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Commitments and contingencies | 9 Months Ended
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Sep. 30, 2023
Commitments and Contingencies Disclosure |
Commitments And Contingencies | Note 21 – 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) September 30, 2023 December 31, 2022 Commitments to extend credit: Credit card lines $ 5,720,469 $ 5,853,990 Commercial and construction lines of credit 4,374,553 4,425,825 Other consumer unused credit commitments 250,571 250,271 Commercial letters of credit 3,083 3,351 Standby letters of credit 53,089 27,868 Commitments to originate or fund mortgage loans 25,104 45,170 At September 30, 2023 and December 31, 2022, the Corporation maintained a reserve of approximately $ 13.3 million and $ 8.8 million, respectively, for potential losses associated with unfunded loan commitments related to commercial and construction lines of credit. Other commitments At September 30, 2023 and December 31, 2022, the Corporation also maintained other non-credit commitments for approximately $ 3.3 million and $ 4.8 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 33 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 September 30, 2023, the Corporation’s direct exposure to the Puerto Rico government and its instrumentalities and municipalities totaled $ 362 million, of which $ 333 million were outstanding ($ 374 million and $ 327 million at December 31, 2022). Of the amount outstanding, $ 314 million consists of loans and $ 19 million are securities ($ 302 million and $ 25 million at December 31, 2022). Substantially all of the amount outstanding at September 30, 2023 and 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 other revenues. At September 30, 2023, 76 % of the Corporation’s exposure to municipal loans and securities was concentrated in the municipalities of San Juan, Guaynabo, Carolina and Caguas. 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 September 30, 2023: (In thousands) Investment Portfolio Loans Total Outstanding Total Exposure Central Government After 1 to 5 years $ 10 $ - $ 10 $ 10 After 5 to 10 years 1 - 1 1 After 10 years 29 - 29 29 Total Central Government 40 - 40 40 Municipalities Within 1 year 4,820 13,217 18,037 43,037 After 1 to 5 years 13,155 141,519 154,674 158,674 After 5 to 10 years 845 112,169 113,014 113,014 After 10 years - 46,823 46,823 46,823 Total Municipalities 18,820 313,728 332,548 361,548 Total Direct Government Exposure $ 18,860 $ 313,728 $ 332,588 $ 361,588 In addition, at September 30, 2023, the Corporation had $ 242 million in loans insured or securities issued by Puerto Rico governmental entities but for which the principal source of repayment is non-governmental ($ 251 million at December 31, 2022). These included $ 195 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, 2022 - $ 209 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 September 30, 2023, $ 40 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, 2022 - $ 42 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, $ 1.7 billion of residential mortgages, $ 10 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 September 30, 2023 (compared to $ 1.6 billion, $ 38 million and $ 72 million, respectively, at December 31, 2022). 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 September 30, 2023, 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, 2022 - $ 28 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 September 30, 2023, the Corporation has operations in the British Virgin Islands (“BVI”), which was 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 approximately $ 201 million comprised of various retail and commercial clients, compared to a loan portfolio of $ 214 million at December 31, 2022. 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 any 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 $ 18.4 million as of September 30, 2023. 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 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. On March 13, 2023, the U.S. Court of Appeals for the First Circuit entered judgment affirming the trial court’s order dismissing the complaint. On March 23, 2023, Plaintiffs filed a Petition for Rehearing and/or Rehearing en Banc . On August 29, 2023, the U.S. Court of Appeals for the First Circuit entered an Order denying Plaintiff’s Petition for Rehearing and/or Rehearing en Banc. The formal mandate of the U.S. Court of Appeals remanding the case to the lower court was issued on September 6, 2023. This matter is now closed. Insufficient Funds and Overdraft Fees Class Actions Popular was 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 overdraft fees (“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 2022, and several other trial-related deadlines for June 2023. During a mediation hearing held in October 2022, the parties reached a settlement in principle on a class-wide basis subject to final court approval. In January 2023, the parties filed before the Court a motion for preliminary approval of the settlement agreement and, on March 31, 2023, the Court issued an order granting preliminary approval of the settlement agreement. The Court scheduled the final approval hearing for September 8, 2023. On September 8, 2023, the Court held a hearing to consider the final approval of the class settlement agreement and, on September 29, 2023, the Court issued an Opinion and Order granting final approval to the settlement agreement. The matter is now closed. 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. In response to Popular’s motion, Plaintiff filed a Notice of Voluntary Dismissal in April 2022. 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. In June 2022, after serving Plaintiff with a written notice of election to arbitrate the claims asserted in the complaint which went unanswered, Popular Bank (“PB”) filed a Pre-Motion Conference motion related to a new Motion to Compel Arbitration. After Plaintiff responded to the Pre-Motion conference motion, the Court allowed PB to file its Motion to Compel Arbitration, which it did in September 2022. Plaintiff opposed such motion in October 2022, and PB filed its reply in November 2022. On December 9, 2022, the Court issued a Decision and Order denying PB’s Motion to Compel Arbitration. On December 20, 2022, PB filed a Notice of Appeal with the United States Court of Appeals for the Second Circuit. PB filed its appeal brief on April 5, 2023 and Plaintiff filed his opposition brief on July 5, 2023. PB filed its reply brief on July 26, 2023. The matter is now fully briefed and pending resolution. 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 led to regulatory inquiries, customer complaints and arbitrations for most broker-dealers in Puerto Rico, including Popular Securities. Popular Securities received numerous customer complaints since 2013 and, as of September 30, 2023, remained named as a respondent in six ( 6 ) pending arbitration proceedings with initial claimed amounts of approximately $ 5.88 million in the aggregate. Popular Securities and claimants in five ( 5 ) of the pending six ( 6 ) arbitration proceedings, however, have reached settlements in principle and agreements related thereto have been executed with two ( 2 ) of such claimants. Popular Securities expects to complete the execution of the remaining agreements, and to resolve the one ( 1 ) pending unsettled arbitration proceeding ($ 1.3 million in claimed amounts) by the end of the first quarter of 2024.

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