UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2019
Commission File Number: 001-34084
POPULAR, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
Incorporation or organization)
(IRS Employer
Identification Number)
Popular Center Building
209 Muñoz Rivera Avenue
Hato Rey, Puerto Rico
(787) 765-9800
(Registrant’s telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)
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 ☐ 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 ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange
on which registered
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, $0.01 par value, 96,647,087 shares outstanding as of May 6, 2019.
INDEX
Page
Part I – Financial Information
Item 1.
Unaudited Consolidated Statements of Financial Condition at March 31, 2019 and December 31, 2018
Unaudited Consolidated Statements of Operations for the quarters ended March 31, 2019 and 2018
Unaudited Consolidated Statements of Comprehensive Income (Loss) for the quarters ended March 31, 2019 and 2018
Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the quarters ended March 31, 2019 and 2018
Unaudited Consolidated Statements of Cash Flows for the quarters ended March 31, 2019 and 2018
Notes to Unaudited Consolidated Financial Statements
Item 2.
Item 3.
Item 4.
Part II – Other Information
Item 1A.
Item 5.
Item 6.
Signatures
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Forward-Looking Information
This Form 10-Q 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;
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 impact of Hurricanes Irma and Maria, and the measures taken to recover from these hurricanes (including the availability of relief funds and insurance proceeds), on the economy of Puerto Rico, the U.S. Virgin Islands and the British Virgin Islands, and on our customers and our business;
changes in interest rates and market liquidity, which may reduce interest margins, impact funding sources and affect our ability to originate and distribute financial products in the primary and secondary markets;
the fiscal and monetary policies of the federal government and its agencies;
changes in federal bank regulatory and supervisory policies, including required levels of capital and the impact of proposed capital standards on our capital ratios;
additional Federal Deposit Insurance Corporation (“FDIC”) assessments;
regulatory approvals that may be necessary to undertake certain actions or consummate strategic transactions such as acquisitions and dispositions;
hurricanes and other weather-related events, as well as man-madedisasters, which could cause a disruption in our operations or other adverse consequences for our business;
the ability to successfully integrate the auto finance business acquired from Wells Fargo & Company, as well as unexpected costs, including as a result of any unrecorded liabilities or issues not identified during the due diligence investigation of the business or that may not be subject to indemnification or reimbursement under the acquisition agreement, and risks that the business may suffer as a result of the transaction, including due to adverse effects on relationships with customers, employees and service providers;
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the relative strength or weakness of the consumer and commercial credit sectors and of the real estate markets in Puerto Rico and the other markets in which borrowers are located;
the performance of the stock and bond markets;
competition in the financial services industry;
possible legislative, tax or regulatory changes; and
a failure in or breach of our operational or security systems or infrastructure or those of EVERTEC, Inc., our provider of core financial transaction processing and information technology services, or of other third parties providing services to us, including as a result of cyberattacks, e-fraud, denial-of-services and computer intrusion, that might result in loss or breach of customer data, disruption of services, reputational damage or additional costs to Popular.
Other possible events or factors that could cause results or performance to differ materially from those expressed in these forward-looking statements include the following:
negative economic conditions that adversely affect housing prices, the job market, consumer confidence and spending habits which may affect, among other things, the level of non-performing assets, charge-offs and provision expense;
changes in market rates and prices which may adversely impact the value of financial assets and liabilities;
liabilities resulting from litigation and regulatory investigations;
changes in accounting standards, rules and interpretations;
our ability to grow our core businesses;
decisions to downsize, sell or close units or otherwise change our business mix; and
management’s ability to identify and manage these and other risks.
Moreover, the outcome of legal and regulatory proceedings, as discussed in “Part II, Item 1. 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 the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2018, as well as “Part II, Item 1A” of this Form 10-Q for a discussion of such factors and certain risks and uncertainties to which the Corporation is subject.
All forward-looking statements included in this Form 10-Q are based upon information available to Popular as of the date of this Form 10-Q, 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.
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CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
(In thousands, except share information)
Assets:
Cash and due from banks
Money market investments:
Time deposits with other banks
Total money market investments
Trading account debt securities, at fair value:
Pledged securities with creditors’ right to repledge
Other trading account debt securities
Debt securitiesavailable-for-sale, at fair value:
Other debt securitiesavailable-for-sale
Debt securitiesheld-to-maturity, at amortized cost (fair value 2019 - $103,457; 2018 - $102,653)
Equity securities (realizable value 2019 - $163,550); (2018 - $159,821)
Loansheld-for-sale, at lower of cost or fair value
Loansheld-in-portfolio
Less – Unearned income
Allowance for loan losses
Total loansheld-in-portfolio, net
Premises and equipment, net
Other real estate
Accrued income receivable
Mortgage servicing assets, at fair value
Other assets
Goodwill
Other intangible assets
Total assets
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing
Interest bearing
Total deposits
Assets sold under agreements to repurchase
Other short-term borrowings
Notes payable
Other liabilities
Total liabilities
Commitments and contingencies (Refer to Note 21)
Stockholders’ equity:
Preferred stock, 30,000,000 shares authorized; 2,006,391 shares issued and outstanding
Common stock, $0.01 par value; 170,000,000 shares authorized; 104,338,340 shares issued (2018 - 104,320,303) and 96,629,891 shares outstanding (2018 - 99,942,845)
Surplus
Retained earnings
Treasury stock - at cost, 7,708,449 shares (2018 - 4,377,458)
Accumulated other comprehensive loss, net of tax
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share information)
Interest income:
Loans
Money market investments
Investment securities
Total interest income
Interest expense:
Deposits
Short-term borrowings
Long-term debt
Total interest expense
Net interest income
Provision for loan losses - non-covered loans
Provision for loan losses - covered loans
Net interest income after provision for loan losses
Service charges on deposit accounts
Other service fees
Mortgage banking activities (Refer to Note 11)
Net gain (loss), including impairment, on equity securities
Net profit (loss) on trading account debt securities
Adjustments (expense) to indemnity reserves on loans sold
FDIC loss share expense (Refer to Note 29)
Other operating income
Total non-interest income
Operating expenses:
Personnel costs
Net occupancy expenses
Equipment expenses
Other taxes
Professional fees
Communications
Business promotion
FDIC deposit insurance
Other real estate owned (OREO) expenses
Other operating expenses
Amortization of intangibles
Total operating expenses
Income before income tax
Income tax expense
Net Income
Net Income Applicable to Common Stock
Net Income per Common Share - Basic
Net Income per Common Share - Diluted
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Net income
Reclassification to retained earnings due to cumulative effect of accounting change
Other comprehensive income (loss) before tax:
Foreign currency translation adjustment
Amortization of net losses of pension and postretirement benefit plans
Amortization of prior service credit of pension and postretirement benefit plans
Unrealized holding gains (losses) on debt securities arising during the period
Unrealized net (losses) gains on cash flow hedges
Reclassification adjustment for net losses (gains) included in net income
Other comprehensive income (loss) before tax
Income tax (expense) benefit
Total other comprehensive income (loss), net of tax
Comprehensive income (loss), net of tax
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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Balance at December 31, 2017
Cumulative effect of accounting change
Issuance of stock
Dividends declared:
Common stock [1]
Preferred stock
Common stock purchases
Common stock reissuance
Stock based compensation
Other comprehensive income, net of tax
Balance at March 31, 2018
Balance at December 31, 2018
Common stock purchases [2]
Balance at March 31, 2019
Dividends declared per common share during the quarter ended March 31, 2019 - $0.30 (2018 - $0.25).
On February 28, 2019, the Corporation entered into a $250 million accelerated share repurchase transaction with respect to its common stock, which was accounted for as a treasury stock transaction. Refer to Note 18 for additional information.
Disclosure of changes in number of shares:
Preferred Stock:
Balance at beginning and end of period
Common Stock – Issued:
Balance at beginning of period
Balance at end of period
Treasury stock
Common Stock – Outstanding
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses
Depreciation and amortization of premises and equipment
Net accretion of discounts and amortization of premiums and deferred fees
Share-based compensation
Impairment losses on long-lived assets
Fair value adjustments on mortgage servicing rights
FDIC loss share expense
Earnings from investments under the equity method, net of dividends or distributions
Deferred income tax expense
Gain on:
Disposition of premises and equipment and other productive assets
Proceeds from insurance claims
Sale of loans, including valuation adjustments on loans held-for-sale and mortgage banking activities
Sale of foreclosed assets, including write-downs
Acquisitions of loansheld-for-sale
Proceeds from sale of loansheld-for-sale
Net originations on loansheld-for-sale
Net decrease (increase) in:
Trading debt securities
Equity securities
Net (decrease) increase in:
Interest payable
Pension and other postretirement benefits obligation
Total adjustments
Net cash provided by operating activities
Cash flows from investing activities:
Net increase in money market investments
Purchases of investment securities:
Available-for-sale
Equity
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Held-to-maturity
Proceeds from sale of investment securities:
Net (disbursements) repayments on loans
Proceeds from sale of loans
Acquisition of loan portfolios
Net payments (to) from FDIC under loss sharing agreements
Return of capital from equity method investments
Acquisition of premises and equipment
Proceeds from sale of:
Premises and equipment and other productive assets
Foreclosed assets
Net cash used in investing activities
Cash flows from financing activities:
Net increase (decrease) in:
Payments of notes payable
Principal payments of finance leases
Proceeds from issuance of notes payable
Proceeds from issuance of common stock
Dividends paid
Net payments for repurchase of common stock
Payments related to tax withholding for share-based compensation
Net cash provided by financing activities
Net decrease in cash and due from banks, and restricted cash
Cash and due from banks, and restricted cash at beginning of period
Cash and due from banks, and restricted cash at the end of the period
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Notes to Consolidated Financial
Statements (Unaudited)
Note 1 - Nature of operations
Note 2 - Basis of presentation and summary of significant accounting policies
Note 3 - New accounting pronouncements
Note 4 - Business combination
Note 5 - Restrictions on cash and due from banks and certain securities
Note 6 - Debt securities available-for-sale
Note 7 - Debt securities held-to-maturity
Note 8 - Loans
Note 9 - Allowance for loan losses
Note 10 - FDIC loss share asset and true-up payment obligation
Note 11 - Mortgage banking activities
Note 12 - Transfers of financial assets and mortgage servicing assets
Note 13 - Other real estate owned
Note 14 - Other assets
Note 15 - Goodwill and other intangible assets
Note 16 - Deposits
Note 17 - Borrowings
Note 18 - Stockholders’ equity
Note 19 - Other comprehensive loss
Note 20 - Guarantees
Note 21 - Commitments and contingencies
Note 22 - Non-consolidated variable interest entities
Note 23 - Related party transactions
Note 24 - Fair value measurement
Note 25 - Fair value of financial instruments
Note 26 - Net income per common share
Note 27 - Revenue from contracts with customers
Note 28 - Leases
Note 29 - FDIC loss share expense
Note 30 - Pension and postretirement benefits
Note 31 - Stock-based compensation
Note 32 - Income taxes
Note 33 - Supplemental disclosure on the consolidated statements of cash flows
Note 34 - Segment reporting
Note 35 - Condensed consolidating financial information of guarantor and issuers of registered guaranteed securities
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Note 1 – Nature of operations
Popular, Inc. (the “Corporation” or “Popular”) is a diversified, publicly-owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation has operations in Puerto Rico, the mainland United States and U.S. and British Virgin Islands. In Puerto Rico, the Corporation provides retail, mortgage, and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as investment banking, broker-dealer, auto and equipment leasing and financing, and insurance services through specialized subsidiaries. In the U.S. mainland, the Corporation provides retail, mortgage and commercial banking services through its New York-chartered banking subsidiary, Popular Bank (“PB”), which has branches located in New York, New Jersey and Florida.
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Note 2 – Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The consolidated interim financial statements have been prepared without audit. The Consolidated Statement of Financial Condition data at December 31, 2018 was derived from audited financial statements. The unaudited interim financial statements are, in the opinion of management, a fair statement of the results for the periods reported and include all necessary adjustments, all of a normal recurring nature, for a fair statement of such results.
Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from the unaudited financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these financial statements should be read in conjunction with the audited Consolidated Financial Statements of the Corporation for the year ended December 31, 2018, included in the Corporation’s 2018 Form 10-K. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.
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.
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Note 3 – New accounting pronouncements
Recently Adopted Accounting Standards Updates
FASB Accounting Standards Updates (“ASUs”), Leases (Topic 842)
The FASB has issued a series of ASUs which, among other things, supersede ASC Topic 840 and set out the principles for the recognition, measurement, presentation and disclosure of leases for both lessors and lessees. The new guidance requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset (“ROU asset”) and a lease liability for all leases with a term greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases.
In addition, the new leases standard requires lessors, among other things, to present lessor costs paid by the lessee to the lessor on a gross basis.
The Corporation adopted the new leases standard during the first quarter of 2019 using the modified retrospective approach. The Corporation elected the practical expedients to not reassess at the date of adoption whether any existing contracts were or contained leases, their lease classification, and initial direct costs. The Corporation also elected the optional transition method that allows application of the transition provisions of the new leases standard at the adoption date, instead of at the earliest comparative period presented. Therefore, comparative periods will continue to be presented in accordance with ASC Topic 840. The Corporation also elected the optional practical expedients that permit the use of hindsight in evaluating lessee options to extend or terminate a lease, and to not apply ASC Topic 842 to all classes of short-term leases. On the other hand, the Corporation did not elect the practical expedient on not separating lease components from nonlease components.
As of January 1, 2019, the Corporation recognized ROU assets of $139 million, net of deferred rent liability of $15 million and lease liabilities of $154 million on its operating leases. In addition, the Corporation recorded a positive cumulative effect adjustment of $4.8 million to retained earnings as a result of the reclassification of previously deferred gains on sale and operating lease back transactions.
In addition, the Corporation early adopted ASU 2019-01 which, among other things, reinstates the specific fair value guidance in ASC Topic 840 for lessors that are not manufacturers or dealers to continue to measure the fair value of an underlying asset at its cost and clarifies that lessors that are depository or lending institutions in the scope of ASC Topic 942 are required to present the principal portion of lessee payments received from sales-type or direct financing leases as cash flows from investing activities. The Corporation was not impacted by the adoption of ASU 2019-01.
FASB Accounting Standards Update (“ASU”)2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes
The FASB issued ASU 2018-16 in October 2018 which permits use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to other permissible U.S. benchmark rates.
The Corporation adopted ASU 2018-16 during the first quarter of 2019. As such, the Corporation will consider this guidance for qualifying new hedging relationships entered into on or after the effective date.
FASB Accounting Standards Update (“ASU”) 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
The FASB issued ASU2018-02 in February 2018, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. These stranded tax effects result from recognizing in income the impact of changes in tax rates even when the related tax effects were recognized in accumulated other comprehensive income. The amendments also require certain disclosures about stranded tax effects.
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The Corporation adopted ASU 2018-02 during the first quarter of 2019. As of December 31, 2018, the Corporation maintained a full valuation allowance on the deferred tax assets, which were recognized in accumulated other comprehensive income related to its U.S. operations. As such, the Corporation was not impacted by the adoption of this accounting pronouncement during the first quarter of 2019.
FASB Accounting Standards Update (“ASU”) 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
The FASB issued ASU 2017-12 in August 2017, which makes more financial and nonfinancial hedging strategies eligible for hedge accounting and changes how companies assess effectiveness by, among other things, eliminating the requirement for entities to recognize hedge ineffectiveness each reporting period for cash flow hedges and requiring presentation of the changes in fair value of cash flow hedges in the same income statement line item(s) as the earnings effect of the hedged items when the hedged item affects earnings.
The Corporation adopted ASU 2017-12during the first quarter of 2019. The cumulative effect adjustment recorded to retained earnings to reverse the hedge ineffectiveness as of December 31, 2018 was not significant. There were no changes in presentation since the earnings effect of the hedges and the hedged items are already presented in the same income statement line item. In addition, the Corporation elected to continue to perform subsequent assessments of hedge effectiveness quantitatively.
Additionally, adoption of the following standards effective during the first quarter of 2019 did not have a significant impact on the Corporation’s Consolidated Financial Statements:
FASB Accounting Standards Update (“ASU”) 2018-09,Codification Improvements
FASB Accounting Standards Update (“ASU”) 2018-07,Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
FASB Accounting Standards Update (“ASU”) 2017-11, Earnings per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): Part I: Accounting for Certain Financial Instruments with Down Round Features; Part II: Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception
FASB Accounting Standards Update (“ASU”) 2017-08,Receivables– Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities
Recently Issued Accounting Standards Updates
FASB Accounting Standards Update (“ASU”) 2019-04, Codification Improvements to Topic 326, Financial Instruments– Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments
The FASB issued ASU 2019-04 in April 2019, which clarifies areas of guidance related to the recently issued standards on credit losses (Topic 326), derivatives and hedging (Topic 815), and recognition and measurement of financial instruments (Topic 825). Amendments to Topic 326 are mainly in the areas of accrued interest receivable, transfers of loans and debt securities between classifications, inclusion of expected recoveries in the allowance for credit losses, and permitting a prepay-adjusted effective interest rate except for TDRs. Amendments to Topic 815 and Topic 825 are mainly in the areas of fair value hedges and equity securities accounted for under the measurement alternative, respectively.
The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.
The Corporation is currently evaluating the impact that the amendments to Topic 326 will have on the CECL implementation. Nonetheless, the Corporation does not anticipate that the amendments to Topic 815 and Topic 825 will have a material effect on its Consolidated Financial Statements.
For other recently issued Accounting Standards Updates not yet effective, refer to Note 3 to the Consolidated Financial Statements included in the 2018 Form 10-K.
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Note 4 – Business combination
On August 1, 2018, Popular, Inc., through its subsidiary Popular Auto, LLC (“Popular Auto”), acquired and assumed from Reliable Financial Services, Inc. and Reliable Finance Holding Co. (“Reliable”), subsidiaries of Wells Fargo & Company, certain assets and liabilities related to their auto finance business in Puerto Rico (the “Reliable Transaction” or “Transaction”). Popular Auto acquired approximately $1.6 billion in retail auto loans and $341 million in primarily auto-related commercial loans. Reliable has continued operating as a Division of Popular Auto in parallel with Popular Auto’s existing operations to provide continuity of service to Reliable customers while allowing Popular to assess best practices before completing the integration of the two operations. The Corporation expects to complete the integration of these operations during the second quarter of 2019 and continue to operate this business under the name of Popular Auto.
Wells Fargo retained approximately $398 million in retail auto loans as part of the Transaction and subsequently sold the same to a third party. Popular Auto has entered into a separate servicing agreement with respect to such loans.
Popular entered into the Transaction as part of its growth strategy to increase its market share in the auto finance business in Puerto Rico.
The following table presents the fair values of the consideration and major classes of identifiable assets acquired and liabilities assumed by the Corporation as of August 1, 2018, net of cumulative measurement period adjustments as of period end.
Cash consideration
Premises and equipment
Trademark
Net assets acquired
Goodwill on acquisition
The fair value discount is comprised of $106 million related to the retail auto loans portfolio and $4 million related to the commercial loans portfolio.
During the fourth quarter of 2018, measurement period adjustments, amounting to $16.5 million, were made to the estimated fair values of the loans acquired as part of the Transaction to reflect new information obtained about facts and circumstances that existed as of the acquisition date. The increase in the fair value of retail auto loans and commercial loans by $12.2 million and $4.3 million, respectively, was mainly attributed to decreases in credit loss expectations. The related cumulative adjustment to the amortization of the fair value discounts for the retail and commercial portfolios offset each other, resulting in an immaterial impact to the Corporation’s results.
Contractual cash flows for retail auto loans and commercial loans amounted to $1.8 billion and $348 million, respectively, from which $105 million and $3 million, respectively, are not expected to be collected.
For a description of the methods used to determine the fair values of significant assets acquired on the Reliable Transaction, refer to Note 4 of the Consolidated Statements included in the 2018 Form 10-K.
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Note 5 – Restrictions on cash and due from banks and certain securities
The Corporation’s banking subsidiaries, BPPR and PB, are required by federal and state 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 $ 1.6 billion at March 31, 2019 (December 31, 2018 - $ 1.6 billion). Cash and due from banks, as well as other highly liquid securities, are used to cover the required average reserve balances.
At March 31, 2019, the Corporation held $ 47 million in restricted assets in the form of funds deposited in money market accounts, debt securities available for sale and equity securities (December 31, 2018 - $ 62 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.
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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 March 31, 2019 and December 31, 2018.
U.S. Treasury securities
Within 1 year
After 1 to 5 years
After 5 to 10 years
Total U.S. Treasury securities
Obligations of U.S. Government sponsored entities
Total obligations of U.S. Government sponsored entities
Obligations of Puerto Rico, States and political subdivisions
Total obligations of Puerto Rico, States and political subdivisions
Collateralized mortgage obligations - federal agencies
After 10 years
Total collateralized mortgage obligations - federal agencies
Mortgage-backed securities
Total mortgage-backed securities
Other
Total other
Total debt securitiesavailable-for-sale[1]
Includes $10 billion pledged to secure public 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 $8.9 billion serve as collateral for public funds.
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Includes $8.9 billion pledged to secure public 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 $7.9 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.
Debt 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.
There were no debt securities sold during the quarters ended March 31, 2019 and March 31, 2018.
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 March 31, 2019 and December 31, 2018.
