Companies: 10,793     total market cap: $134.658 T
โ‚ฌEUR๐Ÿ‡ช๐Ÿ‡บโ‚นINR๐Ÿ‡ฎ๐Ÿ‡ณยฃGBP๐Ÿ‡ฌ๐Ÿ‡ง$CAD๐Ÿ‡จ๐Ÿ‡ฆ$AUD๐Ÿ‡ฆ๐Ÿ‡บ$NZD๐Ÿ‡ณ๐Ÿ‡ฟ$HKD๐Ÿ‡ญ๐Ÿ‡ฐ$SGD๐Ÿ‡ธ๐Ÿ‡ฌ
Popular, Inc. (Banco Popular de Puerto Rico)
BPOP
#2121
Rank
$8.90 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$136.80
Share price
-0.01%
Change (1 day)
68.30%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Popular, Inc. (Banco Popular de Puerto Rico)
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2020 Q3

Popular, Inc. (Banco Popular de Puerto Rico) - 10-Q quarterly report FY2020 Q3


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UNITED STATES

 

 

SECURITIES AND EXCHANGE COMMISSION

 

 

Washington, D.C. 20549

 

 

 

 

 

 

 

Form 10-Q

 

 

 

 

 

 

[X]

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

 

 

 

 

For the quarterly period ended September 30, 2020

 

 

Or

 

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

 

 

Commission File Number: 001-34084

 

 

 

 

 

 

POPULAR, INC.

(Exact name of registrant as specified in its charter)

Puerto Rico

 

66-0667416

(State or other jurisdiction of Incorporation or

 

(IRS Employer Identification Number)

organization)

 

 

Popular Center Building

 

 

 

209 Muñoz Rivera Avenue

 

 

 

Hato Rey, Puerto Rico

 

00918

(Address of principal executive offices)

 

(Zip code)

(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)

 

 

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock ($0.01 par value)

BPOP

The NASDAQ Stock Market

6.70% Cumulative Monthly Income Trust Preferred Securities

BPOPN

The NASDAQ Stock Market

6.125% Cumulative Monthly Income Trust Preferred Securities

BPOPM

The NASDAQ Stock Market

 

 

 

 

 

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.

 

[X] 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).

 

[X] 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:

Large accelerated filer [X]

Accelerated filer [ ]

Non-accelerated filer [ ]

 

Smaller reporting company [ ]

Emerging growth company [ ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

[ ] Yes

[X] No

 

 

1

 

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, 84,251,735 shares outstanding as of November 4, 2020.

 

 

2

 

POPULAR INC

 

 

INDEX

 

 

 

 

 

Part I – Financial Information

Page

 

 

 

 

Item 1. Financial Statements

 

 

 

 

 

Unaudited Consolidated Statements of Financial Condition at September 30, 2020 and

 

 

December 31, 2019

6

 

 

 

 

Unaudited Consolidated Statements of Operations for the quarters

 

 

and nine months ended September 30, 2020 and 2019

7

 

 

 

 

Unaudited Consolidated Statements of Comprehensive Income for the

 

 

quarters and nine months ended September 30, 2020 and 2019

8

 

 

 

 

Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the

 

 

quarters and nine months ended September 30, 2020 and 2019

9

 

 

 

 

 

 

 

Unaudited Consolidated Statements of Cash Flows for the nine months

 

 

ended September 30, 2020 and 2019

11

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

13

 

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and

 

 

Results of Operations

137

 

 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

185

 

 

 

 

Item 4. Controls and Procedures

186

 

 

 

 

Part II – Other Information

 

 

 

 

 

Item 1. Legal Proceedings

187

 

 

 

 

Item 1A. Risk Factors

187

 

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

191

 

 

 

 

Item 3. Defaults Upon Senior Securities

192

 

 

Item 4. Mine Safety Disclosures

192

 

 

Item 5. Other Information

192

 

Item 6. Exhibits

192

 

 

Signatures

193

 

 

3

 

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, future performance and the effects of the COVID-19 pandemic on our business.

Forward-looking statements in this Quarterly Report on Form 10-Q also include the expected completion date for the Popular Bank New York branches optimization strategy, expected benefits of the strategic realignment, estimates of pre-tax charges and anticipated annual operating expense savings related to the transaction. 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 scope and duration of the COVID-19 pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on us, our customers, service providers and third parties;

 

the amount of Puerto Rico public sector deposits held at the Corporation, whose future balances are uncertain and difficult to predict and may be impacted by factors such as the amount of Federal funds received by the P.R. Government in connection with the COVID-19 pandemic and the rate of expenditure of such funds, as well as the timeline and outcome of current Puerto Rico debt restructuring proceedings under Title III of PROMESA;

 

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;

 

4

 

unforeseen or catastrophic events, including extreme weather events, other natural disasters, man-made disasters or the emergence of pandemics, epidemics and other health-related crises, which could cause a disruption in our operations or other adverse consequences for our business;

 

the relative strength or weakness of the consumer and commercial credit sectors and of the real estate markets in Puerto Rico and the other markets in which borrowers are located;

 

the performance of the stock and bond markets;

 

competition in the financial services industry;

 

possible legislative, tax or regulatory changes; and

 

a failure in or breach of our operational or security systems or infrastructure or those of EVERTEC, Inc., our provider of core financial 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 our results or performance to differ materially from those expressed in these forward-looking statements include the following:

 

negative economic conditions that adversely affect housing prices, the job market, consumer confidence and spending habits which may affect, among other things, the level of non-performing assets, charge-offs and provision expense;

 

changes in market rates and prices which may adversely impact the value of financial assets and liabilities;

 

potential judgments, claims, damages, penalties, fines and reputational damage resulting from pending or future litigation and regulatory or government actions, including as a result of our participation in and execution of government programs related to the COVID-19 pandemic;

 

changes in accounting standards, rules and interpretations;

 

our ability to grow our core businesses;

 

decisions to downsize, sell or close units or otherwise change our business mix; and

 

management’s ability to identify and manage these and other risks.

 

Further, statements about the potential effects of the COVID-19 pandemic on our business, financial condition, liquidity and results of operation may constitute forward-looking statements and are subject to the risk that actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control, including actions taken by governmental authorities in response to the pandemic and the direct and indirect impact of the pandemic on us, our customers, service providers and third parties.

 

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, 2019, as well as “Part II, Item 1A” of our Quarterly Reports on 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.

5

 

POPULAR, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(UNAUDITED)

 

 

 

 

 

 

September 30,

December 31,

(In thousands, except share information)

2020

2019

Assets:

 

 

 

 

Cash and due from banks

$

565,202

$

388,311

Money market investments:

 

 

 

 

 

 

Time deposits with other banks

 

11,859,924

 

3,262,286

 

 

Total money market investments

 

11,859,924

 

3,262,286

Trading account debt securities, at fair value:

 

 

 

 

 

 

Pledged securities with creditors’ right to repledge

 

603

 

598

 

 

Other trading account debt securities

 

32,450

 

39,723

Debt securities available-for-sale, at fair value:

 

 

 

 

 

 

Pledged securities with creditors’ right to repledge

 

110,811

 

202,585

 

 

Other debt securities available-for-sale

 

21,067,028

 

17,445,888

Debt securities held-to-maturity, at amortized cost (fair value 2020 - $95,093; 2019 - $105,110)

 

93,163

 

97,662

 

 

Less – Allowance for credit losses

 

12,421

 

-

 

 

Debt securities held-to-maturity, net

 

80,742

 

97,662

Equity securities (realizable value 2020 - $174,370; 2019 - $165,952)

 

173,993

 

159,887

Loans held-for-sale, at lower of cost or fair value

 

102,760

 

59,203

Loans held-in-portfolio

 

29,586,348

 

27,587,856

 

 

Less – Unearned income

 

193,838

 

180,983

 

 

Allowance for credit losses

 

925,850

 

477,708

 

 

Total loans held-in-portfolio, net

 

28,466,660

 

26,929,165

Premises and equipment, net

 

510,473

 

556,650

Other real estate

 

100,592

 

122,072

Accrued income receivable

 

204,233

 

180,871

Mortgage servicing rights, at fair value

 

123,552

 

150,906

Other assets

 

1,816,706

 

1,819,615

Goodwill

 

671,122

 

671,122

Other intangible assets

 

23,518

 

28,780

Total assets

$

65,910,369

$

52,115,324

Liabilities and Stockholders’ Equity

 

 

 

 

Liabilities:

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Non-interest bearing

$

13,546,432

$

9,160,173

 

 

Interest bearing

 

42,475,551

 

34,598,433

 

 

Total deposits

 

56,021,983

 

43,758,606

Assets sold under agreements to repurchase

 

106,028

 

193,378

Other short-term borrowings

 

100,000

 

-

Notes payable

 

1,201,396

 

1,101,608

Other liabilities

 

2,568,877

 

1,044,953

 

 

Total liabilities

 

59,998,284

 

46,098,545

Commitments and contingencies (Refer to Note 21)

 

 

 

 

Stockholders’ equity:

 

 

 

 

Preferred stock, 30,000,000 shares authorized; 885,726 shares issued and outstanding (2019 - 2,006,391)

 

22,143

 

50,160

Common stock, $0.01 par value; 170,000,000 shares authorized;104,475,254 shares issued (2019 - 104,392,222) and 84,219,464 shares outstanding (2019 - 95,589,629)

 

1,045

 

1,044

Surplus

 

4,521,689

 

4,447,412

Retained earnings

 

2,168,153

 

2,147,915

Treasury stock - at cost, 20,255,790 shares (2019 - 8,802,593)

 

(1,016,361)

 

(459,814)

Accumulated other comprehensive income (loss), net of tax

 

215,416

 

(169,938)

 

 

Total stockholders’ equity

 

5,912,085

 

6,016,779

Total liabilities and stockholders’ equity

$

65,910,369

$

52,115,324

The accompanying notes are an integral part of these Consolidated Financial Statements.

6

 

POPULAR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

 

 

Quarters ended September 30,

 

Nine months ended September 30,

(In thousands, except per share information)

2020

 

2019

 

2020

 

2019

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Loans

$

431,286

 

$

453,315

 

$

1,311,402

 

$

1,355,232

 

Money market investments

 

2,773

 

 

19,119

 

 

16,788

 

 

70,873

 

Investment securities

 

79,142

 

 

99,542

 

 

243,938

 

 

274,819

 

 

Total interest income

 

513,201

 

 

571,976

 

 

1,572,128

 

 

1,700,924

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

37,554

 

 

78,760

 

 

142,435

 

 

228,035

 

Short-term borrowings

 

416

 

 

1,572

 

 

2,109

 

 

4,828

 

Long-term debt

 

14,210

 

 

14,653

 

 

42,587

 

 

43,791

 

 

Total interest expense

 

52,180

 

 

94,985

 

 

187,131

 

 

276,654

Net interest income

 

461,021

 

 

476,991

 

 

1,384,997

 

 

1,424,270

Provision for credit losses - loan portfolios

 

19,452

 

 

36,539

 

 

271,551

 

 

118,555

Provision (reversal) for credit losses - investment securities

 

(314)

 

 

-

 

 

(233)

 

 

-

Net interest income after provision for credit losses

 

441,883

 

 

440,452

 

 

1,113,679

 

 

1,305,715

Service charges on deposit accounts

 

36,849

 

 

40,969

 

 

108,671

 

 

119,277

Other service fees

 

69,879

 

 

71,309

 

 

186,736

 

 

209,647

Mortgage banking activities (Refer to Note 10)

 

(9,526)

 

 

10,492

 

 

671

 

 

18,645

Net gain (loss) on sale of debt securities

 

41

 

 

(20)

 

 

41

 

 

(20)

Net gain, including impairment on equity securities

 

5,150

 

 

213

 

 

4,869

 

 

2,174

Net profit on trading account debt securities

 

20

 

 

295

 

 

593

 

 

977

Net (loss) gain on sale of loans, including valuation adjustments on loans held-for-sale

 

(2,198)

 

 

-

 

 

981

 

 

-

Adjustments (expense) to indemnity reserves on loans sold

 

4,183

 

 

(3,411)

 

 

(1,770)

 

 

(1,664)

Other operating income

 

24,369

 

 

22,865

 

 

66,673

 

 

68,432

 

 

Total non-interest income

 

128,767

 

 

142,712

 

 

367,465

 

 

417,468

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Personnel costs

 

135,941

 

 

147,682

 

 

421,938

 

 

432,298

Net occupancy expenses

 

25,907

 

 

24,595

 

 

76,552

 

 

71,431

Equipment expenses

 

24,088

 

 

21,596

 

 

66,537

 

 

62,624

Other taxes

 

13,918

 

 

14,028

 

 

40,922

 

 

38,267

Professional fees

 

96,474

 

 

98,561

 

 

290,092

 

 

281,275

Communications

 

5,694

 

 

5,881

 

 

17,222

 

 

17,685

Business promotion

 

14,664

 

 

18,365

 

 

41,142

 

 

52,158

FDIC deposit insurance

 

6,568

 

 

2,923

 

 

16,988

 

 

13,007

Other real estate owned (OREO) (income) expenses

 

(1,615)

 

 

(185)

 

 

520

 

 

3,729

Other operating expenses

 

38,351

 

 

40,630

 

 

104,647

 

 

107,354

Amortization of intangibles

 

1,076

 

 

2,399

 

 

5,345

 

 

7,082

 

 

Total operating expenses

 

361,066

 

 

376,475

 

 

1,081,905

 

 

1,086,910

Income before income tax

 

209,584

 

 

206,689

 

 

399,239

 

 

636,273

Income tax expense

 

41,168

 

 

41,370

 

 

68,893

 

 

131,923

Net Income

$

168,416

 

$

165,319

 

$

330,346

 

$

504,350

Net Income Applicable to Common Stock

$

168,064

 

$

164,389

 

$

328,941

 

$

501,558

Net Income per Common Share – Basic

$

2.01

 

$

1.71

 

$

3.80

 

$

5.17

Net Income per Common Share – Diluted

$

2.00

 

$

1.70

 

$

3.80

 

$

5.16

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

7

 

POPULAR, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

 

 

 

Quarters ended,

 

Nine months ended,

 

 

September 30,

 

September 30,

(In thousands)

2020

 

2019

 

2020

 

2019

Net income

$

168,416

 

$

165,319

 

$

330,346

 

$

504,350

Reclassification to retained earnings due to cumulative effect of accounting change

 

-

 

 

-

 

 

-

 

 

(50)

Other comprehensive (loss) income before tax:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(2,035)

 

 

155

 

 

(14,710)

 

 

(2,287)

Amortization of net losses of pension and postretirement benefit plans

 

5,362

 

 

5,877

 

 

16,086

 

 

17,629

Unrealized holding (losses) gains on debt securities arising during the period

 

(10,633)

 

 

53,553

 

 

450,134

 

 

306,857

 

Reclassification adjustment for (gains) losses included in net income

 

(41)

 

 

20

 

 

(41)

 

 

20

Unrealized net losses on cash flow hedges

 

(1,478)

 

 

(3,538)

 

 

(6,760)

 

 

(5,358)

 

Reclassification adjustment for net losses included in net income

 

1,613

 

 

1,221

 

 

5,127

 

 

3,142

Other comprehensive (loss) income before tax

 

(7,212)

 

 

57,288

 

 

449,836

 

 

319,953

Income tax benefit (expense)

 

3,279

 

 

(4,955)

 

 

(64,482)

 

 

(30,859)

Total other comprehensive (loss) income, net of tax

 

(3,933)

 

 

52,333

 

 

385,354

 

 

289,094

Comprehensive income, net of tax

$

164,483

 

$

217,652

 

$

715,700

 

$

793,444

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax effect allocated to each component of other comprehensive (loss) income:

 

 

Quarters ended

 

Nine months ended,

 

 

September 30,

 

September 30,

(In thousands)

2020

 

2019

 

2020

 

2019

Amortization of net losses of pension and postretirement benefit plans

$

(2,011)

 

$

(2,204)

 

$

(6,033)

 

$

(6,611)

Unrealized holding (losses) gains on debt securities arising during the period

 

5,390

 

 

(2,583)

 

 

(58,427)

 

 

(24,032)

 

Reclassification adjustment for (gains) losses included in net income

 

6

 

 

(4)

 

 

6

 

 

(4)

Unrealized net losses on cash flow hedges

 

393

 

 

337

 

 

1,693

 

 

1,009

 

Reclassification adjustment for net losses included in net income

 

(499)

 

 

(501)

 

 

(1,721)

 

 

(1,221)

Income tax benefit (expense)

$

3,279

 

$

(4,955)

 

$

(64,482)

 

$

(30,859)

The accompanying notes are an integral part of the Consolidated Financial Statements.

 

 

 

 

 

 

8

 

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other

 

 

 

 

 

 

Common

Preferred

 

 

Retained

 

Treasury

 

comprehensive

 

 

 

(In thousands)

stock

stock

Surplus

earnings

 

stock

 

(loss) income

 

Total

Balance at June 30, 2019

$

1,044

$

50,160

$

4,316,225

$

1,935,826

 

$

(392,208)

 

$

(191,213)

 

$

5,719,834

Net income

 

 

 

 

 

 

 

165,319

 

 

 

 

 

 

 

 

165,319

Issuance of stock

 

 

 

 

 

909

 

 

 

 

 

 

 

 

 

 

909

Dividends declared:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock[1]

 

 

 

 

 

 

 

(29,017)

 

 

 

 

 

 

 

 

(29,017)

 

Preferred stock

 

 

 

 

 

 

 

(930)

 

 

 

 

 

 

 

 

(930)

Common stock purchases

 

 

 

 

 

 

 

 

 

 

(1,367)

 

 

 

 

 

(1,367)

Common stock reissuance

 

 

 

 

 

50

 

 

 

 

914

 

 

 

 

 

964

Stock based compensation

 

 

 

 

 

372

 

 

 

 

31

 

 

 

 

 

403

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

52,333

 

 

52,333

Balance at September 30, 2019

$

1,044

$

50,160

$

4,317,556

$

2,071,198

 

$

(392,630)

 

$

(138,880)

 

$

5,908,448

Balance at June 30, 2020

$

1,044

$

22,143

$

4,520,333

$

2,033,782

 

$

(1,016,486)

 

$

219,349

 

$

5,780,165

Net income

 

 

 

 

 

 

 

168,416

 

 

 

 

 

 

 

 

168,416

Issuance of stock

 

1

 

 

 

1,145

 

 

 

 

 

 

 

 

 

 

1,146

Dividends declared:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock[1]

 

 

 

 

 

 

 

(33,693)

 

 

 

 

 

 

 

 

(33,693)

 

Preferred stock

 

 

 

 

 

 

 

(352)

 

 

 

 

 

 

 

 

(352)

Common stock purchases

 

 

 

 

 

 

 

 

 

 

(185)

 

 

 

 

 

(185)

Common stock reissuance

 

 

 

 

 

(69)

 

 

 

 

269

 

 

 

 

 

200

Stock based compensation

 

 

 

 

 

280

 

 

 

 

41

 

 

 

 

 

321

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,933)

 

 

(3,933)

Balance at September 30, 2020

$

1,045

$

22,143

$

4,521,689

$

2,168,153

 

$

(1,016,361)

 

$

215,416

 

$

5,912,085

[1]

Dividends declared per common share during the quarter ended September 30, 2020 - $0.40 (2019 - $0.30).

9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other

 

 

 

 

 

 

Common

Preferred

 

 

Retained

 

Treasury

 

comprehensive

 

 

 

(In thousands)

stock

stock

Surplus

earnings

 

stock

 

(loss) income

 

Total

Balance at December 31, 2018

$

1,043

$

50,160

$

4,365,606

$

1,651,731

 

$

(205,509)

 

$

(427,974)

 

$

5,435,057

Cumulative effect of accounting change

 

 

 

 

 

 

 

4,905

 

 

 

 

 

 

 

 

4,905

Net income

 

 

 

 

 

 

 

504,350

 

 

 

 

 

 

 

 

504,350

Issuance of stock

 

1

 

 

 

2,632

 

 

 

 

 

 

 

 

 

 

2,633

Dividends declared:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock[1]

 

 

 

 

 

 

 

(86,996)

 

 

 

 

 

 

 

 

(86,996)

 

Preferred stock

 

 

 

 

 

 

 

(2,792)

 

 

 

 

 

 

 

 

(2,792)

Common stock purchases[2]

 

 

 

 

 

(52,670)

 

 

 

 

(203,336)

 

 

 

 

 

(256,006)

Common stock reissuance

 

 

 

 

 

274

 

 

 

 

3,616

 

 

 

 

 

3,890

Stock based compensation

 

 

 

 

 

1,714

 

 

 

 

12,599

 

 

 

 

 

14,313

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

289,094

 

 

289,094

Balance at September 30, 2019

$

1,044

$

50,160

$

4,317,556

$

2,071,198

 

$

(392,630)

 

$

(138,880)

 

$

5,908,448

Balance at December 31, 2019

$

1,044

$

50,160

$

4,447,412

$

2,147,915

 

$

(459,814)

 

$

(169,938)

 

$

6,016,779

Cumulative effect of accounting change

 

 

 

 

 

 

 

(205,842)

 

 

 

 

 

 

 

 

(205,842)

Net income

 

 

 

 

 

 

 

330,346

 

 

 

 

 

 

 

 

330,346

Issuance of stock

 

1

 

 

 

3,139

 

 

 

 

 

 

 

 

 

 

3,140

Dividends declared:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock[1]

 

 

 

 

 

 

 

(102,861)

 

 

 

 

 

 

 

 

(102,861)

 

Preferred stock

 

 

 

 

 

 

 

(1,405)

 

 

 

 

 

 

 

 

(1,405)

Common stock purchases[3]

 

 

 

 

 

76,336

 

 

 

 

(580,003)

 

 

 

 

 

(503,667)

Common stock reissuance

 

 

 

 

 

(1,180)

 

 

 

 

5,971

 

 

 

 

 

4,791

Preferred stock redemption[4]

 

 

 

(28,017)

 

 

 

 

 

 

 

 

 

 

 

 

(28,017)

Stock based compensation

 

 

 

 

 

(4,018)

 

 

 

 

17,485

 

 

 

 

 

13,467

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

385,354

 

 

385,354

Balance at September 30, 2020

$

1,045

$

22,143

$

4,521,689

$

2,168,153

 

$

(1,016,361)

 

$

215,416

 

$

5,912,085

[1]

Dividends declared per common share during the nine months ended September 30, 2020 - $1.20 (2019 - $0.90).

[2]

During the quarter ended March 31, 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.

[3]

During the quarter ended March 31, 2020, the Corporation entered into a $500 million accelerated share repurchase transaction with respect to its common stock, which was accounted for as a treasury stock transaction. The transaction was completed on May 27, 2020. Refer to Note 18 for additional information.

[4]

On February 24, 2020, the Corporation redeemed all the outstanding shares of 2008 Series B Preferred Stock. Refer to Note 18 for additional information.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30,

Disclosure of changes in number of shares:

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

Preferred Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

 

 

 

 

 

 

 

 

 

 

 

2,006,391

 

 

2,006,391

 

Redemption of stock

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,120,665)

 

 

-

 

Balance at end of period

 

 

 

 

 

 

 

 

 

 

 

 

 

885,726

 

 

2,006,391

Common Stock – Issued:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

 

 

 

 

 

 

 

 

 

 

 

104,392,222

 

 

104,320,303

 

Issuance of stock

 

 

 

 

 

 

 

 

 

 

 

 

 

83,032

 

 

55,192

 

Balance at end of period

 

 

 

 

 

 

 

 

 

 

 

 

 

104,475,254

 

 

104,375,495

 

Treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

(20,255,790)

 

 

(7,660,831)

Common Stock – Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

84,219,464

 

 

96,714,664

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

10

 

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30,

(In thousands)

 

2020

 

 

2019

Cash flows from operating activities:

 

 

 

 

 

Net income

$

330,346

 

$

504,350

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Provision for credit losses

 

271,318

 

 

118,555

 

Amortization of intangibles

 

5,345

 

 

7,082

 

Depreciation and amortization of premises and equipment

 

43,419

 

 

42,928

 

Net accretion of discounts and amortization of premiums and deferred fees

 

(56,134)

 

 

(126,548)

 

Share-based compensation

 

8,308

 

 

11,418

 

Impairment losses on long-lived assets

 

-

 

 

2,591

 

Fair value adjustments on mortgage servicing rights

 

33,360

 

 

25,853

 

Adjustments to indemnity reserves on loans sold

 

1,770

 

 

1,664

 

Earnings from investments under the equity method, net of dividends or distributions

 

(19,160)

 

 

(18,461)

 

Deferred income tax expense

 

26,742

 

 

110,058

 

(Gain) loss on:

 

 

 

 

 

 

 

Disposition of premises and equipment and other productive assets

 

(10,286)

 

 

(5,133)

 

 

Proceeds from insurance claims

 

(366)

 

 

-

 

 

Sale of debt securities

 

(41)

 

 

20

 

 

Sale of loans, including valuation adjustments on loans held-for-sale and mortgage banking activities

 

(21,370)

 

 

(11,360)

 

 

Sale of foreclosed assets, including write-downs

 

(13,676)

 

 

(15,858)

 

Acquisitions of loans held-for-sale

 

(151,916)

 

 

(157,993)

 

Proceeds from sale of loans held-for-sale

 

51,077

 

 

51,067

 

Net originations on loans held-for-sale

 

(243,954)

 

 

(208,875)

 

Net decrease (increase) in:

 

 

 

 

 

 

 

Trading debt securities

 

287,764

 

 

333,013

 

 

Equity securities

 

(5,390)

 

 

(6,482)

 

 

Accrued income receivable

 

(48,457)

 

 

7,724

 

 

Other assets

 

75,243

 

 

(12,837)

 

Net (decrease) increase in:

 

 

 

 

 

 

 

Interest payable

 

(11,308)

 

 

(6,900)

 

 

Pension and other postretirement benefits obligation

 

4,225

 

 

(4,979)

 

 

Other liabilities

 

(65,269)

 

 

(102,049)

Total adjustments

 

161,244

 

 

34,498

Net cash provided by operating activities

 

491,590

 

 

538,848

Cash flows from investing activities:

 

 

 

 

 

 

Net increase in money market investments

 

(8,597,704)

 

 

(1,000,840)

 

Purchases of investment securities:

 

 

 

 

 

 

 

Available-for-sale

 

(15,997,778)

 

 

(13,579,074)

 

 

Equity

 

(28,885)

 

 

(15,474)

 

Proceeds from calls, paydowns, maturities and redemptions of investment securities:

 

 

 

 

 

 

 

Available-for-sale

 

14,386,967

 

 

10,671,630

 

 

Held-to-maturity

 

5,770

 

 

5,325

 

Proceeds from sale of investment securities:

 

 

 

 

 

 

 

Available-for-sale

 

5,103

 

 

99,445

 

 

Equity

 

20,169

 

 

17,083

 

Net disbursements on loans

 

(965,465)

 

 

(324,479)

 

Proceeds from sale of loans

 

64,917

 

 

77,327

 

Acquisition of loan portfolios

 

(994,908)

 

 

(421,482)

 

Payments to acquire other intangible

 

(83)

 

 

(793)

 

Return of capital from equity method investments

 

812

 

 

2,747

 

Payments to acquire equity method investments

 

(443)

 

 

-

 

Acquisition of premises and equipment

 

(39,121)

 

 

(45,961)

 

Proceeds from insurance claims

 

366

 

 

-

 

Proceeds from sale of:

 

 

 

 

 

 

 

Premises and equipment and other productive assets

 

20,816

 

 

17,186

 

 

Foreclosed assets

 

53,872

 

 

83,848

Net cash used in investing activities

 

(12,065,595)

 

 

(4,413,512)

11

 

Cash flows from financing activities:

 

 

 

 

 

 

Net increase (decrease) in:

 

 

 

 

 

 

 

Deposits

 

12,264,323

 

 

4,454,466

 

 

Assets sold under agreements to repurchase

 

(87,350)

 

 

(68,433)

 

 

Other short-term borrowings

 

100,000

 

 

(41)

 

Payments of notes payable

 

(127,989)

 

 

(144,991)

 

Principal payments of finance leases

 

(1,608)

 

 

(1,269)

 

Proceeds from issuance of notes payable

 

226,807

 

 

75,000

 

Proceeds from issuance of common stock

 

7,931

 

 

6,523

 

Payments for repurchase of redeemable preferred stock

 

(28,017)

 

 

-

 

Dividends paid

 

(99,600)

 

 

(85,863)

 

Net payments for repurchase of common stock

 

(500,325)

 

 

(250,574)

 

Payments related to tax withholding for share-based compensation

 

(3,342)

 

 

(5,432)

Net cash provided by financing activities

 

11,750,830

 

 

3,979,386

Net increase in cash and due from banks, and restricted cash

 

176,825

 

 

104,722

Cash and due from banks, and restricted cash at beginning of period

 

394,323

 

 

403,251

Cash and due from banks, and restricted cash at the end of the period

$

571,148

 

$

507,973

The accompanying notes are an integral part of these Consolidated Financial Statements.

12

 

Notes to Consolidated Financial

Statements (Unaudited)

 

 

Note 1 -

Nature of operations

14

 

Note 2 -

Basis of presentation

15

 

Note 3 -

New accounting pronouncements

16

 

Note 4 -

Summary of significant accounting policies

21

 

Note 5 -

Restrictions on cash and due from banks and certain securities

24

 

Note 6 -

Debt securities available-for-sale

25

 

Note 7 -

Debt securities held-to-maturity

28

 

Note 8 -

Loans

31

 

Note 9 -

Allowance for credit losses – loans held-in-portfolio

40

 

Note 10 -

Mortgage banking activities

62

 

Note 11 -

Transfers of financial assets and mortgage servicing assets

63

 

Note 12 -

Other real estate owned

67

 

Note 13 -

Other assets

68

 

Note 14 -

Goodwill and other intangible assets

69

 

Note 15 -

Deposits

72

 

Note 16 -

Borrowings

73

 

Note 17 -

Other liabilities

75

 

Note 18 -

Stockholders’ equity

76

 

Note 19 -

Other comprehensive income (loss)

77

 

Note 20 -

Guarantees

79

 

Note 21 -

Commitments and contingencies

81

 

Note 22-

Non-consolidated variable interest entities

88

 

Note 23 -

Related party transactions

90

 

Note 24 -

Fair value measurement

93

 

Note 25 -

Fair value of financial instruments

100

 

Note 26 -

Net income per common share

103

 

Note 27 -

Revenue from contracts with customers

104

 

Note 28 -

Leases

106

 

Note 29 -

Pension and postretirement benefits

108

 

Note 30 -

Stock-based compensation

109

 

Note 31 -

Income taxes

112

 

Note 32 -

Supplemental disclosure on the consolidated statements of cash flows

116

 

Note 33 -

Segment reporting

117

 

Note 34 -

Condensed consolidating financial information of guarantor and issuers of registered guaranteed securities

123

 

Note 35-

Subsequent events

137

 

13

 

Note 1 – Nature of operations

Popular, Inc. (the “Corporation” or “Popular”) is a diversified, publicly-owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation has operations in Puerto Rico, the mainland United States (“U.S.”) and the U.S. and British Virgin Islands. In Puerto Rico, the Corporation provides retail, mortgage, and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as investment banking, broker-dealer, auto and equipment leasing and financing, and insurance services through specialized subsidiaries. In the mainland U.S., the Corporation provides retail, mortgage and commercial banking services through its New York-chartered banking subsidiary, Popular Bank (“PB”), which has branches located in New York, New Jersey and Florida.

14

 

Note 2 – Basis of Presentation

Basis of Presentation

The consolidated interim financial statements have been prepared without audit. The Consolidated Statement of Financial Condition data at December 31, 2019 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, 2019, included in the Corporation’s 2019 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.

 

15

 

Note 3 - New accounting pronouncements

 

 

 

 

 

 

 

 

 

Recently Adopted Accounting Standards Updates

 

 

 

 

 

 

 

 

 

Standard

 

Description

Date of adoption

Effect on the financial statements

 

 

FASB ASU 2020-03, Codification Improvements to Financial Instruments

 

The FASB issued ASU 2020-03 in March 2020, which, among other things, provides clarification on issues related to the term that should be used to measure expected credit losses of net investments in leases and that an allowance for credit losses should be recorded once control of financial assets has been regained.

January 1, 2020

The Corporation was not impacted by the adoption of ASU 2020-03 during the first quarter of 2020.

 

 

FASB ASU 2019-08, Compensation – Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements – Share-Based Consideration Payable to a Customer

 

The FASB issued ASU 2019-08 in November 2019, which requires that an entity measure and classify share-based payment awards granted to a customer in accordance with Topic 718. Therefore, the grant-date fair value of the share-based payment awards will be the basis for the reduction of the transaction price.

January 1, 2020

The Corporation was not impacted by the adoption of ASU 2019-08 during the first quarter of 2020 since it does not grant shared-based payments awards to its customers.

16

 

 

 

 

 

 

 

 

Standard

 

Description

Date of adoption

Effect on the financial statements

 

FASB ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606

 

The FASB issued ASU 2018-18 in November 2018 which, among other things, provides guidance on how to assess whether certain collaborative arrangement transactions should be accounted for under Topic 606.

January 1, 2020

The Corporation was not impacted by the adoption of ASU 2018-18 during the first quarter of 2020 since it does not have collaborative arrangements.

 

FASB ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities

 

The FASB issued ASU 2018-17 in October 2018, which requires entities to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety when determining whether a decision-making fee is a variable interest.

January 1, 2020

The Corporation was not impacted by the adoption of ASU 2018-17 during the first quarter of 2020.

 

FASB ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

 

The FASB issued ASU 2018-15 in August 2018 which, among other things, aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software, and clarifies the term over which such capitalized implementation costs should be amortized.

January 1, 2020

The Corporation adopted ASU 2018-15 during the first quarter of 2020 and was not significantly impacted, since it applied the existing guidance and capitalized implementation costs of cloud computing arrangements. Capitalized implementation costs of cloud computing arrangements are presented as part of “Other assets”. Refer to amended disclosures on Note 13, Other assets.

17

 

 

 

 

 

 

Standard

 

Description

Date of adoption

Effect on the financial statements

FASB ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment

 

The FASB issued ASU 2017-04 in January 2017, which simplifies the accounting for goodwill impairment by removing Step 2 of the two-step goodwill impairment test under the current guidance. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts.

January 1, 2020

The Corporation adopted ASU 2017-04 during the first quarter of 2020 and, as such, considered this guidance when performing the interim impairment tests during 2020. Refer to Note 14, Goodwill and other intangible assets, for additional information.

FASB ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings (SEC Update)

 

The FASB issued ASU 2017-03 in January 2017, which incorporates into the Accounting Standards Codification recent SEC guidance about certain investments in qualified affordable housing and disclosing under SEC SAB Topic 11.M the effect on financial statements of adopting the revenue, leases and credit losses standards.

January 1, 2020

The Corporation has considered the guidance in this Update in its disclosures on the effect in its consolidated financial statements of adoption of the new Credit Loss Standard, discussed below.

18

 

FASB ASUs Financial Instruments – Credit Losses (Topic 326)

 

Since June 2016, the FASB has issued a series of ASUs mainly related to credit losses (Topic 326), which replace the incurred loss model with a current expected credit loss (“CECL”) model. The CECL model applies to financial assets measured at amortized cost that are subject to credit losses and certain off-balance sheet exposures. CECL establishes a forward-looking methodology that reflects the expected credit losses over the lives of financial assets, starting when such assets are first acquired. Under the revised methodology, credit losses will be measured based on past events, current conditions and reasonable and supportable forecasts that affect the collectability of financial assets. CECL also revises the approach to recognizing credit losses for available-for-sale securities by replacing the direct write-down approach with the allowance approach and limiting the allowance to the amount at which the security’s fair value is less than the amortized cost. In addition, CECL provides that the initial allowance for credit losses on purchased credit deteriorated (“PCD”) financial assets will be recorded as an increase to the purchase price, with subsequent changes to the allowance recorded as a credit loss expense. The amendments to Topic 326 include the areas of accrued interest receivable, transfers of loans and debt securities between classifications and the inclusion of expected recoveries in the allowance for credit losses including PCD assets. The standards also expand credit quality disclosures. These accounting standards updates were effective on January 1, 2020.

The Corporation adopted the new CECL accounting standard effective on January 1, 2020. As a result of the adoption, the Corporation recorded an increase in its allowance for credit losses related to its loan portfolio of $315 million, and a decrease of $9 million in the allowance for credit losses for unfunded commitments and credit recourse guarantees which is recorded in Other Liabilities. The Corporation also recognized an allowance for credit losses of approximately $13 million related to its held-to-maturity debt securities portfolio. The adoption of CECL was recognized under the modified retrospective approach. Therefore, the adjustments to record the increase in the allowance for credit losses was recorded as a decrease to the opening balance of retained earnings of the year of implementation, net of income taxes, except for approximately $17 million related to loans previously accounted under ASC Subtopic 310-30, which resulted in a reclassification between certain contra loan balance accounts to the allowance for credit losses. The total impact to retained earnings, net of tax, related to the adoption of CECL was of $205.8 million.

As part of the adoption of CECL, the Corporation has made the election to break the existing pools of purchased credit impaired (“PCI”) loans previously accounted for under the ASC Subtopic 310-30 guidance. These loans are now accounted for on an individual loan basis under the PCD accounting methodology under CECL. Following the applicable accounting guidance, PCI loans were previously excluded from non-performing status. Upon transition to the individual loan measurement, these loans are no longer excluded from non-performing status, resulting in an increase of $278 million in NPLs at January 1, 2020. This increase included $144 million in loans currently over 90 days past due and $134 million in loans that were not delinquent in their payment terms but are reported as non-performing due to other credit quality considerations.

 

The Corporation availed itself of the option to phase in over a period of three years, beginning on January 1, 2022, the day-one effects on regulatory capital arising from the adoption of CECL. The Corporation was also impacted by the additional disclosures required by CECL. The CECL accounting standard also requires additional disclosures related to delinquencies, collateral types and other credit metrics for loans and investments. Refer to Note 7, Debt securities held- to- maturity, Note 8 -Loans and Note 9- Allowance for credit losses - loans held-in-portfolio for additional disclosures provided in compliance with the new CECL standard.

 

19

 

 

 

 

 

 

 

 

Accounting Standards Updates Not Yet Adopted

 

 

 

 

 

 

 

Standard

 

Description

Date of adoption

Effect on the financial statements

 

FASB ASU 2020-10, Codification Improvements

 

The FASB issued ASU 2020-10 in October 2020 which moves all disclosure guidance to the appropriate codification section and makes other improvements and technical corrections.

December 31, 2021

The Corporation does not expect to be impacted as a result of the adoption of this accounting pronouncement.

 

FASB ASU 2020-08, Codification Improvements to Subtopic 310-20 – Receivables – Nonrefundable Fees and Other Costs

 

The FASB issued ASU 2020-08 in October 2020 which clarifies that a reporting entity should assess whether a callable debt security purchased at a premium is within the scope of ASC 310-20-35-33 each reporting period, which impacts the amortization period for nonrefundable fees and other costs.

January 1, 2021

The Corporation will not be impacted by the adoption of this accounting pronouncement since it does not currently hold purchased callable debt securities at a premium.

 

FASB ASU 2020-06, Debt – Debt with Conversion and other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity

 

The FASB issued ASU 2020-06 in August 2020 which, among other things, simplifies the accounting for convertible instruments and contracts in an entity’s own equity and amends the diluted EPS computation for these instruments.

January 1, 2022

Upon adoption of this standard, the Corporation will consider these amendments in its evaluation of contracts in its own equity, including accelerated share repurchase transactions.

 

FASB ASU 2020-04, Reference Rate Reform (Topic 848)

 

The FASB issued ASU 2020-04 in March 2020, which provides accounting relief from the future impact of the cessation of LIBOR by, among other things, providing optional expedients to treat contract modifications resulting from such reference rate reform as a continuation of the existing contract and for hedging relationships to not be de-designated resulting from such changes provided certain criteria are met.

December 31, 2022

The Corporation is currently in the process of identifying its LIBOR-based contracts that will be impacted by the cessation of LIBOR, incorporating fallback language in negotiated contracts and incorporating non-LIBOR reference rate and/or fallback language in new contracts to prepare for these changes. Notwithstanding these efforts, the Corporation expects to utilize the optional expedients provided by ASU 2020-04 for contracts left unmodified.

 

For other recently issued Accounting Standards Updates not yet effective, refer to Note 3 to the Consolidated Financial Statements included in the 2019 Form 10-K.

20

 

Note 4 – Summary of significant accounting policies

The accounting and financial reporting policies of Popular, Inc. and its subsidiaries (the “Corporation”) conform with accounting principles generally accepted in the United States of America and with prevailing practices within the financial services industry. A description of the significant accounting and financial reporting policies can be found on Note 2 to the Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended December 31, 2019.

 

In connection with the implementation of the CECL new accounting standard, the Corporation has made changes to certain of its accounting policies related to its loans portfolio, debt securities portfolio and allowance for credit losses (“ACL”).

 

Investment securities

 

Debt securities that the Corporation has the intent and ability to hold to maturity are classified as debt securities held-to-maturity and reported at amortized cost. An ACL is established for the expected credit losses over the remaining term of debt securities-held-to-maturity. The Corporation has established a methodology to estimate credit losses which considers qualitative factors, including internal credit ratings and the underlying source of repayment in determining the amount of expected credit losses. Debt securities held-to-maturity are written-off through the ACL when a portion or the entire amount is deemed uncollectible, based on the information considered to develop expected credit losses through the life of the asset. The ACL is estimated by leveraging the expected loss framework for mortgages in the case of securities collateralized by 2nd lien loans and the commercial C&I models for municipal bonds. As part of this framework, internal factors are stressed, as a qualitative adjustment, to reflect current conditions that are not necessarily captured within the historical loss experience. The modeling framework includes a 2-year reasonable and supportable period gradually reverting, over a 1-year horizon, to historical information at the model input level.

 

Debt securities classified as available-for-sale are reported at fair value. Declines in fair value below the securities’ amortized cost which are not related to estimated credit losses are recorded through other comprehensive income or loss, net of taxes. If the Corporation intends to sell or believes it is more likely than not that it will be required to sell the debt security, it is written down to fair value through earnings. Credit losses relating to available-for-sale debt securities should be recorded through an ACL, which will be limited to the difference between the amortized cost and the fair value of the asset. The ACL should be established for the expected credit losses over the remaining term of debt security. The Corporation’s portfolio of available-for-sale securities is comprised mainly of U.S. Treasury notes and obligations from the U.S. Government. These securities have an explicit or implicit guarantee from the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. Accordingly, the Corporation applies a zero-credit loss assumption and no ACL has been established. The Corporation monitors its securities portfolio composition and credit performance on a quarterly basis to determine if any allowance is considered necessary. Debt securities available-for-sale are written-off when a portion or the entire amount is deemed uncollectible, based on the information considered to develop expected credit losses through the life of the asset.

 

Loans

 

Purchased loans with no evidence of credit deterioration since origination are accounted at fair value upon acquisition. Credit discounts are included in the determination of fair value and are amortized over the remaining contractual term using the effective interest method. An ACL is recognized as a provision expense for expected losses over the remaining life of the loans.

 

Loans acquired with deteriorated credit quality

 

PCD loans are defined as those with evidence of a more-than-insignificant deterioration in a loan’s credit quality since origination. PCD loans are initially recorded at its purchase price plus an estimated ACL. Upon the acquisition of a PCD loan, the Corporation makes an estimate of the expected credit losses over the remaining contractual term of each individual loan. The estimated credit losses over the life of the loan is recorded as an allowance of credit losses with a corresponding addition to the loan purchase price. The amount of the purchase premium or discount which is not related to credit risk is amortized over the life of the loan through net interest income using the effective interest method or a method that approximates the effective interest method. Changes in expected credit losses are recorded as an increase or decrease to the ACL with a corresponding charge (reverse) to the provision for credit losses in the Consolidated Statement of Operations.

 

21

 

Refer to Note 8 to the Consolidated Financial Statements for additional information with respect to loans acquired with deteriorated credit quality.

 

Allowance for credit losses – loans portfolio

 

The Corporation establishes an ACL for its loan portfolio based on its estimate of credit losses over the remaining contractual term of the loans, adjusted for expected prepayments. An ACL is recognized for all loans including originated and purchased loans, since inception, with a corresponding charge to the provision for loan losses, except for PCD loans for which the ACL at acquisition is recorded as an addition to the purchase price with subsequent changes recorded in earnings.

The Corporation has established a methodology to estimate the ACL which includes a reasonable and supportable forecast period for estimating credit losses, considering quantitative and qualitative factors as well as the economic outlook. As part of this methodology management evaluates various macroeconomic scenarios, provided by third parties, and may apply probability weights to the outcome of the selected scenarios. This evaluation includes benchmarking procedures as well as careful analysis of the underlying assumptions used to build the scenarios. The application of probability weights will include a baseline, optimistic and pessimistic scenarios. The weights applied are subject to evaluation on a quarterly basis as part of the ACL’s governance process. The Corporation may process, from time to time, additional macroeconomic scenarios as part of its qualitative adjustment framework.

The macroeconomic variables chosen to estimate credit losses were selected by combining quantitative procedures with expert judgment. These variables were determined to be the best predictors of expected credit losses within the Corporation’s loan portfolios and include drivers such as unemployment rate, different measures of employment levels, house prices, gross domestic product and measures of disposable income, amongst others. The loss estimation framework includes a reasonable and supportable period of 2 years for PR portfolios, gradually reverting, over a 1-year horizon, to historical macroeconomic variables at the model input level. For the US portfolio the reasonable and supportable period considers the contractual life of the asset, impacted by prepayments, except for the US CRE portfolio. The US CRE portfolio utilizes a 2-year reasonable and supportable period gradually reverting, over a 1-year horizon, to historical information at the output level.

The Corporation developed loan level quantitative models distributed by geography and loan type. This segmentation was determined by evaluating their risk characteristics, which include default patterns, source of repayment, type of collateral, and lending channels, amongst others. The modeling framework includes competing risk models to generate lifetime defaults and prepayments, and other loan level modeling techniques to estimate loss severity. Recoveries on future losses are contemplated as part of the loss severity modeling. These parameters are estimated by combining internal risk factors with macroeconomic expectations. In order to generate the expected credit losses, the output of these models is combined with loan level repayment information. The internal risk factors contemplated within the models may include borrowers’ credit scores, loan-to-value, delinquency status, risk ratings, interest rate, loan term, loan age and type of collateral, amongst others.

The ACL also includes a qualitative framework that addresses two main components: losses that are expected but not captured within the quantitative modeling framework, and model imprecision. In order to identify potential losses that are not captured through the models, management evaluated model limitations as well as the different risks covered by the variables used in each quantitative model. This assessment took into consideration factors listed as part of ASC 326-20-55-4. To complement the analysis, management also evaluated sectors that have low levels of historical defaults, but current conditions show the potential for future losses. This type of qualitative adjustment is more prevalent in the commercial portfolios. The model imprecision component of the qualitative adjustments is determined after evaluating model performance for these portfolios through different time periods. This type of qualitative adjustment mainly impacts consumer portfolios.

The Corporation has designated loans classified as collateral dependent for which it applies the practical expedient to measure the ACL based on the fair value of the collateral less cost to sell, when the repayment is expected to be provided substantially by the sale or operation of the collateral and the borrower is experiencing financial difficulty. The fair value of the collateral is based on appraisals, which may be adjusted due to their age, and the type, location, and condition of the property or area or general market conditions to reflect the expected change in value between the effective date of the appraisal and the measurement date.

In the case of troubled debt restructurings (“TDRs”), the established framework captures the impact of concessions through discounting modified contractual cash flows, both principal and interest, at the loan’s original effective rate. The impact of these concessions is combined with the expected credit losses generated by the quantitative loss models in order to arrive at the ACL. As a result, the ACL related to TDRs is impacted by the expected macroeconomic conditions.

22

 

The Credit Cards portfolio, due to its revolving nature, does not have a specified maturity date. To estimate the average remaining term of this segment, management evaluated the portfolios payment behavior based on internal historical data. These payment behaviors were further classified into sub-categories that accounted for delinquency history and differences between transactors, revolvers and customers that have exhibited mixed transactor/revolver behavior. Transactors are defined as active accounts without any finance charge in the last 6 months. The paydown curves generated for each sub-category are applied to the outstanding exposure at the measurement date using the first-in first-out (FIFO) methodology. These amortization patterns are combined with loan level default and loss severity modeling to arrive at the ACL.

Accrued interest receivable

The amortized basis for loans and investments in debt securities is presented exclusive of accrued interest receivable. The Corporation has elected not to establish an ACL for accrued interest receivable for loans and investments in debt securities, given the Corporation’s non-accrual policies, in which accrual of interest is discontinued and reversed based on the asset’s delinquency status. Refer to Note 2 to the Consolidated Financial Statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019 for a description of the Corporation’s nonaccrual policies.

 

Reserve for unfunded commitments

The Corporation establishes a reserve for unfunded commitments, based on the estimated losses over the remaining term of the facility. An allowance is not established for commitments that are unconditionally cancellable by the Corporation. Accordingly, no reserve is established for unfunded commitments related to its credit cards portfolio. Reserve for the unfunded portion of credit commitments is presented separately within other liabilities in the Consolidated Statements of Financial Condition.

Guarantees, including indirect guarantees of indebtedness to others

The estimated losses to be absorbed under the credit recourse arrangements are recorded as a liability when the loans are sold and are updated by accruing or reversing expense (categorized in the line item “Adjustments (expense) to indemnity reserves on loans sold” in the Consolidated Statements of Operations) throughout the life of the loan, as necessary, when additional relevant information becomes available. The recourse liability is estimated using loan level statistical techniques. Internal factors that are evaluated include customer credit scores, refreshed loan-to-values, loan age, and outstanding balance, amongst others. The methodology leverages the expected loss framework for mortgage loans and includes macroeconomic expectations based on a 2-year reasonable and supportable period, gradually reverting over a 1-year horizon to historical macroeconomic variables at the input level. Estimated future defaults, prepayments and loss severity are combined with loan level repayment information in order to estimate lifetime expected losses for this portfolio. The reserve for the estimated losses under the credit recourse arrangements is presented separately within other liabilities in the Consolidated Statements of Financial Condition.

23

 

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 $ 2.4 billion at September 30, 2020 (December 31, 2019 - $ 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 September 30, 2020, the Corporation held $36 million in restricted assets in the form of funds deposited in money market accounts, debt securities available for sale and equity securities (December 31, 2019 - $ 52 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.

24

 

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 September 30, 2020 and December 31, 2019.

 

 

 

At September 30, 2020

 

 

 

 

 

Gross

Gross

 

 

Weighted

 

 

 

Amortized

unrealized

unrealized

Fair

average

 

(In thousands)

cost

gains

losses

value

yield

 

U.S. Treasury securities

 

 

 

 

 

 

 

 

 

 

 

Within 1 year

$

5,379,791

$

16,184

$

-

$

5,395,975

0.65

%

 

After 1 to 5 years

 

5,029,655

 

270,498

 

-

 

5,300,153

2.09

 

 

After 5 to 10 years

 

886,769

 

64,694

 

-

 

951,463

1.72

 

Total U.S. Treasury securities

 

11,296,215

 

351,376

 

-

 

11,647,591

1.37

 

Obligations of U.S. Government sponsored entities

 

 

 

 

 

 

 

 

 

 

 

Within 1 year

 

59,977

 

302

 

-

 

60,279

1.47

 

 

After 1 to 5 years

 

90

 

2

 

-

 

92

5.63

 

Total obligations of U.S. Government sponsored entities

 

60,067

 

304

 

-

 

60,371

1.48

 

Collateralized mortgage obligations - federal agencies

 

 

 

 

 

 

 

 

 

 

 

Within 1 year

 

20

 

-

 

-

 

20

1.37

 

 

After 1 to 5 years

 

239

 

3

 

-

 

242

2.16

 

 

After 5 to 10 years

 

69,780

 

1,184

 

-

 

70,964

1.62

 

 

After 10 years

 

367,974

 

11,167

 

61

 

379,080

2.03

 

Total collateralized mortgage obligations - federal agencies

 

438,013

 

12,354

 

61

 

450,306

1.98

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

After 1 to 5 years

 

63,157

 

2,071

 

8

 

65,220

2.39

 

 

After 5 to 10 years

 

389,976

 

16,636

 

15

 

406,597

1.86

 

 

After 10 years

 

8,374,132

 

178,637

 

5,272

 

8,547,497

2.05

 

Total mortgage-backed securities

 

8,827,265

 

197,344

 

5,295

 

9,019,314

2.05

 

Other

 

 

 

 

 

 

 

 

 

 

 

After 1 to 5 years

 

246

 

11

 

-

 

257

3.62

 

Total other

 

246

 

11

 

-

 

257

3.62

 

Total debt securities available-for-sale[1]

$

20,621,806

$

561,389

$

5,356

$

21,177,839

1.66

%

[1]

Includes $16.7 billion pledged to secure government and trust deposits, assets sold under agreements to repurchase, credit facilities and loan servicing agreements that the secured parties are not permitted to sell or repledge the collateral, of which $15.3 billion serve as collateral for public funds.

