group 4,589,169 shares
of Evertec common
stock valued at closing at $169.2 million (based on Evertec’s stock price on June 30, 2022 of $36.88). A total of $144.8 million of the
consideration for
the transaction
was attributed
to the
acquisition of
the critical
channels of
which $28.7
million were
attributed to
software
intangible
assets
and
$116.1
million
were
attributed
to
goodwill.
The
transaction
was
accounted
for
as
a
business
combination.
The
remaining
$24.2
million
was
attributed
to
the
renegotiation of
the
MSA
with
Evertec
and
was
recorded
as
an
52
expense. The Corporation also recorded a credit of $6.9 million in Evertec billings under the MSA during the third quarter of 2022 as
a result of the Business Acquisition Transaction, resulting in a net
expense charge for the quarter of $17.3
million.
On
August
15,
2022,
the
Corporation
completed
the
sale
of
its
remaining
7,065,634
shares
of
common
stock
of
Evertec
(the
“Evertec Stock Sale”, and collectively
with the Business Acquisition Transaction,
the “Evertec Transactions”). Following
the Evertec
Stock
Sale, Popular
no longer
owns any
Evertec common
stock. The
impact of
the
gain on
the sale
of
Evertec shares
used as
consideration
for
the
Business
Acquisition
Transaction
in
exchange
for
the
acquired
applications
on
July
1,
2022
and
the
net
expense associated with the renegotiation of the MSA resulted in an
after-tax gain of $97.9 million, while the Evertec Stock Sale and
the related
accounting adjustments resulted
in an after-tax
gain of $128.8
million, recorded during
the third quarter
of 2022, for
an
aggregate after-tax gain of $226.6 million.
Transformation Initiative:
Leveraging the completion
of the Evertec
Transactions, the
Corporation embarked on
a broad-based multi-year,
technological and
business
process
transformation
during
the
second
half
of
2022.
The
needs
and
expectations
of
our
clients,
as
well
as
the
competitive landscape, have evolved, requiring us to make important investments in our technological infrastructure and adopt more
agile practices.
Our technology and business
transformation will be a
significant priority for the
company over the next
three years
and beyond.
Through December
31, 2022,
excluding compensation
costs of
our employees
involved in
the initiative,
we expensed
$24 million
toward this effort,
primarily in professional
fees and technology
related expenses. As
part of this
transformation, we aim
to expand
our digital capabilities,
modernize our technology
platform, and implement
agile and efficient
business processes across
the entire
company.
In
2023,
we
plan
an
expense
of
approximately
$50
million
toward
this
effort,
excluding
employee
compensation
and
capitalized costs.
We
expect the
expenses tied
to
this transformation
initiative, which
will continue
through 2025
to
result in
an
enhanced digital experience for our clients, as well as better technology and more efficient processes for our employees. We expect
this effort to contribute to better efficiency
and higher earnings, resulting in a targeted sustainable return on tangible common equity
of 14% by the end of 2025.
To
facilitate
the
transparency
of
the
progress
with
these
efforts,
effective
in
the
fourth
quarter
of
2022,
the
Corporation
has
separated
technology,
professional
fees
and
transactional
activities
as
standalone
expense
categories
in
the
accompanying
Consolidated Statement of Operations. Refer to additional
information in the Operating expenses section
of this MD&A.
Capital Actions
On July 12,
2022, the Corporation completed
an accelerated share repurchase
(“ASR”) program for the
repurchase of $400 million
of
Popular’s
common
stock
for
which
an
initial
delivery
of
3,483,942
shares
were
delivered
in
March
2022
(the
“March
ASR
Agreement”). Upon
the final
settlement of
the March
ASR Agreement,
the Corporation
received an
additional 1,582,922 shares
of
common stock.
The Corporation
repurchased a
total of
5,066,864 shares
at an
average purchase
price of
$78.9443, which
were
recorded as treasury stock by $440 million under
the March ASR Agreement.
On December 7, 2022, the Corporation completed
the settlement of another ASR agreement (the
“August ASR Agreement”) for the
repurchase of
$231 million
of Popular’s
common stock,
for which
an initial
2,339,241 shares
were delivered
on August
26, 2022.
Upon the final
settlement of the
August ASR Agreement, the
Corporation received an additional
840,024 shares of common
stock.
The Corporation repurchased a total of
3,179,265 shares at an average purchase price
of $72.66, which were recorded as treasury
stock by $245 million under the August ASR Agreement.
Hurricanes Fiona and Ian
On September
18, 2022,
Hurricane Fiona made
landfall in
the southwest
area of
Puerto Rico
as a
Category 1
hurricane, bringing
record rainfall and flooding throughout the island and affecting communities where BPPR does business. Hurricane Fiona’s rain and
winds
caused
a
complete
blackout
on
the
island
and
caused
considerable
damage
to
certain
sectors
in
the
southwest
region.
President
Biden
issued
a
disaster
declaration
for
the
island.
While
the
impact
to
BPPR’s
operation
was
not
material,
certain
customers, highly concentrated in certain municipalities, were
impacted by the disaster.
53
As
part
of
hurricane
relief
efforts
on
the
island,
the
Corporation
waived
late-payment
fees
on
individual
lending
products
from
September 16 through October 31, 2022. Popular also waived, through September 30, withdrawal fees payable by our customers at
ATMs
outside of
the Popular
network and
fees payable
by customers
of other
banking institutions
at Popular’s ATMs.
In addition,
the Corporation
offered to
clients impacted
by the
hurricane a
moratorium of
up to
three monthly
payments, up
to December
31,
2022, on
personal and
commercial credit
cards, auto
loans, leases
and personal
loans, subject
to certain
eligibility requirements.
Mortgage clients
may also
benefit from
different payment
relief alternatives
available, depending
on their
type of
loan. Loan
relief
options for commercial clients are reviewed on a case-by-case
basis.
Separately,
on September 28,
2022, Hurricane Ian made
a landfall on
the west coast
of central Florida
as a Category
4 hurricane,
causing extensive
floods and
destruction in
the impacted
areas in
Florida. President
Biden made
a major
disaster declaration
for
certain counties
in central
Florida. PB
and BPPR
do not
have significant
operations in
the area
but have
some limited
retail and
commercial clients who reside or have business activities
in the impacted areas.
For
clients
impacted
by
the
hurricane
that
reside
in
counties
in
Florida declared
as
disaster zones
by
President
Biden,
Popular
offered a moratorium
for up to
three payments, up to
January 31, 2023, subject
to certain eligibility requirements.
As in the case
of
Puerto Rico, relief options for commercial clients
are reviewed on a case-by-case basis.
Refer to the Credit Risk section of this MD&A
for additional information of the loan moratorium
offered to clients.
Transfer of Securities from Available-for Sale to Held-To-Maturity
In October 2022, the
Corporation transferred U.S. Treasury securities
with a fair value
of $6.5 billion (par value
of $7.4 billion) from
its available-for-sale portfolio to its held-to-maturity portfolio. Management changed its intent, given its ability to hold these securities
to maturity
due to
the Corporation’s
liquidity position
and its
intention to
reduce the
impact on
accumulated other
comprehensive
income (loss) (“AOCI”) and tangible capital of further
increases in interest rates.
The
securities
were reclassified
at
fair value
at the
time
of
the transfer.
At
the
date of
the transfer,
these
securities
had
pre-tax
unrealized
losses
of
$873.0
million
recorded
in
AOCI.
This
fair
value
discount
is
being
accreted
to
interest
income
and
the
unrealized loss remaining in
AOCI is being amortized,
offsetting each other through
the remaining life of
the securities. There were
no realized gains or losses recorded as a result
of this transfer.
While changes
in the
amount of
unrealized gains
and losses
in AOCI
have an
impact on
the Corporation’s
and its
wholly-owned
banking
subsidiaries’
tangible
capital
ratios,
they
do
not
impact
regulatory
capital
ratios,
in
accordance
with
the
regulatory
framework.
Refer
to
Note
7
to
the
Consolidated
Financial
Statements
which
presents
information
about
the
Corporation’s
Debt
Securities Held-to-Maturity for additional details
Partial Release of the Deferred Tax Asset Valuation Allowance
During the
fourth quarter
of 2022,
the Corporation
recorded a
partial reversal
of the
deferred tax
asset valuation
allowance of
the
U.S. operations of $68.2 million. As
of December 31, 2022, the deferred tax
asset (“DTA”) for
the U.S. operations, mainly related to
net
operating
losses
(“NOLs”),
was
valued
at
$278
million,
net
of
the
corresponding
valuation
allowance
of
$402
million.
The
reversal during
the fourth
quarter was
determined based
on management’s
expectation of
the realization
of additional
amounts of
federal
and
state
NOLs
over
their
remaining
carryover
period.
The
determination
was
based
on
the
U.S.
operations’
sustained
profitability during the
years ended December 31,
2021 and 2022,
together with evidence of
stable credit metrics
and the length
of
the expiration of the net operating losses. As of December 31, 2022, the Corporation had approximately $525 million in
DTA related
to federal
NOLs with
expiration dates
between 2028
and 2033
and approximately
$135 million
in DTA
related to
state NOLs
with
expiration dates between 2030 and 2036.
54
Table 1 - Selected Financial Data
Years ended December
31,
(Dollars in thousands, except per common share data)
2022
2021
2020
CONDENSED STATEMENTS
OF OPERATIONS
Interest income
$
2,465,911
$
2,122,637
$
2,091,551
Interest expense
298,552
165,047
234,938
Net interest income
2,167,359
1,957,590
1,856,613
Provision for credit losses (benefit)
83,030
(193,464)
292,536
Non-interest income
897,062
642,128
512,312
Operating expenses
1,746,420
1,549,275
1,457,829
Income tax expense
132,330
309,018
111,938
Net income
$
1,102,641
$
934,889
$
506,622
Net income applicable to common stock
$
1,101,229
$
933,477
$
504,864
PER COMMON SHARE DATA
Net income per common share - basic
$
14.65
$
11.49
$
5.88
Net income per common share - diluted
14.63
11.46
5.87
Dividends declared
2.20
1.75
1.60
Common equity per share
56.66
74.48
71.30
Market value per common share
66.32
82.04
56.32
Outstanding shares:
Average - basic
75,147,263
81,263,027
85,882,371
Average - assuming dilution
75,274,003
81,420,154
85,975,259
End of period
71,853,720
79,851,169
84,244,235
AVERAGE BALANCES
Net loans
[1]
$
30,405,281
$
29,074,036
$
28,384,981
Earning assets
69,729,933
68,088,675
56,404,607
Total assets
72,808,604
71,168,650
59,583,455
Deposits
64,716,404
63,102,916
51,585,779
Borrowings
1,119,878
1,255,495
1,321,772
Total stockholders'
equity
6,009,225
5,777,652
5,419,938
PERIOD END BALANCE
Net loans
[1]
$
32,083,150
$
29,299,725
$
29,484,651
Allowance for credit losses - loans portfolio
720,302
695,366
896,250
Earning assets
64,251,062
72,103,862
62,989,715
Total assets
67,637,917
75,097,899
65,926,000
Deposits
61,227,227
67,005,088
56,866,340
Borrowings
1,400,319
1,155,166
1,346,284
Total stockholders'
equity
4,093,425
5,969,397
6,028,687
SELECTED RATIOS
Net interest margin (non-taxable equivalent basis)
3.11
%
2.88
%
3.29
%
Net interest margin (taxable equivalent basis) -Non-GAAP
3.46
3.19
3.62
Return on assets
1.51
1.31
0.85
Return on common equity
18.39
16.22
9.36
Tier I capital
16.45
17.49
16.33
Total capital
18.26
19.35
18.81
[1] Includes loans held-for-sale.
55
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
in
Table
3
for
the
year
ended
December 31,
2022
as compared
with
the same
period in
2021, 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.
Net interest
income, on
a taxable
equivalent basis,
as 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,
2022
The Corporation’s net income for the year ended December 31, 2022 amounted to
$1.1 billion, compared to a net income of $934.9
million for 2021.
The discussion
that follows
provides highlights
of the
Corporation’s results
of
operations for
the year
ended December
31, 2022
compared to the results of
operations of 2021. 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. For
a discussion
of our
2021 results
of operations compared
with 2020,
see “Management’s
Discussion and
Analysis of
Financial Condition
and Results
of Operations”
in our
Annual Report
on Form
10-K for
the year
ended December
31,
2021.
56
Table 2 - Components of Net
Income as a Percentage of Average Total
Assets
2022
2021
2020
Net interest income
2.98
%
2.75
%
3.12
%
Provision for credit (losses) benefit
(0.11)
0.27
(0.49)
Mortgage banking activities
0.06
0.07
0.02
Net (loss) gain and valuation adjustments on investment
securities
(0.01)
-
0.01
Other non-interest income
1.18
0.83
0.83
Total net interest
income and non-interest income, net of provision
for credit losses
4.10
3.92
3.49
Operating expenses
(2.40)
(2.18)
(2.45)
Income before income tax
1.70
1.74
1.04
Income tax expense
(0.19)
(0.43)
(0.19)
Net income
1.51
%
1.31
%
0.85
%
Net interest income for the
year ended December 31, 2022 was
$2.2 billion, an increase of $209.8
million when compared to 2021.
The
increase in
net interest
income was
mainly
driven
by
higher interest
income
from
money market
investments due
to
higher
interest rates,
higher income
from investment
securities and
higher interest
income from
commercial and
consumer loans
due to
higher volumes and
yields. The
net interest margin
for the year
ended December 31,
2022 was 3.11
%
compared to 2.88%
for the
same period in 2021, driven by higher average volume of earning assets
and higher interest rates as the Federal Reserve increased
the Federal Funds Rate
during 2022.
On a taxable equivalent
basis, net interest margin was
3.46% in 2022, compared to
3.19% in
2021. Refer to the Net Interest Income section
of this MD&A for additional information.
The
Corporation’s total
provision for
credit losses
reflected an
expense of
$83.0 million
for the
year ended
December 31,
2022,
compared to
a reserve
release of
$193.5 million
for
2021. The
expense for
the year
2022
was mostly
driven by
changes in
the
economic scenario, higher loan volumes
and changes in credit
quality.
The Corporation continued to exhibit
favorable credit quality
trends
with
low
levels
of
net
charge-offs
and
decreasing
non-performing loans.
Non-performing assets
totaled
$528.6
million
at
December 31, 2022, reflecting a decrease of $104.4 million when compared to December 31, 2021. 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,
2022
amounted
to
$897.1
million,
an
increase
of
$254.9
million,
when
compared with 2021, mostly due to:
the $257.7 million gain related to the
Evertec Transactions and related accounting adjustments
and
higher
service
fees
due
to
higher credit
card
fees
and
merchant
network
business fees
as
a
result
of
the
revenue sharing
agreement entered
into
in connection
with the
Evertec Transactions.
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 $1.7 billion for the year 2022, reflecting an increase of
$197.1 million, when compared to the
same period
in 2021,
mainly due
to higher
personnel costs
reflecting salary increases
and a
higher headcount,
professional fees,
technology
and
software
expenses,
reflecting
the
impact
of
the
investment
in
the
transformation
initiative,
higher
business
promotions expense
driven by
customer loyalty
programs and
a $17.3
million expense
associated with
the Evertec
Transactions.
Refer to the Operating Expenses section of this MD&A
for additional information.
Income tax expense
amounted to $132.3 million
for the year
ended December 31, 2022,
compared with an
income tax expense of
$309.0 million
for the
previous year.
The decrease
in income
tax expense
for the
year is
mainly due
to
the impact
of the
partial
reversal of the deferred tax asset valuation allowance of the U.S. Operations and, higher taxable income that was exempt or subject
to preferential tax rates. 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, 2022,
the Corporation’s
total assets
were $67.6
billion, compared
with $75.1
billion at
December 31,
2021. The
decrease of $7.5 billion is mainly driven by lower money market
investments due to a decrease in deposits mainly
in the Puerto Rico
57
public sector, partially offset
by an increase in loans held-in-portfolio mainly in the commercial and
consumer portfolios.
Refer to the
Statement of Financial Condition Analysis section of
this MD&A for additional information.
Deposits amounted to
$61.2 billion at
December 31, 2022,
compared with $67.0
billion at December
31, 2021. Table
8 presents a
breakdown of deposits
by major categories. The
decrease in deposits was
mainly due to
lower Puerto Rico
public sector deposits.
The
Corporation’s
borrowings
amounted
to
$1.4
billion
at
December 31,
2022,
compared
to
$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
7
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 amounted to $4.1 billion at December 31, 2022, compared to
$6.0 billion at December 31, 2021. The decrease
was principally due to
higher accumulated unrealized losses on debt
securities available-for-sale and the impact of
two accelerated
share
repurchase
transactions
completed
during
2022,
declared
dividends,
partially
offset
by
net
income
for
the
year.
The
Corporation and its
banking subsidiaries continue to
be well-capitalized at December
31, 2022. The Common
Equity Tier
1 Capital
ratio at December 31, 2022 was 16.39%, compared
to 17.42% at December 31, 2021.
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 is
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.
58
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.
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.
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,
2022, 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
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.
59
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
to
the
Consolidated
Financial Statements. 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. These loans
follow the same nonaccrual policies as non-PCD loans. Modifications of PCD
loans that meet the definition of a
TDR 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
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.
60
For the
evaluation of
the realization
of the
deferred tax
asset by
taxing jurisdiction,
refer to
Note 35
to the
Consolidated Financial
Statements.
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 the 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.
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.
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
61
permitted under applicable accounting standards. For a detailed description of the annual goodwill impairment evaluation performed
by the Corporation during the third quarter of 2022,
refer to Note 15 to the Consolidated Financial
Statements.
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,
2022
was
$619.9
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
2023 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,
2023;
for
example, 8.5%
for
large
cap
stocks,
8.8% for
small cap
stocks,
9.0% for
international stocks,
6.1% for
long
corporate
bonds
and
4.9%
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 increased its expected return
on plan assets for year
2023 to 5.9% and 6.5%
for the Pension
Plans. Expected rates
of return of
4.3% and 5.4%
had been used
for 2022 and
4.6% and 5.5%
had been used
for
2021 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.
Net Periodic
Benefit Cost
(“pension expense”)
for the
Pension Plans
amounted to
a net
benefit of
$0.5 million
in 2022.
The total
pension expense included a benefit of $35.4 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
2022 from
5.9% to
5.65% would
increase the
projected 2023
pension expense
for the
Banco Popular
de Puerto
Rico Retirement
Plan, the Corporation’s largest plan, by approximately
$1.4 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
to
the
Consolidated
Financial
Statements.
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 liability of $8.3
million at December 31, 2022.
62
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
5.34%
to
5.37%
for
the
Pension Plans and 5.42% for the OPEB Plan to determine
the benefit obligations at December 31, 2022.
A 50
basis point
decrease to
each of
the rates
in the
December 31,
2022 Willis
Towers
Watson RATE:
Link (10/90)
Model would
increase the
projected 2023
expense for
the Banco
Popular de
Puerto Rico
Retirement Plan
by approximately
$1.8 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, 2022. The Corporation had recorded a liability for
the underfunded postretirement benefit obligation of
$118.3 million at December 31, 2022.
63
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 borrowed money.
Various risk factors
affect net interest income including the economic environment in
which we operate, market related events, the mix
and size of the earning assets and
related funding, changes in volumes, repricing
characteristics,
loan
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,
2022
was $2.2
billion
or
$209.8
million
higher than
in
2021.
Net
interest
income, on a taxable equivalent basis, for
the year ended December 31, 2022 was $2.4 billion
compared to $2.2 billion in 2021.
The average key index rates for the years 2022 and
2021 were as follows:
2022
2021
Prime rate………………………………………………………………………………………………….
4.86%
3.25%
Fed funds rate…………………………………………………………………………………………….
1.86
0.25
3-month Treasury Bill…………………………………………………………………………………….
2.01
0.03
10-year Treasury………………………………………………………………………………………….
2.95
1.44
FNMA 30-year…………………………………………………………………………………………….
4.26
1.84
Average
outstanding securities
balances are
based upon
amortized cost
excluding any
unrealized gains
or losses
on securities.
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,
2022, included $44.6
million related to
those items, compared
to $131.5 million
for the
same period in
2021.
The year over
year decrease is
related to lower
amortized fees resulting from
the forgiveness of
PPP loans by
$55.7 million, lower
discount amortization on commercial loans by $16.3 million mainly driven by lower
interest from cancellation of PCD loans and $6.6
million lower amortization of the fair value discount
of the auto 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,
2022, as compared
with the same
period in 2021,
segregated by major
categories of interest
earning assets
and
interest-bearing
liabilities.
Net
interest
margin
was
3.11%
in
2022
or
23
basis
points
higher
than
the
2.88%
reported
in
2021. The
higher
net
interest
margin
for
the
year
is
driven
by
$1.6
billion
higher
average
volume
of
earning
assets
and
higher
interest rates as
the Federal Reserve
increased the Federal
Funds Rate by
425 basis points
during 2022. On
a taxable equivalent
basis, net interest margin
was 3.46% in 2022, compared to 3.19%
in 2021, an increase
of 27 basis points.
The main drivers for the
increase in net interest income on a taxable equivalent
basis were:
Positive variances:
●
Higher interest income
from money market
investments by $96.9
million due to
higher interest rates
by 111
basis points,
partially offset by lower volume by $6.5 billion,
as part of the liquidity was deployed to
purchase investment securities and
fund loan growth;
●
Higher interest income from investment securities by
$156.1 million due to a higher volume
by $6.8 million;
●
Higher interest income from loans by $130.1
million due to:
●
Increase in commercial loan Interest
income by $71.4 million driven
by a higher average
volume of loans by
$1.1
billion
and
higher
yield
by
7
basis
points
as
the
origination
of
loans
occurs
in
a
higher
interest
rate
scenario and
the positive
impact on
the repricing
of adjustable-rate
loans, partially
offset by
lower amortized
fees
resulting
from
the
forgiveness
of
PPP
loans
by
$55.7
million
and
lower
discount
amortization
on
commercial loans by $16.3 million mainly from
cancellation of PCD loans;
64
●
Higher interest income from
consumer loans by $44.8
million resulting from a
higher volume by $280
million
and higher
yield by
49 basis
points, driven
by the
increase in
personal loans
year over
year and
increase in
credit cards volume.
Partially offset by:
●
Higher interest
expense on
deposits by
$141.2
million
due to
the increase
in interest
cost
by
29 basis
points
resulting
mainly from a
higher cost of
the fully indexed
Puerto Rico government
deposits and the
increase in cost
of Popular U.S.
deposits.
Under the
terms
of
BPPR’s
deposit pricing
agreement with
Puerto
Rico
public sector,
public funds
rates
are
market linked
with a
lag minus
a specified
spread. As
such, if
short-term interest
rates continue
to
increase, we
would
expect the costs
of public funds
to continue to
increase. This source
of funding still
results in an
attractive spread under
market rates.
65
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
2022
2021
Variance
2022
2021
Variance
2022
2021
Variance
Rate
Volume
(In millions)
(In thousands)
$
9,531
$
16,000
$
(6,469)
1.24
%
0.13
%
1.11
%
Money market investments
$
118,079
$
21,147
$
96,932
$
108,780
$
(11,848)
29,743
22,931
6,812
2.23
2.22
0.01
Investment securities [1]
664,278
508,131
156,147
16,116
140,031
51
84
(33)
5.94
5.16
0.78
Trading securities
3,049
4,339
(1,290)
600
(1,890)
Total money market,
investment and trading
39,325
39,015
310
2.00
1.37
0.63
securities
785,406
533,617
251,789
125,496
126,293
Loans:
14,562
13,455
1,107
5.46
5.39
0.07
Commercial
795,115
723,765
71,350
10,997
60,353
778
849
(71)
6.29
5.41
0.88
Construction
48,920
45,821
3,099
7,172
(4,073)
1,475
1,289
186
5.92
6.00
(0.08)
Leasing
87,274
77,356
9,918
(1,093)
11,011
7,322
7,696
(374)
5.34
5.09
0.25
Mortgage
391,133
392,047
(914)
18,584
(19,498)
2,743
2,463
280
11.66
11.17
0.49
Consumer
319,920
275,078
44,842
11,546
33,296
3,525
3,322
203
8.02
8.47
(0.45)
Auto
282,533
280,722
1,811
(14,833)
16,644
30,405
29,074
1,331
6.33
6.19
0.14
Total loans
1,924,895
1,794,789
130,106
32,373
97,733
$
69,730
$
68,089
$
1,641
3.89
%
3.43
%
0.46
%
Total earning assets
$
2,710,301
$
2,328,406
$
381,895
$
157,869
$
224,026
Interest bearing deposits:
$
25,884
$
25,959
$
(75)
0.61
%
0.12
%
0.49
%
NOW and money market [2]
$
158,664
$
31,911
$
126,753
$
127,953
$
(1,200)
15,886
15,429
457
0.20
0.18
0.02
Savings
32,400
27,123
5,277
4,983
294
6,853
7,028
(175)
0.90
0.75
0.15
Time deposits
61,781
52,587
9,194
10,241
(1,047)
48,623
48,416
207
0.52
0.23
0.29
Total interest bearing
deposits
252,845
111,621
141,224
143,177
(1,953)
206
92
114
2.78
0.35
2.43
Short-term borrowings
5,737
318
5,419
2,030
3,389
Other medium and
939
1,185
(246)
4.26
4.49
(0.23)
long-term debt
39,970
53,107
(13,137)
63
(13,200)
Total interest bearing
49,768
49,693
75
0.60
0.33
0.27
liabilities
298,552
165,046
133,506
145,270
(11,764)
16,094
14,687
1,407
Demand deposits
3,868
3,709
159
Other sources of funds
$
69,730
$
68,089
$
1,641
0.43
%
0.24
%
0.19
%
Total source of funds
298,552
165,046
133,506
145,270
(11,764)
3.46
%
3.19
%
0.27
%
Net interest margin/ income
on a taxable equivalent basis
(Non-GAAP)
2,411,749
2,163,360
248,389
$
12,599
$
235,790
3.29
%
3.10
%
0.19
%
Net interest spread
Taxable equivalent
adjustment
244,390
205,770
38,620
3.11
%
2.88
%
0.23
%
Net interest margin/ income
non-taxable equivalent basis
(GAAP)
$
2,167,359
$
1,957,590
$
209,769
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 balances exclude unrealized gains or losses
on debt securities available-for-sale and the unrealized
loss related to certain securities transferred
from available-for-sale to held-to-maturity.
[2] Includes interest bearing demand deposits corresponding
to certain government entities in Puerto Rico.
66
Provision for Credit Losses - Loans Held-in-Portfolio
and Unfunded Commitments
For the
year ended
December 31,
2022, the
Corporation recorded
an expense
of $84.2
million for
its allowance
for credit
losses
(“ACL”) related to loans held-in-portfolio and unfunded commitments, compared with a reserve release of $191.3 million for the year
ended
December
31,
2021.
The
provision
expense
related
to
the
loans-held-in-portfolio
for
the
year
2022
was
$83.3
million,
compared
to
a
reserve
release
of
$183.3
million
for
the
year
2021.
The
reserve
increase
is
mostly
driven
by
changes
in
the
economic scenario, higher loan
volumes and changes in
credit quality.
The updated economic scenarios
used to estimate the
ACL
on December
31, 2022
considered an
expected slowdown in
the economy
as a
result of
tight monetary
policy,
weaker job
growth
and persistent inflation. The reserve release recorded in 2021 was driven
by the release of Covid-related reserves recorded in 2020.
The provision for
unfunded commitments for
the year 2022
reflected an expense
of $0.9 million,
compared to a
reserve release of
$8.0 million for the same period of 2021.
The provision expense related
to loans held-in-portfolio for
the BPPR segment was
$69.5 million for the
year ended December 31,
2022, compared to
a reserve release
of $129.0 million
for the
year ended December
31, 2021, an
unfavorable variance of
$198.6
million. The provision expense related to loans held-in-portfolio for
the Popular U.S. segment was $13.8 million for the year 2022, an
unfavorable variance of $68.1 million, compared to
a reserve release of $54.3 million for
the year 2021.
At
December
31,
2022,
the
total
allowance
for
credit
losses
for
loans
held-in-portfolio amounted
to
$720.3
million,
compared
to
$695.4
million
as
of
December
31,
2021.
The
ratio
of
the
allowance
for
credit
losses
to
loans
held-in-portfolio
was
2.25%
at
December
31,
2022, compared
to
2.38%
at
December 31,
2021. Refer
to
Note
9
to
the
Consolidated Financial
Statements, for
additional information on the Corporation’s methodology to estimate its ACL. As discussed therein, within the process to estimate its
ACL, the Corporation applies probability weights to the
outcomes of simulations using Moody’s Analytics’ Baseline, S3 (pessimistic)
and
S1
(optimistic) scenarios.
The baseline
scenario is
assigned the
highest probability,
followed
by the
pessimistic scenario.
In
addition,
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.
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,
2022,
the
Corporation recorded a reserve release of
$1.2 million, compared to a reserve
release of $2.2 million for the
year ended December
31, 2021. At
December 31, 2022,
the total allowance
for credit losses
for this portfolio
amounted to $6.9
million, compared to
$8.1
million as of December 31, 2021. Refer to Note 7 to the Consolidated Financial Statements for additional information on the ACL for
this portfolio.
Non-Interest Income
For the
year ended December
31, 2022, non-interest
income increased by
$254.9 million, when
compared with the
previous year.
The results for the year 2022 included a $257.7 million gain related to the Evertec
Transactions and related accounting adjustments.
Other factors that contributed to the variance in non-interest
income were:
●
higher other service fees by $22.8 million, principally at the BPPR segment, due to higher credit card fees by $18.9 million
mainly in interchange income resulting from higher customer purchase activity and higher fees from the merchant network
business by $6.7 million due to the revenue sharing
agreement entered into in connection with
the Evertec Transactions;
●
a
favorable
adjustment
of
$9.2
million
in
the
fair
value
of
the
contingent
consideration
related
to
purchase
price
adjustments
for
the
acquisition
of
the
K2
Capital
Group
LLC
business
in
2021
(‘’K2
Acquisition’’),
as
the
Corporation
updated its estimates related to the ability to realize
the earnings targets for the contingent payment; and
●
a gain of $8.2 million from the sale of an
investment which had been previously written off;
partially offset by:
67
●
lower service charges on deposit accounts by $5.5 million, mainly at BPPR, due to lower overdraft related charges, in part
due to the
Corporation’s determination of
eliminating insufficient funds
fees and modifying
overdraft fees effective
on the
third quarter of 2022 and lower cash management service charges from commercial clients due to higher earnings credits
on transactional accounts driven by the current interest
rate environment;
●
lower
income
from
mortgage
banking
activities
by
7.7
million
mainly
due
to
lower
gains
from
loan
securitization
and
valuation adjustments
on loans
held for
sale
by
$21.9 million,
impacted by
the
Corporation’s determination
in the
third
quarter of 2022 to
retain certain guaranteed loans as
held for investment; partially offset
by a favorable variance of
$10.4
million in the
fair value adjustments for
mortgage servicing rights driven
by slower projected prepayments
in the serviced
portfolio and higher gains from closed derivative
positions by $5.3 million;
●
an unfavorable variance of $7.5 million on the fair value adjustments to the portfolio of equity securities related to deferred
benefit plans, which have an offsetting effect recorded as
lower personnel costs; and
●
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.
Operating Expenses
As discussed
in the
significant events
section of
this MD&A,
to facilitate
the transparency
of the
progress with
the transformation
initiative and
to better
portray the
level of
technology related
expenses categorized
by the
nature of
the expense,
effective in
the
fourth
quarter
of
2022,
the
Corporation
has
separated
technology,
professional
fees
and
transactional
activities
as
standalone
expense categories
in the
accompanying Consolidated
Statements
of
Operations. There
were no
changes to
the total
operating
expenses presented.
Prior periods amount in the financial
statements and related disclosures have been reclassified to conform
to
the current presentation.
Table 4 provides the detail of the reclassifications for each respective year.
Table 4 - Operating Expen
ses Reclassification
2021
2020
Financial statement line item
As reported
Adjustments
Adjusted
As reported
Adjustments
Adjusted
Equipment expenses
$
92,097
$
(59,178)
$
32,919
$
88,932
$
(56,418)
$
32,514
Professional services
410,865
(284,144)
126,721
394,122
(261,708)
132,414
Technology and
software expenses
-
277,979
277,979
-
263,886
263,886
Processing and transactional services
-
121,367
121,367
-
112,039
112,039
Communications
25,234
(11,205)
14,029
23,496
(10,266)
13,230
Other expenses
136,988
(44,819)
92,169
128,882
(47,533)
81,349
Net effect on operating expenses
$
665,184
$
-
$
665,184
$
635,432
$
-
$
635,432
68
Table 5 provides a breakdown of operating expenses by major categories.
Table 5 - Operating Expenses
Years ended December
31,
(In thousands)
2022
2021
2020
Personnel costs:
Salaries
$
432,910
$
371,644
$
370,179
Commissions, incentives and other bonuses
155,889
142,212
78,582
Pension, postretirement and medical insurance
56,085
52,077
44,123
Other personnel costs, including payroll taxes
74,880
65,869
71,321
Total personnel
costs
719,764
631,802
564,205
Net occupancy expenses
106,169
102,226
119,345
Equipment expenses
35,626
32,919
32,514
Other taxes
63,603
56,783
54,454
Professional fees
172,043
126,721
132,414
Technology and
software expenses
291,902
277,979
263,886
Processing and transactional services:
Credit and debit cards
45,455
40,383
40,903
Other processing and transactional services
81,690
80,984
71,136
Total processing
and transactional services
127,145
121,367
112,039
Communications
14,885
14,029
13,230
Business promotion:
Rewards and customer loyalty programs
51,832
38,919
30,380
Other business promotion
37,086
34,062
27,228
Total business
promotion
88,918
72,981
57,608
FDIC deposit insurance
26,787
25,579
23,868
Other real estate owned (OREO) income
(22,143)
(14,414)
(3,480)
Other operating expenses:
Operational losses
32,049
38,391
26,331
All other
77,397
53,778
55,018
Total other operating
expenses
109,446
92,169
81,349
Amortization of intangibles
3,275
9,134
6,397
Goodwill impairment charge
9,000
-
-
Total operating
expenses
$
1,746,420
$
1,549,275
$
1,457,829
Personnel costs to average assets
0.99
%
0.89
%
0.95
%
Operating expenses to average assets
2.40
2.18
2.45
Employees (full-time equivalent)
8,813
8,351
8,522
Average assets per employee (in millions)
$8.26
$8.52
$6.99
Operating expenses
for the
year ended
December 31,
2022 increased
by $197.1
million, when
compared with
the previous
year.
The increase in operating expenses was driven
primarily by:
●
Higher
personnel
costs
by
$88.0
million
mainly
due
to
higher
salaries
expense
by
$61.3
million
as
a
result
of
market
adjustments,
annual salary
revisions and
an increase
in headcount,
higher commission
and incentives
by $13.7
million,
due to higher headcount, salary revisions and, in part, profit-sharing expense and higher payroll taxes and fringe benefits,
including health and retirement benefits, reflecting
the overall increase in salary base;
●
Higher net occupancy expense by $3.9 million mainly due to BPPR’s lower rental income
due to the sale of two corporate
office buildings during the third quarter of 2021,
coupled with higher rent expense related to the space remaining occupied
by BPPR;
69
●
Higher other taxes by
$6.8 million mainly due to
an increase in personal property
tax expense and a higher
base used to
estimate an annual Puerto Rico regulatory license
fee;
●
Higher professional fees by $45.3 million primarily due
to Corporate initiatives including $22 million related to
a multi-year
corporate transformation
initiative to
expand the
Corporation’s digital
capabilities, modernize
its technology
platform and
implement agile and efficient business processes;
●
Higher technology and software
expenses by $13.9
million mainly due
to higher software
amortization expense by $10.3
million, including
$2.4 million
related to
the software
intangible assets acquired
as part
of the
Evertec Transactions,
and
higher
IT
professional
fees
and
network
management
expense
by
$15.5
million
due
to
various
ongoing
technology
projects; partially offset
by a decrease in
charges related to internet
banking of $9.6 million
and lower application hosting
expense reflecting savings as a result of the Evertec
Transactions;
●
Higher
processing
and
transactional
services
by
$5.8
million
mainly
due
to
higher
credit
and
debit
card
processing
expense as
a result
of higher transactional
volumes, reflecting
an increase in
customer purchase activity;
partially offset
by lower merchant processing
due to higher incentives received
during the year related to
the ATH
Network Participation
Agreement entered into in connection with the
Evertec Transactions;
●
Higher business promotion expense by $15.9 million mainly due to higher customer reward program expense in our credit
card business by $12.9
million, reflecting an increase
in customer purchase activity,
higher sponsorship expense by $1.5
million and higher donations by $1.2
million, including hurricane related donations;
●
Higher
total
other
operating
expenses,
including
operational
losses,
by
$17.3
million
mainly
due
to
the
$17.3
million
expense related to the Evertec Transactions;
net of $6.9 million in credits received in
connection with this transaction and
higher gain on sale of foreclosed auto units by
$6.6 million; offset by $6.5 million of lower sundry
losses;
and
●
a goodwill impairment charge of $9.0 million due
to a decrease in Popular Equipment Finance’s (PEF) projected earnings
considered as part of the Corporation’s annual goodwill
impairment analysis.