Total debt securitiesavailable-for-sale in an unrealized loss position
18
As of March 31, 2019, the portfolio ofavailable-for-sale debt securities reflects gross unrealized losses of approximately $128 million, driven mainly by mortgage-backed securities, U.S. Treasury securities and collateralized mortgage obligations.
Management evaluates debt securities for other-than-temporary (“OTTI”) declines in fair value on a quarterly basis. Once a decline in value is determined to be other-than-temporary, the value of a debt security is reduced and a corresponding charge to earnings is recognized for anticipated credit losses. The OTTI analysis requires management to consider various factors, which include, but are not limited to: (1) the length of time and the extent to which fair value has been less than the amortized cost basis, (2) the financial condition of the issuer or issuers, (3) actual collateral attributes, (4) the payment structure of the debt security and the likelihood of the issuer being able to make payments, (5) any rating changes by a rating agency, (6) adverse conditions specifically related to the security, industry, or a geographic area, and (7) management’s intent to sell the debt security or whether it is more likely than not that the Corporation would be required to sell the debt security before a forecasted recovery occurs.
At March 31, 2019, management performed its quarterly analysis of all debt securities in an unrealized loss position. Based on the analysis performed, management concluded that no individual debt security was other-than-temporarily impaired as of such date. At March 31, 2019, the Corporation did not have the intent to sell debt securities in an unrealized loss position and it was not more likely than not that the Corporation would have to sell the debt securities prior to recovery of their amortized cost basis.
The following table states the name of issuers, and the aggregate amortized cost and fair value of the debt securities of such issuer (includes available-for-sale and held-to-maturity debt securities), in which the aggregate amortized cost of such securities exceeds 10% of stockholders’ equity. This information excludes debt securities backed by the full faith and credit of the U.S. Government. Investments in obligations issued by a state of the U.S. and its political subdivisions and agencies, which are payable and secured by the same source of revenue or taxing authority, other than the U.S. Government, are considered securities of a single issuer.
FNMA
Freddie Mac
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Note 7 – Debt securities held-to-maturity
The following tables present the amortized cost, gross unrealized gains and losses, approximate fair value, weighted average yield and contractual maturities of debt securities held-to-maturity at March 31, 2019 and December 31, 2018.
Securities in wholly owned statutory business trusts
Total securities in wholly owned statutory business trusts
Total debt securitiesheld-to-maturity
Debt securities not due on a single contractual maturity date, such as collateralized mortgage obligations, are classified in the period of final contractual maturity. The expected maturities of collateralized mortgage obligations and certain other securities may differ from their contractual maturities because they may be subject to prepayments or may be called by the issuer.
The following tables present the Corporation’s fair value and gross unrealized losses of debt securities held-to-maturity, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2019 and December 31, 2018.
20
Total debt securitiesheld-to-maturity in an unrealized loss position
As indicated in Note 6 to these Consolidated Financial Statements, management evaluates debt securities for OTTI declines in fair value on a quarterly basis.
The “Obligations of Puerto Rico, States and political subdivisions” classified as held-to-maturity at March 31, 2019 are primarily associated with securities issued by municipalities of Puerto Rico and are generally not rated by a credit rating agency. This includes $42 million of general and special obligation bonds issued by three municipalities of Puerto Rico, which are payable primarily from certain property taxes imposed by the issuing municipality. 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 portfolio also includes $45 million in securities for which the underlying source of payment is second mortgage loans in Puerto Rico residential properties, not the central government, but in which a government instrumentality provides a guarantee in the event of default and subsequent foreclosure of the underlying property. The Corporation performs periodic credit quality reviews on these issuers. Based on the quarterly analysis performed, management concluded that no individual debt security held-to-maturity was other-than-temporarily impaired at March 31, 2019. A 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. The Corporation does not have the intent to sell debt securitiesheld-to-maturity and it is more likely than not that the Corporation will not have to sell these debt securities prior to recovery of their amortized cost basis.
Refer to Note 21 for additional information on the Corporation’s exposure to the Puerto Rico Government.
21
Note 8 – Loans
For a summary of the accounting policies related to loans, interest recognition and allowance for loan losses refer to Note 2 —Summary of Significant Accounting Policies of the 2018 Form 10-K.
As previously disclosed in Note 4, as a result of the Reliable Transaction completed on August 1, 2018, Popular Auto, LLC, acquired approximately $1.6 billion in retail auto loans and $341 million in primarily auto-related commercial loans. These loans are included in the information presented in this note.
During the quarter ended March 31, 2019, the Corporation recorded purchases (including repurchases) of mortgage loans amounting to $81 million and consumer loans of $69 million, compared to purchases (including repurchases) of mortgage loans of $156 million and consumer loans of $51 million, during the quarter ended March 31, 2018.
The Corporation performed whole-loan sales involving approximately $12 million of residential mortgage loans and $8 million of commercial loans during the quarter ended March 31, 2019 (March 31, 2018 - $10 million of residential mortgage loans). Also, during the quarter ended March 31, 2019, the Corporation securitized approximately $71 million of mortgage loans into Government National Mortgage Association (“GNMA”) mortgage-backed securities and $21 million of mortgage loans into Federal National Mortgage Association (“FNMA”) mortgage-backed securities, compared to $112 million and $26 million, respectively, during the quarter ended March 31, 2018.
Delinquency status
The following table presents the composition 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 March 31, 2019 and December 31, 2018.
March 31, 2019
Puerto Rico
Commercial multi-family
Commercial real estate:
Non-owner occupied
Owner occupied
Commercial and industrial
Construction
Mortgage
Leasing
Consumer:
Credit cards
Home equity lines of credit
Personal
Auto
Total
[1] Loans HIP of $194 million accounted for under ASC Subtopic 310-30 are excluded from the above table as they are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analysis.
22
Popular U.S.
Legacy
Loans HIP of $63 million accounted for under ASC Subtopic 310-30are excluded from the above table as they are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analysis.
Popular, Inc.
Mortgage[1]
Legacy[2]
[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.
[2] The legacy portfolio is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years at the Popular U.S. segment.
[3] Loans held-in-portfolio are net of $161 million in unearned income and exclude $44 million in loansheld-for-sale.
[4] 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 $4.6 billion were pledged at the Federal Home Loan Bank (“FHLB”) as collateral for borrowings and $2.0 billion at the Federal Reserve Bank (“FRB”) for discount window borrowings.
[5] Loans HIP of $257 million accounted for under ASC Subtopic 310-30 are excluded from the above table as they are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analysis.
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December 31, 2018
[1] Non-covered loans HIP of $143 million accounted for under ASC Subtopic 310-30 are excluded from the above table as they are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analysis.
[1] Non-covered loans HIP of $73 million accounted for under ASC Subtopic 310-30 are excluded from the above table as they are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analysis.
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[3] Loans held-in-portfolio are net of $156 million in unearned income and exclude $51 million in loansheld-for-sale.
[4] Includes $6.9 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 FHLB as collateral for borrowings and $2.1 billion at the FRB for discount window borrowings.
[5] Non-covered loans HIP of $216 million accounted for under ASC Subtopic 310-30 are excluded from the above table as they are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analysis.
At March 31, 2019, mortgage loansheld-in-portfolio include $1.4 billion of loans insured by the Federal Housing Administration (“FHA”), or guaranteed by the U.S. Department of Veterans Affairs (“VA”) of which $535 million are 90 days or more past due, including $106 million of loans rebooked under the GNMA buyback option, discussed below (December 31, 2018 - $1.4 billion, $598 million and $134 million, respectively). Within this portfolio, loans in a delinquency status of 90 days or more are reported as accruing loans as opposed to non-performing since the principal repayment is insured. These balances include $292 million of residential mortgage loans in Puerto Rico that are no longer accruing interest as of March 31, 2019 (December 31, 2018 - $283 million). Additionally, the Corporation has approximately $67 million in reverse mortgage loans in Puerto Rico which are guaranteed by FHA, but which are currently not accruing interest at March 31, 2019 (December 31, 2018 - $69 million).
Loans with a delinquency status of 90 days past due as of March 31, 2019 include $106 million in loans previously pooled into GNMA securities (December 31, 2018 - $134 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 acquired with deteriorated credit quality accounted for under ASC 310-30
The following provides information of loans acquired with evidence of credit deterioration as of the acquisition date, accounted for under the guidance of ASC 310-30.
The outstanding principal balance of acquired loans accounted pursuant to ASC Subtopic 310-30, amounted to $2.1 billion at March 31, 2019 (December 31, 2018—$2.2 billion). The carrying amount of these loans consisted of loans determined to be impaired at the time of acquisition, which are accounted for in accordance with ASC Subtopic 310-30 (“credit impaired loans”), and loans that were considered to be performing at the acquisition date, accounted for by analogy to ASC Subtopic 310-30 (“non-credit impaired loans”).
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The following table provides the carrying amount of acquired loans accounted for under ASC 310-30 by portfolio at March 31, 2019 and December 31, 2018.
Carrying amount
Commercial real estate
Consumer
Carrying amount, net of allowance
At March 31, 2019, none of the acquired loans accounted for under ASC Subtopic310-30 were considered non-performing loans. Therefore, interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, was recognized on all acquired loans.
Changes in the carrying amount and the accretable yield for the loans accounted pursuant to the ASC Subtopic 310-30, for the quarters ended March 31, 2019 and 2018, were as follows:
Carrying amount of acquired loans accounted for pursuant to ASC 310-30
Beginning balance
Additions
Accretion
Collections / loan sales / charge-offs
Ending balance[1]
Ending balance, net of ALLL
At March 31, 2019, includes $1.3 billion of loans considerednon-credit impaired at the acquisition date (March 31, 2018 - $1.5 billion).
Activity in the accretable yield of acquired loans accounted for pursuant to ASC 310-30
Change in expected cash flows
At March 31, 2019, includes $0.7 billion for loans considerednon-credit impaired at the acquisition date (March 31, 2018 - $0.9 billion).
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Note 9 – Allowance for loan losses
The Corporation follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan losses (“ALLL”) to provide for inherent losses in the loan portfolio. This methodology includes the consideration of factors such as current economic conditions, portfolio risk characteristics, prior loss experience and results of periodic credit reviews of individual loans. The provision for loan losses charged to current operations is based on this methodology. Loan losses are charged and recoveries are credited to the ALLL.
The Corporation’s assessment of the ALLL is determined in accordance with the guidance of loss contingencies in ASC Subtopic 450-20 and loan impairment guidance in ASC Section 310-10-35. Also, the Corporation determines the ALLL on purchased impaired loans and purchased loans accounted for under ASC Subtopic 310-30, by evaluating decreases in expected cash flows after the acquisition date.
The accounting guidance provides for the recognition of a loss allowance for groups of homogeneous loans. The determination of the general ALLL includes the following principal factors:
Base net loss rates, which are based on the moving average of annualized net loss rates computed over a 5-year historical loss period for the commercial and construction loan portfolios, and an 18-month period for the consumer and mortgage loan portfolios. The base net loss rates are applied by loan type and by legal entity.
Recent loss trend adjustment, which replaces the base loss rate with a12-month average loss rate, when these trends are higher than the respective base loss rates. The objective of this adjustment is to allow for a more recent loss trend to be captured and reflected in the ALLL estimation process.
For the period ended March 31, 2019, 41% (March 31, 2018 - 45%) of the ALLL for the BPPR segment loan portfolios utilized the recent loss trend adjustment instead of the base loss. The effect of replacing the base loss with the recent loss trend adjustment was mainly concentrated in the commercial and personal loans portfolios for 2019 and in the mortgage, leasing, credit cards and auto loans portfolios for 2018.
For the period ended March 31, 2019, 23% (March 31, 2018 - 5%) of the Popular U.S. segment loan portfolios utilized the recent loss trend adjustment instead of the base loss. The effect of replacing the base loss with the recent loss trend adjustment was concentrated in the consumer portfolio for 2019 and 2018.
Environmental factors, which include credit and macroeconomic indicators such as unemployment rate, economic activity index and delinquency rates, adopted to account for current market conditions that are likely to cause estimated credit losses to differ from historical losses. The Corporation reflects the effect of these environmental factors on each loan group as an adjustment that, as appropriate, increases the historical loss rate applied to each group. Environmental factors provide updated perspective on credit and economic conditions. Regression analysis is used to select these indicators and quantify the effect on the general ALLL. The Corporation’s methodology also includes qualitative judgmental reserves based on stressed credit quality assumptions to provide for probable losses in the loan portfolios not embedded in the historical loss rates.
The following tables present the changes in the allowance for loan losses, loan ending balances and whether such loans and the allowance pertain to loans individually or collectively evaluated for impairment for the quarters ended March 31, 2019 and 2018.
For the quarter ended March 31, 2019
Allowance for credit losses:
Provision (reversal of provision)
Charge-offs
Recoveries
Ending balance
Specific ALLL
General ALLL
Loansheld-in-portfolio:
Impaired non-covered loans
Non-covered loans held-in-portfolio excluding impaired loans
Total loansheld-in-portfolio
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Impaired loans
Loansheld-in-portfolio excluding impaired loans
For the quarter ended March 31, 2018
Puerto Rico -Non-covered loans
Provision
Total non-covered loans held-in-portfolio
28
Puerto Rico - Covered Loans
Impaired covered loans
Covered loansheld-in-portfolio excluding impaired loans
Total covered loansheld-in-portfolio
29
The following table provides the activity in the allowance for loan losses related to loans accounted for pursuant to ASC Subtopic 310-30.
Net charge-offs
The following tables present loans individually evaluated for impairment at March 31, 2019 and December 31, 2018.
Commercial real estate non-owner occupied
Commercial real estate owner occupied
Total Puerto Rico
HELOCs
Total Popular U.S.
30
Credit Cards
Total Popular, Inc.
31
The following tables present the average recorded investment and interest income recognized on impaired loans for the quarters ended March 31, 2019 and 2018.
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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 the 2018 Form 10-K.
TDRs amounted to $1.5 billion at March 31, 2019 (December 31, 2018 - $1.5 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 March 31, 2019 (December 31, 2018 - $16 million).
At March 31, 2019, the mortgage loan TDRs include $570 million guaranteed by U.S. sponsored entities at BPPR, compared to $543 million at December 31, 2018.
The following table presents the loans classified as TDRs according to their accruing status and the related allowance at March 31, 2019 and December 31, 2018.
Commercial
Leases
The following tables present the loan count by type of modification for those loans modified in a TDR during the quarters ended March 31, 2019 and 2018. Loans modified as TDRs for the U.S. operations are considered insignificant to the Corporation.
33
The following tables present, by class, quantitative information related to loans modified as TDRs during the quarters ended March 31, 2019 and 2018.
(Dollars in thousands)
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.
34
Defaulted during the quarter ended March 31, 2019
Defaulted during the quarter ended March 31, 2018
Commercial, consumer and mortgage loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Corporation evaluates the loan for possible further impairment. The allowance for loan losses may be increased or partial charge-offs may be taken to further write-down the carrying value of the loan.
Credit Quality
The following table presents the outstanding balance, net of unearned income, of loansheld-in-portfolio based on the Corporation’s assignment of obligor risk ratings as defined at March 31, 2019 and December 31, 2018. For the definitions of the obligor risk ratings, refer to the Credit Quality section of Note 9 to the Consolidated Financial Statements included in the Corporation’s Form 10K for the year ended December 31, 2018.
Total Commercial
Total Consumer
35
The following table presents the weighted average obligor risk rating at March 31, 2019 for those classifications that consider a range of rating scales.
36
The following table presents the weighted average obligor risk rating at December 31, 2018 for those classifications that consider a range of rating scales.
37
38
Note 10 – FDIC loss-share asset andtrue-up payment obligation
In connection with the Westernbank FDIC-assisted transaction, BPPR entered into loss-share arrangements with the FDIC with respect to the covered loans and other real estate owned. Pursuant to the terms of the loss-share arrangements, the FDIC’s obligation to reimburse BPPR for losses with respect to covered assets began with the first dollar of loss incurred. The FDIC reimbursed BPPR for 80% of losses with respect to covered assets, and BPPR reimbursed the FDIC for 80% of recoveries with respect to losses for which the FDIC paid reimbursement under loss-share arrangements. The loss-share component of the arrangements applicable to commercial (including construction) and consumer loans expired during the quarter ended June 30, 2015, but the arrangement provided for reimbursement of recoveries to the FDIC to continue through the quarter ending June 30, 2018, and for the single family mortgage loss-share component of such agreement to expire in the quarter ended June 30, 2020.
As of March 31, 2018, the Corporation had an FDIC loss share asset of $ 44.5 million related to the covered assets. As part of the loss-share agreements, BPPR had agreed to make a true-up payment to the FDIC 45 days following the last day (such day, the “true-up measurement date”) of the final shared-loss month, or upon the final disposition of all covered assets under the loss-share agreements, in the event losses on the loss-share agreements fail to reach expected levels. The estimated fair value of suchtrue-up payment obligation at March 31, 2018 was approximately $ 171 million and was included as a contingent consideration within the caption of other liabilities in the Consolidated Statements of Financial Condition.
On May 22, 2018, the Corporation entered into a Termination Agreement (the “Termination Agreement”) with the FDIC to terminate all loss-share arrangements in connection with the Westernbank FDIC-assisted transaction. Under the terms of the Termination Agreement, BPPR made a payment of approximately $ 23.7 million (the “Termination Payment”) to the FDIC as consideration for the termination of the loss-share agreements. Popular recorded a gain of $ 102.8 million within the FDIC loss share income (expense) caption in the Consolidated Statements of Operations calculated based on the difference between the Termination Payment and the net amount of the true-up payment obligation and the FDIC loss share asset.
The following table sets forth the activity in the FDIC loss-share asset for the quarter ended March 31, 2018.
Amortization of loss-share indemnification asset
Credit impairment losses to be covered under loss-sharing agreements
Reimbursable expenses
Net payments from FDIC under loss-sharing agreements
Balance due to the FDIC for recoveries on covered assets
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As a result of the Termination Agreement, assets that were covered by the loss share agreement, including covered loans in the amount of approximately $ 514.6 million and covered real estate owned assets in the amount of approximately $ 15.3 million as of March 31, 2018, were reclassified asnon-covered. The Corporation now recognizes entirely all future credit losses, expenses, gains, and recoveries related to the formerly covered assets with no offset due to or from the FDIC.
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Note 11 – 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 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:
Mortgage servicing fees, net of fair value adjustments:
Mortgage servicing fees
Mortgage servicing rights fair value adjustments
Total mortgage servicing fees, net of fair value adjustments
Net gain on sale of loans, including valuation on loans held-for-sale
Trading account (loss) profit:
Unrealized losses on outstanding derivative positions
Realized (losses) gains on closed derivative positions
Total trading account (loss) profit
Total mortgage banking activities
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Note 12 – Transfers of financial assets and mortgage servicing assets
The Corporation typically transfers conforming residential mortgage loans in conjunction with GNMA and FNMA 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 20 to the Consolidated Financial Statements for a description of such arrangements.
No liabilities were incurred as a result of these securitizations during the quarters ended March 31, 2019 and 2018 because they did not contain any credit recourse arrangements. During the quarter ended March 31, 2019, the Corporation recorded a net gain of $3.7 million (March 31, 2018 - $1.0 million) 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 quarters ended March 31, 2019 and 2018:
Assets
Trading account debt securities:
Mortgage-backed securities - GNMA
Mortgage-backed securities - FNMA
Total trading account debt securities
Mortgage servicing rights
Debt securitiesavailable-for-sale:
Total debt securitiesavailable-for-sale
During the quarter ended March 31, 2019, the Corporation retained servicing rights on whole loan sales involving approximately $11.9 million in principal balance outstanding (March 31, 2018 - $10.0 million), with realized gains of approximately $0.4 million (March 31, 2018 - gains of $0.1 million). All loan sales performed during the quarters ended March 31, 2019 and 2018 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 (“MSR”) 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 Corporation’s loan characteristics and portfolio behavior.
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The following table presents the changes in MSRs measured using the fair value method for the quarters ended March 31, 2019 and 2018.
Residential MSRs
Fair value at beginning of period
Changes due to payments on loans[1]
Reduction due to loan repurchases
Changes in fair value due to changes in valuation model inputs or assumptions
Fair value at end of period
Represents changes due to collection / realization of expected cash flows over time.
Residential mortgage loans serviced for others were $15.5 billion at March 31, 2019 (December 31, 2018 - $15.7 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 March 31, 2019, those weighted average mortgage servicing fees were 0.29% (March 31, 2018 - 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 quarters ended March 31, 2019 and 2018 were as follows:
Prepayment speed
Weighted average life (in years)
Discount rate (annual rate)
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:
Fair value of servicing rights
Weighted average prepayment speed (annual rate)
Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change
Weighted average discount rate (annual rate)
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
43
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 March 31, 2019, the Corporation serviced $1.3 billion (December 31, 2018 - $1.3 billion) in residential mortgage loans with credit recourse to the Corporation. Refer to Note 20 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 March 31, 2019, the Corporation had recorded $106 million in mortgage loans on its Consolidated Statements of Financial Condition related to this buy-back option program (December 31, 2018 - $134 million). 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 quarter ended March 31, 2019, the Corporation repurchased approximately $34 million (March 31, 2018 - $85 million) of mortgage loans under the GNMA buy-back option program. 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. Furthermore, the risk associated with the loans is reduced due to their guaranteed nature. The Corporation places these loans under its loss mitigation programs and once brought back to current status, these may be either retained in portfolio or re-sold in the secondary market.