25

 

 

 

At December 31, 2019

 

 

 

 

 

Gross

Gross

 

 

Weighted

 

 

 

Amortized

unrealized

unrealized

Fair

average

 

(In thousands)

cost

gains

losses

value

yield

 

U.S. Treasury securities

 

 

 

 

 

 

 

 

 

 

 

Within 1 year

$

5,071,201

$

3,262

$

567

$

5,073,896

1.58

%

 

After 1 to 5 years

 

5,137,804

 

75,597

 

3,435

 

5,209,966

2.19

 

 

After 5 to 10 years

 

1,778,568

 

429

 

6,604

 

1,772,393

1.70

 

Total U.S. Treasury securities

 

11,987,573

 

79,288

 

10,606

 

12,056,255

1.86

 

Obligations of U.S. Government sponsored entities

 

 

 

 

 

 

 

 

 

 

 

Within 1 year

 

62,492

 

2

 

21

 

62,473

1.45

 

 

After 1 to 5 years

 

60,021

 

-

 

90

 

59,931

1.48

 

Total obligations of U.S. Government sponsored entities

 

122,513

 

2

 

111

 

122,404

1.47

 

Obligations of Puerto Rico, States and political subdivisions

 

 

 

 

 

 

 

 

 

 

 

Within 1 year

 

6,975

 

-

 

-

 

6,975

-

 

Total obligations of Puerto Rico, States and political subdivisions

 

6,975

 

-

 

-

 

6,975

-

 

Collateralized mortgage obligations - federal agencies

 

 

 

 

 

 

 

 

 

 

 

Within 1 year

 

236

 

-

 

-

 

236

1.83

 

 

After 1 to 5 years

 

350

 

1

 

-

 

351

2.16

 

 

After 5 to 10 years

 

85,079

 

31

 

1,180

 

83,930

1.63

 

 

After 10 years

 

504,391

 

3,640

 

6,373

 

501,658

2.08

 

Total collateralized mortgage obligations - federal agencies

 

590,056

 

3,672

 

7,553

 

586,175

2.02

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

Within 1 year

 

16

 

-

 

-

 

16

2.13

 

 

After 1 to 5 years

 

36,717

 

852

 

1

 

37,568

3.38

 

 

After 5 to 10 years

 

350,373

 

1,958

 

1,303

 

351,028

2.02

 

 

After 10 years

 

4,447,561

 

60,384

 

20,243

 

4,487,702

2.60

 

Total mortgage-backed securities

 

4,834,667

 

63,194

 

21,547

 

4,876,314

2.57

 

Other

 

 

 

 

 

 

 

 

 

 

 

After 1 to 5 years

 

341

 

9

 

-

 

350

3.62

 

Total other

 

341

 

9

 

-

 

350

3.62

 

Total debt securities available-for-sale[1]

$

17,542,125

$

146,165

$

39,817

$

17,648,473

2.05

%

[1]

Includes $12.2 billion pledged to secure government and trust deposits, assets sold under agreements to repurchase, credit facilities and loan servicing agreements that the secured parties are not permitted to sell or repledge the collateral, of which $10.9 billion serve as collateral for public funds.

 

The weighted average yield on debt securities available-for-sale is based on amortized cost; therefore, it does not give effect to changes in fair value.

Securities not due on a single contractual maturity date, such as mortgage-backed securities and collateralized mortgage obligations, are classified based on 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.

During the nine months ended September 30, 2020 and 2019 the Corporation sold U.S. Treasury Notes and U.S. Treasury Bills, respectively. The proceeds from these sales were $ 5 million and $99 million, respectively.

 

The following table presents the Corporation’s gross realized gains and losses on the sale of debt securities available-for-sale for the quarters and nine months ended September 30, 2020 and 2019.

 

 

For the quarter ended September 30,

Nine months ended September 30,

(In thousands)

 

2020

 

2019

 

2020

 

2019

Gross realized gains

$

41

$

-

$

41

$

-

Gross realized losses

 

-

 

(20)

 

-

 

(20)

Net realized losses on sale of debt securities available-for-sale

$

41

$

(20)

$

41

$

(20)

 

26

 

The following table 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 September 30, 2020 and December 31, 2019.

 

 

 

At September 30, 2020

 

Less than 12 months

12 months or more

Total

 

 

 

 

Gross

 

 

Gross

 

 

Gross

 

 

Fair

unrealized

Fair

unrealized

Fair

unrealized

(In thousands)

value

losses

value

losses

value

losses

Collateralized mortgage obligations - federal agencies

$

19,920

$

61

$

-

$

-

$

19,920

$

61

Mortgage-backed securities

 

1,752,642

 

5,267

 

910

 

28

 

1,753,552

 

5,295

Total debt securities available-for-sale in an unrealized loss position

$

1,772,562

$

5,328

$

910

$

28

$

1,773,472

$

5,356

 

 

 

At December 31, 2019

 

Less than 12 months

12 months or more

Total

 

 

 

 

Gross

 

 

Gross

 

 

Gross

 

 

Fair

unrealized

Fair

unrealized

Fair

unrealized

(In thousands)

value

losses

value

losses

value

losses

U.S. Treasury securities

$

2,439,114

$

9,798

$

452,784

$

808

$

2,891,898

$

10,606

Obligations of U.S. Government sponsored entities

 

9,973

 

4

 

99,846

 

107

 

109,819

 

111

Collateralized mortgage obligations - federal agencies

 

114,603

 

537

 

310,315

 

7,016

 

424,918

 

7,553

Mortgage-backed securities

 

179,312

 

693

 

1,784,414

 

20,854

 

1,963,726

 

21,547

Total debt securities available-for-sale in an unrealized loss position

$

2,743,002

$

11,032

$

2,647,359

$

28,785

$

5,390,361

$

39,817

 

 

As of September 30, 2020, the portfolio of available-for-sale debt securities reflects gross unrealized losses of approximately $5 million, driven mainly by mortgage-backed securities.

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.

 

 

 

September 30, 2020

 

December 31, 2019

 

 

 

 

 

 

 

 

 

(In thousands)

Amortized cost

Fair value

Amortized cost

Fair value

FNMA

$

2,478,911

$

2,583,405

$

3,113,373

$

3,129,538

Freddie Mac

 

3,089,137

 

3,148,769

 

1,623,116

 

1,638,796

27

 

Note 7 –Debt securities held-to-maturity

The following tables present the amortized cost, allowance for credit losses, gross unrealized gains and losses, approximate fair value, weighted average yield and contractual maturities of debt securities held-to-maturity at September 30, 2020 and December 31, 2019.

 

 

 

At September 30, 2020

 

 

 

 

 

 

Allowance

 

 

Gross

Gross

 

 

Weighted

 

 

 

Amortized

 

for Credit

 

Net of

unrealized

unrealized

Fair

average

 

(In thousands)

cost

 

Losses

 

Allowance

gains

losses

value

yield

 

Obligations of Puerto Rico, States and political subdivisions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Within 1 year

$

3,990

$

206

$

3,784

$

83

$

-

$

3,867

6.06

%

 

After 1 to 5 years

 

16,030

 

1,547

 

14,483

 

1,507

 

-

 

15,990

6.16

 

 

After 5 to 10 years

 

14,845

 

1,118

 

13,727

 

556

 

131

 

14,152

2.77

 

 

After 10 years

 

46,202

 

9,550

 

36,652

 

12,334

 

-

 

48,986

1.60

 

Total obligations of Puerto Rico, States and political subdivisions

 

81,067

 

12,421

 

68,646

 

14,480

 

131

 

82,995

2.93

 

Collateralized mortgage obligations - federal agencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

After 1 to 5 years

 

35

 

-

 

35

 

2

 

-

 

37

6.44

 

Total collateralized mortgage obligations - federal agencies

 

35

 

-

 

35

 

2

 

-

 

37

6.44

 

Securities in wholly owned statutory business trusts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

After 10 years

 

11,561

 

-

 

11,561

 

-

 

-

 

11,561

6.51

 

Total securities in wholly owned statutory business trusts

 

11,561

 

-

 

11,561

 

-

 

-

 

11,561

6.51

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Within 1 year

 

500

 

-

 

500

 

-

 

-

 

500

2.97

 

Total other

 

500

 

-

 

500

 

-

 

-

 

500

2.97

 

Total debt securities held-to-maturity

$

93,163

$

12,421

$

80,742

$

14,482

$

131

$

95,093

3.38

%

 

 

 

At December 31, 2019

 

 

 

 

 

Gross

Gross

 

 

Weighted

 

 

 

Amortized

unrealized

unrealized

Fair

average

 

(In thousands)

cost

gains

losses

value

yield

 

Obligations of Puerto Rico, States and political subdivisions

 

 

 

 

 

 

 

 

 

 

 

Within 1 year

$

3,745

$

-

$

11

$

3,734

6.01

%

 

After 1 to 5 years

 

17,580

 

-

 

320

 

17,260

6.11

 

 

After 5 to 10 years

 

18,195

 

-

 

1,607

 

16,588

3.11

 

 

After 10 years

 

46,036

 

9,384

 

-

 

55,420

1.67

 

Total obligations of Puerto Rico, States and political subdivisions

 

85,556

 

9,384

 

1,938

 

93,002

3.08

 

Collateralized mortgage obligations - federal agencies

 

 

 

 

 

 

 

 

 

 

 

After 1 to 5 years

 

45

 

2

 

-

 

47

6.44

 

Total collateralized mortgage obligations - federal agencies

 

45

 

2

 

-

 

47

6.44

 

Securities in wholly owned statutory business trusts

 

 

 

 

 

 

 

 

 

 

 

After 10 years

 

11,561

 

-

 

-

 

11,561

6.51

 

Total securities in wholly owned statutory business trusts

 

11,561

 

-

 

-

 

11,561

6.51

 

Other

 

 

 

 

 

 

 

 

 

 

 

Within 1 year

 

500

 

-

 

-

 

500

2.97

 

Total other

 

500

 

-

 

-

 

500

2.97

 

Total debt securities held-to-maturity

$

97,662

$

9,386

$

1,938

$

105,110

3.49

%

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 December 31, 2019.

28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2019

 

 

Less than 12 months

12 months or more

Total

 

 

 

 

Gross

 

 

Gross

 

 

Gross

 

 

Fair

unrealized

Fair

unrealized

Fair

unrealized

(In thousands)

value

losses

value

losses

value

losses

Obligations of Puerto Rico, States and political subdivisions

$

17,544

$

291

$

12,673

$

1,647

$

30,217

$

1,938

Total debt securities held-to-maturity in an unrealized loss position

$

17,544

$

291

$

12,673

$

1,647

$

30,217

$

1,938

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Indicators

The following describes the credit quality indicators by major security type that the Corporation considers in its’ estimate to develop the allowance for credit losses for investment securities held-to-maturity.

The “Obligations of Puerto Rico, States and political subdivisions” classified as held-to-maturity at September 30, 2020 includes securities issued by municipalities of Puerto Rico that are generally not rated by a credit rating agency. This includes $35 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 Corporation performs periodic credit quality reviews of these securities and internally assigns standardized credit risk ratings based on its evaluation. The Corporation considers these ratings in its estimate to develop the allowance for credit losses associated with these securities. For the definitions of the obligor risk ratings, refer to the Credit Quality section of Note 9 to the Consolidated Financial Statements included in the Corporation’s Form 10K for the year ended December 31, 2019.

The following presents the amortized cost basis of securities held by the Corporation issued by municipalities of Puerto Rico aggregated by the internally assigned standardized credit risk rating:

 

 

 

 

 

 

September 30, 2020

(In thousands)

 

Securities issued by Puerto Rico Municipalities

Watch

$

20,585

Special Mention

 

14,730

Ending Balance

$

35,315

 

 

 

 

 

The portfolio of “Obligations of Puerto Rico, States and political subdivisions” also includes $46 million in securities issued by the Puerto Rico Housing Finance Authority (“HFA”), a government instrumentality, for which the underlying source of payment is second mortgage loans in Puerto Rico residential properties (not the government), but for which HFA, provides a guarantee in the event of default and upon the satisfaction of certain other conditions. These securities are not rated by a credit rating agency. The Corporation assesses the credit risk associated with these securities by evaluating the refreshed FICO scores of a representative sample of the underlying borrowers. The average refreshed FICO score for the representative sample, comprised of 65% of the nominal value of the securities, used for the September 30, 2020 loss estimate was of 690. The loss estimates for this portfolio was based on the methodology established under CECL for similar loan obligations. The Corporation does not consider the government guarantee when estimating the credit losses associated with this portfolio.

A further deterioration of the Puerto Rico economy or of the fiscal health of the Government of Puerto Rico and/or its instrumentalities (including if any of the issuing municipalities become subject to a debt restructuring proceeding under PROMESA) could further affect the value of these securities, resulting in losses to the Corporation.

Refer to Note 21 for additional information on the Corporation’s exposure to the Puerto Rico Government.

Delinquency status

At September 30, 2020 there are no securities held-to-maturity in past due or non-performing status.

29

 

Allowance for credit losses on debt securities held-to-maturity

The following table provides the activity in the allowance for credit losses related to debt securities held-to-maturity by security type for the quarter and nine months ended September 30, 2020.

 

 

 

 

 

 

 

 

 

 

For the quarter ended September 30, 2020

(In thousands)

 

Obligations of Puerto Rico, States and political subdivisions

Allowance for credit losses:

 

 

 

Beginning balance

$

12,735

 

Provision for credit loss expense (reversal of provision)

 

(314)

 

Securities charged-off

 

-

 

Recoveries

 

-

Ending Balance

$

12,421

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2020

(In thousands)

 

Obligations of Puerto Rico, States and political subdivisions

Allowance for credit losses:

 

 

 

Beginning balance, January 1, 2020

$

-

 

Impact of adopting CECL

 

12,654

 

Provision for credit loss expense (reversal of provision)

 

(233)

 

Securities charged-off

 

-

 

Recoveries

 

-

Ending Balance

$

12,421

 

 

 

 

The allowance for credit losses for the Obligations of Puerto Rico, States and political subdivisions, includes $2.9 million for securities issued by municipalities of Puerto Rico, and $9.5 million for bonds issued by the Puerto Rico HFA, which are secured by second mortgage loans on Puerto Rico residential properties.

30

 

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 2019 Form 10-K and Note 4 in this Form 10-Q.

 

During the quarter and nine months ended September 30, 2020, the Corporation recorded purchases (including repurchases) of mortgage loans amounting to $941 million and $1.1 billion, respectively; including $137 million and $143 million in PCD loans, respectively. These mortgage loan repurchases included a bulk repurchase transaction of $688 million in GNMA loans, of which $684 million are included in the 90 days past due category, including $324 million which were included in the Corporation’s ending portfolio balance at June 30, 2020, since due to the delinquency status of the loans the Corporation had the right but not the obligation to repurchase the assets and is required to recognize (rebook) these loans in accordance with U.S. GAAP. The bulk loan repurchases also included $120 million in loans from the FNMA and FHMLC servicing portfolio, subject to credit recourse which were considered PCD loans.

 

There were no purchases of commercial and consumer loans during the quarter ended September 30, 2020. During the nine months ended September 30, 2020, the Corporation recorded purchases of commercial loans of $3 million and consumer loans of $56 million.

 

During the quarter and nine months ended September 30, 2019, the Corporation recorded purchases (including repurchases) of mortgage loans amounting to $81 million and $266 million, respectively; and purchases of consumer loans of $64 million and $222 million, respectively. There were no purchases of commercial loans (including loan participations) for the quarter ended September 30, 2019; $43 million for the nine months ended September 30, 2019.

 

The Corporation performed whole-loan sales involving approximately $62 million and $101 million of residential mortgage loans during the quarter and nine months ended September 30, 2020, respectively (September 30, 2019 - $18 million and $46 million, respectively). Also, the Corporation securitized approximately $100 million and $ 214 million of mortgage loans into Government National Mortgage Association (“GNMA”) mortgage-backed securities during the quarter and nine months ended September 30, 2020, respectively (September 30, 2019 - $ 88 million and $247 million, respectively). Furthermore, the Corporation securitized approximately $ 54 million and $ 94 million of mortgage loans into Federal National Mortgage Association (“FNMA”) mortgage-backed securities during the quarter and nine months ended September 30, 2020, respectively (September 30, 2019 - $ 33 million and $ 84 million, respectively). During the quarter and nine months ended September 30, 2020, the Corporation performed sales of commercial and construction loans, including loan participations amounting to $1 million and $7 million, respectively (September 30, 2019 - $47 million and $81 million, respectively).

 

Delinquency status

 

The following tables present 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 September 30, 2020 and December 31, 2019.

31

 

September 30, 2020

 

Puerto Rico

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Past due

 

 

 

 

 

 

 

Past due 90 days or more

 

 

 

 

30-59

 

60-89

 

90 days

Total

 

 

 

 

 

 

Non-accrual

 

 

Accruing

 

(In thousands)

 

days

 

days

 

or more[1]

past due

 

Current

 

Loans HIP

 

 

loans

 

loans

 

Commercial multi-family

 

$

3,480

 

$

129

 

$

1,400

$

5,009

 

$

139,169

 

$

144,178

 

 

$

1,400

 

$

-

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-owner occupied

 

 

19,523

 

 

2,014

 

 

98,811

 

120,348

 

 

1,950,794

 

 

2,071,142

 

 

 

98,811

 

 

-

 

 

Owner occupied

 

 

10,187

 

 

4,223

 

 

97,453

 

111,863

 

 

1,458,412

 

 

1,570,275

 

 

 

97,453

 

 

-

 

Commercial and industrial

 

 

6,809

 

 

6,376

 

 

45,013

 

58,198

 

 

4,233,554

 

 

4,291,752

 

 

 

44,320

 

 

693

 

Construction

 

 

4,895

 

 

-

 

 

21,514

 

26,409

 

 

169,656

 

 

196,065

 

 

 

21,514

 

 

-

 

Mortgage

 

 

336,824

 

 

59,386

 

 

1,567,504

 

1,963,714

 

 

4,863,266

 

 

6,826,980

 

 

 

370,060

 

 

1,197,444

[2]

Leasing

 

 

8,254

 

 

2,450

 

 

3,217

 

13,921

 

 

1,139,187

 

 

1,153,108

 

 

 

3,217

 

 

-

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

6,125

 

 

6,305

 

 

14,505

 

26,935

 

 

904,604

 

 

931,539

 

 

 

-

 

 

14,505

 

 

Home equity lines of credit

 

 

181

 

 

-

 

 

58

 

239

 

 

4,075

 

 

4,314

 

 

 

-

 

 

58

 

 

Personal

 

 

13,166

 

 

7,569

 

 

29,343

 

50,078

 

 

1,255,707

 

 

1,305,785

 

 

 

29,343

 

 

-

 

 

Auto

 

 

39,887

 

 

10,377

 

 

13,454

 

63,718

 

 

2,981,735

 

 

3,045,453

 

 

 

13,454

 

 

-

 

 

Other

 

 

190

 

 

1,224

 

 

14,348

 

15,762

 

 

108,290

 

 

124,052

 

 

 

14,104

 

 

244

 

Total

 

$

449,521

 

$

100,053

 

$

1,906,620

$

2,456,194

 

$

19,208,449

 

$

21,664,643

 

 

$

693,676

 

$

1,212,944

 

[1]

Loans included as 90 days or more past due include loans that that are not delinquent in their payment terms but that are reported as non-performing due to other credit quality considerations. As part of the adoption of CECL, at January 1, 2020, the Corporation reclassified to this category $134 million of acquired loans with credit deterioration that were previously accounted for under ASC 310-30 and were excluded from non-performing status. In addition, as part of the CECL transition, an additional $125 million of loans that were 90 days or more past due previously accounted for under ASC 310-30 and excluded from non-performing status are now included as non-performing.

 

[2]

It is the Corporation’s policy to report delinquent residential mortgage loans insured by FHA or guaranteed by the VA as accruing loans past due 90 days or more as opposed to non-performing since the principal repayment is insured. These include $161 million in loans rebooked under the GNMA program at September 30, 2020, in which issuers such as BPPR have the option but not the obligation to repurchase loans that are 90 days or more past due. During the third quarter the Corporation purchased $688 million in GNMA loans of which $684 million are included in the 90 days past due category including $324 million previously accounted under the repurchase option at June 30, 2020.

 

 

September 30, 2020

Popular U.S.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Past due

 

 

 

 

 

 

 

Past due 90 days or more

 

 

 

30-59

 

60-89

 

90 days

 

Total

 

 

 

 

 

 

Non-accrual

 

 

Accruing

(In thousands)

 

days

 

days

 

or more

 

past due

 

Current

 

Loans HIP

 

 

loans

 

loans

Commercial multi-family

 

$

-

 

$

-

 

$

1,755

 

$

1,755

 

$

1,734,982

 

$

1,736,737

 

 

$

1,755

 

$

-

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-owner occupied

 

 

-

 

 

-

 

 

396

 

 

396

 

 

1,938,617

 

 

1,939,013

 

 

 

396

 

 

-

 

Owner occupied

 

 

653

 

 

-

 

 

342

 

 

995

 

 

360,131

 

 

361,126

 

 

 

342

 

 

-

Commercial and industrial

 

 

552

 

 

50

 

 

3,901

 

 

4,503

 

 

1,492,648

 

 

1,497,151

 

 

 

3,901

 

 

-

Construction

 

 

-

 

 

-

 

 

9,069

 

 

9,069

 

 

731,140

 

 

740,209

 

 

 

9,069

 

 

-

Mortgage

 

 

2,467

 

 

6,433

 

 

14,484

 

 

23,384

 

 

1,074,077

 

 

1,097,461

 

 

 

14,484

 

 

-

Legacy

 

 

41

 

 

16

 

 

1,360

 

 

1,417

 

 

14,751

 

 

16,168

 

 

 

1,360

 

 

-

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

-

 

 

3

 

 

3

 

 

6

 

 

25

 

 

31

 

 

 

-

 

 

3

 

Home equity lines of credit

 

 

1,257

 

 

351

 

 

7,586

 

 

9,194

 

 

95,715

 

 

104,909

 

 

 

7,586

 

 

-

 

Personal

 

 

1,641

 

 

1,597

 

 

1,770

 

 

5,008

 

 

228,754

 

 

233,762

 

 

 

1,770

 

 

-

 

Other

 

 

22

 

 

2

 

 

29

 

 

53

 

 

1,247

 

 

1,300

 

 

 

29

 

 

-

Total

 

$

6,633

 

$

8,452

 

$

40,695

 

$

55,780

 

$

7,672,087

 

$

7,727,867

 

 

$

40,692

 

$

3

32

 

September 30, 2020

 

Popular, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

Past due

 

 

 

 

 

 

 

Past due 90 days or more

 

 

 

30-59

 

60-89

 

90 days

Total

 

 

 

 

 

Non-accrual

 

 

Accruing

 

(In thousands)

days

 

days

 

or more[3]

past due

 

Current

 

Loans HIP[4] [5]

 

 

loans

 

loans

 

Commercial multi-family

$

3,480

 

$

129

 

$

3,155

$

6,764

 

$

1,874,151

 

$

1,880,915

 

 

$

3,155

 

$

-

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-owner occupied

 

19,523

 

 

2,014

 

 

99,207

 

120,744

 

 

3,889,411

 

 

4,010,155

 

 

 

99,207

 

 

-

 

 

Owner occupied

 

10,840

 

 

4,223

 

 

97,795

 

112,858

 

 

1,818,543

 

 

1,931,401

 

 

 

97,795

 

 

-

 

Commercial and industrial

 

7,361

 

 

6,426

 

 

48,914

 

62,701

 

 

5,726,202

 

 

5,788,903

 

 

 

48,221

 

 

693

 

Construction

 

4,895

 

 

-

 

 

30,583

 

35,478

 

 

900,796

 

 

936,274

 

 

 

30,583

 

 

-

 

Mortgage[1]

 

339,291

 

 

65,819

 

 

1,581,988

 

1,987,098

 

 

5,937,343

 

 

7,924,441

 

 

 

384,544

 

 

1,197,444

[6]

Leasing

 

8,254

 

 

2,450

 

 

3,217

 

13,921

 

 

1,139,187

 

 

1,153,108

 

 

 

3,217

 

 

-

 

Legacy[2]

 

41

 

 

16

 

 

1,360

 

1,417

 

 

14,751

 

 

16,168

 

 

 

1,360

 

 

-

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

6,125

 

 

6,308

 

 

14,508

 

26,941

 

 

904,629

 

 

931,570

 

 

 

-

 

 

14,508

 

 

Home equity lines of credit

 

1,438

 

 

351

 

 

7,644

 

9,433

 

 

99,790

 

 

109,223

 

 

 

7,586

 

 

58

 

 

Personal

 

14,807

 

 

9,166

 

 

31,113

 

55,086

 

 

1,484,461

 

 

1,539,547

 

 

 

31,113

 

 

-

 

 

Auto

 

39,887

 

 

10,377

 

 

13,454

 

63,718

 

 

2,981,735

 

 

3,045,453

 

 

 

13,454

 

 

-

 

 

Other

 

212

 

 

1,226

 

 

14,377

 

15,815

 

 

109,537

 

 

125,352

 

 

 

14,133

 

 

244

 

Total

$

456,154

 

$

108,505

 

$

1,947,315

$

2,511,974

 

$

26,880,536

 

$

29,392,510

 

 

$

734,368

 

$

1,212,947

 

[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 included as 90 days or more past due include loans that that are not delinquent in their payment terms but that are reported as non-performing due to other credit quality considerations. As part of the adoption of CECL, at January 1, 2020, the Corporation reclassified to this category $134 million of acquired loans with credit deterioration that were previously accounted for under ASC 310-30 and were excluded from non-performing status. In addition, as part of the CECL transition, an additional $144 million of loans that were 90 days or more past due previously accounted for under ASC 310-30 and excluded from non-performing status are now included as non-performing.

[4]

Loans held-in-portfolio are net of $ 194 million in unearned income and exclude $ 103 million in loans held-for-sale.

[5]

Includes $6.8 billion pledged to secure credit facilities and public funds that the secured parties are not permitted to sell or repledge the collateral, of which $4.2 billion were pledged at the Federal Home Loan Bank ("FHLB") as collateral for borrowings and $2.6 billion at the Federal Reserve Bank ("FRB") for discount window borrowings.

[6]

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. During the third quarter the Corporation purchased $688 million in GNMA loans of which $684 are included in the 90 days past due category including $324 million previously accounted under the repurchase option at June 30, 2020.These include loans rebooked, which were previously pooled into GNMA securities amounting to $161 million. Under the GNMA program, issuers such as BPPR have the option but not the obligation to repurchase loans that are 90 days or more past due. For accounting purposes, these loans subject to the repurchase option are required to be reflected (rebooked)on the financial statements of BPPR with an offsetting liability. Loans in our serviced GNMA portfolio benefit from payment forbearance programs but continue to reflect the contractual delinquency until the borrower repays deferred payments or completes a payment deferral modification or other borrower assistance alternative.

33

 

December 31, 2019

Puerto Rico

 

 

 

 

 

 

 

 

 

 

 

 

Past due

 

 

 

 

 

 

 

Past due 90 days or more

 

 

 

 

30-59

 

 

60-89

 

 

90 days

 

Total

 

 

 

 

 

 

 

Non-accrual

 

 

Accruing

(In thousands)

 

 

days

 

 

days

 

 

or more

 

past due

 

Current

 

Loans HIP

 

 

loans

 

loans[1]

Commercial multi-family

 

$

2,941

 

$

129

 

$

1,512

 

$

4,582

 

$

143,267

 

$

147,849

 

 

$

1,473

 

$

-

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-owner occupied

 

 

10,439

 

 

5,244

 

 

43,664

 

 

59,347

 

 

2,048,871

 

 

2,108,218

 

 

 

39,968

 

 

-

 

Owner occupied

 

 

5,704

 

 

3,978

 

 

84,537

 

 

94,219

 

 

1,492,110

 

 

1,586,329

 

 

 

69,276

 

 

-

Commercial and industrial

 

 

8,780

 

 

1,646

 

 

37,156

 

 

47,582

 

 

3,371,152

 

 

3,418,734

 

 

 

36,538

 

 

544

Construction

 

 

1,555

 

 

-

 

 

119

 

 

1,674

 

 

135,796

 

 

137,470

 

 

 

119

 

 

-

Mortgage

 

 

285,006

 

 

146,197

 

 

837,651

 

 

1,268,854

 

 

4,897,894

 

 

6,166,748

 

 

 

283,708

 

 

439,662

Leasing

 

 

12,014

 

 

3,053

 

 

3,657

 

 

18,724

 

 

1,040,783

 

 

1,059,507

 

 

 

3,657

 

 

-

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

11,358

 

 

7,928

 

 

19,461

 

 

38,747

 

 

1,085,053

 

 

1,123,800

 

 

 

-

 

 

19,461

 

Home equity lines of credit

 

 

-

 

 

85

 

 

-

 

 

85

 

 

4,953

 

 

5,038

 

 

 

-

 

 

-

 

Personal

 

 

13,481

 

 

9,352

 

 

20,296

 

 

43,129

 

 

1,325,021

 

 

1,368,150

 

 

 

19,529

 

 

61

 

Auto

 

 

81,169

 

 

23,182

 

 

31,148

 

 

135,499

 

 

2,782,023

 

 

2,917,522

 

 

 

31,148

 

 

-

 

Other

 

 

358

 

 

1,418

 

 

14,189

 

 

15,965

 

 

124,902

 

 

140,867

 

 

 

13,784

 

 

405

Total

 

$

432,805

 

$

202,212

 

$

1,093,390

 

$

1,728,407

 

$

18,451,825

 

$

20,180,232

 

 

$

499,200

 

$

460,133

[1]

Loans HIP of $134 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 would accrete interest income over the remaining life of the loans using estimated cash flow analysis.

 

December 31, 2019

Popular U.S.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Past due

 

 

 

 

 

 

 

 

Past due 90 days or more

 

 

 

 

30-59

 

 

60-89

 

 

90 days

 

 

Total

 

 

 

 

 

 

 

Non-accrual

 

 

Accruing

(In thousands)

 

 

days

 

 

days

 

 

or more

 

 

past due

 

 

Current

 

 

Loans HIP

 

 

loans

 

loans[1]

Commercial multi-family

 

$

9

 

$

-

 

$

2,097

 

$

2,106

 

$

1,645,204

 

$

1,647,310

 

 

$

2,097

 

$

-

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-owner occupied

 

 

1,047

 

 

-

 

 

281

 

 

1,328

 

 

1,868,968

 

 

1,870,296

 

 

 

281

 

 

-

 

Owner occupied

 

 

1,750

 

 

-

 

 

251

 

 

2,001

 

 

337,134

 

 

339,135

 

 

 

251

 

 

-

Commercial and industrial

 

 

454

 

 

128

 

 

19,945

 

 

20,527

 

 

1,174,353

 

 

1,194,880

 

 

 

876

 

 

-

Construction

 

 

-

 

 

-

 

 

26

 

 

26

 

 

693,596

 

 

693,622

 

 

 

26

 

 

-

Mortgage

 

 

15,474

 

 

4,024

 

 

11,091

 

 

30,589

 

 

986,195

 

 

1,016,784

 

 

 

11,091

 

 

-

Legacy

 

 

49

 

 

8

 

 

1,999

 

 

2,056

 

 

20,049

 

 

22,105

 

 

 

1,999

 

 

-

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

-

 

 

-

 

 

-

 

 

-

 

 

36

 

 

36

 

 

 

-

 

 

-

 

Home equity lines of credit

 

 

404

 

 

267

 

 

9,954

 

 

10,625

 

 

106,718

 

 

117,343

 

 

 

9,954

 

 

-

 

Personal

 

 

2,286

 

 

1,582

 

 

2,066

 

 

5,934

 

 

318,506

 

 

324,440

 

 

 

2,066

 

 

-

 

Other

 

 

3

 

 

-

 

 

-

 

 

3

 

 

687

 

 

690

 

 

 

-

 

 

-

Total

 

$

21,476

 

$

6,009

 

$

47,710

 

$

75,195

 

$

7,151,446

 

$

7,226,641

 

 

$

28,641

 

$

-

[1]

Loans HIP of $ 19 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 would accrete interest income over the remaining life of the loans using estimated cash flow analysis.

34

 

December 31, 2019

Popular, Inc.

 

 

 

 

 

 

 

 

 

 

 

Past due

 

 

 

 

 

 

 

Past due 90 days or more

 

 

 

30-59

 

 

60-89

 

 

90 days

 

 

Total

 

 

 

 

 

 

Non-accrual

 

 

Accruing

(In thousands)

 

days

 

 

days

 

 

or more

 

 

past due

 

Current

 

Loans HIP[3] [4]

 

 

loans

 

loans[5]

Commercial multi-family

$

2,950

 

$

129

 

$

3,609

 

$

6,688

 

$

1,788,471

 

$

1,795,159

 

 

$

3,570

 

$

-

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-owner occupied

 

11,486

 

 

5,244

 

 

43,945

 

 

60,675

 

 

3,917,839

 

 

3,978,514

 

 

 

40,249

 

 

-

 

Owner occupied

 

7,454

 

 

3,978

 

 

84,788

 

 

96,220

 

 

1,829,244

 

 

1,925,464

 

 

 

69,527

 

 

-

Commercial and industrial

 

9,234

 

 

1,774

 

 

57,101

 

 

68,109

 

 

4,545,505

 

 

4,613,614

 

 

 

37,414

 

 

544

Construction

 

1,555

 

 

-

 

 

145

 

 

1,700

 

 

829,392

 

 

831,092

 

 

 

145

 

 

-

Mortgage[1]

 

300,480

 

 

150,221

 

 

848,742

 

 

1,299,443

 

 

5,884,089

 

 

7,183,532

 

 

 

294,799

 

 

439,662

Leasing

 

12,014

 

 

3,053

 

 

3,657

 

 

18,724

 

 

1,040,783

 

 

1,059,507

 

 

 

3,657

 

 

-

Legacy[2]

 

49

 

 

8

 

 

1,999

 

 

2,056

 

 

20,049

 

 

22,105

 

 

 

1,999

 

 

-

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

11,358

 

 

7,928

 

 

19,461

 

 

38,747

 

 

1,085,089

 

 

1,123,836

 

 

 

-

 

 

19,461

 

Home equity lines of credit

 

404

 

 

352

 

 

9,954

 

 

10,710

 

 

111,671

 

 

122,381

 

 

 

9,954

 

 

-

 

Personal

 

15,767

 

 

10,934

 

 

22,362

 

 

49,063

 

 

1,643,527

 

 

1,692,590

 

 

 

21,595

 

 

61

 

Auto

 

81,169

 

 

23,182

 

 

31,148

 

 

135,499

 

 

2,782,023

 

 

2,917,522

 

 

 

31,148

 

 

-

 

Other

 

361

 

 

1,418

 

 

14,189

 

 

15,968

 

 

125,589

 

 

141,557

 

 

 

13,784

 

 

405

Total

$

454,281

 

$

208,221

 

$

1,141,100

 

$

1,803,602

 

$

25,603,271

 

$

27,406,873

 

 

$

527,841

 

$

460,133

[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 $ 181 million in unearned income and exclude $ 59 million in loans held-for-sale.

[4]

Includes $6.7 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 FHLB as collateral for borrowings and $2.1 billion at the FRB for discount window borrowings.

[5]

Loans HIP of $153 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 would accrete interest income over the remaining life of the loans using estimated cash flow analysis.

 

Recognition of interest income on mortgage loans is generally discontinued when loans are 90 days or more in arrears on payments of principal or interest. The Corporation discontinues the recognition of interest income on residential mortgage loans insured by the Federal Housing Administration (“FHA”) or guaranteed by the U.S. Department of Veterans Affairs (“VA”) when 15 months delinquent as to principal or interest, since the principal repayment on these loans is insured.

 

At September 30, 2020, mortgage loans held-in-portfolio include $2.1 billion (December 31, 2019 - $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 $1.2 billion (December 31, 2019 - $441 million) are 90 days or more past due, including $688 million which were included in the Corporation’s bulk loan repurchases completed during the third quarter of 2020 (of which $684 million are included in the 90 days past due category including $324 million previously accounted under the repurchase option at June 30, 2020). These balances include $650 million in loans modified under a TDR (December 31, 2019 - $625 million), that are presented as accruing loans. The portfolio of U.S. guaranteed loans includes $318 million of residential mortgage loans in Puerto Rico that are no longer accruing interest as of September 30, 2020 (December 31, 2019 - $213 million). The Corporation has approximately $60 million in reverse mortgage loans in Puerto Rico which are guaranteed by FHA, but which are currently not accruing interest at September 30, 2020 (December 31, 2019 - $65 million).

 

Loans with a delinquency status of 90 days past due as of September 30, 2020 include $161 million in loans previously pooled into GNMA securities (December 31, 2019 - $103 million). Under the GNMA program, issuers such as BPPR have the option but not the obligation to repurchase loans that are 90 days or more past due. For accounting purposes, these loans subject to the repurchase option are required to be reflected on the financial statements of BPPR with an offsetting liability. Loans in our serviced GNMA portfolio benefit from payment forbearance programs but continue to reflect the contractual delinquency until the borrower repays deferred payments or completes a payment deferral modification or other borrower assistance alternative.

 

35

 

The following table presents the amortized cost basis of non-accrual loans as of September 30, 2020 by class of loans and the related interest income recognized on these loans:

 

September 30, 2020

 

Puerto Rico

 

Popular U.S.

 

Popular, Inc.

(In thousands)

Non-accrual with no allowance

Non-accrual with allowance

Interest income recognized

 

Non-accrual with no allowance

Non-accrual with allowance

Interest income recognized

 

Non-accrual with no allowance

Non-accrual with allowance

Interest income recognized

Commercial multi-family

$

-

$

1,400

$

1

 

$

1,755

$

-

$

-

 

$

1,755

$

1,400

$

1

Commercial real estate non-owner occupied

 

19,008

 

79,803

 

337

 

 

-

 

396

 

-

 

 

19,008

 

80,199

 

337

Commercial real estate owner occupied

 

21,927

 

75,526

 

672

 

 

-

 

342

 

-

 

 

21,927

 

75,868

 

672

Commercial and industrial

 

21,147

 

23,173

 

127

 

 

1,800

 

2,101

 

-

 

 

22,947

 

25,274

 

127

Construction

 

-

 

21,514

 

52

 

 

-

 

9,069

 

-

 

 

-

 

30,583

 

52

Mortgage

 

145,243

 

224,817

 

727

 

 

526

 

13,958

 

60

 

 

145,769

 

238,775

 

787

Leasing

 

-

 

3,217

 

2

 

 

-

 

-

 

-

 

 

-

 

3,217

 

2

Legacy

 

-

 

-

 

-

 

 

-

 

1,360

 

-

 

 

-

 

1,360

 

-

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HELOCs

 

-

 

-

 

-

 

 

-

 

7,586

 

1

 

 

-

 

7,586

 

1

Personal

 

7,212

 

22,131

 

227

 

 

-

 

1,770

 

4

 

 

7,212

 

23,901

 

231

Auto

 

-

 

13,454

 

34

 

 

-

 

-

 

-

 

 

-

 

13,454

 

34

Other

 

-

 

14,104

 

121

 

 

-

 

29

 

-

 

 

-

 

14,133

 

121

Total

$

214,537

$

479,139

$

2,300

 

$

4,081

$

36,611

$

65

 

$

218,618

$

515,750

$

2,365

 

 

Loans in non-accrual status with no allowance include $218 million in collateral dependent loans.

 

The Corporation has designated loans classified as collateral dependent for which it applies the practical expedient to measure the ACL based on the fair value of the collateral less cost to sell, when the repayment is expected to be provided substantially by the sale or operation of the collateral and the borrower is experiencing financial difficulty. The fair value of the collateral is based on appraisals, which may be adjusted due to their age, and the type, location, and condition of the property or area or general market conditions to reflect the expected change in value between the effective date of the appraisal and the measurement date. Appraisals are updated every one to two years depending on the type of loan and the total exposure of the borrower.

 

The following table present the amortized cost basis of collateral-dependent loans by class of loans and type of collateral as of September 30, 2020:

36

 

 

 

September 30, 2020

(In thousands)

 

Real Estate

 

Auto

 

Equipment

 

Taxi Medallions

 

Accounts Receivables

 

Other

 

Total

Puerto Rico

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial multi-family

$

2,265

$

-

$

-

$

-

$

-

$

-

$

2,265

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-owner occupied

 

324,143

 

-

 

-

 

-

 

-

 

-

 

324,143

 

Owner occupied

 

83,963

 

-

 

-

 

-

 

-

 

-

 

83,963

Commercial and industrial

 

8,911

 

-

 

996

 

-

 

12,934

 

17,538

 

40,379

Construction

 

21,514

 

-

 

-

 

-

 

-

 

-

 

21,514

Mortgage

 

184,300

 

-

 

-

 

-

 

-

 

-

 

184,300

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal

 

5,480

 

-

 

-

 

-

 

-

 

-

 

5,480

Total Puerto Rico

$

630,576

$

-

$

996

$

-

$

12,934

$

17,538

$

662,044

Popular U.S.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial multi-family

$

1,755

$

-

$

-

$

-

$

-

$

-

$

1,755

Commercial and industrial

 

-

 

-

 

-

 

3,607

 

-

 

-

 

3,607

Construction

 

9,069

 

-

 

-

 

-

 

-

 

-

 

9,069

Mortgage

 

527

 

-

 

-

 

-

 

-

 

-

 

527

Total Popular U.S.

$

11,351

$

-

$

-

$

3,607

$

-

$

-

$

14,958

Popular, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial multi-family

$

4,020

$

-

$

-

$

-

$

-

$

-

$

4,020

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-owner occupied

 

324,143

 

-

 

-

 

-

 

-

 

-

 

324,143

 

Owner occupied

 

83,963

 

-

 

-

 

-

 

-

 

-

 

83,963

Commercial and industrial

 

8,911

 

-

 

996

 

3,607

 

12,934

 

17,538

 

43,986

Construction

 

30,583

 

-

 

-

 

-

 

-

 

-

 

30,583

Mortgage

 

184,827

 

-

 

-

 

-

 

-

 

-

 

184,827

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal

 

5,480

 

-

 

-

 

-

 

-

 

-

 

5,480

Total Popular, Inc.

$

641,927

$

-

$

996

$

3,607

$

12,934

$

17,538

$

677,002

 

Purchased Credit Deteriorated Loans (PCD)

 

The Corporation has purchased loans during the quarter and nine months ended, for which there was, at acquisition, evidence of more than insignificant deterioration of credit quality since origination. The carrying amount of those loans is as follows:

 

 

 

 

 

 

(In thousands)

 

For the quarter ended September 30, 2020

 

For the nine months ended September 30, 2020

Purchase price of loans at acquisition

$

132,738

$

137,477

Allowance for credit losses at acquisition

 

4,823

 

5,819

Non-credit discount/premium at acquisition

 

(6,485)

 

(6,273)

Par value of acquired loans at acquisition

$

131,076

$

137,023

Loans acquired with deteriorated credit quality accounted for under ASC 310-30

37

 

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 $1.9 billion at December 31, 2019. 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”).

The following table provides the carrying amount of acquired loans accounted for under ASC 310-30 by portfolio at December 31, 2019.

 

Carrying amount

(In thousands)

 

December 31, 2019

Commercial real estate

$

670,566

Commercial and industrial

 

104,756

Mortgage

 

856,618

Consumer

 

11,778

Carrying amount

 

1,643,718

Allowance for loan losses

 

(74,039)

Carrying amount, net of allowance

$

1,569,679

38

 

At December 31, 2019, none of the acquired loans accounted for under ASC Subtopic 310-30 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 quarter and nine months ended September 30, 2019, were as follows:

 

Carrying amount of acquired loans accounted for pursuant to ASC 310-30

(In thousands)

 

For the quarter ended September 30, 2019

 

 

For the nine months ended September 30, 2019

Beginning balance

$

1,789,237

 

$

1,883,556

Additions

 

11,891

 

 

27,639

Accretion

 

35,502

 

 

111,083

Collections / loan sales / charge-offs

 

(134,256)

 

 

(319,904)

Ending balance[1]

$

1,702,374

 

$

1,702,374

Allowance for loan losses

 

(94,610)

 

 

(94,610)

Ending balance, net of ALLL

$

1,607,764

 

$

1,607,764

[1]

At September 30, 2019, includes $1.2 billion of loans considered non-credit impaired at the acquisition date.

 

Activity in the accretable yield of acquired loans accounted for pursuant to ASC 310-30

(In thousands)

 

For the quarter ended September 30, 2019

 

 

For the nine months ended September 30, 2019

Beginning balance

$

1,042,407

 

$

1,092,504

Additions

 

7,711

 

 

19,577

Accretion

 

(35,502)

 

 

(111,083)

Change in expected cash flows

 

5,043

 

 

18,661

Ending balance[1]

$

1,019,659

 

$

1,019,659

[1]

At September 30, 2019, includes $ 0.7 billion of loans considered non-credit impaired at the acquisition date.

39

 

Note 9 – Allowance for credit losses – loans held-in-portfolio

 

The Corporation follows the current expected credit loss (“CECL”) model, to establish and evaluate the adequacy of the allowance for credit losses (“ACL”) to provide for expected losses in the loan portfolio. This model establishes a forward-looking methodology that reflects the expected credit losses over the lives of financial assets, starting when such assets are first acquired. In addition, CECL provides that the initial allowance for credit losses on purchased credit deteriorated (“PCD”) financial assets will be recorded as an increase to the purchase price, with subsequent changes to the allowance recorded as a credit loss expense. The provision for credit losses charged to current operations is based on this methodology. Loan losses are charged and recoveries are credited to the ACL. Refer to Note 4 - Summary of significant accounting policies, for a description of the Corporation’s methodology to estimate the ACL.

In the third quarter of 2020, the Corporation applied probability weights to the outcomes of simulations using Moody’s Analytics’ Baseline, S3 (pessimistic) and S1 (optimistic) scenarios. The Baseline scenario carried the highest weight. The remaining weights were assigned based on the evaluation of risks to the Baseline scenario. When compared to the Moody’s Analytics’ second quarter’s June Baseline scenario, the third quarter’s Baseline scenario assumes a more favorable increase in economic activity from the third quarter of 2020 through the second quarter of 2021, with continued growth thereafter. However, a significant second wave of COVID-19 infections, as well as delays in the additional government stimulus, continue to be key risks to the Baseline forecast. This contributed to the S3 (pessimistic) scenario having the second highest probability. The impact of applying probability weights to alternative scenarios resulted in an increase in estimated reserves of approximately $31 million. This effect was partially offset by the net impact of net charge-offs, changes to portfolio balances and credit quality.

 

The following tables present the changes in the allowance for credit losses, and loan ending balances for the quarters and nine months ended September 30, 2020 and 2019.