These variances were partially offset by:
●
Higher
other
real
estate
owned
(OREO)
income
by
$7.7
million
mainly
due
to
higher
gain
on
sale
of
commercial
properties;
and
●
Lower amortization
of intangibles
by $5.9
million due
to an
impairment write-down
of $5.4
million of
a trademark
during
2021.
Income Taxes
For the
year ended
December 31,
2022, the
Corporation recorded an
income tax
expense of
$132.3 million,
compared to
$309.0
million for
the same
period of
2021.
The income
tax expense
for the
year ended
December 31,
2022, reflects
the impact
of the
reversal of a portion of the deferred tax asset valuation allowance of the U. S. Operations amounting to $68.2 million, higher taxable
income
subject
to
preferential tax
rates,
primarily attributed
to
the
gain
from
the
sale
of
Evertec shares,
and
higher tax
exempt
income recorded during this year.
At December
31, 2022,
the Corporation
had a
net deferred
tax asset
amounting to
$1 billion,
net of
a valuation
allowance of
$0.5
billion. The net deferred tax asset related to the U.S.
operations was $0.3 billion, net of a valuation
allowance of $0.4 billion.
The Inflation
Reduction Act
of 2022 imposes
a new
corporate alternative minimum
tax (“AMT”),
effective for
taxable year
2023, to
corporations that meet a dual three-year average adjusted financial statement income (“AFSI”)
threshold of $1 billion on a worldwide
basis and $100
million for its
U.S. operations.
The AFSI is,
in general, the
GAAP net income
per financial statements
with certain
adjustments, including
foreign taxes
and tax
depreciation.
The Corporation
is still
evaluating the
application of
these adjustments
that could be
decisive in whether Popular
is subject to
the corporate AMT.
If it is
determined that the Corporation
is subject to
the
corporate AMT, it is not expected to have a material impact on the financial statements
of the Corporation.
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.
70
Fourth Quarter Results
The Corporation recognized net income of $257.1 million for the
quarter ended December 31, 2022, compared with a net income
of
$206.1 million for the same quarter of 2021.
Net interest income for the fourth quarter of
2022 amounted to $559.6 million, compared with $501.3 million for the
fourth quarter of
2021, an increase of $58.3 million.
The increase in net interest income was mainly due higher interest rates as the Federal Reserve
increased the Federal
Funds Rate by
425 basis points
during 2022 and
higher average balance
of loans resulting
from the growth
during 2022
at both
BPPR and
PB. The
net interest
margin increased
by 50
basis points
to 3.28%
due to
an increase
in market
rates
and
the
earning
assets
mix,
that
had
a
higher
concentration on
loans
which
carry
a
higher
yield
than
money
market
and
investment securities. On a taxable equivalent
basis, the net interest margin for the
fourth quarter of 2022 was 3.64%, compared
to
3.02% for the fourth quarter of 2021.
The provision
for credit
losses was
a $49.5
million for
the fourth
quarter of
2022, compared
to a
reserve release
benefit of
$33.1
million for the fourth quarter of 2021. The provision expense
recorded in the fourth quarter or 2022 reflects
changes in credit metrics,
portfolio growth
as well
as changes
in the
macroeconomic outlook
and considers
an
expected slowdown
in the
economy during
2023, as
a result
of weaker
job growth,
monetary policy
and the
persistent inflation.
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
$158.5 million
for the
quarter ended
December 31,
2022, compared
with $164.7
million for
the
same quarter in 2021. The
decrease of $6.2 million was mainly
due lower income from mortgage banking activities by
$10.5 million
due to
an unfavorable
variance of
$4.1 million
in the
fair value
adjustments of
mortgage servicing
rights and
lower gains
from the
sale and securitization of
mortgage loans as the
Corporation made the determination to
retain certain guaranteed loans
as held for
investment. In addition,
service charges on
deposit accounts were
lower by $6.9
million, due to
lower overdraft related
charges, in
part due
to the
Corporation’s determination of
eliminating insufficient funds
fees and
modifying overdraft fees
effective on
the third
quarter
of
2022
and
lower
cash
management
service
charges
from
commercial
clients
due
to
higher
earnings
credits
on
transactional accounts.
Operating expenses
totaled $461.7
million for
the quarter
ended December
31, 2022,
compared with
$417.4 million
for the
same
quarter in
the previous
year.
The increase
of $44.3
million is
mainly related
to higher
personnel costs
by $29.7
million, due
to
a
higher
headcount
and
market
and
annual
salary
revisions
as
well
as
higher
incentives
and
commissions;
higher
professional
services expense
by $16.6
million due
to various
corporate projects,
including the
transformation initiative;
higher technology
and
software expenses by $7.3
million due to various
ongoing technology projects and
software amortization, including from the
assets
acquired from Evertec; partially offset by higher benefit from OREO related activity by $5.3 million due to gains on sale of foreclosed
properties; lower operational losses by $7.8 million and lower
amortization of intangibles by $5.3 million due to an
impairment write-
down of $5.4 million of a trademark during 2021.
For the quarter ended December
31, 2022, the Corporation recorded
an income tax benefit of
$50.3 million, compared with income
tax expense of $75.6 million for
the same quarter of 2021. The
favorable variance in income tax expense was mainly
attributable to
a
partial
reversal
of
the
deferred tax
asset valuation
allowance
of
the
U.S.
operation during
the
fourth
quarter
of
2022
of
$68.2
million and lower
income before tax,
higher benefit from
tax-exempt income, including true-up
adjustment of $9.5 million
in relation
to the
fiscal year
2021 tax
returns for
the P.R.
subsidiaries filed
in the
fourth quarter
and related
year-to-date adjustments
for the
same concept.
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.
71
The Corporate group reported a net income of $150.1
million for the year ended December 31, 2022,
compared with a net income of
$13.4
million
for
the
previous
year.
The
increase
in
net
income
was
mainly
attributed
to
the
$128.8
million
in
after-tax
gains
recognized by the Corporation as
a result of the
Evertec Stock Sale and related
accounting adjustments; lower interest expense by
$10.4 million
from the
redemption in
the fourth
quarter of
2021 of
$186.7 million
in Trust
Preferred Securities
issued by
Popular
Capital Trust I; and higher earnings from equity method investments.
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 $782.0
million for the
year ended December 31,
2022, compared with $787.5 million for
the year ended December 31, 2021.
The principal factors that contributed to the
variance in
the financial results included the following:
●
Higher
net
interest
income
by
$148.9
million
due
to
higher
income
from
money
market
and
investment
securities
by
$218.3
million mainly
due to
higher yields
driven by
the increase
in rates
by the
Federal Reserve
and
higher
average
balances of
U.S. Treasury
securities;
higher interest
income from
loans by
$54.7 million,
mainly due
to higher
average
balances from consumer, leasing and
commercial loans; partially offset by
higher interest expense on deposits by $123.7
million
mainly
due to
higher costs
on the
market- indexed
Puerto Rico
government deposits,
NOW accounts
and time
deposits.
The
BPPR
segment’s
net
interest margin
was
3.05%
for
2022
compared
with
2.86% for
the
same
period in
2021.
●
A provision for loan losses expenses of $70.3 million in 2022, compared to a reserve release of $136.4 million for the year
ended 2021,
or
an unfavorable
variance of
$206.7 million.
The provision
for loan
losses for
2022
reflects an
expected
slowdown in the economy in
2023. During 2021, BPPR recorded a
reserve for credit losses release of
$136.4 million due
to improved credit metrics and Covid-related macroeconomic
outlook and
changes in qualitative reserves;
●
Higher non-interest income by $115.0 million mainly due to:
●
Higher other operating income by $112.0 million mostly due to the benefit related to the Evertec Business Acquisition
Transaction,
●
Higher
other
service
fees
by
$21.3
million
due
to
higher
merchant
acquiring
fees
related
to
the
revenue
sharing
agreement
entered
in
connection with
the
Evertec
Transactions
and
higher
credit
card
fees
as
a
result
of
higher
interchange transaction volumes.
●
Higher operating expenses by $167.8 million, mainly
due to:
●
Higher other
expenses by $75.5
million mainly due
to higher allocations
from the
Corporate group by
$56.0 million,
mainly advisory and other professional services, and
a $17.3 million expense related to Evertec Transactions;
●
Higher personnel costs by $71.8 million driven
by higher salaries and benefits due to market
salary adjustments and
annual salary revisions
and a higher
headcount; higher incentive compensation,
higher profit sharing expenses
and
higher fringe benefits;
●
Higher
business
promotions
by
$15.6
million
mainly
due
to
higher
customer
rewards
expense
related
to
higher
transactional volumes and higher sponsorships and donations,
including hurricane related assistance;
●
Higher
technology and
software expenses
by
$5.7
million
including $2.4
million
related
to
the software
intangible
assets acquired as part of the Evertec Transactions, and costs
associated with several ongoing projects;
●
Higher processing
and transactional
services by
$5.8 million
mainly due
to higher
credit and
debit card
processing
expense as
a result
of higher
transactional volumes,
reflecting an
increase in
customer purchase
activity;
partially
offset by
lower merchant
processing due
to higher
incentives received
during the
year related
to the
ATH
Network
Participation Agreement entered into in connection with
the Evertec Transactions;
72
Partially offset by:
●
Higher OREO income by $7.4 million mainly due
to higher gain on sale of OREO of $5.9
million.
●
Lower professional fees by $3.8 million mainly due
to lower consulting fees related to ongoing projects.
●
Lower
income
tax
expense
by
$105.1
million
due
to
lower
income
before
tax
and
higher
income
that
was
exempt
or
subject to preferential tax rates.
Popular U.S.
For the
year ended
December 31, 2022, the
reportable segment of
Popular U.S.
reported net income
of $170.3
million, compared
with a net
income of $134.1 million for
the year ended December
31, 2021. The principal
factors that contributed to
the variance in
the financial results included the following:
●
Higher net interest income by $51.8 million mainly due to higher interest income from loans by $74.2 million mainly due to
higher
average
balances from
commercial
loans as
well
as
higher yields
due
to
increase
in
rates; and
higher
interest
income from money market investment securities by $2.9 million due to
higher rates,
partially offset by lower income from
debt securities by
$1.6 million and higher
cost of deposits
by $22.9 million due
to higher interest rates.
The Popular U.S.
reportable segment’s net interest margin was 3.68%
for 2022 compared with 3.39% for the same period
in 2021;
●
An unfavorable variance of
$69.3 million on the
provision for loan losses
and unfunded commitments, due to
the reserve
release
of
$56.9
million
in
2021,
which
reflected
improvements
in
credit
metrics
and
Covid-related
economic
outlook,
compared to
a provision
expense of
$12.5 million
recorded in
2022 which
reflected an
expected economic
slowdown in
2023;
●
Higher non-interest income by
$7.4 million mainly due
to the positive adjustment
of $9.2 million on
the contingent liability
related to the K-2 Acquisition;
●
Higher operating expenses by $35.4 million mainly due
to:
●
Higher personnel costs by $10.2 million due to
salary market and annual adjustments;
●
Higher
other
expenses
by
$7.4
million
due
to
higher
charges
allocated from
the
Corporate segment,
mainly
professional fees; and
●
The goodwill impairment charge of $9.0 million recorded
at PEF.
●
Lower
income
tax
expense
by
$81.7
million
due
mainly
to
a
lower
income
before
tax
and
the
partial
reversal
of
the
deferred tax asset valuation allowance recorded during
the fourth quarter of 2022 of $68.2 million.
STATEMENT
OF FINANCIAL CONDITION ANALYSIS
Assets
The Corporation’s total
assets were $67.6 billion
at December 31, 2022,
compared to $75.1 billion
at December 31, 2021.
Refer to
the Corporation’s Consolidated Statements of Financial Condition at December 31, 2022 and 2021 included in this 2022 Form 10-K.
Also, refer to the Statistical Summary 2022-2021
in this MD&A for Condensed Statements of Financial
Condition.
Money market investments and debt securities
Money market
investments decreased
by $11
.9 billion
at December
31, 2022,
when compared
to December
31, 2021.
This was
impacted
by
the
decrease
in
deposits of
$5.8
billion,
mainly
in the
Puerto
Rico
Public
sector,
and
the deployment
of
liquidity to
purchase
debt
securities.
Debt
securities
available-for-sale
decreased
by
$7.2
billion,
while
debt
securities
held-to-maturity
increased by $8.4 billion. As previously mentioned, during
2022 the Corporation transferred U.S. Treasury securities with
a fair value
73
of $6.5 billion (par
value of $7.4 billion)
from its available-for-sale portfolio to
its held-to-maturity portfolio. Refer to
Notes 6 and 7
to
the Consolidated Financial
Statements for additional
information with respect
to the
Corporation’s debt securities
available-for-sale
and held-to-maturity.
Loans
Refer to Table
6 for a breakdown of
the Corporation’s loan portfolio. Also,
refer to Note 8
to the Consolidated Financial Statements
for detailed information about the Corporation’s loan portfolio
composition and loan purchases and sales.
Loans
held-in-portfolio increased
by
$2.8
billion to
$32.1
billion
at
December
31,
2022,
mainly
due
to
growth in
the
commercial
portfolio
of
$2.0
billion,
reflected
at
both
BPPR
and
PB
by
approximately $1.0
billion,
at
each
segment
and
consumer
loans
at
BPPR.
The
commercial
loans
growth
includes
U.S.
region
loans
participated
between
BPPR
and
PB.
During
the
year
ended
December
31,
2022, BPPR
participated in
loans
originated by
PB
totaling
$184
million.
Consumer loans
at
BPPR
increased
by
$532.4 million in the aggregate including credit
cards, personal loans and auto loans.
The increase in BPPR’s consumer portfolio is
aligned with the increase in
retail sales and consumer spending in
Puerto Rico during 2022 and
the purchase of national consumer
loans through
its U.S.
branch. The
auto loans
portfolio at
BPPR benefited
from the
sustained level
of auto
sales, which
although
lower than 2021, remained a higher than 2020. In addition, though mortgage loans declined by $29.7 million from the previous year,
this was
impacted by
management’s determination
to retain
certain guaranteed
loans in
the portfolio,
which reduced
the portfolio
attrition.
The
allowance
for
credit
losses
for
the
loan
portfolio
increased
by
$24.9
million
mainly
due
to
changes
in
the
macroeconomic
outlook, credit quality metrics and portfolio
growth. Refer to the Credit
Quality section of the MD&A
for additional information on the
Allowance for credit losses for the loan portfolio.
74
Table 6 - Loans Ending Balances
At December 31,
(In thousands)
2022
2021
Loans held-in-portfolio:
Commercial
$
15,739,132
$
13,732,701
Construction
757,984
716,220
Leasing
1,585,739
1,381,319
Mortgage
7,397,471
7,427,196
Auto
3,512,530
3,412,187
Consumer
3,084,913
2,570,934
Total loans held-in
-portfolio
$
32,077,769
$
29,240,557
Loans held-for-sale:
Mortgage
$
5,381
$
59,168
Total loans held-for-sale
$
5,381
$
59,168
Total loans
$
32,083,150
$
29,299,725
Other assets
Other assets amounted to $1.8
billion at December 31, 2022, an
increase of $0.2 billion when compared
to December 31, 2021. At
December 31,
2022, this
includes $125
million in
cash receivable
from the
maturities of
investment securities
near the
end of
the
year and
$28.7 million
in software
intangibles acquired
as part
of the
Evertec Transactions.
Refer to
Note 14
to the
Consolidated
Financial Statements
for a
breakdown of
the principal
categories that
comprise the
caption of
“Other Assets”
in the
Consolidated
Statements of Financial Condition at December
31, 2022 and 2021.
Liabilities
The Corporation’s
total liabilities
were $63.5
billion at
December 31,
2022, a
decrease of
$5.6 billion
compared to
$69.1 billion
at
December 31, 2021, mainly due to a
decrease 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, 2022 and 2021 is included
in Table 7.
Table 7 - Financing to Total
Assets
December 31,
December 31,
% increase (decrease)
% of total assets
(In millions)
2022
2021
from 2021 to 2022
2022
2021
Non-interest bearing deposits
$
15,960
$
15,684
1.8
%
23.6
%
20.9
%
Interest-bearing core deposits
41,600
47,954
(13.3)
61.5
63.9
Other interest-bearing deposits
3,667
3,367
8.9
5.4
4.5
Repurchase agreements
149
92
62.0
0.2
0.1
Other short-term borrowings
365
75
N.M.
0.5
0.1
Notes payable
887
989
(10.3)
1.3
1.3
Other liabilities
917
968
(5.3)
1.4
1.3
Stockholders’ equity
4,093
5,969
(31.4)
6.1
7.9
Deposits
The
Corporation’s
deposits
totaled
$61.2
billion
at
December
31,
2022,
compared
to
$67.0
billion
at
December
31,
2021.The
deposits decrease
of $5.8
billion was mainly
due to
lower Puerto Rico
public sector
deposits by
$5.2 billion.
Public sector
deposit
balances
amounted
to
$15.2
billion
at
December
31,
2022.
The
receipt
by
the
Puerto
Rico
Government
of
additional
Federal
75
assistance, and
seasonal tax
collections, could
increase public
deposit balances
at BPPR
in the
near term.
However,
the rate
at
which public deposit balances may decline is uncertain and difficult to predict. The
amount and timing of any such reduction is likely
to
be
impacted
by,
for
example,
the
speed
at
which
federal
assistance
is
distributed,
the
financial
condition,
liquidity
and
cash
management
practices
of
the
Puerto
Rico
Government
and
its
instrumentalities
and
the
implementation
of
fiscal
and
debt
adjustment plans approved
pursuant to PROMESA
or other actions
mandated by the
Fiscal Oversight and
Management Board for
Puerto Rico (the “Oversight Board”).
Approximately 25% of the
Corporation’s deposits are public
fund deposits from the
Government of Puerto Rico,
municipalities and
government instrumentalities and corporations (‘’public funds’’).
These public funds deposits are
indexed to short term market
rates
and fluctuate
in cost
with changes
in those
rates with
a one-quarter
lag, in
accordance with
contractual terms.
As a
result, these
public
funds
deposits’
costs
have
generally
lagged
variable
asset
repricing.
During
2022,
the
deposit
costs
for
public
funds
increased by 61% when compared
to 2021.
We expect these costs
to continue to increase if
short-term rates continue their recent
trend.
For example, we
expect an increase
in costs on
these public funds
by approximately 120
basis points in
the first quarter
of
2023 when compared to the last quarter in 2022.
Refer to Table 8 for a breakdown of the Corporation’s deposits at December 31, 2022 and 2021.
Table 8 - Deposits Ending Balances
(In thousands)
2022
2021
Demand deposits
[1]
$
26,382,605
$
25,889,732
Savings, NOW and money market deposits (non-brokered)
27,265,156
33,674,134
Savings, NOW and money market deposits (brokered)
798,064
729,073
Time deposits (non-brokered)
6,442,886
6,685,938
Time deposits (brokered CDs)
338,516
26,211
Total deposits
$
61,227,227
$
67,005,088
[1] Includes interest and non-interest bearing demand deposits.
Borrowings
The
Corporation’s
borrowings
amounted
to
$1.4
billion
at
December 31,
2022,
compared
to
$1.2
billion at
December
31,
2021.
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, 2022,
a decrease
of $51.3
million when
compared to
December 31, 2021.
Stockholders’ Equity
Stockholders’ equity totaled
$4.1 billion at
December 31, 2022,
a decrease of
$1.9 billion when
compared to
December 31, 2021.
The decrease
was principally due
to higher
accumulated unrealized losses on
debt securities available-for-sale
by $2.2 billion
and
the impact of
$631.0 million from the
two accelerated share repurchase
transactions completed during 2022,
declared dividends of
$163.7 million on
common stock and
$1.4 million
in dividends on
preferred stock, partially
offset by
net income for
the year ended
December 31,
2022
of $1.1
billion. 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
to
the
Consolidated
Financial
Statements
for
a
detail
of
accumulated
other
comprehensive
loss
(income),
an
integral
component
of
stockholders’ equity.
76
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
9
show
that
the
Corporation
was
“well
capitalized” for
regulatory purposes,
the highest
classification, under
Basel III
for years
2022 and
2021. 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 9 presents the Corporation’s capital adequacy
information for the years 2022 and 2021.
Table 9 - Capital Adequacy
Data
At December 31,
(Dollars in thousands)
2022
2021
Risk-based capital:
Common Equity Tier 1 capital
$
5,639,686
$
5,476,031
Additional Tier 1 Capital
22,143
22,143
Tier 1 capital
$
5,661,829
$
5,498,174
Supplementary (Tier 2) capital
623,818
585,931
Total
capital
$
6,285,647
$
6,084,105
Total
risk-weighted assets
$
34,415,889
$
31,441,224
Adjusted average quarterly assets
$
70,287,610
$
74,238,367
Ratios:
Common Equity Tier 1 capital
16.39
%
17.42
%
Tier 1 capital
16.45
17.49
Total capital
18.26
19.35
Leverage ratio
8.06
7.41
Average equity to assets
8.25
8.12
Average tangible equity to assets
7.27
7.20
Average equity to loans
19.76
19.87
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
77
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 decrease in the CET1 capital ratio,
Tier 1 capital ratio
and, total capital ratio as of
December 31, 2022, compared to December
31,
2021,
was
mostly
due
to
an
increase
in
risk
weighted
assets
driven
by
the
growth
in
the
commercial
and
consumer
loan
portfolios, partially offset by the annual earnings net of the accelerated share
repurchase agreements to repurchase an aggregate of
$400 million and
$231 million of Popular’s common
stock. The increase in
leverage capital ratio was
mainly due to the
decrease in
average total assets, driven by the reduction
in zero-risk weighted investments in money market FED accounts
and zero or low-risk
weighted debt securities, 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.
As of
December 31, 2022,
the Corporation had
phased-in
25% of the cumulative CECL deferral with the remaining impact to be
recognized over the remaining two years. In the first quarter of
2023, the Corporation will phase in a cumulative
50% of the deferral.
On
August
26,
2020,
federal
banking
regulators
issued
a
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,
2022,
the Corporation has $38 million in PPP loans and no
loans were pledged as collateral for PPPL
Facilities.
Table 10 reconciles the Corporation’s total common stockholders’ equity to common equity Tier 1 capital.
Table 10 - Reconciliation Common
Equity Tier 1 Capital
At December 31,
(In thousands)
2022
2021
Common stockholders’ equity
$
4,198,409
$
6,116,756
AOCI related adjustments due to opt-out election
2,468,193
257,762
Goodwill, net of associated deferred tax liability
(DTL)
(691,560)
(591,703)
Intangible assets, net of associated DTLs
(12,944)
(16,219)
Deferred tax assets and other deductions
(322,412)
(290,565)
Common equity tier 1 capital
$
5,639,686
$
5,476,031
Common equity tier 1 capital to risk-weighted assets
16.39
%
17.42
%
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.
78
The decrease
in the
Tangible
common
equity to
tangible assets
ratio during
2022 was
mainly related
to the
decrease in
the fair
value of
the Corporation’s
fixed rate
available for sale
debt securities
portfolio and
its impact
on the
unrealized loss component
of
accumulated
other
comprehensive
income
(loss)
(‘’AOCI’’).
Given
its
ability
due
to
the
Corporation’s
liquidity
position
and
its
intention to reduce the
impact on AOCI and tangible
capital of further increases in
interest rates, management changed its intent
to
hold certain securities to maturity.
Therefore, in October 2022, the Corporation transferred U.S.
Treasury securities with a fair
value
of $6.5 billion (par value of $7.4 billion) from
its available-for-sale portfolio to its held-to-maturity portfolio.
The
securities
were reclassified
at
fair value
at the
time
of
the transfer.
At
the
date of
the transfer,
these
securities
had
pre-tax
unrealized
losses
of
$873.0
million
recorded
in
AOCI.
This
fair
value
discount
is
being
accreted
to
interest
income
and
the
unrealized loss remaining in
AOCI is being amortized,
offsetting each other through
the remaining life of
the securities. There were
no realized gains or losses recorded as a result
of this transfer.
While changes
in the
amount of
unrealized gains
and losses
in AOCI
have an
impact on
the Corporation’s
and its
wholly-owned
banking
subsidiaries’
tangible
capital
ratios,
they
do
not
impact
regulatory
capital
ratios,
in
accordance
with
the
regulatory
framework.
Refer
to
Note
7
to
the
Consolidated
Financial
Statements
which
presents
information
about
the
Corporation’s
Debt
Securities Held-to-Maturity for additional details.
Table
11
provides
a
reconciliation of
total
stockholders’
equity
to
tangible
common
equity
and
total
assets
to
tangible
assets
at
December 31, 2022 and 2021.
79
Table 11
- Reconciliation of Tangible
Common Equity and Tangible
Assets
At December 31,
(In thousands, except share or per share information)
2022
2021
Total stockholders’
equity
$
4,093,425
$
5,969,397
Less: Preferred stock
(22,143)
(22,143)
Less: Goodwill
(827,428)
(720,293)
Less: Other intangibles
(12,944)
(16,219)
Total tangible common
equity
$
3,230,910
$
5,210,742
Total assets
$
67,637,917
$
75,097,899
Less: Goodwill
(827,428)
(720,293)
Less: Other intangibles
(12,944)
(16,219)
Total tangible assets
$
66,797,545
$
74,361,387
Tangible common
equity to tangible assets
4.84
%
7.01
%
Common shares outstanding at end of period
71,853,720
79,851,169
Tangible book value
per common share
$
44.97
$
65.26
Year-to-date average
Total stockholders’
equity [1]
$
6,009,225
$
5,777,652
Less: Preferred Stock
(22,143)
(22,143)
Less: Goodwill
(757,133)
(679,959)
Less: Other intangibles
(17,113)
(20,861)
Total tangible common
equity
$
5,212,836
$
5,054,689
Average return on tangible common equity
21.13
%
18.47
%
[1] Average balances exclude unrealized gains or losses
on debt securities available-for-sale and unrealized losses
on debt
securities transfer to held-
to-maturities.
80
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 to the
Consolidated Financial
Statements for
further information
on the
debt
securities available-for-sale
and
held-to-maturity portfolios.
Debt securities classified
as available-for-sale amounted
to $17.8 billion
as of December
31, 2022. Other
assets subject to
market
risk include loans
held-for-sale, which amounted
to $5
million, mortgage servicing
rights (“MSRs”) which
amounted to $128
million
and securities classified as “trading”, which amounted
to $28 million, as of December 31, 2022.
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.
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
magnitude (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.
Additionally,
the
Corporation is also subject to
basis risk in the
repricing of its assets and
liabilities, including the basis related
to using different
rate
indexes for
the repricing
of assets and
liabilities, as
well as
the effect
of pricing
lags which
may be
contractual or
due to
historical
differences
in
the
timing
of
management
responses
to
changes
in
the
rate
environment.
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, 2022
and December
31, 2021,
assuming a
static balance
sheet and
parallel changes
over flat spot rates over a one-year time horizon:
81
Table 12 - Net Interest Income
Sensitivity (One Year Projection)
December 31, 2022
December 31, 2021
(Dollars in thousands)
Amount Change
Percent Change
Amount Change
Percent Change
Change in interest rate
+400 basis points
$
(38,548)
(1.75)
%
$
257,223
13.21
%
+200 basis points
(18,078)
(0.82)
197,354
10.14
+100 basis points
(7,787)
(0.35)
166,920
8.57
-100 basis points
41,763
1.90
(78,408)
(4.03)
-200 basis points
78,381
3.56
(120,661)
(6.20)
As of December 31, 2022, NII simulations show the Corporation
has a neutral to slightly liability sensitive position driven by the
rapid
increase in short-term
interest rates throughout the
year and its
impact on Puerto
Rico public sector deposits
which are indexed to
market rates, as well as the deployment of cash to fund loan growth and purchase investments. These results suggest that changes
in net interest income are driven by changes in liability
costs, primarily Puerto Rico public sector deposits. In
declining rate scenarios
net interest income would increase as the decline in
the cost of these deposits generates a greater benefit
than the changes in asset
yields.
In
rising
rate
scenarios
Popular’s
sensitivity
profile
is
also
impacted
by
its
large
proportion
of
Puerto
Rico
public
sector
deposits which
are indexed to
market rates. As
short-term rates
have risen, the
cost of these
deposits now increases
in sync
with
market rates and
therefore reduce the
benefit banks typically
have in
rising rate environments.
As of
December 31, 2022,
Popular
has a more neutral
position as compared to a
substantially asset sensitive position as
of December 31, 2021. The
primary reasons
for the
reduction in sensitivity
are i)
the realization of
much of the
expected benefit in
net interest income
given the
higher interest
rates observed
during 2022,
ii) a
decrease in
cash balances
(which reprice
instantaneously) via
the deployment
into longer
term
investments and
loans, and iii)
the market
indexed nature of
Puerto Rico
public sector deposits
which represented $15.2
billion or
25% of deposits as of December 31, 2022.
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.
82
Table 13 - Interest Rate Sensitivity
At December 31, 2022
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
assets /
liabilities
Total
Assets:
Money market investments
$
5,614,595
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
5,614,595
Investment and trading securities
2,085,332
750,646
1,026,603
1,076,243
1,116,553
4,590,807
16,292,815
(392,593)
26,546,406
Loans
5,090,409
2,875,448
1,436,637
1,248,850
1,256,549
4,559,631
15,718,001
(102,375)
32,083,150
Other assets
-
-
-
-
-
-
-
3,393,766
3,393,766
Total
12,790,336
3,626,094
2,463,240
2,325,093
2,373,102
9,150,438
32,010,816
2,898,798
67,637,917
Liabilities and stockholders' equity:
Savings, NOW and money market and
other interest bearing demand
deposits
17,880,089
794,797
1,115,771
1,031,454
954,856
3,178,624
13,529,678
-
38,485,269
Certificates of deposit
1,921,505
468,312
640,081
452,482
496,747
1,194,998
1,607,276
-
6,781,401
Federal funds purchased and assets
sold under agreements to
repurchase
99,558
31,530
17,521
-
-
-
-
-
148,609
Other short-term borrowings
365,000
-
-
-
-
-
-
-
365,000
Notes payable
1,000
-
20,000
299,109
22,261
91,943
452,397
-
886,710
Non-interest bearing deposits
-
-
-
-
-
-
-
15,960,557
15,960,557
Other non-interest bearing liabilities
-
-
-
-
-
-
-
916,946
916,946
Stockholders' equity
-
-
-
-
-
-
-
4,093,425
4,093,425
Total
$
20,267,152
$
1,294,639
$
1,793,373
$
1,783,045
$
1,473,864
$
4,465,565
$
15,589,351
$
20,970,928
$
67,637,917
Interest rate sensitive gap
(7,476,816)
2,331,455
669,867
542,048
899,238
4,684,873
16,421,465
(18,072,130)
-
Cumulative interest rate sensitive gap
(7,476,816)
(5,145,361)
(4,475,494)
(3,933,446)
(3,034,208)
1,650,665
18,072,130
-
-
Cumulative interest rate sensitive gap
to earning assets
(11.55)
%
(7.95)
%
(6.91)
%
(6.08)
%
(4.69)
%
2.55
%
27.92
%
-
-
Table 14, which presents the maturity distribution of earning assets, takes into consideration
prepayment assumptions.
Table 14 - Maturity Distribution
of Earning Assets
As of December 31, 2022
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
$
5,614,595
$
-
$
-
$
-
$
-
$
-
$
-
$
5,614,595
Investment and trading
securities
5,972,315
15,917,065
12,593
4,474,589
3,287
-
-
26,379,849
Loans:
Commercial
4,609,900
5,335,022
3,628,170
1,092,038
930,166
45,176
98,659
15,739,132
Construction
469,212
45,911
193,334
8,261
34,232
-
7,033
757,984
Leasing
426,138
1,127,923
-
31,678
-
-
-
1,585,739
Consumer
1,845,426
3,584,443
298,977
187,647
595,179
85,770
-
6,597,443
Mortgage
581,384
2,074,029
107,067
3,759,026
54,812
826,508
26
7,402,852
Subtotal loans
7,932,060
12,167,328
4,227,549
5,078,651
1,614,390
957,454
105,718
32,083,150
Total earning assets
$
19,518,969
$
28,084,393
$
4,240,142
$
9,553,241
$
1,617,677
$
957,454
$
105,718
$
64,077,594
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.
83
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, 2022,
the Corporation held trading securities
with a fair value
of $28 million, representing approximately 0.04%
of
the Corporation’s total assets,
compared with $30 million and 0.04%, respectively, at December 31, 2021. As
shown in Table 15, the
trading
portfolio
consists
principally
of
mortgage-backed
securities
and
U.S.
Treasuries,
which
at
December
31,
2022
were
investment grade
securities. As
of December
31, 2022
and December
31, 2021,
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 net
trading account
loss of $784
thousand and a net
trading account loss of
$389 thousand, respectively,
for the years ended
December 31, 2022 and
2021.
Table 15 - Trading
Portfolio
December 31, 2022
December 31, 2021
(Dollars in thousands)
Amount
Weighted
Average Yield
[1]
Amount
Weighted
Average Yield
[1]
Mortgage-backed securities
$
14,223
5.79
%
$
22,559
5.12
%
U.S. Treasury securities
13,069
3.26
6,530
0.03
Collateralized mortgage obligations
160
5.51
257
5.61
Puerto Rico government obligations
64
0.45
85
0.47
Interest-only strips
207
12.00
280
12.00
Total
$
27,723
4.63
%
$
29,711
4.06
%
[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
$0.2 million
for the
last week
in December
31, 2022.
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
84
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
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 to
the Consolidated Financial
Statements 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, 2022
amounted to $
15 million
(2021 -
$ 88
million).
Refer
to
Note
26
to
the
Consolidated
Financial
Statements
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,
2022
and
2021.
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,
2022,
the
notional
amount of
the indexed
options on deposits
approximated $
85 million
(2021 -
$ 79
million) with
a fair
value of
$ 18
million (asset)
(2021 - $
26 million) while the
embedded options had a
notional value of
$ 79 million
(2021 - $
72 million) with
a fair value
of $ 16
million (liability) (2021 - $ 23 million).
Refer to Note 26 to
the Consolidated Financial Statements for a
description of other non-hedging derivative activities utilized
by the
Corporation during 2022 and 2021.
85
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 $
199.8 million at
December 31, 2022.
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,
2022, the
Corporation had
approximately $
57 million in
an unfavorable
foreign currency translation
adjustment as part
of accumulated other
comprehensive income (loss),
compared with an
unfavorable
adjustment of $ 67 million at December 31,
2021 and $ 71 million at December 31,
2020.
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 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
91% of
the Corporation’s
total assets
at December
31, 2022
and 89%
at December
31, 2021.
The ratio of total ending loans to deposits was
52% at December 31, 2022, compared to 44% at December 31, 2021.
In addition to
traditional deposits, the Corporation maintains borrowing
arrangements, which amounted to approximately
$1.4 billion in outstanding
balances at December 31, 2022 (December 31, 2021 - $1.2 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
July
12,
2022,
the
Corporation
completed
an
ASR
program
for
the
repurchase
of
an
aggregate
$400
million
of
Popular’s
common stock,
for which
an initial
3,483,942 shares
were delivered
in March
2022 (the
“March ASR
Agreement”). Upon
the final
settlement
of
the
March
ASR
Agreement,
the
Corporation
received
an
additional
1,582,922
shares
of
common
stock.
The
Corporation repurchased a
total of
5,066,864 shares
at an
average purchase
price of
$78.9443, which
were recorded
as treasury
stock by $440 million under the March ASR Agreement.
86
On December
7, 2022,
the Corporation
completed the
settlement of
another ASR
Agreement for
the repurchase
of an
aggregate
$231
million
of
Popular’s common
stock,
for
which
an
initial
2,339,241 shares
were
delivered
on
August
26,
2022
(the
“August
ASR”). Upon the
final settlement of
the ASR Agreement,
the Corporation received
an additional 840,024
shares of common
stock.
The Corporation repurchased a total of
3,179,265 shares at an average purchase price of
$72.66, which were recorded as treasury
stock by
$245 million under
the August ASR
Agreement.
Refer to Note
20 to
the Consolidated Financial
Statements for
additional
information.
The
following
sections
provide
further
information
on
the
Corporation’s
major
funding
activities
and
needs,
as
well
as
the
risks
involved in these activities.
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
and
credit
card
licensing
agreements.
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
8 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 $57.6 billion,
or
94% of total deposits, at December 31, 2022, compared with $63.6 billion, or 95% of
total deposits, at December 31, 2021. Core
deposits financed 90% of the Corporation’s earning assets
at December 31, 2022, compared with 88%
at December 31, 2021.
The distribution by maturity of
certificates of deposits with denominations of
$250,000 and over at December 31,
2022 is presented
in the table that follows:
87
Table 16 - Distribution by
Maturity of Certificate of Deposits of $250,000 and Over
(In thousands)
3 months or less
$
1,809,781
Over 3 to 12 months
333,648
Over 1 year to 3 years
282,506
Over 3 years
119,815
Total
$
2,545,750
For the
years ended
December 31,
2022 and
2021, average
deposits, including
brokered deposits,
represented
93% of
average
earning assets. Table 17 summarizes average deposits for the past three years.
Table 17 - Average
Total Deposits
For the years ended December 31,
(In thousands)
2022
2021
Non-interest bearing demand deposits
$
16,093,704
$
14,687,093
Savings accounts
16,242,457
15,753,630
NOW, money market and other interest
bearing demand accounts
25,539,909
25,648,707
Certificates of deposit
6,840,334
7,013,486
Total interest bearing
deposits
48,622,700
48,415,823
Total average deposits
$
64,716,404
$
63,102,916
The Corporation
had $1.1
billion in
brokered deposits
at December
31, 2022,
which financed
approximately 2%
of its
total assets
(December 31, 2021 -
$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, 2022,
total public
sector deposits were $15.2 billion,
compared to $20.3 billion at December 31, 2021. 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.