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Note 13 – Other real estate owned
The following tables present the activity related to Other Real Estate Owned (“OREO”), for the quarters ended March 31, 2019 and 2018.
Write-downs in value
Sales
Other adjustments
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Note 14 – Other assets
The caption of other assets in the consolidated statements of financial condition consists of the following major categories:
Net deferred tax assets (net of valuation allowance)
Investments under the equity method
Prepaid taxes
Other prepaid expenses
Derivative assets
Trades receivable from brokers and counterparties
Principal, interest and escrow servicing advances
Guaranteed mortgage loan claims receivable
Operating ROU assets (Note 28)
Finance ROU assets (Note 28)
Others
Total other assets
46
Note 15 – Goodwill and other intangible assets
There were no changes in the carrying amount of goodwill for the quarters ended March 31, 2019 and 2018.
The following tables present the gross amount of goodwill and accumulated impairment losses by reportable segments:
Banco Popular de Puerto Rico
Other Intangible Assets
At March 31, 2019 and December 31, 2018, the Corporation had $ 6.1 million of identifiable intangible assets with indefinite useful lives, mostly associated with the E-LOAN trademark.
The following table reflects the components of other intangible assets subject to amortization:
Core deposits
Other customer relationships
Total other intangible assets
During the quarter ended March 31, 2019, the Corporation recognized $ 2.3 million in amortization expense related to other intangible assets with definite useful lives (March 31, 2018 - $ 2.3 million).
47
The following table presents the estimated amortization of the intangible assets with definite useful lives for each of the following periods:
Remaining 2019
Year 2020
Year 2021
Year 2022
Year 2023
Later years
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Note 16 – Deposits
Total interest bearing deposits as of the end of the periods presented consisted of:
Savings accounts
NOW, money market and other interest bearing demand deposits
Total savings, NOW, money market and other interest bearing demand deposits
Certificates of deposit:
Under $100,000
$100,000 and over
Total certificates of deposit
Total interest bearing deposits
A summary of certificates of deposit by maturity at March 31, 2019 follows:
2019
2020
2021
2022
2023
2024 and thereafter
At March 31, 2019, the Corporation had brokered deposits amounting to $ 0.5 billion (December 31, 2018 - $ 0.5 billion).
The aggregate amount of overdrafts in demand deposit accounts that were reclassified to loans was $6 million at March 31, 2019 (December 31, 2018 - $5 million).
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Note 17 – Borrowings
The following table presents the balances of assets sold under agreements to repurchase at March 31, 2019 and December 31, 2018.
Total assets sold under agreements to repurchase
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.
The following table presents information related to the Corporation’s repurchase transactions accounted for as secured borrowings that are collateralized with debt securities available-for-sale, other assets held-for-trading purposes or which have been obtained under agreements to resell. It is the Corporation’s policy to maintain effective control over assets sold under agreements to repurchase; accordingly, such securities continue to be carried on the Consolidated Statements of Financial Condition.
Repurchase agreements accounted for as secured borrowings
Within 30 days
After 30 to 90 days
After 90 days
Obligations of U.S. government sponsored entities
Total obligations of U.S. government sponsored entities
Collateralized mortgage obligations
Total collateralized mortgage obligations
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.
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The following table presents the composition of notes payable at March 31, 2019 and December 31, 2018.
Advances with the FHLB with maturities ranging from 2019 through 2029 paying interest at monthly fixed rates ranging from 0.95% to 4.19 %
Advances with the FHLB paying interest monthly at a floating rate
Advances with the FHLB maturing on 2019 paying interest quarterly at a floating rate of 0.24% over the 3 month LIBOR
Unsecured senior debt securities maturing on 2023 paying interest semiannually at a fixed rate of 6.125%, net of debt issuance costs of $5,644
Junior subordinated deferrable interest debentures (related to trust preferred securities) with maturities ranging from 2033 to 2034 with fixed interest rates ranging from 6.125% to 6.7%, net of debt issuance costs of $416
Capital lease obligations
Total notes payable
Note: Refer to the Corporation’s 2018 Form 10-K for rates information at December 31, 2018.
A breakdown of borrowings by contractual maturities at March 31, 2019 is included in the table below.
Total borrowings
At March 31, 2019 and December 31, 2018, the Corporation had FHLB borrowing facilities whereby the Corporation could borrow up to $3.4 billion and $3.4 billion, respectively, of which $0.5 billion and $0.6 billion, respectively, were used. In addition, at March 31, 2019 and December 31, 2018, the Corporation had placed $0.9 billion and $0.9 billion, respectively, of the available FHLB credit facility as collateral for a municipal letter 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 March 31, 2019, the Corporation has a borrowing facility at the discount window of the Federal Reserve Bank of New York amounting to $1.2 billion (2018 - $1.2 billion), which remained unused at March 31, 2019 and December 31, 2018. The facility is a collateralized source of credit that is highly reliable even under difficult market conditions.
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Note 18 – Stockholders’ equity
As of March 31, 2019, stockholder’s equity totaled $5.4 billion. During the quarter ended March 31, 2019, the Corporation declared cash dividends of $0.30 (2018 - $0.25 ) per common share outstanding amounting to $29.0 million (2018 - $25.5 million). The quarterly dividend declared to shareholders of record as of the close of business on March 8, 2019, was paid on April 1, 2019.
On February 28, 2019, the Corporation entered into a $250 million accelerated share repurchase (“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 shares, the Corporation recognized in shareholders’ equity approximately $200 million in treasury stock and $50 million as a reduction in capital surplus. The Corporation expects to further adjust its treasury stock and capital surplus accounts to reflect the delivery or receipt of cash or shares upon the termination of the ASR agreement, which will depend on the average price of the Corporation’s shares during the term of the ASR.
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Note 19 – Other comprehensive loss
The following table presents changes in accumulated other comprehensive loss by component for the quarters ended March 31, 2019 and 2018.
Changes in Accumulated Other Comprehensive Loss by Component [1]
Foreign currency translation
Adjustment of pension and postretirement benefit plans
Unrealized net holding losses on debt securities
Unrealized holding gains on equity securities
Unrealized net losses on cash flow hedges
All amounts presented are net of tax.
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The following table presents the amounts reclassified out of each component of accumulated other comprehensive loss during the quarters ended March 31, 2019 and 2018.
Reclassifications Out of Accumulated Other Comprehensive Loss
Consolidated Statements of Operations
Amortization of net losses
Amortization of prior service credit
Forward contracts
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Note 20 – Guarantees
At March 31, 2019 the Corporation recorded a liability of $0.5 million (December 31, 2018 - $0.3 million), which represents the unamortized balance of the obligations undertaken in issuing the guarantees under the standby letters of credit. Management does not anticipate any material losses related to these instruments.
From time to time, the Corporation securitized mortgage loans into guaranteed mortgage-backed securities subject to limited, and in certain instances, 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. At March 31, 2019 the Corporation serviced $1.3 billion (December 31, 2018 - $1.3 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 the quarter ended March 31, 2019, the Corporation repurchased approximately $8 million of unpaid principal balance in mortgage loans subject to the credit recourse provisions (March 31, 2018 - $8 million). In the event of nonperformance by the borrower, the Corporation has rights to the underlying collateral securing the mortgage loan. The Corporation suffers ultimate 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 March 31, 2019 the Corporation’s liability established to cover the estimated credit loss exposure related to loans sold or serviced with credit recourse amounted to $52 million (December 31, 2018 - $ 56 million).
The following table shows the changes in the Corporation’s liability of estimated losses related to loans serviced with credit recourse provisions during the quarters ended March 31, 2019 and 2018.
Balance as of beginning of period
Provision (reversal) for recourse liability
Balance as of end of period
When the Corporation sells or securitizes mortgage loans, it generally makes customary representations and warranties regarding the characteristics of the loans sold. 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 quarter ended March 31, 2019, the Corporation did not repurchase loans under representation and warranty arrangements (March 31, 2018 - $9 million). A substantial amount of these loans reinstates 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. The following table presents the changes in the Corporation’s liability for estimated losses associated with indemnifications and representations and warranties related to loans sold by BPPR for the quarters ended March 31, 2019 and 2018.
Provision (reversal) for representation and warranties
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 March 31, 2019, the Corporation serviced $15.5 billion in mortgage loans for third-parties, including the loans serviced with credit recourse (December 31,
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2018 - $15.7 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 March 31, 2019, the outstanding balance of funds advanced by the Corporation under such mortgage loan servicing agreements was approximately $94 million (December 31, 2018 - $88 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 wholly-owned consolidated subsidiaries amounting to $94 million at March 31, 2019 and December 31, 2018. In addition, at March 31, 2019 and December 31, 2018, PIHC fully and unconditionally guaranteed on a subordinated basis $374 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 20 to the Consolidated Financial Statements in the 2018 Form 10-K for further information on the trust preferred securities.
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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:
Commitments to extend credit:
Credit card lines
Commercial and construction lines of credit
Other consumer unused credit commitments
Commercial letters of credit
Standby letters of credit
Commitments to originate or fund mortgage loans
At March 31, 2019 and December 31, 2018, the Corporation maintained a reserve of approximately $8 million for potential losses associated with unfunded loan commitments related to commercial and consumer lines of credit.
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 34 to the Consolidated Financial Statements.
Puerto Rico remains in the midst of a profound fiscal and economic crisis. In response to such crisis, the U.S. Congress enacted the Puerto Rico Oversight Management and Economic Stability Act (“PROMESA”) in 2016, which, among other things, established a Fiscal Oversight and Management Board for Puerto Rico (the “Oversight Board”) and a framework for the restructuring of the debts of the Commonwealth, its instrumentalities and municipalities. The Commonwealth and several of its instrumentalities have commenced debt restructuring proceedings under PROMESA. As of the date of this report, while municipalities have been recently 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 March 31, 2019 and December 31, 2018, the Corporation’s direct exposure to the Puerto Rico government and its instrumentalities and municipalities totaled $455 million and $458 million, respectively, which amounts were fully outstanding on such dates. Of this amount, $413 million consists of loans and $42 million are securities ($413 million and $45 million at December 31, 2018). Substantially all of the amount outstanding at March 31, 2019 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 March 31, 2019, 75% of the Corporation’s exposure to municipal loans and securities was concentrated in the municipalities of San Juan, Guaynabo, Carolina and Bayamón.
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The following table details the loans and investments representing the Corporation’s direct exposure to the Puerto Rico government according to their maturities:
Central Government
Total Central Government
Government Development Bank (GDB)
Total Government Development Bank (GDB)
Puerto Rico Highways and Transportation Authority
Total Puerto Rico Highways and Transportation Authority
Municipalities
Total Municipalities
Total Direct Government Exposure
In addition, at March 31, 2019, the Corporation had $365 million in loans insured or securities issued by Puerto Rico governmental entities but for which the principal source of repayment is non-governmental ($368 million at December 31, 2018). These included $290 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, 2018 - $293 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 subsequent foreclosure of the underlying property. The Corporation also had at March 31, 2019, $45 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 subsequent foreclosure of the underlying property (December 31, 2018 - $45 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. Although the Governor is currently authorized by local legislation to impose a temporary moratorium on the financial obligations of the HFA, he has not exercised this power as of the date hereof. In addition, at March 31, 2019, the Corporation had $7 million in securities issued by HFA that have been economically defeased and refunded and for which securities consisting of U.S. agencies and Treasury obligations have been escrowed (December 31, 2018 - $7 million), and $23 million of commercial real estate notes issued by government entities but that are payable from rent paid by non-governmental parties (December 31, 2018 - $23 million).
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 fiscal measures to be implemented to address the Commonwealth’s fiscal crisis and the ongoing Title III proceedings under PROMESA described above. Similarly, BPPR’s mortgage and consumer loan portfolios include loans to government employees which could also be negatively affected by fiscal measures such as employee layoffs or furloughs.
The Corporation has operations in the United States Virgin Islands (the “USVI”) and has approximately $75 million in direct exposure to USVI government entities. 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.
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Legal Proceedings
The nature of Popular’s business ordinarily results in a certain number of claims, litigation, investigations, and legal and administrative cases and proceedings (“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 both the Corporation and its shareholders to do so. On at least a quarterly basis, Popular assesses its liabilities and contingencies relating to outstanding Legal Proceedings utilizing the latest 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 as appropriate to reflect any relevant developments. 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 $31.5 million as of March 31, 2019. For certain other 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 particular period.
Set forth below is a description of the Corporation’s significant Legal Proceedings.
BANCO POPULAR DE PUERTO RICO
Hazard Insurance Commission-Related Litigation
Popular, Inc., BPPR and Popular Insurance, LLC (the “Popular Defendants”) have been named defendants in a putative class action complaint captioned Pérez Díaz v. Popular, Inc., et al, filed before the Court of First Instance, Arecibo Part. The complaint seeks damages and preliminary and permanent injunctive relief on behalf of the purported class against the Popular Defendants, as well as Antilles Insurance Company and MAPFRE-PRAICO Insurance Company (the “Defendant Insurance Companies”). Plaintiffs allege that the Popular Defendants have been unjustly enriched by failing to reimburse them for commissions paid by the Defendant Insurance Companies to the insurance agent and/or mortgagee for policy years when no claims were filed against their hazard insurance policies. They demand the reimbursement to the purported “class” of an estimated $400 million plus legal interest, for the “good experience” commissions allegedly paid by the Defendant Insurance Companies during the relevant time period, as well as injunctive relief seeking to enjoin the Defendant Insurance Companies from paying commissions to the insurance agent/mortgagee and ordering them to pay those fees directly to the insured. A motion for dismissal on the merits, which the Defendant Insurance Companies filed shortly before hearing, was denied with a right to replead following limited targeted discovery. The Court of Appeals and then the Puerto Rico Supreme Court, both denied the Popular Defendants’ request to review the lower court’s denial of the motion to dismiss. In December 2017, plaintiffs sought to amend the complaint and, on 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. Hence, now the Popular Defendants remain the sole defendants in this action.
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A status conference was held in March 2019, where, among other things, plaintiffs stated that they sought to make changes to the certified class that seek to better define the size of the class as well as the scope of the remedies sought by the plaintiffs. The plaintiffs submitted their proposed changes to the class on April 8, 2019, which were timely opposed by Popular. A status and settlement conference is set for October 22, 2019.
BPPR has separately been named a defendant in a putative class action complaint captioned Ramirez Torres, et al. v. Banco Popular de Puerto Rico, et al, filed before the Puerto Rico Court of First Instance, San Juan Part. The complaint seeks damages and preliminary and permanent injunctive relief on behalf of the purported class against the same Popular Defendants, as well as other financial institutions with insurance brokerage subsidiaries in Puerto Rico. Plaintiffs essentially contend that in November 2015, Antilles Insurance Company obtained approval from the Puerto Rico Insurance Commissioner to market an endorsement that allowed its customers to obtain reimbursement on their insurance deductible for good experience, but that defendants failed to offer this product or disclose its existence to their customers, favoring other products instead, in violation of their duties as insurance brokers. Plaintiffs seek a determination that defendants unlawfully failed to comply with their duty to disclose the existence of this new insurance product, as well as double or treble damages (the latter subject to a determination that defendants engaged in monopolistic practices in failing to offer this product). Between late March and early April of 2017, co-defendants filed motions to dismiss the complaint and opposed the request for preliminary injunctive relief. A co-defendant filed a third-party Complaint against Antilles Insurance Company. A preliminary injunction and class certification hearing originally scheduled for April 6, 2017 was subsequently postponed, pending resolution of the motions to dismiss. In July 2017, the Court dismissed the complaint with prejudice. In August 2017, plaintiffs appealed this judgment and, in March 2018, the Court of Appeals reversed the Court of First Instance’s dismissal. In May 2018, all defendants filed their respective Petitions of Certiorari to the Puerto Rico Supreme Court, which denied review. On May 2, 2019, a hearing was held in the Court of First Instance, where the parties requested that the Court first determine the validity of the endorsement obtained by Antilles Insurance Company and approved by the Puerto Rico Insurance Commissioner, which was challenged by the co-defendant in the third-party complaint. The Court agreed to first rule on the validity of the endorsement and set an injunction hearing for September 2019 in case the validity of said endorsement is upheld.
Mortgage-Related Litigation and Claims
BPPR has been named a defendant in a putative class action captioned Lilliam González Camacho, et al. v. Banco Popular de Puerto Rico, et al., filed before the United States District Court for the District of Puerto Rico on behalf of mortgage-holders who have allegedly been subjected to illegal foreclosures and/or loan modifications through their mortgage servicers. Plaintiffs maintain 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 (or dual tracking). Plaintiffs assert that such actions violate the Home Affordable Modification Program (“HAMP”), the Home Affordable Refinance Program (“HARP”) and other federally sponsored loan modification programs, as well as the Puerto Rico Mortgage Debtor Assistance Act and the Truth in Lending Act (“TILA”). For the alleged violations stated above, plaintiffs request that all defendants (over 20, including all local banks), be held jointly and severally liable in an amount no less than $400 million. BPPR waived service of process in June 2017 and filed a motion to dismiss in August 2017, as did most co-defendants. On March 2018, the District Court dismissed the complaint in its entirety. After being denied reconsideration by the District Court, on August 2018, plaintiffs filed a Notice of Appeal to the U.S. Court of Appeals for the First Circuit. On January 22, 2019, the Appellants filed their brief. Appellees’ filed a request for extension of time to file their brief, until March 27, 2019. However, on March 12, 2019, the Court of Appeals entered an order where it consolidated three pending appeals related to the same subset of facts. Thus, the briefs filed by the Appellants were vacated and the Clerk of the Court has yet to set a new briefing schedule.
BPPR has also been named a defendant in another putative class action captioned Yiries Josef Saad Maura v. Banco Popular, et al., filed by the same counsel who filed the González Camacho action referenced above, 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. As in González Camacho, 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 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 on the same grounds as those asserted in the González Camacho action (as did most co-defendants, separately). BPPR further filed a motion to oppose class certification, which the Court granted, denying the motion for class certification in September 2018. On April 5, 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 on April 15, 2019, which Popular timely opposed and which remains pending.
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BPPR has been named a defendant in a complaint for damages and breach of contract captioned Héctor Robles Rodriguez et al. v. Municipio de Ceiba, et al. Plaintiffs are residents of a development called Hacienda Las Lomas. Through the Doral Bank-FDIC assisted transaction, BPPR acquired a significant number of mortgage loans within this development and is currently the primary mortgage lender in the project. Plaintiffs claim damages against the developer, contractor, the relevant insurance companies, and most recently, their mortgage lenders, because of a landslide that occurred in October 2015, affecting various streets and houses within the development. Plaintiffs specifically allege that the mortgage lenders, including BPPR, should be deemed liable for their alleged failure to properly inspect the subject properties. Plaintiffs demand $30 million in damages plus attorney’s fees, costs and the annulment of their mortgages. BPPR extended plaintiffs four consecutive six-month payment forbearances, the last of which is still in effect, and it is engaged in settlement discussions with plaintiffs. In November 2017, the FDIC notified BPPR that it had agreed to indemnify the Bank in connection with its Doral Bank-related exposure, pursuant to the terms of the relevant Purchase and Assumption Agreement with the FDIC. The FDIC filed a Notice of Removal to the United States District Court for the District of Puerto Rico (“USDC”) on March 2018 and, in April 2018, the state court stayed the proceedings in response thereto. On October 18, 2018, the Court granted FDIC’s motion to stay the proceedings until plaintiffs have exhausted administrative remedies.
Mortgage-Related Investigations
The Corporation and its subsidiaries from time to time receive requests for information from departments of the U.S. government that investigate mortgage-related conduct. In particular, BPPR has received subpoenas and other requests for information from the Federal Housing Finance Agency’s Office of the Inspector General, the Civil Division of the Department of Justice, the Special Inspector General for the Troubled Asset Relief Program and the Federal Department of Housing and Urban Development’s Office of the Inspector General mainly concerning real estate appraisals and residential and construction loans in Puerto Rico. The Corporation is cooperating with these requests and is in discussions regarding the resolution of such matters. There can be no assurances as to the outcome of those discussions.
Separately, in July 2017, management learned that certain letters generated by the Corporation to comply with Bureau of Consumer Financial Protection (“CFPB”) rules requiring written notification to borrowers who have submitted a loss mitigation application were not mailed to borrowers over a period of up to approximately three-years due to a systems interface error. Loss mitigation is a process whereby creditors work with mortgage loan borrowers who are having difficulties making their loan payments on their debt. The loss mitigation process applies both to mortgage loans held by the Corporation and to mortgage loans serviced by the Corporation for third parties. The Corporation has corrected the systems interface error that caused the letters not to be sent.
The Corporation notified applicable regulators and conducted a review of its mortgage files to assess the scope of potential customer impact. The review found that while the mailing error extended to approximately 23,000 residential mortgage loans (approximately 50% of which are serviced by the Corporation for third parties), the number of borrowers actually harmed by the mailing error was substantially lower. This was due to, among other things, the fact that the Corporation regularly uses means other than the mail to communicate with borrowers, including email and hand delivery of written notices at our mortgage servicing centers or bank branches. Importantly, more than half of those borrowers potentially subject to such error actually closed on a loss mitigation alternative. Furthermore, the Corporation’s outreach and remediation efforts with respect to potentially affected borrowers are substantially complete.
The Corporation has also engaged in remediation with respect to other printing and mailings incidents and other servicing matters in its mortgage servicing operation.