40

 

For the quarter ended September 30, 2020

Puerto Rico

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

Commercial

 

Construction

 

Mortgage

 

Leasing

 

Consumer

 

Total

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

214,927

 

$

354

 

$

199,250

 

$

13,093

 

$

328,158

 

$

755,782

 

Provision (reversal of provision)

 

1,562

 

 

4,358

 

 

1,549

 

 

1,746

 

 

(1,533)

 

 

7,682

 

Initial allowance for credit losses - PCD Loans

 

-

 

 

-

 

 

4,823

 

 

-

 

 

-

 

 

4,823

 

Charge-offs

 

(2,059)

 

 

-

 

 

(5,217)

 

 

(957)

 

 

(25,808)

 

 

(34,041)

 

Recoveries

 

4,018

 

 

156

 

 

3,253

 

 

1,286

 

 

11,559

 

 

20,272

Ending balance

$

218,448

 

$

4,868

 

$

203,658

 

$

15,168

 

$

312,376

 

$

754,518

 

For the quarter ended September 30, 2020

Popular U.S.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

Commercial

 

Construction

 

Mortgage

 

Legacy

 

Consumer

 

Total

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

100,029

 

$

6,063

 

$

22,987

 

$

2,052

 

$

31,521

 

$

162,652

 

Provision (reversal of provision)

 

12,159

 

 

1,403

 

 

(1,312)

 

 

(198)

 

 

(282)

 

 

11,770

 

Charge-offs

 

(458)

 

 

-

 

 

(12)

 

 

(26)

 

 

(3,852)

 

 

(4,348)

 

Recoveries

 

98

 

 

-

 

 

17

 

 

77

 

 

1,066

 

 

1,258

Ending balance

$

111,828

 

$

7,466

 

$

21,680

 

$

1,905

 

$

28,453

 

$

171,332

41

 

For the quarter ended September 30, 2020

Popular, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

Commercial

 

Construction

 

Mortgage

 

Legacy

Leasing

 

Consumer

 

Total

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

314,956

 

$

6,417

 

$

222,237

 

$

2,052

$

13,093

 

$

359,679

 

$

918,434

 

Provision (reversal of provision)

 

13,721

 

 

5,761

 

 

237

 

 

(198)

 

1,746

 

 

(1,815)

 

 

19,452

 

Initial allowance for credit losses - PCD Loans

 

-

 

 

-

 

 

4,823

 

 

-

 

-

 

 

-

 

 

4,823

 

Charge-offs

 

(2,517)

 

 

-

 

 

(5,229)

 

 

(26)

 

(957)

 

 

(29,660)

 

 

(38,389)

 

Recoveries

 

4,116

 

 

156

 

 

3,270

 

 

77

 

1,286

 

 

12,625

 

 

21,530

Ending balance

$

330,276

 

$

12,334

 

$

225,338

 

$

1,905

$

15,168

 

$

340,829

 

$

925,850

 

For the nine months ended September 30, 2020

Puerto Rico

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

Commercial

 

Construction

 

Mortgage

 

Leasing

 

Consumer

 

Total

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

131,063

 

$

574

 

$

116,281

 

$

10,768

 

$

173,965

 

$

432,651

 

Impact of adopting CECL

 

62,393

 

 

115

 

 

86,081

 

 

(713)

 

 

122,492

 

 

270,368

 

Provision (reversal of provision)

 

24,710

 

 

3,809

 

 

10,533

 

 

11,481

 

 

130,576

 

 

181,109

 

Initial allowance for credit losses - PCD Loans

 

-

 

 

-

 

 

5,819

 

 

-

 

 

-

 

 

5,819

 

Charge-offs

 

(7,799)

 

 

-

 

 

(22,940)

 

 

(8,681)

 

 

(141,794)

 

 

(181,214)

 

Recoveries

 

8,081

 

 

370

 

 

7,884

 

 

2,313

 

 

27,137

 

 

45,785

Ending balance

$

218,448

 

$

4,868

 

$

203,658

 

$

15,168

 

$

312,376

 

$

754,518

 

For the nine months ended September 30, 2020

Popular U.S.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

Commercial

 

Construction

 

Mortgage

 

Legacy

 

Consumer

 

Total

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

15,989

 

$

4,204

 

$

4,827

 

$

630

 

$

19,407

 

$

45,057

 

Impact of adopting CECL

 

29,103

 

 

(2,986)

 

 

10,431

 

 

382

 

 

7,809

 

 

44,739

 

Provision (reversal of provision)

 

66,299

 

 

6,093

 

 

6,397

 

 

854

 

 

10,799

 

 

90,442

 

Charge-offs

 

(1,412)

 

 

-

 

 

(28)

 

 

(40)

 

 

(13,663)

 

 

(15,143)

 

Recoveries

 

1,849

 

 

155

 

 

53

 

 

79

 

 

4,101

 

 

6,237

Ending balance

$

111,828

 

$

7,466

 

$

21,680

 

$

1,905

 

$

28,453

 

$

171,332

 

For the nine months ended September 30, 2020

Popular, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

Commercial

 

Construction

 

Mortgage

 

Legacy

Leasing

 

Consumer

 

Total

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

147,052

 

$

4,778

 

$

121,108

 

$

630

$

10,768

 

$

193,372

 

$

477,708

 

Impact of adopting CECL

 

91,496

 

 

(2,871)

 

 

96,512

 

 

382

 

(713)

 

 

130,301

 

 

315,107

 

Provision (reversal of provision)

 

91,009

 

 

9,902

 

 

16,930

 

 

854

 

11,481

 

 

141,375

 

 

271,551

 

Initial allowance for credit losses - PCD Loans

 

-

 

 

-

 

 

5,819

 

 

-

 

-

 

 

-

 

 

5,819

 

Charge-offs

 

(9,211)

 

 

-

 

 

(22,968)

 

 

(40)

 

(8,681)

 

 

(155,457)

 

 

(196,357)

 

Recoveries

 

9,930

 

 

525

 

 

7,937

 

 

79

 

2,313

 

 

31,238

 

 

52,022

Ending balance

$

330,276

 

$

12,334

 

$

225,338

 

$

1,905

$

15,168

 

$

340,829

 

$

925,850

42

 

For the quarter ended September 30, 2019

Puerto Rico

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

Commercial

 

Construction

 

Mortgage

 

Leasing

 

Consumer

 

Total

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

190,227

 

$

2,996

 

$

127,930

 

$

6,907

 

$

148,131

 

$

476,191

 

Provision (reversal of provision)

 

(18,036)

 

 

(4,916)

 

 

6,494

 

 

3,739

 

 

47,198

 

 

34,479

 

Charge-offs

 

(15,419)

 

 

(27)

 

 

(13,886)

 

 

(4,040)

 

 

(46,398)

 

 

(79,770)

 

Recoveries

 

4,787

 

 

3,013

 

 

1,197

 

 

587

 

 

10,286

 

 

19,870

Ending balance

$

161,559

 

$

1,066

 

$

121,735

 

$

7,193

 

$

159,217

 

$

450,770

Specific ALLL

$

30,130

 

$

57

 

$

40,483

 

$

71

 

$

21,009

 

$

91,750

General ALLL

$

131,429

 

$

1,009

 

$

81,252

 

$

7,122

 

$

138,208

 

$

359,020

Loans held-in-portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

$

407,124

 

$

274

 

$

523,876

 

$

624

 

$

95,356

 

$

1,027,254

Loans held-in-portfolio excluding impaired loans

 

6,761,529

 

 

123,798

 

 

5,711,700

 

 

1,021,860

 

 

5,286,441

 

 

18,905,328

Total loans held-in-portfolio

$

7,168,653

 

$

124,072

 

$

6,235,576

 

$

1,022,484

 

$

5,381,797

 

$

19,932,582

 

For the quarter ended September 30, 2019

Popular U.S.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

Commercial

 

Construction

 

Mortgage

 

Legacy

 

Consumer

 

Total

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

35,302

 

$

6,887

 

$

4,586

 

$

774

 

$

19,926

 

$

67,475

 

Provision (reversal of provision)

 

(2,507)

 

 

2,826

 

 

288

 

 

(280)

 

 

1,733

 

 

2,060

 

Charge-offs

 

(5,912)

 

 

(2,215)

 

 

-

 

 

(2)

 

 

(4,619)

 

 

(12,748)

 

Recoveries

 

2,279

 

 

-

 

 

18

 

 

299

 

 

2,212

 

 

4,808

Ending balance

$

29,162

 

$

7,498

 

$

4,892

 

$

791

 

$

19,252

 

$

61,595

Specific ALLL

$

-

 

$

-

 

$

2,385

 

$

-

 

$

1,711

 

$

4,096

General ALLL

$

29,162

 

$

7,498

 

$

2,507

 

$

791

 

$

17,541

 

$

57,499

Loans held-in-portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

$

2,097

 

$

10,060

 

$

9,441

 

$

-

 

$

9,761

 

$

31,359

Loans held-in-portfolio excluding impaired loans

 

5,037,699

 

 

619,924

 

 

923,602

 

 

23,192

 

 

439,617

 

 

7,044,034

Total loans held-in-portfolio

$

5,039,796

 

$

629,984

 

$

933,043

 

$

23,192

 

$

449,378

 

$

7,075,393

 

For the quarter ended September 30, 2019

Popular, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

Commercial

Construction

Mortgage

Legacy

Leasing

Consumer

Total

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

225,529

$

9,883

$

132,516

$

774

$

6,907

$

168,057

$

543,666

 

Provision (reversal of provision)

 

(20,543)

 

(2,090)

 

6,782

 

(280)

 

3,739

 

48,931

 

36,539

 

Charge-offs

 

(21,331)

 

(2,242)

 

(13,886)

 

(2)

 

(4,040)

 

(51,017)

 

(92,518)

 

Recoveries

 

7,066

 

3,013

 

1,215

 

299

 

587

 

12,498

 

24,678

Ending balance

$

190,721

$

8,564

$

126,627

$

791

$

7,193

$

178,469

$

512,365

Specific ALLL

$

30,130

$

57

$

42,868

$

-

$

71

$

22,720

$

95,846

General ALLL

$

160,591

$

8,507

$

83,759

$

791

$

7,122

$

155,749

$

416,519

Loans held-in-portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

$

409,221

$

10,334

$

533,317

$

-

$

624

$

105,117

$

1,058,613

Loans held-in-portfolio excluding impaired loans

 

11,799,228

 

743,722

 

6,635,302

 

23,192

 

1,021,860

 

5,726,058

 

25,949,362

Total loans held-in-portfolio

$

12,208,449

$

754,056

$

7,168,619

$

23,192

$

1,022,484

$

5,831,175

$

27,007,975

43

 

For the nine months ended September 30, 2019

Puerto Rico

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

Commercial

 

Construction

 

Mortgage

 

Leasing

 

Consumer

 

Total

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

207,214

 

$

886

 

$

142,978

 

$

11,486

 

$

144,594

 

$

507,158

 

Provision (reversal of provision)

 

(18,245)

 

 

(2,877)

 

 

11,342

 

 

2,276

 

 

102,412

 

 

94,908

 

Charge-offs

 

(40,275)

 

 

(79)

 

 

(37,056)

 

 

(8,467)

 

 

(120,187)

 

 

(206,064)

 

Recoveries

 

12,865

 

 

3,136

 

 

4,471

 

 

1,898

 

 

32,398

 

 

54,768

Ending balance

$

161,559

 

$

1,066

 

$

121,735

 

$

7,193

 

$

159,217

 

$

450,770

Specific ALLL

$

30,130

 

$

57

 

$

40,483

 

$

71

 

$

21,009

 

$

91,750

General ALLL

$

131,429

 

$

1,009

 

$

81,252

 

$

7,122

 

$

138,208

 

$

359,020

Loans held-in-portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

$

407,124

 

$

274

 

$

523,876

 

$

624

 

$

95,356

 

$

1,027,254

Loans held-in-portfolio excluding impaired loans

 

6,761,529

 

 

123,798

 

 

5,711,700

 

 

1,021,860

 

 

5,286,441

 

 

18,905,328

Total loans held-in-portfolio

$

7,168,653

 

$

124,072

 

$

6,235,576

 

$

1,022,484

 

$

5,381,797

 

$

19,932,582

 

For the nine months ended September 30, 2019

Popular U.S.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

Commercial

 

Construction

 

Mortgage

 

Legacy

 

Consumer

 

Total

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

31,901

 

$

6,538

 

$

4,434

 

$

969

 

$

18,348

 

$

62,190

 

Provision (reversal of provision)

 

9,519

 

 

3,167

 

 

899

 

 

(1,467)

 

 

11,529

 

 

23,647

 

Charge-offs

 

(15,737)

 

 

(2,215)

 

 

(594)

 

 

142

 

 

(15,879)

 

 

(34,283)

 

Recoveries

 

3,479

 

 

8

 

 

153

 

 

1,147

 

 

5,254

 

 

10,041

Ending balance

$

29,162

 

$

7,498

 

$

4,892

 

$

791

 

$

19,252

 

$

61,595

Specific ALLL

$

-

 

$

-

 

$

2,385

 

$

-

 

$

1,711

 

$

4,096

General ALLL

$

29,162

 

$

7,498

 

$

2,507

 

$

791

 

$

17,541

 

$

57,499

Loans held-in-portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

$

2,097

 

$

10,060

 

$

9,441

 

$

-

 

$

9,761

 

$

31,359

Loans held-in-portfolio excluding impaired loans

 

5,037,699

 

 

619,924

 

 

923,602

 

 

23,192

 

 

439,617

 

 

7,044,034

Total loans held-in-portfolio

$

5,039,796

 

$

629,984

 

$

933,043

 

$

23,192

 

$

449,378

 

$

7,075,393

44

 

For the nine months ended September 30, 2019

Popular, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

Commercial

Construction

Mortgage

Legacy

Leasing

Consumer

Total

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

239,115

$

7,424

$

147,412

$

969

$

11,486

$

162,942

$

569,348

 

Provision (reversal of provision)

 

(8,726)

 

290

 

12,241

 

(1,467)

 

2,276

 

113,941

 

118,555

 

Charge-offs

 

(56,012)

 

(2,294)

 

(37,650)

 

142

 

(8,467)

 

(136,066)

 

(240,347)

 

Recoveries

 

16,344

 

3,144

 

4,624

 

1,147

 

1,898

 

37,652

 

64,809

Ending balance

$

190,721

$

8,564

$

126,627

$

791

$

7,193

$

178,469

$

512,365

Specific ALLL

$

30,130

$

57

$

42,868

$

-

$

71

$

22,720

$

95,846

General ALLL

$

160,591

$

8,507

$

83,759

$

791

$

7,122

$

155,749

$

416,519

Loans held-in-portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

$

409,221

$

10,334

$

533,317

$

-

$

624

$

105,117

$

1,058,613

Loans held-in-portfolio excluding impaired loans

 

11,799,228

 

743,722

 

6,635,302

 

23,192

 

1,021,860

 

5,726,058

 

25,949,362

Total loans held-in-portfolio

$

12,208,449

$

754,056

$

7,168,619

$

23,192

$

1,022,484

$

5,831,175

$

27,007,975

 

The following table presents the changes in the allowance for credit losses on unfunded commitments, which is presented as part of Other Liabilities, for the quarters and nine months ended September 30, 2020 and 2019.

 

 

 

For the quarters ended

For the nine months ended

(In thousands)

September 30, 2020

September 30, 2019

September 30, 2020

September 30, 2019

Allowance for credit losses on unfunded commitments:

 

 

 

 

 

 

 

 

Balance at beginning of period

$

6,717

$

8,735

$

8,717

$

8,216

 

Impact of adopting CECL

 

-

 

-

 

(5,460)

 

-

 

Provision (reversal of provision)

 

6,578

 

(425)

 

10,038

 

94

Ending balance

$

13,295

$

8,310

$

13,295

$

8,310

 

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

 

 

 

 

For the quarters ended

For the nine months ended

(In thousands)

September 30, 2019

September 30, 2019

Balance at beginning of period

$

120,818

$

122,135

Provision (reversal of provision)

 

(14,617)

 

(2,007)

Net charge-offs

 

(11,591)

 

(25,518)

Balance at end of period

$

94,610

$

94,610

 

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 2019 Form 10-K.

The outstanding balance of loans classified as TDRs amounted to $ 1.7 billion at September 30, 2020 (December 31, 2019 - $ 1.6 billion). The amount of outstanding commitments to lend additional funds to debtors owing receivables whose terms have been modified in TDRs amounted to $19 million related to the commercial loan portfolio at September 30, 2020 (December 31, 2019 - $14 million).

In response to the COVID-19 pandemic, the Corporation has entered into loan modifications with eligible customers in mortgage, personal loans, credit cards, auto loans and leases and certain commercial credit facilities, comprised mainly of payment deferrals

45

 

of up to six months, subject to certain terms and conditions. These loan modifications do not affect the asset quality measures as the deferred payments are not deemed to be delinquent and the Corporation continues to accrue interest on these loans. The Puerto Rico Legislative Assembly enacted legislation in April 2020 that required financial institutions to offer through June 2020 moratoriums on consumer financial products to clients impacted by the COVID-19 pandemic and extended relief with respect to mortgage products through August 2020. The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), signed by the President of the United States as part of an economic stimulus package, provided relief related to U.S. GAAP requirements for loan modifications related to COVID-19 relief measures. In addition, the Federal Reserve, along with other U.S. banking regulators, also issued interagency guidance to financial institutions that offers some practical expedients for evaluating whether loan modifications that occur in response to the COVID-19 pandemic are TDRs. According to the interagency guidance, COVID-19 related short-term modifications (i.e., six months or less) granted to consumer or commercial loans that were current as of the date of the loan modification are not TDRs, since the lender can conclude that the borrower is current on their loan and thus not experiencing financial difficulties and furthermore the period of the deferral granted does not represent a more than insignificant concession on the part of the lender. In addition, a modification or deferral program that is mandated by the federal government or a state government (e.g., a state program that requires all institutions within that state to suspend mortgage payments for a specified period) does not represent a TDR.

The Corporation implemented a relief program to work with customers affected by the COVID-19 pandemic in March 2020. As of September 30, 2020, the Corporation had granted loan payment moratoriums under the program to 125,736 eligible retail customers with an aggregate book value of $4.5 billion, and to 5,063 eligible commercial clients with an aggregate book value of $4.1 billion. In addition, certain participating clients impacted by the seismic activity in the southern region of the island also benefitted from other loan payment moratoriums offered by the Corporation since mid-January 2020. As of September 30, 2020, 124,884 loans in the COVID-19 relief program with an aggregate book value of $7.9 billion had already completed their payment moratorium period, while 5,915 loans with an aggregate book value of $0.7 billion are still under the moratorium. Out of the approximately $8.6 billion in loans modified under this program, approximately $30 million have been classified as TDRs. In making this determination, the Corporation considered the criteria of whether the borrower was in financial difficulty at the time of the deferral and whether the deferral period was more than insignificant, as discussed above.

At September 30, 2020, 95% of COVID-19 payment deferrals had expired. After excluding government guaranteed mortgage loans that are still pending to complete their COVID-19 related modifications, 95% of the remaining loans were current on their payments as of quarter end. Given the recent expiration of the payment moratorium, the Corporation will continue to monitor and assess the post-moratorium payment behavior of these borrowers to recognize any deterioration in these loans, and potential loss exposure, in a timely manner.

The following table presents the outstanding balance of loans classified as TDRs according to their accruing status and the related allowance at September 30, 2020 and December 31, 2019.

 

 

September 30, 2020

 

 

December 31, 2019

(In thousands)

 

Accruing

 

Non-Accruing

 

Total

 

Related Allowance

 

 

 

Accruing

 

Non-Accruing

 

Total

 

Related Allowance

Loans held-in-portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

$

263,094

$

99,381

$

362,475

$

17,403

 

 

$

237,861

$

111,587

$

349,448

$

16,443

Construction

 

-

 

21,514

 

21,514

 

4,414

 

 

 

-

 

119

 

119

 

6

Mortgage[1]

 

1,075,980

 

113,681

 

1,189,661

 

73,755

 

 

 

1,013,561

 

126,036

 

1,139,597

 

42,012

Leases

 

326

 

147

 

473

 

108

 

 

 

264

 

243

 

507

 

61

Consumer

 

78,294

 

12,635

 

90,929

 

25,311

 

 

 

82,205

 

15,808

 

98,013

 

21,404

Loans held-in-portfolio

$

1,417,694

$

247,358

$

1,665,052

$

120,991

 

 

$

1,333,891

$

253,793

$

1,587,684

$

79,926

[1] At September 30, 2020, accruing mortgage loan TDRs include $650 million guaranteed by U.S. sponsored entities at BPPR, compared to $625 million at December 31, 2019.

46

 

The following tables present the loan count by type of modification for those loans modified in a TDR during the quarters and nine months ended September 30, 2020 and 2019. Loans modified as TDRs for the U.S. operations are considered insignificant to the Corporation.

 

 

Popular, Inc.

 

For the quarter ended September 30, 2020

 

For the nine months ended September 30, 2020

 

Reduction in interest rate

Extension of maturity date

Combination of reduction in interest rate and extension of maturity date

Other

 

Reduction in interest rate

Extension of maturity date

Combination of reduction in interest rate and extension of maturity date

Other

Commercial multi-family

-

1

-

-

 

-

2

-

-

Commercial real estate non-owner occupied

-

2

-

-

 

-

4

-

1

Commercial real estate owner occupied

-

7

-

-

 

-

26

-

-

Commercial and industrial

-

12

-

-

 

1

38

-

-

Construction

-

1

-

-

 

-

1

-

-

Mortgage

-

24

70

254

 

2

50

231

326

Leasing

-

-

-

-

 

-

-

3

11

Consumer:

 

 

 

 

 

 

 

 

 

Credit cards

69

-

-

13

 

621

-

-

78

HELOCs

-

-

-

-

 

-

1

1

-

Personal

91

1

-

-

 

269

3

-

1

Auto

-

1

-

-

 

-

2

2

8

Other

1

-

-

-

 

3

-

-

-

Total

161

49

70

267

 

896

127

237

425

 

 

Popular, Inc.

 

For the quarter ended September 30, 2019

 

For the nine months ended September 30, 2019

 

Reduction in interest rate

Extension of maturity date

Combination of reduction in interest rate and extension of maturity date

Other

 

Reduction in interest rate

Extension of maturity date

Combination of reduction in interest rate and extension of maturity date

Other

Commercial multi-family

-

-

-

-

 

-

1

-

-

Commercial real estate non-owner occupied

-

3

-

-

 

-

6

-

-

Commercial real estate owner occupied

-

4

-

-

 

1

19

-

-

Commercial and industrial

2

7

-

-

 

2

41

-

-

Mortgage

2

43

207

3

 

33

98

494

5

Leasing

-

1

1

-

 

-

1

2

-

Consumer:

 

 

 

 

 

 

 

 

 

Credit cards

111

-

1

41

 

394

-

2

161

HELOCs

-

2

2

-

 

-

14

11

-

Personal

183

1

-

-

 

527

4

-

1

Auto

-

1

-

-

 

-

5

1

-

Other

7

-

-

-

 

22

-

-

-

Total

305

62

211

44

 

979

189

510

167

47

 

The following tables present by class, quantitative information related to loans modified as TDRs during the quarters and nine months ended September 30, 2020 and 2019.

 

For the quarter ended September 30, 2020

(Dollars in thousands)

Loan count

Pre-modification outstanding recorded investment

Post-modification outstanding recorded investment

Increase (decrease) in the allowance for loan losses as a result of modification

Commercial multi-family

1

$

140

$

139

$

1

Commercial real estate non-owner occupied

2

 

5,060

 

5,058

 

-

Commercial real estate owner occupied

7

 

1,964

 

1,960

 

4

Commercial and industrial

12

 

625

 

614

 

-

Construction

1

 

21,514

 

21,514

 

4,370

Mortgage

348

 

40,932

 

36,036

 

3,784

Consumer:

 

 

 

 

 

 

 

Credit cards

82

 

1,032

 

1,076

 

14

Personal

92

 

1,682

 

1,682

 

290

Auto

1

 

18

 

19

 

3

Other

1

 

1

 

1

 

-

Total

547

$

72,968

$

68,099

$

8,466

 

For the quarter ended September 30, 2019

(Dollars in thousands)

Loan count

Pre-modification outstanding recorded investment

Post-modification outstanding recorded investment

Increase (decrease) in the allowance for loan losses as a result of modification

Commercial real estate non-owner occupied

3

$

16,822

$

16,822

$

(86)

Commercial real estate owner occupied

4

 

2,966

 

2,959

 

(48)

Commercial and industrial

9

 

1,436

 

1,384

 

103

Mortgage

255

 

23,583

 

21,907

 

746

Leasing

2

 

237

 

238

 

-

Consumer:

 

 

 

 

 

 

 

Credit cards

153

 

1,375

 

1,355

 

109

HELOCs

4

 

276

 

246

 

25

Personal

184

 

2,546

 

2,544

 

677

Auto

1

 

7

 

7

 

1

Other

7

 

31

 

31

 

2

Total

622

$

49,279

$

47,493

$

1,529

 

Popular, Inc.

For the nine months ended September 30, 2020

(Dollars in thousands)

Loan count

Pre-modification outstanding recorded investment

Post-modification outstanding recorded investment

Increase (decrease) in the allowance for loan losses as a result of modification

Commercial multi-family

2

$

1,133

$

1,115

$

(18)

Commercial real estate non-owner occupied

5

 

8,478

 

8,476

 

(748)

Commercial real estate owner occupied

26

 

8,463

 

8,436

 

110

Commercial and industrial

39

 

2,409

 

2,392

 

25

Construction

1

 

21,514

 

21,514

 

4,370

Mortgage

609

 

75,695

 

62,930

 

6,629

Leasing

14

 

326

 

327

 

6

Consumer:

 

 

 

 

 

 

 

Credit cards

699

 

6,492

 

6,530

 

276

HELOCs

2

 

369

 

298

 

862

Personal

273

 

4,703

 

4,701

 

781

Auto

12

 

164

 

166

 

15

Other

3

 

25

 

25

 

6

Total

1,685

$

129,771

$

116,910

$

12,314

48

 

Popular, Inc.

For the nine months ended September 30, 2019

(Dollars in thousands)

Loan count

Pre-modification outstanding recorded investment

Post-modification outstanding recorded investment

Increase (decrease) in the allowance for loan losses as a result of modification

Commercial multi-family

1

$

154

$

116

$

(5)

Commercial real estate non-owner occupied

6

 

19,389

 

19,379

 

721

Commercial real estate owner occupied

20

 

6,378

 

6,110

 

9

Commercial and industrial

43

 

9,749

 

10,219

 

888

Mortgage

630

 

64,533

 

58,818

 

2,104

Leasing

3

 

264

 

266

 

7

Consumer:

 

 

 

 

 

 

 

Credit cards

557

 

4,690

 

4,823

 

466

HELOCs

25

 

2,359

 

2,256

 

345

Personal

532

 

8,836

 

8,839

 

2,312

Auto

6

 

70

 

73

 

13

Other

22

 

177

 

177

 

27

Total

1,845

$

116,599

$

111,076

$

6,887

 

During the nine months ended September 30, 2020, five loans with an aggregate unpaid principal balance of $ 32.8 million were restructured into multiple notes (“Note A / B split”). The Corporation recorded $0.1 million in charge-offs as part of these restructurings. These loans were restructured after analyzing the borrowers’ capacity to repay the debt, collateral and ability to perform under the modified terms. The recorded investment on these commercial TDRs amounted to approximately $32.4 million at September 30, 2020.

 

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.

49

 

Popular, Inc.

 

Defaulted during the quarter endedSeptember 30, 2020

 

Defaulted during the nine months ended September 30, 2020

(Dollars in thousands)

Loan count

 

Recorded investment as of first default date

 

Loan count

 

Recorded investment as of first default date

Commercial real estate non-owner occupied

-

$

-

 

1

$

1,700

Commercial real estate owner occupied

-

 

-

 

5

 

846

Commercial and industrial

-

 

-

 

3

 

97

Mortgage

23

 

2,321

 

215

 

22,518

Consumer:

 

 

 

 

 

 

 

Credit cards

124

 

975

 

290

 

2,190

Personal

13

 

185

 

89

 

1,504

Other

-

 

-

 

2

 

1

Total

160

$

3,481

 

605

$

28,856

 

Popular, Inc.

 

Defaulted during the quarter endedSeptember 30, 2019

 

Defaulted during the nine months ended September 30, 2019

(Dollars in thousands)

Loan count

 

Recorded investment as of first default date

 

Loan count

 

Recorded investment as of first default date

Commercial real estate non-owner occupied

-

$

-

 

1

$

47

Commercial real estate owner occupied

1

 

68

 

3

 

495

Commercial and industrial

1

 

34

 

4

 

7,082

Mortgage

32

 

2,099

 

31

 

3,148

Leasing

-

 

-

 

1

 

22

Consumer:

 

 

 

 

 

 

 

Credit cards

68

 

551

 

222

 

2,063

Personal

62

 

1,144

 

163

 

4,768

Auto

2

 

24

 

2

 

24

Other

1

 

5

 

2

 

7

Total

167

$

3,925

 

429

$

17,656

 

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 credit losses may be increased or partial charge-offs may be taken to further write-down the carrying value of the loan.

Credit Quality

The risk rating system provides for the assignment of ratings at the obligor level based on the financial condition of the borrower. The risk rating analysis process is performed at least once a year or more frequently if events or conditions change which may deteriorate the credit quality. In the case of consumer and mortgage loans, these loans are classified considering their delinquency status at the end of the reporting period.

The following table presents the amortized cost basis, net of unearned income, of loans held-in-portfolio based on the Corporation’s assignment of obligor risk ratings as defined at September 30, 2020 by vintage year. 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 10-K for the year ended December 31, 2019.

50

 

September 30, 2020

 

 

 

 

Term Loans

 

Revolving Loans Amortized Cost Basis

 

Revolving Loans Converted to Term Loans Amortized Cost Basis

 

 

 

 

 

 

Amortized Cost Basis by Origination Year

 

 

 

 

(In thousands)

 

2020

 

2019

 

2018

 

2017

 

2016

 

Prior

Years

 

 

 

Total

Puerto Rico

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial multi-family

 

 

 

Watch

$

-

$

-

$

-

$

-

$

-

$

1,429

$

-

$

-

$

1,429

 

 

 

Special mention

 

-

 

-

 

-

 

-

 

-

 

3,481

 

-

 

-

 

3,481

 

 

 

Substandard

 

-

 

-

 

-

 

-

 

-

 

1,365

 

100

 

-

 

1,465

 

 

 

Pass/Unrated

 

5,240

 

36,653

 

26,209

 

2,116

 

2,617

 

64,968

 

-

 

-

 

137,803

 

 

Total commercial multi-family

$

5,240

$

36,653

$

26,209

$

2,116

$

2,617

$

71,243

$

100

$

-

$

144,178

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate non-owner occupied

 

 

 

Watch

$

96,883

$

74,865

$

26,934

$

43,635

$

32,928

$

280,011

$

2,220

$

-

$

557,476

 

 

 

Special Mention

 

-

 

17,668

 

125,684

 

27,315

 

20,024

 

92,564

 

401

 

-

 

283,656

 

 

 

Substandard

 

33,678

 

94,206

 

26,985

 

4,164

 

34,075

 

151,334

 

95

 

-

 

344,537

 

 

 

Doubtful

 

-

 

-

 

-

 

-

 

-

 

2,630

 

-

 

-

 

2,630

 

 

 

Pass/Unrated

 

15,165

 

57,677

 

41,390

 

61,880

 

130,169

 

573,114

 

3,448

 

-

 

882,843

 

 

Total commercial real estate non-owner occupied

$

145,726

$

244,416

$

220,993

$

136,994

$

217,196

$

1,099,653

$

6,164

$

-

$

2,071,142

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate owner occupied

 

 

 

Watch

$

5,092

$

9,008

$

20,352

$

13,796

$

9,913

$

174,407

$

1,857

$

-

$

234,425

 

 

 

Special Mention

 

55

 

6,754

 

386

 

2,703

 

442

 

168,082

 

-

 

-

 

178,422

 

 

 

Substandard

 

-

 

2,377

 

37,968

 

2,227

 

27,651

 

160,619

 

-

 

-

 

230,842

 

 

 

Doubtful

 

-

 

-

 

-

 

296

 

-

 

2,164

 

-

 

-

 

2,460

 

 

 

Pass/Unrated

 

147,666

 

62,663

 

61,772

 

61,143

 

130,903

 

448,333

 

11,646

 

-

 

924,126

 

 

Total commercial real estate owner occupied

$

152,813

$

80,802

$

120,478

$

80,165

$

168,909

$

953,605

$

13,503

$

-

$

1,570,275

 

 

Commercial and industrial

 

 

 

Watch

$

117,988

$

133,311

$

170,332

$

45,970

$

69,043

$

300,831

$

156,973

$

-

$

994,448

 

 

 

Special Mention

 

33,069

 

9,606

 

19,369

 

57,695

 

2,455

 

104,889

 

26,129

 

-

 

253,212

 

 

 

Substandard

 

42,980

 

3,144

 

24,512

 

27,527

 

1,937

 

60,828

 

52,544

 

-

 

213,472

 

 

 

Doubtful

 

-

 

-

 

-

 

4

 

-

 

90

 

1

 

-

 

95

 

 

 

Loss

 

-

 

-

 

-

 

-

 

-

 

-

 

11

 

-

 

11

 

 

 

Pass/Unrated

 

1,121,208

 

527,626

 

181,294

 

203,235

 

118,250

 

366,882

 

312,019

 

-

 

2,830,514

 

 

Total commercial and industrial

$

1,315,245

$

673,687

$

395,507

$

334,431

$

191,685

$

833,520

$

547,677

$

-

$

4,291,752

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

Watch

$

-

$

2,620

$

11,554

$

-

$

-

$

-

$

960

$

-

$

15,134

 

 

 

Substandard

 

-

 

-

 

-

 

21,514

 

-

 

-

 

-

 

-

 

21,514

 

 

 

Pass/Unrated

 

197

 

39,627

 

10,183

 

64,082

 

-

 

-

 

45,328

 

-

 

159,417

 

Total construction

$

197

$

42,247

$

21,737

$

85,596

$

-

$

-

$

46,288

$

-

$

196,065

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage

 

 

 

Substandard

$

-

$

131

$

1,477

$

2,772

$

3,691

$

128,352

$

-

$

-

$

136,423

 

 

 

Pass/Unrated

 

138,336

 

245,347

 

195,875

 

237,310

 

243,823

 

5,629,866

 

-

 

-

 

6,690,557

 

Total mortgage

$

138,336

$

245,478

$

197,352

$

240,082

$

247,514

$

5,758,218

$

-

$

-

$

6,826,980

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leasing

 

 

 

Substandard

$

114

$

989

$

825

$

541

$

447

$

301

$

-

$

-

$

3,217

 

 

 

Pass/Unrated

 

357,798

 

338,881

 

229,685

 

122,989

 

74,899

 

25,639

 

-

 

-

 

1,149,891

 

Total leasing

$

357,912

$

339,870

$

230,510

$

123,530

$

75,346

$

25,940

$

-

$

-

$

1,153,108

51

 

September 30, 2020

 

 

 

 

Term Loans

 

Revolving Loans Amortized Cost Basis

 

Revolving Loans Converted to Term Loans Amortized Cost Basis

 

 

 

 

 

 

Amortized Cost Basis by Origination Year

 

 

 

 

(In thousands)

 

2020

 

2019

 

2018

 

2017

 

2016

 

Prior

Years

 

 

 

Total

Puerto Rico

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer:

 

 

Credit cards

 

 

 

Substandard

$

-

$

-

$

-

$

-

$

-

$

-

$

14,505

$

-

$

14,505

 

 

 

Pass/Unrated

 

-

 

-

 

-

 

-

 

-

 

-

 

917,034

 

-

 

917,034

 

Total credit cards

$

-

$

-

$

-

$

-

$

-

$

-

$

931,539

$

-

$

931,539

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HELOCs

 

 

 

Pass/Unrated

$

-

$

-

$

-

$

-

$

-

$

-

$

4,314

$

-

$

4,314

 

Total HELOCs

$

-

$

-

$

-

$

-

$

-

$

-

$

4,314

$

-

$

4,314

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal

 

 

 

Substandard

$

670

$

4,002

$

1,697

$

1,197

$

927

$

19,244

$

56

$

1,513

$

29,306

 

 

 

Loss

 

-

 

-

 

4

 

-

 

-

 

-

 

-

 

34

 

38

 

 

 

Pass/Unrated

 

229,806

 

472,235

 

193,640

 

114,348

 

66,910

 

150,081

 

2,418

 

47,003

 

1,276,441

 

Total Personal

$

230,476

$

476,237

$

195,341

$

115,545

$

67,837

$

169,325

$

2,474

$

48,550

$

1,305,785

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auto

 

 

 

Substandard

$

897

$

4,319

$

3,382

$

1,989

$

1,546

$

1,322

$

-

$

-

$

13,455

 

 

 

Pass/Unrated

 

773,339

 

942,367

 

684,447

 

333,558

 

195,352

 

102,935

 

-

 

-

 

3,031,998

 

Total Auto

$

774,236

$

946,686

$

687,829

$

335,547

$

196,898

$

104,257

$

-

$

-

$

3,045,453

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other consumer

 

 

 

Substandard

$

-

$

-

$

1,054

$

-

$

175

$

12,875

$

-

$

-

$

14,104

 

 

 

Pass/Unrated

 

12,470

 

17,702

 

14,210

 

6,213

 

2,964

 

5,074

 

51,315

 

-

 

109,948

 

Total Other consumer

$

12,470

$

17,702

$

15,264

$

6,213

$

3,139

$

17,949

$

51,315

$

-

$

124,052

Total Puerto Rico

$

3,132,651

$

3,103,778

$

2,111,220

$

1,460,219

$

1,171,141

$

9,033,710

$

1,603,374

$

48,550

$

21,664,643

52

 

September 30, 2020

 

 

 

 

Term Loans

 

Revolving Loans Amortized Cost Basis

 

Revolving Loans Converted to Term Loans Amortized Cost Basis

 

 

 

 

 

 

Amortized Cost Basis by Origination Year

 

 

 

 

(In thousands)

 

2020

 

2019

 

2018

 

2017

 

2016

 

Prior

Years

 

 

 

Total

Popular U.S.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial multi-family

 

 

 

Watch

$

12,253

$

34,933

$

42,529

$

42,696

$

33,654

$

72,674

$

-

$

-

$

238,739

 

 

 

Special mention

 

-

 

25,428

 

11,670

 

18,222

 

50,511

 

13,128

 

-

 

-

 

118,959

 

 

 

Substandard

 

-

 

1,207

 

-

 

1,755

 

8,584

 

1,143

 

-

 

-

 

12,689

 

 

 

Pass/Unrated

 

240,743

 

345,453

 

204,316

 

111,279

 

161,894

 

301,034

 

1,631

 

-

 

1,366,350

 

 

Total commercial multi-family

$

252,996

$

407,021

$

258,515

$

173,952

$

254,643

$

387,979

$

1,631

$

-

$

1,736,737

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate non-owner occupied

 

 

 

Watch

$

8,429

$

28,035

$

69,838

$

91,838

$

59,844

$

67,346

$

342

$

-

$

325,672

 

 

 

Special Mention

 

-

 

4,783

 

10,016

 

14,675

 

63,822

 

12,854

 

350

 

-

 

106,500

 

 

 

Substandard

 

761

 

12,268

 

36,571

 

11,137

 

40,885

 

28,199

 

-

 

-

 

129,821

 

 

 

Pass/Unrated

 

266,740

 

235,476

 

252,634

 

229,827

 

154,019

 

224,526

 

13,798

 

-

 

1,377,020

 

 

Total commercial real estate non-owner occupied

$

275,930

$

280,562

$

369,059

$

347,477

$

318,570

$

332,925

$

14,490

$

-

$

1,939,013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate owner occupied

 

 

 

Watch

$

1,477

$

8,315

$

8,004

$

4,261

$

16,564

$

16,149

$

4,222

$

-

$

58,992

 

 

 

Special Mention

 

-

 

1,155

 

193

 

-

 

-

 

4,060

 

-

 

-

 

5,408

 

 

 

Substandard

 

-

 

-

 

2,366

 

-

 

1,358

 

20,514

 

-

 

-

 

24,238

 

 

 

Pass/Unrated

 

50,760

 

47,797

 

47,720

 

34,326

 

21,550

 

70,013

 

322

 

-

 

272,488

 

 

Total commercial real estate owner occupied

$

52,237

$

57,267

$

58,283

$

38,587

$

39,472

$

110,736

$

4,544

$

-

$

361,126

 

 

Commercial and industrial

 

 

 

Watch

$

10,538

$

1,870

$

32

$

3,625

$

1,251

$

8,213

$

7,780

$

-

$

33,309

 

 

 

Special Mention

 

11,138

 

34

 

-

 

152

 

4,908

 

921

 

124

 

-

 

17,277

 

 

 

Substandard

 

2,029

 

236

 

516

 

-

 

5

 

7,976

 

21

 

-

 

10,783

 

 

 

Pass/Unrated

 

344,220

 

213,673

 

200,545

 

147,598

 

129,196

 

317,955

 

82,595

 

-

 

1,435,782

 

 

Total commercial and industrial

$

367,925

$

215,813

$

201,093

$

151,375

$

135,360

$

335,065

$

90,520

$

-

$

1,497,151

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

Watch

$

6,424

$

-

$

-

$

34,133

$

-

$

9,786

$

-

$

-

$

50,343

 

 

 

Special Mention

 

-

 

-

 

-

 

2,981

 

-

 

20,291

 

-

 

-

 

23,272

 

 

 

Substandard

 

-

 

-

 

20,341

 

9,372

 

9,069

 

-

 

-

 

-

 

38,782

 

 

 

Pass/Unrated

 

55,564

 

256,482

 

176,245

 

113,954

 

20,594

 

4,973

 

-

 

-

 

627,812

 

Total construction

$

61,988

$

256,482

$

196,586

$

160,440

$

29,663

$

35,050

$

-

$

-

$

740,209

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage

 

 

 

Substandard

$

-

$

1,371

$

433

$

-

$

-

$

12,680

$

-

$

-

$

14,484

 

 

 

Pass/Unrated

 

284,848

 

282,208

 

112,886

 

9,967

 

11,323

 

381,745

 

-

 

-

 

1,082,977

 

Total mortgage

$

284,848

$

283,579

$

113,319

$

9,967

$

11,323

$

394,425

$

-

$

-

$

1,097,461

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Legacy

 

 

 

Watch

$

-

$

-

$

-

$

-

$

-

$

3,085

$

-

$

-

$

3,085

 

 

 

Special Mention

 

-

 

-

 

-

 

-

 

-

 

186

 

-

 

-

 

186

 

 

 

Substandard

 

-

 

-

 

-

 

-

 

-

 

3,753

 

-

 

-

 

3,753

 

 

 

Pass/Unrated

 

83

 

-

 

-

 

-

 

-

 

7,739

 

1,322

 

-

 

9,144

 

Total legacy

$

83

$

-

$

-

$

-

$

-

$

14,763

$

1,322

$

-

$

16,168

53

 

September 30, 2020

 

 

 

 

Term Loans

 

Revolving Loans Amortized Cost Basis

 

Revolving Loans Converted to Term Loans Amortized Cost Basis

 

 

 

 

 

 

Amortized Cost Basis by Origination Year

 

 

 

 

(In thousands)

 

2020

 

2019

 

2018

 

2017

 

2016

 

Prior

Years

 

 

 

Total

Popular U.S.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer:

 

 

Credit cards

 

 

 

Pass/Unrated

$

-

$

-

$

-

$

-

$

-

$

-

$

31

$

-

$

31

 

Total credit cards

$

-

$

-

$

-

$

-

$

-

$

-

$

31

$

-

$

31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HELOCs

 

 

 

Substandard

$

-

$

-

$

-

$

-

$

-

$

191

$

-

$

677

$

868

 

 

 

Loss

 

-

 

-

 

-

 

-

 

-

 

306

 

-

 

6,412

 

6,718

 

 

 

Pass/Unrated

 

-

 

-

 

-

 

-

 

-

 

13,454

 

46,191

 

37,678

 

97,323

 

Total HELOCs

$

-

$

-

$

-

$

-

$

-

$

13,951

$

46,191

$

44,767

$

104,909

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal

 

 

 

Substandard

$

164

$

819

$

355

$

97

$

22

$

-

$

1

$

-

$

1,458

 

 

 

Loss

 

-

 

24

 

17

 

-

 

6

 

262

 

4

 

-

 

313

 

 

 

Pass/Unrated

 

41,668

 

128,664

 

36,597

 

12,112

 

3,022

 

9,737

 

191

 

-

 

231,991

 

Total Personal

$

41,832

$

129,507

$

36,969

$

12,209

$

3,050

$

9,999

$

196

$

-

$

233,762

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other consumer

 

 

 

Substandard

$

-

 

-

 

-

 

-

 

-

 

-

 

17

 

-

 

17

 

 

 

Loss

 

-

 

-

 

-

 

-

 

-

 

-

 

12

 

-

 

12

 

 

 

Pass/Unrated

$

-

$

-

$

-

$

-

$

-

$

-

$

1,271

$

-

$

1,271

 

Total Other consumer

$

-

$

-

$

-

$

-

$

-

$

-

$

1,300

$

-

$

1,300

Total Popular U.S.

$

1,337,839

$

1,630,231

$

1,233,824

$

894,007

$

792,081

$

1,634,893

$

160,225

$

44,767

$

7,727,867

54

 

September 30, 2020

 

 

 

 

Term Loans

 

Revolving Loans Amortized Cost Basis

 

Revolving Loans Converted to Term Loans Amortized Cost Basis

 

 

 

 

 

 

Amortized Cost Basis by Origination Year

 

 

 

 

(In thousands)

 

2020

 

2019

 

2018

 

2017

 

2016

 

Prior

Years

 

 

 

Total

Popular, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial multi-family

 

 

 

Watch

$

12,253

$

34,933

$

42,529

$

42,696

$

33,654

$

74,103

$

-

$

-

$

240,168

 

 

 

Special mention

 

-

 

25,428

 

11,670

 

18,222

 

50,511

 

16,609

 

-

 

-

 

122,440

 

 

 

Substandard

 

-

 

1,207

 

-

 

1,755

 

8,584

 

2,508

 

100

 

-

 

14,154

 

 

 

Pass/Unrated

 

245,983

 

382,106

 

230,525

 

113,395

 

164,511

 

366,002

 

1,631

 

-

 

1,504,153

 

 

Total commercial multi-family

$

258,236

$

443,674

$

284,724

$

176,068

$

257,260

$

459,222

$

1,731

$

-

$

1,880,915

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate non-owner occupied

 

 

 

Watch

$

105,312

$

102,900

$

96,772

$

135,473

$

92,772

$

347,357

$

2,562

$

-

$

883,148

 

 

 

Special Mention

 

-

 

22,451

 

135,700

 

41,990

 

83,846

 

105,418

 

751

 

-

 

390,156

 

 

 

Substandard

 

34,439

 

106,474

 

63,556

 

15,301

 

74,960

 

179,533

 

95

 

-

 

474,358

 

 

 

Doubtful

 

-

 

-

 

-

 

-

 

-

 

2,630

 

-

 

-

 

2,630

 

 

 

Pass/Unrated

 

281,905

 

293,153

 

294,024

 

291,707

 

284,188

 

797,640

 

17,246

 

-

 

2,259,863

 

 

Total commercial real estate non-owner occupied

$

421,656

$

524,978

$

590,052

$

484,471

$

535,766

$

1,432,578

$

20,654

$

-

$

4,010,155

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate owner occupied

 

 

 

Watch

$

6,569

$

17,323

$

28,356

$

18,057

$

26,477

$

190,556

$

6,079

$

-

$

293,417

 

 

 

Special Mention

 

55

 

7,909

 

579

 

2,703

 

442

 

172,142

 

-

 

-

 

183,830

 

 

 

Substandard

 

-

 

2,377

 

40,334

 

2,227

 

29,009

 

181,133

 

-

 

-

 

255,080

 

 

 

Doubtful

 

-

 

-

 

-

 

296

 

-

 

2,164

 

-

 

-

 

2,460

 

 

 

Pass/Unrated

 

198,426

 

110,460

 

109,492

 

95,469

 

152,453

 

518,346

 

11,968

 

-

 

1,196,614

 

 

Total commercial real estate owner occupied

$

205,050

$

138,069

$

178,761

$

118,752

$

208,381

$

1,064,341

$

18,047

$

-

$

1,931,401

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

 

Watch

$

128,526

$

135,181

$

170,364

$

49,595

$

70,294

$

309,044

$

164,753

$

-

$

1,027,757

 

 

 

Special Mention

 

44,207

 

9,640

 

19,369

 

57,847

 

7,363

 

105,810

 

26,253

 

-

 

270,489

 

 

 

Substandard

 

45,009

 

3,380

 

25,028

 

27,527

 

1,942

 

68,804

 

52,565

 

-

 

224,255

 

 

 

Doubtful

 

-

 

-

 

-

 

4

 

-

 

90

 

1

 

-

 

95

 

 

 

Loss

 

-

 

-

 

-

 

-

 

-

 

-

 

11

 

-

 

11

 

 

 

Pass/Unrated

 

1,465,428

 

741,299

 

381,839

 

350,833

 

247,446

 

684,837

 

394,614

 

-

 

4,266,296

 

 

Total commercial and industrial

$

1,683,170

$

889,500

$

596,600

$

485,806

$

327,045

$

1,168,585

$

638,197

$

-

$

5,788,903

55

 

September 30, 2020

 

 

 

 

Term Loans

 

Revolving Loans Amortized Cost Basis

 

Revolving Loans Converted to Term Loans Amortized Cost Basis

 

 

 

 

 

 

Amortized Cost Basis by Origination Year

 

 

 

 

(In thousands)

 

2020

 

2019

 

2018

 

2017

 

2016

 

Prior

Years

 

 

 

Total

Popular, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

Watch

$

6,424

$

2,620

$

11,554

$

34,133

$

-

$

9,786

$

960

$

-

$

65,477

 

 

 

Special Mention

 

-

 

-

 

-

 

2,981

 

-

 

20,291

 

-

 

-

 

23,272

 

 

 

Substandard

 

-

 

-

 

20,341

 

30,886

 

9,069

 

-

 

-

 

-

 

60,296

 

 

 

Pass/Unrated

 

55,761

 

296,109

 

186,428

 

178,036

 

20,594

 

4,973

 

45,328

 

-

 

787,229

 

Total construction

$

62,185

$

298,729

$

218,323

$

246,036

$

29,663

$

35,050

$

46,288

$

-

$

936,274

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage

 

 

 

Substandard

$

-

$

1,502

$

1,910

$

2,772

$

3,691

$

141,032

$

-

$

-

$

150,907

 

 

 

Pass/Unrated

 

423,184

 

527,555

 

308,761

 

247,277

 

255,146

 

6,011,611

 

-

 

-

 

7,773,534

 

Total mortgage

$

423,184

$

529,057

$

310,671

$

250,049

$

258,837

$

6,152,643

$

-

$

-

$

7,924,441

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Legacy

 

 

 

Watch

$

-

$

-

$

-

$

-

$

-

$

3,085

$

-

$

-

$

3,085

 

 

 

Special Mention

 

-

 

-

 

-

 

-

 

-

 

186

 

-

 

-

 

186

 

 

 

Substandard

 

-

 

-

 

-

 

-

 

-

 

3,753

 

-

 

-

 

3,753

 

 

 

Pass/Unrated

 

83

 

-

 

-

 

-

 

-

 

7,739

 

1,322

 

-

 

9,144

 

Total legacy

$

83

$

-

$

-

$

-

$

-

$

14,763

$

1,322

$

-

$

16,168

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leasing

 

 

 

Substandard

$

114

$

989

$

825

$

541

$

447

$

301

$

-

$

-

$

3,217

 

 

 

Pass/Unrated

 

357,798

 

338,881

 

229,685

 

122,989

 

74,899

 

25,639

 

-

 

-

 

1,149,891

 

Total leasing

$

357,912

$

339,870

$

230,510

$

123,530

$

75,346

$

25,940

$

-

$

-

$

1,153,108

56

 

September 30, 2020

 

 

 

 

Term Loans

 

Revolving Loans Amortized Cost Basis

 

Revolving Loans Converted to Term Loans Amortized Cost Basis

 

 

 

 

 

 

Amortized Cost Basis by Origination Year

 

 

 

 

(In thousands)

 

2020

 

2019

 

2018

 

2017

 

2016

 

Prior

Years

 

 

 

Total

Popular, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer:

 

 

Credit cards

 

 

 

Substandard

$

-

$

-

$

-

$

-

$

-

$

-

$

14,505

$

-

$

14,505

 

 

 

Pass/Unrated

 

-

 

-

 

-

 

-

 

-

 

-

 

917,065

 

-

 

917,065

 

Total credit cards

$

-

$

-

$

-

$

-

$

-

$

-

$

931,570

$

-

$

931,570

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HELOCs

 

 

 

Substandard

$

-

$

-

$

-

$

-

$

-

$

191

$

-

$

677

$

868

 

 

 

Loss

 

-

 

-

 

-

 

-

 

-

 

306

 

-

 

6,412

 

6,718

 

 

 

Pass/Unrated

 

-

 

-

 

-

 

-

 

-

 

13,454

 

50,505

 

37,678

 

101,637

 

Total HELOCs

$

-

$

-

$

-

$

-

$

-

$

13,951

$

50,505

$

44,767

$

109,223

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal

 

 

 

Substandard

$

834

$

4,821

$

2,052

$

1,294

$

949

$

19,244

$

57

$

1,513

$

30,764

 

 

 

Loss

 

-

 

24

 

21

 

-

 

6

 

262

 

4

 

34

 

351

 

 

 

Pass/Unrated

 

271,474

 

600,899

 

230,237

 

126,460

 

69,932

 

159,818

 

2,609

 

47,003

 

1,508,432

 

Total Personal

$

272,308

$

605,744

$

232,310

$

127,754

$

70,887

$

179,324

$

2,670

$

48,550

$

1,539,547

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auto

 

 

 

Substandard

$

897

$

4,319

$

3,382

$

1,989

$

1,546

$

1,322

$

-

$

-

$

13,455

 

 

 

Pass/Unrated

 

773,339

 

942,367

 

684,447

 

333,558

 

195,352

 

102,935

 

-

 

-

 

3,031,998

 

Total Auto

$

774,236

$

946,686

$

687,829

$

335,547

$

196,898

$

104,257

$

-

$

-

$

3,045,453

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other consumer

 

 

 

Substandard

$

-

$

-

$

1,054

$

-

$

175

$

12,875

$

17

$

-

$

14,121

 

 

 

Loss

 

-

 

-

 

-

 

-

 

-

 

-

 

12

 

-

 

12

 

 

 

Pass/Unrated

 

12,470

 

17,702

 

14,210

 

6,213

 

2,964

 

5,074

 

52,586

 

-

 

111,219

 

Total Other consumer

$

12,470

$

17,702

$

15,264

$

6,213

$

3,139

$

17,949

$

52,615

$

-

$

125,352

Total Popular Inc.

$

4,470,490

$

4,734,009

$

3,345,044

$

2,354,226

$

1,963,222

$

10,668,603

$

1,763,599

$

93,317

$

29,392,510

 

The following table presents the outstanding balance, net of unearned income, of loans held-in-portfolio based on the Corporation’s assignment of obligor risk ratings as defined at December 31, 2019.

57

 

December 31, 2019

 

 

 

 

Special

 

 

 

 

 

 

 

 

Pass/

 

 

(In thousands)

Watch

Mention

Substandard

Doubtful

Loss

Sub-total

Unrated

Total

Puerto Rico

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial multi-family

$

1,341

$

3,870

$

1,793

$

-

$

-

$

7,004

$

140,845

$

147,849

Commercial real estate non-owner occupied

 

492,357

 

166,810

 

239,448

 

3,290

 

-

 

901,905

 

1,206,313

 

2,108,218

Commercial real estate owner occupied

 

192,895

 

184,678

 

183,377

 

1,629

 

-

 

562,579

 

1,023,750

 

1,586,329

Commercial and industrial

 

592,861

 

170,183

 

130,872

 

148

 

16

 

894,080

 

2,524,654

 

3,418,734

 

Total Commercial

 

1,279,454

 

525,541

 

555,490

 

5,067

 

16

 

2,365,568

 

4,895,562

 

7,261,130

Construction

 

340

 

649

 

20,771

 

-

 

-

 

21,760

 

115,710

 

137,470

Mortgage

 

2,187

 

2,218

 

127,621

 

-

 

-

 

132,026

 

6,034,722

 

6,166,748

Leasing

 

-

 

-

 

3,590

 

-

 

68

 

3,658

 

1,055,849

 

1,059,507

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

-

 

-

 

19,461

 

-

 

-

 

19,461

 

1,104,339

 

1,123,800

 

HELOCs

 

-

 

-

 

-

 

-

 

-

 

-

 

5,038

 

5,038

 

Personal

 

77

 

-

 

19,558

 

-

 

-

 

19,635

 

1,348,515

 

1,368,150

 

Auto

 

-

 

-

 

30,775

 

-

 

372

 

31,147

 

2,886,375

 

2,917,522

 

Other

 

459

 

11

 

15,020

 

-

 

53

 

15,543

 

125,324

 

140,867

 

Total Consumer

 

536

 

11

 

84,814

 

-

 

425

 

85,786

 

5,469,591

 

5,555,377

Total Puerto Rico

$

1,282,517

$

528,419

$

792,286

$

5,067

$

509

$

2,608,798

$

17,571,434

$

20,180,232

Popular U.S.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial multi-family

$

48,359

$

13,827

$

8,433

$

-

$

-

$

70,619

$

1,576,691

$

1,647,310

Commercial real estate non-owner occupied

 

80,608

 

24,383

 

100,658

 

-

 

-

 

205,649

 

1,664,647

 

1,870,296

Commercial real estate owner occupied

 

27,298

 

5,709

 

13,826

 

-

 

-

 

46,833

 

292,302

 

339,135

Commercial and industrial

 

25,679

 

1,460

 

20,386

 

-

 

-

 

47,525

 

1,147,355

 

1,194,880

 

Total Commercial

 

181,944

 

45,379

 

143,303

 

-

 

-

 

370,626

 

4,680,995

 

5,051,621

Construction

 

46,644

 

17,291

 

44,798

 

-

 

-

 

108,733

 

584,889

 

693,622

Mortgage

 

-

 

-

 

11,091

 

-

 

-

 

11,091

 

1,005,693

 

1,016,784

Legacy

 

388

 

202

 

1,528

 

-

 

-

 

2,118

 

19,987

 

22,105

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

-

 

-

 

-

 

-

 

-

 

-

 

36

 

36

 

HELOCs

 

-

 

-

 

2,024

 

-

 

7,930

 

9,954

 

107,389

 

117,343

 

Personal

 

-

 

-

 

1,664

 

-

 

403

 

2,067

 

322,373

 

324,440

 

Other

 

-

 

-

 

-

 

-

 

-

 

-

 

690

 

690

 

Total Consumer

 

-

 

-

 

3,688

 

-

 

8,333

 

12,021

 

430,488

 

442,509

Total Popular U.S.

$

228,976

$

62,872

$

204,408

$

-

$

8,333

$

504,589

$

6,722,052

$

7,226,641

Popular, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial multi-family

$

49,700

$

17,697

$

10,226

$

-

$

-

$

77,623

$

1,717,536

$

1,795,159

Commercial real estate non-owner occupied

 

572,965

 

191,193

 

340,106

 

3,290

 

-

 

1,107,554

 

2,870,960

 

3,978,514

Commercial real estate owner occupied

 

220,193

 

190,387

 

197,203

 

1,629

 

-

 

609,412

 

1,316,052

 

1,925,464

Commercial and industrial

 

618,540

 

171,643

 

151,258

 

148

 

16

 

941,605

 

3,672,009

 

4,613,614

 

Total Commercial

 

1,461,398

 

570,920

 

698,793

 

5,067

 

16

 

2,736,194

 

9,576,557

 

12,312,751

Construction

 

46,984

 

17,940

 

65,569

 

-

 

-

 

130,493

 

700,599

 

831,092

Mortgage

 

2,187

 

2,218

 

138,712

 

-

 

-

 

143,117

 

7,040,415

 

7,183,532

Legacy

 

388

 

202

 

1,528

 

-

 

-

 

2,118

 

19,987

 

22,105

Leasing

 

-

 

-

 

3,590

 

-

 

68

 

3,658

 

1,055,849

 

1,059,507

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

-

 

-

 

19,461

 

-

 

-

 

19,461

 

1,104,375

 

1,123,836

 

HELOCs

 

-

 

-

 

2,024

 

-

 

7,930

 

9,954

 

112,427

 

122,381

 

Personal

 

77

 

-

 

21,222

 

-

 

403

 

21,702

 

1,670,888

 

1,692,590

 

Auto

 

-

 

-

 

30,775

 

-

 

372

 

31,147

 

2,886,375

 

2,917,522

 

Other

 

459

 

11

 

15,020

 

-

 

53

 

15,543

 

126,014

 

141,557

 

Total Consumer

 

536

 

11

 

88,502

 

-

 

8,758

 

97,807

 

5,900,079

 

5,997,886

Total Popular, Inc.