Additionally,
the
Corporation
mainly
utilizes
fixed-rate
U.S.
Treasury
debt
securities
as
collateral.
While
these
securities have
limited credit risk,
they are
subject to
market value
risk based on
changes in
the interest rate
environment.
When
interest
rates
increase,
the
value
of
this
collateral
decreases
and
could
result
in
the
Corporation
having
to
provide
additional
collateral
to
cover
the
same
amount
of
deposit
liabilities.
This
additional
collateral
could
reduce
unpledged
securities
otherwise
available as liquidity sources to the Corporation.
At December 31, 2022,
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 on repurchase
agreements and other collateralized borrowing facilities. To
the extent that
the value of securities
previously pledged as collateral
declines because of market
changes, the Corporation will
be
88
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,
repurchases of the Corporation’s securities and capitalizing its
banking subsidiaries.
The
outstanding
balance
of
notes
payable
at
the
BHCs
amounted
to
$497
million
at
December
31,
2022
and
$496
million
at
December 31, 2021.
The contractual maturities of the BHCs notes payable
at December 31, 2022 are presented in
Table 18.
Table 18
- Distribution of BHC's Notes Payable by Contractual
Maturity
Year
(In thousands)
2023
$
299,109
Later years
198,319
Total
$
497,428
The Corporation’s
6.125% unsecured senior
debt securities mature
in the
September of 2023.
Annual debt service
at the BHCs
is
approximately $32
million,
and
the
Corporation’s
latest
quarterly dividend
was
$0.55
per share
or
approximately $40
million
per
quarter.
As
of
December
31,
2022,
the
BHCs
had
cash
and
money
markets
investments
totaling
$203
million
and
borrowing
potential of
$169 million
from its
secured facility
with BPPR.
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
interest
payments
and
dividend obligations during the
foreseeable future. The Corporation
intends to refinance
the 6.125% unsecured senior
debt prior to
its
maturity in
September.
If
we are
unable to
refinance these
notes, we
could have
to
declare extraordinary
dividends from
our
banking and other operating
subsidiaries to repay such
notes. Our ability to
declare such dividends could
be subject to
approval of
the Federal Reserve Board.
The BHCs have in
the past borrowed in the
corporate debt market primarily to finance
their non-banking subsidiaries and refinance
debt obligations. 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.
Factors that the Corporation
does not control, such
as the economic outlook,
interest rate volatility,
inflation, disruptions in the
debt
market, among others,
could also affect
its ability to
obtain funding. 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.
On July 1,
2022, the Corporation exchanged a
portion of Evertec shares as
part of a transaction
in which it acquired
certain critical
channels from Evertec and renegotiated several service agreements. The Corporation completed the sale of its remaining shares of
Evertec on August 15, 2022. Following the
Evertec Stock Sale, Popular no longer owns any
Evertec common stock.
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. During the period
89
ended December
31, 2022,
Popular, Inc.
made capital
contributions to its
wholly owned subsidiaries
of $25
million to
Popular Re,
Inc., $10 million to Popular Securities,
LLC and $3 million to Popular Impact Fund, LLC.
Dividends
During
the
year
ended
December
31,
2022,
the
Corporation
declared
cash
dividends
of
$2.20
per
common
share
outstanding
($163.7 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,
2022, the
BHCs received
dividends amounting
to $450
million from
BPPR, $54
million from
PNA,
$19
million
from
PIBI,
$8 million
in dividends
from
its
non-banking subsidiaries
and
$2 million
in
dividends from
Evertec.
In
addition,
during the year ended December 31, 2022, Popular International
Bank Inc., a wholly owned subsidiary of Popular, Inc., received $16
million in dividends from its investment in BHD.
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
$8.0
billion at
December 31,
2022
and
$3.0 billion
at
December 31,
2021. 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.
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
to
the
Consolidated Financial Statements for information on operating leases and
to Note 23 to the
Consolidated Financial Statements 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 $1.4
billion at December 31,
2022 (December 31, 2021 - $1.2 billion).
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
90
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,
2022
and
December 31,
2021,
and
the
results
of
their
operations
for
the
period
ended December
31,
2022
and
December 31,
2021. Investments in and equity in the earnings from the other subsidiaries and affiliates that are not members of the
obligor group have been excluded.
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.
91
Table 19 - Summarized Statement
of Condition
(In thousands)
December 31, 2022
December 31, 2021
Assets
Cash and money market investments
$
203,083
$
291,540
Investment securities
24,815
25,691
Accounts receivables from non-obligor subsidiaries
16,853
17,634
Other loans (net of allowance for credit losses of $370 (2021
- $96))
27,826
29,349
Investment in equity method investees
5,350
114,955
Other assets
45,278
42,251
Total assets
$
323,205
$
521,420
Liabilities and Stockholders' deficit
Accounts payable to non-obligor subsidiaries
$
3,709
$
6,481
Accounts payable to affiliates and related parties
-
1,254
Notes payable
497,428
496,134
Other liabilities
112,847
97,172
Stockholders' deficit
(290,779)
(79,621)
Total liabilities and
stockholders' deficit
$
323,205
$
521,420
Table 20 - Summarized Statement
of Operations
For the years ended
(In thousands)
December 31, 2022
December 31, 2021
Income:
Dividends from non-obligor subsidiaries
$
458,000
$
792,000
Interest income from non-obligor subsidiaries and affiliates
705
848
Earnings from investments in equity method investees
15,688
29,387
Other operating income
145,295
3,136
Total income
$
619,688
$
825,371
Expenses:
Services provided by non-obligor subsidiaries and affiliates
(net of
reimbursement by subsidiaries for services provided by parent
of
$222,935 (2021 - $162,019))
$
18,467
$
13,594
Other operating expenses
23,607
33,524
Total expenses
$
42,074
$
47,118
Net income (loss)
$
577,614
$
778,253
During the year ended
December 31, 2022, the Obligor
group recorded $1.5 million of
dividend distributions from its direct
equity method investees, and $72.0 million of dividend distributions from non-obligor subsidiaries which were recorded as a
reduction
to
the
investments.
During
the
year
ended
December
31,
2021,
the
Obligor
group
recorded
$3.0
million
of
distributions from its direct equity method investees,
of which $2.3 million were related to dividend
distributions.
In
addition, during
the year
ending December
31, 2022,
the Obligor
group recorded
$228.1 million
in proceeds
from the
sale of two of its direct equity method investees (2021-
$0).
92
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
Corporation is
subject to
positive tangible
capital
requirements to
utilize secured
loan facilities
with the
FHLB that
could
result in
a limitation
of
borrowing amounts or maturity terms, even if the Corporation
exceeds well-capitalized regulatory capital levels.
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, 2022, BPPR
declared
cash
dividends of
$450 million,
a
portion of
which was
used by
Popular for
the
payments of
the
cash
dividends on
its
outstanding common stock and $231 million in accelerated
stock repurchases.
At December 31, 2022, BPPR needed to obtain prior
approval of the Federal Reserve Board before
declaring a dividend in excess of $53 million
due to its declared dividend activity and
transfers to statutory reserves over the three years ended
December 31, 2022. 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 and capital, including tangible and
regulatory
capital, 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,
repurchase its
securities
or meet
its
debt
obligations, 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, 2022 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.
93
Certain
contractual
agreements
require
the
Corporation
to
post
collateral
to
secure
such
recourse
obligations
if
the
institution’s
required
credit
ratings
are
not
maintained.
Collateral
pledged
by
the
Corporation
to
secure
recourse
obligations
amounted
to
approximately
$29
million
at
December
31,
2022.
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 37 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
(“Puerto
Rico”), which has faced severe economic and fiscal
challenges in the past and may face additional
challenges in the future.
Economic Performance.
Puerto
Rico’s
economy suffered
a
severe and
prolonged recession
from
2007
to
2017,
with real
gross national
product (“GNP”)
contracting approximately 15% during this
period.
In 2017, Hurricane María
caused significant damage and destruction
across the
island, resulting in further economic contraction.
Puerto Rico’s economy has been gradually recovering since 2018, in part aided by
the large amount
of federal disaster
relief and recovery
assistance funds injected
into the Puerto
Rico economy in
connection with
Hurricane María
and other
recent natural
disasters. This
growth was
interrupted by
the economic
shock caused
by the
COVID-19
pandemic in 2020, but has since resumed, in part
aided by additional federal assistance from
pandemic-related stimulus measures.
The
latest
Puerto
Rico
Economic Activity
Index,
published
by
the
Economic
Development Bank
for
Puerto
Rico
(the
“Economic
Activity
Index”),
reflected
a
0.6%
increase
in
December
2022,
compared
to
December
2021.
During
calendar
year
2022,
the
Economic Activity Index increased by 1.8%,
compared to the same period in
calendar year 2021.
The Economic Activity Index is
a
coincident indicator of ongoing economic activity but not a
direct measurement of real GNP.
According to the Puerto Rico Planning
Board’s latest economic forecast (dated August 2021), Puerto Rico’s
real GNP is projected to increase 1.7% during the
current fiscal
year (July 2022-June 2023).
While the
Puerto Rico
economy has
not directly
tracked the
United States
economy in
recent years,
many of
the external
factors
that impact the
Puerto Rico economy
are affected by
the policies and
performance of the
United States economy.
These external
factors include
the level
of interest
rates and
the rate
of inflation.
Inflation in
the United
States, as
measured by the
United States
Consumer Price Index
(published by the
U.S. Bureau of
Labor Statistics), increased
6.5% in calendar
year 2022, mainly
driven by
pent-up
demand
and
supply-chain
disruptions
caused
by
the
pandemic.
During
the
same
period,
inflation
in
Puerto
Rico,
as
measured by the Puerto Rico Consumer Price Index (published by the Department of Labor and Human Resources of Puerto Rico),
increased 6.1%
for similar
reasons.
The rate
of inflation
has slowed
down in
recent months,
following a
mid-2022 peak,
as the
Federal Reserve has
implemented a series
of benchmark interest
rate increases.
The speed
and scope of
the inflation slowdown
will inform
if and
how much
interest rates
will continue
to increase,
as well
how these
changes will
impact the
United States
and
Puerto Rico economies.
94
Fiscal Challenges.
As the
Puerto Rico
economy contracted, the
government’s public
debt rose
rapidly,
in part
from borrowing to
cover deficits
to pay
debt service, pension
benefits and other
government expenditures.
By 2016, the
Puerto Rico government
had over $120
billion in
combined debt and unfunded
pension liabilities, had lost access to the capital
markets, and was in the midst of a fiscal
crisis.
Puerto
Rico’s
escalating fiscal
and economic
challenges
and imminent
widespread defaults
in
its
public debt
prompted the
U.S.
Congress to
enact the
Puerto Rico
Oversight, Management,
and Economic
Stability Act
(“PROMESA”) in
June 2016.
PROMESA
created the “Oversight Board” with ample powers over Puerto Rico’s fiscal and economic affairs and those of its public corporations,
instrumentalities and municipalities (collectively, “PR
Government Entities”).
Pursuant to PROMESA, the Oversight Board will
be in
place
until
market
access
is
restored
and
balanced
budgets
are
produced
for
at
least
four
consecutive
years.
PROMESA
also
established two
mechanisms for
the restructuring
of the
obligations of
PR Government
Entities: (a)
Title III,
which provides
an in-
court process that incorporates many of the
powers and provisions of the U.S. Bankruptcy Code
and permits adjustment of a broad
range of obligations, and
(b) Title VI,
which provides for a
largely out-of-court process through which
modifications to financial debt
can be accepted by a supermajority of creditors
and bind holdouts.
Since 2017, Puerto Rico and several
of its instrumentalities have availed themselves
of the debt restructuring mechanisms of Titles
III and VI of PROMESA. The Puerto Rico government emerged from Title III of PROMESA in March 2022. Several instrumentalities,
including Government
Development Bank for
Puerto Rico,
the Puerto
Rico Sales
Tax
Financing Corporation, and
the Puerto
Rico
Highways
and
Transportation
Authority,
have
also
completed
debt
restructurings
under
Titles
III
or
VI
of
PROMESA.
While
the
majority
of
the
debt
has
already
been
restructured,
some
PR
Government
Entities
still
face
significant
fiscal
challenges.
For
example, the
Puerto Rico
Electric Power
Authority is
still in
the process
of restructuring
its debts
under Title
III of
PROMESA and
other PR Government
Entities, such as
the Puerto Rico
Industrial Development Company,
have defaulted on
their bonds but
have
not commenced debt restructuring proceedings under
PROMESA.
Municipalities.
Puerto Rico’s fiscal and economic challenges have
also adversely impacted its municipalities. Budgetary subsidies to municipalities
have
gradually
declined
in
recent
years
and
are
scheduled
to
be
ultimately
eliminated
by
fiscal
year
2025
as
part
of
the
fiscal
measures
required
by
the
Oversight
Board.
According
to
the
latest
Puerto
Rico
fiscal
plan
certified
by
the
Oversight
Board,
municipalities
have
made
little
to
no
progress
towards
implementing
the
fiscal
discipline
required
to
reduce
reliance
on
these
budgetary appropriations and this
lack of fiscal
management may threaten the
ability of certain
municipalities to provide
necessary
services, such as health, sanitation, public safety
and emergency services to their residents, forcing them
to prioritize expenditures.
Municipalities
are
subject
to
PROMESA
and,
at
the
Oversight
Board’s
request,
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.
With
the
Oversight
Board’s approval, municipalities are also eligible to avail themselves of the debt restructuring processes provided by PROMESA. To
date, however, no municipality has been subject to any such debt
restructuring process.
Exposure of the Corporation
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.
Deterioration in the Puerto
Rico economy has resulted
in the
past, and could
result in the future,
in higher delinquencies, greater
charge-offs and increased losses,
which could materially affect
our financial condition and results of operations.
At
December 31,
2022, the
Corporation’s direct
exposure to
PR Government
Entities totaled
$374
million, of
which $327
million
were
outstanding,
compared
to
$367
million
at
December
31,
2021,
of
which
$349
million
were
outstanding.
A
deterioration
in
Puerto Rico’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, $302 million
consists of loans and
$25 million are securities ($319
million and $30 million,
respectively,
at December
31, 2021).
All of
the Corporation’s
direct exposure
outstanding at
December 31,
2022 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 basic
property tax
or
sales
tax
revenues. At
December 31,
2022,
73%
of
the
Corporation’s
exposure to municipal loans
and securities was concentrated in
the municipalities of San Juan,
Guaynabo, Carolina and Bayamón.
95
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 to the Consolidated Financial Statements.
In
addition,
at
December
31,
2022,
the
Corporation
had
$251
million
in
loans
insured
or
securities
issued
by
Puerto
Rico
governmental entities,
but for
which the
principal source
of repayment
is non-governmental
($275 million at
December 31, 2021).
These
included
$209
million
in
residential mortgage
loans
insured by
the
Puerto
Rico
Housing
Finance Authority
(“HFA”),
a
PR
Government
Entity
(December
31,
2021
-
$232 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,
2022,
$42
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, 2021 - $43 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.
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 a deterioration in the fiscal and
economic
situation
of
PR
Government
Entities.
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, if the fiscal and economic
situation deteriorates.
As
of
December
31,
2022,
BPPR
had
$15.2
billion
in
deposits
from
the
Puerto
Rico
government,
its
instrumentalities,
and
municipalities. The rate at
which public deposit balances may
decline is uncertain and
difficult to predict. The
amount and timing of
any such
reduction is
likely to
be impacted
by,
for example,
the speed
at which
federal assistance
is distributed
and the
financial
condition, liquidity
and cash
management practices of
such entities,
as well
as on
the ability
of BPPR
to maintain
these customer
relationships.
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
to 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 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, 2022,
the Corporation
had approximately $28
million in
direct exposure to
USVI government
entities (December
31, 2021 - $70 million).
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, 2022 it has a loan portfolio amounting to approximately
$214 million comprised of various retail and commercial
clients, compared to a loan portfolio of $221 million
at December 31, 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
96
mortgage-backed and U.S. Treasury securities. In addition, $1.6 billion
of residential mortgages, $38 million of SBA loans under the
Paycheck Protection Program (“PPP”) and $72 million
commercial loans were insured or guaranteed by
the U.S. Government or its
agencies at December 31, 2022 (compared
to $1.6 billion, $353 million and $67 million,
respectively, at December 31, 2021).
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 21.
During 2022, the Corporation showed favorable
credit quality trends with low levels
of NCOs and decreasing NPLs. We
continue to
closely
monitor
changes
in
the
macroeconomic
environment
and
borrower
performance,
given
inflationary
pressures
and
geopolitical
uncertainty.
However,
management
believes
that
the
improvement
over
recent
years
in
the
risk
profile
of
the
Corporation’s loan portfolios positions Popular to operate
successfully under the current environment.
Total
NPAs
decreased
by
$104
million
when
compared
with
December
31,
2021.
Total
non-performing
loans
held-in-portfolio
(“NPLs”) decreased
by
$108 million
from
December 31,
2021. BPPR’s
NPLs
decreased by
$112
million,
mainly
driven by
lower
mortgage and commercial NPLs by $91 million and
$38 million, respectively, in
part offset by higher auto NPLs by
$18 million.
The
mortgage
NPLs
decrease
was
mainly
due
to
the
combined
effects
of
collection
efforts,
increased foreclosure
activity
and
lower
inflows compared
with pre-pandemic
trends.
Popular U.S.
NPLs increased
by $4
million from
December 31,
2021, mainly
in the
commercial portfolio, in part due to an $11 million commercial borrower within the healthcare
industry that was placed in non-accrual
status and for which a partial charge-off of $8.7 million was recognized during the fourth quarter of 2022. At December 31, 2022, the
ratio of
NPLs to
total loans
held-in-portfolio was
1.4% compared
to 1.9%,
at December
31, 2021.
Other real
estate owned
loans
(“OREOs”) increased
by $4
million. At
December 31,
2022, NPLs
secured by
real estate
amounted to
$303 million
in the
Puerto
Rico
operations and
$33 million
in Popular
U.S. These
figures were
$428 million
and $31
million, respectively,
at
December 31,
2021.
The Corporation’s commercial loan portfolio secured by real estate
(“CRE”) amounted to $9.9 billion at December 31,
2022, of which
$3.1 billion was secured
with owner occupied properties, compared
with $8.4 billion and
$1.8 billion, respectively,
at December 31,
2021. During
the first
quarter of
2022, the
Corporation reclassified
$0.9 billion
of loans
from the
Commercial Real
Estate (“CRE”)
Non-Owner-Occupied category to the CRE Owner-Occupied category. The selected loans are primarily to skilled and assisted
living
nursing homes where the majority
of the revenues, which are
the basis for the
repayment of the loans, are
generated from medical
and
related
operational
activities.
These
loans
meet
the
type
of
business
and
source
requirements as
defined
in
the
regulatory
guidance
allowing
this
classification.
CRE
NPLs
amounted
to
$54
million
at
December
31,
2022,
compared
with
$77
million
at
December
31,
2021.
The
CRE
NPL
ratios
for
the
BPPR
and
Popular
U.S.
segments
were
1.04%
and
0.12%,
respectively,
at
December 31, 2021, compared with 1.95% and 0.04%,
respectively, at December 31, 2021.
In addition to the NPLs included in Table 21, at December 31, 2022, there were $374 million of performing loans, mostly commercial
loans, which in management’s opinion, are currently subject to potential future classification as non-performing (December 31, 2021
- $214 million).
For
the
year
ended
December
31,
2022,
total
inflows
of
NPLs
held-in-portfolio,
excluding
consumer
loans,
decreased
by
approximately $74 million, when compared to the inflows for the
same period in 2021. Inflows of NPLs held-in-portfolio at the
BPPR
segment decreased by $76 million compared
to the same period in
2021, driven by lower mortgage
and commercial inflows by $38
million each. Inflows of NPLs held-in-portfolio at
the Popular U.S. segment increased by $2 million
from the same period in 2021.
97
Table 21 - Non-Performing
Assets
December 31, 2022
December 31, 2021
(Dollars in thousands)
BPPR
Popular
U.S.
Popular,
Inc.
BPPR
Popular
U.S.
Popular,
Inc.
Non-accrual loans:
Commercial
$
82,171
$
10,868
$
93,039
$
120,047
$
5,532
$
125,579
Construction
-
-
-
485
-
485
Leasing
5,941
-
5,941
3,102
-
3,102
Mortgage
242,391
20,488
262,879
333,887
21,969
355,856
Auto
40,978
-
40,978
23,085
-
23,085
Consumer
30,528
6,076
36,604
33,683
6,087
39,770
Total non-performing
loans held-in-portfolio
402,009
37,432
439,441
514,289
33,588
547,877
Other real estate owned ("OREO")
88,773
353
89,126
83,618
1,459
85,077
Total non-performing
assets
$
490,782
$
37,785
$
528,567
$
597,907
$
35,047
$
632,954
Accruing loans past-due 90 days or more
[2]
$
351,248
$
366
$
351,614
$
480,649
$
118
$
480,767
Non-performing loans to loans held-in-portfolio
1.37
%
1.87
%
Interest lost
$
27,920
$
38,123
[1] There were no non-performing loans held-for-sale
as of December 31, 2022 and 2021.
[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 $14 million at December 31,
2022 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, 2021 - $13 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
$190 million of residential mortgage loans insured
by FHA or
guaranteed by the VA that
are no longer accruing interest as of December 31, 2022 (December
31, 2021 - $304 million).
Furthermore, the Corporation
has approximately $42 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, 2021 - $50 million).
98
Table 22 - Activity in Non
-Performing Loans Held-in-Portfolio (Excluding Consumer
Loans)
For the year ended December 31, 2022
(In thousands)
BPPR
Popular U.S.
Popular, Inc.
Beginning balance
$
454,419
$
27,501
$
481,920
Plus:
New non-performing loans
158,128
50,754
208,882
Advances on existing non-performing loans
-
2,825
2,825
Less:
Non-performing loans transferred to OREO
(38,580)
(85)
(38,665)
Non-performing loans charged-off
(7,413)
(9,062)
(16,475)
Loans returned to accrual status / loan collections
(241,992)
(40,577)
(282,569)
Ending balance NPLs
$
324,562
$
31,356
$
355,918
Table 23 - 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
99
Table 24 - Activity in Non
-Performing Commercial Loans Held-In-Portfolio
For the year ended December 31, 2022
(In thousands)
BPPR
Popular U.S.
Popular, Inc.
Beginning balance - NPLs
$120,047
$5,532
$125,579
Plus:
New non-performing loans
19,476
33,861
53,337
Advances on existing non-performing loans
-
2,525
2,525
Less:
Non-performing loans transferred to OREO
(4,763)
-
(4,763)
Non-performing loans charged-off
(5,872)
(8,935)
(14,807)
Loans returned to accrual status / loan collections
(46,717)
(22,115)
(68,832)
Ending balance - NPLs
$82,171
$10,868
$93,039
Table 25 - 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 26
-
Activity in Non-Performing Construction Loans Held-In
-Portfolio
For the year ended December 31, 2022
(In thousands)
BPPR
Popular U.S.
Popular, Inc.
Beginning balance - NPLs
$485
$-
$485
Less:
Loans returned to accrual status / loan collections
(485)
-
(485)
Ending balance - NPLs
$-
$-
$-
100
Table 27 -
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
Table 28 - Activity in Non
-Performing Mortgage Loans Held-in-Portfolio
For the year ended December 31,
2022
(In thousands)
BPPR
Popular U.S.
Popular, Inc.
Beginning balance - NPLs
$333,887
$21,969
$355,856
Plus:
New non-performing loans
138,652
16,893
155,545
Advances on existing non-performing loans
-
300
300
Less:
Non-performing loans transferred to OREO
(33,817)
(85)
(33,902)
Non-performing loans charged-off
(1,541)
(127)
(1,668)
Loans returned to accrual status / loan collections
(194,790)
(18,462)
(213,252)
Ending balance - NPLs
$242,391
$20,488
$262,879
Table 29 - 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
101
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,
2022
and
2021,
are
presented
below.
Table 30 - Loan Delinquencies
(Dollars in thousands)
2022
2021
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
$
119,476
$
15,739,132
0.76
%
$
161,251
$
13,732,701
1.17
%
Construction
-
757,984
-
485
716,220
0.07
Leasing
21,487
1,585,739
1.36
14,379
1,381,319
1.04
Mortgage
[1]
937,253
7,397,471
12.67
1,141,082
7,427,196
15.36
Consumer
216,401
6,597,443
3.28
173,896
5,983,121
2.91
Loans held-for-sale
-
5,381
-
59,168
-
Total
$
1,294,617
$
32,083,150
4.04
%
$
1,491,093
$
29,299,725
5.09
%
[1]
Loans delinquent 30 days or more includes $0.5 billion of
residential mortgage loans insured by FHA or guaranteed
by the VA as of December
31,
2021 (December 31, 2020 - $0.6 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, 2022, the
allowance for credit
losses amounted to
$720 million, an
increase of $25
million, when compared
with
December 31,
2021. 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.
The
Corporation evaluates,
at
least on
an annual
basis, the
assumptions tied
to the
CECL accounting
framework. These
include the
reasonable
and
supportable
period as
well
as
the
reversion window.
During the
third
quarter
of
2022,
as
part
of
its
evaluation
procedures, the Corporation decided to extend the reversion
window from 1 year to 3 years.
The extension in the reversion window
results in
a better
representation of
historical movements
for key
macroeconomic variables
that
impact the
ACL. This
change
in
assumptions contributed
to a
reduction of
$11
million in
the ACL.
The reasonable
and supportable
period assumptions
remained
unchanged at 2-years.
102
The baseline scenario assumes a 2023 annualized GDP growth for Puerto Rico and the United States of 1.3% and 0.7%. For 2022,
annualized expected
growth was
2.6% and
1.8% for
Puerto Rico
and United States,
respectively.
The reduction
in 2023
is due
to
the expected
slowdown in
the economy
as a
result of
tight monetary
policy,
weaker job
growth and
persistent inflation.
The 2023
average unemployment
rate is
forecasted at
7.8% and
4.0% for
Puerto Rico
and
United States,
respectively,
compared to
2022
average levels of 6.4% for Puerto Rico and 3.7% for the United States. In 2023, weaker job growth due to the expected slowdown in
the economy will contribute to the increase in unemployment
rate.
The ACL
for BPPR
increased by $21
million to
$616 million, when
compared to
December 31, 2021,
mostly driven
by changes
in
the economic scenario, higher loan volumes and changes in credit quality The ACL for Popular U.S. increased by $4 million to $105
million, when compared to December 31, 2021.
The provision
for credit
losses for
the year
ended December
31, 2022,
amounted to
an expense
of $83.3
million, compared
to a
benefit
of
$183.3
million
for
the
year
ended
December 31,
2021, as
the
prior
year
included
reductions in
reserves
due
to
post-
pandemic improvements in the macroeconomic outlook and lower NCOs. Refer
to Note 9 – Allowance for credit losses – loans held-
in-portfolio
to
the
Consolidated Financial
Statements, 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, 2022 and 2021:
Table 31 - Net Charge-Offs
(Recoveries) to Average Loans HIP
December 31, 2022
December 31, 2021
BPPR
Popular U.S.
Popular Inc.
BPPR
Popular U.S.
Popular Inc.
Commercial
(0.14)
%
0.11
%
(0.02)
%
(0.24)
%
(0.02)
%
(0.15)
%
Construction
(0.48)
(0.19)
(0.25)
1.27
(0.02)
0.19
Mortgage
(0.26)
-
(0.22)
0.04
-
0.04
Leasing
0.26
-
0.26
0.11
-
0.11
Consumer
1.22
1.33
1.22
0.58
0.99
0.60
Total
0.23
%
0.12
%
0.20
%
0.09
%
0.01
%
0.07
%
NCOs for the
year ended December
31, 2022
amounted to $59.3
million, increasing by
$38.6 million when
compared to the
same
period in
2021. The
BPPR segment
increased by
$29.4 million
mainly driven
by higher
consumer NCOs
by $40.5
million, mostly
auto loans, in part offset by lower mortgage NCOs by $18.5 million. The increase in the consumer NCOs was mostly related to post-
pandemic normalization, as NCOs continue at historical
low levels.
The PB segment NCOs increased by $9.2 million, mainly
driven
by
higher commercial
NCOs
by
$8.6
million,
due
to
the
$8.7
million
charge-off
during the
fourth
quarter of
2022
on
the
above-
mentioned healthcare NPL.
103
Table 32 - Allowance for Credit
Losses - Loan Portfolios
December 31, 2022
(Dollars in thousands)
Commercial
Construction
Mortgage
Leasing
Consumer
Total
Total ACL
$
235,376
$
4,246
$
135,254
$
20,618
$
324,808
$
720,302
Total loans held-in
-portfolio
$
15,739,132
$
757,984
$
7,397,471
$
1,585,739
$
6,597,443
$
32,077,769
ACL to loans held-in-portfolio
1.50
%
0.56
%
1.83
%
1.30
%
4.92
%
2.25
%
Total Non-performing
loans held-in-portfolio
$
93,039
$
-
$
262,879
$
5,941
$
77,582
$
439,441
ACL to non-performing loans held-in-portfolio
252.99
%
N.M.
51.45
%
347.05
%
418.66
%
163.91
%
N.M. - Not meaningful.
Table 33 - 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
34
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.
Table 34 - Allocation of the
Allowance for Credit Losses - Loans
At December 31,
2022
2021
% of loans
% of loans
in each
in each
category to
category to
(Dollars in millions)
ACL
total loans
ACL
total loans
Commercial
$235.4
49.1
%
$215.8
47.0
%
Construction
4.2
2.4
6.4
2.4
Mortgage
135.3
23.1
154.5
25.4
Leasing
20.6
4.9
17.6
4.7
Consumer
324.8
20.5
301.1
20.5
Total
[1]
$720.3
100.0
%
$695.4
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
$1.6 billion
at December
31, 2022,
decreasing by
$12
million,
from
December 31,
2021.
A
total
of
$725
million
of
these
TDRs
are
related
to
guaranteed
loans,
which
are
in
accruing
status.
The
Corporation
has
offered
to
clients
impacted
by
the
hurricanes
Fiona
and
Ian
a
moratorium
of
up
to
three
monthly
payments
on
personal
and
commercial
credit
cards,
auto
loans,
leases,
and
personal
loans,
subject
to
certain
eligibility
requirements. Mortgage clients
also benefited
from different
payment relief
alternatives available, depending
on their
type of
loan.
Loan relief options
for commercial clients
were reviewed on
a case-by-case basis.
As of December
31, 2022, approximately
2,428
loans with
a $94.8
million amortized
cost were
granted a
moratorium of
which 218
loans with
a $7.7
million amortized
cost have
been classified as TDR.
104
TDRs in the BPPR segment amounted to $1.6 billion,
a decrease of $12 million, mostly related to
lower consumer TDRs by $11
million. The Popular U.S. segment TDRs have remained
essentially flat since December 31, 2021. TDRs
in accruing status
increased by $26 million from December 31, 2021,
mostly related to an increase of $26 million
in BPPR’s mortgage TDRs, while
non-accruing TDRs decreased by $39 million, mostly related
to lower mortgage and commercial TDRs by $26
million and $10
million, respectively.
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
Enterprise
Risk Management
Department in
the
Financial and
Operational Risk Management
Division (the
“FORM Division”), in
coordination with the
Chief Risk
Officer, create
the framework to
identify and
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,
climate, legal, regulatory affairs, regulatory and financial
compliance, BSA/ AML & sanctions, strategic and
reputational.
The
Enterprise
Risk
Management
Department
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
Financial
Risk,
Corporate
Insurance Advisory
Department 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
and the
Financial Crimes
Compliance 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.
105
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
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 ESG
Committee also assesses
ESG-related considerations in
the credit
approval process of
commercial credit applications.
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
Strategy and
Transformation Division,
which reports to
the Corporation’s
Chief Operations Officer,
performs periodic assessments
regarding corporate
strategic priority
initiatives, such as
the Corporation’s
transformation initiative
and other
emerging issues.
The
Acquisitions
and
Corporate
Investments
Division
continuously
assesses
potential
strategic
transactions.
The
Corporate
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.
106
Statistical Summary 2022-2021
Statements of Financial Condition
At December 31,
(In thousands)
2022
2021
Assets:
Cash and due from banks
$
469,501
$
428,433
Money market investments:
Time deposits with other banks
5,614,595
17,536,719
Total money market investments
5,614,595
17,536,719
Trading account debt securities, at fair value
27,723
29,711
Debt securities available-for-sale, at fair
value
17,804,374
24,968,269
Debt securities held-to-maturity, at amortized cost
8,525,366
79,461
Less – Allowance for credit losses
6,911
8,096
Debt securities held-to-maturity, net
8,518,455
71,365
Equity securities
195,854
189,977
Loans held-for-sale, at lower of cost or fair
value
5,381
59,168
Loans held-in-portfolio:
Loans held-in-portfolio
32,372,925
29,506,225
Less – Unearned income
295,156
265,668
Allowance for credit losses
720,302
695,366
Total loans held-in-portfolio, net
31,357,467
28,545,191
Premises and equipment, net
498,711
494,240
Other real estate
89,126
85,077
Accrued income receivable
240,195
203,096
Mortgage servicing rights, at fair value
128,350
121,570
Other assets
1,847,813
1,628,571
Goodwill
827,428
720,293
Other intangible assets
12,944
16,219
Total assets
$
67,637,917
$
75,097,899
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing
$
15,960,557
$
15,684,482
Interest bearing
45,266,670
51,320,606
Total deposits
61,227,227
67,005,088
Assets sold under agreements to repurchase
148,609
91,603
Other short-term borrowings
365,000
75,000
Notes payable
886,710
988,563
Other liabilities
916,946
968,248
Total liabilities
63,544,492
69,128,502
Stockholders’ equity:
Preferred stock
22,143
22,143
Common stock
1,047
1,046
Surplus
4,790,993
4,650,182
Retained earnings
3,834,348
2,973,745
Treasury stock – at cost
(2,030,178)
(1,352,650)
Accumulated other comprehensive loss, net
of tax
(2,524,928)
(325,069)
Total stockholders’ equity
4,093,425
5,969,397
Total liabilities and stockholders’ equity
$
67,637,917
$
75,097,899
107
Statistical Summary 2020-2022
Statements of Operations
For the years ended December 31,
(In thousands)
2022
2021
2020
Interest income:
Loans
$
1,876,166
$
1,747,827
$
1,742,390
Money market investments
118,080
21,147
19,721
Investment securities
471,665
353,663
329,440
Total interest income
2,465,911
2,122,637
2,091,551
Less - Interest expense
298,552
165,047
234,938
Net interest income
2,167,359
1,957,590
1,856,613
Provision for credit losses (benefit)
83,030
(193,464)
292,536
Net interest income after provision for
credit losses
2,084,329
2,151,054
1,564,077
Mortgage banking activities
42,450
50,133
10,401
Net gain on sale of debt securities
-
23
41
Net (loss) gain, including impairment, on
equity securities
(7,334)
131
6,279
Net (loss) gain on trading account debt securities
(784)
(389)
1,033
Net (loss) gain on sale of loans, including
valuation adjustments on loans held-for-sale
-
(73)
1,234
Adjustment to indemnity reserves on loans
sold
919
4,406
390
Other non-interest income
861,811
587,897
492,934
Total non-interest income
897,062
642,128
512,312
Operating expenses:
Personnel costs
719,764
631,802
564,205
All other operating expenses
1,026,656
917,473
893,624
Total operating expenses
1,746,420
1,549,275
1,457,829
Income before income tax
1,234,971
1,243,907
618,560
Income tax expense
132,330
309,018
111,938
Net Income
$
1,102,641
$
934,889
$
506,622
Net Income Applicable to Common Stock
$
1,101,229
$
933,477
$
504,864
108
Statistical Summary 2020-2022
Average Balance Sheet and Summary
of Net Interest Income
On a Taxable Equivalent
Basis*
2022
2021
2020
(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
$
9,530,698
$
118,079
1.24
%
$
15,999,741
$
21,147
0.13
%
$
8,597,652
$
19,723
0.23
%
U.S.
Treasury securities
21,141,431
448,961
2.12
12,396,773
266,670
2.16
12,107,819
257,308
2.13
Obligations of U.S.