The Corporation is engaged in ongoing dialogue with applicable regulators with respect to the aforementioned mortgage servicing matters and there can be no assurances as to the outcome thereof. At this point, we are not able to estimate the financial impact of the foregoing.
Other Significant Proceedings
In June 2017, a syndicate comprised of BPPR and other local banks (the “Lenders”) filed an involuntary Chapter 11 bankruptcy proceeding against Betteroads Asphalt and Betterecycling Corporation (the “Involuntary Debtors”). This filing followed attempts by the Lenders to restructure and resolve the Involuntary Debtors’ obligations and outstanding defaults under a certain credit agreement, first through good faith negotiations and subsequently, through the filing of a collection action against the Involuntary Debtors in local court. The involuntary debtors subsequently counterclaimed, asserting damages in excess of $900 million. The Lenders ultimately joined in the commencement of these involuntary bankruptcy proceedings against the Debtors in order to preserve and recover the Involuntary Debtors’ assets, having confirmed that the Involuntary Debtors were transferring assets out of their estate for little or no consideration. The Involuntary Debtors subsequently filed a motion to dismiss the proceedings and for damages against the syndicate, arguing both that this petition was filed in bad faith and that there was a bona fide dispute as to the petitioners’ claims, as set forth in the counterclaim filed by the Involuntary Debtors in local court. The court allowed limited discovery to take place prior to an evidentiary hearing to determine the merits of debtors’ motion to dismiss.
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On November 30, 2018, the Court issued an order where it ruled that: (1) the Lenders, as petitioning creditors, satisfied the three-prong requirement for filing an involuntary petition; (2) nonetheless, bad faith is an independent cause for dismissal of an involuntary petition under section 303(b) of the Bankruptcy Code; and (3) the Involuntary Debtors failed to show that dismissal pursuant to section 305(a)(1) abstention is in the best interest of both the creditors and the debtors. An evidentiary hearing is set for June 27 and 28, 2019 to consider whether the involuntary petitions were filed in bad faith, that is, for an improper purpose that constitutes an abuse of the bankruptcy process.
POPULAR SECURITIES
Puerto Rico Bonds and Closed-End Investment Funds
The volatility in prices and declines in value that Puerto Rico municipal bonds and closed-end investment companies that invest primarily in Puerto Rico municipal bonds have experienced since August 2013 have led to regulatory inquiries, customer complaints and arbitrations for most broker-dealers in Puerto Rico, including Popular Securities. Popular Securities has received customer complaints and is named as a respondent (among other broker-dealers) in 169 arbitration proceedings with aggregate claimed amounts of approximately $201 million, including one arbitration with claimed damages of approximately $30 million. While Popular Securities believes it has meritorious defenses to the claims asserted in these proceedings, it has often determined that it is in its best interest to settle certain claims rather than expend the money and resources required to see such cases to completion. The Puerto Rico Government’s defaults and non-payment of its various debt obligations, as well as the Commonwealth’s and the Financial Oversight Management Board’s (the “Oversight Board”) decision to pursue restructurings under Title III and Title VI of PROMESA, have increased and may continue to increase the number of customer complaints (and claimed damages) filed against Popular Securities concerning Puerto Rico bonds and closed-end investment companies that invest primarily in Puerto Rico bonds. An adverse result in the arbitration proceedings described above, or a significant increase in customer complaints, could have a material adverse effect on Popular.
PROMESA Title III Proceedings
In 2017, the Oversight Board engaged the law firm of Kobre & Kim to carry out an independent investigation on behalf of the Oversight Board regarding, among other things, the causes of the Puerto Rico financial crisis. Popular, Inc., BPPR and Popular Securities (collectively, the “Popular Companies”) were served by, and cooperated with, the Oversight Board in connection with requests for the preservation and voluntary production of certain documents and witnesses with respect to Kobre & Kim’s independent investigation.
On August 20, 2018, Kobre & Kim issued its Final Report, which contained various references to the Popular Companies, including an allegation that Popular Securities participated as an underwriter in Commonwealth’s 2014 issuance of government obligation bonds notwithstanding having allegedly advised against it. The report discussed 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 being challenged as invalid by the SCC and the UCC. Prior to the filing of those claims, 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.
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Note 22 – Non-consolidatedvariable interest entities
The Corporation is involved with three statutory trusts which it created to issue trust preferred securities to the public. These trusts are deemed to be variable interest entities (“VIEs”) since the equity investors at risk have no substantial decision-making rights. The Corporation does not hold any variable interest in the trusts, and therefore, cannot be the trusts’ primary beneficiary. Furthermore, the Corporation concluded that it did not hold a controlling financial interest in these trusts since the decisions of the trusts are predetermined through the trust documents and the guarantee of the trust preferred securities is irrelevant since in substance the sponsor is guaranteeing its own debt.
Also, the Corporation is involved with various special purpose entities mainly in guaranteed mortgage securitization transactions, including GNMA and FNMA. These special purpose entities are deemed to be VIEs since they lack equity investments at risk. The Corporation’s continuing involvement in these guaranteed loan securitizations includes owning certain beneficial interests in the form of securities as well as the servicing rights retained. The Corporation is not required to provide additional financial support to any of the variable interest entities to which it has transferred the financial assets. The mortgage-backed securities, to the extent retained, are classified in the Corporation’s Consolidated Statements of Financial Condition as available-for-sale or trading securities. The Corporation concluded that, essentially, these entities (FNMA and GNMA) control the design of their respective VIEs, dictate the quality and nature of the collateral, require the underlying insurance, set the servicing standards via the servicing guides and can change them at will, and can remove a primary servicer with cause, and without cause in the case of FNMA. Moreover, through their guarantee obligations, agencies (FNMA and GNMA) have the obligation to absorb losses that could be potentially significant to the VIE.
The Corporation holds variable interests in these VIEs in the form of agency mortgage-backed securities and collateralized mortgage obligations, including those securities originated by the Corporation and those acquired from third parties. Additionally, the Corporation holds agency mortgage-backed securities and agency collateralized mortgage obligations issued by third party VIEs in which it has no other form of continuing involvement. Refer to Note 24 to the Consolidated Financial Statements for additional information on the debt securities outstanding at March 31, 2019 and December 31, 2018, which are classified as available-for-saleand 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 March 31, 2019 and December 31, 2018.
Servicing assets:
Total servicing assets
Other assets:
Servicing advances
Maximum exposure to loss
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 $10.4 billion at March 31, 2019 (December 31, 2018 - $10.6 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 March 31, 2019 and December 31, 2018, 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.
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In September of 2011, BPPR sold construction and commercial real estate loans to a newly created joint venture, PRLP 2011 Holdings, LLC. In March of 2013, BPPR completed a sale of commercial and construction loans, and commercial and single family real estate owned to a newly created joint venture, PR Asset Portfolio2013-1 International, LLC.
These joint ventures were created for the limited purpose of acquiring the loans from BPPR; servicing the loans through a third-party servicer; ultimately working out, resolving and/or foreclosing the loans; and indirectly owning, operating, constructing, developing, leasing and selling any real properties acquired by the joint ventures through deed in lieu of foreclosure, foreclosure, or by resolution of any loan.
BPPR provided financing to these entities for the acquisition of the assets. In addition, BPPR provided these joint ventures with a non-revolving advance facility to cover unfunded commitments andcosts-to-complete related to certain construction projects, and a revolving working capital line to fund certain operating expenses of the joint venture. As part of these transactions, BPPR received $ 48 million and $92 million, for PRLP 2011 Holdings, LLC and PR Asset Portfolio 2013-1 International, LLC, respectively, in cash and a 24.9% equity interest in each joint venture. The Corporation is not required to provide any other financial support to these joint ventures. BPPR accounted for both transactions as a true sale pursuant to ASC Subtopic 860-10.
The Corporation determined that PRLP 2011 Holdings, LLC and PR Asset Portfolio 2013-1 International, LLC are VIEs but it is not the primary beneficiary. All decisions are made by Caribbean Property Group (“CPG”) (or an affiliate thereof) (the “Manager”), except for certain limited material decisions which would require the unanimous consent of all members. The Manager is authorized to execute and deliver on behalf of the joint ventures any and all documents, contracts, certificates, agreements and instruments, and to take any action deemed necessary in the benefit of the joint ventures. All financing facilities extended by BPPR to these joint ventures have been repaid in full. The Corporation maintains a variable interests in these VIEs in the form of the 24.9% equity interest. The equity interest is accounted for under the equity method of accounting pursuant to ASC Subtopic 323-10.
The following tables present the carrying amount and classification of the assets and liabilities related to the Corporation’s variable interests in the non-consolidated VIEs, PRLP 2011 Holdings, LLC and PR Asset Portfolio2013-1 International, LLC, and their maximum exposure to loss at March 31, 2019 and December 31, 2018.
Equity investment
Liabilities
Total net assets
The Corporation determined that the maximum exposure to loss under a worst case scenario at March 31, 2019 would be not recovering the net assets held by the Corporation as of the reporting date.
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-consolidatedVIEs 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 March 31, 2019.
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Note 23 – Related party transactions
The Corporation considers its equity method investees as related parties. The following provides information on transactions with equity method investees considered related parties.
EVERTEC
The Corporation has an investment in EVERTEC, Inc. (“EVERTEC”), which provides various processing and information technology services to the Corporation and its subsidiaries and gives BPPR access to the ATH network owned and operated by EVERTEC. As of March 31, 2019, the Corporation held 11,654,803 shares of EVERTEC, an ownership stake of 16.13%. The Corporation continues to have significant influence over EVERTEC. Accordingly, the investment in EVERTEC is accounted for under the equity method and is evaluated for impairment if events or circumstances indicate that a decrease in value of the investment has occurred that is other than temporary.
The Corporation received $ 0.6 million in dividend distributions during the quarter ended March 31, 2019, from its investments in EVERTEC’s holding company. During the quarter March 31, 2018, there were no dividend distributions received by the Corporation. The Corporation’s equity in EVERTEC is presented in the table which follows and is included as part of “other assets” in the Consolidated Statements of Financial Condition.
Equity investment in EVERTEC
The Corporation had the following financial condition balances outstanding with EVERTEC at March 31, 2019 and December 31, 2018. Items that represent liabilities to the Corporation are presented with parenthesis.
Accounts receivable (Other assets)
Accounts payable (Other liabilities)
Net total
The Corporation’s proportionate share of income from EVERTEC is included in other operating income in the consolidated statements of operations. The following table presents the Corporation’s proportionate share of EVERTEC’s income and changes in stockholders’ equity for the quarters ended March 31, 2019 and 2018.
Share of income from investment in EVERTEC
Share of other changes in EVERTEC’s stockholders’ equity
Share of EVERTEC’s changes in equity recognized in income
The following table presents 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 quarters ended March 31, 2019 and 2018. Items that represent expenses to the Corporation are presented with parenthesis.
Interest expense on deposits
ATH and credit cards interchange income from services to EVERTEC
Rental income charged to EVERTEC
Processing fees on services provided by EVERTEC
Other services provided to EVERTEC
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PRLP 2011 Holdings, LLC and PR Asset Portfolio 2013-1International, LLC
As indicated in Note 22 to the Consolidated Financial Statements, the Corporation holds a 24.9% equity interest in PRLP 2011 Holdings, LLC and PR Asset Portfolio 2013-1 International, LLC.
The Corporation’s equity in PRLP 2011 Holdings, LLC and PR Asset Portfolio 2013-1 International, LLC is presented in the table which follows and is included as part of “other assets” in the Consolidated Statements of Financial Condition.
The Corporation held deposits from these entities, as follows:
Deposits (non-interest bearing)
The Corporation’s proportionate share of income or loss from these entities is presented in the following table and is included in other operating income in the Consolidated Statements of Operations.
Share of (loss) income from the equity investment
During the quarter ended March 31, 2019, the Corporation received $ 1.3 million in capital distributions from its investment in PR Asset Portfolio 2013-1 International, LLC.There were no transactions between the Corporation and PRLP 2011 Holdings, LLC during the quarters ended March 31, 2019 and 2018.
Centro Financiero BHD León
At March 31, 2019, 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 quarter ended March 31, 2019, the Corporation recorded $ 5.5 million in earnings from its investment in BHD León (March 31, 2018 - $ 8.5 million), which had a carrying amount of $ 148.6 million at March 31, 2019 (December 31, 2018 - $ 143.5 million). On December 2017, BPPR extended a credit facility of $ 40 million to BHD León. This credit facility was repaid during the quarter ended March 31, 2018. There were no dividend distributions received by the Corporation from its investment in BHD León, during the quarters ended March 31, 2019 and 2018.
On June 30, 2017, BPPR extended an $8 million credit facility to Grupo Financiero Leon, S.A. Panamá (“GFL”), a shareholder of BHD León with an outstanding balance of $8 million at March 31, 2018. The sources of repayment for this loan were the dividends to be received by GFL from its investment in BHD León. BPPR’s credit facility ranked pari passu with another $8 million credit facility extended to GFL by BHD International Panama, an affiliate of BHD León. This credit facility was repaid during the quarter ended June 30, 2018.
Investment Companies
The Corporation provides advisory services to several investment companies registered under the Puerto Rico Investment Companies Act in exchange for a fee. The Corporation 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 quarter ended March 31, 2019 administrative fees charged to these investment companies amounted to $ 1.5 million (March 31, 2018 - $ 1.7 million) and waived fees amounted to $ 0.5 million (March 31, 2018 - $ 0.5 million), for a net fee of $ 1.0 million (March 31, 2018 - $ 1.2 million).
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The Corporation, through its subsidiary BPPR, has also entered into certain uncommitted credit facilities with those investment companies. As of March 31, 2019, the available lines of credit facilities amounted to $ 330 million (December 31, 2018 - $ 330 million). The aggregate sum of all outstanding balances under all credit facilities that may be made available by BPPR, from time to time, to those investment companies for which BPPR acts as investment advisor or co-investment advisor, shall never exceed the lesser of $200 million or 10% of BPPR’s capital. At March 31, 2019 there was no outstanding balance for these credit facilities.
Other related party transactions
On August 2018, BPPR acquired certain assets and assumed certain liabilities of Reliable Financial Services and Reliable Finance Holding Company, Puerto Rico-based subsidiaries of Wells Fargo & Company engaged in the auto finance business in Puerto Rico. Refer to Note 4 for additional information on this transaction. As part of the acquisition transaction, the Corporation entered into an agreement with Reliable Financial Services to sublease the space necessary to continue the acquired operations. Reliable Financial Services’ lease agreement is with the entity in which the Corporation’s Executive Chairman and his family members hold an ownership interest. During the quarter ended March 31, 2019, the Corporation paid to Reliable Financial Services approximately $0.4 million under the sublease. The lease expired as of April 30, 2019.
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Note 24 – 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 assumptions 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. There have been no changes in the Corporation’s methodologies used to estimate the fair value of assets and liabilities from those disclosed in the 2018 Form 10-K.
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 March 31, 2019 and December 31, 2018:
At March 31, 2019
RECURRING FAIR VALUE MEASUREMENTS
Trading account debt securities, excluding derivatives:
Total trading account debt securities, excluding derivatives
Derivatives
Total assets measured at fair value on a recurring basis
Total liabilities measured at fair value on a recurring basis
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At December 31, 2018
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 quarters ended March 31, 2019 and 2018 and excludes nonrecurring fair value measurements of assets no longer outstanding as of the reporting date.
Quarter ended March 31, 2019
NONRECURRING FAIR VALUE MEASUREMENTS
Loans[1]
Other real estate owned[2]
Other foreclosed assets[2]
Total assets measured at fair value on a nonrecurring basis
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, in accordance with the provisions of ASC Section 310-10-35. Costs to sell are excluded from the reported fair value amount.
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.
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Quarter ended March 31, 2018
[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, in accordance with the provisions of ASC Section 310-10-35. 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.
The following tables present the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the quarters ended March 31, 2019 and 2018.
Gains (losses) included in earnings
Gains (losses) included in OCI
Settlements
Changes in unrealized gains (losses) included in earnings relating to assets still held at March 31, 2019
Changes in unrealized gains
(losses) included in earnings relating to assets still held at March 31, 2018
Gains and losses (realized and unrealized) included in earnings for the quarters ended March 31, 2019 and 2018 for Level 3 assets and liabilities included in the previous tables are reported in the consolidated statements of operations as follows:
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Mortgage banking activities
Trading account loss
The following table includes 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.
CMO’s - trading
Other - trading
12.0%
10.8%
6.8 years (0.1 - 15.6 years)11.2% (9.5% - 24.5%)
Other real estate owned
[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.
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.
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Note 25 – 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 March 31, 2019 and December 31, 2018, 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.
Financial Assets:
Trading account debt securities, excluding derivatives[1]
Debt securitiesavailable-for-sale[1]
Debt securitiesheld-to-maturity:
Collateralized mortgage obligation-federal agency
Equity securities:
FHLB stock
FRB stock
Other investments
Total equity securities
Loansheld-for-sale
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Demand deposits
Time deposits
FHLB advances
Unsecured senior debt securities
Junior subordinated deferrable interest debentures (related to trust preferred securities)
Refer to Note 24 to the Consolidated Financial Statements for the fair value by class of financial asset and its hierarchy level.
Refer to Note 17 to the Consolidated Financial Statements for the composition of other short-term borrowings.
Loans covered under loss sharing
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Other short-term borrowings[2]
Unsecured senior debt
The notional amount of commitments to extend credit at March 31, 2019 and December 31, 2018 is $ 7.6 billion and $ 7.5 billion, respectively, and represents the unused portion of credit facilities granted to customers. The notional amount of letters of credit at March 31, 2019 and December 31, 2018 is $ 81 million and $ 29 million respectively, and represents the contractual amount that is required to be paid in the event of nonperformance. The fair value of commitments to extend credit and letters of credit, which are based on the fees charged to enter into those agreements, are not material to Popular’s financial statements.
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Note 26 – Net income per common share
The following table sets forth the computation of net income per common share (“EPS”), basic and diluted, for the quarters ended March 31, 2019 and 2018:
Preferred stock dividends
Net income applicable to common stock
Average common shares outstanding
Average potential dilutive common shares
Average common shares outstanding - assuming dilution
Basic EPS
Diluted EPS
As disclosed in Note 18, during the quarter ended March 31, 2019, the Corporation entered into a $250 million accelerated share repurchase transaction (“ASR”) and, in connection therewith, received an initial delivery of 3,500,000 shares of common stock. The initial share delivery was accounted for as a treasury stock transaction. As part of this transaction, the Corporation entered into a forward contract, which remains outstanding as of March 31, 2019, for which the Corporation expects to receive additional shares upon the termination of the ASR agreement. The diluted EPS computation for the quarter ended March 31, 2019 excludes 1,268,890 antidilutive shares related to the ASR.
For the quarters ended March 31, 2019 and 2018, the Corporation calculated the impact of potential dilutive common shares under the treasury stock method, consistent with the method used for the preparation of the financial statements for the year ended December 31, 2018. For a discussion of the calculation under the treasury stock method, refer to Note 32 of the Consolidated Financial Statements included in the 2018 Form 10-K.
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Note 27 – Revenue from contracts with customers
The following table presents the Corporation’s revenue streams from contracts with customers by reportable segment for the quarters ended March 31, 2019 and 2018:
Other service fees:
Debit card fees
Insurance fees, excluding reinsurance
Credit card fees, excluding late fees and membership fees
Sale and administration of investment products
Trust fees
Total revenue from contracts with customers[1]
The amounts include intersegment transactions of $0.2 million and $0.4 million, respectively, for the quarters ended March 31, 2019 and 2018.
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 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 include, but are not limited to, interchange fees, surcharging income and foreign transaction fees. These transaction-based fees are recognized at a point in time, upon occurrence of an activity or event or upon the occurrence of a condition which triggers the fee assessment. Interchange fees are recognized upon settlement of the debit card payment transactions. The Corporation is acting as principal in these transactions.
Insurance fees
Insurance fees include, but are not limited to, commissions and contingent commissions. Commissions and fees are recognized when related policies are effective since the Corporation does not have an enforceable right to payment for services completed to date. An allowance is created for expected adjustments to commissions earned related to policy cancellations. Contingent commissions are recorded on an accrual basis when the amount to be received is notified by the insurance company. The 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.
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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.
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 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.
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Note 28 – 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 34.8 years considers options to extend the leases for up to 10.1 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. At March 31, 2019, ROU assets related to operating and finance lease amounted to $132 million and $17 million, respectively, and lease liabilities related to operating and finance leases amounted to $148 million and $24 million, respectively.
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:
Operating Leases
Finance Leases
The following table presents the lease cost recognized by the Corporation in the Consolidated Statements of Operations as follows:
Finance lease cost:
Amortization of ROU assets
Interest on lease liabilities
Operating lease cost
Short-term lease cost
Sublease income
Total lease cost
Total rental expense for all operating leases, except those with terms of a month or less that were not renewed, for the quarter ended March 31, 2018 was $ 7.4 million, which is included in net occupancy, equipment and communication expenses, according to their nature. Total amortization and interest expense for capital leases for the quarter ended March 31, 2018 was $0.3 million and $0.3 million, respectively.
The following table presents supplemental cash flow information and other related information related to operating and finance leases.
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Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Operating cash flows from finance leases
Financing cash flows from finance leases
ROU assets obtained in exchange for new lease obligations:
Operating leases
Finance leases
Weighted-average remaining lease term:
Weighted-average discount rate:
As of March 31, 2019, the Corporation has additional operating leases contracts that have not yet commenced with an undiscounted contract amount of $22 million, which will have lease terms of 10 years.