$

1,511,493

$

591,291

$

996,694

$

5,067

$

8,842

$

3,113,387

$

24,293,486

$

27,406,873

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following table presents the weighted average obligor risk rating at December 31, 2019 for those classifications that consider a range of rating scales.

58

 

Weighted average obligor risk rating

(Scales 11 and 12)

 

 

 

(Scales 1 through 8)

Puerto Rico:

 

 

 

 

Substandard

 

 

 

 

 

 

Pass

 

 

Commercial multi-family

 

 

 

 

 

11.82

 

 

 

 

 

 

 

6.02

 

 

Commercial real estate non-owner occupied

 

 

 

 

 

11.17

 

 

 

 

 

 

 

6.77

 

 

Commercial real estate owner occupied

 

 

 

 

 

11.36

 

 

 

 

 

 

 

7.30

 

 

Commercial and industrial

 

 

 

 

 

11.26

 

 

 

 

 

 

 

7.20

 

 

 

Total Commercial

 

 

 

 

 

11.25

 

 

 

 

 

 

 

7.10

 

 

Construction

 

 

 

 

 

11.01

 

 

 

 

 

 

 

7.85

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Popular U.S.:

 

 

 

 

Substandard

 

 

 

 

 

 

Pass

 

 

Commercial multi-family

 

 

 

 

 

11.25

 

 

 

 

 

 

 

7.37

 

 

Commercial real estate non-owner occupied

 

 

 

 

 

11.00

 

 

 

 

 

 

 

6.94

 

 

Commercial real estate owner occupied

 

 

 

 

 

11.02

 

 

 

 

 

 

 

7.48

 

 

Commercial and industrial

 

 

 

 

 

11.01

 

 

 

 

 

 

 

6.63

 

 

 

Total Commercial

 

 

 

 

 

11.02

 

 

 

 

 

 

 

7.04

 

 

Construction

 

 

 

 

 

11.00

 

 

 

 

 

 

 

7.74

 

 

Legacy

 

 

 

 

 

11.25

 

 

 

 

 

 

 

7.95

 

 

 

For changes in the allowance for credit losses, loan ending balances and whether such loans and the allowance pertained to loans individually or collectively evaluated for impairment for the quarter and nine months ended September 30, 2019, refer to the allowance activity section of this note.

 

Impaired loans

The following tables present loans individually evaluated for impairment at December 31, 2019.

59

 

December 31, 2019

Puerto Rico

 

Impaired Loans – With an

Impaired Loans

 

 

 

 

 

 

 

Allowance

With No Allowance

Impaired Loans - Total

 

 

 

Unpaid

 

 

 

 

Unpaid

 

 

Unpaid

 

 

 

Recorded

principal

Related

Recorded

principal

Recorded

principal

 

Related

(In thousands)

investment

balance

allowance

investment

balance

investment

balance

 

allowance

Commercial multi-family

$

1,196

$

1,229

$

4

$

1,017

$

1,247

$

2,213

$

2,476

$

4

Commercial real estate non-owner occupied

 

44,975

 

45,803

 

12,281

 

149,587

 

173,124

 

194,562

 

218,927

 

12,281

Commercial real estate owner occupied

 

105,841

 

122,814

 

5,077

 

26,365

 

58,540

 

132,206

 

181,354

 

5,077

Commercial and industrial

 

43,640

 

47,611

 

3,171

 

24,831

 

44,255

 

68,471

 

91,866

 

3,171

Construction

 

119

 

119

 

6

 

-

 

-

 

119

 

119

 

6

Mortgage

 

420,949

 

479,936

 

40,596

 

101,520

 

134,331

 

522,469

 

614,267

 

40,596

Leasing

 

507

 

507

 

61

 

-

 

-

 

507

 

507

 

61

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

24,475

 

24,475

 

2,957

 

-

 

-

 

24,475

 

24,475

 

2,957

Personal

 

65,521

 

65,521

 

17,142

 

-

 

-

 

65,521

 

65,521

 

17,142

Auto

 

310

 

310

 

51

 

-

 

-

 

310

 

310

 

51

Other

 

851

 

851

 

109

 

-

 

-

 

851

 

851

 

109

Total Puerto Rico

$

708,384

$

789,176

$

81,455

$

303,320

$

411,497

$

1,011,704

$

1,200,673

$

81,455

 

December 31, 2019

Popular U.S.

 

Impaired Loans – With an

Impaired Loans

 

 

 

 

 

 

 

Allowance

With No Allowance

Impaired Loans - Total

 

 

 

Unpaid

 

 

 

 

Unpaid

 

 

Unpaid

 

 

 

Recorded

principal

Related

Recorded

principal

Recorded

principal

Related

(In thousands)

investment

balance

allowance

investment

balance

investment

balance

allowance

Commercial multi-family

$

-

$

-

$

-

$

2,097

$

2,539

$

2,097

$

2,539

$

-

Mortgage

 

6,906

 

7,257

 

2,208

 

2,480

 

2,844

 

9,386

 

10,101

 

2,208

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HELOCs

 

6,691

 

6,691

 

1,560

 

2,829

 

3,087

 

9,520

 

9,778

 

1,560

Personal

 

26

 

26

 

3

 

88

 

88

 

114

 

114

 

3

Total Popular U.S.

$

13,623

$

13,974

$

3,771

$

7,494

$

8,558

$

21,117

$

22,532

$

3,771

 

December 31, 2019

Popular, Inc.

 

Impaired Loans – With an

Impaired Loans

 

 

 

 

 

 

 

Allowance

With No Allowance

Impaired Loans - Total

 

 

 

Unpaid

 

 

 

 

Unpaid

 

 

Unpaid

 

 

 

Recorded

principal

Related

Recorded

principal

Recorded

principal

Related

(In thousands)

investment

balance

allowance

investment

balance

investment

balance

allowance

Commercial multi-family

$

1,196

$

1,229

$

4

$

3,114

$

3,786

$

4,310

$

5,015

$

4

Commercial real estate non-owner occupied

 

44,975

 

45,803

 

12,281

 

149,587

 

173,124

 

194,562

 

218,927

 

12,281

Commercial real estate owner occupied

 

105,841

 

122,814

 

5,077

 

26,365

 

58,540

 

132,206

 

181,354

 

5,077

Commercial and industrial

 

43,640

 

47,611

 

3,171

 

24,831

 

44,255

 

68,471

 

91,866

 

3,171

Construction

 

119

 

119

 

6

 

-

 

-

 

119

 

119

 

6

Mortgage

 

427,855

 

487,193

 

42,804

 

104,000

 

137,175

 

531,855

 

624,368

 

42,804

Leasing

 

507

 

507

 

61

 

-

 

-

 

507

 

507

 

61

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

24,475

 

24,475

 

2,957

 

-

 

-

 

24,475

 

24,475

 

2,957

HELOCs

 

6,691

 

6,691

 

1,560

 

2,829

 

3,087

 

9,520

 

9,778

 

1,560

Personal

 

65,547

 

65,547

 

17,145

 

88

 

88

 

65,635

 

65,635

 

17,145

Auto

 

310

 

310

 

51

 

-

 

-

 

310

 

310

 

51

Other

 

851

 

851

 

109

 

-

 

-

 

851

 

851

 

109

Total Popular, Inc.

$

722,007

$

803,150

$

85,226

$

310,814

$

420,055

$

1,032,821

$

1,223,205

$

85,226

 

The following tables present the average recorded investment and interest income recognized on impaired loans for the quarters and nine months ended September 30, 2019.

60

 

For the quarter ended September 30, 2019

 

Puerto Rico

 

Popular U.S.

 

Popular, Inc.

 

Average

 

Interest

 

Average

 

Interest

 

Average

 

Interest

 

recorded

 

income

 

recorded

 

income

 

recorded

 

income

(In thousands)

investment

 

recognized

 

investment

 

recognized

 

investment

 

recognized

Commercial multi-family

$

1,641

 

$

12

 

$

2,309

 

$

-

 

$

3,950

 

$

12

Commercial real estate non-owner occupied

 

182,078

 

 

2,561

 

 

-

 

 

-

 

 

182,078

 

 

2,561

Commercial real estate owner occupied

 

138,325

 

 

1,698

 

 

720

 

 

-

 

 

139,045

 

 

1,698

Commercial and industrial

 

74,674

 

 

888

 

 

-

 

 

-

 

 

74,674

 

 

888

Construction

 

1,031

 

 

-

 

 

11,060

 

 

-

 

 

12,091

 

 

-

Mortgage

 

522,567

 

 

4,399

 

 

9,417

 

 

155

 

 

531,984

 

 

4,554

Leasing

 

745

 

 

-

 

 

-

 

 

-

 

 

745

 

 

-

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

26,346

 

 

-

 

 

-

 

 

-

 

 

26,346

 

 

-

HELOCs

 

-

 

 

-

 

 

9,749

 

 

-

 

 

9,749

 

 

-

Personal

 

69,103

 

 

64

 

 

107

 

 

-

 

 

69,210

 

 

64

Auto

 

742

 

 

-

 

 

-

 

 

-

 

 

742

 

 

-

Other

 

939

 

 

-

 

 

-

 

 

-

 

 

939

 

 

-

Total Popular, Inc.

$

1,018,191

 

$

9,622

 

$

33,362

 

$

155

 

$

1,051,553

 

$

9,777

 

For the nine months ended September 30, 2019

 

Puerto Rico

 

Popular U.S.

 

Popular, Inc.

 

Average

 

Interest

 

Average

 

Interest

 

Average

 

Interest

 

recorded

 

income

 

recorded

 

income

 

recorded

 

income

(In thousands)

investment

 

recognized

 

investment

 

recognized

 

investment

 

recognized

Commercial multi-family

$

1,284

 

$

36

 

$

1,155

 

$

-

 

$

2,439

 

$

36

Commercial real estate non-owner occupied

 

180,401

 

 

6,987

 

 

-

 

 

-

 

 

180,401

 

 

6,987

Commercial real estate owner occupied

 

139,086

 

 

4,831

 

 

783

 

 

-

 

 

139,869

 

 

4,831

Commercial and industrial

 

72,668

 

 

2,744

 

 

-

 

 

-

 

 

72,668

 

 

2,744

Construction

 

1,410

 

 

-

 

 

11,560

 

 

-

 

 

12,970

 

 

-

Mortgage

 

517,492

 

 

12,423

 

 

9,423

 

 

296

 

 

526,915

 

 

12,719

Leasing

 

902

 

 

-

 

 

-

 

 

-

 

 

902

 

 

-

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

27,350

 

 

-

 

 

-

 

 

-

 

 

27,350

 

 

-

HELOCs

 

-

 

 

-

 

 

8,855

 

 

-

 

 

8,855

 

 

-

Personal

 

70,700

 

 

208

 

 

447

 

 

-

 

 

71,147

 

 

208

Auto

 

952

 

 

-

 

 

-

 

 

-

 

 

952

 

 

-

Other

 

1,093

 

 

-

 

 

-

 

 

-

 

 

1,093

 

 

-

Total Popular, Inc.

$

1,013,338

 

$

27,229

 

$

32,223

 

$

296

 

$

1,045,561

 

$

27,525

61

 

Note 10 – Mortgage banking activities

Income from mortgage banking activities includes mortgage servicing fees earned in connection with administering residential mortgage loans and valuation adjustments on mortgage servicing rights. It also includes gain on sales and securitizations of residential mortgage loans, losses on repurchased loans, including interest advances, and trading gains and losses on derivative contracts used to hedge the Corporation’s securitization activities. In addition, lower-of-cost-or-market valuation adjustments to residential mortgage loans held for sale, if any, are recorded as part of the mortgage banking activities.

The following table presents the components of mortgage banking activities:

 

 

 

Quarters ended September 30,

Nine months ended September 30,

(In thousands)

 

2020

 

2019

 

2020

 

2019

Mortgage servicing fees, net of fair value adjustments:

 

 

 

 

 

 

 

 

 

Mortgage servicing fees

$

12,966

$

11,797

$

32,992

$

35,400

 

Mortgage servicing rights fair value adjustments

 

(20,491)

 

(4,842)

 

(33,360)

 

(25,853)

Total mortgage servicing fees, net of fair value adjustments

 

(7,525)

 

6,955

 

(368)

 

9,547

Net gain on sale of loans, including valuation on loans held-for-sale

 

10,916

 

5,421

 

20,389

 

14,653

Trading account (loss) profit:

 

 

 

 

 

 

 

 

 

Unrealized (losses) gains on outstanding derivative positions

 

(4)

 

227

 

(4)

 

-

 

Realized losses on closed derivative positions

 

(1,958)

 

(2,111)

 

(8,391)

 

(5,555)

Total trading account loss

 

(1,962)

 

(1,884)

 

(8,395)

 

(5,555)

Losses on repurchased loans, including interest advances [1]

 

(10,955)

 

-

 

(10,955)

 

-

Total mortgage banking activities

$

(9,526)

$

10,492

$

671

$

18,645

[1]

The Corporation, from time to time, repurchases delinquent loans from its GNMA servicing portfolio, in compliance with Guarantor guidelines, and may incur in losses related to previously advanced interest on delinquent loans. During the quarter ended September 30, 2020 the Corporation repurchased $687.9 million of GNMA loans and recorded a loss of $10.5 million for previously advanced interest on delinquent loans. Effective for the quarter ended September 30, 2020, the Corporation has determined to present these losses as part of its Mortgage Banking Activities, which were previously presented within the indemnity reserves on loans sold component of non-interest income, which amounted to $0.7 million and $2.4 million for the quarter and nine months ended September 30, 2019, respectively.

62

 

Note 11 – 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 and nine months ended September 30, 2020 and 2019 because they did not contain any credit recourse arrangements. During the quarter and nine months ended September 30, 2020, the Corporation recorded a net gain of $9.1 million and $17.6 million, respectively (September 30, 2019 - $4.9 million and $13.4 million, respectively) 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 and nine months ended September 30, 2020 and 2019:

 

 

 

Proceeds Obtained During the Quarter Ended September 30, 2020

(In thousands)

Level 1

Level 2

Level 3

Initial Fair Value

Assets

 

 

 

 

 

 

 

 

Trading account debt securities:

 

 

 

 

 

 

 

 

Mortgage-backed securities - GNMA

$

-

$

99,576

$

-

$

99,576

Mortgage-backed securities - FNMA

 

-

 

54,390

 

-

 

54,390

Total trading account debt securities

$

-

$

153,966

$

-

$

153,966

Mortgage servicing rights

$

-

$

-

$

1,737

$

1,737

Total

$

-

$

153,966

$

1,737

$

155,703

 

 

 

Proceeds Obtained During the Nine Months Ended September 30, 2020

(In thousands)

Level 1

Level 2

Level 3

Initial Fair Value

Assets

 

 

 

 

 

 

 

 

Trading account debt securities:

 

 

 

 

 

 

 

 

Mortgage-backed securities - GNMA

$

-

$

213,608

$

-

$

213,608

Mortgage-backed securities - FNMA

 

-

 

93,904

 

-

 

93,904

Total trading account debt securities

$

-

$

307,512

$

-

$

307,512

Mortgage servicing rights

$

-

$

-

$

4,324

$

4,324

Total

$

-

$

307,512

$

4,324

$

311,836

 

 

 

Proceeds Obtained During the Quarter Ended September 30, 2019

(In thousands)

Level 1

Level 2

Level 3

Initial Fair Value

Assets

 

 

 

 

 

 

 

 

Trading account debt securities:

 

 

 

 

 

 

 

 

Mortgage-backed securities - GNMA

$

-

$

88,139

$

-

$

88,139

Mortgage-backed securities - FNMA

 

-

 

32,519

 

-

 

32,519

Total trading account debt securities

$

-

$

120,658

$

-

$

120,658

Mortgage servicing rights

$

-

$

-

$

2,216

$

2,216

Total

$

-

$

120,658

$

2,216

$

122,874

63

 

 

 

Proceeds Obtained During the Nine Months Ended September 30, 2019

(In thousands)

Level 1

Level 2

Level 3

Initial Fair Value

Assets

 

 

 

 

 

 

 

 

Trading account debt securities:

 

 

 

 

 

 

 

 

Mortgage-backed securities - GNMA

$

-

$

247,091

$

-

$

247,091

Mortgage-backed securities - FNMA

 

-

 

84,021

 

-

 

84,021

Total trading account debt securities

$

-

$

331,112

$

-

$

331,112

Mortgage servicing rights

$

-

$

-

$

6,028

$

6,028

Total

$

-

$

331,112

$

6,028

$

337,140

 

 

During the nine months ended September 30, 2020, the Corporation retained servicing rights on whole loan sales involving approximately $100 million in principal balance outstanding (September 30, 2019 - $45 million), with realized gains of approximately $2.7 million (September 30, 2019 - gains of $1.3 million). All loan sales completed during the nine months ended September 30, 2020 and 2019 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.

The following table presents the changes in MSRs measured using the fair value method for the nine months ended September 30, 2020 and 2019.

64

 

Residential MSRs

(In thousands)

September 30, 2020

September 30, 2019

Fair value at beginning of period

$

150,906

$

169,777

Additions

 

6,006

 

6,728

Changes due to payments on loans[1]

 

(8,427)

 

(8,449)

Reduction due to loan repurchases

 

(9,679)

 

(1,411)

Changes in fair value due to changes in valuation model inputs or assumptions

 

(15,278)

 

(15,993)

Other disposals

 

24

 

-

Fair value at end of period

$

123,552

$

150,652

[1]

Represents changes due to collection / realization of expected cash flows over time.

 

 

Residential mortgage loans serviced for others were $13.1 billion at September 30, 2020 (December 31, 2019 -$14.8 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 September 30, 2020, those weighted average mortgage servicing fees were 0.31% (September 30, 2019 - 0.30%). Under these servicing agreements, the banking subsidiaries do not generally earn significant prepayment penalty fees on the underlying loans serviced.

 

During the quarter ended June 30, 2020, PB commenced selling whole loans with servicing retained.

 

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 and nine months ended September 30, 2020 and 2019 were as follows:

 

Quarters ended

 

 

Nine months ended

 

September 30, 2020

 

 

September 30, 2019

 

 

September 30, 2020

 

September 30, 2019

 

BPPR

 

PB

 

 

BPPR

 

PB

 

 

BPPR

 

PB

 

 

BPPR

 

PB

 

Prepayment speed

9.5

%

21.8

%

 

6.8

%

-

%

 

7.1

%

22.1

%

 

6.9

%

-

%

Weighted average life (in years)

7.3

 

3.6

 

 

9.6

 

-

 

 

8.9

 

3.5

 

 

9.6

 

-

 

Discount rate (annual rate)

10.9

%

10.8

%

 

10.8

%

-

%

 

10.8

%

10.4

%

 

10.9

%

-

%

Key economic assumptions used to estimate the fair value of MSRs derived from sales and securitizations of mortgage loans performed by the banking subsidiaries and servicing rights purchased from other financial institutions, and the sensitivity to immediate changes in those assumptions, were as follows as of the end of the periods reported:

 

 

 

Originated MSRs

Purchased MSRs

 

 

September 30,

December 31,

September 30,

December 31,

(In thousands)

2020

2019

2020

2019

Fair value of servicing rights

$

47,684

 

$

58,842

 

$

75,868

 

$

92,064

 

Weighted average life (in years)

 

6.3

 

 

6.7

 

 

5.9

 

 

6.3

 

Weighted average prepayment speed (annual rate)

 

6.4

%

 

5.7

%

 

7.1

%

 

6.2

%

 

Impact on fair value of 10% adverse change

$

(1,268)

 

$

(1,303)

 

$

(2,397)

 

$

(2,306)

 

 

Impact on fair value of 20% adverse change

$

(2,494)

 

$

(2,568)

 

$

(4,683)

 

$

(4,525)

 

Weighted average discount rate (annual rate)

 

11.4

%

 

11.4

%

 

11.1

%

 

11.0

%

 

Impact on fair value of 10% adverse change

$

(1,946)

 

$

(2,381)

 

$

(3,022)

 

$

(3,603)

 

 

Impact on fair value of 20% adverse change

$

(3,764)

 

$

(4,596)

 

$

(5,845)

 

$

(6,959)

 

65

 

The sensitivity analyses presented in the table above for servicing rights are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10 and 20 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in the sensitivity tables included herein, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities.

 

At September 30, 2020, the Corporation serviced $0.9 billion (December 31, 2019 - $1.2 billion) in residential mortgage loans with credit recourse to the Corporation. The reduction was mainly related to a bulk loan repurchase from FNMA and FHLMC loan servicing portfolio discussed in Note 8 - Loans. Also 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 September 30, 2020, the Corporation had recorded $161 million in mortgage loans on its Consolidated Statements of Financial Condition related to this buy-back option program (December 31, 2019 - $103 million). Loans in our serviced GNMA portfolio benefit from payment forbearance programs but continue to reflect the contractual delinquency until the borrower repays deferred payments or completes a payment deferral modification or other borrower assistance alternative. As long as the Corporation continues to service the loans that continue to be collateral in a GNMA guaranteed mortgage-backed security, the MSR is recognized by the Corporation.

 

During the nine months ended September 30, 2020, the Corporation repurchased approximately $753 million (September 30, 2019 - $88 million) of mortgage loans from its GNMA servicing portfolio. The determination to repurchase these loans was based on the economic benefits of the transaction, which results in a reduction of the servicing costs for these severely delinquent loans, mostly related to principal and interest advances. The risk associated with the loans is reduced due to their guaranteed nature. The Corporation may place these loans under COVID-19 modification programs offered by FHA, VA or USDA or other loss mitigation programs offered by the Corporation, and once brought back to current status, these may be either retained in portfolio or re-sold in the secondary market.

66

 

Note 12 – Other real estate owned

The following tables present the activity related to Other Real Estate Owned (“OREO”), for the quarters and nine months ended September 30, 2020 and 2019.

 

 

 

For the quarter ended September 30, 2020

 

 

OREO

 

OREO

 

 

(In thousands)

 

Commercial/Construction

 

Mortgage

 

Total

Balance at beginning of period

$

16,482

$

97,458

$

113,940

Write-downs in value

 

(160)

 

(843)

 

(1,003)

Additions

 

41

 

1,467

 

1,508

Sales

 

(1,385)

 

(12,416)

 

(13,801)

Other adjustments

 

(56)

 

4

 

(52)

Ending balance

$

14,922

$

85,670

$

100,592

 

 

 

For the quarter ended September 30, 2019

 

 

OREO

 

OREO

 

 

(In thousands)

 

Commercial/Construction

 

Mortgage

 

Total

Balance at beginning of period

$

18,548

$

100,303

$

118,851

Write-downs in value

 

(348)

 

(745)

 

(1,093)

Additions

 

1,080

 

16,572

 

17,652

Sales

 

(2,069)

 

(15,182)

 

(17,251)

Other adjustments

 

-

 

(231)

 

(231)

Ending balance

$

17,211

$

100,717

$

117,928

 

 

 

For the nine months ended September 30, 2020

 

 

OREO

 

OREO

 

 

(In thousands)

 

Commercial/Construction

 

Mortgage

 

Total

Balance at beginning of period

$

16,959

$

105,113

$

122,072

Write-downs in value

 

(1,474)

 

(2,414)

 

(3,888)

Additions

 

2,161

 

17,716

 

19,877

Sales

 

(2,668)

 

(34,845)

 

(37,513)

Other adjustments

 

(56)

 

100

 

44

Ending balance

$

14,922

$

85,670

$

100,592

 

 

 

For the nine months ended September 30, 2019

 

 

OREO

 

OREO

 

 

(In thousands)

 

Commercial/Construction

 

Mortgage

 

Total

Balance at beginning of period

$

21,794

$

114,911

$

136,705

Write-downs in value

 

(1,327)

 

(3,896)

 

(5,223)

Additions

 

4,259

 

41,042

 

45,301

Sales

 

(7,515)

 

(50,742)

 

(58,257)

Other adjustments

 

-

 

(598)

 

(598)

Ending balance

$

17,211

$

100,717

$

117,928

67

 

Note 13 − Other assets

The caption of other assets in the consolidated statements of financial condition consists of the following major categories:

 

(In thousands)

September 30, 2020

December 31, 2019

Net deferred tax assets (net of valuation allowance)

$

882,230

$

886,353

Investments under the equity method

 

239,860

 

237,081

Prepaid taxes

 

40,077

 

47,226

Other prepaid expenses

 

84,717

 

82,425

Derivative assets

 

18,080

 

17,966

Trades receivable from brokers and counterparties

 

67,124

 

47,049

Principal, interest and escrow servicing advances

 

72,721

 

77,800

Guaranteed mortgage loan claims receivable

 

89,763

 

108,946

Operating ROU assets (Note 28)

 

149,855

 

149,849

Finance ROU assets (Note 28)

 

17,143

 

12,888

Others

 

155,136

 

152,032

Total other assets

$

1,816,706

$

1,819,615

 

The Corporation enters in the ordinary course of business into hosting arrangements that are service contracts. These arrangements can include capitalizable implementation costs that are amortized during the term of the hosting arrangement. The Corporation recognizes capitalizable implementation costs related to hosting arrangements that are service contracts within the Other assets line item in the accompanying Consolidated Statements of Financial Condition. As of September 30, 2020, the total capitalized implementation costs amounted to $16.8 million with an accumulated amortization of $4.2 million for a net value of $12.6 million. Total amortization expense for all capitalized implementation costs of hosting arrangements that are service contracts for the quarter and nine months ended September 30, 2020 was $0.5 million and $1.5 million, respectively.

68

 

Note 14 – Goodwill and other intangible assets

Goodwill

 

There were no changes in the carrying amount of goodwill for the quarters and nine months ended September 30, 2020 and 2019.

 

Other Intangible Assets

At September 30, 2020 and December 31, 2019, 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:

 

 

Gross Carrying

 

Accumulated

 

Net Carrying

(In thousands)

 

Amount

 

Amortization

 

Value

September 30, 2020

 

 

 

 

 

 

 

Core deposits

$

12,810

$

7,152

$

5,658

 

Other customer relationships

 

26,656

 

15,236

 

11,420

 

Trademark

 

488

 

212

 

276

Total other intangible assets

$

39,954

$

22,600

$

17,354

December 31, 2019

 

 

 

 

 

 

 

Core deposits

$

37,224

$

29,792

$

7,432

 

Other customer relationships

 

42,909

 

28,075

 

14,834

 

Trademark

 

488

 

138

 

350

Total other intangible assets

$

80,621

$

58,005

$

22,616

 

 

During the quarter ended June 30, 2020, $24.4 million in core deposits recognized as part of the Westernbank FDIC-assisted transaction during 2010 and $16.3 million in other customer relationships related to the purchase of the Doral Insurance Agency portfolio during 2015 became fully amortized and thus were removed from the Corporation’s intangible assets list.

 

During the quarter ended September 30, 2020, the Corporation recognized $ 1.1 million in amortization expense related to other intangible assets with definite useful lives (September 30, 2019 - $ 2.4 million). During the nine months ended September 30, 2020, the Corporation recognized $ 5.3 million in amortization related to other intangible assets with definite useful lives (September 30, 2019 - $ 7.1 million).

 

The following table presents the estimated amortization of the intangible assets with definite useful lives for each of the following periods:

 

(In thousands)

 

 

Remaining 2020

$

1,052

Year 2021

 

3,575

Year 2022

 

2,700

Year 2023

 

2,659

Year 2024

 

2,361

Later years

 

5,007

 

Results of the Annual Goodwill Impairment Test

 

The Corporation’s goodwill and other identifiable intangible assets having an indefinite useful life are tested for impairment, at least annually and on a more frequent basis if events or circumstances indicate impairment could have taken place. Such events could include, among others, a significant adverse change in the business climate, an adverse action by a regulator, an unanticipated change in the competitive environment and a decision to change the operations or dispose of a reporting unit.

69

 

 

Management monitors events or changes in circumstances between annual tests to determine if these events or changes in circumstances would more likely than not reduce the fair value of its reporting units below their carrying amounts.

 

The Corporation performed the annual goodwill impairment evaluation for the entire organization during the third quarter of 2020 using July 31, 2020 as the annual evaluation date. The reporting units utilized for this evaluation were those that are one level below the business segments, which are the legal entities within the reportable segment. The Corporation follows push-down accounting, as such all goodwill is assigned to the reporting units when carrying out a business combination.

As discussed in Note 3, “New accounting pronouncements”, effective on January 1, 2020, the Corporation adopted ASU 2017-04, which simplifies the accounting for goodwill impairment by removing Step 2 of the two-step goodwill impairment test under the previous guidance. Accordingly, if the carrying amount of any of the reporting units exceeds its fair value, the Corporation would be required to record an impairment charge for the difference up to the amount of the goodwill.

 

In determining the fair value of each reporting unit, the Corporation generally uses a combination of methods, including market price multiples of comparable companies and transactions, as well as discounted cash flow analysis. Management evaluates the particular circumstances of each reporting unit in order to determine the most appropriate valuation methodology and the weights applied to each valuation methodology, as applicable. The Corporation evaluates the results obtained under each valuation methodology to identify and understand the key value drivers in order to ascertain that the results obtained are reasonable and appropriate under the circumstances. Elements considered include current market and economic conditions, developments in specific lines of business, and any particular features in the individual reporting units.

 

The computations require management to make estimates and assumptions. Critical assumptions that are used as part of these evaluations include:

a selection of comparable publicly traded companies, based on nature of business, location and size;

a selection of comparable acquisitions;

the discount rate applied to future earnings, based on an estimate of the cost of equity;

the potential future earnings of the reporting unit; and

the market growth and new business assumptions.

 

For purposes of the market comparable companies’ approach, valuations were determined by calculating average price multiples of relevant value drivers from a group of companies that are comparable to the reporting unit being analyzed and applying those price multiples to the value drivers of the reporting unit. Management uses judgment in the determination of which value drivers are considered more appropriate for each reporting unit. Comparable companies’ price multiples represent minority-based multiples and thus, a control premium adjustment is added to the comparable companies’ market multiples applied to the reporting unit’s value drivers. For purposes of the market comparable transactions’ approach, valuations had been previously determined by the Corporation by calculating average price multiples of relevant value drivers from a group of transactions for which the target companies are comparable to the reporting unit being analyzed and applying those price multiples to the value drivers of the reporting unit. For the July 31, 2020 annual goodwill impairment test, and after considering the effects of COVID-19 in the M&A market and uncertainties regarding the comparability and reliability of those few transactions completed, management decided to give zero weight to the market comparable transactions approach.

 

For purposes of the discounted cash flows (“DCF”) approach, the valuation is based on estimated future cash flows. The financial projections used in the DCF valuation analysis for each reporting unit are based on the most recent (as of the valuation date) financial projections presented to the Corporation’s Asset / Liability Management Committee (“ALCO”). The growth assumptions included in these projections are based on management’s expectations for each reporting unit’s financial prospects considering economic and industry conditions as well as particular plans of each entity (i.e. restructuring plans, de-leveraging, etc.). The cost of equity used to discount the cash flows was calculated using the Ibbotson Build-Up Method and ranged from 10.72% to15.13 % for the 2020 analysis. The Ibbotson Build-Up Method builds up a cost of equity starting with the rate of return of a “risk-free” asset (20-year U.S. Treasury note) and adds to it additional risk elements such as equity risk premium, size premium, industry risk premium, and a specific geographic risk premium (as applicable). The resulting discount rates were analyzed in terms of reasonability given the current market conditions.

 

70

 

The results of the BPPR annual goodwill impairment test as of July 31, 2020 indicated that the average estimated fair value using the DCF and market comparable companies methodologies exceeded BPPR’s equity value by approximately $282 million or 9% compared to $1.2 billion or 37%, for the annual goodwill impairment test completed as of July 31, 2019. PB’s annual goodwill impairment test results as of such dates indicated that the average estimated fair value using the DCF and market comparable companies methodologies exceeded PB’s equity value by approximately $215 million or 13%, compared to $338 million or 21%, for the annual goodwill impairment test completed as of July 31, 2019. Accordingly, there was no impairment on goodwill recorded at July 31, 2020. The goodwill balance of BPPR and PB, as legal entities, represented approximately 91% of the Corporation’s total goodwill balance as of the July 31, 2020 valuation date.

 

Furthermore, as part of the analyses, management performed a reconciliation of the aggregate fair values determined for the reporting units to the market capitalization of the Corporation concluding that the fair value results determined for the reporting units in the July 31, 2020 annual assessment were reasonable.

 

The goodwill impairment evaluation process requires the Corporation to make estimates and assumptions with regard to the fair value of the reporting units. Actual values may differ significantly from these estimates. Such differences could result in future impairment of goodwill that would, in turn, negatively impact the Corporation’s results of operations and the reporting units where the goodwill is recorded. Declines in the Corporation’s market capitalization and adverse economic conditions sustained over a longer period of time negatively affecting forecasted cash flows could increase the risk of goodwill impairment in the future.

 

The extent to which the COVID-19 pandemic further impacts our business, results of operations and financial condition, as well as the operations of our clients, customers, service providers and suppliers, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response thereto. A further decline in the Corporation’s stock price related to global and/or regional macroeconomic conditions, the continued weakness in the Puerto Rico economy and fiscal situation, reduced future earnings estimates, additional expenses and higher credit losses, and the continuance of the current interest rate environment could, individually or in the aggregate, have a material impact on the determination of the fair value of our reporting units, which could in turn result in an impairment of goodwill in the future. An impairment of goodwill would result in a non-cash expense, net of tax impact. A charge to earnings related to a goodwill impairment would not impact regulatory capital calculations.

 

The following tables present the gross amount of goodwill and accumulated impairment losses by reportable segments.

 

 

September 30, 2020

 

Balance at

 

 

Balance at

 

September 30,

Accumulated

September 30,

 

2020

impairment

2020

(In thousands)

(gross amounts)

losses

(net amounts)

Banco Popular de Puerto Rico

$

324,049

$

3,801

$

320,248

Popular U.S.

 

515,285

 

164,411

 

350,874

Total Popular, Inc.

$

839,334

$

168,212

$

671,122

 

December 31, 2019

 

Balance at

 

 

Balance at

 

December 31,

Accumulated

December 31,

 

2019

impairment

2019

(In thousands)

(gross amounts)

losses

(net amounts)

Banco Popular de Puerto Rico

$

324,049

$

3,801

$

320,248

Popular U.S.

 

515,285

 

164,411

 

350,874

Total Popular, Inc.

$

839,334

$

168,212

$

671,122

71

 

Note 15 – Deposits

Total interest bearing deposits as of the end of the periods presented consisted of:

(In thousands)

September 30, 2020

December 31, 2019

Savings accounts

$

13,227,332

$

10,618,629

NOW, money market and other interest bearing demand deposits

 

21,403,290

 

16,305,007

Total savings, NOW, money market and other interest bearing demand deposits

 

34,630,622

 

26,923,636

Certificates of deposit:

 

 

 

 

 

Under $100,000

 

3,077,257

 

3,133,840

 

$100,000 and over

 

4,767,672

 

4,540,957

Total certificates of deposit

 

7,844,929

 

7,674,797

Total interest bearing deposits

$

42,475,551

$

34,598,433

A summary of certificates of deposit by maturity at September 30, 2020 follows:

(In thousands)

 

 

2020

$

3,225,332

2021

 

1,964,211

2022

 

902,403

2023

 

641,180

2024

 

572,449

2025 and thereafter

 

539,354

Total certificates of deposit

$

7,844,929

 

At September 30, 2020, the Corporation had brokered deposits amounting to $ 0.7 billion (December 31, 2019 - $ 0.5 billion).

 

The aggregate amount of overdrafts in demand deposit accounts that were reclassified to loans was $3 million at September 30, 2020 (December 31, 2019 - $4 million).

72

 

Note 16 – Borrowings

 

Assets sold under agreements to repurchase amounted to $106 million at September 30, 2020 and $193 million December 31, 2019.

 

The Corporation’s repurchase transactions are overcollateralized with the securities detailed in the table below. The Corporation’s repurchase agreements have a right of set-off with the respective counterparty under the supplemental terms of the master repurchase agreements. In an event of default each party has a right of set-off against the other party for amounts owed in the related agreement and any other amount or obligation owed in respect of any other agreement or transaction between them. Pursuant to the Corporation’s accounting policy, the repurchase agreements are not offset with other repurchase agreements held with the same counterparty.

 

The following table presents information related to the Corporation’s repurchase transactions accounted for as secured borrowings that are collateralized with debt securities available-for-sale, other assets held-for-trading purposes or which have been obtained under agreements to resell. It is the Corporation’s policy to maintain effective control over assets sold under agreements to repurchase; accordingly, such securities continue to be carried on the Consolidated Statements of Financial Condition.

 

Repurchase agreements accounted for as secured borrowings

 

 

 

September 30, 2020

December 31, 2019

 

 

 

Repurchase

 

Repurchase

 

(In thousands)

 

liability

 

liability

 

U.S. Treasury securities

 

 

 

 

 

 

Within 30 days

$

14,861

$

88,646

 

 

After 30 to 90 days

 

14,636

 

78,061

 

 

After 90 days

 

72,457

 

24,538

 

Total U.S. Treasury securities

 

101,954

 

191,245

 

Mortgage-backed securities

 

 

 

 

 

 

Within 30 days

 

2,961

 

1,235

 

 

After 90 days

 

287

 

-

 

Total mortgage-backed securities

 

3,248

 

1,235

 

Collateralized mortgage obligations

 

 

 

 

 

 

Within 30 days

 

826

 

898

 

Total collateralized mortgage obligations

 

826

 

898

 

Total

$

106,028

$

193,378

 

 

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.

 

At September 30, 2020, other short-term borrowings consisted of $100 million in FHLB advances. There were no other short-term borrowings outstanding at December 31, 2019.

 

The following table presents the composition of notes payable at September 30, 2020 and December 31, 2019.

73

 

(In thousands)

September 30, 2020

 

December 31, 2019

Advances with the FHLB with maturities ranging from 2020 through 2029 paying interest at monthly fixed rates ranging from 0.39% to 4.19%

$

519,208

 

$

421,399

Advances with the FRB maturing on 2022 paying interest annually at a fixed rate of 0.35%

 

1,009

 

 

-

Unsecured senior debt securities maturing on 2023 paying interest semiannually at a fixed rate of 6.125%, net of debt issuance costs of $ 3,743

 

296,257

 

 

295,307

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 $375

 

384,922

 

 

384,902

Total notes payable

$

1,201,396

 

$

1,101,608

Note: Refer to the Corporation's 2019 Form 10-K for rates information at December 31, 2019.

 

A breakdown of borrowings by contractual maturities at September 30, 2020 is included in the table below.

 

 

Assets sold under

 

Short-term

 

 

 

(In thousands)

 

agreements to repurchase

 

borrowings

 

Notes payable

Total

2020

$

33,284

$

100,000

$

11,931

$

145,215

2021

 

72,744

 

-

 

50,040

 

122,784

2022

 

-

 

-

 

104,156

 

104,156

2023

 

-

 

-

 

339,518

 

339,518

2024

 

-

 

-

 

91,943

 

91,943

Later years

 

-

 

-

 

603,808

 

603,808

Total borrowings

$

106,028

$

100,000

$

1,201,396

$

1,407,424

 

At September 30, 2020 and December 31, 2019, the Corporation had FHLB borrowing facilities whereby the Corporation could borrow up to $3.2 billion and $3.6 billion, respectively, of which $0.6 billion and $0.4 billion, respectively, were used. In addition, at September 30, 2020 and December 31, 2019, the Corporation had placed $0.9 billion 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 September 30, 2020, the Corporation has a borrowing facility at the discount window of the Federal Reserve Bank of New York amounting to $1.4 billion (2019 - $1.1 billion), which remained unused at September 30, 2020 and December 31, 2019. The facility is a collateralized source of credit that is highly reliable even under difficult market conditions.

74

 

Note 17 − Other liabilities

The caption of other liabilities in the consolidated statements of financial condition consists of the following major categories:

 

(In thousands)

September 30, 2020

December 31, 2019

Accrued expenses

$

245,596

$

273,184

Accrued interest payable

 

32,719

 

44,026

Accounts payable

 

70,846

 

65,688

Dividends payable

 

33,692

 

29,027

Trades payable

 

1,484,410

 

4,084

Liability for GNMA loans sold with an option to repurchase

 

161,358

 

102,663

Reserves for loan indemnifications

 

29,882

 

38,074

Reserve for operational losses

 

41,890

 

35,665

Operating lease liabilities (Note 28)

 

164,958

 

165,139

Finance lease liabilities (Note 28)

 

23,969

 

19,810

Pension benefit obligation

 

41,453

 

52,616

Postretirement benefit obligation

 

167,983

 

168,681

Others

 

70,121

 

46,296

Total other liabilities

$

2,568,877

$

1,044,953

75

 

Note 18 – Stockholders’ equity

As of September 30, 2020, stockholder’s equity totaled $5.9 billion. During the nine months ended September 30, 2020, the Corporation declared cash dividends on its common stock of $102.9 million (2019 - $87.0 million). The quarterly dividend of $33.7 million declared to shareholders of record as of the close of business on August 18, 2020 was paid on October 1, 2020. Dividends per share declared for the quarter and nine months ended September 30, 2020 were $0.40 and $1.20, respectively (2019 - $0.30 and $0.90, respectively).

 

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 Shares”), 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 of capital surplus. The Corporation completed this transaction during the fourth quarter of 2019 and received 1,165,607 additional shares of common stock. The final number of shares delivered at settlement was based on the average daily volume weighted average price (“VWAP”) of its common stock, net of a discount, during the term of the ASR of $53.58.

 

On January 30, 2020, the Corporation entered into a $500 million ASR transaction with respect to its common stock, which was accounted for as a treasury stock transaction. As a result of the receipt of the initial 7,055,919 shares, the Corporation recognized in shareholder’s equity approximately $400 million in treasury stock and $100 million as a reduction in capital surplus. On March 19, 2020 (the “early termination date”), the dealer counterparty to the ASR exercised its right to terminate the ASR as a result of the trading price of the Corporation’s common stock falling below a specified level due to the effects of the COVID-19 pandemic on the global markets. As a result of such early termination, the final settlement of the ASR, which was expected to occur during the fourth quarter of 2020, occurred during the second quarter of 2020. The Corporation completed the transaction on May 27, 2020 and received 4,763,216 additional shares of common stock after the early termination date. In total the Corporation repurchased 11,819,135 shares at an average price per share of $42.3043 under the ASR.

 

On February 24, 2020, the Corporation redeemed all outstanding shares of its 8.25% Non-Cumulative Monthly Income Preferred Stock, Series B (“Series B Preferred Stock”). The Series B Preferred Stock was redeemed at the redemption price of $25.00 per share, plus $0.1375 in accrued and unpaid dividends on each share, for a total payment per share in the amount of $25.1375 and a total aggregate payment of $28.2 million.

 

 

76

 

Note 19 – Other comprehensive income (loss)

The following table presents changes in accumulated other comprehensive income (loss) by component for the quarters and nine months ended September 30, 2020 and 2019.

 

 

 

Changes in Accumulated Other Comprehensive Income (Loss) by Component [1]

 

 

 

 

Quarters ended

Nine months ended

 

 

 

September 30,

September 30,

(In thousands)

 

 

2020

 

2019

 

2020

 

2019

Foreign currency translation

Beginning Balance

$

(69,458)

$

(52,378)

$

(56,783)

$

(49,936)

 

 

Other comprehensive (loss) income

 

(2,035)

 

155

 

(14,710)

 

(2,287)

 

 

Net change

 

(2,035)

 

155

 

(14,710)

 

(2,287)

 

 

Ending balance

$

(71,493)

$

(52,223)

$

(71,493)

$

(52,223)

Adjustment of pension and postretirement benefit plans

Beginning Balance

$

(196,114)

$

(196,491)

$

(202,816)

$

(203,836)

 

 

Amounts reclassified from accumulated other comprehensive loss for amortization of net losses

 

3,351

 

3,673

 

10,053

 

11,018

 

 

Net change

 

3,351

 

3,673

 

10,053

 

11,018

 

 

Ending balance

$

(192,763)

$

(192,818)

$

(192,763)

$

(192,818)

Unrealized net holding gains on debt securities

Beginning Balance

$

489,105

$

58,044

$

92,155

$

(173,811)

 

 

Other comprehensive (loss) income

 

(5,243)

 

50,970

 

391,707

 

282,825

 

 

Amounts reclassified from accumulated other comprehensive income (loss) for (gains) loss on securities

 

(35)

 

16

 

(35)

 

16

 

 

Net change

 

(5,278)

 

50,986

 

391,672

 

282,841

 

 

Ending balance

$

483,827

$

109,030

$

483,827

$

109,030

Unrealized net losses on cash flow hedges

Beginning Balance

$

(4,184)

$

(388)

$

(2,494)

$

(391)

 

 

Reclassification to retained earnings due to cumulative effect adjustment of accounting change

 

-

 

-

 

-

 

(50)

 

 

Other comprehensive loss before reclassifications

 

(1,085)

 

(3,201)

 

(5,067)

 

(4,349)

 

 

Amounts reclassified from accumulated other comprehensive loss

 

1,114

 

720

 

3,406

 

1,921

 

 

Net change

 

29

 

(2,481)

 

(1,661)

 

(2,478)

 

 

Ending balance

$

(4,155)

$

(2,869)

$

(4,155)

$

(2,869)

 

 

Total

$

215,416

$

(138,880)

$

215,416

$

(138,880)

[1]

All amounts presented are net of tax.

 

 

 

 

 

 

 

 

77

 

The following table presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) during the quarters and nine months ended September 30, 2020 and 2019.

 

 

 

Reclassifications Out of Accumulated Other Comprehensive Income (Loss)

 

 

 

 

Quarters ended

Nine months ended

 

 

Affected Line Item in the

September 30,

September 30,

(In thousands)

Consolidated Statements of Operations

 

2020

 

2019

 

2020

 

2019

Adjustment of pension and postretirement benefit plans

 

 

 

 

 

 

 

 

 

 

Amortization of net losses

Personnel costs

$

(5,362)

$

(5,877)

$

(16,086)

$

(17,629)

 

 

Total before tax

 

(5,362)

 

(5,877)

 

(16,086)

 

(17,629)

 

 

Income tax benefit

 

2,011

 

2,204

 

6,033

 

6,611

 

 

Total net of tax

$

(3,351)

$

(3,673)

$

(10,053)

$

(11,018)

 

 

 

 

 

 

 

 

 

 

 

 

Realized gain (loss) on sale of debt securities

Net gain (loss) on sale of debt securities

 

41

 

(20)

 

41

 

(20)

 

 

Total before tax

 

41

 

(20)

 

41

 

(20)

 

 

Income tax benefit

 

(6)

 

4

 

(6)

 

4

 

 

Total net of tax

$

35

$

(16)

$

35

$

(16)

Unrealized net losses on cash flow hedges

 

 

 

 

 

 

 

 

 

 

Forward contracts

Mortgage banking activities

$

(1,331)

$

(1,337)

$

(4,590)

$

(3,258)

 

Interest rate swaps

Other operating income

 

(282)

 

116

 

(537)

 

116

 

 

Total before tax

 

(1,613)

 

(1,221)

 

(5,127)

 

(3,142)

 

 

Income tax benefit

 

499

 

501

 

1,721

 

1,221

 

 

Total net of tax

$

(1,114)

$

(720)

$

(3,406)

$

(1,921)

 

 

Total reclassification adjustments, net of tax

$

(4,430)

$

(4,409)

$

(13,424)

$

(12,955)

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Note 20 – Guarantees

 

At September 30, 2020, the Corporation recorded a liability of $0.1 million (December 31, 2019 - $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 September 30, 2020, the Corporation serviced $0.9 billion (December 31, 2019 - $1.2 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 and nine months ended September 30, 2020, the Corporation repurchased approximately $131 million and $143 million, respectively, of unpaid principal balance in mortgage loans subject to the credit recourse provisions (September 30, 2019 - $15 million and $38 million, respectively). These included $120 million as part of the bulk loan repurchase from FNMA and FHLMC, for which the Corporation recorded a release of $5.1 million in its reserve for credit recourse. In the event of nonperformance by the borrower, the Corporation has rights to the underlying collateral securing the mortgage loan. The Corporation suffers 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 September 30, 2020, the Corporation’s liability established to cover the estimated credit loss exposure related to loans sold or serviced with credit recourse amounted to $27 million (December 31, 2019 - $35 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 and nine months ended September 30, 2020 and 2019.

 

Quarters ended September 30,

 

Nine months ended September 30,

(In thousands)

2020

 

2019

 

2020

 

2019

Balance as of beginning of period

$

31,305

 

$

48,100

 

$

34,862

 

$

56,230

Impact of adopting CECL

 

-

 

 

-

 

 

(3,831)

 

 

-

Provision (reversal) for recourse liability

 

(4,058)

[1]

 

2,755

 

 

1,356

[1]

 

3,711

Net charge-offs

 

(362)

 

 

(5,394)

 

 

(5,502)

 

 

(14,480)

Balance as of end of period

$

26,885

 

$

45,461

 

$

26,885

 

$

45,461

[1] Includes a release of $5.1 million recorded in connection with the bulk loan repurchase of $120 million loans from FNMA and FHLMC completed during the quarter ended September 30, 2020.

 

 

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. There were no repurchases of loans under representation and warranty arrangements during the nine months ended September 30, 2020 and 2019. 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 and nine months ended September 30, 2020 and 2019.

79

 

 

 

Quarters ended September 30,

 

Nine months ended September 30,

(In thousands)

 

2020

 

2019

 

2020

 

2019

Balance as of beginning of period

$

3,122

$

3,825

$

3,212

$

10,837

Provision (reversal) for representation and warranties

 

(125)

 

(81)

 

(215)

 

(4,488)

Net charge-offs

 

-

 

-

 

-

 

(75)

Settlements paid

 

-

 

-

 

-

 

(2,530)

Balance as of end of period

$

2,997

$

3,744

$

2,997

$

3,744

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 September 30, 2020, the Corporation serviced $13.1 billion in mortgage loans for third-parties, including the loans serviced with credit recourse (December 31, 2019 - $14.8 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 September 30, 2020, the outstanding balance of funds advanced by the Corporation under such mortgage loan servicing agreements was approximately $73 million (December 31, 2019 - $78 million). To the extent the mortgage loans underlying the Corporation’s servicing portfolio experience increased delinquencies, the Corporation would be required to dedicate additional cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts.

Popular, Inc. Holding Company (“PIHC”) fully and unconditionally guarantees certain borrowing obligations issued by certain of its 100% owned consolidated subsidiaries amounting to $94 million at September 30, 2020 and December 31, 2019. In addition, at September 30, 2020 and December 31, 2019, 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 2019 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:

(In thousands)

September 30, 2020

December 31, 2019

Commitments to extend credit:

 

 

 

 

 

Credit card lines

$

5,213,611

$

4,889,694

 

Commercial and construction lines of credit

 

3,496,920

 

3,205,306

 

Other consumer unused credit commitments

 

265,875

 

262,516

Commercial letters of credit

 

3,390

 

2,629

Standby letters of credit

 

59,317

 

75,186

Commitments to originate or fund mortgage loans

 

109,391

 

96,653

 

 

At September 30, 2020 and December 31, 2019, the Corporation maintained a reserve of approximately $13 million and $9 million, respectively, for potential losses associated with unfunded loan commitments related to commercial and consumer lines of credit.

 

Other commitments

At September 30, 2020, and December 31, 2019, the Corporation’s also maintained other non-credit commitments for approximately $2.1 million and $2.5 million, respectively, primarily for the acquisition of other investments.

 

Business concentration

Since the Corporation’s business activities are concentrated primarily in Puerto Rico, its results of operations and financial condition are dependent upon the general trends of the Puerto Rico economy and, in particular, the residential and commercial real estate markets. The concentration of the Corporation’s operations in Puerto Rico exposes it to greater risk than other banking companies with a wider geographic base. Its asset and revenue composition by geographical area is presented in Note 33 to the Consolidated Financial Statements.

 

Puerto Rico 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 September 30, 2020 and December 31, 2019, the Corporation’s direct exposure to the Puerto Rico government and its instrumentalities and municipalities totaled $370 million and $432 million, respectively, which amounts were fully outstanding on such dates. Of this amount, $335 million consists of loans and $35 million are securities ($391 million and $ 41 million at December 31, 2019). Substantially all of the amount outstanding at September 30, 2020 were obligations from various Puerto Rico municipalities. In most cases, these were “general obligations” of a municipality, to which the applicable municipality has pledged its good faith, credit and unlimited taxing power, or “special obligations” of a municipality, to which the applicable municipality has pledged other revenues. At September 30, 2020, 74% of the Corporation’s exposure to municipal loans and securities was concentrated in the municipalities of San Juan, Guaynabo, Carolina and Bayamón. On July 1, 2020 and July 1, 2019 the

81

 

Corporation received principal payments amounting to $58 million and $22 million, respectively, from various obligations from Puerto Rico municipalities.