Government
sponsored entities
41
2
5.66
7,972
120
1.50
70,424
2,818
4.00
Obligations of Puerto Rico, States
and political subdivisions
67,965
7,824
11.51
75,607
7,608
10.06
82,051
5,705
6.95
Collateralized mortgage obligations and
mortgage-backed securities
8,342,672
198,566
2.38
10,255,525
224,706
2.19
6,913,416
194,794
2.82
Other
190,489
8,925
4.68
194,640
9,027
4.64
178,818
7,369
4.12
Total investment securities
29,742,598
664,278
2.23
22,930,517
508,131
2.22
19,352,528
467,994
2.42
Trading account securities
51,357
3,049
5.94
84,380
4,339
5.16
69,446
4,165
6.00
Loans (net of unearned income)
30,405,280
1,924,895
6.33
29,074,036
1,794,789
6.19
28,384,981
1,785,022
6.29
Total interest earning
assets/Interest
income
$
69,729,933
$
2,710,301
3.89
%
$
68,088,674
$
2,328,406
3.43
%
$
56,404,607
$
2,276,904
4.04
%
Total non-interest
earning assets
3,078,671
3,079,976
3,178,848
Total assets
$
72,808,604
$
71,168,650
$
59,583,455
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Savings, NOW,
money market and
other
interest bearing demand accounts
$
41,769,576
$
191,064
0.46
%
$
41,387,504
$
59,034
0.15
%
$
32,077,578
$
92,417
0.29
%
Time deposits
6,853,127
61,781
0.90
7,028,334
52,587
0.75
7,970,474
83,438
1.05
Federal funds purchased
7
-
3.92
1
-
0.25
342
1
0.25
Securities purchased under agreement
to resell
107,305
2,309
2.15
91,394
317
0.35
143,718
2,336
1.63
Other short-term borrowings
99,083
3,428
3.46
343
1
0.35
21,557
120
0.56
Notes payable
938,778
39,970
4.26
1,184,737
53,107
4.49
1,178,169
56,626
4.81
Total interest bearing
liabilities/Interest
expense
49,767,876
298,552
0.60
49,692,313
165,046
0.33
41,391,838
234,938
0.57
Total non-interest
bearing liabilities
17,031,503
15,698,685
12,771,679
Total liabilities
66,799,379
65,390,998
54,163,517
Stockholders' equity
6,009,225
5,777,652
5,419,938
Total liabilities and
stockholders' equity
$
72,808,604
$
71,168,650
$
59,583,455
Net interest income on a taxable
equivalent basis
$
2,411,749
$
2,163,360
$
2,041,966
Cost of funding earning assets
0.43
%
0.24
%
0.42
%
Net interest margin
3.46
%
3.19
%
3.62
%
Effect of the taxable equivalent
adjustment
244,390
205,770
185,353
Net interest income per books
$
2,167,359
$
1,957,590
$
1,856,613
*
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.
109
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,
2022.
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).
Based on our assessment, management concluded that the Corporation maintained effective internal control over financial reporting
as of December 31, 2022 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, 2022,
as stated
in their
report dated
March 1,
2023
which appears herein.
Ignacio Alvarez
Carlos J. Vázquez
President and
Executive Vice President
Chief Executive Officer
and Chief Financial Officer
110
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,
2022
and
2021,
and
the
related
consolidated
statements
of
operations, comprehensive (loss) income,
changes in stockholders’ equity
and cash flows for
each of the three
years
in
the
period
ended
December
31,
2022,
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, 2022,
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, 2022 and 2021, and the
results of its operations and its cash
flows
for
each
of
the
three
years
in
the
period
ended
December
31,
2022
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,
2022, 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
111
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.
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, 2022, the allowance
for credit losses
was $720
million
on
total
loans
of
$32
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
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.
112
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 $827 million as of December 31, 2022, 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
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
113
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, 2023
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, 2025
Stamp E497972 of the P.R. Society of
Certified Public Accountants has been
affixed to the file copy of this report
114
POPULAR, INC.
CONSOLIDATED STATEMENTS
OF FINANCIAL CONDITION
December 31,
December 31,
(In thousands, except share information)
2022
2021
Assets:
Cash and due from banks
$
469,501
$
428,433
Money market investments:
Time deposits with other banks
5,614,595
17,536,719
Total money market investments
5,614,595
17,536,719
Trading account debt securities, at fair value:
Other trading account debt securities
27,723
29,711
Debt securities available-for-sale, at fair
value:
Pledged securities with creditors’ right to repledge
129,203
93,330
Other debt securities available-for-sale
17,675,171
24,874,939
Debt securities held-to-maturity, at amortized cost (fair value 2022
- $
8,440,196
; 2021 - $
83,368
)
8,525,366
79,461
Less – Allowance for credit losses
6,911
8,096
Debt securities held-to-maturity, net
8,518,455
71,365
Equity securities (realizable value 2022 -
$
196,665
; 2021 - $
192,345
)
195,854
189,977
Loans held-for-sale, at lower of cost or fair
value
5,381
59,168
Loans held-in-portfolio
32,372,925
29,506,225
Less – Unearned income
295,156
265,668
Allowance for credit losses
720,302
695,366
Total loans held-in-portfolio, net
31,357,467
28,545,191
Premises and equipment, net
498,711
494,240
Other real estate
89,126
85,077
Accrued income receivable
240,195
203,096
Mortgage servicing rights, at fair value
128,350
121,570
Other assets
1,847,813
1,628,571
Goodwill
827,428
720,293
Other intangible assets
12,944
16,219
Total assets
$
67,637,917
$
75,097,899
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing
$
15,960,557
$
15,684,482
Interest bearing
45,266,670
51,320,606
Total deposits
61,227,227
67,005,088
Assets sold under agreements to repurchase
148,609
91,603
Other short-term borrowings
365,000
75,000
Notes payable
886,710
988,563
Other liabilities
916,946
968,248
Total liabilities
63,544,492
69,128,502
Commitments and contingencies (Refer
to Note 24)
Stockholders’ equity:
Preferred stock,
30,000,000
shares authorized;
885,726
shares issued and outstanding (2021 -
885,726
)
22,143
22,143
Common stock, $
0.01
par value;
170,000,000
shares authorized;
104,657,522
shares issued (2021 -
104,579,334
) and
71,853,720
shares outstanding (2021 -
79,851,169
)
1,047
1,046
Surplus
4,790,993
4,650,182
Retained earnings
3,834,348
2,973,745
Treasury stock - at cost,
32,803,802
shares (2021 -
24,728,165
)
(2,030,178)
(1,352,650)
Accumulated other comprehensive loss, net
of tax
(2,524,928)
(325,069)
Total stockholders’ equity
4,093,425
5,969,397
Total liabilities and stockholders’ equity
$
67,637,917
$
75,097,899
The accompanying notes are an integral part of
these Consolidated Financial Statements.
115
POPULAR, INC.
CONSOLIDATED STATEMENTS
OF OPERATIONS
Years ended December 31,
(In thousands, except per share information)
2022
2021
2020
Interest income:
Loans
$
1,876,166
$
1,747,827
$
1,742,390
Money market investments
118,080
21,147
19,721
Investment securities
471,665
353,663
329,440
Total interest income
2,465,911
2,122,637
2,091,551
Interest expense:
Deposits
252,845
111,621
175,855
Short-term borrowings
5,737
319
2,457
Long-term debt
39,970
53,107
56,626
Total interest expense
298,552
165,047
234,938
Net interest income
2,167,359
1,957,590
1,856,613
Provision for credit losses (benefit)
83,030
(193,464)
292,536
Net interest income after provision for credit losses
(benefit)
2,084,329
2,151,054
1,564,077
Service charges on deposit accounts
157,210
162,698
147,823
Other service fees
334,009
311,248
257,892
Mortgage banking activities (Refer to Note 10)
42,450
50,133
10,401
Net gain on sale of debt securities
-
23
41
Net (loss) gain, including impairment on equity securities
(7,334)
131
6,279
Net (loss) profit on trading account debt securities
(784)
(389)
1,033
Net (loss) gain on sale of loans, including
valuation adjustments on loans
held-for-sale
-
(73)
1,234
Adjustments to indemnity reserves on loans sold
919
4,406
390
Other operating income
370,592
113,951
87,219
Total non-interest income
897,062
642,128
512,312
Operating expenses:
Personnel costs
719,764
631,802
564,205
Net occupancy expenses
106,169
102,226
119,345
Equipment expenses
35,626
32,919
32,514
Other taxes
63,603
56,783
54,454
Professional fees
172,043
126,721
132,414
Technology and software expenses
291,902
277,979
263,886
Processing and transactional services
127,145
121,367
112,039
Communications
14,885
14,029
13,230
Business promotion
88,918
72,981
57,608
FDIC deposit insurance
26,787
25,579
23,868
Other real estate owned (OREO) income
(22,143)
(14,414)
(3,480)
Other operating expenses
109,446
92,169
81,349
Amortization of intangibles
3,275
9,134
6,397
Goodwill impairment charge
9,000
-
-
Total operating expenses
1,746,420
1,549,275
1,457,829
Income before income tax
1,234,971
1,243,907
618,560
Income tax expense
132,330
309,018
111,938
Net Income
$
1,102,641
$
934,889
$
506,622
Net Income Applicable to Common Stock
$
1,101,229
$
933,477
$
504,864
Net Income per Common Share – Basic
$
14.65
$
11.49
$
5.88
Net Income per Common Share – Diluted
$
14.63
$
11.46
$
5.87
The accompanying notes are an integral part of
these consolidated financial statements.
116
POPULAR, INC.
CONSOLIDATED STATEMENTS
OF COMPREHENSIVE (LOSS) INCOME
Years ended December 31,
(In thousands)
2022
2021
2020
Net income
$
1,102,641
$
934,889
$
506,622
Other comprehensive (loss) income before
tax:
Foreign currency translation adjustment
10,572
3,947
(14,471)
Adjustment of pension and postretirement
benefit plans
7,811
36,950
(9,032)
Amortization of net losses
15,644
20,749
21,447
Unrealized net holding (losses) gains on debt
securities arising during the period
(2,539,421)
(619,470)
419,993
Reclassification adjustment for gains included
in net income
-
(23)
(41)
Amortization of unrealized losses of debt
securities transfer from available-for-sale
to
held-to-maturity [1]
41,642
-
-
Unrealized net gains (losses) on cash flow
hedges
3,719
539
(8,872)
Reclassification adjustment for net (gains)
losses included in net income
(960)
1,847
6,379
Other comprehensive (loss) income before
tax
(2,460,993)
(555,461)
415,403
Income tax benefit (expense)
261,134
40,401
(55,474)
Total other comprehensive (loss) income, net of tax
(2,199,859)
(515,060)
359,929
Comprehensive (loss) income, net of tax
$
(1,097,218)
$
419,829
$
866,551
Tax effect allocated to each component of other comprehensive
(loss) income:
Years ended December 31,
(In thousands)
2022
2021
2020
Adjustment of pension and postretirement
benefit plans
$
(2,929)
$
(13,856)
$
3,387
Amortization of net losses
(5,867)
(7,781)
(8,042)
Unrealized net holding (losses) gains on debt
securities arising during the period
278,324
62,468
(51,213)
Reclassification adjustment for gains included
in net income
-
5
6
Amortization of unrealized losses of debt
securities transfered from available-for-sale
to
held-to-maturity [1]
(8,328)
-
-
Unrealized net gains (losses) on cash flow
hedges
(612)
(172)
2,472
Reclassification adjustment for net (gains)
losses included in net income
546
(263)
(2,084)
Income tax benefit (expense)
$
261,134
$
40,401
$
(55,474)
[1] In October 2022, the Corporation transferred
U.S. Treasury securities with a fair value of $
6.5
billion (par value of $
7.4
billion) from its available-
for-sale portfolio to its held-to-maturity portfolio.
Refer to Note 7 to the Consolidated Financial
Statements for additional information.
The accompanying notes are an integral
part of these consolidated financial statements.
117
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, 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
[2]
76,335
(580,507)
(504,172)
Common stock reissuance
(1,192)
6,022
4,830
Preferred Stock, Redemption Amount
[3]
(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
[4]
(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
Net income
1,102,641
1,102,641
Issuance of stock
1
5,836
5,837
Dividends declared:
Common stock
[1]
(163,693)
(163,693)
Preferred stock
(1,412)
(1,412)
Common stock purchases
[5]
53,592
(691,256)
(637,664)
Stock based compensation
4,450
13,728
18,178
Other comprehensive loss, net of tax
(2,199,859)
(2,199,859)
Transfer
to statutory reserve
76,933
(76,933)
-
Balance at December 31, 2022
$
1,047
$
22,143
$
4,790,993
$
3,834,348
$
(2,030,178)
$
(2,524,928)
$
4,093,425
[1]
Dividends declared per common share during the year ended
December 31, 2022 - $
2.20
(2021 - $
1.75
; 2020 - $
1.60
).
[2]
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.
[3]
On February 24, 2020, the Corporation redeemed all
the outstanding shares of 2008 Series B Preferred Stock.
Refer to Note 20 for additional
information.
[4]
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.
[5]
During the year ended December 31, 2022, the Corporation
completed two accelerated share repurchase transaction
with respect to its common
stock, which were accounted for as a treasury stock transactions.
The aggregate amount of both transactions was $
631
million. Refer to Note 20
for additional information.
Years ended December
31,
Disclosure of changes in number of shares:
2022
2021
2020
Preferred Stock:
Balance at beginning of year
885,726
885,726
2,006,391
Redemption of stocks
-
-
(1,120,665)
Balance at end of year
885,726
885,726
885,726
Common Stock:
Balance at beginning of year
104,579,334
104,508,290
104,392,222
Issuance of stock
78,188
71,044
116,068
Balance at end of year
104,657,522
104,579,334
104,508,290
Treasury stock
(32,803,802)
(24,728,165)
(20,264,055)
Common Stock – Outstanding
71,853,720
79,851,169
84,244,235
The accompanying notes are an integral part of these consolidated
financial statements.
118
POPULAR, INC.
CONSOLIDATED STATEMENTS
OF CASH FLOWS
Years ended December
31,
(In thousands)
2022
2021
2020
Cash flows from operating activities:
Net income
$
1,102,641
$
934,889
$
506,622
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for credit losses (benefit)
83,030
(193,464)
292,536
Goodwill impairment losses
9,000
-
-
Amortization of intangibles
3,275
9,134
6,397
Depreciation and amortization of premises and equipment
55,107
55,104
58,452
Net accretion of discounts and amortization of premiums and
deferred fees
29,120
(21,962)
(63,300)
Interest capitalized on loans subject to the temporary payment
moratorium or loss mitigation
alternatives
(11,521)
(15,567)
(95,212)
Share-based compensation
16,727
17,774
8,254
Impairment losses on right-of-use and long-lived assets
2,233
5,320
18,004
Fair value adjustments on mortgage servicing rights
(166)
10,206
42,055
Fair value adjustment for contingent consideration
(9,241)
-
-
Adjustments to indemnity reserves on loans sold
(919)
(4,406)
(390)
Earnings from investments under the equity method, net
of dividends or distributions
(29,522)
(50,942)
(27,738)
Deferred income tax (benefit) expense
(33,129)
229,371
75,044
(Gain) loss on:
Disposition of premises and equipment and other productive
assets
(9,453)
(18,393)
(11,561)
Proceeds from insurance claims
-
-
(366)
Sale of debt securities
-
(23)
(41)
Sale of loans, including valuation adjustments on loans
held-for-sale and mortgage banking
activities
252
(21,611)
(32,449)
Sale of equity method investment
(8,198)
-
-
Disposition of stock as part of the Evertec Transactions
(240,412)
-
-
Sale of foreclosed assets, including write-downs
(33,008)
(30,098)
(19,958)
Acquisitions of loans held-for-sale
(122,363)
(251,336)
(227,697)
Proceeds from sale of loans held-for-sale
64,542
95,100
83,456
Net originations on loans held-for-sale
(202,913)
(527,585)
(391,537)
Net decrease (increase) in:
Trading debt securities
353,301
741,465
493,993
Equity securities
54
(2,336)
(8,263)
Accrued income receivable
(62,932)
6,193
(35,616)
Other assets
76,589
25,022
114,329
Net increase (decrease) in:
Interest payable
6,061
(5,395)
(5,404)
Pension and other postretirement benefits obligation
(2,893)
(4,104)
5,898
Other liabilities
(20,724)
22,802
(106,736)
Total adjustments
(88,103)
70,269
172,150
Net cash provided by operating activities
1,014,538
1,005,158
678,772
Cash flows from investing activities:
Net decrease (increase) in money market investments
11,922,703
(5,895,789)
(8,378,577)
Purchases of investment securities:
Available-for-sale
(22,232,278)
(14,672,856)
(21,033,807)
Held-to-maturity
(1,879,443)
-
-
Equity
(48,921)
(16,196)
(30,794)
Proceeds from calls, paydowns, maturities and redemptions
of investment securities:
Available-for-sale
20,143,921
9,602,430
18,224,362
Held-to-maturity
9,826
15,700
6,733
Proceeds from sale of investment securities:
Available-for-sale
-
235,992
5,103
Equity
42,990
2,904
25,206
Net (disbursements) repayments on loans
(2,237,084)
469,268
(875,941)
Proceeds from sale of loans
141,314
203,179
84,385
Acquisition of loan portfolios
(753,684)
(348,179)
(1,138,276)
Payments to acquire other intangible
-
(905)
(83)
Payments to acquire businesses, net of cash acquired
-
(155,828)
-
Return of capital from equity method investments
681
6,362
959
Payments to acquire equity method investments
(1,625)
(375)
(1,778)
Proceeds from sale of equity method investment
8,198
-
-
Proceeds from the Evertec stock sale
219,883
-
-
119
Acquisition of premises and equipment
(103,789)
(72,781)
(60,073)
Proceeds from insurance claims
-
-
366
Proceeds from sale of:
Premises and equipment and other productive assets
10,305
21,482
26,548
Foreclosed assets
107,203
86,942
77,521
Net cash provided by (used in) investing activities
5,350,200
(10,518,650)
(13,068,146)
Cash flows from financing activities:
Net (decrease) increase in:
Deposits
(5,770,261)
10,138,617
13,102,028
Assets sold under agreements to repurchase
57,006
(29,700)
(72,076)
Other short-term borrowings
290,000
75,000
-
Payments of notes payable
(103,147)
(237,713)
(139,920)
Principal payments of finance leases
(3,346)
(2,852)
(3,145)
Proceeds from issuance of notes payable
-
-
261,999
Proceeds from issuance of common stock
5,837
4,674
9,093
Payments for repurchase of redeemable preferred stock
-
-
(28,017)
Dividends paid
(161,516)
(141,466)
(133,645)
Net payments for repurchase of common stock
(631,893)
(350,535)
(500,479)
Payments related to tax withholding for share-based compensation
(5,771)
(5,115)
(3,693)
Net cash (used in) provided by financing activities
(6,323,091)
9,450,910
12,492,145
Net increase (decrease) in cash and due from banks, and
restricted cash
41,647
(62,582)
102,771
Cash and due from banks, and restricted cash at beginning
of period
434,512
497,094
394,323
Cash and due from banks, and restricted cash at end of period
$
476,159
$
434,512
$
497,094
The accompanying notes are an integral part of these consolidated
financial statements.
120
Notes to Consolidated Financial Statements
Note 1 -
Nature of Operations and Basis of Presentation
121
Note 2 -
Summary of Significant Accounting Policies
122
Note 3 -
New Accounting Pronouncements
133
Note 4 -
Business Combination
137
Note 5 -
Restrictions on Cash and Due from Banks and Certain Securities
141
Note 6 -
Debt Securities Available-For-Sale
142
Note 7 -
Debt Securities Held-to-Maturity
145
Note 8 -
Loans
148
Note 9 -
Allowance for Credit Losses – Loans Held-In-Portfolio
157
Note 10 -
Mortgage Banking Activities
179
Note 11 -
Transfers of Financial Assets and Mortgage
Servicing Assets
180
Note 12 -
Premises and Equipment
183
Note 13 -
Other Real Estate Owned
184
Note 14 -
Other Assets
185
Note 15 -
Goodwill and Other Intangible Assets
186
Note 16 -
Deposits
190
Note 17 -
Borrowings
191
Note 18 -
Trust Preferred Securities
194
Note 19 -
Other Liabilities
195
Note 20 -
Stockholders’ Equity
196
Note 21 -
Regulatory Capital Requirements
198
Note 22 -
Other Comprehensive (Loss) Income
201
Note 23 -
Guarantees
203
Note 24 -
Commitments and Contingencies
206
Note 25-
Non-consolidated Variable Interest
Entities
214
Note 26 -
Derivative Instruments and Hedging Activities
216
Note 27 -
Related Party Transactions
219
Note 28 -
Fair Value Measurement
222
Note 29 -
Fair Value of Financial Instruments
231
Note 30 -
Employee Benefits
234
Note 31 -
Net Income per Common Share
242
Note 32 -
Revenue from Contracts with Customers
243
Note 33 -
Leases
245
Note 34 -
Stock-Based Compensation
247
Note 35 -
Income Taxes
250
Note 36 -
Supplemental Disclosure on the Consolidated Statements of Cash
Flows
254
Note 37 -
Segment Reporting
255
Note 38 -
Popular, Inc. (Holding company only)
Financial Information
258
121
Note 1 – Nature of Operations and basis of
Presentation
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 wholly
owned subsidiary
of PB based in Minnesota.
Basis of Presentation
Leveraging
the
completion
of
the
Evertec
Transactions,
as
defined
in
Note
4
to
the
Consolidated
Financial
Statements,
the
Corporation embarked
on a
broad-based multi-year,
technological and
business process
transformation during
the second
half of
2022.
The
needs
and
expectations
of
our
clients,
as
well
as
the
competitive
landscape,
have
evolved,
requiring
us
to
make
important
investments
in
our
technological
infrastructure
and
adopt
more
agile
practices.
Our
technology
and
business
transformation will be a significant priority for the Corporation
over the next three years and beyond.
As part of this transformation, we aim to expand our digital capabilities,
modernize our technology platform, and implement agile and
efficient
business processes
across the
entire Corporation.
To
facilitate
the transparency
of the
progress with
the transformation
initiative and
to better
portray the
level of
technology related
expenses categorized
by the
nature of
the expense,
effective in
the
fourth quarter of 2022, the
Corporation has separated technology,
professional fees and transactional and items
processing related
expenses as standalone expense categories in the accompanying Consolidated statement of operations. There were no changes to
the
total
operating
expenses
presented.
Prior
periods
amount
in
the
financial
statements
and
related
disclosures
have
been
reclassified to conform to the current presentation.
The following table provides the detail of
the reclassifications for each respective year:
2021
2020
Financial statement line item
As reported
Adjustments
Adjusted
As reported
Adjustments
Adjusted
Equipment expenses
$
92,097
$
(59,178)
$
32,919
$
88,932
$
(56,418)
$
32,514
Professional services
410,865
(284,144)
126,721
394,122
(261,708)
132,414
Technology and
software expenses
-
277,979
277,979
-
263,886
263,886
Processing and transactional services
-
121,367
121,367
-
112,039
112,039
Communications
25,234
(11,205)
14,029
23,496
(10,266)
13,230
Other expenses
136,988
(44,819)
92,169
128,882
(47,533)
81,349
Net effect on operating expenses
$
665,184
$
-
$
665,184
$
635,432
$
-
$
635,432
122
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.
Refer
to
Note
4
for
information
of
business
combinations
completed by the Corporation for the years presented.
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
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.
123
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
3-years
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
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.
124
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.
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
125
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.
These
loans
follow
the
same
nonaccrual policies as non-PCD loans. Modifications of PCD loans that meet the definition of
a TDR 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
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
126
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,
2022,
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 3-years 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 3-years 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
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
127
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, 2022 and 2021.
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
128
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, 2022, 2021 and 2020 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
129
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
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.
130
The Corporation may require counterparties to deposit
additional collateral or return collateral pledged,
when appropriate.
Software
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
methodology
used
to
estimate
the
recourse
liability
considers
current
conditions,
macroeconomic expectations
through a
2-years reasonable
and supportable
period, gradually
reverting over
a 3-years
horizon to
historical
loss
experience,
portfolio
composition
by
risk
characteristics,
amongst
other
factors.
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 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
income (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
131
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.
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 stockholders, 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
132
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.
133
Note 3 - New accounting pronouncements
Recently Adopted Accounting Standards Updates
Standard
Description
Date of adoption
Effect on the financial statements
FASB ASU 2022-06,
Reference Rate Reform
(Topic 848) - Deferral of
the Sunset Date of Topic
848
The
FASB
issued
Accounting
Standards
Update
("ASU")
2022-06
in
December
2022, which defers the sunset date of
Topic
848 from
December 31,
2022 to
December
31,
2024.
Topic
848
provided
optional
guidance
to
ease
the
potential
burden
in
accounting for (or recognizing the effects of)
reference rate reform on financial reporting.
December 21, 2022
The
Corporation
was
not
impacted
by
the
adoption
of
ASU
2022-06
during
the
fourth
quarter of
2022 since
it
had
adopted
FASB
ASU
2020-04,
Reference Rate
Reform (Topic
848) in
December 2021, as disclosed in Note 2
to
the
Consolidated
Financial
Statements
included
in
Form
10-K
for
the
year
ended
December
31,
2021.
The
Corporation
ceased
originating
LIBOR-based
contracts
in
December
2021.
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
was
not
impacted
by
the
adoption
of
ASU
2021-05
during
the
first
quarter
of
2022
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
The
Corporation
was
not
impacted
by
the
adoption
of
ASU
2021-04
during
the
first
quarter
of
2022
since
it
does
not
hold
freestanding
equity-classified
written call
options under
the scope
of
this guidance.
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
The Corporation adopted ASU
2020-06
during
the
first
quarter
of
2022.
There
was
no
material
impact
upon
the
adoption
in
the
analysis
of
the
accelerated
share
repurchase
transaction discussed in Note 17, which
was
classified
as
an
equity
instrument
and
the
related
potential
shares
were
considered
in
its
dilutive
earnings
per
share calculation.
134
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.
135
Accounting Standards Updates Not Yet Adopted
Standard
Description
Date of adoption
Effect on the financial statements
FASB ASU 2022-05,
Financial Services -
Insurance (Topic 944)
Transition for Sold
Contracts
The
FASB
issued
ASU
2022-05
in
December 2022, which
allows an insurance
entity to make
an accounting policy election
of
applying
the
Long-Duration
Contracts
(LDTI) transition guidance
on a transaction-
by-transaction
basis
if
the
contracts
have
been
derecognized
because
of
a
sale
or
disposal
and
the
insurance
entity
has
no
significant
continuing
involvement
with
the
derecognized contract.
January 1, 2023
The Corporation
does not
expect to
be
impacted
by
the
adoption
of
this
standard since
it does
not holds
Long-
Duration Contracts (LDTI).
FASB ASU 2022-04,
Liabilities—Supplier
Finance Programs
(Subtopic 405-50)
Disclosure of Supplier
Finance Program
Obligations
The
FASB
issued
ASU
2022-04
in
September 2022, which requires to disclose
information
about
the
use
of
supplier
finance
programs
in
connection
with
the
purchase of goods and services.
January 1, 2023
The Corporation
does not
expect to
be
impacted
by
the
adoption
of
this
standard since
it does
not use
supplier
finance programs.
FASB ASU 2022-03, Fair
Value Measurement
(Topic 820) Fair Value
Measurement of Equity
Securities Subject to
Contractual Sale
Restriction
The
FASB
issued
ASU
2022-03
in
June
2022,
which
clarifies
that
a
contractual
restriction that prohibits the sale of an equity
security is
not considered part
of the unit
of
account
of
the equity
security,
therefore, is
not
considered
in
measuring
its
fair
value.
The
ASU
also
provides
enhanced
disclosures for equity securities
subject to a
contractual sale restriction.
January 1, 2024
The
Corporation
does
not
anticipate
that
the
adoption
of
this
accounting
pronouncement
will
have
a
material
effect
in
its
consolidated
statement
of
financial
condition
and
results
of
operations.
FASB ASU 2022-02,
Financial Instruments—
Credit Losses (Topic 326)
Troubled Debt
Restructurings and
Vintage Disclosures
The
FASB
issued
ASU
2022-02
in
March
2022,
which
eliminates
the
accounting
guidance
for
troubled
debt
restructurings
(“TDRs”) in
Subtopic 310-40
Receivables—
Troubled
Debt
Restructurings
by
Creditors
and
requires
creditors
to
apply
the
loan
refinancing
and
restructuring
guidance
to
determine whether
a modification
results in
a new
loan or
a continuation
of an
existing
loan.
In
addition,
the
ASU
enhances
the
disclosure
requirements
for
certain
loan
refinancing
and
restructurings
by
creditors
when
a
borrower
is
experiencing
financial
difficulty
and
enhances
the
vintage
disclosure
by
requiring
the
disclosure
of
current-period
gross
write-offs
by
year
of
origination for financing
receivables and net
investments in leases.
January 1, 2023
The adoption of this
standard will result
in
enhanced
disclosure
for
loans
modified
to
borrowers
with
financial
difficulties
and
the
disclosure
of
gross
charge
offs
by
vintage
year.
The
Corporation
anticipates
that
there
will
be loans subject to disclosure under the
new standard that
did not qualify
under
the prior guidance
given the removal
of
the
concession
requirement
for
such
disclosures.
The
amended
guidance
eliminates
the
requirement to
measure
the effect of the concession from a
loan
modification, for
which the
Corporation
used
a
discounted
cash
flow
(“DCF”)
model.
The
Corporation
preliminarily
estimates
that
the
impact
of
discontinuing the use of the DCF model
to measure the concession will
result in
a
release
of
the
ACL
of
approximately
$45 million,
mainly related
to mortgage
loans
for
which
modifications
mostly
included
a
reduction
in
contractual
interest
rates
and
given
the
extended
maturity
term
of
these
loans,
this
resulted
in
an
increase
in
the
ACL
in
the
period
of
modification.
The
Corporation
has
elected
to
apply
the
modified retrospective approach
for the
adoption
of
this
standard.
Accordingly,
this will
be presented as
an adjustment
increase,
net
of
tax
effect,
to
the
beginning balance
of retained
earnings
upon adoption on January 1, 2023.
136
Accounting Standards Updates Not Yet Adopted
Standard
Description
Date of adoption
Effect on the financial statements
FASB ASU 2022-01,
Derivatives and Hedging
(Topic 815) – Fair Value
Hedging—Portfolio Layer
Method
The
FASB
issued
ASU
2022-01
in
March
2022,
which
amends
ASC
Topic
815
by
allowing
non
prepayable
financial
assets
also
to
be
included
in
a
closed
portfolio
hedged
using
the
portfolio
layer
method.
This
amendment permits
an entity
to
apply
fair
value
hedging to
a
stated
amount
of
a
closed
portfolio
of
prepayable
and
non-
prepayable
financial
assets
without
considering
prepayment
risk
or
credit
risk
when measuring those assets.
January 1, 2023
The Corporation
does not
expect to
be
impacted
by
the
adoption
of
this
standard
since
it
does
not
hold
derivatives
designated
as
fair
value
hedges.
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
contract 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.
137
Note 4
–
Business combinations
Acquisition of key customer channels and business
from Evertec
On July
1,
2022, BPPR
completed its
previously announced
acquisition of
certain assets
used by
Evertec Group,
LLC (“Evertec
Group”),
a
wholly
owned
subsidiary
of
Evertec,
Inc.
(“Evertec”),
to
service
certain
BPPR
channels
(“Business
Acquisition
Transaction”).
As
a
result
of
the closing
of
the Business
Acquisition Transaction,
BPPR
acquired
from
Evertec Group
certain critical
channels,
including
BPPR’s
retail
and
business
digital
banking
and
commercial
cash
management
applications.
In
connection
with
the
Business Acquisition Transaction, BPPR
also entered into amended and
restated service agreements with Evertec Group
pursuant
to
which
Evertec
Group
will
continue
to
provide
various
information
technology
and
transaction
processing
services
to
Popular,
BPPR and their respective subsidiaries.
Under the
amended service
agreements, Evertec
Group no
longer has
exclusive rights
to provide
certain of
Popular’s technology
services. The
amended service
agreements include
discounted pricing
and lowered
caps on
contractual pricing
escalators tied
to
the Consumer Price Index. As
part of the transaction, BPPR and Evertec
also entered into a revenue sharing
structure for BPPR in
connection
with
its
merchant
acquiring
relationship
with
Evertec.
Under
the
terms
of
the
amended
and
restated
Master
Service
Agreement (“MSA”), Evertec will be entitled to receive monthly payments
from the Corporation to the extent that Evertec’s revenues,
covered under the MSA, fall below certain agreed
annualized minimum amounts.
As consideration for the
Business Acquisition Transaction, BPPR delivered
to Evertec Group
4,589,169
shares of Evertec common
stock valued at closing at $
169.2
million (based on Evertec’s stock price on June 30, 2022 of $
36.88
). A total of $
144.8
million of the
consideration for
the transaction
was attributed
to the
acquisition of
the critical
channels of
which $
28.7
million were
attributed to
Software
Intangible
Assets
and
$
116.1
million
were
attributed
to
goodwill.
The
transaction
was
accounted
for
as
a
business
combination.
The
remaining
$
24.2
million
was
attributed
to
the
renegotiation of
the
MSA
with
Evertec
and
was
recorded
as
an
expense. The Corporation also recorded a credit of $
6.9
million in Evertec billings under the MSA during the third quarter of 2022 as
a result of the Business Acquisition Transaction, resulting in a net
expense charge of $
17.3
million.
On
August
15,
2022,
the
Corporation
completed
the
sale
of
its
remaining
7,065,634
shares
of
common
stock
of
Evertec
(the
“Evertec Stock Sale”, and collectively
with the Business Acquisition Transaction,
the “Evertec Transactions”). Following
the Evertec
Stock
Sale, Popular
no longer
owns any
Evertec common
stock. The
impact of
the
gain on
the sale
of
Evertec shares
used as
consideration
for
the
Business
Acquisition
Transaction
in
exchange
for
the
acquired
applications
on
July
1,
2022
and
the
net
expense associated with the renegotiation of the MSA, together with the Evertec Stock Sale and the related accounting adjustments
of the Evertec Transactions, resulted in an aggregate after-tax gain
of $
226.6
million, recorded during the third quarter of 2022.
The following
table presents
the fair
values of
the consideration
and major
classes of
identifiable assets
acquired by
BPPR as
of
July 1, 2022.
(In thousands)
Fair Value
Stock consideration
$
144,785
Total consideration
$
144,785
Assets:
Developed technology - Software intangible assets
$
28,650
Total assets
$
28,650
Net assets acquired
$
28,650
Goodwill on acquisition
$
116,135
The fair
value initially
assigned to the
assets acquired is
preliminary and subject
to refinement
for up
to one
year after
the closing
date
of
the
acquisition
as
new
information
relative
to
closing
date
fair
value
becomes
available. As
the
Corporation finalizes
its
138
analysis, there may
continue to be
adjustments to the
recorded carrying values, and
thus the recognized
goodwill may increase
or
decrease.
The
following
is
a
description
of
the
methods
used
to
determine
the
fair
values
of
significant
assets
acquired
in
the
Business
Acquisition Transaction:
Developed technology – Software intangible assets
In order
to determine
the fair
value of
the developed
technology acquired,
the Corporation
considered the
guidance in
ASC Topic
820,
Fair Value
Measurements. The
Corporation
used the
cost
replacement methodology
and
estimated the
cost
that
would
be
incurred in developing the acquired technology as the assets’ fair value. In developing this
estimate, the Corporation considered the
historical direct costs as well as indirect costs and applied an inflation factor to arrive at what would be the current replacement cost.
To
this
estimated
cost,
the
Corporation
applied
an
obsolescence
factor
to
arrive
at
the
estimated
fair
value
of
the
acquired
technology.
The obsolescence
factor considered
the estimated
remaining useful
life of
the acquired
software, considering existing
and
upcoming technology
changes,
as
well
as
the
scalability
of
the
system
architecture for
further
developments. This
software
acquired
for
internal
use
is
recorded
within
Other
Assets
in
the
accompanying
Consolidated
Financial
Statements
and
will
be
amortized over its current estimated remaining useful
life of
5
years.
Goodwill
The goodwill
is the
residual difference
between the consideration
transferred to
Evertec and
the fair
value of
the assets
acquired,
net of
the liabilities assumed,
if any.
The entire amount
of goodwill is
deductible for income
tax purposes pursuant
to P.R.
Internal
Revenue Code (“IRC”) section 1033.07 over a
15
-year period.
The Corporation believes
that given the
amount of assets
acquired and the
size of
the operations acquired
in relation to
Popular’s
operations, the historical results of Evertec are not
material to Popular’s results, and thus
no pro forma information is presented.
139
Acquisition of K2 Capital Group LLC’s equipment leasing and financing
business
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.
Specializing in the healthcare industry,
the Acquired Business provided 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.
(In thousands)
Fair Value
Cash consideration
$
156,628
Contingent consideration
9,241
Total consideration
$
165,869
Assets:
Cash and due from banks
$
800
Commercial loans
115,575
Premises and equipment
8,996
Accrued income receivable
57
Other assets
2,822
Other intangible assets
2,887
Total assets
$
131,137
Other liabilities
14,439
Total liabilities
$
14,439
Net assets acquired
$
116,698
Goodwill on acquisition
$
49,171
The fair
value initially
assigned to the
assets acquired is
preliminary and subject
to refinement
for up
to one
year after
the closing
date
of
the
acquisition
as
new
information
relative
to
closing
date
fair
value
becomes
available. As
the
Corporation finalizes
its
analysis, 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.
140
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.
During the third
quarter of 2022,
the Corporation revised
its projected earnings
related to this
Acquired Business, and
accordingly,
recorded a goodwill impairment charge of $
9.0
million.
Contingent consideration
The fair value of the contingent consideration, which related 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.
During the
third quarter
of 2022,
the Corporation
updated its
estimates related
to the
ability to
realize the
earnings targets
for the
contingent payment, and accordingly, recorded a positive adjustment of $
9.2
million related this liability.
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.
141
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
$
2.8
billion at
December 31,
2022 (December
31,
2021
-
$
2.7
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,
2022,
the
Corporation
held
$
80
million
in
restricted
assets
in
the
form
of
funds
deposited
in
money
market
accounts, debt
securities available for
sale and
equity securities (December
31, 2021
- $
50
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.
142
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, 2022 and December 31, 2021.