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Note 29 – FDIC loss share expense
The caption of FDIC loss-share expense in the Consolidated Statements of Operations consists of the following major categories:
Amortization
80% mirror accounting on credit impairment losses
80% mirror accounting on reimbursable expenses
80% mirror accounting on recoveries on covered assets, including rental income on OREOs, subject to reimbursement to the FDIC
Change in true-up payment obligation
Total FDIC loss share expense
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Note 30 – Pension and postretirement benefits
The Corporation has a non-contributory defined benefit pension plan and supplementary pension benefit restoration plans for regular employees of certain of its subsidiaries (the “Pension Plans”). The accrual of benefits under the Pension Plans is frozen to all participants. The Corporation also provides certain postretirement health care benefits for retired employees of certain subsidiaries (the “OPEB Plan”)
The components of net periodic cost for the Pension Plans and the OPEB Plan for the periods presented were as follows:
Personnel Cost:
Service cost
Other operating expenses:
Interest cost
Expected return on plan assets
Amortization of prior service cost/(credit)
Amortization of net loss
Total net periodic pension cost
The Corporation paid the following contributions to the plans during the quarter ended March 31, 2019 and expects to pay the following contributions for the year ending December 31, 2019.
Pension Plans
OPEB Plan
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Note 31 – Stock-based compensation
In April 2004, the Corporation’s shareholders adopted the Popular, Inc. 2004 Omnibus Incentive Plan (the “Incentive Plan”). The Incentive Plan permits the granting of incentive awards in the form of Annual Incentive Awards, Long-term Performance Unit Awards, Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Units or Performance Shares. Participants in the Incentive Plan are designated by the Compensation Committee of the Board of Directors (or its delegate as determined by the Board). Employees and directors of the Corporation and/or any of its subsidiaries are eligible to participate in the Incentive Plan.
Under the Incentive Plan, the Corporation has issued restricted shares and performance shares, which become vested based on the employees’ continued service with Popular. Unless otherwise stated in an agreement, the compensation cost associated with the shares of restricted stock is determined based on a two-prong vesting schedule. The first part is vested ratably over five years commencing at the date of grant and the second part is vested at termination of employment after attainment of 55 years of age and 10 years of service. The five-year vesting part is accelerated at termination of employment after attaining 55 years of age and 10 years of service. The vesting schedule for restricted shares granted on or after 2014 was modified as follows, the first part is vested ratably over four years commencing at the date of the grant and the second part is vested at termination of employment after attainment of the earlier of 55 years of age and 10 years of service or 60 years of age and 5 years of service. The four year vesting part 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 consist of the opportunity to receive shares of Popular, Inc.’s common stock provided that the Corporation achieves certain goals during a three-year performance cycle. The goals will be based on two metrics weighted equally: the Relative Total Shareholder Return (“TSR”) and the Absolute Earnings per Share (“EPS”) goals. The TSR metric is considered to be a market condition under ASC 718. For equity settled awards based on a market condition, the fair value is determined as of the grant date and is not subsequently revised based on actual performance. The EPS metric is considered to be a performance condition under ASC 718. The fair value is determined based on the probability of achieving the EPS goal as of each reporting period. The TSR and EPS metrics are equally weighted and work independently. The number of shares that will ultimately vest ranges from 50% to a 150% of target based on both market (TSR) and performance (EPS) 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.
(Not in thousands)
Non-vested at December 31, 2017
Granted
Performance Shares Quantity Adjustment
Vested
Forfeited
Non-vested at December 31, 2018
Non-vested at March 31, 2019
During the quarter ended March 31, 2019, 84,590 shares of restricted stock (March 31, 2018 - 84,616) and 65,396 performance shares (March 31, 2018 - 72,414) were awarded to management under the Incentive Plan.
During the quarter ended March 31, 2019, the Corporation recognized $ 3.8 million of restricted stock expense related to management incentive awards, with a tax benefit of $ 0.4 million (March 31, 2018 - $ 2.7 million, with a tax benefit of $ 0.3 million). For the quarter ended March 31, 2019, the fair market value of the restricted stock and performance shares vested was $5 million at grant date and $9.8 million at vesting date. This differential triggers a windfall, of $1.8 million that was recorded as a reduction in income tax expense.
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For the quarter ended March 31, 2019, the Corporation recognized $3.6 million of performance shares expense, with a tax benefit of $0.3 million (March 31, 2018 - $2.6 million, with a tax benefit of $0.3 million). The total unrecognized compensation cost related to non-vested restricted stock awards and performance shares to members of management at March 31, 2019 was $ 8.9 million and is expected to be recognized over a weighted-average period of 2.4 years.
The following table summarizes the restricted stock activity under the Incentive Plan for members of the Board of Directors:
During the quarter ended March 31, 2019, the Corporation granted 1,052 shares of restricted stock to members of the Board of Directors of Popular, Inc. No shares of restricted stock were granted to members of the Board of Directors of Popular, Inc. during the quarter ended March 31, 2018. During this period, the Corporation recognized $0.1 million of restricted stock expense, with a tax benefit of $6 thousand (March 31, 2018 - $0.3 million, with a tax benefit of $39 thousand). The fair value at vesting date of the restricted stock vested during the quarter ended March 31, 2019 for directors was
$0.1 million.
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Note 32 – Income taxes
The reason 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:
Computed income tax expense at statutory rates
Net benefit of tax exempt interest income
Deferred tax asset valuation allowance
Difference in tax rates due to multiple jurisdictions
Effect of income subject to preferential tax rate
Adjustments in net deferred tax due to change in tax law
State and local taxes
Income tax (benefit) expense
Income tax expense amounted to $50.2 million for the quarter ended March 31, 2019, compared with $22.2 million for the same quarter of 2018. The increase in income tax expense was primarily due to higher taxable income in the Puerto Rico operations net of higher tax benefit on net exempt interest income.
Effective for taxable years beginning after December 31, 2018, Act No.257 of 2018, which amended the Puerto Rico Internal Revenue Code reduce the Puerto Rico corporate income tax rate from 39% to 38%.
The following table presents a breakdown of the significant components of the Corporation’s deferred tax assets and liabilities.
Deferred tax assets:
Tax credits available for carryforward
Net operating loss and other carryforward available
Postretirement and pension benefits
Deferred loan origination fees
Deferred gains
Accelerated depreciation
FDIC-assisted transaction
Intercompany deferred gains
Difference in outside basis from pass-through entities
Other temporary differences
Total gross deferred tax assets
Deferred tax liabilities:
Indefinite-lived intangibles
Unrealized net gain (loss) on trading and available-for-sale securities
Total gross deferred tax liabilities
Valuation allowance
Net deferred tax asset
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The net deferred tax asset shown in the table above at March 31, 2019 is reflected in the consolidated statements of financial condition as $1.0 billion in net deferred tax assets in the “Other assets” caption (December 31, 2018 - $1.0 billion) and $930 thousand in deferred tax liabilities in the “Other liabilities” caption (December 31, 2018 - $926 thousand), reflecting the aggregate deferred tax assets or liabilities of individual tax-paying subsidiaries of the Corporation in their respective tax jurisdiction, Puerto Rico or the United States.
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 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-planningstrategies.
At March 31, 2019 the net deferred tax asset of the U.S. operations amounted to $724 million with a valuation allowance of approximately $401 million, for a net deferred tax asset of approximately $323 million. As of March 31, 2019, management estimated that the U.S. operations would earn enough pre-tax Income during the carryover period to realize the total amount of net deferred tax asset after valuation allowance. After weighting all available positive and negative evidence, management concluded that is more likely than not that a portion of the deferred tax asset from the U.S. operation, amounting to approximately $323 million, will be realized. Management will continue to evaluate the realization of the deferred tax asset each quarter and adjust as any changes arises.
At March 31, 2019, the Corporation’s net deferred tax assets related to its Puerto Rico operations amounted to $669 million.
The Corporation’s Puerto Rico Banking operation is not in a cumulative three year loss position and has sustained profitability for the three year period ended March 31, 2019. This is considered a strong piece of objectively verifiable positive evidence that outweights any negative evidence considered by management in the evaluation of the realization of the deferred tax asset. Based on this evidence and management’s estimate of future taxable income, the Corporation has concluded that it is more likely than not that such net deferred tax asset of the Puerto Rico Banking operations will be realized.
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The Popular, Inc., holding company (“PIHC”) operation is in a cumulative loss position taking into account taxable income exclusive of reversing temporary differences, for the three year period ended March 31, 2019. Management expects these losses will be a trend in future years. This objectively verifiable negative evidence is considered by management as 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 PIHC will not be able to realize any portion of the deferred tax assets, considering the criteria of ASC Topic 740. Accordingly, a valuation allowance is recorded on the deferred tax asset at the PIHC, which amounted to $95 million as of March 31, 2019.
The reconciliation of unrecognized tax benefits, excluding interest, was as follows:
(In millions)
Balance at January 1
Additions for tax positions -January through March
Balance at March 31
At March 31, 2019, the total amount of accrued interest recognized in the statement of financial condition approximated $3.0 million (December 31, 2018 - $2.8 million). The total interest expense recognized at March 31, 2019 was $149 thousand (March 31, 2018 - $151 thousand). Management determined that at March 31, 2019 and December 31, 2018 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, would affect the Corporation’s effective tax rate, was approximately $9.8 million at March 31, 2019 (December 31, 2018 - $9.0 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 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.
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. At March 31, 2019, the following years remain subject to examination in the U.S. Federal jurisdiction: 2015 and thereafter; and in the Puerto Rico jurisdiction, 2014 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 $4.7 million.
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Note 33 – Supplemental disclosure on the consolidated statements of cash flows
Additional disclosures on cash flow information and non-cash activities for the quarters ended March 31, 2019 and March 31, 2018 are listed in the following table:
Non-cash activities:
Loans transferred to other real estate
Loans transferred to other property
Total loans transferred to foreclosed assets
Loans transferred to other assets
Financed sales of other real estate assets
Financed sales of other foreclosed assets
Total financed sales of foreclosed assets
Transfers from loansheld-for-sale to loans held-in-portfolio
Loans securitized into investment securities[1]
Trades payable to brokers and counterparties
Receivables from investments maturities
Recognition of mortgage servicing rights on securitizations or asset transfers
Interest capitalized on loans subject to the temporary payment moratorium
Loans booked under the GNMA buy-back option
Capitalization of lease right of use asset
Includes loans securitized into trading securities and subsequently sold before quarter 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.
Restricted cash and due from banks
Restricted cash in money market investments
Total cash and due from banks, and restricted cash[2]
Refer to Note 5 - Restrictions on cash and due from banks and certain securities for nature of restrictions.
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Note 34 – Segment reporting
The Corporation’s corporate structure consists of two reportable segments – Banco Popular de Puerto Rico and Popular U.S.
Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. The segments were determined based on the organizational structure, which focuses primarily on the markets the segments serve, as well as on the products and services offered by the segments.
Banco Popular de Puerto Rico:
Given that Banco Popular de Puerto Rico constitutes a significant portion of the Corporation’s results of operations and total assets at March 31, 2019, additional disclosures are provided for the business areas included in this reportable segment, as described below:
Commercial banking represents the Corporation’s banking operations conducted at BPPR, which are targeted mainly to corporate, small and middle size businesses. It includes aspects of the lending and depository businesses, as well as other finance and advisory services. BPPR allocates funds across business areas based on duration matched transfer pricing at market rates. This area also incorporates income related with the investment of excess funds, as well as a proportionate share of the investment function of BPPR.
Consumer and retail banking represents the branch banking operations of BPPR which focus on retail clients. It includes the consumer lending business operations of BPPR, as well as the lending operations of Popular Auto and Popular Mortgage. Popular Auto focuses on auto and lease financing, while Popular Mortgage focuses principally on residential mortgage loan originations. During 2018, the Reliable brand was transferred to Popular, Inc. and is being used by Popular Auto. The consumer and retail banking area also incorporates income related with the investment of excess funds from the branch network, as well as a proportionate share of the investment function of BPPR.
Other financial services include the trust and asset management service units of BPPR, the brokerage and investment banking operations of Popular Securities, and the insurance agency and reinsurance businesses of Popular Insurance, Popular Insurance V.I., Popular Risk Services, and Popular Life Re. Most of the services that are provided by these subsidiaries generate profits based on fee income. Popular Insurance V.I. was dissolved on December 31, 2018.
Popular U.S.:
Popular U.S. reportable segment consists of the banking operations of Popular Bank (PB) and Popular Insurance Agency, U.S.A. PB operates through a retail branch network in the U.S. mainland under the name of Popular. Popular Insurance Agency, U.S.A. offers investment and insurance services across the PB branch network.
The Corporate group consists primarily of the holding companies Popular, Inc., Popular North America, Popular International Bank and certain of the Corporation’s investments accounted for under the equity method, including EVERTEC and Centro Financiero BHD, León.
The accounting policies of the individual operating segments are the same as those of the Corporation. Transactions between reportable segments are primarily conducted at market rates, resulting in profits that are eliminated for reporting consolidated results of operations.
Effective on January 1, 2019, the Corporation’s management changed the measurement basis for its reportable segments. Historically, for management reporting purposes, the Corporation had reversed the effect of the intercompany billings from Popular Inc., holding company, to its subsidiaries for certain services or expenses incurred on their behalf. In addition, the Corporation used to reflect an income tax expense allocation for several of its subsidiaries which are Limited Liability Companies (“LLCs”) and had made an election to be treated as a pass through entities for income tax purposes. The Corporation’s management has determined to discontinue making these adjustments, effective on January 1, 2019, for purposes of its management and reportable segment reporting. The Corporation reflected these changes in the measurement of the reportable segments’ results prospectively beginning on January 1, 2019.
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The tables that follow present the results of operations and total assets by reportable segments:
Non-interest income
Depreciation expense
Segment assets
Net interest income (expense)
Net income (loss)
2018
Income tax benefit
Provision (reversal) for loan losses
Income tax expense (benefit)
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Additional disclosures with respect to the Banco Popular de Puerto Rico reportable segment are as follows:
Geographic Information
Revenues:[1]
United States
Total consolidated revenues
Total revenues include net interest income, service charges on deposit accounts, other service fees, mortgage banking activities, net profit (loss) on trading account debt securities, net gain (loss), including impairment on equity securities, adjustments (expense) to indemnity reserves on loans sold, FDIC loss share expense and other operating income.
Selected Balance Sheet Information:
Deposits [1]
Represents deposits from BPPR operations located in the U.S. and British Virgin Islands.
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Note 35 – Condensed consolidating financial information of guarantor and issuers of registered guaranteed securities
The following condensed consolidating financial information presents the financial position of Popular, Inc. Holding Company (“PIHC”) (parent only), Popular North America, Inc. (“PNA”) and all other subsidiaries of the Corporation at March 31, 2019 and December 31, 2018, and the results of their operations and cash flows for periods ended March 31, 2019 and 2018.
PNA is an operating, wholly-owned subsidiary of PIHC and is the holding company of its wholly-owned subsidiaries: Equity One, Inc. and Popular Bank (“PB”), including PB’s wholly-owned subsidiaries Popular Equipment Finance, Inc., Popular Insurance Agency, U.S.A., and E-LOAN, Inc.
PIHC fully and unconditionally guarantees all registered debt securities issued by PNA.
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Condensed Consolidating Statement of Financial Condition (Unaudited)
Trading account debt securities, at fair value
Debt securitiesavailable-for-sale, at fair value
Debt securitiesheld-to-maturity, at amortized cost
Investment in subsidiaries
Less - Unearned income
Common stock
Retained earnings (accumulated deficit)
Treasury stock, at cost
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Condensed Consolidating Statement of Operations (Unaudited)
Interest and dividend income:
Dividend income from subsidiaries
Total interest and dividend income
Net interest income (expense) after provision for loan losses
Net gain, including impairment on equity securities
Net profit on trading account debt securities
Other operating income (expense)
Total non-interest income (expense)
Income (loss) before income tax and equity in (losses) earnings of subsidiaries
Income (loss) before equity in (losses) earnings of subsidiaries
Equity in undistributed (losses) earnings of subsidiaries
Comprehensive income, net of tax
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Provision for loan losses- non-covered loans
Provision for loan losses- covered loans
Net (loss) gain, including impairment on equity securities
Net (loss) profit on trading account debt securities
FDIC loss-share expense
Income (loss) before income tax and equity in earnings (losses) of subsidiaries
Income (loss) before equity in earnings (losses) of subsidiaries
Comprehensive loss, net of tax
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Condensed Consolidating Statement of Cash Flows (Unaudited)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity in earnings of subsidiaries, net of dividends or distributions
Deferred income tax (benefit) expense
Loss (gain) on:
Sale of loans, including valuation adjustments on loans held for sale and mortgage banking activities
Acquisitions of loans held-for-sale
Proceeds from sale of loans held-for-sale
Net originations on loans held-for-sale
Pension and other postretirement benefits obligations
Net cash provided by (used in) operating activities
Net decrease (increase) in money market investments
Net repayments (disbursements) on loans
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Net cash provided by (used in) investing activities
Dividends paid to parent company
Net cash (used in) provided by financing activities
Cash and due from banks, and restricted cash at end of period
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(Gain) loss on:
Net cash (used in) provided by operating activities
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Net payments (to) from FDIC under loss-sharing agreements
Capital contribution to subsidiary
Return of capital to parent company
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report includes management’s discussion and analysis (“MD&A”) of the consolidated financial position and financial performance of Popular, Inc. (the “Corporation” or “Popular”). All accompanying tables, financial statements and notes included elsewhere in this report should be considered an integral part of this analysis.
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. The Corporation’s mortgage origination business is conducted under the brand name Popular Mortgage, a division of BPPR. In the U.S. mainland, the Corporation provides retail, mortgage and commercial banking services through its New York-chartered banking subsidiary, Popular Bank (“PB”), which has branches located in New York, New Jersey and Florida. Note 34 to the Consolidated Financial Statements presents information about the Corporation’s business segments.
The Corporation has several investments which it accounts for under the equity method. As of March 31, 2019, the Corporation had a 16.13% interest in EVERTEC, Inc., whose operating subsidiaries provide transaction processing services throughout the Caribbean and Latin America, and services many of the Corporation’s systems infrastructure and transaction processing businesses. During the quarter ended March 31, 2019, the Corporation recorded $ 5.2 million in earnings from its investment in EVERTEC, which had a carrying amount of $65 million as of the end of the quarter. Also, 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 quarter ended March 31, 2019, the Corporation recorded $5.5 million in earnings from its investment in BHD León, which had a carrying amount of $149 million, as of the end of the quarter.
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SIGNIFICANT EVENTS
Accelerated share repurchase transaction
Increase in quarterly common stock dividend
As part of its capital plan for 2019, on January 23, 2019, the Corporation announced an increase in its quarterly common stock dividend from $0.25 per share to $0.30 per share, payable commencing in the second quarter of 2019. On February 15, 2019, the Corporation’s Board of Directors approved the first quarterly cash dividend of $0.30 per share on its outstanding common stock, which was paid on April 1, 2019 to shareholders of record at the close of business on March 8, 2019.
OVERVIEW
Table 1 provides selected financial data and performance indicators for the quarters ended March 31, 2019 and 2018.
Table 1 - Financial highlights
Financial Condition Highlights
Earning assets
Borrowings
Stockholders’ equity
Operating Highlights
Operating expenses
Net income per common share - Basic
Net income per common share - Diluted
Dividends declared per common share - Basic
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Selected Statistical Information
Common Stock Data
End market price
Book value per common share at period end
Profitability Ratios
Return on assets
Return on common equity
Net interest spread
Net interest spread (taxable equivalent) -Non-GAAP
Net interest margin
Net interest margin (taxable equivalent) -Non-GAAP
Capitalization Ratios
Average equity to average assets
Common equity Tier 1 capital
Tier I capital
Total capital
Tier 1 leverage
Adjusted results of operations – Non-GAAP financial measure
Adjusted net income
The Corporation prepares its Consolidated Financial Statements using accounting principles generally accepted in the United States (“U.S. GAAP” or the “reported basis”). In addition to analyzing the Corporation’s results on a reported basis, management monitors “Adjusted net income” of the Corporation and excludes the impact of certain transactions on the results of its operations. Adjusted net income is a non-GAAPfinancial measure. Management believes that Adjusted net income provides meaningful information about the underlying performance of the Corporation’s ongoing operations. No adjustments to net income are reflected for the first quarter of 2019 and 2018.
Net interest income on a taxable equivalent basis
Net interest income, on a taxable equivalent basis, is presented with its different components in Table 2 for the quarter ended March 31, 2019 as compared with the same period in 2018, 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/or its agencies and municipalities 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 Puerto Rico tax law. Thereunder, the exempt interest can be deducted up to the amount of taxable income. Net interest income on a taxable equivalent basis is anon-GAAP financial measure. Management believes that this presentation provides meaningful information since it facilitates the comparison of revenues arising from taxable and tax exempt sources.
Non-GAAP financial measures used by the Corporation may not be comparable to similarly named Non-GAAP financial measures used by other companies.