 

The following table details the loans and investments representing the Corporation’s direct exposure to the Puerto Rico government according to their maturities as of September 30, 2020:

 

(In thousands)

 

Investment Portfolio

 

Loans

 

Total Outstanding

 

Total Exposure

Central Government

 

 

 

 

 

 

 

 

After 1 to 5 years

$

10

$

-

$

10

$

10

After 5 to 10 years

 

15

 

-

 

15

 

15

After 10 years

 

34

 

-

 

34

 

34

Total Central Government

 

59

 

-

 

59

 

59

Municipalities

 

 

 

 

 

 

 

 

Within 1 year

 

3,990

 

17,147

 

21,137

 

21,137

After 1 to 5 years

 

16,030

 

133,445

 

149,475

 

149,475

After 5 to 10 years

 

14,845

 

113,885

 

128,730

 

128,730

After 10 years

 

450

 

70,478

 

70,928

 

70,928

Total Municipalities

 

35,315

 

334,955

 

370,270

 

370,270

Total Direct Government Exposure

$

35,374

$

334,955

$

370,329

$

370,329

 

In addition, at September 30, 2020, the Corporation had $321 million in loans insured or securities issued by Puerto Rico governmental entities but for which the principal source of repayment is non-governmental ($350 million at December 31, 2019). These included $264 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, 2019 - $276 million). These mortgage loans are secured by first mortgages on Puerto Rico residential properties and the HFA insurance covers losses in the event of a borrower default and upon the satisfaction of certain other conditions. The Corporation also had at September 30, 2020, $46 million in bonds issued by HFA which are secured by second mortgage loans on Puerto Rico residential properties, and for which HFA also provides insurance to cover losses in the event of a borrower default and upon the satisfaction of certain other conditions (December 31, 2019 - $46 million). In the event that the mortgage loans insured by HFA and held by the Corporation directly or those serving as collateral for the HFA bonds default and the collateral is insufficient to satisfy the outstanding balance of these loans, HFA’s ability to honor its insurance will depend, among other factors, on the financial condition of HFA at the time such obligations become due and payable. The Corporation does not consider the government guarantee when estimating the credit losses associated with this portfolio. Although the Governor is currently authorized by local legislation to impose a temporary moratorium on the financial obligations of the HFA, the Governor has not exercised this power as of the date hereof. In addition, at September 30, 2020, the Corporation had $11 million of commercial real estate notes issued by government entities but that are payable from rent paid by non-governmental parties (December 31, 2019 - $21 million). On January 1, 2020, the Corporation received a payment amounting to $7 million upon the maturity of securities issued by HFA which had been economically defeased and refunded and for which securities consisting of U.S. agencies and Treasury obligations had been escrowed (December 31, 2019 - $7 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 $76 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.

 

The Corporation has operations in the British Virgin Islands (“BVI”), which has been negatively affected by the COVID-19 pandemic, particularly as a reduction in the tourism activity which accounts for a significant portion of its economy. Although the Corporation

82

 

has no significant exposure to a single borrower in the BVI, it has a loan portfolio amounting to approximately $253 million comprised of various retail and commercial clients, including a loan of approximately $19 million with the government of the BVI.

 

 

Legal Proceedings

 

The nature of Popular’s business ordinarily generates claims, litigation, investigations, and legal and administrative cases and proceedings (collectively, “Legal Proceedings”). When the Corporation determines that it has meritorious defenses to the claims asserted, it vigorously defends itself. The Corporation will consider the settlement of cases (including cases where it has meritorious defenses) when, in management’s judgment, it is in the best interest of the Corporation and its shareholders to do so. On at least a quarterly basis, Popular assesses its liabilities and contingencies relating to outstanding Legal Proceedings utilizing the most current information available. For matters where it is probable that the Corporation will incur a material loss and the amount can be reasonably estimated, the Corporation establishes an accrual for the loss. Once established, the accrual is adjusted on at least a quarterly basis to reflect any relevant developments, as appropriate. For matters where a material loss is not probable, or the amount of the loss cannot be reasonably estimated, no accrual is established.

 

In certain cases, exposure to loss exists in excess of the accrual to the extent such loss is reasonably possible, but not probable. Management believes and estimates that the range of reasonably possible losses (with respect to those matters where such limits may be determined, in excess of amounts accrued) for current Legal Proceedings ranged from $0 to approximately $30.9 million as of September 30, 2020. In certain cases, management cannot reasonably estimate the possible loss at this time. Any estimate involves significant judgment, given the varying stages of the Legal Proceedings (including the fact that many of them are currently in preliminary stages), the existence of multiple defendants in several of the current Legal Proceedings whose share of liability has yet to be determined, the numerous unresolved issues in many of the Legal Proceedings, and the inherent uncertainty of the various potential outcomes of such Legal Proceedings. Accordingly, management’s estimate will change from time-to-time, and actual losses may be more or less than the current estimate.

 

While the outcome of Legal Proceedings is inherently uncertain, based on information currently available, advice of counsel, and available insurance coverage, management believes that the amount it has already accrued is adequate and any incremental liability arising from the Legal Proceedings in matters in which a loss amount can be reasonably estimated will not have a material adverse effect on the Corporation’s consolidated financial position. However, in the event of unexpected future developments, it is possible that the ultimate resolution of these matters in a reporting period, if unfavorable, could have a material adverse effect on the Corporation’s consolidated financial position for that period.

 

Set forth below is a description of the Corporation’s significant Legal Proceedings.

 

BANCO POPULAR DE PUERTO RICO

 

Hazard Insurance Commission-Related Litigation

 

Popular, Inc., BPPR and Popular Insurance, LLC (the “Popular Defendants”) have been named defendants in a class action complaint captioned Pérez Díaz v. Popular, Inc., et al, filed before the Court of First Instance, Arecibo Part. The complaint seeks damages and preliminary and permanent injunctive relief on behalf of the class against the Popular Defendants, as well as Antilles Insurance Company and MAPFRE-PRAICO Insurance Company (the “Defendant Insurance Companies”). Plaintiffs allege that the Popular Defendants have been unjustly enriched by failing to reimburse them for commissions paid by the Defendant Insurance Companies to the insurance agent and/or mortgagee for policy years when no claims were filed against their hazard insurance policies. They demand the reimbursement to the purported “class” of an estimated $400 million plus legal interest, for the “good experience” commissions allegedly paid by the Defendant Insurance Companies during the relevant time period, as well as injunctive relief seeking to enjoin the Defendant Insurance Companies from paying commissions to the insurance agent/mortgagee and ordering them to pay those fees directly to the insured. A motion for dismissal on the merits filed by the Defendant Insurance Companies was denied with a right to replead following limited targeted discovery. Each of the Puerto Rico Court of Appeals and the Puerto Rico Supreme Court denied the Popular Defendants’ request to review the lower court’s denial of the motion to dismiss. In December 2017, plaintiffs amended the complaint, and, in January 2018, defendants filed an answer thereto. Separately, in October

83

 

2017, the Court entered an order whereby it broadly certified the class, after which the Popular Defendants filed a certiorari petition before the Puerto Rico Court of Appeals in relation to the class certification, which the Court declined to entertain. In November 2018 and in January 2019, plaintiffs filed voluntary dismissal petitions against MAPFRE-PRAICO Insurance Company and Antilles Insurance Company, respectively, leaving the Popular Defendants as the sole remaining defendants in the action.

 

In April 2019, the Court amended the class definition to limit it to individual homeowners whose residential units were subject to a mortgage from BPPR who, in turn, obtained risk insurance policies with Antilles Insurance or MAPFRE Insurance through Popular Insurance from 2002 to 2015, and who did not make insurance claims against said policies during their effective term. The Court approved on September 24, 2020 the notice to the class, which is expected to be published in the next few weeks, and set the deadline for the filing of dispositive motions for May 2021, the Pre-Trial hearing for August 2021 and several dates for trial between the end of August and the beginning of October 2021. Expert discovery remains ongoing.

 

BPPR was separately 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 sought damages and a 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 contended 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 sought 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). In July 2017, after co-defendants filed motions to dismiss the complaint and opposed the request for preliminary injunctive relief, 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. The Puerto Rico Supreme Court denied review. In August 2019, the Popular Defendants and plaintiffs filed a Joint Motion where they informed the Court that plaintiffs were simultaneously filing voluntary dismissals with prejudice against all other parties. On April 24, 2020, the Court preliminarily approved the terms of a proposed class settlement submitted by the parties. Notices to the proposed class for settlement purposes were published on April 28 and May 5, 2020. A hearing was held on June 23, 2020, where the Court granted its final approval of the stipulation for settlement and, on July 10, 2020, the Court issued its final judgment. Such judgment became final and unappealable on August 12, 2020 and, on September 12, 2020, BPPR complied with the disbursements contemplated in the settlement agreement.

 

 

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 filed a motion to dismiss in August 2017, as did most co-defendants, and, in 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 July 21, 2020, the U.S. Court of Appeals for the First Circuit affirmed the District Court ‘s decision dismissing the complaint. On September 4, 2020, the Appellants filed a petition for rehearing and for rehearing en banc, which are pending resolution.

 

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.

84

 

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 in September 2018. In April 2019, the Court entered an Opinion and Order granting BPPR’s and several other defendants’ motions to dismiss with prejudice. Plaintiffs filed a Motion for Reconsideration in April 2019, which Popular timely opposed. In September 2019, the Court issued an Amended Opinion and Order dismissing plaintiffs’ claims against all defendants, denying the reconsideration requests and other pending motions, and issuing final judgment. In October 2019, plaintiffs filed a Motion for Reconsideration of the Court’s Amended Opinion and Order, which was denied in December 2019. On January 13, 2020, plaintiffs filed a Notice of Appeal to the U.S. Court of Appeals for the First Circuit. Plaintiffs filed their appeal brief on July 8, 2020 and Appellees filed their brief on September 21, 2020. The appeal is now fully briefed and pending resolution.

 

Insufficient Funds and Overdraft Fees Class Actions

 

On February 7, 2020, BPPR was served with a putative class action complaint captioned Soto-Melendez v. Banco Popular de Puerto Rico, filed before the United States District Court for the District of Puerto Rico. The complaint alleges breach of contract due to BPPR’s purported practice of (a) assessing more than one insufficient funds fee (“NSF Fees”) on the same “item” or transaction and (b) charging both NSF Fees and overdraft fees (“OD Fees”) on the same item or transaction, and is filed on behalf of all persons who during the applicable statute of limitations period were charged NSF Fees and/or OD Fees pursuant to this purported practices. On April 10, 2020, BPPR filed a Motion to Dismiss in the case, which is now fully briefed and pending resolution.

 

Popular has been named as a defendant on a putative class action complaint captioned Golden v. Popular, Inc. filed on March 25, 2020 before the U.S. District Court for the Southern District of New York, seeking damages, restitution and injunctive relief. Plaintiff alleges breach of contract, violation of the covenant of good faith and fair dealing, unjust enrichment and violation of New York consumer protection law due to Popular’s purported practice of charging OD Fees on transactions that, under plaintiffs’ theory, do not overdraw the account. Plaintiff describes Popular’s purported practice of charging OD Fees as “Authorize Positive, Purportedly Settle Negative Transactions” (“APPSN”) and states that Popular assesses OD Fees over authorized transactions for which sufficient funds are held for settlement. On August 14, 2020, Popular filed a Motion to Dismiss on several grounds, including failure to state a claim against Popular, Inc. and improper venue. On October 2, 2020, Plaintiffs filed a Notice of Voluntary Dismissal before the U.S. District Court for the Southern District of New York and, on that same date, filed an identical complaint in the U.S. District Court for the District of the Virgin Islands against Popular, Inc., Popular Bank and BPPR. On October 27, 2020, a Motion to Dismiss was filed on behalf of Popular, Inc. and Popular Bank, arguing failure to state a claim and lack of minimum contacts of such parties with the U.S.V.I. district court jurisdiction. BPPR has not been served in connection with this new complaint.

 

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 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. After the Court held hearings in June and July 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 in October 2019, the Court entered an Opinion and Order determining that the involuntary petitions were not filed in bad faith and issued an order for relief under Chapter 11 of the U.S. Bankruptcy Code granting the involuntary petitions. In October 2019, the debtors filed a

85

 

Notice of Appeal to the U.S. District Court. Debtors’ filed their appellate briefs in April 2020, and Lenders’ appellate briefs were filed on June 22, 2020.

 

On February 11, 2020, the Debtors initiated an adversary proceeding seeking in excess of $80 million in damages, alleging that in 2016 the Lenders illegally foreclosed on their accounts receivable and as a result illegally interfered with contracts entered with third parties, forcing the Debtors into bankruptcy. Debtors further seek a judgment declaring that Lenders do not possess security interests over certain personal property of the Debtors because either such security interests were not adequately perfected according to Puerto Rico law, or the security interests were lost upon the lapsing date of the financing statements that the Lenders had originally perfected in connection with such interests. On February 25, 2020, Debtors amended their adversary complaint to include references to the Lenders’ Syndicate and Banco Popular’s proof of claims, formally object to such proof of claims, as well as to demand that the District Court, not the Bankruptcy Court, entertains the complaint, requesting trial by jury on all counts. Lenders filed a Motion to Dismiss on June 26, 2020. On September 18, 2020, the Court granted the parties an extension of all pending deadlines for 30 days in furtherance of settlement negotiations, which was extended for an additional 30-day period at the request of the parties, which now have until November 18, 2020 to inform the Court the result of such negotiations.

 

POPULAR BANK

 

Employment-Related Litigation

 

In July 2019, Popular Bank (“PB”) was served in a putative class complaint in which it was named as a defendant along with five (5) current PB employees (collectively, the “AB Defendants”), captioned Aileen Betances, et al. v. Popular Bank, et al., filed before the Supreme Court of the State of New York (the “AB Action”). The complaint, filed by five (5) current and former PB employees, seeks to recover damages for the AB Defendants' alleged violation of local and state sexual harassment, discrimination and retaliation laws. Additionally, in July 2019, PB was served in a putative class complaint in which it was named as a defendant along with six (6) current PB employees (collectively, the “DR Defendants”), captioned Damian Reyes, et al. v. Popular Bank, et al., filed before the Supreme Court of the State of New York (the “DR Action”). The DR Action, filed by three (3) current and former PB employees, seeks to recover damages for the DR Defendants’ alleged violation of local and state discrimination and retaliation laws. Plaintiffs in both complaints are represented by the same legal counsel, and five of the six named individual defendants in the DR Action are the same named individual defendants in the AB Action. Both complaints are related, among other things, to allegations of purported sexual harassment and/or misconduct by a former PB employee as well as PB’s actions in connection thereto and seek no less than $100 million in damages each. On October 21, 2019, PB and the other defendants filed several Motions to Dismiss. Plaintiffs opposed the motions in December 2019 and PB and the other defendants replied on January 22, 2020. On July 15, 2020, a hearing to discuss the motions to dismiss filed by PB in both actions was held, at which the Court dismissed one of the causes of action included by plaintiffs in the AB Action and ordered the parties to submit a copy of the court reporter’s transcript. The parties submitted a copy of the court reporter’s transcript on August 25, 2020 and the motions to dismiss are pending resolution.

 

POPULAR SECURITIES

 

Puerto Rico Bonds and Closed-End Investment Funds

 

The volatility in prices and declines in value that Puerto Rico municipal bonds and closed-end investment companies that invest primarily in Puerto Rico municipal bonds have experienced since August 2013 have led to regulatory inquiries, customer complaints and arbitrations for most broker-dealers in Puerto Rico, including Popular Securities. Popular Securities has received customer complaints and, as of September 30, 2020, is named as a respondent (among other broker-dealers) in 139 pending arbitration proceedings with aggregate claimed amounts of approximately $147 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 impacted the number of customer complaints (and claimed damages) filed against Popular Securities concerning Puerto Rico bonds and closed-end investment companies that invest primarily in Puerto Rico bonds. An adverse result in the arbitration proceedings described above, or a significant increase in customer complaints, could have a material adverse effect on Popular.

 

86

 

PROMESA Title III Proceedings

 

In 2017, the Oversight Board engaged the law firm of Kobre & Kim to carry out an independent investigation on behalf of the Oversight Board regarding, among other things, the causes of the Puerto Rico financial crisis. Popular, Inc., BPPR and Popular Securities (collectively, the “Popular Companies”) were served by, and cooperated with, the Oversight Board in connection with requests for the preservation and voluntary production of certain documents and witnesses with respect to Kobre & Kim’s independent investigation.

 

On August 20, 2018, Kobre & Kim issued its Final Report, which contained various references to the Popular Companies, including an allegation that Popular Securities participated as an underwriter in the Commonwealth’s 2014 issuance of government obligation bonds notwithstanding having allegedly advised against it. The report noted that such allegation could give rise to an unjust enrichment claim against the Corporation and could also serve as a basis to equitably subordinate claims filed by the Corporation in the Title III proceeding to other third-party claims.

 

After the publication of the Final Report, the Oversight Board created a special claims committee (“SCC”) and, before the end of the applicable two-year statute of limitations for the filing of such claims pursuant to the U.S. Bankruptcy Code, the SCC, along with the Commonwealth’s Unsecured Creditors’ Committee (“UCC”), filed various avoidance, fraudulent transfer and other claims against third parties, including government vendors and financial institutions and other professionals involved in bond issuances being challenged as invalid by the SCC and the UCC. The Popular Companies, the SCC and the UCC have 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.

87

 

Note 22 – Non-consolidated variable 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 September 30, 2020 and December 31, 2019, which are classified as available-for-sale and trading securities in the Corporation’s Consolidated Statements of Financial Condition. In addition, the Corporation holds variable interests in the form of servicing fees, since it retains the right to service the transferred loans in those government-sponsored special purpose entities (“SPEs”) and may also purchase the right to service loans in other government-sponsored SPEs that were transferred to those SPEs by a third-party.

The following table presents the carrying amount and classification of the assets related to the Corporation’s variable interests in non-consolidated VIEs and the maximum exposure to loss as a result of the Corporation’s involvement as servicer of GNMA and FNMA loans at September 30, 2020 and December 31, 2019.

 

(In thousands)

September 30, 2020

December 31, 2019

Assets

 

 

 

 

Servicing assets:

 

 

 

 

 

Mortgage servicing rights

$

93,230

$

115,718

Total servicing assets

$

93,230

$

115,718

Other assets:

 

 

 

 

 

Servicing advances

$

10,506

$

29,212

Total other assets

$

10,506

$

29,212

Total assets

$

103,736

$

144,930

Maximum exposure to loss

$

103,736

$

144,930

 

 

The size of the non-consolidated VIEs, in which the Corporation has a variable interest in the form of servicing fees, measured as the total unpaid principal balance of the loans, amounted to $8.8 billion at September 30, 2020 (December 31, 2019 - $9.9 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 September 30, 2020 and December 31, 2019, 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.

88

 

 

ASU 2009-17 requires that an ongoing primary beneficiary assessment should be made to determine whether the Corporation is the primary beneficiary of any of the VIEs it is involved with. The conclusion on the assessment of these non-consolidated VIEs has not changed since their initial evaluation. The Corporation concluded that it is still not the primary beneficiary of these VIEs, and therefore, these VIEs are not required to be consolidated in the Corporation’s financial statements at September 30, 2020.

89

 

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 September 30, 2020, the Corporation held 11,654,803 shares of EVERTEC, representing an ownership stake of 16.21%. 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 $1.7 million in dividend distributions during the nine months ended September 30, 2020, from its investments in EVERTEC’s holding company (September 30, 2019 - $1.7 million). The Corporation’s equity in EVERTEC is presented in the table which follows and is included as part of “other assets” in the Consolidated Statements of Financial Condition.

(In thousands)

 

September 30, 2020

 

 

December 31, 2019

Equity investment in EVERTEC

$

81,916

 

$

73,534

 

 

 

 

 

 

The Corporation had the following financial condition balances outstanding with EVERTEC at September 30, 2020 and December 31, 2019. Items that represent liabilities to the Corporation are presented with parenthesis.

(In thousands)

September 30, 2020

December 31, 2019

Accounts receivable (Other assets)

$

5,040

$

7,779

Deposits

 

(137,680)

 

(63,850)

Accounts payable (Other liabilities)

 

(81)

 

(1,290)

Net total

$

(132,721)

$

(57,361)

 

The Corporation’s proportionate share of income or loss 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 (loss) and changes in stockholders’ equity for the quarters and nine months ended September 30, 2020 and 2019.

 

 

Quarter ended

 

 

Nine months ended

(In thousands)

 

September 30, 2020

 

 

September 30, 2020

Share of income from the investment in EVERTEC

$

5,586

 

$

11,696

Share of other changes in EVERTEC's stockholders' equity

 

1,135

 

 

1,804

Share of EVERTEC's changes in equity recognized in income

$

6,721

 

$

13,500

 

 

 

Quarter ended

 

 

Nine months ended

(In thousands)

 

September 30, 2019

 

 

September 30, 2019

Share of income from the investment in EVERTEC

$

4,010

 

$

12,709

Share of other changes in EVERTEC's stockholders' equity

 

621

 

 

703

Share of EVERTEC's changes in equity recognized in income

$

4,631

 

$

13,412

 

The following tables present the transactions and service payments between the Corporation and EVERTEC (as an affiliate) and their impact on the results of operations for the quarters and nine months ended September 30, 2020 and 2019. Items that represent expenses to the Corporation are presented with parenthesis.

90

 

 

 

Quarter ended

Nine months ended

 

(In thousands)

September 30, 2020

September 30, 2020

Category

Interest expense on deposits

 

$

(71)

 

$

(228)

Interest expense

ATH and credit cards interchange income from services to EVERTEC

 

 

6,153

 

 

16,172

Other service fees

Rental income charged to EVERTEC

 

 

1,758

 

 

5,293

Net occupancy

Processing fees on services provided by EVERTEC

 

 

(57,372)

 

 

(164,373)

Professional fees

Other services provided to EVERTEC

 

 

253

 

 

794

Other operating expenses

Total

 

$

(49,279)

 

$

(142,342)

 

 

 

 

Quarter ended

Nine months ended

 

(In thousands)

 

September 30, 2019

September 30, 2019

Category

Interest expense on deposits

 

$

(27)

 

$

(59)

Interest expense

ATH and credit cards interchange income from services to EVERTEC

 

 

6,221

 

 

22,897

Other service fees

Rental income charged to EVERTEC

 

 

1,744

 

 

5,337

Net occupancy

Processing fees on services provided by EVERTEC

 

 

(55,901)

 

 

(164,255)

Professional fees

Other services provided to EVERTEC

 

 

247

 

 

873

Other operating expenses

Total

 

$

(47,716)

 

$

(135,207)

 

91

 

 

Centro Financiero BHD León

At September 30, 2020, 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 nine months ended September 30, 2020, the Corporation recorded $21.4 million in earnings from its investment in BHD León (September 30, 2019 - $20.1 million), which had a carrying amount of $147.2 million at September 30, 2020 (December 31, 2019 - $151.6 million). The Corporation received $13.2 million in dividend distributions during the nine months ended September 30, 2020 from its investment in BHD León (September 30, 2019 - 12.6 million).

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 nine months ended September 30, 2020 administrative fees charged to these investment companies amounted to $4.8 million (September 30, 2019 - $4.8 million) and waived fees amounted to $2.1 million (September 30, 2019 - $1.6 million), for a net fee of $2.7 million (September 30, 2019 - $3.2 million).

The Corporation, through its subsidiary BPPR, has also entered into certain uncommitted credit facilities with those investment companies. As of September 30, 2020, the available lines of credit facilities amounted to $275 million (December 31, 2019 - $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 September 30, 2020 there was no outstanding balance for these credit facilities.

92

 

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 2019 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 September 30, 2020 and December 31, 2019:

93

 

At September 30, 2020

(In thousands)

Level 1

Level 2

Level 3

Total

RECURRING FAIR VALUE MEASUREMENTS

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Debt securities available-for-sale:

 

 

 

 

 

 

 

 

U.S. Treasury securities

$

3,999,320

$

7,648,271

$

-

$

11,647,591

Obligations of U.S. Government sponsored entities

 

-

 

60,371

 

-

 

60,371

Collateralized mortgage obligations - federal agencies

 

-

 

450,306

 

-

 

450,306

Mortgage-backed securities

 

-

 

9,018,190

 

1,124

 

9,019,314

Other

 

-

 

257

 

-

 

257

Total debt securities available-for-sale

$

3,999,320

$

17,177,395

$

1,124

$

21,177,839

Trading account debt securities, excluding derivatives:

 

 

 

 

 

 

 

 

U.S. Treasury securities

$

4,106

$

-

$

-

$

4,106

Obligations of Puerto Rico, States and political subdivisions

 

-

 

105

 

-

 

105

Collateralized mortgage obligations

 

-

 

74

 

410

 

484

Mortgage-backed securities

 

-

 

24,944

 

-

 

24,944

Other

 

-

 

3,001

 

413

 

3,414

Total trading account debt securities, excluding derivatives

$

4,106

$

28,124

$

823

$

33,053

Equity securities

$

-

$

26,718

$

-

$

26,718

Mortgage servicing rights

 

-

 

-

 

123,552

 

123,552

Derivatives

 

-

 

18,080

 

-

 

18,080

Total assets measured at fair value on a recurring basis

$

4,003,426

$

17,250,317

$

125,499

$

21,379,242

Liabilities

 

 

 

 

 

 

 

 

Derivatives

$

-

$

(15,346)

$

-

$

(15,346)

Total liabilities measured at fair value on a recurring basis

$

-

$

(15,346)

$

-

$

(15,346)

 

 

 

 

 

 

 

 

 

94

 

At December 31, 2019

(In thousands)

Level 1

Level 2

Level 3

Total

RECURRING FAIR VALUE MEASUREMENTS

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Debt securities available-for-sale:

 

 

 

 

 

 

 

 

U.S. Treasury securities

$

3,841,715

$

8,214,540

$

-

$

12,056,255

Obligations of U.S. Government sponsored entities

 

-

 

122,404

 

-

 

122,404

Obligations of Puerto Rico, States and political subdivisions

 

-

 

6,975

 

-

 

6,975

Collateralized mortgage obligations - federal agencies

 

-

 

586,175

 

-

 

586,175

Mortgage-backed securities

 

-

 

4,875,132

 

1,182

 

4,876,314

Other

 

-

 

350

 

-

 

350

Total debt securities available-for-sale

$

3,841,715

$

13,805,576

$

1,182

$

17,648,473

Trading account debt securities, excluding derivatives:

 

 

 

 

 

 

 

 

U.S. Treasury securities

$

7,081

$

2

$

-

$

7,083

Obligations of Puerto Rico, States and political subdivisions

 

-

 

633

 

-

 

633

Collateralized mortgage obligations

 

-

 

76

 

530

 

606

Mortgage-backed securities

 

-

 

28,556

 

-

 

28,556

Other

 

-

 

3,003

 

440

 

3,443

Total trading account debt securities, excluding derivatives

$

7,081

$

32,270

$

970

$

40,321

Equity securities

$

-

$

21,327

$

-

$

21,327

Mortgage servicing rights

 

-

 

-

 

150,906

 

150,906

Derivatives

 

-

 

17,966

 

-

 

17,966

Total assets measured at fair value on a recurring basis

$

3,848,796

$

13,877,139

$

153,058

$

17,878,993

Liabilities

 

 

 

 

 

 

 

 

Derivatives

$

-

$

(16,619)

$

-

$

(16,619)

Total liabilities measured at fair value on a recurring basis

$

-

$

(16,619)

$

-

$

(16,619)

 

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 and nine months ended September 30, 2020 and 2019 and excludes nonrecurring fair value measurements of assets no longer outstanding as of the reporting date.

 

 

Nine months ended September 30, 2020

(In thousands)

Level 1

Level 2

Level 3

Total

 

 

NONRECURRING FAIR VALUE MEASUREMENTS

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Write-downs

Loans[1]

$

-

$

-

$

96,740

$

96,740

$

(20,495)

Loans held-for-sale[2]

 

-

 

-

 

4,070

 

4,070

 

(2,038)

Other real estate owned[3]

 

-

 

-

 

19,475

 

19,475

 

(3,025)

Other foreclosed assets[3]

 

-

 

-

 

444

 

444

 

(701)

Total assets measured at fair value on a nonrecurring basis

$

-

$

-

$

120,729

$

120,729

$

(26,259)

[1]

Relates mostly to certain impaired collateral dependent loans. The impairment was measured based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations. Costs to sell are excluded from the reported fair value amount.

[2]

Relates to a quarterly valuation on loans held-for-sale. Costs to sell are excluded from the reported fair value amount.

[3]

Represents the fair value of foreclosed real estate and other collateral owned that were written down to their fair value. Costs to sell are excluded from the reported fair value amount.

95

 

Nine months ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

(In thousands)

Level 1

Level 2

Level 3

Total

 

 

NONRECURRING FAIR VALUE MEASUREMENTS

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Write-downs

Loans[1]

$

-

$

-

$

65,922

$

65,922

$

(10,761)

Other real estate owned[2]

 

-

 

-

 

17,942

 

17,942

 

(3,486)

Other foreclosed assets[2]

 

-

 

-

 

1,221

 

1,221

 

(153)

Long-lived assets held-for-sale[3]

 

-

 

-

 

2,500

 

2,500

 

(2,591)

Total assets measured at fair value on a nonrecurring basis

$

-

$

-

$

87,585

$

87,585

$

(16,991)

[1]

Relates mostly to certain impaired collateral dependent loans. The impairment was measured based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations. Costs to sell are excluded from the reported fair value amount.

[2]

Represents the fair value of foreclosed real estate and other collateral owned that were written down to their fair value. Costs to sell are excluded from the reported fair value amount.

[3]

Represents the fair value of long-lived assets held-for-sale that were written down to their fair value.

 

The following tables present the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the quarters and nine months ended September 30, 2020 and 2019.

 

 

Quarter ended September 30, 2020

 

 

MBS

CMOs

Other

 

 

 

 

 

 

classified

classified

securities

 

 

 

 

 

 

as debt

as trading

classified

 

 

 

 

 

 

securities

account

as trading

Mortgage

 

 

 

available-

debt

account debt

servicing

Total

(In thousands)

for-sale

securities

securities

rights

assets

Balance at June 30, 2020

$

1,151

$

442

$

423

$

141,144

$

143,160

Gains (losses) included in earnings

 

-

 

-

 

(10)

 

(20,491)

 

(20,501)

Gains (losses) included in OCI

 

(2)

 

-

 

-

 

-

 

(2)

Additions

 

-

 

2

 

-

 

2,899

 

2,901

Settlements

 

(25)

 

(34)

 

-

 

-

 

(59)

Balance at September 30, 2020

$

1,124

$

410

$

413

$

123,552

$

125,499

Changes in unrealized gains (losses) included in earnings relating to assets still held at September 30, 2020

$

-

$

-

$

-

$

(7,892)

$

(7,892)

 

 

Nine months ended September 30, 2020

 

 

MBS

 

 

Other

 

 

 

 

 

 

classified

CMOs

securities

 

 

 

 

 

 

as investment

classified

classified

 

 

 

 

 

 

securities

as trading

as trading

Mortgage

 

 

 

available-

account

account

servicing

Total

(In thousands)

for-sale

securities

securities

rights

assets

Balance at January 1, 2020

$

1,182

$

530

$

440

$

150,906

$

153,058

Gains (losses) included in earnings

 

-

 

-

 

(27)

 

(33,360)

 

(33,387)

Gains (losses) included in OCI

 

(8)

 

-

 

-

 

-

 

(8)

Additions

 

-

 

4

 

-

 

6,006

 

6,010

Settlements

 

(50)

 

(124)

 

-

 

-

 

(174)

Balance at September 30, 2020

$

1,124

$

410

$

413

$

123,552

$

125,499

Changes in unrealized gains (losses) included in earnings relating to assets still held at September 30, 2020

$

-

$

-

$

13

$

(15,278)

$

(15,265)

96

 

 

Quarter ended September 30, 2019

 

 

MBS

 

 

 

 

Other

 

 

 

 

 

 

classified

CMOs

 

 

securities

 

 

 

 

 

 

as investment

classified

MBS

classified

 

 

 

 

 

 

securities

as trading

classified as

as trading

Mortgage

 

 

 

available-

account

trading account

account

servicing

Total

(In thousands)

for-sale

securities

securities

securities

rights

assets

Balance at June 30, 2019

$

1,235

$

618

$

26

$

468

$

153,021

$

155,368

Gains (losses) included in earnings

 

-

 

(1)

 

-

 

(12)

 

(4,842)

 

(4,855)

Gains (losses) included in OCI

 

(1)

 

-

 

-

 

-

 

-

 

(1)

Additions

 

-

 

1

 

-

 

-

 

2,473

 

2,474

Settlements

 

(25)

 

(61)

 

-

 

-

 

-

 

(86)

Balance at September 30, 2019

$

1,209

$

557

$

26

$

456

$

150,652

$

152,900

Changes in unrealized gains (losses) included in earnings relating to assets still held at September 30, 2019

$

-

$

1

$

-

$

5

$

(1,575)

$

(1,569)

 

 

Nine months ended September 30, 2019

 

 

MBS

 

 

 

 

Other

 

 

 

 

 

 

classified

CMOs

 

 

securities

 

 

 

 

 

 

as investment

classified

MBS

classified

 

 

 

 

 

 

securities

as trading

classified as

as trading

Mortgage

 

 

 

available-

account

trading account

account

servicing

Total

(In thousands)

for-sale

securities

securities

securities

rights

assets

Balance at January 1, 2019

$

1,233

$

611

$

43

$

485

$

169,777

$

172,149

Gains (losses) included in earnings

 

-

 

-

 

(1)

 

(29)

 

(25,853)

 

(25,883)

Gains (losses) included in OCI

 

1

 

-

 

-

 

-

 

-

 

1

Additions

 

-

 

65

 

25

 

-

 

6,728

 

6,818

Settlements

 

(25)

 

(119)

 

(41)

 

-

 

-

 

(185)

Balance at September 30, 2019

$

1,209

$

557

$

26

$

456

$

150,652

$

152,900

Changes in unrealized gains (losses) included in earnings relating to assets still held at September 30, 2019

$

-

$

-

$

1

$

13

$

(15,993)

$

(15,979)

Gains and losses (realized and unrealized) included in earnings for the quarters and nine months ended September 30, 2020 and 2019 for Level 3 assets and liabilities included in the previous tables are reported in the consolidated statement of operations as follows:

 

 

Quarter ended September 30, 2020

Nine months ended September 30, 2020

 

 

 

Changes in unrealized

 

 

Changes in unrealized

 

Total gains

gains (losses) relating to

Total gains

gains (losses) relating to

 

(losses) included

assets still held at

(losses) included

assets still held at

(In thousands)

in earnings

reporting date

in earnings

reporting date

Mortgage banking activities

$

(20,491)

$

(7,892)

$

(33,360)

$

(15,278)

Trading account profit (loss)

 

(10)

 

-

 

(27)

 

13

Total

$

(20,501)

$

(7,892)

$

(33,387)

$

(15,265)

97

 

 

Quarter ended September 30, 2019

Nine months ended September 30, 2019

 

 

 

Changes in unrealized

 

 

Changes in unrealized

 

Total gains

gains (losses) relating to

Total gains

gains (losses) relating to

 

(losses) included

assets still held at

(losses) included

assets still held at

(In thousands)

in earnings

reporting date

in earnings

reporting date

Mortgage banking activities

$

(4,842)

$

(1,575)

$

(25,853)

$

(15,993)

Trading account profit (loss)

 

(13)

 

6

 

(30)

 

14

Total

$

(4,855)

$

(1,569)

$

(25,883)

$

(15,979)

 

The following tables include quantitative information about significant unobservable inputs used to derive the fair value of Level 3 instruments, excluding those instruments for which the unobservable inputs were not developed by the Corporation such as prices of prior transactions and/or unadjusted third-party pricing sources at September 30, 2020 and 2019.

 

 

 

Fair value

 

 

 

 

 

 

 

at September 30,

 

 

 

 

 

(In thousands)

 

2020

 

Valuation technique

Unobservable inputs

Weighted average (range) [1]

CMO's - trading

$

410

 

Discounted cash flow model

Weighted average life

1.3 years (0.6 - 1.5 years)

 

 

 

 

 

 

 

Yield

3.7% (3.6% - 4.1%)

 

 

 

 

 

 

 

Prepayment speed

17.7% (13.8% - 18.4%)

 

Other - trading

$

413

 

Discounted cash flow model

Weighted average life

3.8 years

 

 

 

 

 

 

 

Yield

12.0%

 

 

 

 

 

 

 

Prepayment speed

10.8%

 

Mortgage servicing rights

$

123,552

 

Discounted cash flow model

Prepayment speed

6.9%(0.2% - 22.1%)

 

 

 

 

 

 

 

Weighted average life

6.1 years (0.1 - 12.3 years)

 

 

 

 

 

 

 

Discount rate

11.2% (9.5% - 14.7%)

 

Loans held-in-portfolio

$

96,740

[2]

External appraisal

Haircut applied on

 

 

 

 

 

 

 

 

external appraisals

23.2% (21.0% - 40.0%)

 

Other real estate owned

$

13,826

[3]

External appraisal

Haircut applied on

 

 

 

 

 

 

 

 

external appraisals

21.5% (5.0% - 30.0%)

 

[1]

Weighted average of significant unobservable inputs used to develop Level 3 fair value measurements were calculated by relative fair value.

[2]

Loans held-in-portfolio in which haircuts were not applied to external appraisals were excluded from this table.

[3]

Other real estate owned in which haircuts were not applied to external appraisals were excluded from this table.

98

 

 

 

 

Fair value

 

 

 

 

 

 

 

at September 30,

 

 

 

 

 

(In thousands)

 

2019

 

Valuation technique

Unobservable inputs

Weighted average (range) [1]

CMO's - trading

$

557

 

Discounted cash flow model

Weighted average life

1.7 years (1.4 - 1.8 years)

 

 

 

 

 

 

 

Yield

4.0% (3.9% - 4.4%)

 

 

 

 

 

 

 

Prepayment speed

18.5% (15.2% - 20.7%)

 

Other - trading

$

456

 

Discounted cash flow model

Weighted average life

5.2 years

 

 

 

 

 

 

 

Yield

12.0%

 

 

 

 

 

 

 

Prepayment speed

10.8%

 

Mortgage servicing rights

$

150,652

 

Discounted cash flow model

Prepayment speed

6.8% (0.2% - 19.9%)

 

 

 

 

 

 

 

Weighted average life

6.2 years (0.1 - 13.9 years)

 

 

 

 

 

 

 

Discount rate

11.2% (9.5% - 14.7%)

 

Loans held-in-portfolio

$

62,442

[2]

External appraisal

Haircut applied on

 

 

 

 

 

 

 

 

external appraisals

10.3% (10.0% - 21.0%)

 

Other real estate owned

$

15,003

[3]

External appraisal

Haircut applied on

 

 

 

 

 

 

 

 

external appraisals

23.5% (10.0% - 35.0%)

 

[1]

Weighted average of significant unobservable inputs used to develop Level 3 fair value measurements were calculated by relative fair value.

[2]

Loans held-in-portfolio in which haircuts were not applied to external appraisals were excluded from this table.

[3]

Other real estate owned in which haircuts were not applied to external appraisals were excluded from this table.

 

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.

99

 

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 September 30, 2020 and December 31, 2019, 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.

 

100

 

 

 

September 30, 2020

 

Carrying

 

 

 

 

(In thousands)

amount

Level 1

Level 2

Level 3

Fair value

Financial Assets:

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

$

565,202

$

565,202

$

-

$

-

$

565,202

Money market investments

 

11,859,924

 

11,853,978

 

5,946

 

-

 

11,859,924

Trading account debt securities, excluding derivatives[1]

 

33,053

 

4,106

 

28,124

 

823

 

33,053

Debt securities available-for-sale[1]

 

21,177,839

 

3,999,320

 

17,177,395

 

1,124

 

21,177,839

Debt securities held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

Obligations of Puerto Rico, States and political subdivisions

$

68,646

$

-

$

-

$

82,995

$

82,995

 

Collateralized mortgage obligation-federal agency

 

35

 

-

 

-

 

37

 

37

 

Securities in wholly owned statutory business trusts

 

11,561

 

-

 

11,561

 

-

 

11,561

 

Other

 

500

 

-

 

500

 

-

 

500

Total debt securities held-to-maturity

$

80,742

$

-

$

12,061

$

83,032

$

95,093

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

FHLB stock

$

53,252

$

-

$

53,252

$

-

$

53,252

 

FRB stock

 

92,721

 

-

 

92,721

 

-

 

92,721

 

Other investments

 

28,020

 

-

 

26,718

 

1,679

 

28,397

Total equity securities

$

173,993

$

-

$

172,691

$

1,679

$

174,370

Loans held-for-sale

$

102,760

$

-

$

-

$

104,915

$

104,915

Loans held-in-portfolio

 

28,466,660

 

-

 

-

 

27,023,763

 

27,023,763

Mortgage servicing rights

 

123,552

 

-

 

-

 

123,552

 

123,552

Derivatives

 

18,080

 

-

 

18,080

 

-

 

18,080

 

 

September 30, 2020

 

Carrying

 

 

 

 

(In thousands)

amount

Level 1

Level 2

Level 3

Fair value

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

$

48,177,054

$

-

$

48,177,054

$

-

$

48,177,054

 

Time deposits

 

7,844,929

 

-

 

7,845,290

 

-

 

7,845,290

Total deposits

$

56,021,983

$

-

$

56,022,344

$

-

$

56,022,344

Assets sold under agreements to repurchase

$

106,028

$

-

$

105,699

$

-

$

105,699

Other short-term borrowings[2]

$

100,000

$

-

$

100,000

$

-

$

100,000

Notes payable:

 

 

 

 

 

 

 

 

 

 

 

FHLB advances

$

519,208

$

-

$

540,547

$

-

$

540,547

 

Unsecured senior debt securities

 

296,257

 

-

 

301,082

 

-

 

301,082

 

Junior subordinated deferrable interest debentures (related to trust preferred securities)

 

384,922

 

-

 

407,262

 

-

 

407,262

 

FRB advances

 

1,009

 

-

 

1,009

 

-

 

1,009

Total notes payable

$

1,201,396

$

-

$

1,249,900

$

-

$

1,249,900

Derivatives

$

15,346

$

-

$

15,346

$

-

$

15,346

[1]

Refer to Note 24 to the Consolidated Financial Statements for the fair value by class of financial asset and its hierarchy level

[2]

Refer to Note 16 to the Consolidated Financial Statements for the composition of other short-term borrowings.

101

 

 

 

December 31, 2019

 

Carrying

 

 

 

 

(In thousands)

amount

Level 1

Level 2

Level 3

Fair value

Financial Assets:

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

$

388,311

$

388,311

$

-

$

-

$

388,311

Money market investments

 

3,262,286

 

3,256,274

 

6,012

 

-

 

3,262,286

Trading account debt securities, excluding derivatives[1]

 

40,321

 

7,081

 

32,270

 

970

 

40,321

Debt securities available-for-sale[1]

 

17,648,473

 

3,841,715

 

13,805,576

 

1,182

 

17,648,473

Debt securities held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

Obligations of Puerto Rico, States and political subdivisions

$

85,556

$

-

$

-

$

93,002

$

93,002

 

Collateralized mortgage obligation-federal agency

 

45

 

-

 

-

 

47

 

47

 

Securities in wholly owned statutory business trusts

 

11,561

 

-

 

11,561

 

-

 

11,561

 

Other

 

500

 

-

 

500

 

-

 

500

Total debt securities held-to-maturity

$

97,662

$

-

$

12,061

$

93,049

$

105,110

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

FHLB stock

$

43,787

$

-

$

43,787

$

-

$

43,787

 

FRB stock

 

93,470

 

-

 

93,470

 

-

 

93,470

 

Other investments

 

22,630

 

-

 

21,328

 

7,367

 

28,695

Total equity securities

$

159,887

$

-

$

158,585

$

7,367

$

165,952

Loans held-for-sale

$

59,203

$

-

$

-

$

60,030

$

60,030

Loans held-in-portfolio

 

26,929,165

 

-

 

-

 

25,051,400

 

25,051,400

Mortgage servicing rights

 

150,906

 

-

 

-

 

150,906

 

150,906

Derivatives

 

17,966

 

-

 

17,966

 

-

 

17,966

 

 

December 31, 2019

 

Carrying

 

 

 

 

(In thousands)

amount

Level 1

Level 2

Level 3

Fair value

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

$

36,083,809

$

-

$

36,083,809

$

-

$

36,083,809

 

Time deposits

 

7,674,797

 

-

 

7,598,732

 

-

 

7,598,732

Total deposits

$

43,758,606

$

-

$

43,682,541

$

-

$

43,682,541

Assets sold under agreements to repurchase

$

193,378

$

-

$

193,271

$

-

$

193,271

Notes payable:

 

 

 

 

 

 

 

 

 

 

 

FHLB advances

$

421,399

$

-

$

429,718

$

-

$

429,718

 

Unsecured senior debt

 

295,307

 

-

 

323,415

 

-

 

323,415

 

Junior subordinated deferrable interest debentures (related to trust preferred securities)

 

384,902

 

-

 

395,216

 

-

 

395,216

Total notes payable

$

1,101,608

$

-

$

1,148,349

$

-

$

1,148,349

Derivatives

$

16,619

$

-

$

16,619

$

-

$

16,619

[1]

Refer to Note 24 to the Consolidated Financial Statements for the fair value by class of financial asset and its hierarchy level.

 

The notional amount of commitments to extend credit at September 30, 2020 and December 31, 2019 is $ 9.0 billion and $ 8.4 billion, respectively, and represents the unused portion of credit facilities granted to customers. The notional amount of letters of credit at September 30, 2020 and December 31, 2019 is $ 63 million and $ 78 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.

 

102

 

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 and nine months ended September 30, 2020 and 2019:

 

 

Quarters ended September 30,

Nine months ended September 30,

(In thousands, except per share information)

2020

2019

2020

2019

Net income

$

168,416

$

165,319

$

330,346

$

504,350

Preferred stock dividends

 

(352)

 

(930)

 

(1,405)

 

(2,792)

Net income applicable to common stock

$

168,064

$

164,389

$

328,941

$

501,558

Average common shares outstanding

 

83,809,272

 

96,357,117

 

86,567,680

 

97,073,177

Average potential dilutive common shares

 

26,879

 

121,210

 

78,011

 

139,219

Average common shares outstanding - assuming dilution

 

83,836,151

 

96,478,327

 

86,645,691

 

97,212,396

Basic EPS

$

2.01

$

1.71

$

3.80

$

5.17

Diluted EPS

$

2.00

$

1.70

$

3.80

$

5.16

 

As disclosed in Note 18, on May 27, 2020, the Corporation completed its $500 million accelerated share repurchase transaction (“ASR”) in 2020. Under the ASR, the Corporation received from the dealer counterparty an initial delivery of 7,055,919 shares of common stock on February 3, 2020. As part of the final settlement of the ASR, the Corporation received an additional 4,763,216 shares of common stock after the early termination date of March 19, 2020. The early termination resulted from the exercise by the dealer counterparty of its contractual right to terminate the transaction due to the trading price of the Corporation’s common stock falling below a specified level due to the effects of the COVID-19 pandemic on the global markets. The Corporation accounted for the ASR as a treasury stock transaction.

For the quarter and nine months ended September 30, 2020, 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, 2019. For a discussion of the calculation under the treasury stock method, refer to Note 33 of the Consolidated Financial Statements included in the 2019 Form 10-K.

103

 

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 and nine months ended September 30, 2020 and 2019.

 

 

Quarter ended September 30,

 

Nine months ended September 30,

(In thousands)

2020

 

 

2020

 

 

 

BPPR

 

Popular U.S.

 

 

BPPR

 

Popular U.S.

Service charges on deposit accounts

$

34,078

$

2,771

 

$

100,513

$

8,158

Other service fees:

 

 

 

 

 

 

 

 

 

 

Debit card fees

 

10,865

 

258

 

 

27,717

 

725

 

Insurance fees, excluding reinsurance

 

9,269

 

642

 

 

25,140

 

1,910

 

Credit card fees, excluding late fees and membership fees

 

23,631

 

194

 

 

60,777

 

597

 

Sale and administration of investment products

 

5,094

 

-

 

 

16,267

 

-

 

Trust fees

 

4,975

 

-

 

 

16,092

 

-

Total revenue from contracts with customers [1]

$

87,912

$

3,865

 

$

246,506

$

11,390

[1]

The amounts include intersegment transactions of $ 0.2 million and $ 2.6 million, respectively, for the quarter and nine months ended September 30, 2020.

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30,

 

Nine months ended September 30,

(In thousands)

2019

 

 

2019

 

 

 

BPPR

 

Popular U.S.

 

 

BPPR

 

Popular U.S.

Service charges on deposit accounts

$

37,245

$

3,724

 

$

108,344

$

10,933

Other service fees:

 

 

 

 

 

 

 

 

 

 

Debit card fees

 

11,459

 

260

 

 

34,110

 

813

 

Insurance fees, excluding reinsurance

 

8,921

 

1,152

 

 

29,786

 

2,753

 

Credit card fees, excluding late fees and membership fees

 

21,901

 

217

 

 

61,579

 

656

 

Sale and administration of investment products

 

5,714

 

-

 

 

16,705

 

-

 

Trust fees

 

5,277

 

-

 

 

15,844

 

-

Total revenue from contracts with customers [1]

$

90,517

$

5,353

 

$

266,368

$

15,155

[1]

The amounts include intersegment transactions of $ 0.2 million and $ 2.3 million, respectively, for the quarter and nine months ended September 30, 2019.

 

Revenue from contracts with customers is recognized when, or as, the performance obligations are satisfied by the Corporation by transferring the promised services to the customers. A service is transferred to the customer when, or as, the customer obtains control of that service. A performance obligation may be satisfied over time or at a point in time. Revenue from a performance obligation satisfied over time is recognized based on the services that have been rendered to date. Revenue from a performance obligation satisfied at a point in time is recognized when the customer obtains control over the service. The transaction price, or the amount of revenue recognized, reflects the consideration the Corporation expects to be entitled to in exchange for those promised services. In determining the transaction price, the Corporation considers the effects of variable consideration. Variable consideration is included in the transaction price only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. The Corporation is the principal in a transaction if it obtains control of the specified goods or services before they are transferred to the customer. If the Corporation acts as principal, revenues are presented in the gross amount of consideration to which it expects to be entitled and are not netted with any related expenses. On the other hand, the Corporation is an agent if it does not control the specified goods or services before they are transferred to the customer. If the Corporation acts as an agent, revenues are presented in the amount of consideration to which it expects to be entitled, net of related expenses.

 

Following is a description of the nature and timing of revenue streams from contracts with customers:

 

Service charges on deposit accounts

Service charges on deposit accounts are earned on retail and commercial deposit activities and include, but are not limited to, nonsufficient fund fees, overdraft fees and checks stop payment fees. These transaction-based fees are recognized at a point in time, upon occurrence of an activity or event or upon the occurrence of a condition which triggers the fee assessment. The Corporation is acting as principal in these transactions.

104

 

 

Debit card fees

Debit card fees include, but are not limited to, interchange fees, surcharging income and foreign transaction fees. These transaction-based fees are recognized at a point in time, upon occurrence of an activity or event or upon the occurrence of a condition which triggers the fee assessment. Interchange fees are recognized upon settlement of the debit card payment transactions. The Corporation is acting as principal in these transactions.

 

Insurance fees

Insurance fees include, but are not limited to, commissions and contingent commissions. Commissions and fees are recognized when related policies are effective since the Corporation does not have an enforceable right to payment for services completed to date. An allowance is created for expected adjustments to commissions earned related to policy cancellations. Contingent commissions are recorded on an accrual basis when the amount to be received is notified by the insurance company. The Corporation is acting as an agent since it arranges for the sale of the policies and receives commissions if, and when, it achieves the sale.

 

Credit card fees

Credit card fees include, but are not limited to, interchange fees, additional card fees, cash advance fees, balance transfer fees, foreign transaction fees, and returned payments fees. Credit card fees are recognized at a point in time, upon the occurrence of an activity or an event. Interchange fees are recognized upon settlement of the credit card payment transactions. The Corporation is acting as principal in these transactions.

 

Sale and administration of investment products

Fees from the sale and administration of investment products include, but are not limited to, commission income from the sale of investment products, asset management fees, underwriting fees, and mutual fund fees.

 

Commission income from investment products is recognized on the trade date since clearing, trade execution, and custody services are satisfied when the customer acquires or disposes of the rights to obtain the economic benefits of the investment products and brokerage contracts have no fixed duration and are terminable at will by either party. The Corporation is acting as principal in these transactions since it performs the service of providing the customer with the ability to acquire or dispose of the rights to obtain the economic benefits of investment products.

 

Asset management fees are satisfied over time and are recognized in arrears. At contract inception, the estimate of the asset management fee is constrained from the inclusion in the transaction price since the promised consideration is dependent on the market and thus is highly susceptible to factors outside the manager’s influence. As advisor, the broker-dealer subsidiary is acting as principal.

 

Underwriting fees are recognized at a point in time, when the investment products are sold in the open market at a markup. When the broker-dealer subsidiary is lead underwriter, it is acting as an agent. In turn, when it is a participating underwriter, it is acting as principal.

 

Mutual fund fees, such as distribution fees, are considered variable consideration and are recognized over time, as the uncertainty of the fees to be received is resolved as NAV is determined and investor activity occurs. The promise to provide distribution-related services is considered a single performance obligation as it requires the provision of a series of distinct services that are substantially the same and have the same pattern of transfer. When the broker-dealer subsidiary is acting as a distributor, it is acting as principal. In turn, when it acts as third-party dealer, it is acting as an agent.

 

Trust fees

Trust fees are recognized from retirement plan, mutual fund administration, investment management, trustee, escrow, and custody and safekeeping services. These asset management services are considered a single performance obligation as it requires the provision of a series of distinct services that are substantially the same and have the same pattern of transfer. The performance obligation is satisfied over time, except for optional services and certain other services that are satisfied at a point in time. Revenues are recognized in arrears, when, or as, the services are rendered. The Corporation is acting as principal since, as asset manager, it has the obligation to provide the specified service to the customer and has the ultimate discretion in establishing the fee paid by the customer for the specified services.