At December 31, 2022
Gross
Gross
Weighted
Amortized
unrealized
unrealized
Fair
average
(In thousands)
cost
gains
losses
value
yield
U.S. Treasury securities
Within 1 year
$
4,576,127
$
506
$
47,156
$
4,529,477
2.42
%
After 1 to 5 years
6,793,739
-
410,858
6,382,881
1.35
After 5 to 10 years
308,854
-
40,264
268,590
1.63
Total U.S. Treasury
securities
11,678,720
506
498,278
11,180,948
1.78
Collateralized mortgage obligations - federal agencies
After 1 to 5 years
3,914
-
213
3,701
1.77
After 5 to 10 years
47,979
-
3,428
44,551
1.73
After 10 years
127,639
24
10,719
116,944
2.53
Total collateralized
mortgage obligations - federal agencies
179,532
24
14,360
165,196
2.30
Mortgage-backed securities
After 1 to 5 years
74,328
11
3,428
70,911
2.33
After 5 to 10 years
866,757
43
58,997
807,803
2.16
After 10 years
6,762,150
932
1,184,626
5,578,456
1.61
Total mortgage-backed
securities
7,703,235
986
1,247,051
6,457,170
1.68
Other
After 1 to 5 years
1,062
-
2
1,060
3.98
Total other
1,062
-
2
1,060
3.98
Total debt securities
available-for-sale
[1]
$
19,562,549
$
1,516
$
1,759,691
$
17,804,374
1.75
%
[1]
Includes $
11.3
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 $
10.3
billion serve as collateral for
public funds.
143
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.
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, 2022
by contractual maturity.
(In thousands)
Amortized cost
Fair value
Within 1 year
$
4,576,127
$
4,529,477
After 1 to 5 years
6,873,043
6,458,553
After 5 to 10 years
1,223,590
1,120,944
After 10 years
6,889,789
5,695,400
Total debt securities
available-for-sale
$
19,562,549
$
17,804,374
There were
no
debt securities available-for-sale sold during the year ended
December 31, 2022. During the year
ended
December
31, 2021,
the Corporation
sold U.S
Treasury
Notes. The
proceeds from
these sales
were $
236
million. Gross
realized gains
and
losses on the sale of debt securities available-for-sale
for the years ended December 31, 2022,
2021 and 2020 were as follows:
144
(In thousands)
2022
2021
2020
Gross realized gains
$
-
$
695
$
41
Gross realized losses
-
(672)
-
Net realized gains (losses) on sale of debt securities available
-for-sale
$
-
$
23
$
41
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, 2022 and 2021.
At December 31, 2022
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
$
6,027,786
$
288,582
$
3,244,572
$
209,696
$
9,272,358
$
498,278
Collateralized mortgage obligations - federal agencies
139,845
10,655
22,661
3,705
162,506
14,360
Mortgage-backed securities
1,740,214
138,071
4,662,195
1,108,980
6,402,409
1,247,051
Other
60
2
-
-
60
2
Total debt securities
available-for-sale in an unrealized loss position
$
7,907,905
$
437,310
$
7,929,428
$
1,322,381
$
15,837,333
$
1,759,691
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
As of
December 31,
2022, the
portfolio of
available-for-sale debt
securities reflects
gross unrealized
losses of
approximately $
1.8
billion, driven mainly by fixed-rate U.S. Treasury Securities and mortgage-backed securities,
which have been impacted by a decline
in fair value as
a result of the
rising interest rate environment.
The portfolio of available-for-sale debt securities is
comprised mainly
of
U.S
Treasuries
and
obligations
from
the
U.S.
Government,
its
agencies
or
government
sponsored
entities,
including
FNMA,
FHMLC and GNMA.
As discussed in
Note 2 to
the Consolidated Financial
Statements, these securities
carry 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.
In October 2022, the
Corporation transferred U.S. Treasury securities
with a fair value
of $
6.5
billion (par value of
$
7.4
billion) from
its available-for-sale portfolio to its held-to-maturity portfolio.
Management changed its intent, given its ability to hold these securities
to maturity
due to
the Corporation’s
liquidity position
and its
intention to
reduce the
impact on
accumulated other
comprehensive
income (loss) (“AOCI”) and
tangible capital of further
increases in interest rates.
The securities were reclassified
at fair value at
the
time of
the transfer.
At the
date of
the transfer,
these securities
had pre-tax
unrealized losses of
$
873.0
million recorded
in AOCI.
This fair value discount is being accreted to interest income and the unrealized loss remaining in AOCI is being amortized, offsetting
each other through the remaining life of the securities.
There were no realized gains or losses recorded
as a result of this transfer.
145
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, 2022 and 2021.
At December 31, 2022
Allowance
Carrying
Value
Gross
Gross
Weighted
Amortized
Book
[1]
for Credit
Net of
unrealized
unrealized
Fair
average
(In thousands)
cost
Value
Losses
Allowance
gains
losses
value
yield
U.S. Treasury securities
Within 1 year
$
499,034
$
499,034
$
-
$
499,034
$
-
$
6,203
$
492,831
2.83
%
After 1 to 5 years
6,147,568
5,640,767
-
5,640,767
-
59,806
5,580,961
1.49
After 5 to 10 years
2,638,238
2,313,666
-
2,313,666
-
14,857
2,298,809
1.41
Total U.S. Treasury
securities
9,284,840
8,453,467
-
8,453,467
-
80,866
8,372,601
1.54
Obligations of Puerto Rico, States and
political subdivisions
Within 1 year
4,530
4,530
8
4,522
5
-
4,527
6.08
After 1 to 5 years
19,105
19,105
234
18,871
150
82
18,939
4.24
After 5 to 10 years
1,025
1,025
34
991
34
-
1,025
5.80
After 10 years
41,261
41,261
6,635
34,626
4,729
2,229
37,126
1.40
Total obligations of
Puerto Rico, States and
political subdivisions
65,921
65,921
6,911
59,010
4,918
2,311
61,617
2.61
Collateralized mortgage obligations - federal
agencies
After 1 to 5 years
19
19
-
19
-
-
19
6.44
Total collateralized
mortgage obligations -
federal agencies
19
19
-
19
-
-
19
6.44
Securities in wholly owned statutory business
trusts
After 10 years
5,959
5,959
-
5,959
-
-
5,959
6.33
Total securities
in wholly owned statutory
business trusts
5,959
5,959
-
5,959
-
-
5,959
6.33
Total debt securities
held-to-maturity [2]
$
9,356,739
$
8,525,366
$
6,911
$
8,518,455
$
4,918
$
83,177
$
8,440,196
1.55
%
[1]
Book value includes $
831
million of net unrealized loss which remains in Accumulated
other comprehensive income (AOCI) related to certain
securities transferred from available-for-sale securities
portfolio to the held-to-maturity securities portfolio as
discussed in Note 6.
[2]
Includes $
6.9
million pledged to secure public and trust deposits
that the secured parties are not permitted to sell or repledge
the collateral.
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
agencies
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
trusts
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
%
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.
146
The following
table presents the
aggregate amortized cost
and fair value
of debt securities
held-to-maturity at December
31, 2022
by contractual maturity.
(In thousands)
Amortized cost
Book Value
Fair value
Within 1 year
$
503,564
$
503,564
$
497,358
After 1 to 5 years
6,166,692
5,659,891
5,599,919
After 5 to 10 years
2,639,263
2,314,691
2,299,834
After 10 years
47,220
47,220
43,085
Total debt securities
held-to-maturity
$
9,356,739
$
8,525,366
$
8,440,196
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.
As discussed in Note 2 to the Consolidated Financial Statements, U.S. Treasury securities carry
an explicit 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.
At December 31, 2022 and December 31, 2021, 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 $
25
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,
2021
-
$
30
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
to
the
Consolidated
Financial Statements.
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, 2022
At December 31, 2021
(In thousands)
Securities issued by Puerto Rico municipalities
Watch
$
13,735
$
16,345
Pass
10,925
13,800
Total
$
24,660
$
30,145
At December
31, 2022,
the portfolio
of “Obligations
of Puerto
Rico, States
and political
subdivisions” also
includes $
42
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, 2021 -
$
43
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,
2022, the average
refreshed FICO
score
for the
representative sample,
comprised of
65
%
of
the
nominal value
of the
securities, used
for the
loss
estimate was
of
707
(compared to
64
%
and
704
,
respectively,
at December
31, 2021).
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.
147
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
to the
Consolidated Financial
Statements
for additional
information on
the Corporation’s
exposure to
the Puerto
Rico Government.
Delinquency status
At December 31, 2022 and December 31, 2021,
there were
no
securities held-to-maturity in past due or non-performing
status.
Allowance for credit losses on debt securities held-to-maturity
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, 2022 and December 31, 2021:
For the year ended December 31,
2022
2021
(In thousands)
Obligations of Puerto Rico, States and political subdivisions
Allowance for credit losses:
Beginning balance
$
8,096
$
10,261
Provision for credit losses (benefit)
(1,185)
(2,165)
Securities charged-off
-
-
Recoveries
-
-
Ending balance
$
6,911
$
8,096
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 $
6.6
million for bonds issued by
the Puerto Rico HFA,
which are secured by
second mortgage loans on
Puerto Rico residential properties (compared to
$
0.3
million and $
7.8
million, respectively, at
December
31, 2021).
148
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, 2022, the Corporation recorded purchases (including repurchases) of mortgage loans
of $
299
million, which
include $
4
million in
Purchased Credit
Deteriorated (“PCD”)
loans, consumer
loans of
$
433
million and
commercial
loans of $
142
million; compared to purchases (including repurchases)
of mortgage loans of $
393
million, which include $
14
million in
PCD loans, consumer loans of $
61
million and commercial loans of $
139
million during the year ended December 31, 2021.
The Corporation performed
whole-loan sales involving
approximately $
63
million of
residential mortgage loans
and $
138
million of
commercial and
construction loans
during the
year ended
December 31,
2022 (December
31, 2021
- $
145
million of
residential
mortgage
loans
and
$
131
million
of
commercial
and
construction loans).
Also,
during
the
year
ended December
31,
2022,
the
Corporation securitized
approximately $
169
million of
mortgage loans
into Government
National Mortgage
Association (“GNMA”)
mortgage-backed securities
and $
122
million of
mortgage loans
into Federal
National Mortgage
Association (“FNMA”)
mortgage-
backed securities, compared
to $
380
million and $
330
million, respectively,
during the year
ended December 31,
2021. Also, the
Corporation
securitized
approximately
$
9
million
of
mortgage
loans
into
Federal
Home
Loan
Mortgage
Corporation
(“FHLMC”)
mortgage-backed securities during the year ended December
31, 2022.
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, 2022 and 2021.
149
December 31, 2022
BPPR
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
$
425
$
-
$
242
$
667
$
280,706
$
281,373
$
242
$
-
Commercial real estate:
Non-owner occupied
941
428
23,662
25,031
2,732,296
2,757,327
23,662
-
Owner occupied
729
245
23,990
24,964
1,563,092
1,588,056
23,990
-
Commercial and industrial
3,036
941
35,777
39,754
3,756,754
3,796,508
34,277
1,500
Construction
-
-
-
-
147,041
147,041
-
-
Mortgage
222,926
91,881
579,993
894,800
5,215,479
6,110,279
242,391
337,602
Leasing
11,983
3,563
5,941
21,487
1,564,252
1,585,739
5,941
-
Consumer:
Credit cards
7,106
5,049
11,910
24,065
1,017,766
1,041,831
-
11,910
Home equity lines of credit
-
-
-
-
2,954
2,954
-
-
Personal
13,232
8,752
18,082
40,066
1,545,621
1,585,687
18,082
-
Auto
68,868
19,243
40,978
129,089
3,383,441
3,512,530
40,978
-
Other
487
87
12,682
13,256
124,324
137,580
12,446
236
Total
$
329,733
$
130,189
$
753,257
$
1,213,179
$
21,333,726
$
22,546,905
$
402,009
$
351,248
December 31, 2022
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
$
2,177
$
-
$
-
$
2,177
$
2,038,163
$
2,040,340
$
-
$
-
Commercial real estate:
Non-owner occupied
484
-
1,454
1,938
1,740,405
1,742,343
1,454
-
Owner occupied
-
-
5,095
5,095
1,485,398
1,490,493
5,095
-
Commercial and industrial
12,960
2,205
4,685
19,850
2,022,842
2,042,692
4,319
366
Construction
-
-
-
-
610,943
610,943
-
-
Mortgage
16,131
5,834
20,488
42,453
1,244,739
1,287,192
20,488
-
Consumer:
Credit cards
-
-
-
-
39
39
-
-
Home equity lines of
credit
413
161
4,110
4,684
64,278
68,962
4,110
-
Personal
1,808
1,467
1,958
5,233
232,659
237,892
1,958
-
Other
-
-
8
8
9,960
9,968
8
-
Total
$
33,973
$
9,667
$
37,798
$
81,438
$
9,449,426
$
9,530,864
$
37,432
$
366
150
December 31, 2022
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
$
2,602
$
-
$
242
$
2,844
$
2,318,869
$
2,321,713
$
242
$
-
Commercial real estate:
Non-owner occupied
1,425
428
25,116
26,969
4,472,701
4,499,670
25,116
-
Owner occupied
729
245
29,085
30,059
3,048,490
3,078,549
29,085
-
Commercial and industrial
15,996
3,146
40,462
59,604
5,779,596
5,839,200
38,596
1,866
Construction
-
-
-
-
757,984
757,984
-
-
Mortgage
[1]
239,057
97,715
600,481
937,253
6,460,218
7,397,471
262,879
337,602
Leasing
11,983
3,563
5,941
21,487
1,564,252
1,585,739
5,941
-
Consumer:
Credit cards
7,106
5,049
11,910
24,065
1,017,805
1,041,870
-
11,910
Home equity lines of credit
413
161
4,110
4,684
67,232
71,916
4,110
-
Personal
15,040
10,219
20,040
45,299
1,778,280
1,823,579
20,040
-
Auto
68,868
19,243
40,978
129,089
3,383,441
3,512,530
40,978
-
Other
487
87
12,690
13,264
134,284
147,548
12,454
236
Total
$
363,706
$
139,856
$
791,055
$
1,294,617
$
30,783,152
$
32,077,769
$
439,441
$
351,614
[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 $
14
million at December 31, 2022 related to the rebooking
of loans previously pooled
into GNMA securities, in which the Corporation had a
buy-back option. 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 also include $
190
million of
residential mortgage loans insured by FHA or guaranteed by
the VA that are no longer accruing
interest as of December 31, 2022. Furthermore,
the Corporation has approximately $
42
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 $
295
million in unearned income and exclude $
5
million in loans held-for-sale.
[3]
Includes $
7.4
billion pledged to secure credit facilities and public funds
that the secured parties are not permitted to sell or
repledge the collateral,
of which $
4.8
billion were pledged at the Federal Home Loan Bank
("FHLB") as collateral for borrowings and $
2.6
billion at the Federal Reserve
Bank ("FRB") for discount window borrowings.
151
December 31, 2021
BPPR
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
152
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 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.
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 also 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 FHLB as collateral for borrowings
and $
1.7
billion at the FRB for discount window borrowings
and $
1.7
billion serve as collateral for public funds.
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, 2022, mortgage
loans held-in-portfolio include
$
2.0
billion (December 31,
2021 -
$
1.9
billion) of loans
insured by
the FHA,
or guaranteed
by the
VA
of which
$
0.3
billion (December
31, 2021
- $
0.5
billion) are
90 days
or more
past due.
These
balances include
$
725
million in
loans modified
under a
TDR (December
31, 2021
- $
716
million), that
are presented
as accruing
loans.
The
portfolio
of
guaranteed
loans
includes
$
190
million
of
residential
mortgage
loans
in
Puerto
Rico
that
are
no
longer
accruing interest
as of
December 31, 2022
(December 31, 2021
- $
304
million). The
Corporation has approximately
$
42
million in
reverse mortgage loans in Puerto Rico which are guaranteed by FHA, but which are currently not accruing interest at December 31,
2022 (December 31, 2021 - $
50
million).
Loans with
a delinquency status
of 90
days past due
as of
December 31, 2022
include $
14
million in loans
previously pooled into
GNMA securities (December 31, 2021 -
$
13
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, 2022 and
2021 were as follows:
153
(In thousands)
2022
2021
Total minimum lease
payments
$
1,336,173
$
1,190,545
Estimated residual value of leased property
605,638
518,670
Deferred origination costs, net of fees
24,909
21,474
Less - Unearned financing income
293,091
257,738
Net minimum lease payments
1,673,629
1,472,951
Less - Allowance for credit losses
22,216
18,581
Net minimum lease payments, net of allowance for credit losses
$
1,651,413
$
1,454,370
At December 31, 2022, future minimum lease payments
are expected to be received as follows:
(In thousands)
2023
$
111,779
2024
132,371
2025
177,836
2026
303,773
2027
402,035
2028 and thereafter
208,379
Total
$
1,336,173
The following tables present the amortized cost basis
of non-accrual loans as of December 31, 2022
and 2021 by class of loans:
154
December 31, 2022
BPPR
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
$
-
$
242
$
-
$
-
$
-
$
242
Commercial real estate non-owner occupied
15,639
8,023
1,454
-
17,093
8,023
Commercial real estate owner occupied
9,070
14,920
5,095
-
14,165
14,920
Commercial and industrial
20,227
14,050
-
4,319
20,227
18,369
Mortgage
119,027
123,364
71
20,417
119,098
143,781
Leasing
458
5,483
-
-
458
5,483
Consumer:
HELOCs
-
-
-
4,110
-
4,110
Personal
4,623
13,459
-
1,958
4,623
15,417
Auto
1,177
39,801
-
-
1,177
39,801
Other
263
12,183
-
8
263
12,191
Total
$
170,484
$
231,525
$
6,620
$
30,812
$
177,104
$
262,337
December 31, 2021
BPPR
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
Loans in non-accrual status with no
allowance at December 31, 2022 include
$
177
million in collateral dependent loans (December
31,
2021
-
$
237
million).
The
Corporation recognized
$
4
million
in
interest
income
on
non-accrual loans
during
the
year
ended
December 31, 2022 (December 31, 2021 - $
3
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, 2022 and 2021:
155
December 31, 2022
(In thousands)
Real Estate
Auto
Equipment
Accounts
Receivables
Other
Total
BPPR
Commercial multi-family
$
1,329
$
-
$
-
$
-
$
-
$
1,329
Commercial real estate:
Non-owner occupied
202,980
-
-
-
-
202,980
Owner occupied
18,234
-
-
-
-
18,234
Commercial and industrial
1,345
-
32
9,853
20,985
32,215
Mortgage
128,069
-
-
-
-
128,069
Leasing
-
1,020
-
-
-
1,020
Consumer:
Personal
5,381
-
-
-
-
5,381
Auto
-
9,556
-
-
-
9,556
Other
-
-
-
-
263
263
Total BPPR
$
357,338
$
10,576
$
32
$
9,853
$
21,248
$
399,047
Popular U.S.
Commercial real estate:
Non-owner occupied
$
1,454
$
-
$
-
$
-
$
-
$
1,454
Owner occupied
5,095
-
-
-
-
5,095
Commercial and industrial
-
-
136
-
-
136
Mortgage
1,104
-
-
-
-
1,104
Total Popular U.S.
$
7,653
$
-
$
136
$
-
$
-
$
7,789
Popular, Inc.
Commercial multi-family
$
1,329
$
-
$
-
$
-
$
-
$
1,329
Commercial real estate:
Non-owner occupied
204,434
-
-
-
-
204,434
Owner occupied
23,329
-
-
-
-
23,329
Commercial and industrial
1,345
-
168
9,853
20,985
32,351
Mortgage
129,173
-
-
-
-
129,173
Leasing
-
1,020
-
-
-
1,020
Consumer:
Personal
5,381
-
-
-
-
5,381
Auto
-
9,556
-
-
-
9,556
Other
-
-
-
-
263
263
Total Popular,
Inc.
$
364,991
$
10,576
$
168
$
9,853
$
21,248
$
406,836
156
December 31, 2021
(In thousands)
Real Estate
Auto
Equipment
Accounts
Receivables
Other
Total
BPPR
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 BPPR
$
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
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, 2022
December 31, 2021
Purchase price of loans at acquisition
$
3,144
$
10,995
Allowance for credit losses at acquisition
915
3,142
Non-credit discount / (premium) at acquisition
140
446
Par value of acquired loans at acquisition
$
4,199
$
14,583
157
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,
2022,
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
weightings
applied
are
subject
to
evaluation on
a quarterly
basis as
part of
the ACL’s
governance process. The
Corporation evaluates, at
least on
an annual
basis,
the
assumptions
tied
to
the
CECL
accounting
framework.
These
include
the
reasonable
and
supportable
period
as
well
as
the
reversion
window.
During the
third
quarter
of
2022,
as
part
of
its
evaluation
procedures, the
Corporation decided
to
extend
the
reversion
window
from
1
year
to
3
years.
The
extension
in
the
reversion
window
results
in
a
better
representation
of
historical
movements for
key macroeconomic
variables that
impact the
ACL. This
change in
assumptions contributed
to a
reduction of
$
11
million in the ACL. The reasonable and supportable
period assumptions remained unchanged at 2-
years.
The baseline scenario assumes a 2023 annualized
GDP growth for Puerto Rico and
the United States of 1.3% and
0.7%. For 2022
annualized expected growth
was 2.6% and
1.8% for Puerto
Rico and United
States, respectively.
The reduction in
2023 is due
to
the expected slowdown in the economy as a
result of tight monetary policy, weaker job growth and persistent inflation.
The 2023 average unemployment rate is forecasted at 7.8% and 4.0% for Puerto Rico and United States, respectively, compared to
2022 average level 6.4% for Puerto Rico and 3.7% for the United States. In 2023, weaker job growth due to the expected slowdown
in the economy will contribute to an increase
in the unemployment rate.
The
following
tables
present
the
changes
in
the
ACL
of
loans
held-in-portfolio
and
unfunded
commitments
for
the
years
ended
December 31, 2022 and 2021.
For the year ended December 31, 2022
BPPR
(In thousands)
Commercial
Construction
Mortgage
Leasing
Consumer
Total
Allowance for credit losses - loans:
Beginning balance
$
151,928
$
1,641
$
138,286
$
17,578
$
284,729
$
594,162
Provision for credit losses (benefit)
11,475
526
(37,600)
6,832
88,311
69,544
Initial allowance for credit losses - PCD Loans
-
-
915
-
-
915
Charge-offs
(7,238)
-
(5,105)
(7,107)
(106,752)
(126,202)
Recoveries
18,130
811
20,848
3,315
34,022
77,126
Ending balance - loans
$
174,295
$
2,978
$
117,344
$
20,618
$
300,310
$
615,545
Allowance for credit losses - unfunded commitments:
Beginning balance
$
1,751
$
2,388
$
-
$
-
$
-
$
4,139
Provision for credit losses (benefit)
2,585
(366)
-
-
-
2,219
Ending balance - unfunded commitments [1]
$
4,336
$
2,022
$
-
$
-
$
-
$
6,358
[1]
Allowance for credit losses of unfunded commitments is
presented as part of Other Liabilities in the Consolidated
Statements of Financial Condition.
158
For the year ended December 31, 2022
Popular U.S.
(In thousands)
Commercial
Construction
Mortgage
Consumer
Total
Allowance for credit losses - loans:
Beginning balance
$
63,877
$
4,722
$
16,192
$
16,413
$
101,204
Provision for credit losses (benefit)
4,597
(4,586)
1,706
12,046
13,763
Charge-offs
(10,012)
-
(68)
(8,036)
(18,116)
Recoveries
2,619
1,132
80
4,075
7,906
Ending balance - loans
$
61,081
$
1,268
$
17,910
$
24,498
$
104,757
Allowance for credit losses - unfunded commitments:
Beginning balance
$
1,384
$
2,337
$
-
$
37
$
3,758
Provision for credit losses (benefit)
(209)
(1,153)
-
51
(1,311)
Ending balance - unfunded commitments [1]
$
1,175
$
1,184
$
-
$
88
$
2,447
[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, 2022
Popular, Inc.
(In thousands)
Commercial
Construction
Mortgage
Leasing
Consumer
Total
Allowance for credit losses - loans:
Beginning balance
$
215,805
$
6,363
$
154,478
$
17,578
$
301,142
$
695,366
Provision for credit losses (benefit)
16,072
(4,060)
(35,894)
6,832
100,357
83,307
Initial allowance for credit losses - PCD Loans
-
-
915
-
-
915
Charge-offs
(17,250)
-
(5,173)
(7,107)
(114,788)
(144,318)
Recoveries
20,749
1,943
20,928
3,315
38,097
85,032
Ending balance - loans
$
235,376
$
4,246
$
135,254
$
20,618
$
324,808
$
720,302
Allowance for credit losses - unfunded commitments:
Beginning balance
$
3,135
$
4,725
$
-
$
-
$
37
$
7,897
Provision for credit losses (benefit)
2,376
(1,519)
-
-
51
908
Ending balance - unfunded commitments [1]
$
5,511
$
3,206
$
-
$
-
$
88
$
8,805
[1]
Allowance for credit losses of unfunded commitments is
presented as part of Other Liabilities in the Consolidated
Statements of Financial Condition.
159
For the year ended December 31, 2021
BPPR
(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.
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.
160
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.
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
$
1.6
billion at
December 31,
2022 (December
31, 2021
- $
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
$
12
million related to the commercial
loan portfolio at December 31,
2022 (December 31, 2021 -
$
9
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, 2022 and 2021.
The Corporation has offered to clients impacted by the hurricanes Fiona
a moratorium of up to three monthly payments on personal
and commercial credit cards, auto loans, leases, and personal loans,
subject to certain eligibility requirements. Mortgage clients also
benefited from
different
payment relief
alternatives available,
depending on
their type
of
loan. Loan
relief options
for commercial
clients were reviewed on a
case-by-case basis. As of December 31,
2022, approximately 2,428 loans with
a $94.8 loans amortized
cost were granted a moratorium of which 218
loans with a $7.7 million amortized cost have
been classified as TDR.
December 31, 2022
December 31, 2021
(In thousands)
Accruing
Non-
Accruing
Total
Related
Allowance
Accruing
Non-
Accruing
Total
Related
Allowance
Loans held-in-portfolio:
Commercial
$
269,784
$
54,641
$
324,425
$
18,451
$
261,344
$
64,744
$
326,088
$
24,736
Mortgage
[1]
1,169,976
86,790
1,256,766
58,819
1,143,204
112,509
1,255,713
61,888
Leasing
1,154
24
1,178
43
325
47
372
42
Consumer
54,395
7,883
62,278
13,577
64,093
10,556
74,649
16,124
Loans held-in-portfolio
$
1,495,309
$
149,338
$
1,644,647
$
90,890
$
1,468,966
$
187,856
$
1,656,822
$
102,790
[1] At December 31, 2022, accruing mortgage loan TDRs include
$
725
million guaranteed by U.S. sponsored entities
at BPPR, compared to $
716
million at December 31, 2021.
The
following
tables
present
the
loan
count
by
type
of
modification
for
those
loans
modified
in
a
TDR
during
the
years
ended
December 31, 2022 and 2021. Loans modified
as TDRs for the U.S. operations are considered
insignificant to the Corporation.
161
For the year ended December 31, 2022
Reduction in
interest rate
Extension of
maturity date
Combination of
reduction in interest
rate and extension of
maturity date
Other
Commercial real estate non-owner occupied
-
2
2
4
Commercial real estate owner occupied
3
10
1
14
Commercial and industrial
4
9
1
16
Mortgage
7
217
881
5
Leasing
-
2
1
34
Consumer:
Credit cards
48
-
-
48
HELOCs
-
-
1
-
Personal
111
111
3
40
Auto
-
1
-
129
Other
1
-
-
-
Total
174
352
890
290
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
During the year ended December 31, 2022,
three
loans with an aggregate unpaid principal balance of $
2.7
million were restructured
into multiple notes (“Note A / B split”)
,
compared to
five
loans with an aggregate unpaid principal balance of $
10.2
million during the
year ended December 31,
2021.
No
charge-offs were recorded as part of Note A / B splits during 2022 and
2021. These loans were
restructured after analyzing the borrowers’ capacity
to repay the debt, collateral and ability to perform
under the modified terms.
162
The following tables present,
by class, quantitative information related
to loans modified as TDRs during the years
ended December
31, 2022 and 2021.
Popular, Inc.
For the year ended December 31, 2022
(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 real estate non-owner occupied
8
$
6,530
$
6,527
$
60
Commercial real estate owner occupied
28
19,192
19,165
(2,078)
Commercial and industrial
30
51,139
50,929
2,120
Mortgage
1,110
128,581
125,875
4,447
Leasing
37
1,181
1,180
13
Consumer:
Credit cards
96
866
898
10
HELOCs
1
245
236
67
Personal
265
3,581
3,479
671
Auto
130
1,631
1,631
5
Other
1
8
8
1
Total
1,706
$
212,954
$
209,928
$
5,316
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
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, 2022
(Dollars in thousands)
Loan count
Recorded investment as of first default date
Commercial real estate owner occupied
2
$
620
Commercial and industrial
7
6,639
Mortgage
75
9,391
Leasing
1
5
Consumer:
Credit cards
29
249
Personal
49
918
Total
163
$
17,822
163
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
164
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, 2022 and 2021 by vintage year.
165
December 31, 2022
Term Loans
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted to
Term Loans
Amortized
Cost Basis
Amortized Cost Basis by Origination Year
(In thousands)
2022
2021
2020
2019
2018
Prior
Years
Total
BPPR
Commercial:
Commercial multi-family
Watch
$
-
$
-
$
-
$
18,508
$
-
$
4,687
$
-
$
-
$
23,195
Special mention
-
-
-
-
-
2,692
-
-
2,692
Substandard
-
-
-
-
-
3,326
100
-
3,426
Pass
137,411
22,850
20,821
16,145
24,640
30,193
-
-
252,060
Total commercial
multi-family
$
137,411
$
22,850
$
20,821
$
34,653
$
24,640
$
40,898
$
100
$
-
$
281,373
Commercial real estate non-owner occupied
Watch
$
173
$
36,228
$
14,045
$
14,942
$
7,777
$
99,269
$
-
$
-
$
172,434
Special Mention
-
4,361
19,970
7,517
-
25,540
-
-
57,388
Substandard
8,933
-
3,209
19,004
25,490
21,064
-
-
77,700
Pass
855,839
585,690
294,086
94,056
35,105
568,893
16,136
-
2,449,805
Total commercial
real estate non-
owner occupied
$
864,945
$
626,279
$
331,310
$
135,519
$
68,372
$
714,766
$
16,136
$
-
$
2,757,327
Commercial real estate owner occupied
Watch
$
2,296
$
5,271
$
9,447
$
4,275
$
31,649
$
71,568
$
-
$
-
$
124,506
Special Mention
10
284
1,684
6,578
1,076
61,460
-
-
71,092
Substandard
16,205
6,177
802
800
770
84,205
-
-
108,959
Doubtful
-
-
-
-
-
505
-
-
505
Pass
227,404
258,473
274,333
30,691
68,029
407,322
16,742
-
1,282,994
Total commercial
real estate owner
occupied
$
245,915
$
270,205
$
286,266
$
42,344
$
101,524
$
625,060
$
16,742
$
-
$
1,588,056
Commercial and industrial
Watch
$
32,376
$
2,185
$
15,493
$
18,829
$
15,483
$
51,602
$
56,508
$
-
$
192,476
Special Mention
2,537
2,479
5,770
1,139
6,767
46,040
6,283
-
71,015
Substandard
789
1,276
1,600
3,138
11,536
40,636
46,226
-
105,201
Doubtful
-
-
29
-
75
75
-
-
179
Loss
-
-
-
-
-
-
144
-
144
Pass
793,662
684,647
211,013
177,265
65,197
292,173
1,203,536
-
3,427,493
Total commercial
and industrial
$
829,364
$
690,587
$
233,905
$
200,371
$
99,058
$
430,526
$
1,312,697
$
-
$
3,796,508
Construction
Watch
$
35,446
$
3,116
$
98
$
-
$
-
$
-
$
141
$
-
$
38,801
Substandard
-
-
9,629
-
-
-
$
-
-
9,629
Pass
13,044
34,387
15,961
2,262
-
-
32,957
-
98,611
Total construction
$
48,490
$
37,503
$
25,688
$
2,262
$
-
$
-
$
33,098
$
-
$
147,041
Mortgage
Substandard
$
-
$
574
$
687
$
3,926
$
4,227
$
93,959
$
-
$
-
$
103,373
Pass
449,286
451,027
285,026
204,170
237,007
4,380,390
-
-
6,006,906
Total mortgage
$
449,286
$
451,601
$
285,713
$
208,096
$
241,234
$
4,474,349
$
-
$
-
$
6,110,279
Leasing
Substandard
$
953
$
1,491
$
941
$
1,172
$
1,127
$
215
$
-
$
-
$
5,899
Loss
-
-
-
21
-
21
-
-
42
Pass
672,294
428,889
237,939
146,231
79,451
14,994
-
-
1,579,798
Total leasing
$
673,247
$
430,380
$
238,880
$
147,424
$
80,578
$
15,230
$
-
$
-
$
1,585,739
166
December 31, 2022
Term Loans
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted to
Term Loans
Amortized
Cost Basis
Amortized Cost Basis by Origination Year
(In thousands)
2022
2021
2020
2019
2018
Prior
Years
Total
BPPR
Consumer:
Credit cards
Substandard
$
-
$
-
$
-
$
-
$
-
$
-
$
11,907
$
-
$
11,907
Loss
-
-
-
-
-
-
3
-
3
Pass
-
-
-
-
-
-
1,029,921
-
1,029,921
Total credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
1,041,831
$
-
$
1,041,831
HELOCs
Pass
$
-
$
-
$
-
$
-
$
-
$
-
$
2,954
$
-
$
2,954
Total HELOCs
$
-
$
-
$
-
$
-
$
-
$
-
$
2,954
$
-
$
2,954
Personal
Substandard
$
1,330
$
2,001
$
764
$
1,774
$
503
$
10,831
$
-
$
1,285
$
18,488
Loss
-
-
53
20
31
10
-
1
115
Pass
841,564
320,809
103,337
117,568
46,555
109,543
-
27,708
1,567,084
Total Personal
$
842,894
$
322,810
$
104,154
$
119,362
$
47,089
$
120,384
$
-
$
28,994
$
1,585,687
Auto
Substandard
$
6,764
$
11,171
$
10,466
$
10,243
$
4,597
$
2,382
$
-
$
-
$
45,623
Loss
23
41
48
25
7
14
-
-
158
Pass
1,156,654
961,571
588,200
426,169
248,328
85,827
-
-
3,466,749
Total Auto
$
1,163,441
$
972,783
$
598,714
$
436,437
$
252,932
$
88,223
$
-
$
-
$
3,512,530
Other consumer
Substandard
$
-
$
-
$
100
$
593
$
543
$
242
$
10,902
$
-
$
12,380
Loss
-
-
-
-
263
40
-
-
303
Pass
29,557
17,439
6,967
4,201
4,553
1,942
60,238
-
124,897
Total Other
consumer
$
29,557
$
17,439
$
7,067
$
4,794
$
5,359
$
2,224
$
71,140
$
-
$
137,580
Total Puerto Rico
$
5,284,550
$
3,842,437
$
2,132,518
$
1,331,262
$
920,786
$
6,511,660
$
2,494,698
$
28,994
$
22,546,905
167
December 31, 2022
Term Loans
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted to
Term Loans
Amortized
Cost Basis
Amortized Cost Basis by Origination Year
(In thousands)
2022
2021
2020
2019
2018
Prior
Years
Total
Popular U.S.
Commercial:
Commercial multi-family
Watch
$
750
$
917
$
6,218
$
85,579
$
9,633
$
52,835
$
-
$
-
$
155,932
Special mention
-
-
1,198
-
14,491
8,372
-
-
24,061
Substandard
-
-
-
9,305
7,373
2,941
-
-
19,619
Pass
503,010
399,397
238,903
210,295
138,723
347,615
2,785
-
1,840,728
Total commercial
multi-family
$
503,760
$
400,314
$
246,319
$
305,179
$
170,220
$
411,763
$
2,785
$
-
$
2,040,340
Commercial real estate non-owner occupied
Watch
$
-
$
2,167
$
13,622
$
3,355
$
26,931
$
29,849
$
-
$
-
$
75,924
Special Mention
-
-
-
1,353
-
75,269
-
-
76,622
Substandard
-
2,864
2,149
3,220
1,429
4,722
-
-
14,384
Pass
552,258
209,338
211,449
109,781
100,065
383,409
9,113
-
1,575,413
Total commercial
real estate non-
owner occupied
$
552,258
$
214,369
$
227,220
$
117,709
$
128,425
$
493,249
$
9,113
$
-
$
1,742,343
Commercial real estate owner occupied
Watch
$
-
$
-
$
1,197
$
1,079
$
6,095
$
55,005
$
-
$
-
$
63,376
Special Mention
-
-
3,886
-
-
901
-
-
4,787
Substandard
-
-
-
7,403
11,165
33,586
-
-
52,154
Pass
363,655
422,959
114,988
82,971
119,565
258,881
7,157
-
1,370,176
Total commercial
real estate owner
occupied
$
363,655
$
422,959
$
120,071
$
91,453
$
136,825
$
348,373
$
7,157
$
-
$
1,490,493
Commercial and industrial
Watch
$
12,328
$
2,218
$
2,022
$
2,049
$
8,438
$
532
$
4,291
$
-
$
31,878
Special Mention
1,262
1,130
314
244
60
-
3
-
3,013
Substandard
260
935
74
4,278
315
1,829
1,408
-
9,099
Loss
292
525
1
75
192
3
-
-
1,088
Pass
185,318
341,855
368,398
202,301
171,528
376,045
352,169
-
1,997,614
Total commercial
and industrial
$
199,460
$
346,663
$
370,809
$
208,947
$
180,533
$
378,409
$
357,871
$
-
$
2,042,692
Construction
Watch
$
-
$
12,085
$
-
$
6,979
$
18,310
$
34,126
$
-
$
-
$
71,500
Special Mention
-
3
-
-
-
-
-
-
3
Substandard
-
-
1,423
-
6,540
2,095
-
-
10,058
Pass
164,272
146,062
91,486
93,118
10,863
23,581
-
-
529,382
Total construction
$
164,272
$
158,150
$
92,909
$
100,097
$
35,713
$
59,802
$
-
$
-
$
610,943
Mortgage
Substandard
$
-
$
2,009
$
3,478
$
4,048
$
1,156
$
9,798
$
-
$
-
$
20,489
Pass
236,595
303,204
243,468
183,846
58,026
241,564
-
-
1,266,703
Total mortgage
$
236,595
$
305,213
$
246,946
$
187,894
$
59,182
$
251,362
$
-
$
-
$
1,287,192
168
December 31, 2022
Term Loans
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted to
Term Loans
Amortized
Cost Basis
Amortized Cost Basis by Origination Year
(In thousands)
2022
2021
2020
2019
2018
Prior
Years
Total
Popular U.S.