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Financial highlights for the quarter ended March 31, 2019
For the quarter ended March 31, 2019, the Corporation recorded net income of $ 167.9 million, compared to net income of $ 91.3 million for the same quarter of the previous year. The results for the quarter reflect a higher net interest income by $77.9 million mainly due to higher income from investment securities due to higher volume of U.S. Treasury securities and higher income from auto loans impacted by the portfolio acquired as part of the Reliable Transaction, discussed in Note 4 to the Consolidated Financial Statements, partially offset by higher interest expense on deposits. The provision for loan losses decreased by $29.2 million mainly due to a specific reserve of $21.6 million recorded during the quarter ended March 31, 2018. Non-interest income was higher by $22.9 million mostly driven by the termination of the FDIC Shared-Loss Agreements during the second quarter of 2018, higher other service fees and higher earnings from investments under the equity method. Operating expenses were higher by $25.4 million mainly due to personnel costs reflecting our increase in headcount, and higher incentive related compensation.
Total assets at March 31, 2019 amounted to $48.7 billion, compared to $47.6 billion, at December 31, 2018. The increase of $1.1 billion was mainly due to higher balances on money market and investments in debt securities available-for-sale, and a higher loan portfolio balance.
Total deposits at March 31, 2019 increased by $1.2 billion when compared to deposits at December 31, 2018, mainly due to an increase in deposits from Puerto Rico public and private sectors.
Capital ratios continued to be strong. As of March 31, 2019, the Corporation’s common equity tier 1 capital ratio was 16.39%, while the total capital ratio was 19.00%. Refer to Table 7 for capital ratios.
Refer to the Operating Results Analysis and Financial Condition Analysis within this MD&A for additional discussion of significant quarterly variances and items impacting the financial performance of the Corporation.
As a financial services company, the Corporation’s earnings are significantly affected by general business and economic conditions in the markets which we serve. Lending and deposit activities and fee income generation are influenced by the level of business spending and investment, consumer income, spending and savings, capital market activities, competition, customer preferences, interest rate conditions and prevailing market rates on competing products.
The Corporation operates in a highly regulated environment and may be adversely affected by changes in federal and local laws and regulations. Also, competition with other financial institutions could adversely affect its profitability
The Corporation continuously monitors general business and economic conditions, industry-related indicators and trends, competition, interest rate volatility, credit quality indicators, loan and deposit demand, operational and systems efficiencies, revenue enhancements and changes in the regulation of financial services companies.
The description of the Corporation’s business contained in Item 1 of the Corporation’s 2018 Form 10-K, while not all inclusive, discusses additional information about the business of the Corporation and risk factors, many beyond the Corporation’s control that, in addition to the other information in this Form 10-Q, readers should consider. Also, refer to Part II, Item 1A—Risk Factors, of this Form 10-Q for additional information.
The Corporation’s common stock is 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 to generally accepted accounting principles in the United States of America and general practices within the financial services industry. Various elements of the Corporation’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. 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.
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Management has discussed the development and selection of the critical accounting policies and estimates with the Corporation’s Audit Committee. The Corporation has identified as critical accounting policies those related to: (i) Fair Value Measurement of Financial Instruments; (ii) Loans and Allowance for Loan Losses; (iii) Loans Acquired with Deteriorated Credit Quality Accounted for Under ASC 310-30; (iv) Income Taxes; (v) Goodwill; and (vi) Pension and Postretirement Benefit Obligations. For a summary of these critical accounting policies and estimates, refer to that particular section in the MD&A included in Popular, Inc.’s 2018 Form 10-K. Also, refer to Note 2 to the Consolidated Financial Statements included in the 2018 Form 10-K for a summary of the Corporation’s significant accounting policies, including those related to business combinations, and to Note 3 to the Consolidated Financial Statements included in this Form 10Q for information on recently adopted accounting standard updates.
OPERATING RESULTS ANALYSIS
NET INTEREST INCOME
Net interest income was $471.0 million for the first quarter of 2019, an increase of $77.9 million when compared to $393.1 million for the same quarter of 2018. Taxable equivalent net interest income was $510.5 million for the first quarter of 2019, an increase of $85.4 million when compared to $425.1 million for the same quarter of 2018. The increase in $7.5 million in the taxable equivalent adjustment is directly related to a higher volume oftax-exempt investments in P.R. Net interest margin for the first quarter of 2019 was 4.20%, an increase of 31 basis points when compared to 3.89% for the same quarter of the previous year. Net interest margin, on a taxable equivalent basis, for the first quarter of 2019 was 4.56%, an increase of 34 basis points when compared to 4.21% for the same quarter of 2018.The increase in net interest margin is mostly related to the deployment of excess liquidity to acquire the Reliable portfolio and purchase of approximately $3.0 billion in investment securities, thereby improving the after-tax asset yield.
As a result of the May 2018 termination of the loss share agreements (the “FDIC Shared-Loss Agreements”) entered into with the Federal Deposit Insurance Corporation (the “FDIC”) in connection with the acquisition of certain assets and assumption of certain liabilities of Westernbank, the presentation of net interest income has been adjusted to present the balances and income from the loans acquired from Westernbank (the “WB Loans”) in their respective loan segments. Previously, the Corporation presented the income associated with the WB Loans aggregated into a single line in its analysis of average balances and yields. The presentation for prior periods has been adjusted accordingly, for comparative purposes.
The detailed variances of the increase in net interest income are described below:
Positive variances:
Higher interest income from money market investments due to an increase in market interest rates experienced during 2018. The average rate of such portfolios increased 88 basis points when compared to the same period in 2018, partially offset by lower volume by $1.0 billion;
Higher interest income from investment securities mainly due to higher volumes from U.S. Treasuries related to recent purchases to deploy liquidity and benefit from the Puerto Rico tax exemption of these assets;
Higher interest income from loans:
Commercial loans, driven by higher volume of loans mainly in the U.S. portfolio and the commercial loans acquired in the Reliable Transaction. Also improved yields related to the effect on the variable rate portfolio of the above-mentioned rise in interest rates and the origination in a higher interest rate environment;
Lease portfolio due to improved origination activity at Popular Auto;
Consumer loans driven by improved yield on the credit card portfolio and originations through the Eloan channel; and
Auto loans mainly due to the Reliable Transaction, which contributed $46.3 million in auto loans interest income, including the amortization of the fair value discount of $11.7 million, and improved activity in auto loan financing in Puerto Rico.
Negative variances:
Higher interest expense on deposits mainly due to higher cost of interest-bearing deposits in U.S. by 51 basis points and 32 basis points in P.R. The increase was driven by higher volume through the direct digital channel at Popular Bank and higher volume and cost of P.R. government deposits.
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Interest income for the quarter ended March 31, 2019, including the amortization of deferred loans fees, prepayment penalties, late fees and the amortization of premium/discounts, amounted to $16.3 million in income, including $12.2 million of fair value discount amortization related to the Reliable Transaction, compared with $3.4 million in amortization income for the same period in 2018.
Table 2 - Analysis of Levels & Yields on a Taxable Equivalent Basis for Continuing Operations (Non-GAAP)
Quarters ended March 31,
Total money market, investment and trading securities
Loans:
NOW and money
market [1]
Other medium and long-term debt
Total interest bearing liabilities
Net interest margin/ income on a taxable equivalent basis(Non-GAAP)
Taxable equivalent adjustment
Net interest margin/ income non-taxable equivalent basis (GAAP)
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.
Includes interest bearing demand deposits corresponding to certain government entities in Puerto Rico.
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Provision for Loan Losses
The following discussion with respect to the provision for loan losses includes the provision for loans previously classified as “covered” as a result of the FDIC Shared-Loss Agreements, which were terminated during the second quarter of 2018.
The Corporation’s provision for loan losses was $41.8 million for the quarter ended March 31, 2019, compared to $71.1 million for the quarter ended March 31, 2018, a decrease of $29.3 million, mostly related to the BPPR segment.
The provision for loan losses for the BPPR segment was $31.5 million for the quarter ended March 31, 2019, compared to $58.4 million for the quarter ended March 31, 2018, a decrease of $26.9 million, as the provision for the quarter ended March 31, 2018 included a $21.6 million impact related to a single commercial borrower.
The Popular U.S. segment continued to reflect strong growth and favorable credit quality metrics. The provision for loan losses for this segment amounted to $10.4 million for the quarter ended March 31, 2019, compared to $12.6 million for the same quarter in 2018.
Refer to the Credit Risk section of this MD&A for a detailed analysis of net charge-offs, non-performing assets, the allowance for loan losses and selected loan losses statistics.
Non-Interest Income
Non-interest income was $136.4 million for the first quarter of 2019, an increase of $22.9 million when compared with the same quarter of the previous year. As discussed in Note 10, on May 22, 2018, the Corporation terminated the FDIC Shared-Loss Agreements with the FDIC. Excluding the favorable variance on the FDIC loss share expense of $8.0 million, non-interest income increased by $14.9 million primarily driven by:
higher service charges on deposit accounts by $2.2 million due to higher fees on transactional cash management services;
higher other service fees by $3.7 million mainly due to retail auto loan servicing fee income;
higher unrealized net gains on equity securities by $2.1 million mainly on deferred compensation plans that have an offsetting expense in personnel costs and an impairment charge of $0.5 million recorded during 2018;
favorable variance in adjustments to indemnity reserves of $2.8 million related to loans previously sold with credit recourse at BPPR; and
higher other operating income by $5.7 million mainly due to higher aggregated net earnings from investments under the equity method by $2.2 million, $1.6 million in other income related to recoveries of previously charged-off loans from the portfolio acquired as part of the Reliable Transaction, and higher gains on sales of daily rental fleet units by $1.1 million.
These increases were partially offset by lower income from mortgage banking activities by $2.1 million due to higher realized losses on closed derivatives positions by $5.0 million, partially offset by higher gains on securitization transactions by $2.7 million.
Operating Expenses
Operating expenses for the quarter ended March 31, 2019 increased by $ 25.4 million when compared with the same quarter of 2018, driven primarily by:
higher personnel cost by $17.3 million, largely impacted by a higher headcount, reflecting higher salaries by $6.1 million, higher commission, incentives and other bonuses by $4.4 million and higher other personnel cost by $6.9 million, which includes higher stock-based compensation by $2.1 million and the impact of the profit sharing plan of $3.6 million;
higher equipment expense by $2.5 million due to higher technology initiatives, software and maintenance expenses;
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higher professional fees by $4.5 million primarily due to higher programming, processing and other technology services by $8.9 million, partially offset by lower legal, consulting and advisory fees;
higher business promotion expense by $2.7 million due to higher advertising cost and higher consumer reward program expense; and
higher other operating expenses by $2.7 million mainly due to higher pension plan costs by $3.5 million, higher credit and debit card processing, volume and interchange expenses by $3.6 million as a result of incentive received from exceeding volume targets during the first quarter of 2018, partially offset by lower operational losses by $5.0 million.
These increases were partially offset by lower other real estate owned expense by $3.5 million due to higher gains by $2.3 million mainly on sale on mortgage properties at BPPR and lower write-downs on valuation of mortgage properties by $1.2 million.
Table 3 - Operating Expenses
Personnel costs:
Salaries
Commissions, incentives and other bonuses
Pension, postretirement and medical insurance
Other personnel costs, including payroll taxes
Total personnel costs
Professional fees:
Collections, appraisals and other credit related fees
Programming, processing and other technology services
Legal fees, excluding collections
Other professional fees
Total professional fees
Credit and debit card processing, volume and interchange expenses
Operational losses
All other
Total other operating expenses
INCOME TAXES
Income tax expense amounted to $50.2 million for the quarter ended March 31, 2019, compared with income tax expense of $22.2 million for same quarter of the previous year. The increase on income tax expense is mainly attributed to higher taxable income, partially offset by the reduction in tax rate from 39% to 37.5%, effective on December 2018, and a higher tax benefit on net exempt interest income. The effective tax rate for the quarter ended March 31, 2019 was 23%.
At March 31, 2019, the Corporation had a deferred tax asset (“DTA”) amounting to $1.0 billion, net of a valuation allowance of $0.5 billion. Refer to Note 32 to the Consolidated Financial Statements for a reconciliation of the statutory income tax rate to the effective tax rate and additional information on DTA balances.
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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 34 to the Consolidated Financial Statements.
As discussed in Note 34, effective on January 1, 2019, the Corporation’s management changed the measurement basis for its reportable segments. Historically, for management reporting purposes, the Corporation had reversed the effect of the intercompany billings from itself, as holding company, to its subsidiaries for certain services or expenses incurred on their behalf. In addition, the Corporation used to reflect an income tax expense allocation for several of its subsidiaries which are Limited Liability Companies (“LLCs”) and had made an election to be treated as pass through entities for income tax purposes. The Corporation’s management has determined to discontinue making these adjustments, effective on January 1, 2019, for purposes of its management and reportable segment reporting. The Corporation reflected these changes in the measurement of the reportable segments’ results prospectively beginning on January 1, 2019.
The Corporate group reported a net loss of $1.3 million for the quarter ended March 31, 2019, compared with a net loss of $18.5 million for the same quarter of the previous year. The change was mostly driven by lower operating expenses by $19.7 million due to the Corporation’s corporate expense allocations to its subsidiaries as a result of the change in the segment reporting measurement discussed above. The Corporate group also recorded lower interest expense by $4.6 million due to the repayment in 2018 of the $450 million, 7% Senior Notes due on 2019, net of the issuance of $300 million, 6.125% Senior Notes due on 2023, during the third quarter of 2018.
Highlights on the earnings results for the reportable segments are discussed below:
The Banco Popular de Puerto Rico reportable segment’s net income amounted to $156.6 million for the quarter ended March 31, 2019, compared with net income of $91.4 million for the same quarter of the previous year. The principal factors that contributed to the variance in the financial results include the following:
Higher net interest income by $75.1 million due to:
higher income from commercial loans by $11.6 million, mainly related to the portfolio acquired from Reliable and variable rate loans due to the increase in interest rates;
higher income from the lease portfolio by $2.1 million due to improved origination activity at Popular Auto;
higher income from auto loans by $48.6 million mainly related to the portfolio acquired from Reliable, including the amortization of the fair value discount of $11.7 million, and the sustained growth of the auto loan portfolio in P.R.;
higher income from money market investments by $6.4 million due to an increase in volume of funds available to invest related to higher average balance of deposits, and the increases in interest rates;
higher income from consumer loans by $4.9 million mainly related to higher yields on the credit cards and personal loans portfolio; and
higher interest income from investments in debt securities by $24.6 million driven by higher volume and yields of U.S. Treasuries;
Partially offset by higher cost of deposits by $24.9 million driven by the increase in average balances and higher cost of deposits.
The net interest margin for the quarter ended March 31, 2019 was 4.49% compared to 4.14% for the same period in the previous year. The increase in net interest margin is driven by earning assets mix due to the deployment of excess liquidity to acquire the Reliable portfolio and the purchase of investment securities.
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The total provision expense for the first quarter of 2019 was $31.3 million, compared to $58.5 million for the same quarter of the previous year. The provision for the quarter ended March 31, 2018 included a $21.6 million impact related to a single commercial borrower.
Non-interest income was higher by $24.1 million. Excluding the favorable variance on the FDIC loss share expense of $8.0 million, due to the termination of the FDIC Shared-Loss Agreements discussed in Note 10, non-interest income increased by $16.1 million mainly due to:
higher other service fees by $3.4 million mainly due to retail auto loan servicing fees received; and
higher other income by $9.2 million due mainly to higher aggregated net earnings from investments under the equity method by $5.8 million, $1.6 million in recoveries of previously charged-off loans from the portfolio acquired as part of the Reliable Transaction, and higher gains on sales of daily rental fleet units; partially offset by:
lower income from mortgage banking activities by $2.1 million, due to higher realized losses on closed derivatives positions by $5.0 million, partially offset by higher gains on securitization transactions by $2.7 million.
Higher operating expenses by $41.5 million due to:
higher personnel costs by $11.5 million, due to a higher headcount, higher incentives and the impact of the profit sharing plan;
higher professional services expenses by $5.4 million, due to programming, processing and other technology expenses, partially offset by lower legal, consulting and advisory fees;
higher business promotion expense by $3.0 million due to higher advertising cost and higher consumer reward program expense; and
allocation of Corporate expenses by $23.4 million, due to the change in the segment reporting structure discussed above;
Partially offset by lower OREO expenses of $2.8 million due to higher gains on sales and lower write-downs on the valuation of mortgage properties.
Higher income tax expense by $19.5 million mainly related to higher taxable income, partially offset by the reduction in tax rate from 39% to 37.5%, effective in December 2018 and higher tax benefit on net exempt interest income.
For the quarter ended March 31, 2019, the reportable segment of Popular U.S. reported a net income of $12.2 million, compared with a net income of $18.1 million for the same quarter of the previous year. The factors that contributed to the variance in the financial results included the following:
Lower net interest income by $2.2 million due to higher interest expense on deposits, mainly from the digital deposit channel, partially offset by higher interest income from commercial loans due to continued loan growth. For the first quarter of 2019, the net interest margin for the Popular U.S. segment was 3.40%, compared to 3.61% for the same period of the previous year.
Lower provision for loan losses by $2.2 million;
Higher operating expenses by $3.4 million mainly due to higher personnel costs by $2.3 million due to higher salaries and incentives, including the impact of the profit sharing plan and higher other operating expenses by $2.0 million which includes corporate expense allocations; and
Income tax unfavorable variance of $4.1 million due mainly to additional positive adjustments related to the Tax Cuts and Jobs Act recorded in the first quarter of 2018.
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FINANCIAL CONDITION ANALYSIS
The Corporation’s total assets were $48.7 billion at March 31, 2019, compared to $47.6 billion at December 31, 2018. Refer to the Consolidated Statements of Financial Condition included in this report for additional information.
Money market investments, trading and investment securities
Money market investments totaled $4.8 billion at March 31, 2019, compared to $4.2 billion at December 31, 2018. The increase was mainly due to an increase in public sector deposits at BPPR, partially offset by purchases of mortgage-backed securities.
Debt securities available-for-sale increased by $0.2 billion to $13.5 billion at March 31, 2019. The increase was mainly due to additional liquidity deployed for the purchases of mortgage-backed securities at BPPR and PB, partially offset by maturities of U.S. Treasury securities at BPPR. Refer to Note 6 to the Consolidated Financial Statements for additional information with respect to the Corporation’s debt securities available-for-sale.
Refer to Table 4 for a breakdown of the Corporation’s loan portfolio, the principal category of earning assets. Also, refer to Note 8 for detailed information about the Corporation’s loan portfolio composition and loan purchases and sales.
Loans held-in-portfolio increased by $0.1 billion to $ 26.6 billion at March 31, 2019 mainly driven by growth of auto loans and leases at the BPPR segment.
Table 4 - Loans Ending Balances
Legacy[1]
Lease financing
Loansheld-for-sale:
Total loansheld-for-sale
Total loans
The legacy portfolio is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years at the Popular U.S. segment.
Other assets increased by $0.1 billion mainly due to the recognition of right-of-use assets as a result of the implementation of the new lease accounting standard, as discussed in Note 3, which required balance sheet recognition of operating lease contracts. Refer to Note 14 for a breakdown of the principal categories that comprise the caption of “Other Assets” in the Consolidated Statements of Financial Condition at March 31, 2019 and December 31, 2018.
The Corporation’s total liabilities were $43.2 billion at March 31, 2019, compared to $42.2 billion at December 31, 2018.
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Deposits and Borrowings
The composition of the Corporation’s financing sources to total assets at March 31, 2019 and December 31, 2018 is included in Table 5.
Table 5 - Financing to Total Assets
Non-interest bearing deposits
Interest-bearing core deposits
Other interest-bearing deposits
Repurchase agreements
The Corporation’s deposits totaled $40.9 billion at March 31, 2019, compared to $39.7 billion at December 31, 2018. The deposits increase of $1.2 billion was mostly associated to an increase of $0.8 billion and $0.1 billion, respectively, in Puerto Rico public sector deposits and private savings at BPPR and $0.2 billion in non-brokered time deposits at PB primarily from its digital deposit channel. Refer to Table 6 for a breakdown of the Corporation’s deposits at March 31, 2019 and December 31, 2018.
Table 6 - Deposits Ending Balances
Demand deposits [1]
Savings, NOW and money market deposits(non-brokered)
Savings, NOW and money market deposits (brokered)
Time deposits (non-brokered)
Time deposits (brokered CDs)
Includes interest and non-interest bearing demand deposits.
The Corporation’s borrowings amounted to $1.4 billion at March 31, 2019, a decrease of $0.2 billion from December 31, 2018, principally in assets sold under agreements to repurchase and Federal Home Loan Bank advances mainly at PB. 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.
The Corporation’s other liabilities amounted to $1.0 billion at March 31, 2019, an increase of $0.1 billion when compared to December 31, 2018, mainly due to the recognition of operating lease liabilities, as discussed above.
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Stockholders’ Equity
Stockholders’ equity totaled $5.4 billion at March 31, 2019, an increase of $5.0 million, principally due to the net income of $167.9 million for the quarter ended March 31, 2019 and lower unrealized losses on debt securities available-for-sale by $101.4 million, offset by other adjustments including the impact of the $250 million accelerated share repurchase transaction and declared dividends on common and preferred stock. Refer to the Consolidated Statements of Financial Condition, Comprehensive Income and of Changes in Stockholders’ Equity for information on the composition of stockholders’ equity.