105

 

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 33.3years considers options to extend the leases for up to 20.0 years. The Corporation identifies leases when it has both the right to obtain substantially all of the economic benefits from the use of the asset and the right to direct the use of the asset.

The Corporation recognizes right-of-use assets (“ROU assets”) and lease liabilities related to operating and finance leases in its Consolidated Statements of Financial Condition under the caption of other assets and other liabilities, respectively. Refer to Note 13 and Note 17, respectively, for information on the balances of these lease assets and liabilities.

The Corporation uses the incremental borrowing rate for purposes of discounting lease payments for operating and finance leases, since it does not have enough information to determine the rates implicit in the leases. The discount rates are based on fixed-rate and fully amortizing borrowing facilities of its banking subsidiaries that are collateralized. For leases held by non-banking subsidiaries, a credit spread is added to this rate based on financing transactions with a similar credit risk profile.

The following table presents the undiscounted cash flows of operating and finance leases for each of the following periods:

September 30, 2020

(In thousands)

 

Remaining 2020

 

2021

 

2022

 

2023

 

2024

 

Later Years

 

Total Lease Payments

 

Less: Imputed Interest

 

Total

Operating Leases

$

7,334

$

31,544

$

27,430

$

25,095

$

23,986

$

74,358

$

189,747

$

(24,789)

$

164,958

Finance Leases

 

872

 

3,535

 

3,629

 

3,725

 

3,830

 

13,163

 

28,754

 

(4,785)

 

23,969

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

(In thousands)

 

2020

 

2021

 

2022

 

2023

 

2024

 

Later Years

 

Total Lease Payments

 

Less: Imputed Interest

 

Total

Operating Leases

$

29,872

$

27,445

$

23,540

$

21,257

$

20,176

$

70,842

$

193,132

$

(27,993)

$

165,139

Finance Leases

 

3,068

 

3,159

 

3,252

 

3,349

 

3,448

 

8,220

 

24,496

 

(4,686)

 

19,810

 

The following table presents the lease cost recognized by the Corporation in the Consolidated Statements of Operations as follows:

 

 

 

 

Quarters ended September 30,

Nine months ended September 30,

(In thousands)

2020

2019

2020

2019

Finance lease cost:

 

 

 

 

 

 

 

 

 

Amortization of ROU assets

$

525

$

422

$

1,512

$

1,265

 

Interest on lease liabilities

 

299

 

296

 

900

 

901

Operating lease cost

 

8,361

 

7,233

 

24,189

 

23,156

Short-term lease cost

 

38

 

97

 

172

 

172

Variable lease cost

 

12

 

3

 

37

 

5

Sublease income

 

(23)

 

(29)

 

(83)

 

(84)

Net gain recognized from sale and leaseback transaction[1]

 

-

 

-

 

(5,550)

 

-

Total lease cost[2]

$

9,212

$

8,022

$

21,177

$

25,415

[1]

During the quarter ended June 30, 2020, the Corporation recognized the transfer of the Caparra Center as a sale. Since the sale and partial leaseback was considered to be at fair value, no portion of the gain on sale was deferred.

[2]

Total lease cost is recognized as part of net occupancy expense, except for the net gain recognized from the sale and leaseback transaction which was included as part of other operating income.

 

The following table presents supplemental cash flow information and other related information related to operating and finance leases.

106

 

 

 

 

 

Nine months ended

(Dollars in thousands)

 

September 30, 2020

 

September 30, 2019

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

 

Operating cash flows from operating leases

$

24,115

$

22,527

 

Operating cash flows from finance leases

 

900

 

906

 

Financing cash flows from finance leases

 

1,608

 

1,269

ROU assets obtained in exchange for new lease obligations:

 

 

 

 

 

Operating leases[1]

$

13,085

$

7,882

 

Finance leases

 

4,510

 

-

Weighted-average remaining lease term:

 

 

 

 

 

 

 

Operating leases

 

8.1

years

 

8.6

years

 

Finance leases

 

9.2

years

 

7.5

years

Weighted-average discount rate:

 

 

 

 

 

 

 

Operating leases

 

3.2

%

 

3.6

%

 

Finance leases

 

5.0

%

 

6.0

%

[1]

During the quarter ended June 30, 2020, the Corporation recognized a lease liability of $11.1 million and a corresponding ROU asset for the same amount as a result of the partial leaseback of the Caparra Center.

 

As of September 30, 2020, the Corporation has additional operating leases contracts that have not yet commenced with an undiscounted contract amount of $4.5 million, which will have lease terms ranging from 10 to 20 years.

107

 

Note 29 – 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:

 

 

 

 

 

 

 

 

 

 

 

Pension Plans

 

OPEB Plan

 

 

Quarters ended September 30,

 

Quarters ended September 30,

(In thousands)

 

2020

 

2019

 

2020

 

2019

Personnel Cost:

 

 

 

 

 

 

 

 

Service cost

$

-

$

-

$

178

$

190

Other operating expenses:

 

 

 

 

 

 

 

 

Interest cost

 

5,847

 

7,109

 

1,228

 

1,489

Expected return on plan assets

 

(9,526)

 

(8,096)

 

-

 

-

Amortization of prior service cost/(credit)

 

-

 

-

 

-

 

-

Amortization of net loss

 

5,220

 

5,877

 

142

 

-

Total net periodic pension cost

$

1,541

$

4,890

$

1,548

$

1,679

 

 

 

Pension Plans

 

OPEB Plan

 

 

Nine months ended September 30,

 

Nine months ended September 30,

(In thousands)

 

2020

 

2019

 

2020

 

2019

Personnel Cost:

 

 

 

 

 

 

 

 

Service cost

$

-

$

-

$

535

$

570

Other operating expenses:

 

 

 

 

 

 

 

 

Interest cost

 

17,541

 

21,329

 

3,684

 

4,466

Expected return on plan assets

 

(28,577)

 

(24,288)

 

-

 

-

Amortization prior service cost/(credit)

 

-

 

-

 

-

 

-

Amortization of net loss

 

15,660

 

17,629

 

426

 

-

Total net periodic pension cost

$

4,624

$

14,670

$

4,645

$

5,036

 

The Corporation paid the following contributions to the plans for the nine months ended September 30, 2020 and expects to pay the following contributions for the year ending December 31, 2020.

 

For the nine months ended

For the year ending

(In thousands)

September 30, 2020

December 31, 2020

Pension Plans

$

171

$

229

OPEB Plan

$

4,600

$

6,516

108

 

Note 30 - Stock-based compensation

Incentive Plan

On May 12, 2020, the shareholders of the Corporation approved the Popular, Inc. 2020 Omnibus Incentive Plan, which permits the Corporation to issue several types of stock-based compensation to employees and directors of the Corporation and/or any of its subsidiaries (the “2020 Incentive Plan”). The 2020 Incentive Plan replaced the Popular, Inc. 2004 Omnibus Incentive Plan, which was in effect prior to the adoption of the 2020 Incentive Plan (the “2004 Incentive Plan” and, together with the 2020 Incentive Plan, the “Incentive Plan”). Participants under the Incentive Plan are designated by the Compensation Committee of the Board of Directors (or its delegate, as determined by the Board). Under the Incentive Plan, the Corporation has issued restricted stock and performance shares for its employees and restricted stock and restricted stock units (“RSU”) to its directors.

 

The restricted stock granted under the Incentive Plan to employees becomes vested based on the employees’ continued service with Popular. Unless otherwise stated in an agreement, the compensation cost associated with the shares of restricted stock is determined based on a two-prong vesting schedule. The first part is vested ratably over five years commencing at the date of grant (“the graduated vesting portion”) and the second part is vested at termination of employment after attainment of 55 years of age and 10 years of service (“the retirement vesting portion”). The graduated vesting portion is accelerated at termination of employment after attaining 55 years of age and 10 years of service. The vesting schedule for restricted shares granted on or after 2014 was modified as follows, the graduated vesting portion is vested ratably over four years commencing at the date of the grant and the retirement vesting portion is vested at termination of employment after 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 graduated vesting portion is accelerated at termination of employment after attaining the earlier of 55 years of age and 10 years of service or 60 years of age and 5 years of service.

The performance share awards granted under the Incentive Plan consist of the opportunity to receive shares of Popular, Inc.’s common stock provided that the Corporation achieves certain goals during a three-year performance cycle. The goals will be based on two metrics weighted equally: the Relative Total Shareholder Return (“TSR”) and the Absolute Earnings per Share (“EPS”) goals. For grants issued on 2020 and thereafter, the EPS goal is substituted by the Absolute Return on Average Assets (“ROA”) goal. The TSR metric is considered to be a market condition under ASC 718. For equity settled awards based on a market condition, the fair value is determined as of the grant date and is not subsequently revised based on actual performance. The EPS and ROA metrics are considered to be a performance condition under ASC 718. The fair value is determined based on the probability of achieving the EPS or ROA goal as of each reporting period. The TSR and EPS or ROA 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 and ROA) 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)

Shares

 

Weighted-Average Grant Date Fair Value

Non-vested at December 31, 2018

382,186

$

36.41

Granted

218,169

 

55.55

Performance Shares Quantity Adjustment

15,061

 

55.72

Vested

(270,051)

 

44.73

Non-vested at December 31, 2019

345,365

$

41.68

Granted

278,326

 

43.21

Performance Shares Quantity Adjustment

(7)

 

48.79

Vested

(245,002)

 

43.10

Forfeited

(3,555)

 

43.72

Non-vested at September 30, 2020

375,127

$

41.52

 

109

 

During the quarter ended September 30, 2020, 266 shares of restricted stock (September 30, 2019 – 619) were awarded to management under the Incentive Plan. During the quarters ended September 30, 2020 and 2019, no performance shares were awarded to management under the Incentive Plan. For the nine months ended September 30, 2020, 213,511 shares of restricted stock (September 30, 2019 – 152,773) and 64,815 performance shares (September 30, 2019 - 65,396) were awarded to management under the Incentive Plan.

During the quarter ended September 30, 2020, the Corporation recognized $1.0 million of restricted stock expense related to management incentive awards, with a tax benefit of $0.2 million (September 30, 2019 - $1.0 million, with a tax benefit of $0.2 million). For the nine months ended September 30, 2020, the Corporation recognized $6.7 million of restricted stock expense related to management incentive awards, with a tax benefit of $1.1 million (September 30, 2019 - $6.8 million, with a tax benefit of $1.1 million). For the nine months ended September 30, 2020, the fair market value of the restricted stock and performance shares vested was $9.5 million at grant date and $10.9 million at vesting date. This differential triggers a windfall of $0.5 million that was recorded as a reduction on income tax expense. During the quarter ended September 30, 2020 the Corporation recognized $0.3 million of performance shares expense, with a tax benefit of $24 thousand (September 30, 2019 - $0.4 million, with a tax benefit of $23 thousand). For the nine months ended September 30, 2020, the Corporation recognized $3.1 million of performance shares expense, with a tax benefit of $0.3 million (September 30, 2019 - $4.3 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 September 30, 2020 was $10.9 million and is expected to be recognized over a weighted-average period of 2.3 years.

The following table summarizes the restricted stock activity under the Incentive Plan for members of the Board of Directors:

(Not in thousands)

Restricted Stock shares

 

Weighted-Average Grant Date Fair Value per Share

Restricted Stock units

 

Weighted-Average Grant Date Fair Value per Unit

Non-vested at December 31, 2018

-

$

-

-

$

-

Granted

1,052

 

49.25

27,449

 

57.64

Vested

(1,052)

 

49.25

(27,449)

 

57.64

Forfeited

-

 

-

-

 

-

Non-vested at December 31, 2019

-

$

-

-

$

-

Granted

-

 

-

43,084

 

35.46

Vested

-

 

-

(43,084)

 

35.46

Forfeited

-

 

-

-

 

-

Non-vested at September 30, 2020

-

$

-

-

$

-

 

The equity awards granted to members of the Board of Directors of Popular, Inc. (the Directors) will vest and become non-forfeitable on the grant date of such award. Effective on May 2019 all equity awards granted to the Directors may be paid in either restricted stocks or RSU, at the Directors’ election. If RSU are elected the Directors may defer the delivery of the shares of common stocks underlying the RSU award after their retirement. To the extent that cash dividends are paid on the Corporation’s outstanding common stocks, the Directors will receive an additional number of RSU that reflect reinvested dividend equivalent.

 

For 2020 and 2019, all Directors elected RSU. Accordingly, no shares of restricted stock were granted to the Directors and no expense was recorded related to restricted stock shares during the quarters ended September 30, 2020 and 2019. For the nine months ended September 30, 2020, the Corporation did not grant shares of restricted stock to the Directors (September 30, 2019 – 1,052) and did not recognize expense related to the restricted stock shares, (September 30, 2019 - $52 thousand, with a tax benefit of $6 thousand).

 

During the quarter ended September 30, 2020, 783 RSUs were granted to the Directors (September 30, 2019 - 1,989). During this period, the Corporation recognized expense related to these RSUs of $28 thousand with a tax benefit of $5 thousand (September 30, 2019 - $0.1 million). For the nine months ended September 30, 2020, the Corporation granted 43,084 RSU to the Directors (September 30, 2019 - 27,449). During this period, the Corporation recognized $1.5 million of expense related to these RSU, with a

110

 

tax benefit of $0.3 million, (September 30, 2019 - $1.5 million, with a tax benefit of $0.2 million). The fair value at vesting date of the RSU vested during the nine months ended September 30, 2020 for directors was $1.5 million.

111

 

Note 31 – 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:

 

 

 

Quarters ended

 

 

 

 

September 30, 2020

 

 

 

September 30, 2019

 

(In thousands)

 

Amount

% of pre-tax income

 

 

 

Amount

% of pre-tax income

 

Computed income tax expense at statutory rates

$

78,594

38

%

 

$

77,508

38

%

Net benefit of tax exempt interest income

 

(31,177)

(15)

 

 

 

(38,103)

(18)

 

Deferred tax asset valuation allowance

 

2,185

1

 

 

 

3,170

1

 

Difference in tax rates due to multiple jurisdictions

 

(2,584)

(1)

 

 

 

(4,233)

(2)

 

Effect of income subject to preferential tax rate

 

(3,095)

(2)

 

 

 

(2,243)

(1)

 

Unrecognized tax benefits

 

(2,163)

(1)

 

 

 

-

-

 

Adjustment due to estimate on the annual effective rate

 

(4,030)

(2)

 

 

 

2,711

1

 

State and local taxes

 

3,748

2

 

 

 

2,180

1

 

Others

 

(310)

-

 

 

 

380

-

 

Income tax expense

$

41,168

20

%

 

$

41,370

20

%

 

 

 

 

Nine months ended

 

 

 

 

September 30, 2020

 

 

 

September 30, 2019

 

(In thousands)

 

Amount

% of pre-tax income

 

 

 

Amount

% of pre-tax income

 

Computed income tax expense at statutory rates

$

149,715

38

%

 

$

238,602

38

%

Net benefit of tax exempt interest income

 

(93,497)

(24)

 

 

 

(95,986)

(15)

 

Deferred tax asset valuation allowance

 

10,333

3

 

 

 

9,915

2

 

Difference in tax rates due to multiple jurisdictions

 

2,081

1

 

 

 

(9,851)

(2)

 

Effect of income subject to preferential tax rate

 

(7,722)

(2)

 

 

 

(7,458)

(1)

 

Adjustment due to estimate on the annual effective rate

 

2,821

1

 

 

 

-

-

 

Unrecognized tax benefits

 

(2,163)

(1)

 

 

 

-

-

 

State and local taxes

 

5,807

1

 

 

 

5,535

1

 

Others

 

1,518

-

 

 

 

(8,834)

(2)

 

Income tax expense

$

68,893

17

%

 

$

131,923

21

%

 

 

For the nine months period ended September 30, 2020, the Corporation recorded an income tax expense of $68.9 million, compared to $131.9 million for the nine months period ended September 30, 2019. The reduction in income tax expense reflects the impact of lower pre-tax income, resulting primarily from a higher provision for credit losses and the impact of the COVID-19 pandemic.

 

The following table presents a breakdown of the significant components of the Corporation’s deferred tax assets and liabilities.

112

 

 

 

 

September 30, 2020

(In thousands)

 

PR

 

US

 

Total

Deferred tax assets:

 

 

 

 

 

 

Tax credits available for carryforward

$

3,003

$

5,269

$

8,272

Net operating loss and other carryforward available

 

121,842

 

701,733

 

823,575

Postretirement and pension benefits

 

78,175

 

-

 

78,175

Deferred loan origination fees

 

15,410

 

(2,453)

 

12,957

Allowance for credit losses

 

405,681

 

42,452

 

448,133

Accelerated depreciation

 

3,439

 

4,989

 

8,428

FDIC-assisted transaction

 

82,994

 

-

 

82,994

Intercompany deferred gains

 

1,453

 

-

 

1,453

Lease liability

 

23,350

 

21,287

 

44,637

Difference in outside basis from pass-through entities

 

59,348

 

-

 

59,348

Other temporary differences

 

37,883

 

7,901

 

45,784

 

Total gross deferred tax assets

 

832,578

 

781,178

 

1,613,756

Deferred tax liabilities:

 

 

 

 

 

 

Indefinite-lived intangibles

 

39,908

 

37,662

 

77,570

Unrealized net gain (loss) on trading and available-for-sale securities

 

74,101

 

8,793

 

82,894

Right of use assets

 

21,266

 

19,412

 

40,678

Other temporary differences

 

13,473

 

1,182

 

14,655

 

Total gross deferred tax liabilities

 

148,748

 

67,049

 

215,797

Valuation allowance

 

110,435

 

406,590

 

517,025

Net deferred tax asset

$

573,395

$

307,539

$

880,934

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

(In thousands)

 

PR

 

US

 

Total

Deferred tax assets:

 

 

 

 

 

 

Tax credits available for carryforward

$

2,368

$

5,269

$

7,637

Net operating loss and other carryforward available

 

112,803

 

716,796

 

829,599

Postretirement and pension benefits

 

82,623

 

-

 

82,623

Deferred loan origination fees

 

2,519

 

(2,759)

 

(240)

Allowance for loan losses

 

405,475

 

10,981

 

416,456

Accelerated depreciation

 

3,439

 

4,914

 

8,353

FDIC-assisted transaction

 

82,684

 

-

 

82,684

Intercompany deferred gains

 

1,604

 

-

 

1,604

Lease liability

 

22,694

 

23,387

 

46,081

Difference in outside basis from pass-through entities

 

21,670

 

-

 

21,670

Other temporary differences

 

26,554

 

7,460

 

34,014

 

Total gross deferred tax assets

 

764,433

 

766,048

 

1,530,481

Deferred tax liabilities:

 

 

 

 

 

 

Indefinite-lived intangibles

 

37,411

 

36,058

 

73,469

Unrealized net gain (loss) on trading and available-for-sale securities

 

15,635

 

432

 

16,067

Right of use assets

 

20,598

 

21,430

 

42,028

Other temporary differences

 

12,778

 

1,179

 

13,957

 

Total gross deferred tax liabilities

 

86,422

 

59,099

 

145,521

Valuation allowance

 

100,175

 

399,800

 

499,975

Net deferred tax asset

$

577,836

$

307,149

$

884,985

 

113

 

The net deferred tax asset shown in the table above at September 30, 2020 is reflected in the consolidated statements of financial condition as $0.9 billion in net deferred tax assets in the “Other assets” caption (December 31, 2019 - $0.9 billion) and $1.3 million in deferred tax liabilities in the “Other liabilities” caption (December 31, 2019 - $1.4 million), 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 negative and positive 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, mainly the future reversal of existing taxable temporary differences and future taxable income exclusive of reversing temporary differences and carryforwards.

 

At September 30, 2020, the deferred tax asset net of deferred tax liabilities of the U.S. operations amounted to $715 million, mainly related to net operating losses expiring between 2017 and 2033, with a valuation allowance of approximately $407 million, for a net deferred tax asset of approximately $308 million. Management evaluates the realization of the deferred tax asset by taxing jurisdiction. The U.S. mainland operations are evaluated, as a whole, since a consolidated income tax return is filed. As of September 30, 2020, the U.S. operation is not in a cumulative three-years loss position. During 2020, two additional pieces of negative evidence arose: further reduction in interest rates combined with a lower expectation of rate increases in the near future and the economic uncertainty around COVID-19 pandemic. This economic disruption was the principal driver of the significant increase in our provision for credit losses during the first quarter of 2020, although net charge-offs for the first three quarters of 2020 and early credit indicators such as NPL inflows were stable in our U.S. operations. Due to the economic uncertainty, at this time, the additional negative evidence related to the economic disruption is not enough to overcome the positive evidence of recent historical operating performance such as sustained loan growth, the early success of new business initiatives and stable credit metrics, in combination with the length of the expiration of the NOLs. The Corporation believes that this objectively verified positive evidence places the U.S. operations in a good position to continue executing its business plan once the economic environment stabilizes after the current pandemic turmoil. As a result, as of September 30, 2020, management estimates 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. Management will continue to monitor and review the U.S. operation’s results and the pre-tax earnings forecast on a quarterly basis to assess the future realization of the DTA. Management will closely monitor factors like, net income versus forecast, targeted loan growth, net interest income margin, allowance for credit losses, charge offs, NPLs inflows and NPA balances. If such factors worsen during future periods, they could constitute sufficient objectively verifiable negative evidence to overcome the positive evidence that currently exists, and could require additional amounts of valuation allowance to be registered on the DTA. Any increases to the valuation allowance would be reflected as an income tax expense, reducing the Corporation’s earnings.

 

 

At September 30, 2020, the Corporation’s net deferred tax assets related to its Puerto Rico operations amounted to $573 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 September 30, 2020. This is considered a strong piece of objectively verifiable positive evidence that outweighs 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 as of September 30, 2020.

 

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 September 30, 2020. 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 negative and positive 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. Accordingly, a valuation allowance is recorded on the deferred tax asset at the PIHC, which amounted to $110 million as of September 30, 2020.

 

114

 

The extent to which the COVID-19 pandemic further impacts our business, results of operations and financial condition, as well as the operations of our clients, customers, service providers and suppliers, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response thereto. To the extent that the COVID-19 pandemic results in the continued closure of businesses and a reduction in economic activity, and interest rates, the Corporation and its subsidiaries will be further impacted in the form of reduced revenues, additional expenses and higher credit losses and could result in further impairment or reduction in the assessment of the realizability of our DTA in our Puerto Rico and U.S. operations.

 

The reconciliation of unrecognized tax benefits, excluding interest, was as follows:

 

(In millions)

 

2020

 

 

2019

Balance at January 1

$

16.3

 

$

7.2

Additions for tax positions - January through March

 

-

 

 

0.3

Balance at March 31

$

16.3

 

$

7.5

Additions for tax positions - April through June

 

-

 

 

0.2

Balance at June 30

$

16.3

 

$

7.7

Reduction as a result of lapse of statute of limitations - July through September

 

(1.5)

 

 

-

Balance at September 30

$

14.8

 

$

7.7

 

At September 30, 2020, the total amount of accrued interest recognized in the statement of financial condition approximated $4.5 million (December 31, 2019 - $3.5 million). The total interest expense recognized at September 30, 2020 was $1.6 million, net of the reduction of $645 thousand due to the expiration of the statute of limitation (September 30, 2019 - $317 thousand). Management determined that at September 30, 2020 and December 31, 2019 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 September 30, 2020 (December 31, 2019 - $10.5 million).

The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current tax year positions, expiration of open income tax returns due to the 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 September 30, 2020, the following years remain subject to examination in the U.S. Federal jurisdiction: 2016 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 $3.2 million.

115

 

Note 32 – Supplemental disclosure on the consolidated statements of cash flows

Additional disclosures on cash flow information and non-cash activities for the nine months ended September 30, 2020 and September 30, 2019 are listed in the following table:

 

 

 

 

 

 

(In thousands)

 

September 30, 2020

 

September 30, 2019

Non-cash activities:

 

 

 

 

Loans transferred to other real estate

$

16,724

$

44,575

Loans transferred to other property

 

34,351

 

40,384

Total loans transferred to foreclosed assets

 

51,075

 

84,959

Loans transferred to other assets

 

5,763

 

14,174

Financed sales of other real estate assets

 

11,401

 

11,710

Financed sales of other foreclosed assets

 

24,188

 

22,047

Total financed sales of foreclosed assets

 

35,589

 

33,757

Financed sale of premises and equipment

 

31,350

 

-

Transfers from loans held-in-portfolio to loans held-for-sale

 

65,229

 

-

Transfers from loans held-for-sale to loans held-in-portfolio

 

17,640

 

7,735

Loans securitized into investment securities[1]

 

307,512

 

331,112

Trades receivable from brokers and counterparties

 

65,993

 

66,389

Trades payable to brokers and counterparties

 

1,484,410

 

26,782

Recognition of mortgage servicing rights on securitizations or asset transfers

 

6,006

 

6,728

Interest capitalized on loans subject to the temporary payment moratorium

 

17,625

 

-

Loans booked under the GNMA buy-back option

 

121,531

 

52,711

Capitalization of lease right of use asset

 

25,620

 

169,123

[1]

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.

 

 

 

(In thousands)

September 30, 2020

September 30, 2019

Cash and due from banks

$

558,996

$

476,815

Restricted cash and due from banks

 

6,206

 

25,245

Restricted cash in money market investments

 

5,946

 

5,913

Total cash and due from banks, and restricted cash[2]

$

571,148

$

507,973

[2]

Refer to Note 5 - Restrictions on cash and due from banks and certain securities for nature of restrictions.

116

 

Note 33 – 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 September 30, 2020, additional disclosures are provided for the business areas included in this reportable segment, as described below:

 

Commercial banking represents the Corporation’s banking operations conducted at BPPR, which are targeted mainly to corporate, small and middle size businesses. It includes aspects of the lending and depository businesses, as well as other finance and advisory services. BPPR allocates funds across business areas based on duration matched transfer pricing at market rates. This area also incorporates income related with the investment of excess funds, as well as a proportionate share of the investment function of BPPR.

 

Consumer and retail banking represents the branch banking operations of BPPR which focus on retail clients. It includes the consumer lending business operations of BPPR, as well as the lending operations of Popular Auto and Popular Mortgage. Popular Auto focuses on auto and lease financing, while Popular Mortgage focuses principally on residential mortgage loan originations. The consumer and retail banking area also incorporates income related with the investment of excess funds from the branch network, as well as a proportionate share of the investment function of BPPR.

 

Other financial services include the trust 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 Risk Services, and Popular Life Re. Most of the services that are provided by these subsidiaries generate profits based on fee income.

 

Popular U.S.:

Popular U.S. reportable segment consists of the banking operations of Popular Bank (PB) 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.

 

 

The tables that follow present the results of operations and total assets by reportable segments:

117

 

2020

For the quarter ended September 30, 2020

 

 

 

 

Banco Popular

 

 

 

Intersegment

(In thousands)

 

 

 

de Puerto Rico

 

Popular U.S.

 

Eliminations

Net interest income

 

 

$

394,662

$

76,481

$

2

Provision for credit losses

 

 

 

7,288

 

11,770

 

-

Non-interest income

 

 

 

107,577

 

7,186

 

(138)

Amortization of intangibles

 

 

 

886

 

166

 

-

Depreciation expense

 

 

 

11,921

 

2,338

 

-

Other operating expenses

 

 

 

292,528

 

54,679

 

(136)

Income tax expense

 

 

 

35,834

 

5,350

 

-

Net income

 

 

$

153,782

$

9,364

$

-

Segment assets

 

 

$

55,388,782

$

10,220,824

$

(28,177)

 

 

 

 

 

 

 

 

 

For the quarter ended September 30, 2020

 

 

Reportable

 

 

 

 

 

 

(In thousands)

 

Segments

 

Corporate

 

Eliminations

 

Total Popular, Inc.

Net interest income (expense)

$

471,145

$

(10,124)

$

-

$

461,021

Provision for credit losses

 

19,058

 

80

 

-

 

19,138

Non-interest income

 

114,625

 

14,230

 

(88)

 

128,767

Amortization of intangibles

 

1,052

 

24

 

-

 

1,076

Depreciation expense

 

14,259

 

259

 

-

 

14,518

Other operating expenses

 

347,071

 

(748)

 

(851)

 

345,472

Income tax expense (benefit)

 

41,184

 

(312)

 

296

 

41,168

Net income

$

163,146

$

4,803

$

467

$

168,416

Segment assets

$

65,581,429

$

5,201,316

$

(4,872,376)

$

65,910,369

 

For the nine months ended September 30, 2020

 

 

 

 

Banco Popular

 

 

 

Intersegment

(In thousands)

 

 

 

de Puerto Rico

 

Popular U.S.

 

Eliminations

Net interest income

 

 

$

1,191,452

$

222,874

$

9

Provision for credit losses

 

 

 

180,659

 

90,442

 

-

Non-interest income

 

 

 

315,522

 

18,831

 

(414)

Amortization of intangibles

 

 

 

4,773

 

499

 

-

Depreciation expense

 

 

 

36,282

 

6,396

 

-

Other operating expenses

 

 

 

876,438

 

160,749

 

(408)

Income tax expense

 

 

 

69,040

 

666

 

-

Net income (loss)

 

 

$

339,782

$

(17,047)

$

3

Segment assets

 

 

$

55,388,782

$

10,220,824

$

(28,177)

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2020

 

 

Reportable

 

 

 

 

 

Total

(In thousands)

 

Segments

 

Corporate

 

Eliminations

 

Popular, Inc.

Net interest income (expense)

$

1,414,335

$

(29,338)

$

-

$

1,384,997

Provision for credit losses

 

271,101

 

217

 

-

 

271,318

Non-interest income

 

333,939

 

35,645

 

(2,119)

 

367,465

Amortization of intangibles

 

5,272

 

73

 

-

 

5,345

Depreciation expense

 

42,678

 

741

 

-

 

43,419

Other operating expenses

 

1,036,779

 

(1,056)

 

(2,582)

 

1,033,141

Income tax expense (benefit)

 

69,706

 

(964)

 

151

 

68,893

Net income

$

322,738

$

7,296

$

312

$

330,346

Segment assets

$

65,581,429

$

5,201,316

$

(4,872,376)

$

65,910,369

118

 

2019

For the quarter ended September 30, 2019

 

 

 

 

Banco Popular

 

 

 

Intersegment

(In thousands)

 

 

 

de Puerto Rico

 

Popular U.S.

 

Eliminations

Net interest income

 

 

$

412,182

$

74,391

$

4

Provision for credit losses

 

 

 

34,481

 

2,060

 

-

Non-interest income

 

 

 

124,868

 

5,953

 

(140)

Amortization of intangibles

 

 

 

2,208

 

167

 

-

Depreciation expense

 

 

 

11,972

 

2,046

 

-

Other operating expenses

 

 

 

309,815

 

51,616

 

(136)

Income tax expense

 

 

 

35,286

 

6,216

 

-

Net income

 

 

$

143,288

$

18,239

$

-

Segment assets

 

 

$

42,080,292

$

10,095,526

$

(14,414)

 

 

 

 

 

 

 

 

 

For the quarter ended September 30, 2019

 

 

Reportable

 

 

 

 

 

 

(In thousands)

 

Segments

 

Corporate

 

Eliminations

 

Total Popular, Inc.

Net interest income (expense)

$

486,577

$

(9,586)

$

-

$

476,991

Provision (reversal) for credit losses

 

36,541

 

(2)

 

-

 

36,539

Non-interest income

 

130,681

 

12,137

 

(106)

 

142,712

Amortization of intangibles

 

2,375

 

24

 

-

 

2,399

Depreciation expense

 

14,018

 

186

 

-

 

14,204

Other operating expenses

 

361,295

 

(647)

 

(776)

 

359,872

Income tax expense (benefit)

 

41,502

 

(392)

 

260

 

41,370

Net income

$

161,527

$

3,382

$

410

$

165,319

Segment assets

$

52,161,404

$

5,134,608

$

(4,815,597)

$

52,480,415

 

For the nine months ended September 30, 2019

 

 

 

 

Banco Popular

 

 

 

Intersegment

(In thousands)

 

 

 

de Puerto Rico

 

Popular U.S.

 

Eliminations

Net interest income

 

 

$

1,231,088

$

221,856

$

(53)

Provision for credit losses

 

 

 

94,651

 

23,647

 

-

Non-interest income

 

 

 

369,026

 

17,309

 

(421)

Amortization of intangibles

 

 

 

6,510

 

499

 

-

Depreciation expense

 

 

 

36,154

 

6,215

 

-

Other operating expenses

 

 

 

887,941

 

151,966

 

(409)

Income tax expense

 

 

 

117,413

 

15,528

 

-

Net income

 

 

$

457,445

$

41,310

$

(65)

Segment assets

 

 

$

42,080,292

$

10,095,526

$

(14,414)

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2019

 

 

Reportable

 

 

 

 

 

Total

(In thousands)

 

Segments

 

Corporate

 

Eliminations

 

Popular, Inc.

Net interest income (expense)

$

1,452,891

$

(28,621)

$

-

$

1,424,270

Provision for credit losses

 

118,298

 

257

 

-

 

118,555

Non-interest income

 

385,914

 

33,537

 

(1,983)

 

417,468

Amortization of intangibles

 

7,009

 

73

 

-

 

7,082

Depreciation expense

 

42,369

 

559

 

-

 

42,928

Other operating expenses

 

1,039,498

 

(233)

 

(2,365)

 

1,036,900

Income tax expense (benefit)

 

132,941

 

(1,158)

 

140

 

131,923

Net income

$

498,690

$

5,418

$

242

$

504,350

Segment assets

$

52,161,404

$

5,134,608

$

(4,815,597)

$

52,480,415

 

Additional disclosures with respect to the Banco Popular de Puerto Rico reportable segment are as follows:

119

 

2020

For the quarter ended September 30, 2020

Banco Popular de Puerto Rico

 

 

 

 

Consumer

 

Other

 

 

 

Total Banco

 

 

Commercial

 

and Retail

 

Financial

 

 

 

Popular de

(In thousands)

 

Banking

 

Banking

 

Services

 

Eliminations

 

Puerto Rico

Net interest income

$

164,791

$

228,293

$

1,578

$

-

$

394,662

Provision for credit losses

 

4,061

 

3,227

 

-

 

-

 

7,288

Non-interest income

 

24,804

 

58,955

 

24,194

 

(376)

 

107,577

Amortization of intangibles

 

50

 

699

 

137

 

-

 

886

Depreciation expense

 

5,179

 

6,569

 

173

 

-

 

11,921

Other operating expenses

 

77,906

 

195,624

 

19,389

 

(391)

 

292,528

Income tax expense

 

32,331

 

2,275

 

1,228

 

-

 

35,834

Net income

$

70,068

$

78,854

$

4,845

$

15

$

153,782

Segment assets

$

47,920,631

$

29,358,230

$

2,408,998

$

(24,299,077)

$

55,388,782

 

For the nine months ended September 30, 2020

Banco Popular de Puerto Rico

 

 

 

 

Consumer

 

Other

 

 

 

Total Banco

 

 

Commercial

 

and Retail

 

Financial

 

 

 

Popular de

(In thousands)

 

Banking

 

Banking

 

Services

 

Eliminations

 

Puerto Rico

Net interest income

$

486,050

$

694,983

$

10,419

$

-

$

1,191,452

Provision for credit losses

 

23,244

 

157,415

 

-

 

-

 

180,659

Non-interest income

 

74,771

 

170,205

 

71,459

 

(913)

 

315,522

Amortization of intangibles

 

148

 

2,911

 

1,714

 

-

 

4,773

Depreciation expense

 

15,406

 

20,383

 

493

 

-

 

36,282

Other operating expenses

 

226,232

 

587,297

 

63,863

 

(954)

 

876,438

Income tax expense (benefit)

 

82,271

 

(18,912)

 

5,681

 

-

 

69,040

Net income

$

213,520

$

116,094

$

10,127

$

41

$

339,782

Segment assets

$

47,920,631

$

29,358,230

$

2,408,998

$

(24,299,077)

$

55,388,782

120

 

 

2019

 

For the quarter ended September 30, 2019

 

Banco Popular de Puerto Rico

 

 

 

 

 

Consumer

 

Other

 

 

 

Total Banco

 

 

 

Commercial

 

and Retail

 

Financial

 

 

 

Popular de

(In thousands)

 

Banking

 

Banking

 

Services

 

Eliminations

 

Puerto Rico

Net interest income

$

160,038

$

250,944

$

1,212

$

(12)

$

412,182

Provision (reversal) for credit losses

 

(23,619)

 

58,100

 

-

 

-

 

34,481

Non-interest income

 

25,196

 

75,854

 

24,545

 

(727)

 

124,868

Amortization of intangibles

 

50

 

1,072

 

1,086

 

-

 

2,208

Depreciation expense

 

5,064

 

6,753

 

155

 

-

 

11,972

Other operating expenses

 

82,817

 

210,753

 

16,986

 

(741)

 

309,815

Income tax expense

 

29,340

 

2,649

 

3,297

 

-

 

35,286

Net income

$

91,582

$

47,471

$

4,233

$

2

$

143,288

Segment assets

$

35,590,229

$

23,714,260

$

379,126

$

(17,603,323)

$

42,080,292

 

 

For the nine months ended September 30, 2019

 

Banco Popular de Puerto Rico

 

 

 

 

Consumer

 

Other

 

 

 

Total Banco

 

 

Commercial

 

and Retail

 

Financial

 

 

 

Popular de

(In thousands)

 

Banking

 

Banking

 

Services

 

Eliminations

 

Puerto Rico

Net interest income

$

464,441

$

762,913

$

3,857

$

(123)

$

1,231,088

Provision (reversal) for credit losses

 

(22,756)

 

117,407

 

-

 

-

 

94,651

Non-interest income

 

74,481

 

220,064

 

76,733

 

(2,252)

 

369,026

Amortization of intangibles

 

147

 

3,218

 

3,145

 

-

 

6,510

Depreciation expense

 

14,615

 

21,071

 

468

 

-

 

36,154

Other operating expenses

 

229,767

 

611,348

 

49,076

 

(2,250)

 

887,941

Income tax expense

 

88,353

 

19,878

 

9,182

 

-

 

117,413

Net income

$

228,796

$

210,055

$

18,719

$

(125)

$

457,445

Segment assets

$

35,590,229

$

23,714,260

$

379,126

$

(17,603,323)

$

42,080,292

 

Geographic Information

 

The following information presents selected financial information based on the geographic location where the Corporation conducts its business. The banking operations of BPPR are primarily based in Puerto Rico, where it has the largest retail banking franchise. BPPR also conducts banking operations in the U.S. Virgin Islands, the British Virgin Islands and New York. BPPR’s banking operations in the United States include E-loan, an online platform used to offer personal loans, co-branded credit cards offerings and an online deposit gathering platform. In the Virgin Islands, the BPPR segment offers banking products, including loans and deposits. During the quarter ended September 30, 2020, the BPPR segment generated approximately $41.7 million (2019 - $40.6 million) in revenues from its operations in the United States, including net interest income, service charges on deposit accounts and other service fees. In addition, the BPPR segment generated $33.5 million in revenues (2019 - $35.9 million) from its operations in the U.S. and British Virgin Islands. At September 30, 2020, total assets for the BPPR segment related to its operations in the United States amounted to $579 million (2019 - $574 million).

 

Geographic Information

 

 

 

 

 

 

 

Quarter ended

 

Nine months ended

(In thousands)

 

September 30, 2020

 

September 30, 2019

 

September 30, 2020

 

September 30, 2019

Revenues:[1]

 

 

 

 

 

 

 

 

Puerto Rico

$

476,863

$

505,608

$

1,418,243

$

1,507,386

United States

 

95,145

 

94,510

 

279,246

 

278,330

Other

 

17,780

 

19,585

 

54,973

 

56,022

Total consolidated revenues

$

589,788

$

619,703

$

1,752,462

$

1,841,738

[1]

Total revenues include net interest income, service charges on deposit accounts, other service fees, mortgage banking activities, net gain (loss) on sale of debt securities, net gain, including impairment on equity securities, net profit on trading account debt securities, net (loss) gain on sale of loans, including valuation adjustment on loans held-for-sale, adjustments (expense) to indemnity reserves on loans sold, and other operating income.

121

 

Selected Balance Sheet Information:

(In thousands)

 

September 30, 2020

 

December 31, 2019

Puerto Rico

 

 

 

 

 

Total assets

$

54,218,254

$

40,544,255

 

Loans

 

20,548,257

 

18,989,286

 

Deposits

 

46,831,116

 

34,664,243

United States

 

 

 

 

 

Total assets

$

10,797,883

$

10,693,536

 

Loans

 

8,276,731

 

7,819,187

 

Deposits

 

7,662,877

 

7,664,792

Other

 

 

 

 

 

Total assets

$

894,232

$

877,533

 

Loans

 

670,282

 

657,603

 

Deposits[1]

 

1,527,990

 

1,429,571

[1]

Represents deposits from BPPR operations located in the U.S. and British Virgin Islands.

122

 

Note 34 – 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 September 30, 2020 and December 31, 2019, and the results of their operations and cash flows for periods ended September 30, 2020 and 2019.

 

PNA is an operating, 100% 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, joint and severally, all registered debt securities issued by PNA.

123

 

Condensed Consolidating Statement of Financial Condition (Unaudited)

 

 

At September 30, 2020

 

 

 

 

 

 

All other

 

 

 

 

 

 

Popular Inc.

PNA

 

subsidiaries and

 

Elimination

 

Popular, Inc.

(In thousands)

 

Holding Co.

Holding Co.

 

eliminations

 

entries

 

Consolidated

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

62,727

$

-

 

$

565,203

 

$

(62,728)

 

$

565,202

Money market investments

 

 

177,516

 

10,012

 

 

11,859,407

 

 

(187,011)

 

 

11,859,924

Trading account debt securities, at fair value

 

 

-

 

-

 

 

33,053

 

 

-

 

 

33,053

Debt securities available-for-sale, at fair value

 

 

-

 

-

 

 

21,177,839

 

 

-

 

 

21,177,839

Debt securities held -to maturity, at amortized cost

 

 

8,726

 

2,835

 

 

81,602

 

 

-

 

 

93,163

 

Less - Allowance for credit losses

 

 

-

 

-

 

 

12,421

 

 

-

 

 

12,421

 

Debt securities held-to-maturity, net

 

 

8,726

 

2,835

 

 

69,181

 

 

-

 

 

80,742

Equity securities

 

 

14,078

 

20

 

 

160,021

 

 

(126)

 

 

173,993

Investment in subsidiaries

 

 

6,175,196

 

1,779,090

 

 

-

 

 

(7,954,286)

 

 

-

Loans held-for-sale, at lower of cost or fair value

 

 

-

 

-

 

 

102,760

 

 

-

 

 

102,760

Loans held-in-portfolio

 

 

31,617

 

-

 

 

29,548,776

 

 

5,955

 

 

29,586,348

 

Less - Unearned income

 

 

-

 

-

 

 

193,838

 

 

-

 

 

193,838

 

Allowance for credit losses

 

 

433

 

-

 

 

925,417

 

 

-

 

 

925,850

 

Total loans held-in-portfolio, net

 

 

31,184

 

-

 

 

28,429,521

 

 

5,955

 

 

28,466,660

Premises and equipment, net

 

 

5,074

 

-

 

 

505,399

 

 

-

 

 

510,473

Other real estate

 

 

146

 

-

 

 

100,446

 

 

-

 

 

100,592

Accrued income receivable

 

 

194

 

9

 

 

204,060

 

 

(30)

 

 

204,233

Mortgage servicing rights, at fair value

 

 

-

 

-

 

 

123,552

 

 

-

 

 

123,552

Other assets

 

 

106,702

 

22,307

 

 

1,711,320

 

 

(23,623)

 

 

1,816,706

Goodwill

 

 

-

 

-

 

 

671,123

 

 

(1)

 

 

671,122

Other intangible assets

 

 

6,390

 

-

 

 

17,128

 

 

-

 

 

23,518

Total assets

 

$

6,587,933

$

1,814,273

 

$

65,730,013

 

$

(8,221,850)

 

$

65,910,369

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing

 

$

-

$

-

 

$

13,609,160

 

$

(62,728)

 

$

13,546,432

 

Interest bearing

 

 

-

 

-

 

 

42,662,562

 

 

(187,011)

 

 

42,475,551

 

 

Total deposits

 

 

-

 

-

 

 

56,271,722

 

 

(249,739)

 

 

56,021,983

Assets sold under agreements to repurchase

 

 

-

 

-

 

 

106,028

 

 

-

 

 

106,028

Other short-term borrowings

 

 

-

 

-

 

 

100,000

 

 

-

 

 

100,000

Notes payable

 

 

587,069

 

94,111

 

 

520,216

 

 

-

 

 

1,201,396

Other liabilities

 

 

88,845

 

1,664

 

 

2,502,333

 

 

(23,965)

 

 

2,568,877

Total liabilities

 

 

675,914

 

95,775

 

 

59,500,299

 

 

(273,704)

 

 

59,998,284

Stockholders' equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock

 

 

22,143

 

-

 

 

-

 

 

-

 

 

22,143

Common stock

 

 

1,045

 

2

 

 

56,307

 

 

(56,309)

 

 

1,045

Surplus

 

 

4,512,983

 

4,173,136

 

 

5,840,402

 

 

(10,004,832)

 

 

4,521,689

Retained earnings (accumulated deficit)

 

 

2,176,680

 

(2,492,461)

 

 

109,098

 

 

2,374,836

 

 

2,168,153

Treasury stock, at cost

 

 

(1,016,248)

 

-

 

 

-

 

 

(113)

 

 

(1,016,361)

Accumulated other comprehensive income, net of tax

 

 

215,416

 

37,821

 

 

223,907

 

 

(261,728)

 

 

215,416

Total stockholders' equity

 

 

5,912,019

 

1,718,498

 

 

6,229,714

 

 

(7,948,146)

 

 

5,912,085

Total liabilities and stockholders' equity

 

$

6,587,933

$

1,814,273

 

$

65,730,013

 

$

(8,221,850)

 

$

65,910,369

124

 

Condensed Consolidating Statement of Financial Condition (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2019

 

 

 

 

 

 

 

All other

 

 

 

 

 

 

 

 

Popular, Inc.

PNA

 

subsidiaries and

 

Elimination

 

Popular, Inc.

(In thousands)

 

Holding Co.

Holding Co.

 

eliminations

 

entries

 

Consolidated

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

55,956

$

-

 

$

388,363

 

$

(56,008)

 

$

388,311

Money market investments

 

 

221,598

 

16,029

 

 

3,261,688

 

 

(237,029)

 

 

3,262,286

Trading account debt securities, at fair value

 

 

-

 

-

 

 

40,321

 

 

-

 

 

40,321

Debt securities available-for-sale, at fair value

 

 

-

 

-

 

 

17,648,473

 

 

-

 

 

17,648,473

Debt securities held-to-maturity, at amortized cost

 

 

8,726

 

2,835

 

 

86,101

 

 

-

 

 

97,662

Equity securities

 

 

10,744

 

20

 

 

149,322

 

 

(199)

 

 

159,887

Investment in subsidiaries

 

 

6,243,065

 

1,806,583

 

 

-

 

 

(8,049,648)

 

 

-

Loans held-for-sale, at lower of cost or fair value

 

 

-

 

-

 

 

59,203

 

 

-

 

 

59,203

Loans held-in-portfolio

 

 

32,027

 

-

 

 

27,549,874

 

 

5,955

 

 

27,587,856

 

Less - Unearned income

 

 

-

 

-

 

 

180,983

 

 

-

 

 

180,983

 

Allowance for loan losses

 

 

410

 

-

 

 

477,298

 

 

-

 

 

477,708

 

Total loans held-in-portfolio, net

 

 

31,617

 

-

 

 

26,891,593

 

 

5,955

 

 

26,929,165

Premises and equipment, net

 

 

3,893

 

-

 

 

552,757

 

 

-

 

 

556,650

Other real estate

 

 

146

 

-

 

 

121,926

 

 

-

 

 

122,072

Accrued income receivable

 

 

382

 

108

 

 

180,630

 

 

(249)

 

 

180,871

Mortgage servicing rights, at fair value

 

 

-

 

-

 

 

150,906

 

 

-

 

 

150,906

Other assets

 

 

93,835

 

21,324

 

 

1,722,839

 

 

(18,383)

 

 

1,819,615

Goodwill

 

 

-

 

-

 

 

671,123

 

 

(1)

 

 

671,122

Other intangible assets

 

 

6,463

 

-

 

 

22,317

 

 

-

 

 

28,780

Total assets

 

$

6,676,425

$

1,846,899

 

$

51,947,562

 

$

(8,355,562)

 

$

52,115,324

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing

 

$

-

$

-

 

$

9,216,181

 

$

(56,008)

 

$

9,160,173

 

Interest bearing

 

 

-

 

-

 

 

34,835,462

 

 

(237,029)

 

 

34,598,433

 

 

Total deposits

 

 

-

 

-

 

 

44,051,643

 

 

(293,037)

 

 

43,758,606

Assets sold under agreements to repurchase

 

 

-

 

-

 

 

193,378

 

 

-

 

 

193,378

Notes payable

 

 

586,119

 

94,090

 

 

421,399

 

 

-

 

 

1,101,608

Other liabilities

 

 

73,596

 

3,200

 

 

986,865

 

 

(18,708)

 

 

1,044,953

Total liabilities

 

 

659,715

 

97,290

 

 

45,653,285

 

 

(311,745)

 

 

46,098,545

Stockholders' equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock

 

 

50,160

 

-

 

 

-

 

 

-

 

 

50,160

Common stock

 

 

1,044

 

2

 

 

56,307

 

 

(56,309)

 

 

1,044

Surplus

 

 

4,438,706

 

4,173,169

 

 

5,847,389

 

 

(10,011,852)

 

 

4,447,412

Retained earnings (accumulated deficit)

 

 

2,156,442

 

(2,425,429)

 

 

555,398

 

 

1,861,504

 

 

2,147,915

Treasury stock, at cost

 

 

(459,704)

 

-

 

 

-

 

 

(110)

 

 

(459,814)

Accumulated other comprehensive (loss) income, net of tax

 

 

(169,938)

 

1,867

 

 

(164,817)

 

 

162,950

 

 

(169,938)

Total stockholders' equity

 

 

6,016,710

 

1,749,609

 

 

6,294,277

 

 

(8,043,817)

 

 

6,016,779

Total liabilities and stockholders' equity

 

$

6,676,425

$

1,846,899

 

$

51,947,562

 

$

(8,355,562)

 

$

52,115,324

125

 

Condensed Consolidating Statement of Operations (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 2020

 

 

 

 

 

 

 

 

All other

 

 

 

 

 

 

 

 

 

Popular, Inc.

PNA

subsidiaries and

Elimination

Popular, Inc.

(In thousands)

 

Holding Co.

Holding Co.

eliminations

entries

Consolidated

Interest and dividend income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend income from subsidiaries

 

$

2,000

 

$

-

 

$

-

 

$

(2,000)

 

$

-

 

Loans

 

 

566

 

 

-

 

 

430,720

 

 

-

 

 

431,286

 

Money market investments

 

 

97

 

 

18

 

 

2,774

 

 

(116)

 

 

2,773

 

Investment securities

 

 

332

 

 

47

 

 

78,763

 

 

-

 

 

79,142

 

Total interest and dividend income

 

 

2,995

 

 

65

 

 

512,257

 

 

(2,116)

 

 

513,201

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

-

 

 

-

 

 

37,670

 

 

(116)

 

 

37,554

 

Short-term borrowings

 

 

-

 

 

-

 

 

416

 

 

-

 

 

416

 

Long-term debt

 

 

9,632

 

 

1,557

 

 

3,021

 

 

-

 

 

14,210

 

Total interest expense

 

 

9,632

 

 

1,557

 

 

41,107

 

 

(116)

 

 

52,180

Net interest (expense) income

 

 

(6,637)

 

 

(1,492)

 

 

471,150

 

 

(2,000)

 

 

461,021

Provision for credit losses - loan portfolios

 

 

80

 

 

-

 

 

19,372

 

 

-

 

 

19,452

Provision (reversal) for credit losses - investment securities

 

 

-

 

 

-

 

 

(314)

 

 

-

 

 

(314)

Net interest (expense) income after provision for credit losses

 

 

(6,717)

 

 

(1,492)

 

 

452,092

 

 

(2,000)

 

 

441,883

Service charges on deposit accounts

 

 

-

 

 

-

 

 

36,849

 

 

-

 

 

36,849

Other service fees

 

 

-

 

 

-

 

 

69,967

 

 

(88)

 

 

69,879

Mortgage banking activities

 

 

-

 

 

-

 

 

(9,526)

 

 

-

 

 

(9,526)

Net gain, including impairment on equity securities

 

 

666

 

 

-

 

 

4,481

 

 

3

 

 

5,150

Net gain on sale of debt securities

 

 

-

 

 

-

 

 

41

 

 

-

 

 

41

Net profit on trading account debt securities

 

 

-

 

 

-

 

 

20

 

 

-

 

 

20

Net loss on sale of loans, including valuation adjustments on loans held-for-sale

 

 

-

 

 

-

 

 

(2,198)

 

 

-

 

 

(2,198)

Indemnity reserves on loans sold expense

 

 

-

 

 

-

 

 

4,183

 

 

-

 

 

4,183

Other operating income

 

 

6,985

 

 

-

 

 

17,387

 

 

(3)

 

 

24,369

 

Total non-interest income

 

 

7,651

 

 

-

 

 

121,204

 

 

(88)

 

 

128,767

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personnel costs

 

 

15,180

 

 

-

 

 

120,761

 

 

-

 

 

135,941

Net occupancy expenses

 

 

1,031

 

 

-

 

 

24,875

 

 

1

 

 

25,907

Equipment expenses

 

 

1,969

 

 

2

 

 

22,117

 

 

-

 

 

24,088

Other taxes

 

 

65

 

 

-

 

 

13,853

 

 

-

 

 

13,918

Professional fees

 

 

17,659

 

 

29

 

 

78,875

 

 

(89)

 

 

96,474

Communications

 

 

107

 

 

-

 

 

5,587

 

 

-

 

 

5,694

Business promotion

 

 

545

 

 

-

 

 

14,119

 

 

-

 

 

14,664

FDIC deposit insurance

 

 

-

 

 

-

 

 

6,568

 

 

-

 

 

6,568

Other real estate owned (OREO) (income) expenses

 

 

-

 

 

-

 

 

(1,615)

 

 

-

 

 

(1,615)

Other operating expenses

 

 

(37,241)

 

 

13

 

 

76,341

 

 

(762)

 

 

38,351

Amortization of intangibles

 

 

24

 

 

-

 

 

1,052

 

 

-

 

 

1,076

 

Total operating expenses

 

 

(661)

 

 

44

 

 

362,533

 

 

(850)

 

 

361,066

Income (loss) before income tax and equity in earnings of subsidiaries

 

 

1,595

 

 

(1,536)

 

 

210,763

 

 

(1,238)

 

 

209,584

Income tax expense (benefit)

 

 

17

 

 

(323)

 

 

41,178

 

 

296

 

 

41,168

126

 

Income (loss) before equity in earnings of subsidiaries

 

 

1,578

 

 

(1,213)

 

 

169,585

 

 

(1,534)

 

 

168,416

Equity in undistributed earnings of subsidiaries

 

 

166,838

 

 

9,339

 

 

-

 

 

(176,177)

 

 

-

Net income

 

$

168,416

 

$

8,126

 

$

169,585

 

$

(177,711)

 

$

168,416

Comprehensive income, net of tax

 

$

164,483

 

$

9,538

 

$

166,295

 

$

(175,833)

 

$

164,483

127

 

Condensed Consolidating Statement of Operations (Unaudited)

 

 

 

 

 

Nine months ended September 30, 2020

 

 

 

 

 

 

 

 

All other

 

 

 

 

 

 

 

 

 

Popular, Inc.