Consumer:
Credit cards
Pass
$
-
$
-
$
-
$
-
$
-
$
-
$
39
$
-
$
39
Total credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
39
$
-
$
39
HELOCs
Substandard
$
-
$
-
$
-
$
-
$
-
$
2,146
$
20
$
1,402
$
3,568
Loss
-
-
-
-
-
4
-
538
542
Pass
-
-
-
-
-
9,169
41,724
13,959
64,852
Total HELOCs
$
-
$
-
$
-
$
-
$
-
$
11,319
$
41,744
$
15,899
$
68,962
Personal
Substandard
$
621
$
454
$
149
$
238
$
70
$
6
$
-
$
-
$
1,538
Loss
-
-
-
-
-
421
-
-
421
Pass
165,153
46,320
7,339
13,443
2,021
1,657
-
-
235,933
Total Personal
$
165,774
$
46,774
$
7,488
$
13,681
$
2,091
$
2,084
$
-
$
-
$
237,892
Other consumer
Substandard
$
-
$
-
$
-
$
-
$
-
$
-
$
8
$
-
$
8
Pass
-
-
-
-
-
-
9,960
-
9,960
Total Other
consumer
$
-
$
-
$
-
$
-
$
-
$
-
$
9,968
$
-
$
9,968
Total Popular U.S.
$
2,185,774
$
1,894,442
$
1,311,762
$
1,024,960
$
712,989
$
1,956,361
$
428,677
$
15,899
$
9,530,864
169
December 31, 2022
Term Loans
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted to
Term Loans
Amortized
Cost Basis
Amortized Cost Basis by Origination Year
(In thousands)
2022
2021
2020
2019
2018
Prior
Years
Total
Popular, Inc.
Commercial:
Commercial multi-family
Watch
$
750
$
917
$
6,218
$
104,087
$
9,633
$
57,522
$
-
$
-
$
179,127
Special mention
-
-
1,198
-
14,491
11,064
-
-
26,753
Substandard
-
-
-
9,305
7,373
6,267
100
-
23,045
Pass
640,421
422,247
259,724
226,440
163,363
377,808
2,785
-
2,092,788
Total commercial
multi-family
$
641,171
$
423,164
$
267,140
$
339,832
$
194,860
$
452,661
$
2,885
$
-
$
2,321,713
Commercial real estate non-owner occupied
Watch
$
173
$
38,395
$
27,667
$
18,297
$
34,708
$
129,118
$
-
$
-
$
248,358
Special Mention
-
4,361
19,970
8,870
-
100,809
-
-
134,010
Substandard
8,933
2,864
5,358
22,224
26,919
25,786
-
-
92,084
Pass
1,408,097
795,028
505,535
203,837
135,170
952,302
25,249
-
4,025,218
Total commercial
real estate non-
owner occupied
$
1,417,203
$
840,648
$
558,530
$
253,228
$
196,797
$
1,208,015
$
25,249
$
-
$
4,499,670
Commercial real estate owner occupied
Watch
$
2,296
$
5,271
$
10,644
$
5,354
$
37,744
$
126,573
$
-
$
-
$
187,882
Special Mention
10
284
5,570
6,578
1,076
62,361
-
-
75,879
Substandard
16,205
6,177
802
8,203
11,935
117,791
-
-
161,113
Doubtful
-
-
-
-
-
505
-
-
505
Pass
591,059
681,432
389,321
113,662
187,594
666,203
23,899
-
2,653,170
Total commercial
real estate owner
occupied
$
609,570
$
693,164
$
406,337
$
133,797
$
238,349
$
973,433
$
23,899
$
-
$
3,078,549
Commercial and industrial
Watch
$
44,704
$
4,403
$
17,515
$
20,878
$
23,921
$
52,134
$
60,799
$
-
$
224,354
Special Mention
3,799
3,609
6,084
1,383
6,827
46,040
6,286
-
74,028
Substandard
1,049
2,211
1,674
7,416
11,851
42,465
47,634
-
114,300
Doubtful
-
-
29
-
75
75
-
-
179
Loss
292
525
1
75
192
3
144
-
1,232
Pass
978,980
1,026,502
579,411
379,566
236,725
668,218
1,555,705
-
5,425,107
Total commercial
and industrial
$
1,028,824
$
1,037,250
$
604,714
$
409,318
$
279,591
$
808,935
$
1,670,568
$
-
$
5,839,200
170
December 31, 2022
Term Loans
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted to
Term Loans
Amortized
Cost Basis
Amortized Cost Basis by Origination Year
(In thousands)
2022
2021
2020
2019
2018
Prior
Years
Total
Popular, Inc.
Construction
Watch
$
35,446
$
15,201
$
98
$
6,979
$
18,310
$
34,126
$
141
$
-
$
110,301
Special Mention
-
3
-
-
-
-
-
-
3
Substandard
-
-
11,052
-
6,540
2,095
-
-
19,687
Pass
177,316
180,449
107,447
95,380
10,863
23,581
32,957
-
627,993
Total construction
$
212,762
$
195,653
$
118,597
$
102,359
$
35,713
$
59,802
$
33,098
$
-
$
757,984
Mortgage
Substandard
$
-
$
2,583
$
4,165
$
7,974
$
5,383
$
103,757
$
-
$
-
$
123,862
Pass
685,881
754,231
528,494
388,016
295,033
4,621,954
-
-
7,273,609
Total mortgage
$
685,881
$
756,814
$
532,659
$
395,990
$
300,416
$
4,725,711
$
-
$
-
$
7,397,471
Leasing
Substandard
$
953
$
1,491
$
941
$
1,172
$
1,127
$
215
$
-
$
-
$
5,899
Loss
-
-
-
21
-
21
-
-
42
Pass
672,294
428,889
237,939
146,231
79,451
14,994
-
-
1,579,798
Total leasing
$
673,247
$
430,380
$
238,880
$
147,424
$
80,578
$
15,230
$
-
$
-
$
1,585,739
171
December 31, 2022
Term Loans
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted to
Term Loans
Amortized
Cost Basis
Amortized Cost Basis by Origination Year
(In thousands)
2022
2021
2020
2019
2018
Prior
Years
Total
Popular, Inc.
Consumer:
Credit cards
Substandard
$
-
$
-
$
-
$
-
$
-
$
-
$
11,907
$
-
$
11,907
Loss
-
-
-
-
-
-
3
-
3
Pass
-
-
-
-
-
-
1,029,960
-
1,029,960
Total credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
1,041,870
$
-
$
1,041,870
HELOCs
Substandard
$
-
$
-
$
-
$
-
$
-
$
2,146
$
20
$
1,402
$
3,568
Loss
-
-
-
-
-
4
-
538
542
Pass
-
-
-
-
-
9,169
44,678
13,959
67,806
Total HELOCs
$
-
$
-
$
-
$
-
$
-
$
11,319
$
44,698
$
15,899
$
71,916
Personal
Substandard
$
1,951
$
2,455
$
913
$
2,012
$
573
$
10,837
$
-
$
1,285
$
20,026
Loss
-
-
53
20
31
431
-
1
536
Pass
1,006,717
367,129
110,676
131,011
48,576
111,200
-
27,708
1,803,017
Total Personal
$
1,008,668
$
369,584
$
111,642
$
133,043
$
49,180
$
122,468
$
-
$
28,994
$
1,823,579
Auto
Substandard
$
6,764
$
11,171
$
10,466
$
10,243
$
4,597
$
2,382
$
-
$
-
$
45,623
Loss
23
41
48
25
7
14
-
-
158
Pass
1,156,654
961,571
588,200
426,169
248,328
85,827
-
-
3,466,749
Total Auto
$
1,163,441
$
972,783
$
598,714
$
436,437
$
252,932
$
88,223
$
-
$
-
$
3,512,530
Other consumer
Substandard
$
-
$
-
$
100
$
593
$
543
$
242
$
10,910
$
-
$
12,388
Loss
-
-
-
-
263
40
-
-
303
Pass
29,557
17,439
6,967
4,201
4,553
1,942
70,198
-
134,857
Total Other
consumer
$
29,557
$
17,439
$
7,067
$
4,794
$
5,359
$
2,224
$
81,108
$
-
$
147,548
Total Popular Inc.
$
7,470,324
$
5,736,879
$
3,444,280
$
2,356,222
$
1,633,775
$
8,468,021
$
2,923,375
$
44,893
$
32,077,769
172
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
BPPR
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
173
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
BPPR
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
174
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
175
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
176
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
177
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
178
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
179
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)
2022
2021
2020
Mortgage servicing fees, net of fair value adjustments:
Mortgage servicing fees
$
36,487
$
38,105
$
43,234
Mortgage servicing rights fair value adjustments
236
(10,206)
(42,055)
Total mortgage
servicing fees, net of fair value adjustments
36,723
27,899
1,179
Net (loss) gain on sale of loans, including valuation on
loans held for sale
(251)
21,684
31,215
Trading account profit (loss):
Realized gains (losses) on closed derivative positions
6,635
1,323
(10,586)
Total trading account
profit (loss)
6,635
1,323
(10,586)
Losses on repurchased loans, including interest advances [1]
(657)
(773)
(11,407)
Total mortgage
banking activities
$
42,450
$
50,133
$
10,401
[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.
180
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, 2022
and 2021 because
they
did
not
contain
any
credit
recourse
arrangements.
The
Corporation recorded
a
net
loss
of
$
1.8
million
and
a
net
gain
of
$
18.4
million, respectively, during the years ended December 31, 2022 and 2021
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, 2022 and
2021:
Proceeds Obtained During the Year
Ended December 31, 2022
(In thousands)
Level 1
Level 2
Level 3
Initial fair value
Assets
Trading account debt securities:
Mortgage-backed securities - GNMA
$
-
$
169,352
$
-
$
169,352
Mortgage-backed securities - FNMA
-
122,422
-
122,422
Mortgage-backed securities - FHLMC
-
8,505
-
8,505
Total trading account
debt securities
$
-
$
300,279
$
-
$
300,279
Mortgage servicing rights
$
-
$
-
$
5,318
$
5,318
Total
$
-
$
300,279
$
5,318
$
305,597
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
During the
year ended
December 31,
2022, the
Corporation retained
servicing rights
on whole
loan sales
involving approximately
$
114
million in principal balance outstanding (2021 - $
144
million), with net realized gains of approximately $
1.8
million (2021 - $
3.2
million). All loan sales performed during the
years ended December 31, 2022 and 2021 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, 2022
and 2021.
181
Residential MSRs
(In thousands)
December 31, 2022
December 31, 2021
Fair value at beginning of period
$
121,570
$
118,395
Additions
6,614
13,391
Changes due to payments on loans
[1]
(11,063)
(15,383)
Reduction due to loan repurchases
(779)
(1,233)
Changes in fair value due to changes in valuation model inputs
or assumptions
12,845
6,410
Other
(837)
(10)
Fair value at end of period
[2]
$
128,350
$
121,570
[1] Represents changes due to collection / realization
of expected cash flows over time.
[2] At December 31, 2022, PB had MSRs amounting to $
2.0
million (December 31, 2021 - $
1.6
million).
Residential mortgage loans serviced for others were $
11.1
billion at December 31, 2022 (2021 - $
12.1
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,
2022, those
weighted average mortgage
servicing fees
were
0.31
%
(2021 –
0.30
%). 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, 2022 and 2021 were
as follows:
Years ended
December 31, 2022
December 31, 2021
BPPR
PB
BPPR
PB
Prepayment speed
5.4
%
8.1
%
6.8
%
19.0
%
Weighted average life (in years)
9.5
7.8
8.3
20.9
Discount rate (annual rate)
10.5
%
9.9
%
10.5
%
10.7
%
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)
2022
2021
2022
2021
Fair value of servicing rights
$
41,548
$
40,058
$
86,802
$
81,512
Weighted average life (in years)
6.8
7.1
6.9
7.5
Weighted average prepayment speed (annual
rate)
5.9
%
7.7
%
7.0
%
7.6
%
Impact on fair value of 10% adverse change
$
(730)
$
(1,500)
$
(1,602)
$
(1,486)
Impact on fair value of 20% adverse change
$
(1,433)
$
(2,359)
$
(3,143)
$
(3,495)
Weighted average discount rate (annual rate)
11.2
%
11.2
%
11.0
%
11.0
%
Impact on fair value of 10% adverse change
$
(1,485)
$
(2,079)
$
(3,256)
$
(2,731)
Impact on fair value of 20% adverse change
$
(2,876)
$
(3,452)
$
(6,304)
$
(5,832)
182
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, 2022, the Corporation serviced $
0.6
billion (2021 - $
0.7
billion) in residential mortgage loans with credit recourse
to
the Corporation, from which $
15
million was 60 days or
more past due (2021 - $
26
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,
2022,
the
Corporation
had
recorded
$
14
million
in
mortgage
loans
on
its
Consolidated
Statements
of
Financial
Condition related to this
buy-back option program (2021 -
$
13
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,
2022,
the
Corporation
repurchased
approximately
$
58
million
of
mortgage
loans
from
its
GNMA servicing portfolio (2021 - $
94
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 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.
183
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
2022
2021
Premises and equipment:
Land
$
90,625
$
94,246
Buildings
10
-
50
482,030
468,293
Equipment
2
-
10
388,911
374,192
Leasehold improvements
3
-
10
89,693
87,406
960,634
929,891
Less - Accumulated depreciation and amortization
586,479
559,234
Subtotal
374,155
370,657
Construction in progress
33,931
29,337
Premises and equipment, net
$
498,711
$
494,240
Depreciation and
amortization of premises
and equipment for
the year 2022
was $
55.1
million (2021 -
$
55.1
million; 2020
- $
58.4
million), of
which $
24.8
million (2021
- $
25.2
million; 2020
- $
27.2
million) was
charged to
occupancy expense
and $
30.3
million
(2021
-
$
29.8
million;
2020
-
$
31.2
million)
was charged
to
equipment, technology
and
software
and
other
operating expenses.
Occupancy expense of premises and equipment
is net of rental income
of $
13.1
million (2021 - $
13.4
million; 2020 - $
15.5
million).
For information related to the amortization expense
of finance leases, refer to Note 33 - Leases.
184
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, 2022,
2021 and 2020.
For the year ended December 31, 2022
OREO
OREO
(In thousands)
Commercial/Construction
Mortgage
Total
Balance at beginning of period
$
15,017
$
70,060
$
85,077
Write-downs in value
(959)
(1,517)
(2,476)
Additions
5,787
70,069
75,856
Sales
(7,453)
(61,453)
(68,906)
Other adjustments
108
(533)
(425)
Ending balance
$
12,500
$
76,626
$
89,126
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
185
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, 2022
December 31, 2021
Net deferred tax assets (net of valuation allowance)
$
953,676
$
657,597
Investments under the equity method
210,001
298,988
Prepaid taxes
39,405
37,924
Other prepaid expenses
33,384
34,937
Capitalized software costs
81,862
44,908
Derivative assets
19,229
26,093
Trades receivable from brokers and counterparties
35,099
65,460
Receivables from investments maturities
125,000
-
Principal, interest and escrow servicing advances
41,916
53,942
Guaranteed mortgage loan claims receivable
59,659
98,001
Operating ROU assets (Note 33)
125,573
141,748
Finance ROU assets (Note 33)
18,884
13,459
Others
104,125
155,514
Total other assets
$
1,847,813
$
1,628,571
The Corporation regularly incurs in
capitalizable costs associated with software development or
licensing which are recorded within
the Other Assets line item in the accompanying Consolidated Statements of Financial Condition.
In addition, the Corporation incurs
costs
associated
with
hosting
arrangements
that
are
service
contracts
that
are
also
recorded
within
Other
Assets.
The
hosting
arrangements can
include capitalizable
implementation costs
that are
amortized during
the term
of the
hosting arrangement.
The
following
table
summarizes
the
composition
of
acquired
or
developed
software
costs
as
well
as
costs
related
to
hosting
arrangements:
Gross Carrying
Accumulated
Net
Carrying
(In thousands)
Amount
Amortization
Value
December 31, 2022
Software development costs [1]
$
63,609
$
16,803
$
46,806
Software license costs
37,165
14,164
23,001
Cloud computing arrangements
20,745
8,690
12,055
Total Capitalized
software costs [2]
$
121,519
$
39,657
$
81,862
December 31, 2021
Software development costs
$
40,033
$
18,972
$
21,061
Software license costs
168,862
154,571
14,291
Cloud computing arrangements
18,346
8,790
9,556
Total Capitalized
software costs
$
227,241
$
182,333
$
44,908
[1]
Software development costs includes $
28.7
million acquired as part of the Evertec Transactions.
[2]
At December 31, 2022 the table above excludes assets which
have been fully amortized.
Total
amortization expense for
all capitalized software
and hosting arrangement
cost, reflected as
part of
technology and software
expenses in the consolidated statement of operations,
is as follows:
Year ended December
31,
(In thousands)
2022
2021
2020
Software development and license costs
$
55,011
$
45,577
$
43,259
Cloud computing arrangements
3,805
3,867
2,206
Total amortization
expense
$
58,816
$
49,444
$
45,465
186
Note 15 – Goodwill and other intangible assets
The
changes
in
the
carrying
amount
of
goodwill
for
the
years
ended
December
31,
2022
and
2021,
allocated
by
reportable
segments, were as follows (refer to Note 37 for
the definition of the Corporation’s reportable segments):
2022
Balance at
Goodwill on
Goodwill
Balance at
(In thousands)
January 1, 2022
acquisition
impairment
December 31, 2022
Banco Popular de Puerto Rico
$
320,248
$
116,135
$
-
$
436,383
Popular U.S.
400,045
-
(9,000)
391,045
Total Popular,
Inc.
$
720,293
$
116,135
$
(9,000)
$
827,428
2021
Balance at
Goodwill on
Goodwill
Balance at
(In thousands)
January 1, 2021
acquisition
impairment
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, 2022 in
the reportable segment of
Banco Popular de Puerto
Rico of
$
116.1
million
was
related
to
the
Evertec
Business
Acquisition
Transaction.
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 PEF
Acquired Business.
Refer to
Note
4,
Business
combination,
for
additional
information
related
to
the
assets
acquired
and
liabilities
assumed
as
a
result
of
business combinations, including
goodwill and other intangible assets. The goodwill impairment in Popular U.S. of
$
9
million during
the year ended December 31, 2022 was recognized by the Corporation
from the annual test as of July 31, 2022 related to PEF, as a
result of a decrease in the projected earnings
of this business unit.
At December 31, 2022 and 2021, the Corporation
had $
0.7
million of identifiable intangible assets with indefinite
useful lives.
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, 2022
Core deposits
$
12,810
$
10,034
$
2,776
Other customer relationships
14,286
4,878
9,408
Total other intangible
assets
$
27,096
$
14,912
$
12,184
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
During
the
year
ended
December
31,
2022,
the
Corporation
recognized
$
3.3
million
in
amortization
expense
related
to
other
intangible assets with definite useful lives (2021
- $
9.1
million; 2020 - $
6.4
million).
187
The following
table presents
the estimated
amortization of
the intangible
assets with
definite useful
lives for
each of
the following
periods:
(In thousands)
Year 2023
$
3,179
Year 2024
2,938
Year 2025
1,750
Year 2026
1,440
Year 2027
959
Later years
1,918
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 2022
using July 31, 2022 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.
188
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
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
12.51
% to
15.73
% for
the 2022 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.
The results of the BPPR annual goodwill impairment test as of July 31, 2022
indicated that the average estimated fair value using all
valuation methodologies exceeded BPPR’s equity
value by approximately $
3.1
billion or
245
% compared to $
1.5
billion or
50
%, for
the annual
goodwill impairment test
completed as
of July
31, 2021. 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 $
670
million
or
41
%,
compared
to
$
412
million
or
24
%,
for
the
annual
goodwill
impairment
test
completed
as
of
July
31,
2021.
Accordingly, no
impairment was recognized for
BPPR or PB.
The goodwill balance
of BPPR and PB,
as legal entities,
represented
approximately
93
% of the Corporation’s total goodwill balance as of
the July 31, 2022 valuation date.
An impairment of $
9
million was recognized by the Corporation from the annual test as of July 31, 2022 related to PEF as a result of
a decrease in the projected earnings of this
business unit.
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, 2022 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.
A decline in
the Corporation’s stock
price related to
global and/or regional macroeconomic
conditions, a deterioration 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.
December 31, 2022
Balance at
Balance at
December 31,
Accumulated
December 31,
2022
impairment
2022
(In thousands)
(gross amounts)
losses
(net amounts)
Banco Popular de Puerto Rico
$
440,184
$
3,801
$
436,383
Popular U.S.
564,456
173,411
391,045
Total Popular,
Inc.
$
1,004,640
$
177,212
$
827,428
189
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
190
Note 16 – Deposits
Total interest bearing deposits as of the end of the periods presented consisted of:
(In thousands)
December 31, 2022
December 31, 2021
Savings accounts
$
14,746,329
$
15,871,998
NOW, money market and other interest
bearing demand deposits
23,738,940
28,736,459
Total savings, NOW,
money market and other interest bearing demand
deposits
38,485,269
44,608,457
Certificates of deposit:
Under $250,000
4,235,651
4,086,059
$250,000 and over
2,545,750
2,626,090
Total certificates
of deposit
6,781,401
6,712,149
Total interest bearing
deposits
$
45,266,670
$
51,320,606
A summary of certificates of deposits by maturity at
December 31, 2022 follows:
(In thousands)
2023
$
3,949,235
2024
1,102,195
2025
743,799
2026
416,106
2027
486,738
2028 and thereafter
83,328
Total certificates of
deposit
$
6,781,401
At December 31, 2022, the Corporation had brokered
deposits amounting to $
1.1
billion (December 31, 2021 - $
0.8
billion).
The aggregate amount
of overdrafts in
demand deposit accounts
that were reclassified
to loans
was $
6.3
million at
December 31,
2022 (December 31, 2021 - $
6.0
million).
At
December
31,
2022,
public
sector
deposits
amounted
to
$
15.2
billion.
Public
deposit
balances
are
difficult
to
predict.
For
example, the receipt by
the Puerto Rico Government of
hurricane recovery related Federal assistance and
seasonal tax collections
could increase public
deposit balances at BPPR.
On the other
hand, the amount
and timing of
reductions in balances are
likely to
be
impacted
by,
for
example,
the
speed
at
which
federal
assistance
is
distributed,
the
financial
condition,
liquidity
and
cash
management
practices
of
the
Puerto
Rico
Government
and
its
instrumentalities
and
the
implementation
of
fiscal
and
debt
adjustment plans approved
pursuant to PROMESA
or other actions
mandated by the
Fiscal Oversight and
Management Board for
Puerto Rico (the “Oversight Board”).
191
Note 17 – Borrowings
Assets sold under agreements to repurchase
Assets sold under agreements to repurchase amounted
to $
149
million at December 31, 2022 and $
92
million at December 31,
2021.
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, debt securities
held-to-maturity, 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, 2022
December 31, 2021
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
$
410
4.40
%
$
19,538
0.30
%
After 30 to 90 days
30,739
3.79
30,295
0.21
After 90 days
17,521
4.39
29,036
0.29
Total U.S. Treasury
securities
48,670
4.01
78,869
0.26
Mortgage-backed securities
Within 30 days
98,984
4.27
11,733
0.26
After 30 to 90 days
791
3.27
-
-
After 90 days
-
-
722
0.16
Total mortgage-backed
securities
99,775
4.26
12,455
0.26
Collateralized mortgage obligations
Within 30 days
164
4.25
279
0.25
Total collateralized
mortgage obligations
164
4.25
279
0.25
Total
$
148,609
4.18
%
$
91,603
0.26
%
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.
192
(Dollars in thousands)
2022
2021
Maximum aggregate balance outstanding at any month-end
$
162,450
$
92,101
Average monthly aggregate balance outstanding
$
107,305
$
91,394
Weighted average interest rate:
For the year
2.15
%
0.35
%
At December 31
4.23
%
0.26
%
Other short-term borrowings
At December 31, 2022 and December 31, 2021,
other short-term borrowings consisted of $
365
million and $
75
million, respectively,
in FHLB Advances.
The following table presents additional information
related to the Corporation’s other short-term borrowings
for
the years ended December 31, 2022 and December
31, 2021.
(Dollars in thousands)
2022
2021
Maximum aggregate balance outstanding at any month-end
$
375,000
$
75,000
Average monthly aggregate balance outstanding
$
99,083
$
343
Weighted average interest rate:
For the year
3.46
%
0.35
%
At December 31
4.47
%
0.35
%
193
Notes Payable
The following table presents the composition of notes
payable at December 31, 2022 and December
31, 2021.
(In thousands)
December 31, 2022
December 31, 2021
Advances with the FHLB with maturities ranging from
2023
through
2029
paying interest at monthly
fixed rates ranging from
0.39
% to
3.18
%
(2021 -
0.39
% to
3.18
%)
$
389,282
$
492,429
Unsecured senior debt securities maturing on September
2023
paying interest
semiannually
at a fixed
rate of
6.125
%, net of debt issuance costs of $
891
(2021 - $
2,158
)
299,109
297,842
Junior subordinated deferrable interest debentures (related to
trust preferred securities) maturing on
2034
with fixed interest rates ranging from
6.125
% to
6.564
% (2021 -
6.125
% to
6.564
%), net of debt
issuance costs of $
315
(2021 - $
342
)
198,319
198,292
Total notes payable
$
886,710
$
988,563
A breakdown of borrowings by contractual maturities
at December 31, 2022 is included in
the table below.
Assets sold under
Short-term
(In thousands)
agreements to
repurchase
borrowings
Notes payable
Total
2023
$
148,609
$
365,000
$
342,370
$
855,979
2024
-
-
91,944
91,944
2025
-
-
139,920
139,920
2026
-
-
74,500
74,500
Later years
-
-
237,976
237,976
Total borrowings
$
148,609
$
365,000
$
886,710
$
1,400,319
At
December
31,
2022
and
December
31,
2021,
the
Corporation had
FHLB
borrowing
facilities
whereby
the
Corporation could
borrow up to
$
3.3
billion and $
3.0
billion, respectively,
of which $
0.8
billion and $
0.6
billion, respectively,
were used. In
addition, at
December 31, 2022 and
December 31, 2021, the
Corporation had placed $
0.4
billion and $
1.2
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, 2022,
the Corporation has
a borrowing facility
at the discount
window of the
Federal Reserve Bank
of New
York amounting to $
1.4
billion (December 31, 2021 - $
1.3
billion), which remained unused at December 31, 2022
and December 31,
2021.
The facility is a collateralized source
of credit that is highly reliable even under difficult
market conditions.
194
Note 18 – Trust preferred securities
Statutory trusts established by the Corporation (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.
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 table presents financial data pertaining
to the different trusts at December 31, 2022 and 2021.
(Dollars in thousands)
December 31, 2022 and 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.
At
December
31,
2022,
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 $
193
million at December 31, 2021.
195
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, 2022
December 31, 2021
Accrued expenses
$
337,284
$
308,594
Accrued interest payable
39,288
33,227
Accounts payable
76,456
91,804
Dividends payable
39,525
35,937
Trades payable
9,461
13,789
Liability for GNMA loans sold with an option to repurchase
14,271
12,806
Reserves for loan indemnifications
7,520
12,639
Reserve for operational losses
39,266
43,886
Operating lease liabilities (Note 33)
137,290
154,114
Finance lease liabilities (Note 33)
24,737
19,719
Pension benefit obligation
8,290
8,778
Postretirement benefit obligation
118,336
161,988
Others
65,222
70,967
Total other liabilities
$
916,946
$
968,248
196
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
Global Select
Market (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, 2022 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, 2022,
2021 and
2020.
Outstanding shares of 2003 Series A Preferred Stock amounted
to
885,726
at December 31, 2022, 2021 and 2020.
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
.
Common stock
Dividends
During
the
year
2022,
cash
dividends
of
$
2.20
(2021
-
$
1.75
;
2020
-
$
1.60
)
per
common
share
outstanding
were
declared
amounting to $
163.7
million (2021 - $
142.3
million; 2020 -
$
136.6
million) of which
$
39.5
million were payable to
stockholders of
common
stock
at
December
31,
2022
(2021
-
$
35.9
million;
2020
-
$
33.7
million).
The
quarterly
dividend
of
$
0.55
per
share
declared to stockholders of record as of the close of business on
December 7, 2022
, was paid on
January 3, 2023
. On February 28,
2023, the Corporation’s Board of Directors approved a quarterly cash dividend of $
0.55
per share on its outstanding common stock,
payable on
April 3, 2023
to stockholders of record at the close of business
on
March 20, 2023
.
Accelerated share repurchase transaction (“ASR”)
On August
24, 2022,
the Corporation
entered into
a $
231
million ASR
transaction with
respect to
its common
stock (the
“August
ASR Agreement”), which was accounted for as
a treasury transaction. As a result of the
receipt of the initial
2,339,241
shares,
the
Corporation recognized in stockholders’ equity approximately $
185
million in treasury stock and $
46
million as a reduction of capital
surplus. The Corporation completed the transaction on December 7, 2022 and received
840,024
additional shares of common stock
and
recognized
approximately
$
60
million
as
treasury
stock
with
a
corresponding
increase
in
its
capital
surplus.
In
total
the
Corporation repurchase a total of
3,179,265
shares at an average purchased price of $
72.6583
under the August ASR Agreement.
On
March
1,
2022,
the
Corporation
announced
that
on
February 28,
2022
it
entered
into
a
$
400
million
ASR
transactions
with
respect to
its common
stock (the
“March ASR
Agreement”), which was
accounted for
as a
treasury transaction. As
a result
of the
receipt
of
the
initial
3,483,942
shares,
the
Corporation recognized
in
stockholders’
equity
approximately $
320
million
in
treasury
stock and
$
80
million as
a reduction
of capital
surplus. The
Corporation completed the
transaction on
July 12,
2022 and
received
197
1,582,922
additional shares
of common
stock and
recognized $
120
million in
treasury stock
with a
corresponding increase
in its
capital surplus. In
total the Corporation
repurchased a total
of
5,066,864
shares at an
average purchased price
of $
78.9443
under
the March ASR Agreement.
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.
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 $
863
million at
December 31, 2022
(2021 - $
786
million; 2020 -
$
708
million). During
2022, $
77
million
was transferred to the statutory reserve account (2021 - $
78
million, 2020 - $
49
million). BPPR was in compliance with the statutory
reserve requirement in 2022, 2021 and 2020.
198
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,
2022
and
2021,
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
August
26,
2020,
federal
banking
regulators
issued
a
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,
2022,
the Corporation has $
38
million in PPP loans and
no
loans were pledged as collateral for PPPL
Facilities.
At December 31, 2022 and 2021, 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,
2022 and
2021 under
the
Basel III regulatory guidance.
199
Actual
Capital adequacy minimum
requirement (including
conservation capital buffer) [1]
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
2022
Total Capital (to Risk-Weighted
Assets):
Corporation
$
6,285,648
18.26
%
$
3,613,668
10.500
%
BPPR
4,541,915
18.34
2,599,872
10.500
PB
1,463,511
15.59
985,510
10.500
Common Equity Tier I Capital (to Risk-Weighted
Assets):
Corporation
$
5,639,686
16.39
%
$
2,409,112
7.000
%
BPPR
4,230,820
17.09
1,733,248
7.000
PB
1,395,272
14.87
657,007
7.000
Tier I Capital (to Risk-Weighted Assets):
Corporation
$
5,661,829
16.45
%
$
2,925,351
8.500
%
BPPR
4,230,820
17.09
2,104,658
8.500
PB
1,395,272
14.87
797,794
8.500
Tier I Capital (to Average Assets):
Corporation
$
5,661,829
8.06
%
$
2,811,504
4
%
BPPR
4,230,820
7.10
2,383,478
4
PB
1,395,272
13.08
426,832
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.
200
Actual
Capital adequacy minimum
requirement (including
conservation capital buffer)
(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
The following table presents the minimum amounts
and ratios for the Corporation’s banks to be
categorized as well-capitalized.
2022
2021
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
Total Capital (to Risk-Weighted
Assets):
BPPR
$
2,476,068
10
%
$
2,263,032
10
%
PB
938,581
10
811,459
10
Common Equity Tier I Capital (to Risk-Weighted
Assets):
BPPR
$
1,609,444
6.5
%
$
1,470,971
6.5
%
PB
610,078
6.5
527,448
6.5
Tier I Capital (to Risk-Weighted Assets):
BPPR
$
1,980,855
8
%
$
1,810,426
8
%
PB
750,865
8
649,167
8
Tier I Capital (to Average Assets):
BPPR
$
2,979,348
5
%
$
3,201,254
5
%
PB
533,540
5
487,171
5
201
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, 2022, 2021 and 2020.
Changes in Accumulated Other Comprehensive (Loss) Income
by Component [1]
Years ended December
31,
(In thousands)
2022
2021
2020
Foreign currency translation
Beginning Balance
$
(67,307)
$
(71,254)
$
(56,783)
Other comprehensive income (loss)
10,572
3,947
(14,471)
Net change
10,572
3,947
(14,471)
Ending balance
$
(56,735)
$
(67,307)
$
(71,254)
Adjustment of pension and
postretirement benefit plans
Beginning Balance
$
(158,994)
$
(195,056)
$
(202,816)
Other comprehensive income (loss) before reclassifications
4,882
23,094
(5,645)
Amounts reclassified from accumulated other comprehensive loss
for
amortization of net losses
9,777
12,968
13,405
Net change
14,659
36,062
7,760
Ending balance
$
(144,335)
$
(158,994)
$
(195,056)
Unrealized net holding
(losses) gains on debt
securities
Beginning Balance
$
(96,120)
$
460,900
$
92,155
Other comprehensive (loss) income before reclassifications
(2,261,097)
(557,002)
368,780
Amounts reclassified from accumulated other comprehensive
(loss)
income for gains on securities
-
(18)
(35)
Amounts reclassified from accumulated other comprehensive
(loss)
income for amortization of net unrealized losses of debt securities
transferred from available-for-sale to held-to-maturity
33,314
-
-
Net change
(2,227,783)
(557,020)
368,745
Ending balance
$
(2,323,903)
$
(96,120)
$
460,900
Unrealized net gains (losses)
on cash flow hedges
Beginning Balance
$
(2,648)
$
(4,599)
$
(2,494)
Other comprehensive income (loss) before reclassifications
3,107
367
(6,400)
Amounts reclassified from accumulated other comprehensive income
(loss)
(414)
1,584
4,295
Net change
2,693
1,951
(2,105)
Ending balance
$
45
$
(2,648)
$
(4,599)
Total
$
(2,524,928)
$
(325,069)
$
189,991
[1] All amounts presented are net of tax.
202
The following table presents the amounts reclassified out of each component of accumulated other comprehensive (loss) income for
the years ended December 31, 2022, 2021, and
2020.
Reclassifications Out of Accumulated Other Comprehensive
(Loss) Income
Affected Line Item in the
Years ended December
31,
(In thousands)
Consolidated Statements of Operations
2022
2021
2020
Adjustment of pension and postretirement benefit plans
Amortization of net losses
Other operating expenses
$
(15,644)
$
(20,749)
$
(21,447)
Total before tax
(15,644)
(20,749)
(21,447)
Income tax benefit
5,867
7,781
8,042
Total net of tax
$
(9,777)
$
(12,968)
$
(13,405)
Unrealized net holding (losses) gains on debt securities
Realized gain on sale of debt securities
Net gain (loss) on sale of debt securities
$
-
$
23
$
41
Amortization of unrealized net losses of debt
securities transferred to held-to-maturity
Investment securities [1]
(41,642)
-
-
Total before tax
(41,642)
23
41
Income tax benefit (expense)
8,328
(5)
(6)
Total net of tax
$
(33,314)
$
18
$
35
Unrealized net gains (losses) losses on cash flow
hedges
Forward contracts
Mortgage banking activities
$
1,458
$
(704)
$
(5,559)
Interest rate swaps
Other operating income
(498)
(1,143)
(820)
Total before tax
960
(1,847)
(6,379)
Income tax (expense) benefit
(546)
263
2,084
Total net of tax
$
414
$
(1,584)
$
(4,295)
Total reclassification
adjustments, net of tax
$
(42,677)
$
(14,534)
$
(17,665)
[1]
In October 2022, the Corporation transferred U.S. Treasury
securities with a fair value of $
6.5
billion (par value of $
7.4
billion) from its available-for-
sale portfolio to its held-to-maturity portfolio. Refer to Note 7 to
the Consolidated Financial Statements for additional
information.