REGULATORY CAPITAL
The Corporation, BPPR and PB are subject to regulatory capital requirements established by the Federal Reserve Board. The current risk-based capital standards applicable to the Corporation, BPPR and PB (“Basel III capital rules”), which have been effective since January 1, 2015, are based on the final capital framework for strengthening international capital standards, known as Basel III, of the Basel Committee on Banking Supervision. As of March 31, 2019, the Corporation’s, BPPR’s and PB’s capital ratios continue to exceed the minimum requirements for being “well-capitalized” under the Basel III capital rules.
The risk-based capital ratios presented in Table 7, which include common equity tier 1, Tier 1 capital, total capital and leverage capital as of March 31, 2019 and December 31, 2018, are calculated based on the Basel III capital rules related to the measurement of capital, risk-weighted assets and average assets.
Common equity tier 1 capital:
Common stockholders equity - GAAP basis
AOCI related adjustments due to opt-out election
Goodwill, net of associated deferred tax liability (DTL)
Intangible assets, net of associated DTLs
Deferred tax assets and other deductions
Common equity tier 1 capital
Additional tier 1 capital:
Other additional tier 1 capital deductions
Additional tier 1 capital
Tier 1 capital
Tier 2 capital:
Trust preferred securities subject to phase in as tier 2
Other inclusions (deductions), net
Tier 2 capital
Total risk-based capital
Minimum total capital requirement to be well capitalized
Excess total capital over minimum well capitalized
Total risk-weighted assets
Total assets for leverage ratio
Risk-based capital ratios:
The Basel III capital rules provide that a depository institution will be deemed to be well capitalized if it maintains a leverage ratio of at least 5%, a common equity Tier 1 ratio of at least 6.5%, a Tier 1 capital ratio of at least 8% and a total risk-based ratio of at least 10%. Management has determined that as of March 31, 2019, the Corporation, BPPR and PB continue to exceed the minimum requirements for being “well-capitalized” under the Basel III capital rules.
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The decrease in the common equity Tier I capital ratio, Tier I capital ratio, total capital ratio, and leverage ratio as of March 31, 2019 as compared to December 31, 2018 was mainly attributed to higher risk weighted assets driven by the growth in auto loans and leases, the recognition of right-of-use assets as a result of the implementation of the new lease accounting standard, and higher available-for-sale debt securities. Also contributing to the decrease in capital ratios is the accelerated share repurchase transaction of $250 million, partially offset by the three months period earnings.
Non-GAAP financial measures
The tangible common equity ratio, tangible assets 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 GAAP. Moreover, the manner in which the Corporation calculates its tangible common equity, tangible assets and any other related measures may differ from that of other companies reporting measures with similar names.
Table 8 provides a reconciliation of total stockholders’ equity to tangible common equity and total assets to tangible assets as of March 31, 2019, and December 31, 2018.
(In thousands, except share or per share information)
Less: Preferred stock
Less: Goodwill
Less: Other intangibles
Total tangible common equity
Total tangible assets
Tangible common equity to tangible assets
Common shares outstanding at end of period
Tangible book value per common share
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-balancesheet 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. Other types of off-balance sheet arrangements that the Corporation enters in the ordinary course of business include derivatives and provision of guarantees, indemnifications, and representation and warranties. Refer to Note 20 for a detailed discussion related to the Corporation’s obligations under credit recourse and representation and warranties arrangements.
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Contractual Obligations and Commercial Commitments
The Corporation has various financial obligations, including contractual obligations and commercial commitments, which require future cash payments on debt agreements. Also, in the normal course of business, the Corporation enters into contractual arrangements whereby it commits to future purchases of products or services from third parties. Obligations that are legally binding agreements, whereby the Corporation agrees to purchase products or services with a specific minimum quantity defined at a fixed, minimum or variable price over a specified period of time, are defined as purchase obligations.
Purchase obligations include major legal and binding contractual obligations outstanding at March 31, 2019, primarily for services, equipment and real estate construction projects. Services include software licensing and maintenance, facilities maintenance, supplies purchasing, and other goods or services used in the operation of the business. Generally, these contracts are renewable or cancelable at least annually, although in some cases the Corporation has committed to contracts that may extend for several years to secure favorable pricing concessions. Purchase obligations amounted to $340 million at March 31, 2019 of which approximately 56% mature in 2019, 21% in 2020, 12% in 2021 and 11% thereafter.
The Corporation also enters into derivative contracts under which it is required either to receive or pay cash, depending on changes in interest rates. These contracts are carried at fair value on the Consolidated Statement of Financial Condition with the fair value representing the net present value of the expected future cash receipts and payments based on market rates of interest as of the statement of condition date. The fair value of the contract changes daily as interest rates change. The Corporation may also be required to post additional collateral on margin calls on the derivatives and repurchase transactions.
Refer to Note 17 for a breakdown of long-term borrowings by maturity.
The Corporation utilizes lending-related financial instruments in the normal course of business to accommodate the financial needs of its customers. The Corporation’s exposure to credit losses in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit and commercial letters of credit is represented by the contractual notional amount of these instruments. The Corporation uses credit procedures and policies in making those commitments and conditional obligations as it does in extending loans to customers. Since many of the commitments may expire without being drawn upon, the total contractual amounts are not representative of the Corporation’s actual future credit exposure or liquidity requirements for these commitments.
Table 9 presents the contractual amounts related to the Corporation’s off-balance sheet lending and other activities at March 31, 2019.
Commitments to extend credit
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 securities in the debt securities portfolio classified as available-for-sale. Refer to Notes 6 and 7 for further information on the debt securities available-for-sale and held-to-maturity portfolios. Debt securities classified as available-for-sale amounted to $13.5 billion as of March 31, 2019. Other assets subject to market risk include loansheld-for-sale, which amounted to $44 million, mortgage servicing rights (“MSRs”) which amounted to $168 million and securities classified as “trading”, which amounted to $39 million, as of March 31, 2019.
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Management believes that market risk is currently not a material source of risk at the Corporation.
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, parallel and non-parallel rate shocks. Management also performs analyses to isolate and measure basis and prepayment risk exposures.
The asset and liability management group performs validation procedures on various assumptions used as part of the simulation analyses as well as validations of results on a monthly basis. In addition, the model and processes used to assess IRR are subject to independent validations according to the guidelines established in the Model Governance and Validation policy.
The Corporation processes NII simulations under interest rate scenarios in which the yield curve is assumed to rise and decline by the same amount (parallel shifts). The rate scenarios considered in these market risk simulations reflect parallel changes of -200, +200 and +400 basis points during the succeeding twelve-month period. Simulation analyses are based on many assumptions, including relative levels of market interest rates across all yield curve points and indexes, interest rate spreads, loan prepayments and deposit elasticity. Thus, they should not be relied upon as indicative of actual results. Further, the estimates do not contemplate actions that management could take to respond to changes in interest rates. By their nature, these forward-looking computations are only estimates and may be different from what may actually occur in the future. The following table presents the results of the simulations at March 31, 2019 and December 31, 2018, assuming a static balance sheet and parallel changes over flat spot rates over a one-yeartime horizon:
Change in interest rate
+400 basis points
+200 basis points
-200 basis points
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At March 31, 2019, the simulations showed that the Corporation maintains an asset-sensitive position. This is primarily due to (i) a high level of money market investments that are highly sensitive to changes in interest rates, (ii) approximately 29% of the Corporation’s loan portfolio was comprised of variable loans, and (iii) low elasticity of the Corporation’s core deposit base.
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.
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 March 31, 2019, the Corporation held trading securities with a fair value of $39 million, representing approximately 0.1% of the Corporation’s total assets, compared with $38 million and 0.1%, respectively, at December 31, 2018. As shown in Table 11, the trading portfolio consists principally of mortgage-backed securities which at March 31, 2019 were investment grade securities. As of March 31, 2019, the trading portfolio also included $7 million in U.S. Treasury securities and $0.1 million in Puerto Rico government obligations ($6 million and $0.1 million as of December 31, 2018, respectively). Trading instruments are recognized at fair value, with changes resulting from fluctuations in market prices, interest rates or exchange rates reported in current period earnings. The Corporation recognized a net trading account gain of $260 thousand for the quarter ended March 31, 2019 and a net trading account loss of $198 thousand for the quarter ended March 31, 2018.
Puerto Rico government obligations
Interest-only strips
[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 March 2019. 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.
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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.
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, mortgage servicing rights and contingent consideration. Occasionally, the Corporation may be required to record at fair value other assets on a nonrecurring basis, such as loans held-for-sale, impaired 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.
Refer to Note 24 to the Consolidated Financial Statements for information on the Corporation’s fair value measurement required by the applicable accounting standard.
A description of the Corporation’s valuation methodologies used for the assets and liabilities measured at fair value is included in Note 29 to the Consolidated Financial Statements in the 2018 Form 10-K. Also, Refer to the Critical Accounting Policies / Estimates in the 2018 Form 10-K for additional information on the accounting guidance and the Corporation’s policies or procedures related to fair value measurements.
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 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 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, its credit rating is downgraded, it experiences a sudden and unexpected substantial cash outflow, 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-bankingsubsidiaries. It is also managed at the level of the 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 84% of the Corporation’s total assets at March 31, 2019 and 83% at December 31, 2018. The ratio of total ending loans to deposits was 65% at March 31, 2019, compared to 67% at December 31, 2018. In addition to traditional deposits, the Corporation maintains borrowing arrangements, which amounted to approximately $1.4 billion at March 31, 2019 (December 31, 2018 - $1.5 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.
The following sections provide further information on the Corporation’s major funding activities and needs, as well as the risks involved in these activities. Note 35 to the Consolidated Financial Statements provides consolidating statements of condition, of operations and of cash flows which separately presents the Corporation’s bank holding companies and its subsidiaries as part of the “All other subsidiaries and eliminations” column.
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Banking Subsidiaries
Primary sources of funding for the Corporation’s banking subsidiaries (BPPR and PB or “the banking subsidiaries”) include retail and commercial 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 Board (the “FRB”), and has a considerable amount of collateral pledged that can be used to quickly raise funds under these facilities.
Refer to Note 17 to the Consolidated Financial Statements, for additional information of the Corporation’s borrowing facilities available through its banking subsidiaries.
The principal uses of funds for the banking subsidiaries include loan originations, investment portfolio purchases, loan purchases and repurchases, repayment of outstanding obligations (including deposits), advances on certain serviced portfolios, and operational expenses. Also, the banking subsidiaries assume liquidity risk related to collateral posting requirements for certain activities mainly in connection with contractual commitments, recourse provisions, servicing advances, derivatives, credit card licensing agreements and support to several mutual funds administered by BPPR.
The banking subsidiaries maintain sufficient funding capacity to address large increases in funding requirements such as deposit outflows. The Corporation has established liquidity guidelines that require the banking subsidiaries to have sufficient liquidity to cover all short-term borrowings and a portion of deposits.
The Corporation’s ability to compete successfully in the marketplace for deposits, excluding brokered deposits, depends on various factors, including pricing, service, convenience and financial stability as reflected by operating results, credit ratings (by nationally recognized credit rating agencies), and importantly, FDIC deposit insurance. Although a downgrade in the credit ratings of the Corporation’s banking subsidiaries may impact their ability to raise retail and commercial deposits or the rate that it is required to pay on such deposits, management does not believe that the impact should be material. Deposits at all of the Corporation’s banking subsidiaries are federally insured (subject to FDIC limits) and this is expected to mitigate the potential effect of a downgrade in the credit ratings.
Deposits are a key source of funding as they tend to be less volatile than institutional borrowings and their cost is less sensitive to changes in market rates. Refer to Table 6 for a breakdown of deposits by major types. Core deposits are generated from a large base of consumer, corporate and institutional customers. Core deposits include all non-interestbearing deposits, savings deposits and certificates of deposit under $100,000, excluding brokered deposits with denominations under $100,000. Core deposits have historically provided the Corporation with a sizable source of relatively stable and low-cost funds. Core deposits totaled $ 35.9 billion, or 88% of total deposits, at March 31, 2019, compared with $34.9 billion, or 88% of total deposits, at December 31, 2018. Core deposits financed 79% of the Corporation’s earning assets at March 31, 2019, compared with 79% at December 31, 2018.
The distribution by maturity of certificates of deposits with denominations of $100,000 and over at March 31, 2019 is presented in the table that follows:
3 months or less
3 to 6 months
6 to 12 months
Over 12 months
The Corporation had $ 0.5 billion in brokered deposits at March 31, 2019 and December 31, 2018, which financed approximately 1%, of its total assets. 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.
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At March 31, 2019, 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 its banking subsidiaries are unable to maintain access to funding or if adequate financing is not available to accommodate future financing needs at acceptable interest rates. The banking subsidiaries also are required to deposit cash or qualifying securities to meet margin requirements. To the extent that the value of securities previously pledged as collateral declines because of market changes, the Corporation will be required to deposit additional cash or securities to meet its margin requirements, thereby adversely affecting its liquidity. Finally, if management is required to rely more heavily on more expensive funding sources to meet its future growth, revenues may not increase proportionately to cover costs. In this case, profitability would be adversely affected.
Bank Holding Companies
The principal sources of funding for the bank holding companies (the “BHC’s”), which are Popular, Inc. (holding company only) and PNA, include cash on hand, investment securities, dividends received from banking andnon-banking subsidiaries (subject to regulatory limits and authorizations) asset sales, credit facilities available from affiliate banking subsidiaries and proceeds from potential securities offerings.
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) and capitalizing its banking subsidiaries.
The BHC’s have in the past borrowed in the money markets and in the corporate debt market primarily to finance their non-banking subsidiaries, however, the cash needs of the Corporation’s non-banking subsidiaries other than to repay indebtedness and interest are now minimal. These sources of funding have become more costly due to the reductions in the Corporation’s credit ratings. The Corporation’s principal credit ratings are below “investment grade”, which affects the Corporation’s ability to raise funds in the capital markets. The Corporation has an automatic shelf registration statement filed and effective with the Securities and Exchange Commission, which permits the Corporation to issue an unspecified amount of debt or equity securities.
The outstanding balance of notes payable at the BHC’s amounted to $679 million at March 31, 2019 and December 31, 2018.
The contractual maturities of the BHC’s notes payable at March 31, 2019 are presented in Table 13.
Year
The BHCs liquidity position continues to be adequate with sufficient cash on hand, investments and other sources of liquidity which are expected to be enough to meet all BHCs obligations during the foreseeable future.
Non-bankingsubsidiaries
The principal sources of funding for the non-banking subsidiaries include internally generated cash flows from operations, loan sales, repurchase agreements, capital injection and borrowed funds from their direct parent companies or the holding companies. The principal uses of funds for thenon-banking subsidiaries include repayment of maturing debt, operational expenses and payment of dividends to the BHCs. The liquidity needs of the non-bankingsubsidiaries are minimal since most of them are funded internally from operating cash flows or from intercompany borrowings from their holding companies, BPPR or PB.
Dividends
During the quarter ended March 31, 2019, the Corporation declared quarterly dividends on its outstanding common stock of $0.30 per share, for a total of $29.0 million paid on April 1, 2019. The dividends for the Corporation’s Series A and Series B preferred stock amounted to $0.9 million. The BHC’s received dividends amounting to $200 million from BPPR, $2 million in dividends from its non-banking subsidiaries and $0.6 million in dividends from EVERTEC’s parent company.
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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 investment securities, sponsored U.S. agency securities, government sponsored mortgage-backed securities, and collateralized mortgage obligations that can be used to raise funds in the repo markets. The availability of the repurchase agreement would be subject to having sufficient unpledged collateral available at the time the transactions are to be consummated, in addition to overall liquidity and risk appetite of the various counterparties. The Corporation’s unpledged debt securities, amounted to $3.4 billion at March 31, 2019 and $4.3 billion at December 31, 2018. A substantial portion of these debt securities could be used to raise financing quickly 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.
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. The Puerto Rico economy continues to face various challenges, including significant pressures in some sectors of the residential real estate market. Refer to the Geographic and Government Risk section of this MD&A for some highlights on the current status of the Puerto Rico economy and the ongoing fiscal crisis.
Factors that the Corporation does not control, such as the economic outlook and credit ratings of its principal markets and regulatory changes, could also affect its ability to obtain funding. In order to prepare for the possibility of such scenario, management has adopted contingency plans for raising financing under stress scenarios when important sources of funds that are usually fully available are temporarily unavailable. These plans call for using alternate funding mechanisms, such as the pledging of certain asset classes and accessing secured credit lines and loan facilities put in place with the FHLB and the FRB.
The credit ratings of Popular’s debt obligations are a relevant factor for liquidity because they impact the Corporation’s ability to borrow in the capital markets, its cost and access to funding sources. Credit ratings are based on the financial strength, credit quality and concentrations in the loan portfolio, the level and volatility of earnings, capital adequacy, the quality of management, geographic concentration in Puerto Rico, the liquidity of the balance sheet, the availability of a significant base of core retail and commercial deposits, and the Corporation’s ability to access a broad array of wholesale funding sources, among other factors.
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 $10 million in deposits at March 31, 2019 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 20 to the Consolidated Financial Statements, the Corporation services residential mortgage loans subject to credit recourse provisions. Certain contractual agreements require the Corporation to post collateral to secure such recourse obligations if the institution’s required credit ratings are not maintained. Collateral pledged by the Corporation to secure recourse obligations amounted to approximately $60 million at March 31, 2019. 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.
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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 34 to the Consolidated Financial Statements.
Commonwealth of Puerto Rico
A significant portion of our financial activities and credit exposure is concentrated in the Commonwealth of Puerto Rico (the “Commonwealth” or “Puerto Rico”), which has endured a decade-long recession and continues to face severe economic and fiscal challenges.
Economic Performance
The Commonwealth’s economy entered a recession in the fourth quarter of fiscal year 2006, and the Commonwealth’s gross national product (“GNP”) has contracted (in real terms) every fiscal year between 2007 and 2018, with the exception of fiscal year 2012. Pursuant to the latest Puerto Rico Planning Board (the “Planning Board”) estimates, published on May 3, 2019, the Commonwealth’s real GNP for fiscal years 2017 and 2018 decreased by 3% and 4.7%, respectively. The Planning Board projects that real GNP will increase approximately 2% and 3.6% in fiscal years 2019 and 2020, respectively, in part due to the influx of federal funds and private insurance payments to repair damage caused by Hurricanes Irma and María. For information regarding the economic projections of the 2019 Commonwealth Fiscal Plan, see Fiscal Plans, Commonwealth Fiscal Plan, below.
Fiscal Crisis
The Commonwealth remains in the midst of a profound fiscal crisis affecting the central government and many of its instrumentalities, public corporations and municipalities. This fiscal crisis has been primarily the result of economic contraction, persistent and significant budget deficits, a high debt burden, unfunded legacy obligations, and lack of access to the capital markets, among other factors. As a result of the crisis, the Commonwealth and certain of its instrumentalities have been unable to make debt service payments on their outstanding bonds and notes since 2016. The escalating fiscal and economic crisis and the imminent widespread defaults prompted the U.S. Congress to enact the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”) in June 2016, which, as further discussed below, established two mechanisms for the restructuring of the obligations of the Commonwealth, its public corporations, instrumentalities and municipalities. The Commonwealth and several of its instrumentalities are currently in the process of restructuring their debts through such mechanisms.
PROMESA
PROMESA created a seven-member federally-appointed oversight board (the “Oversight Board”) with ample powers over the fiscal and economic affairs of the Commonwealth, its public corporations, instrumentalities and municipalities. Pursuant to PROMESA, the Oversight Board will remain in place until market access is restored and balanced budgets, in accordance with modified accrual accounting, are produced for at least four consecutive years. In August 2016, President Obama appointed the seven voting members of the Oversight Board through the process established in PROMESA, which authorized the President to select the members from several lists required to be submitted by congressional leaders. On February 15, 2019, however, the First Circuit of the U.S. Court of Appeals (the “First Circuit”) declared such appointments unconstitutional on the grounds that they did not comply with the Appointments Clause of the U.S. Constitution, which requires that principal federal officers be appointed by the President, with the advice and consent of the U.S. Senate. The Oversight Board is seeking review of the First Circuit’s decision by the U.S. Supreme Court. The First Circuit’s decision provided that its mandate would not issue for 90 days so as to allow the President and the U.S. Senate to validate the defective appointments or reconstitute the Oversight Board in accordance with the Appointments Clause. The First Circuit extended such period for an additional 60 days, until July 15, 2019. On April 29, 2019, President Donald Trump announced that he intends to nominate the current Oversight Board members to serve their terms through the end of August. Such appointments require confirmation by the U.S. Senate.
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In October 2016, the Oversight Board designated the Commonwealth and all of its public corporations and instrumentalities as “covered entities” under PROMESA. The only Commonwealth government entities that were not subject to such initial designation were the Commonwealth’s municipalities. On May 9, 2019, however, the Oversight Board designated all of the Commonwealth’s municipalities as covered entities. It also announced that it will launch a pilot initiative requiring the development of fiscal plans and budgets for ten municipalities. Further, it requested the development of a fiscal plan for the Municipal Revenue Collection Center, the entity primarily responsible for the collection of property taxes on behalf of municipalities.
At the Oversight Board’s request, covered entities are required to submit fiscal plans and annual budgets to the Oversight Board for its review and approval. They are also required to seek Oversight Board approval to issue, guarantee or modify their debts and to enter into contracts with an aggregate value of $10 million or more. Finally, covered entities are potentially eligible to avail themselves of the restructuring processes provided by PROMESA. One of such restructuring processes, Title VI, is a largely out-of-court process through which a government entity and its financial creditors can agree on terms to restructure such entity’s debt. If a supermajority of creditors of a certain category agrees, that agreement can bind all other creditors in such category. The other one, Title III, draws on the federal bankruptcy code and provides a court-supervised process for a comprehensive restructuring led by the Oversight Board. Access to either of these procedures is dependent on compliance with certain requirements established in PROMESA, including the approval of the Oversight Board.