PNA

subsidiaries and

Elimination

Popular, Inc.

(In thousands)

 

Holding Co.

Holding Co.

eliminations

entries

Consolidated

Interest and dividend income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend income from subsidiaries

 

$

584,000

 

$

-

 

$

-

 

$

(584,000)

 

$

-

 

Loans

 

 

1,686

 

 

-

 

 

1,309,716

 

 

-

 

 

1,311,402

 

Money market investments

 

 

1,653

 

 

86

 

 

16,788

 

 

(1,739)

 

 

16,788

 

Investment securities

 

 

651

 

 

140

 

 

243,147

 

 

-

 

 

243,938

 

Total interest and dividend income

 

 

587,990

 

 

226

 

 

1,569,651

 

 

(585,739)

 

 

1,572,128

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

-

 

 

-

 

 

144,174

 

 

(1,739)

 

 

142,435

 

Short-term borrowings

 

 

-

 

 

-

 

 

2,109

 

 

-

 

 

2,109

 

Long-term debt

 

 

28,896

 

 

4,672

 

 

9,019

 

 

-

 

 

42,587

 

Total interest expense

 

 

28,896

 

 

4,672

 

 

155,302

 

 

(1,739)

 

 

187,131

Net interest income (expense)

 

 

559,094

 

 

(4,446)

 

 

1,414,349

 

 

(584,000)

 

 

1,384,997

Provision for credit losses - loan portfolios

 

 

217

 

 

-

 

 

271,334

 

 

-

 

 

271,551

Provision (reversal) for credit losses - investment securities

 

 

-

 

 

-

 

 

(233)

 

 

-

 

 

(233)

Net interest income (expense) after provision for credit losses

 

 

558,877

 

 

(4,446)

 

 

1,143,248

 

 

(584,000)

 

 

1,113,679

Service charges on deposit accounts

 

 

-

 

 

-

 

 

108,671

 

 

-

 

 

108,671

Other service fees

 

 

-

 

 

-

 

 

188,918

 

 

(2,182)

 

 

186,736

Mortgage banking activities

 

 

-

 

 

-

 

 

671

 

 

-

 

 

671

Net gain on sale of debt securities

 

 

-

 

 

-

 

 

41

 

 

-

 

 

41

Net gain, including impairment on equity securities

 

 

654

 

 

-

 

 

4,139

 

 

76

 

 

4,869

Net profit on trading account debt securities

 

 

-

 

 

-

 

 

593

 

 

-

 

 

593

Net gain on sale of loans, including valuation adjustments on loans held-for-sale

 

 

-

 

 

-

 

 

981

 

 

-

 

 

981

Indemnity reserves on loans sold expense

 

 

-

 

 

-

 

 

(1,770)

 

 

-

 

 

(1,770)

Other operating income

 

 

13,546

 

 

-

 

 

53,140

 

 

(13)

 

 

66,673

 

Total non-interest income

 

 

14,200

 

 

-

 

 

355,384

 

 

(2,119)

 

 

367,465

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personnel costs

 

 

49,357

 

 

-

 

 

372,581

 

 

-

 

 

421,938

Net occupancy expenses

 

 

2,967

 

 

-

 

 

73,584

 

 

1

 

 

76,552

Equipment expenses

 

 

3,602

 

 

4

 

 

62,931

 

 

-

 

 

66,537

Other taxes

 

 

189

 

 

1

 

 

40,732

 

 

-

 

 

40,922

Professional fees

 

 

38,045

 

 

89

 

 

252,358

 

 

(400)

 

 

290,092

Communications

 

 

398

 

 

-

 

 

16,824

 

 

-

 

 

17,222

Business promotion

 

 

2,482

 

 

-

 

 

38,660

 

 

-

 

 

41,142

FDIC deposit insurance

 

 

-

 

 

-

 

 

16,988

 

 

-

 

 

16,988

Other real estate owned (OREO) expenses

 

 

-

 

 

-

 

 

520

 

 

-

 

 

520

Other operating expenses

 

 

(97,967)

 

 

39

 

 

204,758

 

 

(2,183)

 

 

104,647

Amortization of intangibles

 

 

73

 

 

-

 

 

5,272

 

 

-

 

 

5,345

 

Total operating expenses

 

 

(854)

 

 

133

 

 

1,085,208

 

 

(2,582)

 

 

1,081,905

Income (loss) before income tax and equity in losses of subsidiaries

 

 

573,931

 

 

(4,579)

 

 

413,424

 

 

(583,537)

 

 

399,239

Income tax expense (benefit)

 

 

17

 

 

(962)

 

 

69,687

 

 

151

 

 

68,893

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

128

 

Income (loss) before equity in losses of subsidiaries

 

 

573,914

 

 

(3,617)

 

 

343,737

 

 

(583,688)

 

 

330,346

Equity in undistributed losses of subsidiaries

 

 

(243,568)

 

 

(17,119)

 

 

-

 

 

260,687

 

 

-

Net income (loss)

 

$

330,346

 

$

(20,736)

 

$

343,737

 

$

(323,001)

 

$

330,346

Comprehensive income, net of tax

 

$

715,700

 

$

15,218

 

$

732,461

 

$

(747,679)

 

$

715,700

 

Condensed Consolidating Statement of Operations (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 2019

 

 

 

 

 

 

 

 

All other

 

 

 

 

 

 

 

 

Popular, Inc.

PNA

subsidiaries and

Elimination

Popular, Inc.

(In thousands)

Holding Co.

Holding Co.

eliminations

entries

Consolidated

Interest and dividend income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend income from subsidiaries

 

$

102,000

 

$

-

 

$

-

 

$

(102,000)

 

$

-

 

Loans

 

 

576

 

 

-

 

 

452,739

 

 

-

 

 

453,315

 

Money market investments

 

 

758

 

 

55

 

 

19,120

 

 

(814)

 

 

19,119

 

Investment securities

 

 

160

 

 

46

 

 

99,336

 

 

-

 

 

99,542

 

Total interest and dividend income

 

 

103,494

 

 

101

 

 

571,195

 

 

(102,814)

 

 

571,976

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

-

 

 

-

 

 

79,574

 

 

(814)

 

 

78,760

 

Short-term borrowings

 

 

-

 

 

-

 

 

1,572

 

 

-

 

 

1,572

 

Long-term debt

 

 

9,632

 

 

1,556

 

 

3,465

 

 

-

 

 

14,653

 

Total interest expense

 

 

9,632

 

 

1,556

 

 

84,611

 

 

(814)

 

 

94,985

Net interest income (expense)

 

 

93,862

 

 

(1,455)

 

 

486,584

 

 

(102,000)

 

 

476,991

Provision (reversal) for credit losses - loan portfolios

 

 

(2)

 

 

-

 

 

36,541

 

 

-

 

 

36,539

Net interest income (expense) after provision for credit losses

 

 

93,864

 

 

(1,455)

 

 

450,043

 

 

(102,000)

 

 

440,452

Service charges on deposit accounts

 

 

-

 

 

-

 

 

40,969

 

 

-

 

 

40,969

Other service fees

 

 

-

 

 

-

 

 

71,393

 

 

(84)

 

 

71,309

Mortgage banking activities

 

 

-

 

 

-

 

 

10,492

 

 

-

 

 

10,492

Net loss on sale of debt securities

 

 

-

 

 

-

 

 

(20)

 

 

-

 

 

(20)

Net gain, including impairment on equity securities

 

 

64

 

 

-

 

 

148

 

 

1

 

 

213

Net profit on trading account debt securities

 

 

-

 

 

-

 

 

295

 

 

-

 

 

295

Indemnity reserves on loans sold expense

 

 

-

 

 

-

 

 

(3,411)

 

 

-

 

 

(3,411)

Other operating income (expense)

 

 

4,626

 

 

(350)

 

 

18,610

 

 

(21)

 

 

22,865

 

Total non-interest income

 

 

4,690

 

 

(350)

 

 

138,476

 

 

(104)

 

 

142,712

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personnel costs

 

 

14,207

 

 

-

 

 

133,475

 

 

-

 

 

147,682

Net occupancy expenses

 

 

1,006

 

 

-

 

 

23,589

 

 

-

 

 

24,595

Equipment expenses

 

 

917

 

 

1

 

 

20,678

 

 

-

 

 

21,596

Other taxes

 

 

61

 

 

-

 

 

13,967

 

 

-

 

 

14,028

Professional fees

 

 

6,370

 

 

13

 

 

92,263

 

 

(85)

 

 

98,561

Communications

 

 

150

 

 

-

 

 

5,731

 

 

-

 

 

5,881

Business promotion

 

 

754

 

 

-

 

 

17,611

 

 

-

 

 

18,365

FDIC deposit insurance

 

 

-

 

 

-

 

 

2,923

 

 

-

 

 

2,923

Other real estate owned (OREO) (income) expenses

 

 

-

 

 

-

 

 

(185)

 

 

-

 

 

(185)

Other operating expenses

 

 

(24,112)

 

 

14

 

 

65,418

 

 

(690)

 

 

40,630

Amortization of intangibles

 

 

24

 

 

-

 

 

2,375

 

 

-

 

 

2,399

 

Total operating expenses

 

 

(623)

 

 

28

 

 

377,845

 

 

(775)

 

 

376,475

Income (loss) before income tax and equity in earnings of subsidiaries

 

 

99,177

 

 

(1,833)

 

 

210,674

 

 

(101,329)

 

 

206,689

Income tax (benefit) expense

 

 

-

 

 

(385)

 

 

41,494

 

 

261

 

 

41,370

129

 

Income (loss) before equity in earnings of subsidiaries

 

 

99,177

 

 

(1,448)

 

 

169,180

 

 

(101,590)

 

 

165,319

Equity in undistributed earnings of subsidiaries

 

 

66,142

 

 

18,210

 

 

-

 

 

(84,352)

 

 

-

Net income

 

$

165,319

 

$

16,762

 

$

169,180

 

$

(185,942)

 

$

165,319

Comprehensive income, net of tax

 

$

217,652

 

$

25,872

 

$

222,592

 

$

(248,464)

 

$

217,652

130

 

Condensed Consolidating Statement of Operations (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2019

 

 

 

 

 

 

 

 

All other

 

 

 

 

 

 

 

 

 

Popular, Inc.

PNA

subsidiaries and

Elimination

Popular, Inc.

(In thousands)

 

Holding Co.

Holding Co.

eliminations

entries

Consolidated

Interest and dividend income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend income from subsidiaries

 

$

356,300

 

$

-

 

$

-

 

$

(356,300)

 

$

-

 

Loans

 

 

1,661

 

 

-

 

 

1,353,571

 

 

-

 

 

1,355,232

 

Money market investments

 

 

2,498

 

 

161

 

 

70,873

 

 

(2,659)

 

 

70,873

 

Investment securities

 

 

473

 

 

139

 

 

274,207

 

 

-

 

 

274,819

 

Total interest and dividend income

 

 

360,932

 

 

300

 

 

1,698,651

 

 

(358,959)

 

 

1,700,924

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

-

 

 

-

 

 

230,694

 

 

(2,659)

 

 

228,035

 

Short-term borrowings

 

 

-

 

 

-

 

 

4,828

 

 

-

 

 

4,828

 

Long-term debt

 

 

28,896

 

 

4,671

 

 

10,224

 

 

-

 

 

43,791

 

Total interest expense

 

 

28,896

 

 

4,671

 

 

245,746

 

 

(2,659)

 

 

276,654

Net interest income (expense)

 

 

332,036

 

 

(4,371)

 

 

1,452,905

 

 

(356,300)

 

 

1,424,270

Provision for credit losses - loan portfolios

 

 

257

 

 

-

 

 

118,298

 

 

-

 

 

118,555

Net interest income (expense) after provision for credit losses

 

 

331,779

 

 

(4,371)

 

 

1,334,607

 

 

(356,300)

 

 

1,305,715

Service charges on deposit accounts

 

 

-

 

 

-

 

 

119,277

 

 

-

 

 

119,277

Other service fees

 

 

2

 

 

-

 

 

211,565

 

 

(1,920)

 

 

209,647

Mortgage banking activities

 

 

-

 

 

-

 

 

18,645

 

 

-

 

 

18,645

Net loss on sale of debt securities

 

 

-

 

 

-

 

 

(20)

 

 

-

 

 

(20)

Net gain, including impairment on equity securities

 

 

934

 

 

-

 

 

1,261

 

 

(21)

 

 

2,174

Net profit on trading account debt securities

 

 

-

 

 

-

 

 

977

 

 

-

 

 

977

Indemnity reserves on loans sold expense

 

 

-

 

 

-

 

 

(1,664)

 

 

-

 

 

(1,664)

Other operating income (expense)

 

 

13,431

 

 

(984)

 

 

56,026

 

 

(41)

 

 

68,432

 

Total non-interest income (expense)

 

 

14,367

 

 

(984)

 

 

406,067

 

 

(1,982)

 

 

417,468

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personnel costs

 

 

46,910

 

 

-

 

 

385,388

 

 

-

 

 

432,298

Net occupancy expenses

 

 

3,231

 

 

-

 

 

68,243

 

 

(43)

 

 

71,431

Equipment expenses

 

 

2,616

 

 

3

 

 

60,005

 

 

-

 

 

62,624

Other taxes

 

 

185

 

 

1

 

 

38,081

 

 

-

 

 

38,267

Professional fees

 

 

13,780

 

 

68

 

 

267,841

 

 

(414)

 

 

281,275

Communications

 

 

483

 

 

-

 

 

17,202

 

 

-

 

 

17,685

Business promotion

 

 

2,435

 

 

-

 

 

49,723

 

 

-

 

 

52,158

FDIC deposit insurance

 

 

-

 

 

-

 

 

13,007

 

 

-

 

 

13,007

Other real estate owned (OREO) expenses

 

 

-

 

 

-

 

 

3,729

 

 

-

 

 

3,729

Other operating expenses

 

 

(69,904)

 

 

43

 

 

179,123

 

 

(1,908)

 

 

107,354

Amortization of intangibles

 

 

73

 

 

-

 

 

7,009

 

 

-

 

 

7,082

 

Total operating expenses

 

 

(191)

 

 

115

 

 

1,089,351

 

 

(2,365)

 

 

1,086,910

Income (loss) before income tax and equity in earnings of subsidiaries

 

 

346,337

 

 

(5,470)

 

 

651,323

 

 

(355,917)

 

 

636,273

Income tax (benefit) expense

 

 

-

 

 

(1,149)

 

 

132,932

 

 

140

 

 

131,923

131

 

Income (loss) before equity in earnings of subsidiaries

 

 

346,337

 

 

(4,321)

 

 

518,391

 

 

(356,057)

 

 

504,350

Equity in undistributed earnings of subsidiaries

 

 

158,013

 

 

41,248

 

 

-

 

 

(199,261)

 

 

-

Net income

 

$

504,350

 

$

36,927

 

$

518,391

 

$

(555,318)

 

$

504,350

Comprehensive income, net of tax

 

$

793,444

 

$

85,389

 

$

810,359

 

$

(895,748)

 

$

793,444

132

 

Condensed Consolidating Statement of Cash Flows (Unaudited)

 

 

 

 

 

 

 

 

Nine months ended September 30, 2020

 

 

 

 

 

 

 

 

 

 

All other

 

 

 

 

 

 

 

 

 

 

Popular, Inc.

 

PNA

 

subsidiaries

 

Elimination

 

Popular, Inc.

(In thousands)

 

Holding Co.

 

Holding Co.

 

and eliminations

 

entries

 

Consolidated

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

330,346

$

(20,736)

$

343,737

$

(323,001)

$

330,346

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of subsidiaries, net of dividends or distributions

 

243,568

 

17,119

 

-

 

(260,687)

 

-

 

Provision for credit losses

 

217

 

-

 

271,101

 

-

 

271,318

 

Amortization of intangibles

 

73

 

-

 

5,272

 

-

 

5,345

 

Depreciation and amortization of premises and equipment

 

741

 

-

 

42,678

 

-

 

43,419

 

Net accretion of discounts and amortization of premiums and deferred fees

 

926

 

20

 

(57,080)

 

-

 

(56,134)

 

Share-based compensation

 

6,032

 

-

 

2,276

 

-

 

8,308

 

Fair value adjustments on mortgage servicing rights

 

-

 

-

 

33,360

 

-

 

33,360

 

Adjustment to indemnity reserves on loans sold

 

-

 

-

 

1,770

 

-

 

1,770

 

Earnings from investments under the equity method, net of dividends or distributions

 

(11,797)

 

-

 

(7,363)

 

-

 

(19,160)

 

Deferred income tax benefit

 

-

 

(962)

 

27,553

 

151

 

26,742

 

Gain on:

 

 

 

 

 

 

 

 

 

 

 

 

 

Disposition of premises and equipment and other productive assets

 

(1)

 

-

 

(10,285)

 

-

 

(10,286)

 

 

 

Proceeds from insurance claims

 

-

 

-

 

(366)

 

-

 

(366)

 

 

 

Sale of debt securities

 

-

 

-

 

(41)

 

-

 

(41)

 

 

 

Sale of loans, including valuation adjustments on loans held for sale and mortgage banking activities

 

-

 

-

 

(21,370)

 

-

 

(21,370)

 

 

 

Sale of foreclosed assets, including write-downs

 

-

 

-

 

(13,676)

 

-

 

(13,676)

 

Acquisitions of loans held-for-sale

 

-

 

-

 

(151,916)

 

-

 

(151,916)

 

Proceeds from sale of loans held-for-sale

 

-

 

-

 

51,077

 

-

 

51,077

 

Net originations on loans held-for-sale

 

-

 

-

 

(243,954)

 

-

 

(243,954)

 

Net decrease (increase) in:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading debt securities

 

-

 

-

 

287,764

 

-

 

287,764

 

 

 

Equity securities

 

(3,334)

 

-

 

(2,056)

 

-

 

(5,390)

 

 

 

Accrued income receivable

 

187

 

98

 

(48,523)

 

(219)

 

(48,457)

 

 

 

Other assets

 

(3,590)

 

(22)

 

73,767

 

5,088

 

75,243

 

Net (decrease) increase in:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest payable

 

(4,594)

 

(1,550)

 

(5,383)

 

219

 

(11,308)

 

 

 

Pension and other postretirement benefits obligations

 

-

 

-

 

4,225

 

-

 

4,225

 

 

 

Other liabilities

 

15,153

 

15

 

(74,962)

 

(5,475)

 

(65,269)

Total adjustments

 

243,581

 

14,718

 

163,868

 

(260,923)

 

161,244

Net cash provided by (used in) operating activities

 

573,927

 

(6,018)

 

507,605

 

(583,924)

 

491,590

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Net decrease (increase) in money market investments

 

44,000

 

6,018

 

(8,597,704)

 

(50,018)

 

(8,597,704)

 

Purchases of investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

-

 

-

 

(15,997,778)

 

-

 

(15,997,778)

 

 

 

Equity

 

-

 

-

 

(28,812)

 

(73)

 

(28,885)

 

Proceeds from calls, paydowns, maturities and redemptions of investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

-

 

-

 

14,386,967

 

-

 

14,386,967

 

 

 

Held-to-maturity

 

-

 

-

 

5,770

 

-

 

5,770

 

Proceeds from sale of investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale

 

-

 

-

 

5,103

 

-

 

5,103

 

 

 

Equity

 

-

 

-

 

20,169

 

-

 

20,169

 

Net repayments (disbursements) on loans

 

436

 

-

 

(965,901)

 

-

 

(965,465)

 

Proceeds from sale of loans

 

-

 

-

 

64,917

 

-

 

64,917

 

Acquisition of loan portfolios

 

-

 

-

 

(994,908)

 

-

 

(994,908)

 

Payments to acquire other intangible

 

-

 

-

 

(83)

 

-

 

(83)

 

Return of capital from equity method investments

 

131

 

-

 

681

 

-

 

812

 

Payments to acquire equity method investments

 

-

 

-

 

(443)

 

-

 

(443)

 

Capital contribution to subsidiary

 

(5,000)

 

-

 

-

 

5,000

 

-

 

Return of capital from wholly-owned subsidiaries

 

12,500

 

-

 

-

 

(12,500)

 

-

 

Acquisition of premises and equipment

 

(2,190)

 

-

 

(36,931)

 

-

 

(39,121)

 

Proceeds from insurance claims

 

-

 

-

 

366

 

-

 

366

133

 

 

Proceeds from sale of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Premises and equipment and other productive assets

 

283

 

-

 

20,533

 

-

 

20,816

 

 

 

Foreclosed assets

 

-

 

-

 

53,872

 

-

 

53,872

Net cash provided by (used in) investing activities

 

50,160

 

6,018

 

(12,064,182)

 

(57,591)

 

(12,065,595)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in:

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

-

 

-

 

12,221,025

 

43,298

 

12,264,323

 

 

 

Assets sold under agreements to repurchase

 

-

 

-

 

(87,350)

 

-

 

(87,350)

 

 

 

Other short-term borrowings

 

-

 

-

 

100,000

 

-

 

100,000

 

Payments of notes payable

 

-

 

-

 

(127,989)

 

-

 

(127,989)

 

Principal payments of finance leases

 

-

 

-

 

(1,608)

 

-

 

(1,608)

 

Proceeds from issuance of notes payable

 

-

 

-

 

226,807

 

-

 

226,807

 

Proceeds from issuance of common stock

 

14,013

 

-

 

(6,082)

 

-

 

7,931

 

Payments for repurchase of redeemable preferred stock

 

(28,017)

 

-

 

-

 

-

 

(28,017)

 

Dividends paid to parent company

 

-

 

-

 

(584,000)

 

584,000

 

-

 

Dividends paid

 

(99,600)

 

-

 

-

 

-

 

(99,600)

 

Net payments for repurchase of common stock

 

(500,507)

 

-

 

185

 

(3)

 

(500,325)

 

Capital contribution from parent

 

-

 

-

 

(7,500)

 

7,500

 

-

 

Payments related to tax withholding for share-based compensation

 

(3,287)

 

-

 

(55)

 

-

 

(3,342)

Net cash (used in) provided by financing activities

 

(617,398)

 

-

 

11,733,433

 

634,795

 

11,750,830

Net increase in cash and due from banks, and restricted cash

 

6,689

 

-

 

176,856

 

(6,720)

 

176,825

Cash and due from banks, and restricted cash at beginning of period

 

56,554

 

-

 

393,777

 

(56,008)

 

394,323

Cash and due from banks, and restricted cash at end of period

$

63,243

$

-

$

570,633

$

(62,728)

$

571,148

134

 

Condensed Consolidating Statement of Cash Flows (Unaudited)

 

 

 

 

 

 

 

Nine months ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

All other

 

 

 

 

 

 

 

 

 

 

Popular, Inc.

 

PNA

 

subsidiaries

 

Elimination

 

Popular, Inc.

(In thousands)

 

Holding Co.

 

Holding Co.

 

and eliminations

 

entries

 

Consolidated

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

Net income

$

504,350

$

36,927

$

518,391

$

(555,318)

$

504,350

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of subsidiaries, net of dividends or distributions

 

(158,013)

 

(41,248)

 

-

 

199,261

 

-

 

Provision for credit losses

 

257

 

-

 

118,298

 

-

 

118,555

 

Amortization of intangibles

 

73

 

-

 

7,009

 

-

 

7,082

 

Depreciation and amortization of premises and equipment

 

559

 

-

 

42,369

 

-

 

42,928

 

Net accretion of discounts and amortization of premiums and deferred fees

 

933

 

20

 

(127,501)

 

-

 

(126,548)

 

Share-based compensation

 

7,517

 

-

 

3,901

 

-

 

11,418

 

Impairment losses on long-lived assets

 

-

 

-

 

2,591

 

-

 

2,591

 

Fair value adjustments on mortgage servicing rights

 

-

 

-

 

25,853

 

-

 

25,853

 

Indemnity reserves on loans sold expense

 

-

 

-

 

1,664

 

-

 

1,664

 

(Earnings) losses from investments under the equity method, net of dividends or distributions

 

(11,683)

 

984

 

(7,762)

 

-

 

(18,461)

 

Deferred income tax (benefit) expense

 

-

 

(1,149)

 

111,067

 

140

 

110,058

 

Loss (gain) on:

 

 

 

 

 

 

 

 

 

 

 

 

 

Disposition of premises and equipment and other productive assets

 

39

 

-

 

(5,172)

 

-

 

(5,133)

 

 

 

Sale of debt securities

 

-

 

-

 

20

 

-

 

20

 

 

 

Sale of loans, including valuation adjustments on loans held for sale and mortgage banking activities

 

-

 

-

 

(11,360)

 

-

 

(11,360)

 

 

 

Sale of foreclosed assets, including write-downs

 

-

 

-

 

(15,858)

 

-

 

(15,858)

 

Acquisitions of loans held-for-sale

 

-

 

-

 

(157,993)

 

-

 

(157,993)

 

Proceeds from sale of loans held-for-sale

 

-

 

-

 

51,067

 

-

 

51,067

 

Net originations on loans held-for-sale

 

-

 

-

 

(208,875)

 

-

 

(208,875)

 

Net decrease (increase) in:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading debt securities

 

-

 

-

 

333,013

 

-

 

333,013

 

 

 

Equity securities

 

(3,225)

 

-

 

(3,257)

 

-

 

(6,482)

 

 

 

Accrued income receivable

 

7

 

99

 

7,651

 

(33)

 

7,724

 

 

 

Other assets

 

(1,559)

 

43

 

(14,130)

 

2,809

 

(12,837)

 

Net decrease in:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest payable

 

(4,594)

 

(1,551)

 

(788)

 

33

 

(6,900)

 

 

 

Pension and other postretirement benefits obligations

 

-

 

-

 

(4,979)

 

-

 

(4,979)

 

 

 

Other liabilities

 

(681)

 

(85)

 

(98,071)

 

(3,212)

 

(102,049)

Total adjustments

 

(170,370)

 

(42,887)

 

48,757

 

198,998

 

34,498

Net cash provided by (used in) operating activities

 

333,980

 

(5,960)

 

567,148

 

(356,320)

 

538,848

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Net decrease (increase) in money market investments

 

35,000

 

2,631

 

(1,000,840)

 

(37,631)

 

(1,000,840)

 

Purchases of investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

-

 

-

 

(13,579,074)

 

-

 

(13,579,074)

 

 

 

Equity

 

-

 

-

 

(15,515)

 

41

 

(15,474)

 

Proceeds from calls, paydowns, maturities and redemptions of investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

-

 

-

 

10,671,630

 

-

 

10,671,630

 

 

 

Held-to-maturity

 

-

 

-

 

5,325

 

-

 

5,325

 

Proceeds from sale of investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale

 

-

 

-

 

99,445

 

-

 

99,445

 

 

 

Equity

 

-

 

-

 

17,083

 

-

 

17,083

 

Net repayments (disbursements) on loans

 

533

 

-

 

(325,012)

 

-

 

(324,479)

 

Proceeds from sale of loans

 

-

 

-

 

77,327

 

-

 

77,327

 

Acquisition of loan portfolios

 

-

 

-

 

(421,482)

 

-

 

(421,482)

 

Payments to acquire other intangible

 

-

 

-

 

(793)

 

-

 

(793)

 

Return of capital from equity method investments

 

-

 

3,329

 

(582)

 

-

 

2,747

 

Capital contribution to subsidiary

 

(4,000)

 

-

 

-

 

4,000

 

-

 

Return of capital from wholly-owned subsidiaries

 

13,000

 

-

 

-

 

(13,000)

 

-

135

 

 

Acquisition of premises and equipment

 

(791)

 

-

 

(45,170)

 

-

 

(45,961)

 

Proceeds from sale of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Premises and equipment and other productive assets

 

3

 

-

 

17,183

 

-

 

17,186

 

 

 

Foreclosed assets

 

-

 

-

 

83,848

 

-

 

83,848

Net cash provided by (used in) investing activities

 

43,745

 

5,960

 

(4,416,627)

 

(46,590)

 

(4,413,512)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in:

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

-

 

-

 

4,463,708

 

(9,242)

 

4,454,466

 

 

 

Assets sold under agreements to repurchase

 

-

 

-

 

(68,433)

 

-

 

(68,433)

 

 

 

Other short-term borrowings

 

-

 

-

 

(41)

 

-

 

(41)

 

Payments of notes payable

 

-

 

-

 

(144,991)

 

-

 

(144,991)

 

Principal payments of finance leases

 

-

 

-

 

(1,269)

 

-

 

(1,269)

 

Proceeds from issuance of notes payable

 

-

 

-

 

75,000

 

-

 

75,000

 

Proceeds from issuance of common stock

 

11,256

 

-

 

(4,733)

 

-

 

6,523

 

Dividends paid to parent company

 

-

 

-

 

(356,300)

 

356,300

 

-

 

Dividends paid

 

(85,863)

 

-

 

-

 

-

 

(85,863)

 

Net payments for repurchase of common stock

 

(250,566)

 

-

 

13

 

(21)

 

(250,574)

 

Return of capital to parent company

 

-

 

-

 

(13,000)

 

13,000

 

-

 

Capital contribution from parent

 

-

 

-

 

4,000

 

(4,000)

 

-

 

Payments related to tax withholding for share-based compensation

 

(5,420)

 

-

 

(12)

 

-

 

(5,432)

Net cash (used in) provided by financing activities

 

(330,593)

 

-

 

3,953,942

 

356,037

 

3,979,386

Net increase in cash and due from banks, and restricted cash

 

47,132

 

-

 

104,463

 

(46,873)

 

104,722

Cash and due from banks, and restricted cash at beginning of period

 

68,278

 

-

 

402,995

 

(68,022)

 

403,251

Cash and due from banks, and restricted cash at end of period

$

115,410

$

-

$

507,458

$

(114,895)

$

507,973

136

 

Note 35 ─ Subsequent events

Popular Bank New York Branches Optimization Strategy

 

On October 27, 2020, Popular Bank (“PB”), the United States mainland banking subsidiary of the Corporation, authorized and approved a strategic realignment of its New York Metro branch network that will result in eleven (11) branch closures and related staffing reductions. The branch closures are expected to be completed, subject to applicable regulatory requirements, by January 29, 2021.

 

As a result of PB’s closure of the eleven (11) New York Metro region branches, the Corporation expects to record a total pre-tax charge of approximately $24.5 million, of which $23.1 million is expected to be recognized during the fourth quarter of 2020. This aggregate pre-tax charge includes approximately $2.4 million in costs associated with severance and related benefit costs for the 83 impacted employees and charges of approximately $20.0 million associated with the impairment of right-of-use assets related to the abandonment of real property leases.

.

 

 

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 33 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 September 30, 2020, the Corporation had a 16.21% interest in EVERTEC, Inc. (“EVERTEC”), whose operating subsidiaries provide transaction processing services throughout the Caribbean and Latin America, and service many of the Corporation’s systems infrastructure and transaction processing businesses. During the quarter ended September 30, 2020, the Corporation recorded $ 6.7 million in earnings from its investment in EVERTEC, which had a carrying amount of $82 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 September 30, 2020, the Corporation recorded $6.5 million in earnings from its investment in BHD León, which had a carrying amount of $147 million, as of the end of the quarter.

 

SIGNIFICANT EVENTS

 

Coronavirus (COVID-19) Pandemic

 

The disruptions related to the COVID-19 pandemic continue to have an impact on the macroeconomic environment and therefore on the financial results of the Corporation. Although certain measures imposed by the governments of Puerto Rico, the United States and United States Virgin Islands, including lockdowns, business closures, mandatory curfews and limits to public activities, were relaxed during the second and third quarters of 2020 to allow for the gradual reopening of the economy, certain restrictions continue in place which results in many businesses not being able to operate at their full capacity. The Corporation’s results for the third quarter of 2020 reflect the benefit of increased economic activity resulting from such reopening and the related improvement in the macroeconomic environment, as well as the impact of the various government stimulus programs launched in response to the pandemic.

137

 

 

As previously disclosed, beginning in March 2020, the Corporation implemented several financial relief programs in response to the pandemic, including loan payment moratoriums, suspensions of foreclosures and other collection activity, as well as waivers of certain fees and service charges. During the third quarter of 2020, the Corporation reinstated the imposition of the fees the Corporation elected to waive in connection with such financial relief programs and resumed its delinquent loan collection efforts, except for loans with an active moratorium. As of September 30, 2020, the Corporation had granted loan payment moratoriums under the program to 125,736 eligible retail customers with an aggregate book value of $4.5 billion, and to 5,063 eligible commercial clients with an aggregate book value of $4.1 billion. In addition, certain participating clients impacted by the seismic activity in the southern region of the island also benefitted from other loan payment moratoriums offered by the Corporation since mid-January 2020. As of September 30, 2020, 124,884 loans in the COVID-19 relief program with an aggregate book value of $7.9 billion had already completed their payment moratorium period, while 5,915 loans with an aggregate book value of $0.7 billion are still under the moratorium. At September 30, 2020, 95% of COVID-19 payment deferrals had expired. After excluding government guaranteed mortgage loans that are still pending to complete their COVID-19 related modifications, 95% of the remaining loans were current on their payments as of quarter end. Given the recent expiration of the payment moratorium, the Corporation will continue to monitor and assess the post-moratorium payment behavior of these borrowers to recognize any deterioration in these loans, and potential loss exposure, in a timely manner.

 

The delinquency status of loans subject to the Corporation’s payment moratorium programs remains unaltered during the payment deferral period and the Corporation continues to accrue interest income during such term.

 

The extent to which the pandemic further impacts our business, results of operations and financial condition (including our regulatory capital, liquidity ratios and realizability of deferred tax assets), as well as the operations of our clients, customers, service providers and suppliers, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the speed and strength of economic recovery and actions taken by governmental authorities and other third parties in response thereto.

 

Loan Repurchase Transaction

 

During the quarter ended September 30, 2020, the Corporation completed bulk loan repurchases from its Ginnie Mae (“GNMA’’), Fannie Mae (“FNMA’’) and Freddie Mac (‘’FHMLC’’) (combined ‘’GSEs’’) loan servicing portfolios with an aggregate balance of $807.6 million. The transactions were executed to limit future exposures to principal and interest advances as well as sundry losses and to deploy liquidity to increase interest income. At September 30, 2020, loans with an aggregate unpaid principal balance of $106 million, corresponding to the portfolio acquired from FNMA and FHMLC, had been modified under the Corporation’s COVID-19 relief or other loss mitigation programs.

 

Table 1 presents a summary of the impact of the transactions.

138

 

Table 1 - Loan Repurchase Transaction

 

 

 

 

 

 

 

 

 

Transaction highlights (in thousands)

FHLMC & FNMA

GNMA [1]

Total

Balance Sheet:

 

 

 

 

 

 

Repurchased mortgage loans

$

119,764

$

687,871

$

807,635

Loan premium [2]

 

6,297

 

-

 

6,297

Allowance for credit losses ("ACL'') [2]

 

(4,144)

 

-

 

(4,144)

Advanced interest receivable

 

816

 

20,575

 

21,391

Income Statement:

 

 

 

 

 

 

Adjustments to indemnity reserves

$

5,052

$

-

$

5,052

Mortgage banking activities:

 

 

 

 

 

 

Mortgage servicing fees

 

208

 

3,145

 

3,353

Mortgage servicing rights fair value adjustments

 

(936)

 

(7,819)

 

(8,755)

Losses on repurchased loans, including interest advances

 

-

 

(10,548)

 

(10,548)

Total mortgage banking activities

 

(728)

 

(15,222)

 

(15,950)

Pre-tax income (loss)

$

4,324

$

(15,222)

$

(10,898)

[1] The GNMA repurchase transaction resulted in an increase in the mortgage portfolio of $364 million quarter-over-quarter. A portion of the acquired loans amounting to $324 million were included in the prior period's ending portfolio balance, in accordance with U.S. GAAP, due to the delinquency status of the loans and the Corporation's right but not the obligation to repurchase the assets.

[2] The repurchased FNMA loans were previously sold with credit recourse and are considered Purchased Credit Deteriorated (“PCD”) at the time of repurchase. Therefore, the establishment of the related ACL is recorded as an addition to the purchase price and the loan premium amortized (decrease interest income) over the life of the loan.

 

Subsequent Events

 

Popular Bank New York Branches Optimization Strategy

 

On October 27, 2020, Popular Bank (“PB”), the United States mainland banking subsidiary of the Corporation, authorized and approved a strategic realignment of its New York Metro branch network that will result in eleven (11) branch closures and related staffing reductions. The branch closures are expected to be completed, subject to applicable regulatory requirements, by January 29, 2021.

 

This strategic realignment, which is expected to allow PB to reduce its operating expenses, leverage resources to enhance its focus on small and medium size businesses, as well as support changing customer behaviors, was approved after an assessment of PB’s current branch network, including its usage, proximity to its other branches and customer needs. Following the completion of the aforementioned branch closures, PB will maintain twenty-seven (27) branches in the New York Metro Region, located throughout Brooklyn, Bronx, Manhattan and Queens, as well as in northern New Jersey, still its largest regional retail network in the mainland US.

 

As a result of PB’s closure of the eleven (11) New York Metro region branches, the Corporation expects to record a total pre-tax charge of approximately $24.5 million, of which $23.1 million is expected to be recognized during the fourth quarter of 2020. This aggregate pre-tax charge includes approximately $2.4 million in costs associated with severance and related benefit costs for the 83 impacted employees and charges of approximately $20.0 million associated with the impairment of right-of-use assets related to the abandonment of real property leases. The Corporation anticipates annual operating expense savings of approximately $13 million as a result of this strategic realignment. These estimates could change as the Corporation’s plan evolves and becomes finalized.

OVERVIEW

139

 

Table 2 provides selected financial data and performance indicators for the quarters and nine months ended September 30, 2020 and 2019.

 

Net interest income on a taxable equivalent basis – Non-GAAP Financial Measure

 

The Corporation’s 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, 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 a non-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. Net interest income on a taxable equivalent basis is presented with its different components in Tables 3 and 4, along with the reconciliation to net interest income (GAAP), for the quarters and nine months ended September 30, 2020 as compared with the same periods in 2019, segregated by major categories of interest earning assets and interest-bearing liabilities.

Non-GAAP financial measures used by the Corporation may not be comparable to similarly named Non-GAAP financial measures used by other companies.

Financial highlights for the quarter ended September 30, 2020

For the quarter ended September 30, 2020, the Corporation recorded net income of $ 168.4 million, compared to net income of $ 165.3 million for the same quarter of the previous year. Net interest income was $461.0 million, a decrease of $16.0 million when compared to the same quarter of 2019. Net interest margin for the third quarter of 2020 was 3.06%, a decrease of 94 basis points when compared to 4.00% for the same quarter of the previous year, driven by the decrease in the Federal Funds Rate and the increase in average deposits, which were redeployed mostly at overnight Fed Funds, and U.S. Treasuries and agency debt securities and $1.4 billion in loans funded under the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”). On a taxable equivalent basis, the net interest margin was of 3.37%, compared to 4.45% for the same quarter of the previous year. The provision for credit losses for the loans portfolio decreased by $17.0 million due to lower net charge-offs and was calculated under the new CECL accounting standard. Non-interest income was lower by $13.9 million mostly due to lower income from mortgage banking activities, impacted by the bulk mortgage loan repurchase completed during the quarter, partially offset by a favorable variance in adjustments to indemnity reserves also associated with this loan repurchase. Operating expenses were lower by $15.4 million mainly due to lower personnel cost as a result of lower incentives.

Total assets at September 30, 2020 amounted to $65.9 billion, compared to $52.1 billion, at December 31, 2019. The increase of $13.8 billion was mainly due to higher money market investments, impacted by the increase in deposits.

Total deposits at September 30, 2020 increased by $12.2 billion when compared to deposits at December 31, 2019, mainly due to an increase in public sector deposits as well as retail and commercial demand and savings accounts at BPPR.

Capital ratios continued to be strong. As of September 30, 2020, the Corporation’s common equity tier 1 capital ratio was 15.93%, while the total capital ratio was 18.49%. Refer to Table 9 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

140

 

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 2019 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.

141

 

Table 2 - Financial Highlights

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Condition Highlights

 

 

 

 

 

 

 

 

Ending balances at

 

 

Average for the nine months ended

(In thousands)

 

September 30, 2020

December 31, 2019

 

 

Variance

 

 

September 30, 2020

 

September 30, 2019

 

Variance

 

Money market investments

$

11,859,924

 

$

3,262,286

 

$

8,597,638

 

$

7,628,941

 

$

1,378,565

 

$

6,250,376

 

Investment securities[1]

 

21,478,048

 

 

17,946,343

 

 

3,531,705

 

 

18,868,073

 

 

15,641,751

 

 

3,226,322

 

Loans

 

29,495,270

 

 

27,466,076

 

 

2,029,194

 

 

28,077,906

 

 

26,714,236

 

 

1,363,670

 

Earning assets

 

62,833,242

 

 

48,674,705

 

 

14,158,537

 

 

54,574,920

 

 

43,734,552

 

 

10,840,368

 

Total assets

 

65,910,369

 

 

52,115,324

 

 

13,795,045

 

 

57,776,191

 

 

49,796,212

 

 

7,979,979

 

Deposits

 

56,021,983

 

 

43,758,606

 

 

12,263,377

 

 

49,875,563

 

 

41,695,960

 

 

8,179,603

 

Borrowings

 

1,431,393

 

 

1,294,986

 

 

136,407

 

 

1,340,437

 

 

2,271,227

 

 

(930,790)

 

Stockholders’ equity[1]

 

5,912,085

 

 

6,016,779

 

 

(104,694)

 

 

5,379,472

 

 

5,655,011

 

 

(275,539)

 

[1] Average balances exclude unrealized gains or losses on debt securities available-for-sale.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Highlights

Quarters ended September 30,

 

Nine months ended September 30,

 

(In thousands, except per share information)

 

2020

 

 

2019

 

 

Variance

 

 

2020

 

 

2019

 

 

Variance

 

Net interest income

$

461,021

 

$

476,991

 

$

(15,970)

 

$

1,384,997

 

$

1,424,270

 

$

(39,273)

 

Provision for credit losses - loan portfolios

 

19,452

 

 

36,539

 

 

(17,087)

 

 

271,551

 

 

118,555

 

 

152,996

 

Provision (reversal) for credit losses - investment securities

 

(314)

 

 

-

 

 

(314)

 

 

(233)

 

 

-

 

 

(233)

 

Non-interest income

 

128,767

 

 

142,712

 

 

(13,945)

 

 

367,465

 

 

417,468

 

 

(50,003)

 

Operating expenses

 

361,066

 

 

376,475

 

 

(15,409)

 

 

1,081,905

 

 

1,086,910

 

 

(5,005)

 

Income before income tax

 

209,584

 

 

206,689

 

 

2,895

 

 

399,239

 

 

636,273

 

 

(237,034)

 

Income tax expense

 

41,168

 

 

41,370

 

 

(202)

 

 

68,893

 

 

131,923

 

 

(63,030)

 

Net income

$

168,416

 

$

165,319

 

$

3,097

 

$

330,346

 

$

504,350

 

$

(174,004)

 

Net income applicable to common stock

$

168,064

 

$

164,389

 

$

3,675

 

$

328,941

 

$

501,558

 

$

(172,617)

 

Net income per common share – basic

$

2.01

 

$

1.71

 

$

0.30

 

$

3.80

 

$

5.17

 

$

(1.37)

 

Net income per common share – diluted

$

2.00

 

$

1.70

 

$

0.30

 

$

3.80

 

$

5.16

 

$

(1.36)

 

Dividends declared per common share

$

0.40

 

$

0.30

 

$

0.10

 

$

1.20

 

$

0.90

 

$

0.30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarters ended September 30,

 

 

 

Nine months ended September 30,

Selected Statistical Information

 

 

 

 

2020

 

 

2019

 

 

 

 

 

2020

 

 

2019

 

Common Stock Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

End market price

 

 

 

$

36.27

 

 

54.08

 

 

 

 

$

36.27

 

 

54.08

 

Book value per common share at period end

 

 

69.94

 

 

60.57

 

 

 

 

 

69.94

 

 

60.57

 

Profitability Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on assets

 

 

 

 

1.06

%

1.29

%

 

 

 

0.76

%

1.35

%

Return on common equity

 

 

 

 

12.46

 

 

11.44

 

 

 

 

 

8.21

 

 

11.96

 

Net interest spread

 

 

2.93

 

 

3.73

 

 

 

 

 

3.23

 

 

3.82

 

Net interest spread (taxable equivalent) - Non-GAAP

 

 

3.24

 

 

4.18

 

 

 

 

 

3.56

 

 

4.22

 

Net interest margin

 

 

3.06

 

 

4.00

 

 

 

 

 

3.39

 

 

4.10

 

Net interest margin (taxable equivalent) - Non-GAAP

 

 

3.37

 

 

4.45

 

 

 

 

 

3.72

 

 

4.51

 

Capitalization Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average equity to average assets

 

 

 

 

8.53

%

11.29

%

 

 

 

9.31

%

11.36

%

Common equity Tier 1 capital

 

 

 

 

15.93

 

 

17.46

 

 

 

 

 

15.93

 

 

17.46

 

Tier I capital

 

 

 

 

16.01

 

 

17.46

 

 

 

 

 

16.01

 

 

17.46

 

Total capital

 

 

 

 

18.49

 

 

20.05

 

 

 

 

 

18.49

 

 

20.05

 

Tier 1 leverage

 

 

 

 

7.80

 

 

9.87

 

 

 

 

 

7.80

 

 

9.87

 

142

 

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.

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 Credit Losses; (iii) Loans Acquired with Deteriorated Credit Quality; (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 2019 Form 10-K. Also, refer to Note 2 to the Consolidated Financial Statements included in the 2019 Form 10-K for a summary of the Corporation’s significant accounting policies, including those related to business combinations, and to Notes 3 and 4 to the Consolidated Financial Statements included in this Form 10-Q for information on recently adopted accounting standard updates and changes to our significant accounting policies.

143

 

OPERATING RESULTS ANALYSIS

 

NET INTEREST INCOME

 

Net interest income for the third quarter of 2020 was $461.0 million, a decrease of $16.0 million when compared to $477.0 million for the same quarter of 2019. Taxable equivalent net interest income was $506.8 million for the third quarter of 2020, a decrease of $23.9 million when compared to $530.6 million for the same quarter of 2019.

 

Net interest margin for the third quarter of 2020 was 3.06%, a decrease of 94 basis points when compared to 4.00% for the same quarter of the previous year. The lower net interest margin for the quarter is driven by the decrease of 225 basis points in the Federal Funds Rate when compared to the same quarter in 2019 and the increase in average deposits by $12.1 billion which were redeployed mostly in overnight Fed Funds, U.S. Treasury and agency debt securities and $1.4 billion in loans funded under the SBA PPP. These assets, although accretive to net interest income, are low yielding assets and compressed the net interest margin. Management took actions to deploy a portion of this liquidity by acquiring investment securities, including U.S. agency mortgage backed securities and executing the $807.6 million in bulk loan repurchases from its GNMA, FNMA and FHMLC loan servicing portfolios. The net interest margin, on a taxable equivalent basis, for the third quarter of 2020 was 3.37%, a decrease of 108 basis points when compared to 4.45% for the same quarter of 2019.The detailed variances of the decrease in net interest income are described below:

 

Negative variances:

Lower interest income from money market investments related to the decrease in the Federal funds rate, partially offset by an increase in average volume;

Lower interest income from investment securities due to lower rates, partially offset by a higher volume of U.S. Treasuries and U.S. agency mortgage backed agency securities to deploy liquidity and to benefit from the Puerto Rico tax exemption of these assets; and

Lower interest income from loans driven by the lower amortization of fair value discount of the auto loan portfolio acquired from Wells Fargo’s auto finance subsidiary in Puerto Rico during 2019 (“Reliable”), waived fees on past due loans associated to the moratorium to mitigate the financial impact of the COVID-19 pandemic and by the impact of the decrease in rates in variable rate loans and loans issued under a lower interest rate environment. Partially offsetting these negative variances is a higher average loan balance mainly auto loan financing and SBA PPP loans. The latter carry a yield of approximately 2.88%, including the amortization of fees received under the program.

 

Positive variances:

Lower interest expense on deposits due to lower interest cost by 56 basis points resulting from the decrease in market rates, mostly on Puerto Rico Government and U.S. deposits, and management actions to reduce rates in most categories. On the other hand, interest bearing deposits increased $8.1 billion when compared with the same quarter in 2019, therefore increasing interest expense. The increase in deposit balances that we have experienced in the past three years has been amplified during 2020 by the inflow of deposits from the relief and assistance programs provided by the P.R. and Federal governments in response to the pandemic.

 

Interest income for the quarter ended September 30, 2020, included the amortization of deferred loans fees, prepayment penalties, late fees and the amortization of premium/discounts, amounting to $13.7 million, including $6.7 million on fees related to SBA PPP loans, compared with $13.2 million income from the same quarter in 2019. Excluding the impact of SBA PPP fees, the decrease is related to lower amortization of the fair value discount of the portfolio acquired from Reliable and to waived fees.