203
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, 2022, the Corporation recorded a liability of $
0.3
million (December
31, 2021
- $
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, 2022
and 2021, 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,
2022,
the
Corporation
serviced
$
0.6
billion
(December
31,
2021
-
$
0.7
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 2022,
the Corporation
repurchased approximately
$
7
million of
unpaid principal
balance in
mortgage loans
subject to
the
credit recourse
provisions (2021
- $
19
million). 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,
2022, the
Corporation’s liability
established to cover
the estimated credit
loss exposure
related to loans
sold or serviced
with credit
recourse
amounted to
$
7
million (December
31, 2021
- $
12
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, 2022 and 2021.
Years ended December
31,
(In thousands)
2022
2021
Balance as of beginning of period
$
11,800
$
22,484
Provision (benefit) for recourse liability
(1,715)
(2,948)
Net charge-offs
(3,188)
(7,736)
Balance as of end of period
$
6,897
$
11,800
204
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.
During
the
year
ended
December
31,
2022,
the
Corporation
purchased
$
1
million
under
representation
and
warranty
arrangements.
There
were
no
repurchases
under
BPPR’s
representation
and
warranty
arrangements
during
the
year
ended
December 31, 2021.
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.
From
time
to
time, the
Corporation sells
loans and
agrees to
indemnify the
purchaser for
credit
losses
or
any
breach
of
certain
representations and
warranties made
in connection
with the
sale. At
December 31,
2022, the
Corporation’s liability
for estimated
losses associated with indemnifications and representations and warranties related to loans sold by BPPR
amounted to $
0.6
million
(December 31, 2021 - $
0.8
million).
205
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,
2022, the
Corporation serviced
$
11.1
billion in
mortgage loans
for third-parties,
including the
loans serviced
with credit
recourse (December
31, 2021
- $
12.1
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,
2022,
the
outstanding
balance
of
funds
advanced
by
the
Corporation
under
such
mortgage
loan
servicing
agreements
was approximately
$
42
million
(December 31,
2021
- $
54
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,
2022 and December 31, 2021, respectively.
In addition, at both December 31, 2022 and December 31, 2021, PIHC
fully and unconditionally guaranteed on a subordinated basis
$
193
million 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.
206
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, 2022
December 31, 2021
Commitments to extend credit:
Credit card lines
$
5,853,990
$
5,382,089
Commercial and construction lines of credit
4,425,825
3,830,601
Other consumer unused credit commitments
250,271
250,229
Commercial letters of credit
3,351
3,260
Standby letters of credit
27,868
27,848
Commitments to originate or fund mortgage loans
45,170
95,372
At
December
31,
2022
and
December
31,
2021,
the
Corporation
maintained
a
reserve
of
approximately
$
8.8
million
and
$
7.9
million, respectively, for potential losses associated with unfunded loan commitments related to
commercial and construction lines of
credit.
Other commitments
At December 31,
2022, and December
31, 2021, the
Corporation also maintained
other non-credit commitments
for approximately
$
4.8
million and $
1.0
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
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, 2022, the Corporation’s direct exposure to the
Puerto Rico government and its instrumentalities and municipalities
totaled $
374
million, of which
$
327
million were outstanding
($
367
million and $
349
million at December
31, 2021). Of
the amount
outstanding,
$
302
million
consists
of
loans
and
$
25
million
are
securities
($
319
million
and
$
30
million
at
December 31,
2021).
Substantially all
of the
amount outstanding
at December
31, 2022
and 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,
2022,
73
%
of
the
Corporation’s
exposure
to
municipal
loans
and
securities was concentrated in the municipalities of
San Juan, Guaynabo, Carolina and Bayamón.
207
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, 2022:
(In thousands)
Investment
Portfolio
Loans
Total Outstanding
Total Exposure
Central Government
After 1 to 5 years
$
12
$
-
$
12
$
12
After 5 to 10 years
1
-
1
1
After 10 years
29
-
29
29
Total Central
Government
42
-
42
42
Municipalities
Within 1 year
4,530
20,243
24,773
42,962
After 1 to 5 years
19,105
101,009
120,114
149,114
After 5 to 10 years
1,025
131,202
132,227
132,227
After 10 years
-
49,831
49,831
49,831
Total Municipalities
24,660
302,285
326,945
374,134
Total Direct Government
Exposure
$
24,702
$
302,285
$
326,987
$
374,176
In
addition,
at
December
31,
2022,
the
Corporation
had
$
251
million
in
loans
insured
or
securities
issued
by
Puerto
Rico
governmental entities
but for
which the
principal source
of repayment
is non-governmental
($
275
million at
December 31,
2021).
These
included
$
209
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,
2021 -
$
232
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,
2022, $
42
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, 2021
- $
43
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,
$
38
million of
Small Business
Administration (“SBA”)
loans under
the Paycheck
Protection Program (“PPP”) and
$
72
million commercial loans were
insured or guaranteed
by the U.S.
Government or its agencies
at December 31, 2022 (compared to $
1.6
billion, $
353
million and $
67
million, respectively, at December 31, 2021). The Corporation
also had U.S. Treasury and obligations from the U.S. Government,
its agencies or government sponsored entities
within the portfolio
of available-for-sale and held-to-maturity securities as described
in Note 6 and 7 to the Consolidated
Financial Statements.
At December 31,
2022, the Corporation has
operations in the United
States Virgin Islands
(the “USVI”) and
has approximately $
28
million
in
direct
exposure
to
USVI
government
entities
(December
31,
2021
-
$
70
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, 2022, 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
208
approximately
$
214
million
comprised
of
various
retail
and
commercial
clients,
compared
to
a
loan
portfolio
of
$
221
million
at
December 31, 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 $
20.6
million as
of
December
31,
2022.
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”) were
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 alleged that the
Popular
Defendants
were
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 demanded
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 and
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.
209
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, LLC
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 was never published.
In
May 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. Also, in
May 2021, Popular,
Inc.
and BPPR
filed a
separate motion
for summary
judgment for
failure to
state a
claim against
such entities.
During an
oral hearing
held in September 2021 to discuss the pending motions for summary judgment, Plaintiffs notified they did not object the dismissal of
the action with prejudice as to Popular,
Inc. and BPPR, leaving Popular Insurance, LLC (“Popular Insurance”) as the sole
remaining
defendant in the case. In October 2021, the Court
issued a resolution denying Popular Insurance’s Motion
for Summary Judgment.
In
December 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,
and on February 28, 2022, the Court of Appeals entered a judgment reversing the lower
court’s
decision,
after
concluding
it
was
unable
to
review
de
novo
the
denial
of
the
motion
for
summary
judgment
since
such
decision failed
to comply
with the
summary judgment standard.
The Court
of Appeals
remanded the
case to
the lower
court with
instructions to
enter a
summary judgment
that identifies
the material
contested issues
of facts
that prevents
the lower
court from
granting Popular Insurance’s summary judgment motion.
In
May
2022,
the
trial
court
issued
an
amended
resolution
denying
for
a
second
time
Popular
Insurance’s
Motion
for
Summary
Judgment.
On June 14,
2022, 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. On
August 12,
2022, the
Court of
Appeals reversed
the trial
court’s ruling,
granted summary
judgment in
favor of
Popular Insurance,
and ordered
the dismissal
of the
case in
its entirety.
After the
Court of
Appeals denied
a Motion
for Reconsideration
filed by
Plaintiffs, on
October 13,
2022, Plaintiffs
filed a
certiorari petition
before the
Puerto Rico Supreme Court seeking review of the
Court of Appeals judgment.
Popular Insurance
filed its
opposition brief
to Plaintiff’s
certiorari petition
on October
24, 2022.
On December
4, 2022,
the Puerto
Rico
Supreme
Court
issued
an
order denying
the
certiorari
petition.
The
judgment
ordering the
dismissal of
the
complaint
in
its
entirety became final and unappealable on December
19, 2022. This matter is now closed.
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
210
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 ACH “item” or transaction and (b) charging
both NSF Fees and overdraft fees (“OD
Fees”) on
the same
ACH 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. In April
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.
In March
2022, BPPR
was also
named as
a defendant
on a
putative class
action complaint captioned
Orama-Caraballo v.
Banco
Popular,
filed before
the U.S.
District Court
for the
District of
Puerto Rico
by the
same Plaintiffs’
attorneys of
the Soto-Melendez
complaint. Similar to the claims set forth in the Soto-Melendez complaint, Plaintiffs allege breach of contract, breach of the covenant
of good faith and
fair dealing, and unjust enrichment
due to the bank’s
purported practice of (a) assessing more
than one NSF Fee
on
the
same
“item” and
(b)
charging
both
NSF
Fees
and
OD
Fees
on
the
same
“item”
but
included
allegations
with
respect
to
“checks” in addition to ACH payments.
During a
mediation hearing
held in
April 2022,
the parties
in both
the Soto
Melendez and
Orama-Caraballo complaints
reached a
settlement in principle on a
class-wide basis subject to final court
approval. The parties filed before the
Court a notice of settlement
and a
request to
stay the
proceedings in
both cases
and, on
August 15,
2022, the
parties submitted
the class
action settlement
agreement for the Court's preliminary
approval.
On November 23, 2022, the
court issued an order
granting preliminary approval of
the settlement agreement and scheduled the
final approval hearing for March 14, 2023.
Popular was 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
alleged 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 described Popular’s
purported practice of charging
OD Fees as
“Authorize Positive, Purportedly
Settle
Negative”
(“APPSN”)
transactions
and
alleged
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, Plaintiff
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,
Plaintiff
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.
In
October
2021,
the
District
Court,
notwithstanding that
BPPR’s
Motion
to
Dismiss
remained
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.
During a
status
hearing held
on June
7,
2022, the
District Court
entered an
amended scheduling
order extending
the
discovery
deadline to
March 31,
2023, and
granting plaintiffs
until April
14, 2023,
to file
a motion
for class
certification. During
a mediation
hearing held on October 14, 2022, the parties in the Golden action reached a settlement in principle on a class-wide basis subject to
final
court
approval.
On
October
19,
2022,
the
parties
filed
before
the
Court
a
notice
of
settlement
and
a
request
to
stay
the
proceedings while
Plaintiffs submit
a motion
for the
preliminary approval of
the class
action settlement. On
January 19,
2023, the
parties filed the motion for preliminary approval of
the settlement agreement, which is pending resolution.
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 alleged that
Popular assesses OD Fees
over authorized transactions for
which sufficient funds
are held for settlement. Popular
waived service of process and filed
a Motion to Compel Arbitration
on April 4, 2022. In
response to
Popular’s motion, Plaintiff filed a Notice of Voluntary Dismissal on
April 27, 2022.
211
On May
13, 2022,
Plaintiff in
the Lipsett
complaint filed
a new
complaint captioned
Lipsett v.
Banco Popular
North America
d/b/a
Popular
Community Bank
with the
same
allegations of
his
previous complaint
against Popular.
On June
10, 2022,
after serving
Plaintiff with a written notice of election to
arbitrate the claims asserted in the complaint which went unanswered, Popular Bank filed
a
Pre-Motion
Conference
motion
related
to
a
new
Motion
to
Compel
Arbitration.
After
Plaintiff
responded
to
the
Pre-Motion
conference motion, on
September 2, 2022,
the Court allowed
Popular Bank to
file its Motion
to Compel Arbitration,
which it did
on
September 8, 2022. Plaintiff opposed to such motion on
October 13, 2022, and PB filed its reply on
November 3, 2022.
On December
9, 2022, the
Court issued a
Decision and Order
denying Popular’s Motion
to Compel Arbitration.
On December
20,
2022, Popular Bank filed
a Notice of Appeal
with the United States
Court of Appeals for
the Second Circuit.
On January 31, 2022,
the
Court
of
Appeals
issued
a
briefing
schedule
granting Popular
Bank
until
April
6,
2023
to
file
its
appeal
brief.
The
Court
of
Appeals also scheduled a “CAMP” mediation conference, which was held
on February 21, 2023. No settlement was reached during
the mediation.
Cyber Incident Related Litigation
BPPR was named
defendant in a
putative class action
complaint filed before
the U.S. District
Court for the
District of Puerto
Rico,
captioned
Rosa
E.
Rivera
Marrero
v.
Banco
Popular
de
Puerto
Rico.
Plaintiff
contends
BPPR
failed
to
properly
secure
and
safeguard
the
class
members’
personally
identifiable
information
(“PII”)
which
was
purportedly
exposed
through
a
data
breach
experienced
by
a
BPPR’s
vendor
in
June
2021.
Such
data
breach,
which
as
alleged
involved
BPPR’s
files,
occurred
via
the
exploitation
of
an
alleged vulnerability
in Accellion
FTA,
a
legacy software
product
developed by
Accellion, Inc
used by
BPPR’s
vendor. Plaintiff
further alleges that, during the data
breach, an unauthorized actor removed one
or more documents that contained
PII of the plaintiff
and purported class members. Plaintiff demands injunctive relief
requesting, among other things, BPPR to
protect
all data
collected through
the course
of its
business in
accordance with
all applicable
regulations, industry
standards and
federal,
state or local laws, as well as
an award for damages, attorneys’ fees, costs and litigation expenses. BPPR was served with
process
on May 27, 2022
and, on August 1, 2022,
filed a Motion to
Dismiss. On August 15,
2022, Plaintiff filed her
opposition to the Motion
to Dismiss
and, on
September 14,
2022, BPPR
filed a
reply in
support of
its Motion
to Dismiss.
BPPR’s Motion
to Dismiss
is fully
briefed and pending resolution.
POPULAR BANK
Employment-Related Litigation
In
July 2019,
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 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.
212
On
March
25,
2022,
Plaintiffs
in
both
the
AB
Action
and
the
DR
Action
perfected
their
appeals
seeking
to
reverse
both
partial
judgments. PB
filed opposition
briefs as
to both
appeals on
August 10,
2022. However,
on October
24, 2022,
PB and
all but
the
principal plaintiff
in the
AB Action,
Aileen Betances,
reached an
agreement in
principle subject to
final documentation,
to settle
all
their claims
included in
the AB
Action. Also,
on that
same
date, PB
and all
Plaintiffs
in the
DR Action
reached an
agreement in
principle subject to final documentation, to settle all claims
included in the DR Action.
In
December 2022,
after reaching
a settlement
agreement with
the principal
plaintiff in
the AB
Action, the
parties in
both the
AB
Action and the DR Action executed settlement agreements that disposed
of both actions.
On December 22, 2022, the parties filed a
Stipulation of Dismissal with Prejudice with the
court in both actions. These matters are now closed.
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 experienced
following 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,
2022,
was named
as
a
respondent (among
other
broker-dealers) in
13
pending arbitration
proceedings with
initial claimed
amounts of
approximately $
13.4
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
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. Adverse
results
in
the
arbitration
proceedings
described
above,
or
a
significant
increase
in
customer
complaints,
could
have
a
material
adverse effect on Popular.
In October 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. In
November,
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. In January 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 filed a Motion to Dismiss
on March 21, 2022, which Plaintiffs
opposed
on June 10, 2022. Popular
filed its reply in support
of the Motion to Dismiss
on June 30, 2022, and
Plaintiffs sur-replied on July 27,
2022.
On
February 9,
2023, the
Popular Defendants
executed a
global
settlement agreement
with Plaintiffs
resolving all
controversies
between
the
parties,
including
those
arising
from
the
aforementioned
case.
After
the
parties
filed
a
stipulation
of
dismissal,
on
February 15, 2023, the United States District Court for the District of Puerto Rico issued an order dismissing the case
with prejudice
and stating that a judgment shall be entered accordingly.
This matter is now closed.
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
213
requests
for
the
preservation
and
voluntary
production
of
certain
documents
and
witnesses
with
respect
to
Kobre
&
Kim’s
independent investigation.
In August
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. In January
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. Potential claims
being pursued by
the SCC and
the UCC, including
claims tolled
under existing tolling
agreements, were transferred
to a
newly created Puerto
Rico Avoidance Action
Trust as
part of
the approval
of the
Commonwealth of Puerto
Rico’s Plan
of Adjustment. The
tolling agreement
as to
potential claims
that may
be
asserted
against
the
Popular
Companies
by
the
Puerto
Rico
Avoidance
Action
Trust
as
a
result
of
any
role
of
the
Popular
Companies in the offering of certain challenged bond
issuances remains in effect.
214
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.
The
Corporation
has
also
engaged
in
securitization
transactions
with
FHLMC,
but
considers
its
exposure in the
form of servicing
fees and servicing
advances not to be
significant at December
31, 2022.
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,
2022
and
2021,
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, 2022 and 2021.
215
(In thousands)
December 31, 2022
December 31, 2021
Assets
Servicing assets:
Mortgage servicing rights
$
99,614
$
94,464
Total servicing
assets
$
99,614
$
94,464
Other assets:
Servicing advances
$
6,157
$
7,968
Total other assets
$
6,157
$
7,968
Total assets
$
105,771
$
102,432
Maximum exposure to loss
$
105,771
$
102,432
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 $
7.7
billion at December 31, 2022 (December
31, 2021 - $
8.3
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,
2022 and
2021 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,
2022.
216
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, 2022, inclusion
of the
credit risk
in the
fair value
of the
derivatives resulted in
a loss
of $
0.5
million from the
Corporation’s credit standing adjustment.
During the years ended December 31,
2021 and 2020, the Corporation recognized a
loss
of $
0.3
million and a gain of $
0.7
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,
2022
and
2021
were as follows:
217
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)
2022
2021
classification
2022
2021
classification
2022
2021
Derivatives designated as
hedging instruments:
Forward contracts
$
15,100
$
87,900
Other assets
$
93
$
18
Other liabilities
$
22
$
125
Total derivatives designated
as hedging instruments
$
15,100
$
87,900
$
93
$
18
$
22
$
125
Derivatives not designated
as hedging instruments:
Interest rate caps
$
150,000
$
27,866
Other assets
$
1,045
$
-
Other liabilities
$
1,045
$
-
Indexed options on deposits
85,414
79,114
Other assets
18,091
26,075
-
-
-
Bifurcated embedded options
78,972
72,352
-
-
-
Interest
bearing
deposits
15,933
22,753
Total derivatives not
designated as
hedging instruments
$
314,386
$
179,332
$
19,136
$
26,075
$
16,978
$
22,753
Total derivative assets
and liabilities
$
329,486
$
267,232
$
19,229
$
26,093
$
17,000
$
22,878
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
72
days at December 31, 2022.
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, 2022
(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
$
1,636
Mortgage banking activities
$
1,458
$
-
Total
$
1,636
$
1,458
$
-
218
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)
$
-
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)
$
-
Fair Value Hedges
At December 31, 2022 and 2021, there were
no
derivatives designated as fair value hedges.
Non-Hedging Activities
For the year ended December 31, 2022, the
Corporation recognized a gain of $
7.7
million (2021 –gain of $
2.3
million; 2020 – loss
of $
3.0
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
2022
2021
2020
Forward contracts
Mortgage banking activities
$
8,094
$
2,027
$
(5,027)
Indexed options on deposits
Interest expense
(5,290)
6,824
5,462
Bifurcated embedded options
Interest expense
4,942
(6,538)
(3,417)
Total
$
7,746
$
2,313
$
(2,982)
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.
219
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, 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
11,090
Payments
(15,402)
Other changes, including existing loans to new related parties
27,070
Balance at December 31, 2022
$
125,337
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 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 last of these
interim
renewals,
among
other
things,
extended the
maturity
date until
April
2022,
decreased
the
interest
rate
applicable
to
the
Notes A
to
4.25
% and
maintained the
Notes B at
an interest
rate of
1
%. In
March and July
2022, the Audit
Committee authorized
two
separate
90-day interim
maturity extensions
to
provide additional
time
for
the Bank
to
analyze and
negotiate the
terms
and
conditions
for
a
longer-term
renewal
of
the
credit
facilities.
In
November
2022,
BPPR
and
related
parties
of
the
Corporation’s
director entered into a three-year extension of
the loans, until November 2025, which, among
other things: (i) increased the interest
rate applicable to Notes A to
5.25
% and maintained the Notes B
at an interest rate of
1
% and (ii) established a
principal repayment
schedule for
Notes A,
including a $
0.7
million mandatory prepayment.
The three-year extension
of the
loans was
approved by the
Audit Committee in accordance with the Related Party
Policy. The aggregate outstanding
balance on the loans as of December
31,
2022 was approximately $
29.3
million, of which approximately $
15.8
million corresponded to Notes A
and $
13.5
million to Notes B.
During 2022, the borrower paid approximately $
1.4
million and $
0.7
million in principal and interest, respectively.
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
August 2017, the credit
facility was refinanced with
a stated maturity in
February 2019.
During 2017, the facility
was subject to the
220
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. Payments
of principal and
interest of approximately
$
1.2
million and
$
1.5
million,
respectively,
were
made
during
2022.
As
of
December
31,
2022,
the
outstanding
balance
of
the
loan
was
approximately $
33.6
million. The borrower is current on its payments.
At December 31,
2022, the Corporation’s
banking subsidiaries held deposits
from related parties
amounting to approximately $
628
million (2020 - $
700
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,
2022,
the
Corporation made
contributions
of
approximately
$
4.8
million
to
Fundación
Banco
Popular and
Popular Bank
Foundation, which
are not-for-profit
corporations dedicated
to philanthropic
work (2021
- $
4.5
million).
The Corporation also provided
human and operational resources to
support the activities of
the Fundación Banco Popular
which in
2022 amounted to approximately $
1.5
million (2021- $
1.3
million).
Related party transactions with Evertec,
as an affiliate
Until August 15, 2022, the Corporation had an investment in Evertec, which provides various processing and information technology
services to the Corporation
and its subsidiaries and gave
BPPR access to the
ATH network
owned and operated by Evertec.
As of
December
31,
2021,
the
Corporation
held
11,654,803
shares
of
Evertec,
representing
an
ownership
stake
of
16.19
%.
This
investment was
accounted for
under the
equity method.
The Corporation
recorded $
1.5
million in
dividends from
its investment
in
Evertec during the year ended December 31, 2022
(December 31, 2021 - $
2.3
million).
As discussed
in Note
4, Business
combination, on
July 1,
2022, BPPR
completed its
previously announced
acquisition of
certain
assets from Evertec
Group to service certain
BPPR channels. In connection
with the Business Acquisition
Transaction, BPPR also
entered
into
amended
and
restated
service
agreements
with
Evertec
Group
pursuant
to
which
Evertec
Group
will
continue
to
provide various information technology
and transaction processing services
to Popular,
BPPR and their
respective subsidiaries. As
part
of
the
transaction,
BPPR
and
Evertec
entered
into
a
revenue
sharing
structure
for
BPPR
in
connection
with
its
merchant
acquiring relationship
with Evertec.
As consideration
for the
Business Acquisition
Transaction,
BPPR delivered
to Evertec
Group
4,589,169
shares of Evertec common stock valued at
closing at $
169.2
million (based on Evertec’s stock price
on June 30, 2022 of
$
36.88
). As a result of the exchange of shares, the
Corporation recognized a pre-tax gain of $
119.9
million.
Additionally, on August 15, 2022, the Corporation completed the sale of its remaining
7,065,634
shares of common stock of Evertec,
Inc..
Following
the
Evertec
Stock
Sale,
Popular
no
longer
owns
any
Evertec
common
stock.
As
a
result,
the
Corporation
discontinued accounting for its
proportionate share of Evertec’s
income (loss) and changes in
stockholder’s equity under the equity
method of
accounting in the
third quarter of
2022. The Corporation
recognized a pre-tax
gain on the
Evertec Stock Sale
of $
137.8
million, including related accounting adjustments.
The following
table presents
the Corporation’s
proportionate share
of Evertec’s
income (loss)
and changes
in stockholders’
equity
for the years ended December 31, 2022 and 2021,
including
the effects of the gains recognized related to the Evertec
Transactions.
221
Years ended December
31,
(In thousands)
2022
2021
2020
Share of Evertec income and Gain from the Evertec
Transactions and related accounting adjustments
[1]
$
269,539
$
26,096
$
16,936
Share of other changes in Evertec's stockholders' equity
3,168
53
865
Share of Evertec's changes in equity recognized in income
and
Gain from the Evertec Transaction and
related accounting
adjustments
$
272,707
$
26,149
$
17,801
[1]
The
Gain
from
the
Evertec
Transactions
and
related
accounting
adjustments
are
reflected
within
other
operating
income
in
the
accompanying
consolidated
financial
statements.
As
discussed
in
Note
4,
the
Corporation
recognized
an
additional
$
17.3
million
as
an
operating
expense
in
connection with the Business Acquisition Transaction.
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,
2022,
2021
and
2020.
Items
that
represent
expenses to the Corporation are presented with
parenthesis.
Years ended December
31,
(In thousands)
2022 [1]
2021
2020
Category
Interest expense on deposits
$
(267)
$
(388)
$
(315)
Interest expense
ATH and credit cards interchange
income from services to Evertec
13,955
27,384
22,406
Other service fees
Rental income charged to Evertec
3,258
6,593
7,305
Net occupancy
Fees on services provided by Evertec
(128,681)
(245,945)
(223,069)
Professional fees
Other services provided to Evertec
420
740
1,002
Other operating expenses
Total
$
(111,315)
$
(211,616)
$
(192,671)
[1] Includes activity through June 30, 2022.
The Corporation continues to obtain programming, processing, and other technology services from Evertec under the amended and
restated Master
Service Agreement (“MSA”).
For the
year ended
December 31,
2022
the Corporation incurred
expenses of
$
242
million
in connection
with these
services. In
addition, the
Corporation received
$
6.7
million from
Evertec, related
to
its merchant
acquiring relationship. Under the terms of the MSA, Evertec will be entitled to receive monthly payments from the Corporation to the
extent that Evertec’s revenues, covered under the MSA, fall
below certain agreed annualized minimum amounts.
Centro Financiero BHD León
At December 31, 2022, 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,
2022,
the
Corporation recorded $
31.2
million in earnings
from its investment
in BHD León
(December 31, 2021
- $
27.7
million), which had
a
carrying amount
of $
199.8
million at
December 31,
2022 (December
31, 2021
- $
180.3
million). The
Corporation received
$
16.0
million in dividends distributions during the
year ended December 31, 2022
from its investment in BHD
León (December 31, 2021 -
$
4.3
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,
2022
administrative
fees
charged
to
these
investment
companies
amounted
to
$
2.5
million
(December 31, 2021 -
4.1
million) and waived fees amounted to $
0.9
million (December 31, 2021 - $
1.5
million), for a net fee of $
1.6
million (December 31, 2021 - $
2.6
million).
222
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, 2022 and
2021:
223
At December 31, 2022
(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
$
1,908,589
$
9,272,359
$
-
$
-
$
11,180,948
Collateralized mortgage obligations - federal
agencies
-
165,196
-
-
165,196
Mortgage-backed securities
-
6,456,459
711
-
6,457,170
Other
-
60
1,000
-
1,060
Total debt securities
available-for-sale
$
1,908,589
$
15,894,074
$
1,711
$
-
$
17,804,374
Trading account debt securities, excluding
derivatives:
U.S. Treasury securities
$
13,069
$
-
$
-
$
-
$
13,069
Obligations of Puerto Rico, States and political
subdivisions
-
64
-
-
64
Collateralized mortgage obligations
-
47
113
-
160
Mortgage-backed securities
-
14,008
215
-
14,223
Other
-
-
207
-
207
Total trading account
debt securities, excluding
derivatives
$
13,069
$
14,119
$
535
$
-
$
27,723
Equity securities
$
-
$
29,302
$
-
$
330
$
29,632
Mortgage servicing rights
-
-
128,350
-
128,350
Derivatives
-
19,229
-
-
19,229
Total assets measured
at fair value on a
recurring basis
$
1,921,658
$
15,956,724
$
130,596
$
330
$
18,009,308
Liabilities
Derivatives
$
-
$
(17,000)
$
-
$
-
$
(17,000)
Total liabilities measured
at fair value on a
recurring basis
$
-
$
(17,000)
$
-
$
-
$
(17,000)
224
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)
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, 2022,
2021 and 2020
and excludes nonrecurring fair value measurements
of
assets no longer outstanding
as of the reporting date.
225
Year ended December
31, 2022
(In thousands)
Level 1
Level 2
Level 3
Total
NONRECURRING FAIR VALUE
MEASUREMENTS
Assets
Write-downs
Loans
[1]
$
-
$
-
$
11,215
$
11,215
$
(2,067)
Other real estate owned
[2]
-
-
3,992
3,992
(1,026)
Other foreclosed assets
[2]
-
-
13
13
(1)
Long-lived assets held-for-sale
[3]
-
-
1,178
1,178
(2,155)
Total assets measured
at fair value on a nonrecurring basis
$
-
$
-
$
16,398
$
16,398
$
(5,249)
[1] Relates mainly 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.
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 mainly 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.
226
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.
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, 2022, 2021, and 2020.
Year ended December
31, 2022
MBS
Other
classified
classified
CMOs
MBS
Other
as debt
as debt
classified
classified
securities
securities
securities
as trading
as trading
classified as
Mortgage
available-
available-
account debt
account debt
trading account
servicing
Total
Contingent
Total
(In thousands)
for-sale
for-sale
securities
securities
debt securities
rights
assets
Consideration
liabilities
Balance at January 1,
2022
$
826
$
-
$
198
$
-
$
280
$
121,570
$
122,874
$
(9,241)
$
(9,241)
Gains (losses) included in
earnings
-
-
(2)
4
(73)
166
95
9,241
9,241
Gains (losses) included in OCI
(15)
-
-
-
-
-
(15)
-
-
Additions
-
1,000
5
211
-
6,614
7,830
-
-
Settlements
(100)
-
(88)
-
-
-
(188)
-
-
Balance at December 31, 2022
$
711
$
1,000
$
113
$
215
$
207
$
128,350
$
130,596
$
-
$
-
Changes in unrealized gains
(losses) included in earnings
relating to assets still held at
December 31, 2022
$
-
$
-
$
(2)
$
4
$
(23)
$
11,964
$
11,943
$
-
$
-
227
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
$
-
$
-
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)
Gains and losses (realized and
unrealized) included in earnings for the
years ended December 31, 2022,
2021, and 2020 for Level
3 assets and liabilities included in the previous
tables are reported in the consolidated statement
of operations as follows:
2022
2021
2020
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
$
166
$
11,964
$
(10,216)
$
6,410
$
(42,055)
$
(19,327)
Trading account (loss) profit
(71)
(21)
(102)
(46)
(60)
27
Other operating income
9,241
-
-
-
-
-
Total
$
9,336
$
11,943
$
(10,318)
$
6,364
$
(42,115)
$
(19,300)
228
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, 2022 and 2021.
Fair value at
December 31,
(In thousands)
2022
Valuation technique
Unobservable inputs
Weighted average (range) [1]
CMO's - trading
$
113
Discounted cash flow model
Weighted average life
0.4
years (
0.1
-
0.6
years)
Yield
4.9
% (
4.9
% -
5.4
%)
Prepayment speed
10.2
% (
9.1
% -
32
%)
Other - trading
$
207
Discounted cash flow model
Weighted average life
2.5
years
Yield
12.0%
Prepayment speed
10.8%
Loans held-in-portfolio
$
5,087
[2]
External appraisal
Haircut applied on
external appraisals
8.3
% (
5.0
% -
10.4
%)
Other real estate owned
$
528
[3]
External appraisal
Haircut applied on
external appraisals
18.4
% (
5.0
% -
35
%)
[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)
2021
Valuation technique
Unobservable inputs
Weighted average (range) [1]
CMO's - trading
$
198
Discounted cash flow model
Weighted average life
0.8
years (
0.4
-
1
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
[2]
External appraisal
Haircut applied on
external appraisals
5
.0%
Other real estate owned
$
3,631
[3]
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.
Effective the fourth quarter 2021, the mortgage
servicing rights fair value was provided by
a third-party valuation specialist. Refer to
Note 11 to the Consolidated Financial Statements 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
229
●
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.
●
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.
230
Contingent consideration liability
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.
231
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,
2022
and
December 31, 2021, 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.
232
December 31, 2022
Carrying
Measured
(In thousands)
amount
Level 1
Level 2
Level 3
at NAV
Fair value
Financial Assets:
Cash and due from banks
$
469,501
$
469,501
$
-
$
-
$
-
$
469,501
Money market investments
5,614,595
5,607,937
6,658
-
-
5,614,595
Trading account debt securities, excluding
derivatives
[1]
27,723
13,069
14,119
535
-
27,723
Debt securities available-for-sale
[1]
17,804,374
1,908,589
15,894,074
1,711
-
17,804,374
Debt securities held-to-maturity:
U.S. Treasury securities
$
8,453,467
$
-
$
8,372,601
$
-
$
-
$
8,372,601
Obligations of Puerto Rico, States and political
subdivisions
59,010
-
-
61,617
-
61,617
Collateralized mortgage obligation-federal agency
19
-
-
19
-
19
Securities in wholly owned statutory business trusts
5,959
-
5,959
-
-
5,959
Total debt securities
held-to-maturity
$
8,518,455
$
-
$
8,378,560
$
61,636
$
-
$
8,440,196
Equity securities:
FHLB stock
$
65,861
$
-
$
65,861
$
-
$
-
$
65,861
FRB stock
96,206
-
96,206
-
-
96,206
Other investments
33,787
-
29,302
4,966
330
34,598
Total equity securities
$
195,854
$
-
$
191,369
$
4,966
$
330
$
196,665
Loans held-for-sale
$
5,381
$
-
$
-
$
5,404
$
-
$
5,404
Loans held-in-portfolio
31,357,467
-
-
29,366,365
-
29,366,365
Mortgage servicing rights
128,350
-
-
128,350
-
128,350
Derivatives
19,229
-
19,229
-
-
19,229
December 31, 2022
Carrying
Measured
(In thousands)
amount
Level 1
Level 2
Level 3
at NAV
Fair value
Financial Liabilities:
Deposits:
Demand deposits
$
54,445,825
$
-
$
54,445,825
$
-
$
-
$
54,445,825
Time deposits
6,781,402
-
6,464,943
-
-
6,464,943
Total deposits
$
61,227,227
$
-
$
60,910,768
$
-
$
-
$
60,910,768
Assets sold under agreements to repurchase
$
148,609
$
-
$
148,566
$
-
$
-
$
148,566
Other short-term borrowings
[2]
365,000
-
365,000
-
-
365,000
Notes payable:
FHLB advances
$
389,282
$
-
$
361,951
$
-
$
-
$
361,951
Unsecured senior debt securities
299,109
-
300,027
-
-
300,027
Junior subordinated deferrable interest debentures
(related to trust preferred securities)
198,319
-
173,938
-
-
173,938
Total notes payable
$
886,710
$
-
$
835,916
$
-
$
-
$
835,916
Derivatives
$
17,000
$
-
$
17,000
$
-
$
-
$
17,000
[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.
233
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.
The
notional
amount
of
commitments to
extend credit
at
December 31,
2022
and
December 31,
2021
is
$
10.5
billion
and
$
9.5
billion, respectively,
and represents
the unused
portion of
credit facilities
granted to
customers. The
notional amount
of letters
of
credit at
December 31,
2022 and
December 31,
2021 is
$
31
million 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.
234
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,
2022
and
2021
and
the
approved
asset
allocation
ranges, by asset category, are summarized in the table below.
Minimum allotment
Maximum allotment
2022
2021
Equity
0
%
70
%
27
%
30
%
Debt securities
0
%
100
%
69
%
67
%
Popular related securities
0
%
5
%
2
%
2
%
Cash and cash equivalents
0
%
100
%
2
%
1
%
235
The following table sets
forth by level, within
the fair value hierarchy,
the Pension Plans’ assets at
fair value at December
31, 2022
and 2021. 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, 2022
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.
2022
2021
(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
$
-
$
8,113
$
-
$
130,397
$
138,510
$
-
$
9,259
$
-
$
188,377
$
197,636
Corporate bonds and
debentures
-
268,641
-
6,291
274,932
-
375,875
-
8,485
384,360
Equity securities - Common
Stock
32,906
-
-
-
32,906
41,414
-
-
-
41,414
Equity securities - ETF's
51,836
20,276
-
-
72,112
111,365
25,446
-
-
136,811
Foreign commingled trust
funds
-
-
-
64,630
64,630
-
-
-
82,912
82,912
Mutual fund
-
3,471
-
22,106
25,577
-
5,262
-
-
5,262
Private equity investments
-
-
-
-
-
-
-
56
-
56
Cash and cash equivalents
7,637
-
-
-
7,637
7,523
-
-
-
7,523
Accrued investment income
-
-
3,581
-
3,581
-
-
4,510
-
4,510
Total assets
$
92,379
$
300,501
$
3,581
$
223,424
$
619,885
$
160,302
$
415,842
$
4,566
$
279,774
$
860,484
236
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 stock
- 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.
●
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.