Fiscal Plans
Commonwealth Fiscal Plan. The Oversight Board has certified several versions of fiscal plans for the Commonwealth since 2017. The most recent fiscal plan for the Commonwealth certified by the Oversight Board is dated as of May 9, 2019 (the “2019 Commonwealth Fiscal Plan”).
The 2019 Commonwealth Fiscal Plan estimates a 4.7% contraction in real GNP in fiscal year 2018, after accounting for the impact of disaster relief funding and the measures and structural reforms contemplated by the plan. It also projects that disaster relief spending will have a short-term stimulative effect on the economy, which, combined with the estimated effects of the proposed fiscal measures and structural reforms, will result in real GNP growth of approximately 4% and 1.5% in fiscal years 2019 and 2020.The Commonwealth’s population is estimated to steadily decline at rates of approximately 1% to 2% annually through fiscal year 2024.
Before accounting for the impact of the measures and structural reforms contemplated therein, the 2019 Commonwealth Fiscal Plan projects a pre-contractual debt service surplus in fiscal years 2018 through 2020. This surplus is not projected to continue after fiscal year 2020, as federal disaster relief funding slows down. The 2019 Commonwealth Fiscal Plan projects that, without major Government action, the Commonwealth would suffer an annual primary deficit starting in fiscal year 2021. The Oversight Board estimates that the fiscal measures contemplated by the 2019 Commonwealth Fiscal Plan will drive approximately $13.6 billion in savings and extra revenue through fiscal year 2024. However, even after accounting for the impact of the fiscal measures and structural reforms and before contractual debt service, the projections reflect an annual deficit starting in fiscal year 2038. After contractual debt service, the surplus projected in fiscal years 2019 to 2024 drops significantly and annual deficits begin in fiscal year 2027. Based on such long-term projections, the 2019 Commonwealth Fiscal Plan concludes that the Commonwealth cannot afford to meet all of its contractual debt obligations, even with aggressive implementation of the structural reforms and measures contemplated by the plan.
The 2019 Commonwealth Fiscal Plan does not contemplate a restructuring of the debt of the Commonwealth’s municipalities. It does, however, contemplate the gradual reduction and the ultimate elimination of budgetary subsidies provided by the Commonwealth to municipalities, which constitute a material portion of the operating revenues of certain municipalities. Commonwealth appropriations to municipalities were reduced by $150 million in fiscal year 2018 and by an additional $45 million in 2019 (from approximately $370 million in fiscal year 2017 to approximately $220 million in fiscal year 2018 (exclusive of one-time hurricane related appropriations) and approximately $175 in fiscal year 2019). The 2019 Commonwealth Fiscal Plan provides for additional reductions in such appropriations every fiscal year, holding appropriations constant at approximately 45-50% of current levels starting in fiscal year 2022, before ultimately phasing out all subsidies in fiscal year 2024.
Other Fiscal Plans. Pursuant to PROMESA, the Oversight Board has also requested and certified fiscal plans for several public corporations and instrumentalities. Such plans conclude that such entities cannot afford to meet all of their contractual obligations as currently scheduled.
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The certified fiscal plan for the Puerto Rico Electric Power Authority (“PREPA”), Puerto Rico’s electric power utility, contemplates the transformation of Puerto Rico’s electric system through, among other things, the establishment of a public-private partnership with respect to PREPA’s transmission and distribution system, and calls for significant structural reforms at PREPA. The plan also contemplates changes to the treatment of the municipal contribution in lieu of taxes, which could result in increased electricity expenses for municipalities.
The certified fiscal plan for Government Development Bank for Puerto Rico (“GDB”) contemplated the wind-down of GDB and the distribution of the cash flows of GDB’s loan portfolio among its creditors (including its municipal depositors) through a debt restructuring proceeding under Title VI of PROMESA. Such restructuring was approved by the U.S. District Court for the District of Puerto Rico (the “U.S. District Court”) and subsequently consummated on November 29, 2018.
Pending Title III and Title VI Proceedings
On May 3, 2017, the Oversight Board, on behalf of the Commonwealth, filed a petition in the U.S. District Court to restructure the Commonwealth’s liabilities under Title III of PROMESA. The Oversight Board has subsequently filed analogous petitions with respect to the Puerto Rico Sales Tax Financing Corporation (“COFINA”), the Employees Retirement System of the Government of the Commonwealth of Puerto Rico, the Puerto Rico Highways and Transportation Authority and PREPA.
On October 19, 2018, the Oversight Board filed a plan of adjustment for COFINA (as subsequently amended, the “COFINA Plan of Adjustment”), as well as a motion to approve a settlement of certain disputes between the Commonwealth and COFINA regarding the ownership of a portion of the sales and use tax pledged to the payment of COFINA’s bonds (the “COFINA Settlement”). The COFINA Plan of Adjustment provided for the restructuring of COFINA’s bonds based on the COFINA Settlement, which contemplated that the Commonwealth would receive approximately 46.35% of the yearly revenues previously allocated to COFINA. The COFINA Settlement and the COFINA Plan of Adjustment were confirmed by the U.S. District Court on February 4, 2019 and the restructuring transaction contemplated thereby was consummated on February 12, 2019. As of the date of this report, the plans of adjustment for the other Title III debtors have not been filed.
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. The effects of the prolonged recession are reflected in limited loan demand, an increase in the rate of foreclosures and delinquencies on loans granted in Puerto Rico. While PROMESA provides a process to address the Commonwealth’s fiscal crisis, the length and complexity of the Title III proceedings for the Commonwealth and various of its instrumentalities, the adjustment measures required by the fiscal plans and the long-term impact of Hurricanes Irma and Maria present significant economic risks. In addition, the measures taken to address the fiscal crisis and those that will have to be taken in the near future will likely affect many of our individual customers and customers’ businesses, which could cause credit losses that adversely affect us and may negatively affect consumer confidence. This, in turn, could result in reductions in consumer spending that may also adversely impact our interest and non-interest revenues. If global or local economic conditions worsen or the Government of Puerto Rico and the Oversight Board are unable to adequately manage the Commonwealth’s fiscal and economic challenges, including by consummating an orderly restructuring of its debt obligations while continuing to provide essential services, these adverse effects could continue or worsen in ways that we are not able to predict.
At March 31, 2019 and December 31, 2018, the Corporation’s direct exposure to the Puerto Rico government and its instrumentalities and municipalities totaled to $455 million and $458 million, respectively, which amounts were fully outstanding on such dates. Further deterioration of the Commonwealth’s fiscal and economic situation could adversely affect the value of our Puerto Rico government obligations, resulting in losses to us. Of the amount outstanding, $413 million consists of loans and $42 million are securities ($413 million and $45 million, respectively, at December 31, 2018). Substantially all of the amount outstanding at March 31, 2019 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 March 31, 2019, 75% of the Corporation’s exposure to municipal loans and securities was concentrated in the municipalities of San Juan, Guaynabo, Carolina and Bayamón. As discussed above, the Oversight Board recently designated all Commonwealth’s municipalities as covered entities under PROMESA and requested the development of fiscal plans and budgets from ten municipalities as part of a new pilot initiative. The Corporation does not have direct exposure to any of the municipalities that are currently part of such pilot initiative. For a more detailed description of the Corporation’s direct exposure to the Puerto Rico government and its instrumentalities and municipalities, refer to Note 21 – Commitments and contingencies.
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In addition, at March 31, 2019, the Corporation had $365 million in loans insured or securities issued by Puerto Rico governmental entities, but for which the principal source of repayment is non-governmental ($368 million at December 31, 2018). These included $290 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, 2018 - $293 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 subsequent foreclosure of the underlying property. The Corporation also had, at March 31, 2019, $45 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 subsequent foreclosure of the underlying property (December 31, 2018 - $45 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 this 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. Although the Governor is currently authorized by local legislation to impose a temporary moratorium on the financial obligations of the HFA, he has not exercised this power as of the date hereof. In addition, at March 31, 2019, the Corporation had $7 million in securities issued by HFA that have been economically defeased and refunded and for which securities consisting of U.S. agencies and Treasury obligations have been escrowed (December 31, 2018 - $7 million), and $23 million of commercial real estate notes issued by government entities, but that are payable from rent paid by non-governmental parties (December 31, 2018 - $23 million).
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 fiscal measures to be implemented to address the Commonwealth’s fiscal crisis and the ongoing Title III proceedings under PROMESA described above. Similarly, BPPR’s mortgage and consumer loan portfolios include loans to current and former government employees which could also be negatively affected by fiscal measures such as employee layoffs or furloughs or reductions in pension benefits.
BPPR also has a significant amount of deposits from the Commonwealth, its instrumentalities, and municipalities. The amount of such deposits may fluctuate depending on the financial condition and liquidity of such entities, as well as on the ability of BPPR to maintain these customer relationships.
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 21 of the Consolidated Financial Statements.
United States Virgin Islands
The Corporation has operations in the United States Virgin Islands (the “USVI”) and has credit exposure to USVI government entities.
The USVI has been experiencing a number of fiscal and economic challenges that could adversely affect the ability of its public corporations and instrumentalities to service their outstanding debt obligations, and was also severely impacted by Hurricanes Irma and María. 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 March 31, 2019, the Corporation’s direct exposure to USVI instrumentalities and public corporations amounted to approximately $75 million, of which $67 million is outstanding (compared to $76 million and $68 million, respectively, at December 31, 2018). Of the amount outstanding, approximately (i) $42 million represents loans to the West Indian Company LTD, a government-owned company that owns and operates a cruise ship pier and shopping mall complex in St. Thomas, (ii) $14 million represents loans to the Virgin Islands Water and Power Authority, a public corporation of the USVI that operates USVI’s water production and electric generation plants, and (iii) $11 million represents loans to the Virgin Islands Public Finance Authority, a public corporation of the USVI created for the purpose of raising capital for public projects (compared to $42 million, $14 million and $12 million, respectively, at December 31, 2018).
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U.S. Government
As further detailed in Notes 6 and 7 to the Consolidated Financial Statements, a substantial portion of the Corporation’s investment securities represented exposure to the U.S. Government in the form of U.S. Government sponsored entities, as well as agency mortgage-backed and U.S. Treasury securities. In addition, $1.2 billion of residential mortgages and $72 million commercial loans were insured or guaranteed by the U.S. Government or its agencies at March 31, 2019 (compared to $1.2 billion and $74 million, respectively, at December 31, 2018).
Non-Performing Assets
Non-performing assets 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 14.
During the first quarter of 2019, the Puerto Rico segment continued to reflect positive credit quality trends. Mortgage delinquencies continued to improve, and net charge-offs were at 0.71% on that portfolio. The Corporation continues to be attentive to the performance of its portfolios and related credit metrics. The results of the Popular U.S. segment remained stable with strong growth and favorable credit quality metrics.
Total non-performing assets (“NPA”) decreased by $36 million when compared with December 31, 2018. Non-performing loans (‘NPLs”) in the Puerto Rico segment decreased by $23 million, mostly due to lower commercial NPLs of $17 million, primarily related to a $12.0 million charge-off on a previously reserved loan, combined with lower other real estate owned (“OREOs”) of $11 million, mainly driven by increased sales activity during the quarter.
At March 31, 2019, NPLs secured by real estate amounted to $455 million in the Puerto Rico operations and $39 million in the Popular U.S. operations. These figures were $459 million and $49 million, respectively, at December 31, 2018.
The Corporation’s commercial loan portfolio secured by real estate (“CRE”) amounted to $7.7 billion at March 31, 2019, of which $2.0 billion was secured with owner occupied properties, compared with $7.8 billion and $2.0 billion, respectively, at December 31, 2018. CRE NPLs amounted to $125 million at March 31, 2019, compared with $129 million at December 31, 2018. The CRE NPL ratios for the BPPR and Popular U.S. segments were 2.95% and 0.06%, respectively, at March 31, 2019, compared with 3.05% and 0.02%, respectively, at December 31, 2018.
In addition to the NPLs included in Table 14, at March 31, 2019, there were $183 million of performing loans, mostly commercial loans, which in management’s opinion, are currently subject to potential future classification as non-performingand are considered impaired (December 31, 2018—$153 million).
For the quarter ended March 31, 2019, total inflows of NPLs held-in-portfolio, excluding consumer loans, decreased by $69 million, or 53%, when compared to the inflows for the same quarter in 2018. Inflows of NPLs held-in-portfolio at the BPPR segment decreased by $70 million, or 55%, compared to the inflows for the first quarter of 2018, driven by lower mortgage inflows of $61 million, as the first quarter of 2018 was impacted by the end of the payment moratorium granted after the hurricanes. Inflows of NPLs held-in-portfolio at the Popular U.S. segment remained essentially flat, increasing slightly by $0.6 million, or 15%, from the same quarter in 2018.
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Total non-performing loansheld-in-portfolio
Other real estate owned (“OREO”)
Total non-performing assets[2]
Accruing loans past due 90 days or more[3] [4]
Ratios:
Non-performing assets to total assets
Non-performing loansheld-in-portfolio to loans held-in-portfolio
Allowance for loan losses to loansheld-in-portfolio
Allowance for loan losses to non-performing loans, excluding held-for-sale
= “held-in-portfolio”
There were no non-performing loans held-for-sale as of March 31, 2019 and December 31, 2018.
The carrying value of loans accounted for under ASC Sub-topic 310-30 that are contractually 90 days or more past due was $257 million at March 31, 2019 (December 31, 2018 - $216 million). This amount is excluded from the above table as the loans’ accretable yield interest recognition is independent from the underlying contractual loan delinquency status.
It is the Corporation’s policy to report delinquent residential mortgage loans insured by FHA or guaranteed by the VA as accruing loans past due 90 days or more as opposed to non-performing since the principal repayment is insured. These balances include $292 million of residential mortgage loans insured by FHA or guaranteed by the VA that are no longer accruing interest as of March 31, 2019 (December 31, 2018 - $283 million). These balances also include approximately $106 million of loans rebooked due to a repurchase option with GNMA liability (December 31, 2018 - $134 million). The Corporation has approximately $67 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, 2018 - $69 million).
Plus:
New non-performing loans
Advances on existing non-performing loans
Less:
Non-performing loans transferred to OREO
Non-performing loanscharged-off
Loans returned to accrual status / loan collections
Ending balance NPLs[1]
[1] Includes $2.6 million of NPLs related to the legacy portfolio.
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Includes $3.1 million of NPLs related to the legacy portfolio.
Table 17 - Activity in Non-Performing Commercial Loans Held-In-Portfolio
Beginning Balance - NPLs
Ending balance - NPLs
Table 18 - Activity in Non-Performing Commercial Loans Held-In-Portfolio
Table 19 - Activity in Non-Performing Construction Loans Held-In-Portfolio
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Table 20 - Activity in Non-Performing Construction Loans Held-In-Portfolio
Table 21 - Activity in Non-Performing Mortgage LoansHeld-in-Portfolio
Beginning balance - NPLs
Table 22 - Activity inNon-Performing Mortgage Loans Held-in-Portfolio (Excluding Covered Loans)
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 March 31, 2019 and December 31, 2018, are presented below.
Table 23 - Loan Delinquencies
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Allowance for Loan Losses
The allowance for loan and lease losses (“ALLL”), which represents management’s estimate of credit losses inherent in the loan portfolio, is maintained at a sufficient level to provide for estimated credit losses on individually evaluated loans as well as estimated credit losses inherent in the remainder of the loan portfolio. The Corporation’s management evaluates the adequacy of the ALLL on a quarterly basis. In this evaluation, management considers current economic conditions and the resulting impact on Popular Inc.’s loan portfolio, the composition of the portfolio by loan type and risk characteristics, historical loss experience, results of periodic credit reviews of individual loans, regulatory requirements and loan impairment measurement, among 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 the years of historical data when estimating 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, in historical loss experience and in the condition of the various markets in which collateral may be sold, may also affect the required level of the allowance for loan losses. Consequently, the business financial condition, liquidity, capital and results of operations could also be affected. Refer to the Critical Accounting Policies / Estimates section of this MD&A for a description of the Corporation’s allowance for loans losses methodology.
At March 31, 2019, the ALLL amounted to $551 million, a decrease of $19 million when compared with December 31, 2018. The BPPR ALLL decreased by $23 million, principally due to charge-offs from impaired loans, most significantly the previously mentioned $12.0 million commercial charge-off, coupled with improvements in loss trends in the mortgage portfolio. This decrease was offset in part by an increase of $4 million in the Popular U.S. segment, primarily related to the qualitative component of the commercial portfolio. The provision for loan losses for the first quarter of 2019 amounted to $41.8 million, compared to $71.1 million in the same period in the prior year. Refer to the Provision for Loan Losses section of this MD&A for additional information.
The following table presents annualized net charge-offs to average loans held-in-portfolio (“HIP”) by loan category for the quarters ended March 31, 2019 and December 31, 2018.
Table 24 - Annualized Net Charge-offs (Recoveries) to Average LoansHeld-in-Portfolio (Non-Covered Loans)
Total annualized net charge-offs to average loans held-in-portfolio
Net charge-offs for the quarter ended March 31, 2019 amounted to $60.5 million, increasing by $6.6 million when compared to the same quarter in 2018, driven by higher BPPR commercial net charge-offs of $12.7 million, offset in part by lower commercial net charge-offs of $4.0 million in the Popular U.S. segment.
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Table 25 - Composition of ALLL
Specific ALLL to impaired loans
Loansheld-in-portfolio, excluding impaired loans
General ALLL to loansheld-in-portfolio, excluding impaired loans
Total ALLL
ALLL to loansheld-in-portfolio
Table 26 - Composition of ALLL
Troubled debt restructurings
The Corporation’s TDR loans amounted to $1.5 billion at March 31, 2019, increasing by $14 million, or approximately 0.93%, from December 31, 2018, mainly driven by higher TDRs in the BPPR segment of $13 million. The increase in BPPR was mostly related to higher mortgage TDRs of $32 million, of which $27 million were government guaranteed loans, partially offset by lower commercial TDRs of $16 million. TDRs in accruing status increased by $26 million from December 31, 2018, while non-accruing TDRs decreased by $12 million.
Refer to Note 9 to the Consolidated Financial Statements for additional information on modifications considered troubled debt restructurings, including certain qualitative and quantitative data about troubled debt restructurings performed in the past twelve months.
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The following tables present the approximate amount and percentage of commercial impaired loans for which the Corporation relied on appraisals dated more than one year old for purposes of impairment requirements at March 31, 2019 and December 31, 2018.
Appraisals may be adjusted due to their age and the type, location and condition of the property, area or general market conditions to reflect the expected change in value between the effective date of the appraisal and the impairment measurement date. Refer to the Allowance for Loan Losses section of Note 2, “Summary of significant accounting policies” of the Corporation’s 2018 Form 10-K for more information.
Table 27 - Impaired Loans with Appraisals Dated 1 year or Older
[1] Based on outstanding balance of total impaired loans.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosures for the current period can be found in the Market Risk section of this report, which includes changes in market risk exposures from disclosures presented in the Corporation’s 2018 Form 10-K.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Corporation’s management, with the participation of the Corporation’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Corporation’s 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, the Corporation’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Corporation’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Corporation in the reports that it files or submits under the Exchange Act and such information is accumulated and communicated to management, as appropriate, to allow timely decisions regarding required disclosures.
Internal Control Over Financial Reporting
There have been no changes in the Corporation’s 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 March 31, 2019 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
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Part II - Other Information
Item 1. Legal Proceedings
For a discussion of Legal Proceedings, see Note 21, Commitments and Contingencies, to the Consolidated Financial Statements.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the risk factors discussed under “Part I - Item 1A - Risk Factors” in our 2018 Form 10-K. These factors could materially adversely affect our business, financial condition, liquidity, results of operations and capital position, and 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. Also refer to the discussion in “Part I - Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report for additional information that may supplement or update the discussion of risk factors below and in our 2018 Form 10-K.
There have been no material changes to the risk factors previously disclosed under Item 1A of the Corporation’s 2018 Form10-K.
The risks described in our 2018 Form 10-K and in this report are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, liquidity, results of operations and capital position.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
In February 2019, the Corporation entered into a $250 million accelerated share repurchase transaction with respect to its common stock. As part of this transaction, the Corporation received an initial delivery of 3,500,000 shares of common stock. Such shares are held as treasury stock.
In April 2004, the Corporation’s shareholders adopted the Popular, Inc. 2004 Omnibus Incentive Plan. As of March 31, 2019, the maximum number of shares of common stock remaining available for future issuance under this plan was 875,265. In March 2019, the Corporation added to treasury stock 55,812 shares of common stock related to shares that were withheld under Popular’s employee restricted and performance share awards to satisfy tax requirements.
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The following table sets forth the details of purchases of Common Stock during the quarter ended March 31, 2019:
Not in thousands
Period
January 1 - January 31
February 1 - February 28
March 1 - March 31
Total March 31, 2019
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other information
Item 6. Exhibits
Exhibit Index
Exhibit No.
Exhibit Description
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SIGNATURES
Pursuant to the requirements 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.
/s/ Carlos J. Vázquez
/s/ Jorge J. García
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