237
(In thousands)
2022
2021
Balance at beginning of year
$
4,566
$
3,917
Purchases, sales, issuance and settlements (net)
(985)
649
Balance at end of year
$
3,581
$
4,566
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,
2022 and
2021. There
were
no
transfers in
and/or out
of Level
1 and
Level 2
during the
years ended
December 31, 2022 and 2021.
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)
2022
2021
Shares of Popular, Inc. common stock
171,931
167,182
Fair value of shares of Popular, Inc. common
stock
$
11,402
$
13,716
Dividends paid on shares of Popular,
Inc. common stock held by the plan
$
355
$
280
The following table presents the components of net
periodic benefit cost for the years ended
December 31, 2022, 2021 and 2020.
Pension Plans
OPEB Plan
(In thousands)
2022
2021
2020
2022
2021
2020
(in thousands)
Service cost
$
-
$
-
$
-
$
485
$
642
$
713
Other operating expenses:
Interest cost
19,199
15,993
23,389
3,931
3,573
4,913
Expected return on plan assets
(35,388)
(38,679)
(38,104)
-
-
-
Recognized net actuarial loss
15,644
18,876
20,880
-
1,873
567
Net periodic benefit cost
$
(545)
$
(3,810)
$
6,165
$
4,416
$
6,088
$
6,193
Other Adjustments
-
-
-
60
-
-
Total benefit cost
$
(545)
$
(3,810)
$
6,165
$
4,476
$
6,088
$
6,193
238
The following table sets forth the aggregate status of the plans and the amounts recognized in the consolidated financial statements
at December 31, 2022 and 2021.
Pension Plans
OPEB Plan
(In thousands)
2022
2021
2022
2021
Change in benefit obligation:
Benefit obligation at beginning of year
$
851,471
$
914,353
$
159,958
$
179,210
Service cost
-
-
485
642
Interest cost
19,199
15,993
3,931
3,573
Actuarial (gain)/loss
[1]
(194,473)
(34,297)
(39,479)
(17,286)
Benefits paid
(48,022)
(44,578)
(6,619)
(6,181)
Other adjustments
-
-
60
-
Benefit obligation at end of year
$
628,175
$
851,471
$
118,336
$
159,958
Change in fair value of plan assets:
Fair value of plan assets at beginning of year
$
860,484
$
878,785
$
-
$
-
Actual return on plan assets
(192,807)
26,049
-
-
Employer contributions
230
228
6,619
6,181
Benefits paid
(48,022)
(44,578)
(6,619)
(6,181)
Fair value of plan assets at end of year
$
619,885
$
860,484
$
-
$
-
Funded status of the plan:
Benefit obligation at end of year
$
(628,175)
$
(851,471)
$
(118,336)
$
(159,958)
Fair value of plan assets at end of year
619,885
860,484
-
-
Funded status at year end
$
(8,290)
$
9,013
$
(118,336)
$
(159,958)
Amounts recognized in accumulated other comprehensive
loss:
Net loss/(gain)
243,434
225,356
(26,486)
12,993
Accumulated other comprehensive loss (AOCL)
$
243,434
$
225,356
$
(26,486)
$
12,993
Reconciliation of net (liabilities) assets:
Net liabilities at beginning of year
$
9,013
$
(35,568)
$
(159,958)
$
(179,210)
Amount recognized in AOCL at beginning of year,
pre-tax
225,356
265,899
12,993
32,152
Amount prepaid at beginning of year
234,369
230,331
(146,965)
(147,058)
Total benefit
cost
545
3,810
(4,476)
(6,088)
Contributions
230
228
6,619
6,181
Amount prepaid at end of year
235,144
234,369
(144,822)
(146,965)
Amount recognized in AOCL
(243,434)
(225,356)
26,486
(12,993)
Net asset/(liabilities) at end of year
$
(8,290)
$
9,013
$
(118,336)
$
(159,958)
[1]
For 2022, 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 partially offset
by the health care cost trend assumption which
was updated to reflect inflationary pressures in
the health care industry.
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.
239
The following table presents the change in accumulated other
comprehensive loss (“AOCL”), pre-tax, for the years ended December
31, 2022 and 2021.
(In thousands)
Pension Plans
OPEB Plan
2022
2021
2022
2021
Accumulated other comprehensive loss at beginning of year
$
225,356
$
265,899
$
12,993
$
32,152
Increase (decrease) in AOCL:
Recognized during the year:
Amortization of actuarial losses
(15,644)
(18,876)
-
(1,873)
Occurring during the year:
Net actuarial (gains)/losses
33,722
(21,667)
(39,479)
(17,286)
Total (decrease) increase
in AOCL
18,078
(40,543)
(39,479)
(19,159)
Accumulated other comprehensive loss at end of year
$
243,434
$
225,356
$
(26,486)
$
12,993
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, 2022
and 2021.
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 Plan
OPEB Plan
Weighted average assumptions used to
determine net periodic benefit cost for the
years ended December 31:
2022
2021
2020
2022
2021
2020
Discount rate for benefit obligation
2.79
-
2.83
%
2.41
-
2.48
%
3.22
-
3.27
%
2.94
%
2.65
%
3.38
%
Discount rate for service cost
N/A
N/A
N/A
3.21
%
3.09
%
3.72
%
Discount rate for interest cost
2.3
0 -
2.33
%
1.76
-
1.8
0
%
2.81
-
2.83
%
2.51
%
2.03
%
2.98
%
Expected return on plan assets
4.3
0 -
5.40
%
4.6
0 -
5.50
%
5
.00 -
5.8
0
%
N/A
N/A
N/A
Initial health care cost trend rate
N/A
N/A
N/A
4.75
%
5.00
%
5.00
%
Ultimate health care cost trend rate
N/A
N/A
N/A
4.50
%
4.50
%
5.00
%
Year that the ultimate trend
rate is reached
N/A
N/A
N/A
2023
2023
2020
Pension Plans
OPEB Plan
Weighted average assumptions used to determine
benefit obligation at
December 31:
2022
2021
2022
2021
Discount rate for benefit obligation
5.34
-
5.37
%
2.79
-
2.83
%
5.42
%
2.94
%
Initial health care cost trend rate
N/A
N/A
7.50
%
4.75
%
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
2035
2023
240
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,
2022 and 2021.
Pension Plans
OPEB Plan
(In thousands)
2022
2021
2022
2021
Projected benefit obligation
$
628,175
$
851,471
$
118,336
$
159,958
Accumulated benefit obligation
628,175
851,471
118,336
159,958
Fair value of plan assets
619,885
860,484
-
-
The Corporation expects to pay the following contributions
to the plans during the year ended December
31, 2023.
(In thousands)
2023
Pension Plans
$
228
OPEB Plan
$
5,924
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
2023
$
48,472
$
5,924
2024
45,590
6,149
2025
45,750
6,429
2026
45,847
6,754
2027
45,843
7,053
2028 - 2032
225,107
38,873
241
The table below presents a breakdown of the
plans’ assets and liabilities at December
31, 2022 and 2021.
Pension Plans
OPEB Plan
(In thousands)
2022
2021
2022
2021
Non-current assets
$
-
$
17,792
$
-
$
-
Current liabilities
222
227
5,779
5,959
Non-current liabilities
8,068
8,552
112,557
153,999
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, 2022 was $
18.7
million (2021 - $
13.3
million, 2020 - $
14.0
million).
The
plans held
1,246,519
(2021 –
1,279,982
) shares
of common
stock
of
the
Corporation with
a market
value of
approximately
$
82.7
million at December 31, 2022 (2021 - $
105
million).
242
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, 2022, 2021 and 2020:
(In thousands, except per share information)
2022
2021
2020
Net income
$
1,102,641
$
934,889
$
506,622
Preferred stock dividends
(1,412)
(1,412)
(1,758)
Net income applicable to common stock
$
1,101,229
$
933,477
$
504,864
Average common shares outstanding
75,147,263
81,263,027
85,882,371
Average potential dilutive common shares
126,740
157,127
92,888
Average common shares outstanding - assuming dilution
75,274,003
81,420,154
85,975,259
Basic EPS
$
14.65
$
11.49
$
5.88
Diluted EPS
$
14.63
$
11.46
$
5.87
As
disclosed
in
Note
20,
as
of
September
30,
2022,
the
Corporation completed
its
$
400
million
accelerated
share
repurchase
transaction (“ASR”)
and, in
connection therewith,
received an
initial delivery
of
3,483,942
shares of
common stock
during the
first
quarter
of
2022
and
1,582,922
additional shares
of
common
stock
during the
third
quarter of
2022.
The final
number
of
shares
delivered
was
based
in
the
average
daily
volume
weighted
average
price
(“VWAP”)
of
the
Corporation’s
common
stock,
net
of
discount, during the term of the ASR, which amounted
to $
78.94
.
As of December 31,
2022, the Corporation completed its
$
231
million accelerated share repurchase transaction
entered on August
2022, (the “August ASR Agreement”) and, in connection therewith, received an initial delivery of
2,339,241
shares of common stock
during the third quarter of 2022 and
840,024
additional shares of common stock during the fourth quarter of 2022.
The final number
of shares
delivered was based
in the
average daily volume
weighted average price
(“VWAP”) of
the Corporation’s common
stock,
net of discount, during the term of the ASR, which
amounted to $
72.66
.
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.
243
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, 2022, 2021 and 2020
.
Years ended December
31,
(In thousands)
2022
2021
2020
BPPR
Popular U.S.
BPPR
Popular U.S.
BPPR
Popular U.S.
Service charges on deposit accounts
$
146,073
$
11,137
$
151,453
$
11,245
$
136,703
$
11,120
Other service fees:
Debit card fees
49,297
876
47,681
956
38,685
967
Insurance fees, excluding reinsurance
40,545
5,018
40,929
3,798
35,799
2,484
Credit card fees, excluding late fees and membership
fees
136,295
1,275
117,418
1,052
88,091
831
Sale and administration of investment products
23,553
-
23,634
-
21,755
-
Trust fees
23,614
-
24,855
-
21,700
-
Total revenue from
contracts with customers
[1]
$
419,377
$
18,306
$
405,970
$
17,051
$
342,733
$
15,402
[1] The amounts include intersegment transactions of $
5
million, $
4.1
million and $
4.3
million, respectively, for
the years ended December 31, 2022,
2021 and 2020.
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
244
commissions
are
recorded
on
an
accrual
basis
when
the
amount
to
be
received
is
notified
by
the
insurance
company.
The
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.
245
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
to
the
Consolidated Financial
Statements,
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.
The following table presents the undiscounted
cash flows of operating and finance leases for
each of the following periods:
December 31, 2022
(In thousands)
2023
2024
2025
2026
2027
Later
Years
Total Lease
Payments
Less:
Imputed
Interest
Total
Operating Leases
$
29,836
$
28,220
$
25,301
$
16,779
$
11,633
$
44,208
$
155,977
$
(18,687)
$
137,290
Finance Leases
4,328
4,426
4,537
4,197
2,263
8,185
27,936
(3,199)
24,737
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)
2022
2021
2020
Finance lease cost:
Amortization of ROU assets
$
2,938
$
2,006
$
2,215
Interest on lease liabilities
1,117
1,044
1,185
Operating lease cost
30,534
29,970
31,674
Short-term lease cost
505
647
214
Variable lease cost
124
93
51
Sublease income
(37)
(70)
(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]
$
35,181
$
26,683
$
45,596
[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.
The
following
table
presents
supplemental
cash
flow
information
and
other
related
information
related
to
operating
and
finance
leases.
246
Years ended December
31,
(Dollars in thousands)
2022
2021
2020
Cash paid for amounts included in the measurement of
lease liabilities:
Operating cash flows from operating leases
[1]
$
29,985
$
38,288
$
41,650
Operating cash flows from finance leases
1,117
1,044
1,185
Financing cash flows from finance leases
[1]
3,346
2,852
3,145
ROU assets obtained in exchange for new lease obligations:
Operating leases
[2]
$
14,564
$
24,136
$
14,975
Finance leases
556
-
4,510
Weighted-average remaining lease term:
Operating leases
7.5
years
7.9
years
8.0
years
Finance leases
8.2
years
8.3
years
8.9
years
Weighted-average discount rate:
Operating leases
3.0
%
2.7
%
3.0
%
Finance leases
4.2
%
5.0
%
5.0
%
[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, 2022, the Corporation has additional operating and finance leases contracts that have not yet commenced with
an undiscounted
contract amount
of $
4.1
million and
$
2.2
million, respectively,
which will
have lease
terms ranging
from
10
to
20
years.
247
Note 34 - Stock-based compensation
Incentive Plan
On May 12, 2020, the stockholders 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 Talent and 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 to 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
granted prior to 2021 was determined based on a two-prong vesting schedule. The first part is vested ratably over five or four 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 or 60 years of age and 5 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 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 vesting schedule 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.
The
performance share
awards
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,
depending
on
the
date
of
the
grant,
the
Absolute Return
on Average
Assets (“ROA”) goal
or the
Absolute Return on
Average Tangible
Common Equity (“ROATCE”)
goal.
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 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 ROA or ROATCE
goal as of each reporting period.
The TSR and 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 (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.
248
(Not in thousands)
Shares
Weighted-average
grant date fair value
Non-vested at January 1, 2020
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
Granted
194,791
84.29
Performance Shares Quantity Adjustment
6,947
78.02
Vested
(240,033)
66.11
Forfeited
(1,625)
78.86
Non-vested at December 31, 2022
281,963
$
56.50
During
the
year
ended
December
31,
2022,
137,934
shares
of
restricted
stock
(2021
-
120,105
;
2020
-
213,511
)
and
56,857
performance shares (2021 -
71,374
; 2020 -
40,432
) were awarded to management under the
Incentive Plan.
During
the
year
ended
December
31,
2022,
the
Corporation
recognized
$
10.3
million
of
restricted
stock
expense
related
to
management incentive awards,
with a tax
benefit of $
1.8
million (2021 -
$
8.6
million, with a
tax benefit of
$
1.6
million; 2020 -
$
7.6
million, with
a tax
benefit of
$
1.3
million). During
the year
ended December
31, 2022,
the fair
market value
of the
restricted stock
and performance shares vested was $
12.2
million at grant date and $
20.7
million at vesting date. This differential triggers
a windfall
of $
3.1
million that was recorded as a reduction in income tax expense.
During the year ended December 31, 2022, the Corporation
recognized $
4.8
million of performance
shares expense, with
a tax benefit
of $
0.4
million (2021 -
$
5.8
million, with a
tax benefit of
$
0.5
million; 2020 - $
2.3
million, with a tax benefit of $
0.2
million).
The total unrecognized compensation cost related to non-vested
restricted
stock
awards
and
performance
shares
to
members
of
management
at
December
31,
2022
was
$
10.1
million
and
is
expected to be recognized over a weighted-average
period of
1.86
years.
The following table summarizes the restricted stock
activity under the Incentive Plan for members of
the Board of Directors:
(Not in thousands)
RSU
Weighted-average
grant
date fair value
Non-vested at January 1, 2020
-
-
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
-
-
Granted
25,321
$
77.48
Vested
(25,321)
77.48
Forfeited
-
-
Non-vested at December 31, 2022
-
-
249
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 will
receive an additional number of RSUs
that reflect a reinvested dividend equivalent.
For 2022, 2021
and 2020, all
Directors elected RSUs.
For the year
ended December 31,
2022,
25,321
RSUs were granted
to the
Directors (2021 -
20,638
; 2020 -
43,866
).
For the year ended December
31, 2022, $
2.0
million of restricted stock expense
related
to these
RSUs was recognized,
with a tax
benefit of $
0.4
million (2021 -
$
1.9
million with a
tax benefit of
$
0.4
million; 2020 -
$
1.6
million with
a tax
benefit of
$
0.3
million).
The fair
value at
vesting date
of the
RSUs vested
during the
year ended
December 31,
2022 for the Directors was $
2.0
million.
250
Note 35 – Income taxes
The components of income tax expense for the years
ended December 31, are summarized in the
following table.
(In thousands)
2022
2021
2020
Current income tax (benefit) expense:
Puerto Rico
$
156,425
$
69,415
$
33,281
Federal and States
9,034
10,232
3,613
Subtotal
165,459
79,647
36,894
Deferred income tax expense (benefit):
Puerto Rico
(4,373)
179,688
69,300
Federal and States
(28,756)
49,683
5,744
Subtotal
(33,129)
229,371
75,044
Total income tax
expense
$
132,330
$
309,018
$
111,938
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:
2022
2021
2020
(In thousands)
Amount
% of pre-tax
income
Amount
% of pre-tax
income
Amount
% of pre-tax
income
Computed income tax at statutory rates
$
463,114
38
%
$
466,465
38
%
$
231,960
38
%
Benefit of net tax exempt interest income
(165,065)
(13)
(139,426)
(12)
(126,232)
(20)
Effect of income subject to preferential tax rate
(86,797)
(7)
(11,981)
(1)
(10,141)
(2)
Deferred tax asset valuation allowance
(21,469)
(2)
20,932
2
15,276
2
NOL Adjustments
(34,817)
(3)
-
-
-
-
Difference in tax rates due to multiple jurisdictions
(26,887)
(2)
(30,719)
(3)
(1,903)
-
Unrecognized tax benefits
(1,503)
-
(5,484)
-
(2,163)
-
State and local taxes
14,981
1
14,629
1
4,350
-
Others
(9,227)
(1)
(5,398)
-
791
-
Income tax expense
$
132,330
11
%
$
309,018
25
%
$
111,938
18
%
For the year ended December 31, 2022, the Corporation
recorded income tax expense of $
132.3
million, compared to $
309.0
million
for the
same period
of 2021.
The decrease
in income
tax expense was
mainly due
to the
reversal of a
portion of
the deferred
tax
asset (“DTA”) valuation allowance of the U.S. operations amounting to $
68.2
million, to higher taxable income subject to preferential
tax rates, primarily attributed to the gain from the
sale of Evertec shares, and
higher tax-exempt income recorded during this
year.
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:
251
December 31, 2022
(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
121,742
661,144
782,886
Postretirement and pension benefits
47,122
-
47,122
Allowance for credit losses
250,615
32,688
283,303
Accelerated depreciation
5,972
6,309
12,281
FDIC-assisted transaction
152,665
-
152,665
Intercompany deferred gains
1,548
-
1,548
Lease liability
28,290
23,521
51,811
Unrealized net loss on investment securities
265,955
23,913
289,868
Difference in outside basis from pass-through entities
40,602
-
40,602
Other temporary differences
29,285
7,815
37,100
Total gross deferred
tax assets
944,057
758,171
1,702,228
Deferred tax liabilities:
Intangibles
81,174
54,623
135,797
Right of use assets
26,015
20,262
46,277
Deferred loan origination fees/cost
1,076
2,961
4,037
Other temporary differences
24,884
-
24,884
Total gross deferred
tax liabilities
133,149
77,846
210,995
Valuation allowance
137,863
402,333
540,196
Net deferred tax asset
$
673,045
$
277,992
$
951,037
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:
Intangibles
76,635
51,150
127,785
Unrealized net gain on investment 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
252
The net deferred
tax asset shown
in the
table above at
December 31, 2022
is reflected in
the consolidated statements
of financial
condition as
$
1.0
billion in
net deferred
tax assets
(in the
“other assets”
caption) (2021
- $
0.7
billion in
deferred tax
asset in
the
“other assets” caption) and
$
2.6
million in deferred tax
liabilities (in the “other
liabilities” caption) (2021 - $
825
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 and
other carryforwards as of December 31, 2022, expires
as follows:
(In thousands)
2023
$
1,363
2024
9,310
2025
13,516
2026
13,367
2027
15,202
2028
260,622
2029
111,307
2030
121,017
2031
122,324
2032
55,335
2033
10,565
2034
5,666
2035
43,121
2036
171
$
782,886
At December
31, 2022
the net
deferred tax
asset of the
U.S. operations
amounted to $
680.3
million with
a valuation
allowance of
$
402.3
million, for a net DTA of $
278
million. The Corporation evaluates on a quarterly basis the realization of the deferred tax asset
by taxing jurisdiction.
The U. S. operations sustained profitability for the three years period ended December 31, 2022.
Years 2020
and 2021 were
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 had been favorably impacted
by a strong economic recovery that resulted in ACL reserve releases, reversing the year 2020 build-up.
The financial results for the
year ended December 31, 2022, demonstrate financial stability for the
U. S. operations, despite the climate of uncertainty as a result
of
recent global
geopolitical challenges.
These historical
financial results
together with
pre-tax earnings
forecasts are
objectively
verifiable positive evidence, evaluated in
addition to 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
in
prior
years,
and
challenges
to
the
economy
due
to
global
geopolitical
uncertainty.
Accordingly,
after weighting
all positive
and negative
evidence, the
Corporation recorded
during the
fourth quarter
of year
2022 a
partial release of its
valuation allowance amounting to
$
68.2
million and concluded that
it is more
likely than not that
approximately
$
278
million of the
DTA from
the U.S. Operations will
be realized. The
Corporation has approximately $
525
million in deferred
tax
asset related
to federal
NOLs with
expiration dates
between 2028
and 2033
and $
135
million in
DTA
related to
state NOLs
with
expiration dates
between 2030
and 2036.
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, the pre-tax
earnings forecast, any
new
tax initiative, and other factors, including net income
versus forecast, targeted loan growth, net interest income
margin, allowance for
credit losses, charge offs, NPLs inflows and NPA balances.
At December 31, 2022, the Corporation’s net deferred
tax assets related to its Puerto Rico operations
amounted to $
673
million.
The Corporation’s
Puerto Rico
Banking operation
is not
in a
cumulative loss
position and
has sustained
profitability for
the three
years period ended
December 31, 2022.
This is considered
a strong piece
of objectively verifiable
positive evidence that
outweigh
any
negative evidence
considered by
management in
the
evaluation of
the
realization of
the
deferred tax
asset.
Based
on
this
253
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, 2022.
Management expects these
losses will be
a trend in
future years. This
objectively verifiable negative evidence is
considered by management 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 $
138
million as of December 2022.
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, 2021
$
14.8
Reduction as a result of lapse of statute of limitations
(11.3)
Balance at December 31, 2021
$
3.5
Reduction as a result of lapse of statute of limitations
(1.0)
Balance at December 31, 2022
$
2.5
At
December 31,
2022, the
total amount
of
interest recognized
in the
statement of
financial condition
approximated
$
2.6
million
(2021 -
$
2.8
million). The
total interest
expense recognized
during 2022
was $
268
thousand net
of a
reduction of
$
448
thousand
due to the
expiration of the
statute of limitation
(2021 - $
892
thousand net of
a reduction of
$
2.9
million). Management determined
that, as of
December 31, 2022
and 2021, 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 $
4.3
million at December 31, 2022 (2021 - $
5.5
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,
2022, the
following years remain
subject to
examination in the
U.S.
Federal
jurisdiction
–
2019
and
thereafter
and
in
the
Puerto
Rico
jurisdiction
–
2018
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 $
1.5
million, including interest.
254
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, 2022, 2021 and 2020 are
listed in the following table:
(In thousands)
2022
2021
2020
Income taxes paid
$
178,808
$
64,997
$
13,045
Interest paid
292,491
170,442
240,342
Non-cash activities:
Loans transferred to other real estate
64,953
57,638
14,464
Loans transferred to other property
51,642
45,144
48,614
Total loans transferred
to foreclosed assets
116,595
102,782
63,078
Loans transferred to other assets
8,664
7,219
7,117
Financed sales of other real estate assets
8,535
13,014
15,606
Financed sales of other foreclosed assets
38,467
43,060
34,492
Total financed sales
of foreclosed assets
47,002
56,074
50,098
Financed sale of premises and equipment
47,697
31,085
31,350
Transfers from premises and equipment to
long-lived assets held-for-sale
1,739
32,103
-
Transfers from loans held-in-portfolio to
loans held-for-sale
11,531
69,890
82,299
Transfers from loans held-for-sale to loans
held-in-portfolio
26,425
9,762
20,153
Transfers from available-for-sale to held-to-maturity
debt securities
6,531,092
-
-
Loans securitized into investment securities
[1]
300,279
732,533
508,071
Trades receivables from brokers and
counterparties
9,461
64,824
64,092
Trades payable to brokers and counterparties
9,461
13,789
720,212
Receivables from investments securities
125,000
-
-
Recognition of mortgage servicing rights on securitizations
or asset transfers
6,614
13,391
9,544
Loans booked under the GNMA buy-back option
9,799
19,798
24,244
Capitalization of right of use assets
17,932
35,683
29,692
Acquisition of software intangible assets
28,650
-
-
Goodwill on acquisition
116,135
-
-
Total stock consideration
related to Evertec transaction
144,785
-
-
[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, 2022
December 31, 2021
December 31, 2020
Cash and due from banks
$
423,233
$
411,346
$
484,859
Restricted cash and due from banks
46,268
17,087
6,206
Restricted cash in money market investments
6,658
6,079
6,029
Total cash and due
from banks, and restricted cash
[2]
$
476,159
$
434,512
$
497,094
[2]
Refer to Note 5 - Restrictions on cash and due from banks
and certain securities for nature of restrictions.
255
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:
The Banco Popular de
Puerto Rico reportable segment
includes commercial, consumer and retail
banking operations conducted at
BPPR, including
U.S. based
activities conducted
through its
New York
Branch. It
also includes
the lending
operations of
Popular
Auto
and
Popular
Mortgage.
Other
financial
services
within
the
BPPR
segment
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, Popular
Life Re, and Popular Re.
Popular U.S.:
Popular U.S. reportable segment
consists of the
banking operations of Popular
Bank (PB), Popular Insurance
Agency, U.S.A.,
and
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,
until August 15,
2022, 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:
December 31, 2022
Banco Popular
Intersegment
(In thousands)
de Puerto Rico
Popular U.S.
Eliminations
Net interest income
$
1,823,517
$
372,988
$
3
Provision for credit losses
70,304
12,452
-
Non-interest income
680,276
31,958
(547)
Amortization of intangibles
1,937
1,338
-
Goodwill impairment charge
-
9,000
-
Depreciation expense
47,003
6,919
-
Other operating expenses
1,454,187
230,136
(543)
Income tax expense
148,351
(25,205)
-
Net income
$
782,011
$
170,306
$
(1)
Segment assets
$
56,190,260
$
11,558,280
$
(421,781)
December 31, 2022
Reportable
Total
(In thousands)
Segments
Corporate
Eliminations
Popular, Inc.
Net interest income (expense)
$
2,196,508
$
(29,149)
$
-
$
2,167,359
Provision for credit losses
82,756
274
-
83,030
Non-interest income
711,687
189,835
(4,460)
897,062
Amortization of intangibles
3,275
-
-
3,275
Goodwill impairment charge
9,000
-
-
9,000
Depreciation expense
53,922
1,185
-
55,107
Other operating expenses
1,683,780
80
(4,822)
1,679,038
Income tax expense
123,146
9,074
110
132,330
Net income
$
952,316
$
150,073
$
252
$
1,102,641
Segment assets
$
67,326,759
$
5,390,122
$
(5,078,964)
$
67,637,917
256
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
257
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 co-branded
credit
cards
offerings
and commercial
lending activities.
BPPR’s
commercial
lending
activities
in
the
U.S.,
through its
New
York
Branch,
include periodic
loan
participations
with
PB.
During
the
year
ended
December 31, 2022, BPPR participated
in loans originated by PB
totaling $
184
million (2021 - $
35
million). At December 31, 2022,
total
assets for
the BPPR
segment
related
to
its
operations in
the United
States
amounted to
$
1.2
billion
(2021 -
$
589
million).
During the year ended December 31, 2022, the
BPPR segment generated approximately $
67.8
million (2021 - $
50.6
million, 2020 -
$
55.3
million)
in
revenues
from
its
operations
in
the
United
States,
including
net
interest
income,
service
charges
on
deposit
accounts and
other service
fees. In
the Virgin
Islands, the
BPPR segment
offers banking
products, including
loans and
deposits.
The BPPR segment
generated $
46.6
million in revenues
(2021 - $
45.4
million, 2020 -
$
44.2
million) from its
operations in the U.S.
and British Virgin Islands.
(In thousands)
2022
2021
2020
Revenues:
[1]
Puerto Rico
$
2,505,988
$
2,136,481
$
1,921,207
United States
480,545
390,201
376,529
Other
77,888
73,036
71,189
Total consolidated
revenues
$
3,064,421
$
2,599,718
$
2,368,925
[1]
Total revenues include
net interest income, service charges on deposit accounts,
other service fees, mortgage banking activities, net
gain 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 to indemnity reserves on loans sold, and
other operating income.
Selected Balance Sheet Information
(In thousands)
2022
2021
2020
Puerto Rico
Total assets
$
53,541,427
$
63,221,282
$
54,143,954
Loans
20,884,442
19,770,118
20,413,112
Deposits
51,138,790
57,211,608
47,586,880
United States
Total assets
$
12,718,775
$
10,986,055
$
10,878,030
Loans
10,643,964
8,903,493
8,396,983
Deposits
8,182,702
7,777,232
7,672,549
Other
Total assets
$
1,377,715
$
890,562
$
904,016
Loans
554,744
626,115
674,556
Deposits
[1]
1,905,735
2,016,248
1,606,911
[1]
Represents deposits from BPPR operations located in the
U.S. and British Virgin Islands.
258
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, 2022 and 2021, and the results of its
operations and cash flows for the years ended
December 31, 2022, 2021 and 2020.
Condensed Statements of Condition
December 31,
(In thousands)
2022
2021
ASSETS
Cash and due from banks (includes $
101,753
due from bank subsidiary (2021 - $
79,660
))
$
101,753
$
79,660
Money market investments
77,180
205,646
Debt securities held-to-maturity,
at amortized cost (includes $
3,125
in common
securities from statutory trusts (2021 - $
3,125
))
[1]
3,125
3,125
Equity securities, at lower of cost or realizable value
18,835
19,711
Investment in BPPR and subsidiaries, at equity
2,120,503
3,858,701
Investment in Popular North America and subsidiaries, at
equity
1,879,123
1,834,931
Investment in other non-bank subsidiaries, at equity
335,552
288,736
Other loans
28,196
29,445
Less - Allowance for credit losses
370
96
Premises and equipment
6,411
5,684
Investment in equity method investees
5,350
114,955
Other assets (includes $
6,115
due from subsidiaries and affiliate (2021 - $
6,802
))
34,841
32,810
Total assets
$
4,610,499
$
6,473,308
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable
$
403,257
$
401,990
Other liabilities (includes $
2,764
due to subsidiaries and affiliate (2021 - $
6,591
))
113,772
101,923
Stockholders’ equity
4,093,470
5,969,395
Total liabilities and
stockholders’ equity
$
4,610,499
$
6,473,308
[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)
2022
2021
2020
Income:
Dividends from subsidiaries
$
458,000
$
792,000
$
586,000
Interest income (includes $
680
due from subsidiaries and affiliates (2021 - $
828
; 2020 -
$
2,290
))
2,846
4,303
4,949
Earnings from investments in equity method investees
15,688
29,387
17,841
Other operating income
139,191
-
1
Net (loss) gain, including impairment, on equity securities
(4,446)
(525)
1,494
Total income
611,279
825,165
610,285
Expenses:
Interest expense
26,021
36,444
38,528
Provision for credit losses (benefit)
274
(215)
95
Operating expense (income) (includes expenses for services
provided by subsidiaries and
affiliate of $
18,414
(2021 - $
13,546
; 2020 - $
13,140
)), net of reimbursement by subsidiaries
for services provided by parent of $
222,935
(2021 - $
162,019
; 2020 - $
138,729
)
223
5,432
(921)
Total expenses
26,517
41,661
37,702
Income before income taxes and equity in undistributed
earnings (losses) of subsidiaries
584,762
783,504
572,583
Income tax expense
8,723
352
17
Income before equity in undistributed earnings (losses) of subsidiaries
576,038
783,152
572,566
Equity in undistributed earnings (losses) of subsidiaries
526,603
151,737
(65,944)
Net income
$
1,102,641
$
934,889
$
506,622
Comprehensive (loss) income, net of tax
$
(1,097,218)
$
419,829
$
866,551
259
Condensed Statements of Cash Flows
Years ended December 31,
(In thousands)
2022
2021
2020
Cash flows from operating activities:
Net income
$
1,102,641
$
934,889
$
506,622
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in (earnings) losses of subsidiaries, net of dividends
or distributions
(526,603)
(151,737)
65,944
Provision for credit losses (benefit)
274
(215)
95
Amortization of intangibles
-
5,656
98
Net accretion of discounts and amortization of premiums and
deferred fees
1,250
1,241
1,233
Share-based compensation
9,440
8,895
5,770
Earnings from investments under the equity method, net
of dividends or distributions
(14,170)
(26,360)
(15,510)
(Gain) loss on:
Disposition of stock as part of the Evertec Transactions
(137,813)
-
-
Sale of foreclosed assets, including write-downs
-
59
-
Net increase in:
Equity securities
(339)
(3,662)
(5,305)
Other assets
(1,952)
(1,970)
(8,327)
Net (decrease) increase in:
Interest payable
-
(1,042)
-
Other liabilities
8,257
19,095
2,470
Total adjustments
(661,656)
(150,040)
46,468
Net cash provided by operating activities
440,985
784,849
553,090
Cash flows from investing activities:
Net decrease (increase) in money market investments
129,000
(94,000)
110,000
Proceeds from calls, paydowns, maturities and redemptions
of investment securities held-to-maturity
-
5,601
-
Net repayments on other loans
1,267
1,879
587
Capital contribution to subsidiaries
(54,188)
(12,900)
(10,000)
Return of capital from wholly owned subsidiaries
72,000
-
12,500
Return of capital from equity method investments
-
-
131
Proceeds from Evertec Stock Sale
219,883
-
-
Acquisition of premises and equipment
(2,224)
(1,788)
(2,667)
Proceeds from sale of premises and equipment
1,678
83
285
Proceeds from sale of foreclosed assets
-
87
-
Net cash provided by (used in) investing activities
367,416
(101,038)
110,836
Cash flows from financing activities:
Payments of notes payable
-
(186,664)
-
Proceeds from issuance of common stock
13,479
10,493
15,175
Payments for repurchase of redeemable preferred stock
-
-
(28,017)
Dividends paid
(161,516)
(141,466)
(133,645)
Net payments for repurchase of common stock
(631,965)
(350,656)
(500,705)
Payments related to tax withholding for share-based compensation
(5,771)
(5,107)
(3,394)
Net cash used in financing activities
(785,773)
(673,400)
(650,586)
Net increase in cash and due from banks, and restricted
cash
22,628
10,411
13,340
Cash and due from banks, and restricted cash at beginning
of period
80,305
-
69,894
56,554
Cash and due from banks, and restricted cash at end of
period
$
102,933
$
80,305
$
69,894
260
Popular, Inc.
(parent company only)
received distributions from
its direct equity
method investees amounting to
$
1.5
million for the
year ended December
31, 2022 (2021
- $
3.0
million; 2020 -
$
2.3
million), of which
$
1.5
million are related
to dividend distributions
(2021
-
$
2.3
million;
2020
-
$
2.3
million).
Also
received
dividend
distributions
from
PNA
amounting
to
$
53.5
million
(2021
-
$
0
million; 2020
- $
0
million) and
from PIBI
amounting to
$
18.5
million (2021
- $
0
million; 2020
- $
12.5
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, 2022:
Year
(In thousands)
2023
$
299,109
2024
-
2025
-
2026
-
2027
-
Later years
104,148
Total
$
403,257
261
SIGNATURES
Pursuant to the
requirements of Section
13 or
15 (d)
of the Securities
Exchange Act of
1934, the registrant
has duly caused
this
report to be signed on its behalf by the undersigned,
thereunto duly authorized on March 1, 2023.
POPULAR, INC.
(Registrant)
By: /S/ IGNACIO ALVAREZ
Ignacio Alvarez
President and
Chief Executive Officer
Pursuant to the requirements
of the Securities Exchange Act
of 1934, this report
has been signed below by
the following persons
on behalf of the registrant and in the capacities
and on the dates indicated.
/S/ RICHARD L. CARRIÓN
Chairman of the Board
3-1-2023
Richard L. Carrión
Chairman of the Board
/S/ IGNACIO ALVAREZ
President, Chief Executive Officer
3-1-2023
Ignacio Alvarez
and Director
President and Chief Executive Officer
/S/ CARLOS J. VÁZQUEZ
Principal Financial Officer
3-1-2023
Carlos J. Vázquez
Executive Vice President
/S/ JORGE J. GARCÍA
Principal Accounting Officer
3-1-2023
Jorge J. García
Senior Vice President and Comptroller
/S/ ALEJANDRO M. BALLESTER
Director
3-1-2023
Alejandro M. Ballester
S/ MARÍA LUISA FERRÉ
Director
3-1-2023
María Luisa Ferré
/S/ C. KIM GOODWIN
Director
3-1-2023
C. Kim Goodwin
/S/ JOAQUÍN E. BACARDÍ, III
Director
3-1-2023
Joaquín E. Bacardi, III
/S/ CARLOS A. UNANUE
Director
3-1-2023
Carlos A. Unanue
/S/ JOHN W. DIERCKSEN
Director
3-1-2023
John W. Diercksen
/S/ MYRNA M. SOTO
Director
3-1-2023
Myrna M. Soto
/S/ ROBERT CARRADY
Director
3-1-2023
Robert Carrady
/S/ JOSÉ R. RODRÍGUEZ
Director
3-1-2023
José R. Rodríguez
/S/ BETTY DEVITA
Director
3-1-2023
Betty Devita