 

144

 

 

Table 3 - Analysis of Levels & Yields on a Taxable Equivalent Basis (Non-GAAP)

 

Quarters ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variance

 

Average Volume

 

Average Yields / Costs

 

 

 

Interest

 

Attributable to

 

2020

 

2019

Variance

 

2020

 

2019

 

Variance

 

 

 

 

 

2020

 

2019

 

Variance

 

Rate

 

Volume

 

(In millions)

 

 

 

 

 

 

 

 

 

 

(In thousands)

$

10,853

$

3,532

$

7,321

 

0.10

%

2.15

%

(2.05)

%

 

Money market investments

$

2,773

$

19,119

$

(16,346)

$

(30,107)

$

13,761

 

20,405

 

17,022

 

3,383

 

2.22

 

3.25

 

(1.03)

 

 

Investment securities [1]

 

113,603

 

139,130

 

(25,527)

 

(49,491)

 

23,964

 

79

 

63

 

16

 

5.44

 

8.18

 

(2.74)

 

 

Trading securities

 

1,079

 

1,289

 

(210)

 

(498)

 

288

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total money market,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

investment and trading

 

 

 

 

 

 

 

 

 

 

 

31,337

 

20,617

 

10,720

 

1.49

 

3.08

 

(1.59)

 

 

 

securities

 

117,455

 

159,538

 

(42,083)

 

(80,096)

 

38,013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

13,669

 

12,167

 

1,502

 

4.95

 

6.11

 

(1.16)

 

 

 

Commercial

 

170,124

 

187,270

 

(17,146)

 

(38,522)

 

21,376

 

930

 

809

 

121

 

5.67

 

6.50

 

(0.83)

 

 

 

Construction

 

13,251

 

13,256

 

(5)

 

(1,844)

 

1,839

 

1,122

 

1,004

 

118

 

6.08

 

6.03

 

0.05

 

 

 

Leasing

 

17,069

 

15,133

 

1,936

 

130

 

1,806

 

7,094

 

7,127

 

(33)

 

5.40

 

5.37

 

0.03

 

 

 

Mortgage

 

95,770

 

95,708

 

62

 

512

 

(450)

 

2,722

 

2,918

 

(196)

 

11.21

 

11.77

 

(0.56)

 

 

 

Consumer

 

76,696

 

86,544

 

(9,848)

 

(4,354)

 

(5,493)

 

3,006

 

2,867

 

139

 

9.08

 

9.44

 

(0.36)

 

 

 

Auto

 

68,604

 

68,183

 

421

 

(2,803)

 

3,223

 

28,543

 

26,892

 

1,651

 

6.16

 

6.89

 

(0.73)

 

 

Total loans

 

441,514

 

466,094

 

(24,580)

 

(46,881)

 

22,301

$

59,880

$

47,509

$

12,371

 

3.72

%

5.24

%

(1.52)

%

 

Total earning assets

$

558,969

$

625,632

$

(66,663)

$

(126,977)

$

60,314

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits:

 

 

 

 

 

 

 

 

 

 

$

21,225

$

15,958

$

5,267

 

0.17

%

0.94

%

(0.77)

%

 

 

NOW and money market [2]

$

9,063

$

37,670

$

(28,607)

$

(36,237)

$

7,630

 

13,103

 

10,241

 

2,862

 

0.25

 

0.46

 

(0.21)

 

 

 

Savings

 

8,328

 

11,839

 

(3,511)

 

(6,737)

 

3,226

 

7,810

 

7,829

 

(19)

 

1.03

 

1.48

 

(0.45)

 

 

 

Time deposits

 

20,164

 

29,251

 

(9,087)

 

(8,441)

 

(646)

 

42,138

 

34,028

 

8,110

 

0.35

 

0.92

 

(0.57)

 

 

Total deposits

 

37,555

 

78,760

 

(41,205)

 

(51,415)

 

10,210

 

138

 

236

 

(98)

 

1.19

 

2.64

 

(1.45)

 

 

Short-term borrowings

 

416

 

1,573

 

(1,157)

 

(646)

 

(511)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other medium and

 

 

 

 

 

 

 

 

 

 

 

1,220

 

1,204

 

16

 

4.67

 

4.88

 

(0.21)

 

 

 

long-term debt

 

14,209

 

14,653

 

(444)

 

(567)

 

123

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest bearing

 

 

 

 

 

 

 

 

 

 

 

43,496

 

35,468

 

8,028

 

0.48

 

1.06

 

(0.58)

 

 

 

liabilities

 

52,180

 

94,986

 

(42,806)

 

(52,628)

 

9,822

 

12,806

 

8,794

 

4,012

 

 

 

 

 

 

 

 

Demand deposits

 

 

 

 

 

 

 

 

 

 

 

3,578

 

3,247

 

331

 

 

 

 

 

 

 

 

Other sources of funds

 

 

 

 

 

 

 

 

 

 

$

59,880

$

47,509

$

12,371

 

0.35

%

0.79

%

(0.44)

%

 

Total source of funds

 

52,180

 

94,986

 

(42,806)

 

(52,628)

 

9,822

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin/

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.37

%

4.45

%

(1.08)

%

 

 

income on a taxable equivalent basis (Non-GAAP)

 

506,789

 

530,646

 

(23,857)

$

(74,349)

$

50,492

 

 

 

 

 

 

 

3.24

%

4.18

%

(0.94)

%

 

Net interest spread

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable equivalent adjustment

 

45,769

 

53,656

 

(7,887)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin/ income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.06

%

4.00

%

(0.94)

%

 

 

non-taxable equivalent basis (GAAP)

$

461,020

$

476,990

$

(15,970)

 

 

 

 

Note: The changes that are not due solely to volume or rate are allocated to volume and rate based on the proportion of the change in each category.

[1] Average outstanding securities balances are based upon amortized cost excluding any unrealized gains or losses on securities available-for-sale.

[2] Includes interest bearing demand deposits corresponding to certain government entities in Puerto Rico.

145

 

Net interest income for the nine months period ended September 30, 2020 was $1.4 billion, flat when compared to the same period in 2019, reflecting a decrease of $39.3 million. Taxable equivalent net interest income was $1.5 billion for the nine months ended September 30, 2020, compared to $1.6 billion for the same period of 2019, a decrease of $43.9 million. Net interest margin was 3.39%, a decrease of 71 basis points when compared to 4.10% in 2019. The drivers to the decrease in net interest margin are similar to those of the quarter; driven principally by the lower market rates, the increase in deposit volume and the investment of those deposits mostly in money market investments, debt securities and in loans, mainly under the SBA PPP. Net interest margin, on a taxable equivalent basis, for the nine months ended September 30, 2020 was 3.72%, a decrease of 79 basis points when compared to the 4.51% for the same period of 2019. The drivers of the variances in net interest income for the nine-month period are:

 

Negative variances:

Lower interest income from money market investments due to the cumulative impact of the decreases in the Federal Reserve interest rate that occurred in 2019 and in March 2020, partially offset by higher volume;

Lower interest income from investment securities due to lower rates, partially offset by a higher volume of U.S. Treasuries and U.S. agency mortgage backed agency securities to deploy liquidity and to benefit from the Puerto Rico tax exemption of these assets and higher yield; and,

Lower interest income from loans mainly driven by a lower amortization on the discount on the portfolio acquired from Reliable, waived fees on past due loans associated to the moratoriums granted in connection with the COVID-19 pandemic, and the impact of the decrease in rates in variable rate loans and new production, partially offset by higher volume of loans, mainly SBA PPP loans and auto loan financing.

 

Positive variances:

Lower interest expense on deposits due to lower interest cost resulting from the decrease in market rates, mostly on Puerto Rico Government and U.S. deposits and management action to reduce deposit cost in most categories, partially offset by higher average balance of interest-bearing deposits.

 

Interest income for the nine months ended September 30, 2020 included the amortization of deferred loans fees, prepayment penalties, late fees and the amortization of premium/discounts, amounting to $39.3 million income, including $10.9 million in SBA PPP loan fees, compared with $43.9 million in income for the same period in 2019. Excluding SBA PPP loans, the decrease is mostly due to a lower amortization from the Reliable portfolio, as mentioned above, and waived fees from the moratoriums granted as relief as a result of the COVID-19 pandemic.

 

146

 

Table 4 - Analysis of Levels & Yields on a Taxable Equivalent Basis from Continuing Operations (Non-GAAP)

 

Nine months ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variance

Average Volume

 

Average Yields / Costs

 

 

 

Interest

 

Attributable to

 

2020

 

2019

Variance

 

2020

 

2019

 

Variance

 

 

 

 

 

2020

 

2019

 

Variance

 

Rate

 

Volume

 

(In millions)

 

 

 

 

 

 

 

 

 

 

(In thousands)

$

7,629

$

4,049

$

3,580

 

0.29

%

2.34

%

(2.05)

%

 

Money market investments

$

16,789

$

70,874

$

(54,085)

$

(89,108)

$

35,023

 

18,804

 

15,576

 

3,228

 

2.45

 

3.22

 

(0.77)

 

 

Investment securities [1]

 

344,926

 

375,705

 

(30,779)

 

(96,069)

 

65,290

 

64

 

66

 

(2)

 

6.20

 

7.81

 

(1.61)

 

 

Trading securities

 

2,960

 

3,852

 

(892)

 

(772)

 

(120)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total money market,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

investment and trading

 

 

 

 

 

 

 

 

 

 

 

26,497

 

19,691

 

6,806

 

1.84

 

3.06

 

(1.22)

 

 

 

securities

 

364,675

 

450,431

 

(85,756)

 

(185,949)

 

100,193

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

13,122

 

12,137

 

985

 

5.31

 

6.20

 

(0.89)

 

 

 

Commercial

 

522,126

 

562,355

 

(40,229)

 

(83,484)

 

43,255

 

909

 

807

 

102

 

5.83

 

6.69

 

(0.86)

 

 

 

Construction

 

39,649

 

40,424

 

(775)

 

(5,515)

 

4,740

 

1,092

 

973

 

119

 

6.04

 

6.06

 

(0.02)

 

 

 

Leasing

 

49,480

 

44,222

 

5,258

 

(134)

 

5,392

 

7,054

 

7,125

 

(71)

 

5.32

 

5.36

 

(0.04)

 

 

 

Mortgage

 

281,191

 

286,305

 

(5,114)

 

(2,265)

 

(2,849)

 

2,916

 

2,865

 

51

 

11.40

 

11.88

 

(0.48)

 

 

 

Consumer

 

248,912

 

254,615

 

(5,703)

 

(10,583)

 

4,880

 

2,985

 

2,807

 

178

 

9.06

 

9.69

 

(0.63)

 

 

 

Auto

 

202,372

 

203,489

 

(1,117)

 

(13,630)

 

12,513

 

28,078

 

26,714

 

1,364

 

6.39

 

6.96

 

(0.57)

 

 

Total loans

 

1,343,730

 

1,391,410

 

(47,680)

 

(115,611)

 

67,931

$

54,575

$

46,405

$

8,170

 

4.18

%

5.30

%

(1.12)

%

 

Total earning assets

$

1,708,405

$

1,841,841

$

(133,436)

$

(301,560)

$

168,124

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits:

 

 

 

 

 

 

 

 

 

 

$

18,956

$

14,994

$

3,962

 

0.32

%

0.99

%

(0.67)

%

 

 

NOW and money market [2]

$

45,909

$

110,699

$

(64,790)

$

(82,187)

$

17,397

 

11,899

 

10,053

 

1,846

 

0.34

 

0.43

 

(0.09)

 

 

 

Savings

 

30,239

 

32,200

 

(1,961)

 

(8,882)

 

6,921

 

8,076

 

7,778

 

298

 

1.10

 

1.46

 

(0.36)

 

 

 

Time deposits

 

66,287

 

85,136

 

(18,849)

 

(20,303)

 

1,454

 

38,931

 

32,825

 

6,106

 

0.49

 

0.93

 

(0.44)

 

 

Total deposits

 

142,435

 

228,035

 

(85,600)

 

(111,372)

 

25,772

 

178

 

242

 

(64)

 

1.58

 

2.67

 

(1.09)

 

 

Short-term borrowings

 

2,109

 

4,828

 

(2,719)

 

(1,576)

 

(1,143)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other medium and

 

 

 

 

 

 

 

 

 

 

 

1,162

 

1,210

 

(48)

 

4.89

 

4.83

 

0.06

 

 

 

long-term debt

 

42,587

 

43,791

 

(1,204)

 

227

 

(1,431)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest bearing

 

 

 

 

 

 

 

 

 

 

 

40,271

 

34,277

 

5,994

 

0.62

 

1.08

 

(0.46)

 

 

 

liabilities

 

187,131

 

276,654

 

(89,523)

 

(112,721)

 

23,198

 

10,945

 

8,871

 

2,074

 

 

 

 

 

 

 

 

Demand deposits

 

 

 

 

 

 

 

 

 

 

 

3,359

 

3,257

 

102

 

 

 

 

 

 

 

 

Other sources of funds

 

 

 

 

 

 

 

 

 

 

$

54,575

$

46,405

$

8,170

 

0.46

%

0.80

%

(0.34)

%

 

Total source of funds

 

187,131

 

276,654

 

(89,523)

 

(112,721)

 

23,198

 

 

 

 

 

 

3.72

%

4.51

%

(0.79)

%

 

Net interest margin/ income on a taxable equivalent basis (Non-GAAP)

 

1,521,274

 

1,565,187

 

(43,913)

$

(188,839)

$

144,926

 

 

 

 

 

 

 

3.56

%

4.22

%

(0.66)

%

 

Net interest spread

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable equivalent adjustment

 

136,278

 

140,918

 

(4,640)

 

 

 

 

 

 

 

 

 

 

 

3.39

%

4.10

%

(0.71)

%

 

Net interest margin/ income non-taxable equivalent basis (GAAP)

$

1,384,996

$

1,424,269

$

(39,273)

 

 

 

 

Note: The changes that are not due solely to volume or rate are allocated to volume and rate based on the proportion of the change in each category.

[1] Average outstanding securities balances are based upon amortized cost excluding any unrealized gains or losses on securities available-for-sale.

[2] Includes interest bearing demand deposits corresponding to certain government entities in Puerto Rico.

147

 

Provision for Credit Losses - Loans Held-in-Portfolio

The Corporation’s provision for credit losses was $19.5 million for the quarter ended September 30, 2020, compared to $36.5 million for the quarter ended September 30, 2019, a decrease of $17.0 million.

As discussed in Note 9 to the Consolidated Financial Statements, within the process to estimate its allowance for credit losses (“ACL”), in the third quarter of 2020 the Corporation applied probability weights to the outcomes of simulations using Moody’s Analytics’ Baseline, S3 (pessimistic) and S1 (optimistic) scenarios. The impact of applying probability weights to alternative scenarios, resulted in an increase in estimated reserves of approximately $31 million. This effect was partially offset by the net impact of net charge-offs, changes to portfolio balances and credit quality.

The provision for credit losses for the BPPR segment was $7.7 million for the quarter ended September 30, 2020, compared to $34.5 million for the quarter ended September 30, 2019, a decrease of $26.8 million. The decrease was mainly due to lower net charge-offs for this quarter, offset by the implementation of the CECL model in 2020. The Popular U.S. segment provision for credit losses amounted to $11.8 million for the quarter ended September 30, 2020, an increase of $9.7 million when compared to $2.1 million for the same quarter in 2019. The increase was due in part to the use of the probability weights in the estimation process during this quarter.

The Corporation’s provision for credit losses was $271.6 million for the nine months ended September 30, 2020, compared to $118.6 million for the nine months ended September 30, 2019, an increase of $153.0 million.

The provision for credit losses for the BPPR segment was $181.1 million for the nine months ended September 30, 2020, compared to $94.9 million for the nine months ended September 30, 2019, an increase of $86.2 million. The Popular U.S. segment provision for credit losses amounted to $90.4 million for the nine months ended September 30, 2020, an increase of $66.8 million when compared to $23.6 million for the same period in 2019.

The increase in the provision for credit losses for the nine month period ended September 30, 2020 when compared to the period of the previous year reflects the impact of the adoption of the new CECL accounting standard, discussed in Note 2 to the Consolidated Financial Statements, as well as the estimated impact of the COVID-19 pandemic. During the quarter ended March 31, 2020, the Corporation recorded $134 million in incremental reserves resulting from the deterioration in the economic outlook driven by the COVID-19 pandemic. Management will continue to carefully review the exposure of the portfolios to COVID-19 related risks, as well as changes in the economic outlook and their effect on credit quality.

Refer to the Credit Risk section of this MD&A for a detailed analysis of net charge-offs, non-performing assets, the allowance for credit losses and selected loan losses statistics.

 

Provision for Credit Losses – Investment Securities

 

During the quarter ended September 30, 2020, the Corporation recorded a release of $0.3 million on its Allowance for Credit Losses (“ACL”) related to its investment securities portfolio of obligations from the Government of Puerto Rico, states and political subdivisions. The decrease in the ACL is mainly related to the lower balances of obligations from the Government of Puerto Rico, states and political subdivisions. At September 30, 2020, the total allowance for credit losses for this portfolio amounted to $12.4 million.

148

 

Non-Interest Income

 

Non-interest income amounted to $128.8 million for the quarter ended September 30, 2020, compared to $142.7 million for the same quarter of the previous year. The decrease in non-interest income by $13.9 million was primarily driven by:

lower service charges on deposit accounts by $4.1 million, mainly in the BPPR segment, principally due to higher average deposit balances;

lower income from mortgage banking activities by $20.0 million mainly due to higher unfavorable fair value adjustments on mortgage servicing rights (“MSRs”) by $15.6 million, of which $8.8 million was related to the bulk loan repurchases from the Corporation’s GNMA, FNMA and FHLMC loan servicing portfolio; and $10.5 million in interest advanced losses related to the loans repurchased in bulk from GNMA; partially offset by higher gains on securitization transactions and whole loan sales by $5.5 million; and

an unfavorable variance in net loss (gain) on sale of loans, including valuation adjustments, of $2.2 million mainly due to a $2.0 million negative adjustment recognized during the third quarter of 2020 on the held-for-sale taxi medallion portfolio at PB;

Partially offset by:

an increase in net gain, including impairment, on equity securities of $4.9 million mainly related to a $4.1 million gain on sale of certain equity securities at PB during the third quarter of 2020; and

a favorable variance in adjustments to indemnity reserves of $7.6 million mainly due to a $5.1 million recourse reserve release related to the bulk loan repurchase from FNMA and FHLMC.

 

Non-interest income amounted to $367.5 million for the nine months ended September 30, 2020, compared to $417.5 million for the same period of the previous year. Non-interest income decreased by $50.0 million primarily driven by:

lower service charges on deposit accounts by $10.6 million due to the combined impact of lower transactions and the waiver of fees as a result of the pandemic and higher average balances during the third quarter of 2020, as previously explained;

lower other service fees by $22.9 million mainly due to lower credit and debit card fees by $11.2 million mainly due to lower transactional volumes and the waiver of service charges and late charges as a result of the pandemic, lower insurance fees by $6.4 million in part due to $3.5 million in contingent commissions received during the second quarter of 2019, and lower other fees by $5.1 million in part due to lower retail auto loan servicing fee income; and

lower income from mortgage banking activities by $18.0 million mainly due to lower mortgage servicing fees by $2.4 million due to a decrease in collections resulting from the payment moratoriums; higher unfavorable fair value adjustments on MSRs by $7.5 million, of which $8.8 million was related to the previously mentioned bulk loan repurchases; $10.5 million in interest advanced losses related to the previously mentioned bulk loan repurchases from GNMA and higher realized losses on closed derivatives positions by $2.8 million; partially offset by higher gains on securitization transactions and whole loan sales by $5.7 million.

 

 

149

 

Operating Expenses

 

Operating expenses amounted to $361.1 million for the quarter ended September 30, 2020, a decrease of $15.4 million when compared with the same quarter of 2019, driven primarily by:

 

Lower personnel cost by $11.7 million mainly due to lower incentives related to the profit-sharing plan which is tied to the Corporation’s financial performance by $9.4 million and lower commission, incentive and other bonuses by $4.5 million;

 

Lower professional fees by $2.1 million due to lower advisory expenses by $2.2 million related to corporate initiatives and lower collections, appraisals and other credit related fees by $1.3 million; partially offset by higher programming, processing and other technology services by $1.8 million mainly due to higher volume of transactions;

 

Lower business promotions by $3.7 million due to lower advertising expense by $1.9 million and lower consumer reward program expense by $0.9 million;

 

Lower OREO expenses by $1.4 million due to lower foreclosure expenses; and

 

Lower other operating expenses by $2.3 million mainly due to lower pension plan cost by $3.3 million due to annual changes in actuarial assumptions, $2.6 million loss recorded in 2019 related to an undeveloped corporate site which was placed for sale and subsequently sold, and lower transportation and traveling expenses by $1.3 million due to the pandemic; partially offset by higher credit and debit card processing expenses by $2.3 million due to higher volume of transactions.

 

These decreases were partially offset by:

 

Higher equipment expenses by $2.5 million mainly due to higher software license cost; and

 

Higher FDIC deposit insurance expense by $3.6 million due to an increase in the assessment base.

 

Operating expenses amounted to $1.1 billion for the nine months ended September 30, 2020, a decrease of $5.0 million when compared with the same period of 2019, driven primarily by:

 

Lower personnel cost by $10.4 million mainly due to due to lower incentives related to the profit-sharing plan by $19.3 million and lower commission, incentive and other bonuses by $11.6 million; partially offset by higher salaries by $17.5 million due to increase in headcount, annual salary revision and additional calendar hours of accrued salaries;

 

Lower business promotions by $11.0 million due to lower advertising expense by $7.4 million as a result of expenses associated with the integration of Reliable during 2019 and lower consumer reward program expense by $2.7 million;

 

Lower OREO expenses by $3.2 million due to the temporary suspension of foreclosure activity as part of the pandemic relief measures; and

 

Lower other operating expenses by $2.7 million mainly due to lower pension plan cost by $10.0 million due to annual changes in actuarial assumptions and lower transportation and traveling expenses by $2.5 million due to the pandemic; partially offset by higher provision for unused loan commitments by $9.9 million, higher credit and debit card processing expenses by $4.3 million and higher reserves for operational losses by $2.8 million.

 

These decreases were partially offset by:

 

Higher net occupancy expenses by $5.1 million due to higher cleaning costs and lower building rental and parking income;

 

Higher equipment expenses by $3.9 million due to higher software license costs and maintenance expenses;

 

Higher professional fees by $8.8 million primarily due to higher advisory expenses by $9.0 million related to Corporate initiatives, higher audit and tax services by $3.9 million mainly related to work on new accounting pronouncements and higher

150

 

programming, processing and other technology services by $2.8 million; partially offset by lower collections, appraisals and other credit related fees by $3.0 million due to the temporary suspension of collection efforts related to the pandemic and lower legal fees by $2.5 million; and

 

Higher FDIC deposit insurance expense by $4.0 million due to an increase in the assessment base.

 

Table 5 - Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

Quarters ended September 30,

 

Nine months ended September 30,

(In thousands)

2020

2019

Variance

 

2020

 

2019

 

Variance

Personnel costs:

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries

$

91,891

$

90,016

$

1,875

$

278,116

$

260,627

$

17,489

 

Commissions, incentives and other bonuses

 

17,849

 

22,360

 

(4,511)

 

59,183

 

70,757

 

(11,574)

 

Pension, postretirement and medical insurance

 

10,639

 

10,356

 

283

 

31,669

 

30,523

 

1,146

 

Other personnel costs, including payroll taxes

 

15,562

 

24,950

 

(9,388)

 

52,970

 

70,391

 

(17,421)

 

Total personnel costs

 

135,941

 

147,682

 

(11,741)

 

421,938

 

432,298

 

(10,360)

Net occupancy expenses

 

25,907

 

24,595

 

1,312

 

76,552

 

71,431

 

5,121

Equipment expenses

 

24,088

 

21,596

 

2,492

 

66,537

 

62,624

 

3,913

Other taxes

 

13,918

 

14,028

 

(110)

 

40,922

 

38,267

 

2,655

Professional fees:

 

 

 

 

 

 

 

 

 

 

 

 

 

Collections, appraisals and other credit related fees

 

2,862

 

4,131

 

(1,269)

 

9,640

 

12,596

 

(2,956)

 

Programming, processing and other technology services

 

64,876

 

63,092

 

1,784

 

187,082

 

184,303

 

2,779

 

Legal fees, excluding collections

 

2,707

 

2,415

 

292

 

7,877

 

10,350

 

(2,473)

 

Other professional fees

 

26,029

 

28,923

 

(2,894)

 

85,493

 

74,026

 

11,467

 

Total professional fees

 

96,474

 

98,561

 

(2,087)

 

290,092

 

281,275

 

8,817

Communications

 

5,694

 

5,881

 

(187)

 

17,222

 

17,685

 

(463)

Business promotion

 

14,664

 

18,365

 

(3,701)

 

41,142

 

52,158

 

(11,016)

FDIC deposit insurance

 

6,568

 

2,923

 

3,645

 

16,988

 

13,007

 

3,981

Other real estate owned (OREO) (income) expenses

 

(1,615)

 

(185)

 

(1,430)

 

520

 

3,729

 

(3,209)

Other operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit and debit card processing, volume and interchange expenses

 

11,744

 

9,450

 

2,294

 

31,899

 

27,573

 

4,326

 

Operational losses

 

8,837

 

8,832

 

5

 

21,339

 

18,498

 

2,841

 

All other

 

17,770

 

22,348

 

(4,578)

 

51,409

 

61,283

 

(9,874)

 

Total other operating expenses

 

38,351

 

40,630

 

(2,279)

 

104,647

 

107,354

 

(2,707)

Amortization of intangibles

 

1,076

 

2,399

 

(1,323)

 

5,345

 

7,082

 

(1,737)

Total operating expenses

$

361,066

$

376,475

$

(15,409)

$

1,081,905

$

1,086,910

$

(5,005)

 

INCOME TAXES

For the nine-month period ended September 30, 2020, the Corporation recorded an income tax expense of $68.9 million with an effective tax rate (“ETR”) of 17%, compared to $131.9 million with an ETR of 21% for the same period of 2019. The income tax expense and ETR for the nine-month period ended September 30, 2020 reflects the impact of lower pre-tax income, resulting primarily from a higher provision for credit losses and the impact of the COVID-19 pandemic. The Corporation expects a consolidated ETR for the fourth quarter of 2020 to be within a range of 19% to 22%. This expectation will be impacted by the composition and source of its pre-tax income.

At September 30, 2020, the Corporation had a deferred tax asset amounting to $0.9 billion, net of a valuation allowance of $0.5 billion. The deferred tax asset related to the U.S. operations was $0.3 billion, net of a valuation allowance of $0.4 billion.

Refer to Note 31 to the Consolidated Financial Statements for a reconciliation of the statutory income tax rate to the effective tax rate and additional information on the income tax expense and deferred tax asset balances.

 

151

 

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 33 to the Consolidated Financial Statements.

 

The Corporate group reported a net income of $4.8 million for the quarter ended September 30, 2020, compared with a net income of $3.4 million for the same quarter of the previous year. For the nine-month period ended September 30, 2020, the Corporate group reported a net income of $7.3 million, compared to a net income of $5.4 million for the same period of the previous year.

 

Highlights on the earnings results for the reportable segments are discussed below:

 

Banco Popular de Puerto Rico

 

The Banco Popular de Puerto Rico reportable segment’s net income amounted to $153.8 million for the quarter ended September 30, 2020, compared with net income of $143.3 million for the same quarter of the previous year. The principal factors that contributed to the variance in the financial results include the following:

 

Lower net interest income by $17.5 million mainly due to:

 

Lower interest income from investment securities by $34.6 million largely due to lower yields due to the decrease in the Federal Reserve interest rates, partially offset by higher average balances; and

 

Lower interest income from loans by $16.3 million due to lower yields, principally in the commercial portfolio.

 

Partially offset by:

 

Lower interest expense on deposits by $32.9 million mainly due to a lower cost of public sector deposits, partially offset by higher average balances.

 

The net interest margin for the quarter ended September 30, 2020 was 3.13% compared to 4.26% for the same quarter in the previous year. The decrease in net interest margin is driven by a lower yield in earning assets, and earning asset mix, partially offset by a lower cost of public sector deposits.

 

The total provision for credit losses for the third quarter of 2020 was $7.3 million, compared to $34.5 million for the same quarter of the previous year. The decrease of $27.2 million was mainly due to lower net charge offs in the quarter.

 

Non-interest income was lower by $17.3 million mainly due to:

 

Lower service charges on deposit accounts by $3.2 million due to lower transaction volumes; and

 

Unfavorable variance in mortgage banking activities by $20.9 million mainly due to $10.5 million in interest advanced losses related to the loans repurchased in bulk from GNMA; and an unfavorable variance in fair value adjustment on mortgage servicing rights of $15.6 million, of which $8.8 million was related to the bulk loan repurchase; partially offset by higher gains on securitization transactions and whole loan sales by $5.5 million.

 

Partially offset by:

 

Favorable variance in adjustments to indemnity reserves of $7.6 million mainly due to the release of reserves associated with the bulk loan repurchase completed in the quarter.

 

Lower operating expenses by $18.7 million mostly due to:

152

 

 

Lower personnel cost by $9.3 million due mainly to the profit-sharing plan accrual of $8.3 million recorded in the third quarter of 2019;

 

Lower professional fees by $8.6 million due to lower advisory services and lower collection and credit related expenses; and

 

Lower OREO expenses by $3.0 million due to lower maintenance costs on foreclosed mortgage properties.

 

The Banco Popular de Puerto Rico reportable segment’s net income amounted to $339.8 million for the nine-month period ended September 30, 2020, compared with net income of $457.4 million for the same period of the previous year. The principal factors that contributed to the variance in the financial results include the following:

 

Lower net interest income by $39.6 million mainly due to:

 

Lower interest income from investment securities by $78.7 million largely due lower yields due to the decrease in the Federal Reserve interest rates, partially offset by higher average balances; and

 

Lower interest income from loans by $38.4 million due to lower yields, mainly in the commercial portfolio.

 

Partially offset by:

 

Lower interest expense on deposits by $76.1 million mainly due to a lower cost of public sector deposits.

 

The net interest margin for the nine-month period ended September 30, 2020 decreased to 3.53% from 4.36% for the same period in the previous year, mainly due to lower yields in earning assets, partially offset by a lower cost of public sector deposits.

 

The total provision for credit losses for the nine months ended September 30, 2020 was $180.7 million, compared to $94.7 million for the same period of the previous year. The increase of $86 million was mainly due to the impact of the adoption of the new CECL accounting standard and the estimated impact of the COVID-19 pandemic, partially offset by lower net charge offs in the third quarter of 2020.

 

Non-interest income was lower by $53.5 million mainly due to:

 

Lower service charges on deposit accounts by $7.8 million due to lower transaction volumes and the waiver of fees as part of the pandemic relief initiatives;

 

Lower other service fees by $21.5 million driven by lower debit and credit card transactions and the waiver of fees as part of the pandemic relief initiatives;

 

Lower income from mortgage banking activities by $19.2 million mainly due the loss of $10.5 million in interest advanced related to the GSEs bulk loan repurchase and to higher unfavorable fair value adjustment on mortgage servicing rights, as discussed above; and

 

Lower other operating income by $4.2 million mainly due to lower auto daily rental income and lower recoveries from previously charged off auto loans.

Lower operating expenses by $13.1 million mostly due to:

 

Lower personnel costs by $7.5 million due to the profit-sharing plan accrual of $16.4 million recorded in 2019, partially offset by higher salaries by $7.2 million;

 

Lower professional fees by $13.3 million due to lower collection and credit related expenses, lower legal and attorney fees and lower advisory fees;

153

 

 

Lower business promotion expense by $8.5 million driven by lower advertising expense and lower customer reward program expense; and

 

Lower OREO expenses by $5.1 million due to lower maintenance costs related to foreclosed mortgage properties.

 

Partially offset by:

 

Higher occupancy expense by $3.9 million mainly due to higher cleaning costs and lower building rental income and parking revenues as a result of the lockdown related to the pandemic; and

 

Higher other operating expenses by $13.3 million mainly due to higher Corporate expense allocations related to consulting and advisory fees and higher provision for unused commitments.

 

Lower income tax expense by $48.4 million mainly due to lower income before tax.

 

Popular U.S.

For the quarter ended September 30, 2020, the reportable segment of Popular U.S. reported a net income of $9.4 million, compared with a net income of $18.2 million for the same quarter of the previous year. The factors that contributed to the variance in the financial results included the following:

 

Higher provision for credit losses by $9.7 million mainly due to the impact of applying probability weighted scenarios in its estimation process during this quarter as discussed in Note 9;

 

Higher operating expenses by $3.4 million due to:

 

Higher other operating expenses by $8.4 million due in part to higher operational losses reserves and provision for unused commitments; and

 

Higher FDIC assessment expense by $2.4 million due to an increase in the assessment base.

 

Partially offset by:

 

Lower personnel costs by $3.4 million due to lower salaries and other benefits; and

 

Lower professional fees by $4.8 million due to lower intercompany advisory fees allocations.

 

Partially offset by:

 

Higher net interest income by $2.1 million due mainly to lower cost of deposits, partially offset by lower income from loans, primarily due to lower yields on commercial loans.

 

The net interest margin for the third quarter of 2020 was 3.18% compared to 3.29% or the same quarter of the previous year. The decrease in the net interest margin was mainly related to lower yields from earning assets, driven by the decrease in market rates.

 

For the nine-month period ended September 30, 2020, the reportable segment of Popular U.S. reported a net loss of $17.0 million, compared with a net income of $41.3 million for the same period of the previous year.

 

Net interest income was relatively flat when compared with the same period of the previous year. Net interest margin declined from 3.37% to 3.15%, due mainly to lower yields, offset by higher average balance of earning assets and lower deposit costs.

 

The factors that contributed to the variance in the financial results included the following:

 

154

 

Higher provision for credit losses by $66.8 million due to the implementation of CECL and the estimated impact of the COVID-19 pandemic.

 

Higher operating expenses by $9.0 million mainly due to:

 

Higher other operating expenses by $12.3 million due to higher reserve for operational losses, Corporate expense allocations for advisory services and a higher provision for unused commitments.

 

Partially offset by:

 

Lower personnel costs by $5.3 million, including the accrual for the profit-sharing plan incentive recorded in 2019.

 

Income tax favorable variance of $14.9 million mainly due to the loss before tax for the nine-month period ended September 30, 2020.

155

 

FINANCIAL CONDITION ANALYSIS

Assets

The Corporation’s total assets were $65.9 billion at September 30, 2020, compared to $52.1 billion at December 31, 2019. 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 $11.9 billion at September 30, 2020, compared to $3.3 billion at December 31, 2019. The increase was mainly due to an increase in deposits, partially offset by purchases of debt securities available-for-sale, originations of PPP loans and bulk loan repurchases from the Corporation’s GSEs loan servicing portfolios.

 

Debt securities available-for-sale increased by $3.5 billion to $21.2 billion at September 30, 2020. The increase was mainly due to purchases of U.S. agency mortgage-backed securities, partially offset by maturities and paydowns of U.S. Treasury securities. Refer to Note 6 to the Consolidated Financial Statements for additional information with respect to the Corporation’s debt securities available-for-sale.

 

 

 

Loans

Refer to Table 6 for a breakdown of the Corporation’s loan portfolio, the principal category of earning assets. Also, refer to Note 8 in the Consolidated Financial Statements for detailed information about the Corporation’s loan portfolio composition and loan purchases and sales.

 

Loans held-in-portfolio increased by $2.0 billion to $ 29.4 billion at September 30, 2020 mainly driven by growth of commercial loans due to originations of SBA PPP loans at both BPPR and PB and an increase of $0.7 billion in mortgage loans mainly due to the bulk loan repurchases from the Corporation’s GSEs loan servicing portfolios.

 

The allowance for credit losses for the loan portfolio increased by $0.4 billion, which includes the impact of the adoption of CECL and reserves resulting from the deterioration in the economic outlook as result of the COVID-19 pandemic. Refer to the Credit Quality section of the MD&A for additional information on the Allowance for credit losses for the loan portfolio.

 

 

156

 

Table 6 - Loans Ending Balances

 

 

 

 

(In thousands)

 

September 30, 2020

 

December 31, 2019

 

Variance

Loans held-in-portfolio:

 

 

 

 

 

 

Commercial

$

13,611,374

$

12,312,751

$

1,298,623

Construction

 

936,274

 

831,092

 

105,182

Legacy[1]

 

16,168

 

22,105

 

(5,937)

Lease financing

 

1,153,108

 

1,059,507

 

93,601

Mortgage

 

7,924,441

 

7,183,532

 

740,909

Auto

 

3,045,453

 

2,917,522

 

127,931

Consumer

 

2,705,692

 

3,080,364

 

(374,672)

Total loans held-in-portfolio

 

29,392,510

 

27,406,873

 

1,985,637

Loans held-for-sale:

 

 

 

 

 

 

Commercial

 

4,070

 

-

 

4,070

Mortgage

 

98,690

 

59,203

 

39,487

Total loans held-for-sale

 

102,760

 

59,203

 

43,557

Total loans

$

29,495,270

$

27,466,076

$

2,029,194

[1] 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

Refer to Note 13 for a breakdown of the principal categories that comprise the caption of “Other Assets” in the Consolidated Statements of Financial Condition at September 30, 2020 and December 31, 2019.

 

Liabilities

The Corporation’s total liabilities were $60.0 billion at September 30, 2020, compared to $46.1 billion at December 31, 2019.

 

Deposits and Borrowings

The composition of the Corporation’s financing sources to total assets at September 30, 2020 and December 31, 2019 is included in Table 7.

157

 

Table 7 - Financing to Total Assets

 

 

 

 

 

 

 

September 30,

December 31,

% increase (decrease)

 

% of total assets

(In millions)

 

2020

 

2019

from 2019 to 2020

 

2020

 

2019

 

Non-interest bearing deposits

$

13,546

$

9,160

47.9

%

20.5

%

17.6

%

Interest-bearing core deposits

 

37,027

 

29,610

25.0

 

56.2

 

56.8

 

Other interest-bearing deposits

 

5,449

 

4,988

9.2

 

8.3

 

9.6

 

Repurchase agreements

 

106

 

193

(45.1)

 

0.2

 

0.4

 

Other short-term borrowings

 

100

 

-

N.M.

 

0.1

 

-

 

Notes payable

 

1,201

 

1,102

9.0

 

1.8

 

2.1

 

Other liabilities

 

2,569

 

1,045

N.M.

 

3.9

 

2.0

 

Stockholders’ equity

 

5,912

 

6,017

(1.7)

 

9.0

 

11.5

 

 

Deposits

 

The Corporation’s deposits totaled $56.0 billion at September 30, 2020, compared to $43.8 billion at December 31, 2019. The increase in deposits of $12.2 billion was mainly due to an increase at BPPR of public sector deposits by $4.0 billion and retail and commercial demand and savings accounts by $7.7 billion, including $0.7 billion in GNMA custodial deposit balances related to the previously mentioned repurchases that were transferred out in early October 2020. Public sector deposit balances are expected to decline over the long term. However, the receipt by the P.R. Government of additional COVID-19-related Federal assistance and seasonal tax collections are likely to increase public deposit balances at BPPR in the near term. The rate at which public deposit balances will decline is uncertain and difficult to predict. The amount and timing of any such reduction is likely to be impacted by, for example, the timeline of current debt restructuring efforts under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”) and the speed at which the Coronavirus Aid, Relief and Economic Security Act “CARES Act” assistance is distributed. Refer to Table 8 for a breakdown of the Corporation’s deposits at September 30, 2020 and December 31, 2019.

 

Table 8 - Deposits Ending Balances

(In thousands)

September 30, 2020

 

December 31, 2019

 

Variance

Demand deposits [1]

$

22,929,040

 

$

16,566,145

 

$

6,362,895

Savings, NOW and money market deposits (non-brokered)

 

24,696,244

 

 

19,169,899

 

 

5,526,345

Savings, NOW and money market deposits (brokered)

 

551,770

 

 

347,765

 

 

204,005

Time deposits (non-brokered)

 

7,664,361

 

 

7,546,621

 

 

117,740

Time deposits (brokered CDs)

 

180,568

 

 

128,176

 

 

52,392

Total deposits

$

56,021,983

 

$

43,758,606

 

$

12,263,377

[1]

Includes interest and non-interest bearing demand deposits.

 

Borrowings

The Corporation’s borrowings increased by $0.1 billion to $1.4 billion at September 30, 2020 mainly due to an increase in FHLB advances at PB. Refer to Note 16 to the Consolidated Financial Statements for detailed information on the Corporation’s borrowings. Also, refer to the Liquidity section in this MD&A for additional information on the Corporation’s funding sources.

 

Other liabilities

The Corporation’s other liabilities increased by $1.5 billion to $2.6 billion at September 30, 2020, when compared to December 31, 2019, mainly due to an increase in unsettled purchases of debt securities.

 

Stockholders’ Equity

 

158

 

Stockholders’ equity totaled $5.9 billion at September 30, 2020, a decrease of $104.7 million when compared to December 31, 2019, principally due to the impact of the $500 million accelerated share repurchase transaction completed during the first quarter of 2020, a reduction in preferred stock of $28.0 million due to the redemption of all outstanding shares of 2008 Series B preferred stock, the cumulative effect of $205.8 million related to the adoption of CECL, declared dividends of $102.9 million on common stock, and $1.4 million in dividends on preferred stock, partially offset by the net income for the nine months ended September 30, 2020 of $330.3 million and an increase of unrealized gains on debt securities available-for-sale by $391.7 million. Refer to the Consolidated Statements of Financial Condition, Comprehensive Income and of Changes in Stockholders’ Equity for information on the composition of stockholders’ equity.

 

 

REGULATORY CAPITAL

 

The Corporation, BPPR and PB are subject to regulatory capital requirements established by the Federal Reserve Board. The risk-based capital standards applicable to the Corporation, BPPR and PB (“Basel III capital rules”) 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 September 30, 2020, 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 9, which include common equity tier 1, Tier 1 capital, total capital and leverage capital as of September 30, 2020 and December 31, 2019.

 

Table 9 - Capital Adequacy Data

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

September 30, 2020

 

 

December 31, 2019

 

Common equity tier 1 capital:

 

 

 

 

 

 

 

Common stockholders equity - GAAP basis

$

6,113,424

 

$

5,966,619

 

 

AOCI related adjustments due to opt-out election

 

(286,909)

 

 

113,155

 

 

Goodwill, net of associated deferred tax liability (DTL)

 

(592,852)

 

 

(596,994)

 

 

Intangible assets, net of associated DTLs

 

(23,518)

 

 

(28,780)

 

 

Deferred tax assets and other deductions

 

(363,846)

 

 

(332,763)

 

Common equity tier 1 capital

$

4,846,299

 

$

5,121,237

 

Additional tier 1 capital:

 

 

 

 

 

 

 

Preferred stock

 

22,143

 

 

50,160

 

 

Other additional tier 1 capital deductions

 

-

 

 

(50,160)

 

Additional tier 1 capital

$

22,143

 

$

-

 

Tier 1 capital

$

4,868,442

 

$

5,121,237

 

Tier 2 capital:

 

 

 

 

 

 

 

Trust preferred securities subject to phase in as tier 2

 

373,737

 

 

373,737

 

 

Other inclusions (deductions), net

 

382,613

 

 

363,638

 

Tier 2 capital

$

756,350

 

$

737,375

 

Total risk-based capital

$

5,624,792

 

$

5,858,612

 

Minimum total capital requirement to be well capitalized

$

3,041,709

 

$

2,884,037

 

Excess total capital over minimum well capitalized

$

2,583,083

 

$

2,974,575

 

Total risk-weighted assets

$

30,417,091

 

$

28,840,368

 

Total assets for leverage ratio

$

62,455,157

 

$

51,057,484

 

Risk-based capital ratios:

 

Common equity tier 1 capital

 

15.93

%

 

17.76

%

Tier 1 capital

 

16.01

 

 

17.76

 

 

Total capital

 

18.49

 

 

20.31

 

 

Tier 1 leverage

7.80

 

 

10.03

 

159

 

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 September 30, 2020, the Corporation, BPPR and PB continue to exceed the minimum requirements for being “well-capitalized” under the Basel III capital rules.

 

Pursuant to the adoption of the CECL accounting standard on January 1, 2020, the Corporation elected to use the five-year transition period option as provided in the final interim regulatory capital rules effective March 31, 2020. The five-year transition period provision delays for two years the estimated impact of CECL on regulatory capital, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay.

 

On April 1, 2020, the Corporation adopted the final rule issued by the federal banking regulatory agencies pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996 that simplified several requirements in the agencies' regulatory capital rules. These rules simplified the regulatory capital requirement for mortgage servicing assets (MSAs), deferred tax assets arising from temporary differences and investments in the capital of unconsolidated financial institutions by raising the CET1 deduction threshold from 10% to 25%. The 15% CET 1 deduction threshold which applies to the aggregate amount of such items was eliminated. The rule also requires, among other changes, increasing from 100% to 250% the risk weight to MSAs and temporary difference deferred tax asset not deducted from capital. For investments in the capital of unconsolidated financial institutions, the risk weight would be based on the exposure category of the investment. As a result of these rules, the Corporation’s CET1 decreased by 54 bps.

 

The decrease in the common equity Tier I capital ratio, Tier I capital ratio, total capital ratio, and leverage capital ratio as of September 30, 2020 as compared to December 31, 2019 was mainly attributed to the accelerated share repurchase transaction of $500 million completed during the second quarter of 2020, and to the increase in risk weighted assets driven by the increase from 100% to 250% in the risk weight assets of MSAs and temporary difference deferred tax asset not deducted from capital, resulting from the adoption of the aforementioned final rule.

 

160

 

Non-GAAP financial measures

The tangible common equity, 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 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 10 provides a reconciliation of total stockholders’ equity to tangible common equity and total assets to tangible assets as of September 30, 2020, and December 31, 2019.

 

Table 10 - Reconciliation of Tangible Common Equity and Tangible Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands, except share or per share information)

 

 

September 30, 2020

 

 

 

December 31, 2019

 

Total stockholders’ equity

 

$

5,912,085

 

 

$

6,016,779

 

Less: Preferred stock

 

 

(22,143)

 

 

 

(50,160)

 

Less: Goodwill

 

 

(671,122)

 

 

 

(671,122)

 

Less: Other intangibles

 

 

(23,518)

 

 

 

(28,780)

 

Total tangible common equity

 

$

5,195,302

 

 

$

5,266,717

 

Total assets

 

$

65,910,369

 

 

$

52,115,324

 

Less: Goodwill

 

 

(671,122)

 

 

 

(671,122)

 

Less: Other intangibles

 

 

(23,518)

 

 

 

(28,780)

 

Total tangible assets

 

$

65,215,729

 

 

$

51,415,422

 

Tangible common equity to tangible assets

 

 

7.97

%

 

 

10.24

%

Common shares outstanding at end of period

 

 

84,219,464

 

 

 

95,589,629

 

Tangible book value per common share

 

$

61.69

 

 

$

55.10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarterly average

 

Total stockholders’ equity [1]

 

$

5,383,126

 

 

$

5,887,125

 

Less: Preferred Stock

 

 

(22,143)

 

 

 

(50,160)

 

Less: Goodwill

 

 

(671,121)

 

 

 

(671,121)

 

Less: Other intangibles

 

 

(24,161)

 

 

 

(20,674)

 

Total tangible common equity

 

$

4,665,701

 

 

$

5,145,170

 

Return on average tangible common equity

 

 

14.32

%

 

 

12.79

%

[1] Average balances exclude unrealized gains or losses on debt securities available-for-sale.

161

 

OFF-BALANCE SHEET ARRANGEMENTS AND OTHER COMMITMENTS

In the ordinary course of business, the Corporation engages in financial transactions that are not recorded on the balance sheet, or may be recorded on the balance sheet in amounts that are different than the full contract or notional amount of the transaction. As a provider of financial services, the Corporation routinely enters into commitments with off-balance sheet risk to meet the financial needs of its customers. These commitments may include loan commitments and standby letters of credit. These commitments are subject to the same credit policies and approval process used for on-balance sheet instruments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position. 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 in the Consolidated Financial Statements for a detailed discussion related to the Corporation’s obligations under credit recourse and representation and warranties arrangements.

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.

As previously indicated, 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 16 in the Consolidated Financial Statements 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 expire without being drawn upon or a default occurring, the total contractual amounts are not representative of the Corporation’s actual future credit exposure or liquidity requirements for these commitments.

Table 11 presents the contractual amounts related to the Corporation’s off-balance sheet lending and other activities at September 30, 2020.

 

Table 11 - Off-Balance Sheet Lending and Other Activities

 

 

 

Amount of commitment - Expiration Period

(In thousands)

 

2020

Years 2021 - 2022

Years 2023 - 2024

Years 2025 - thereafter

Total

Commitments to extend credit

 

$

6,577,031

$

1,915,746

$

363,007

$

120,622

$

8,976,406

Commercial letters of credit

 

 

3,105

 

285

 

-

 

-

 

3,390

Standby letters of credit

 

 

4,543

 

54,774

 

-

 

-

 

59,317

Commitments to originate or fund mortgage loans

 

 

105,412

 

3,979

 

-

 

-

 

109,391

Total

 

$

6,690,091

$

1,974,784

$

363,007

$

120,622

$

9,148,504

162

 

RISK MANAGEMENT

Market / Interest Rate Risk

The financial results and capital levels of the Corporation are constantly exposed to market, interest rate and liquidity risks.

Market risk refers to the risk of a reduction in the Corporation’s capital due to changes in the market valuation of its assets and/or liabilities.

Most of the assets subject to market valuation risk are debt securities classified as available-for-sale. Refer to Notes 6 and 7 for further information on the debt securities available-for-sale and held-to-maturity portfolios. Debt securities classified as available-for-sale amounted to $21.2 billion as of September 30, 2020. Other assets subject to market risk include loans held-for-sale, which amounted to $103 million, mortgage servicing rights (“MSRs”) which amounted to $124 million and securities classified as “trading”, which amounted to $33 million, as of September 30, 2020.

Interest Rate Risk (“IRR”)

The Corporation’s net interest income is subject to various categories of interest rate risk, including repricing, basis, yield curve and option risks. In managing interest rate risk, management may alter the mix of floating and fixed rate assets and liabilities, change pricing schedules, adjust maturities through sales and purchases of investment securities, and enter into derivative contracts, among other alternatives.

Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate rate risk position given line of business forecasts, management objectives, market expectations and policy constraints.

Management utilizes various tools to assess IRR, including Net Interest Income (“NII”) simulation modeling, static gap analysis, and Economic Value of Equity (“EVE”). The three methodologies complement each other and are used jointly in the evaluation of the Corporation’s IRR. NII simulation modeling is prepared for a five-year period, which in conjunction with the EVE analysis, provides management a better view of long-term IRR.

Net interest income simulation analysis performed by legal entity and on a consolidated basis is a tool used by the Corporation in estimating the potential change in net interest income resulting from hypothetical changes in interest rates. Sensitivity analysis is calculated using a simulation model which incorporates actual balance sheet figures detailed by maturity and interest yields or costs.

Management assesses interest rate risk by comparing various NII simulations under different interest rate scenarios that differ in direction of interest rate changes, the degree of change and the projected shape of the yield curve. For example, the types of rate scenarios processed during the quarter include flat rates, implied forwards, and parallel and non-parallel rate shocks. Management also performs analyses to isolate and measure basis and prepayment risk exposures.

The asset and liability management group perform validation procedures on various assumptions used as part of the simulation analyses as well as validations of results on a monthly basis. In addition, the model and processes used to assess IRR are subject to independent validations according to the guidelines established in the Model Governance and Validation policy.

The Corporation processes NII simulations under interest rate scenarios in which the yield curve is assumed to rise and decline by the same amount (parallel shifts). The rate scenarios considered in these market risk simulations reflect instantaneous parallel changes of -100, -200, +100, +200 and +400 basis points during the succeeding twelve-month period. Simulation analyses are based on many assumptions, including relative levels of market interest rates across all yield curve points and indexes, interest rate spreads, loan prepayments and deposit elasticity. Thus, they should not be relied upon as indicative of actual results. Further, the estimates do not contemplate actions that management could take to respond to changes in interest rates. By their nature, these forward-looking computations are only estimates and may be different from what may actually occur in the future. The following table presents the results of the simulations at September 30, 2020 and December 31, 2019, assuming a static balance sheet and parallel changes over flat spot rates over a one-year time horizon:

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Table 12 - Net Interest Income Sensitivity (One Year Projection)

 

September 30, 2020

 

 

December 31, 2019

(Dollars in thousands)

 

Amount Change

Percent Change

 

 

Amount Change

Percent Change

 

Change in interest rate

 

 

 

 

 

 

 

 

+400 basis points

$

203,621

11.51

%

$

64,351

3.37

%

+200 basis points

 

100,356

5.67

 

 

32,766

1.72

 

+100 basis points

 

49,089

2.77

 

 

16,379

0.86

 

-100 basis points

 

(49,056)

(2.77)

 

 

(35,213)

(1.84)

 

-200 basis points

 

(63,630)

(3.60)

 

 

(131,874)

(6.91)

 

 

As of September 30, 2020, NII simulations show the Corporation maintains an asset sensitive position and is expected to benefit from an overall rising rate environment. The changes in sensitivity for the period are primarily driven by large deposit increases of over $12 billion along with reductions in the rates paid for deposit products. Overall, rates are now considered to be close to their “lower bound” because we currently assume, in our interest risk models, that rates will not reach negative values. This has the effect of reducing sensitivity in most products given that rates are close to zero in most curve tenors and therefore have little room to fall further in the declining rates scenarios. We would expect this “flooring” effect on sensitivity to declining rates to reverse itself if rates were to rise, because it would mean that rates would once again have more room to fall. In contrast, the sensitivity to rising rate scenarios notably increased as most of the increase in deposits remained in short-term assets and cash at the close of the quarter.

 

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.

 

 

Trading

The Corporation engages in trading activities in the ordinary course of business at its subsidiaries, BPPR and Popular Securities. Popular Securities’ trading activities consist primarily of market-making activities to meet expected customers’ needs related to its retail brokerage business, and purchases and sales of U.S. Government and government sponsored securities with the objective of realizing gains from expected short-term price movements. BPPR’s trading activities consist primarily of holding U.S. Government sponsored mortgage-backed securities classified as “trading” and hedging the related market risk with “TBA” (to-be-announced) market transactions. The objective is to derive spread income from the portfolio and not to benefit from short-term market movements. In addition, BPPR uses forward contracts or TBAs to hedge its securitization pipeline. Risks related to variations in interest rates and market volatility are hedged with TBAs that have characteristics similar to that of the forecasted security and its conversion timeline.

At September 30, 2020, the Corporation held trading securities with a fair value of $33 million, representing approximately 0.1% of the Corporation’s total assets, compared with $40 million and 0.1%, respectively, at December 31, 2019. As shown in Table 13, the trading portfolio consists principally of mortgage-backed securities which at September 30, 2020 were investment grade securities. As of September 30, 2020, the trading portfolio also included $0.1 million in Puerto Rico government obligations ($0.6 million as of December 31, 2019). 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 $ 20 thousand for the quarter ended September 30, 2020 and a net trading account gain of $295 thousand for the quarter ended September 30, 2019.

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Table 13 - Trading Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2020

 

 

December 31, 2019

 

(Dollars in thousands)

 

Amount

 

Weighted Average Yield[1]

 

 

Amount

 

Weighted Average Yield[1]

 

Mortgage-backed securities

$

24,944

 

5.45

%

$

28,556

 

5.28

%

U.S. Treasury securities

 

4,106

 

0.08

 

 

7,083

 

1.22

 

Collateralized mortgage obligations

 

484

 

5.71

 

 

606

 

5.72

 

Puerto Rico government obligations

 

105

 

0.50

 

 

633

 

2.60

 

Interest-only strips

 

413

 

12.00

 

 

440

 

12.05

 

Other

 

3,001

 

1.21

 

 

3,003

 

2.79

 

Total

$

33,053

 

4.47

%

$

40,321

 

4.42

%

[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 $0.4 million for the last week in September 2020. There are numerous assumptions and estimates associated with VAR modeling, and actual results could differ from these assumptions and estimates. Backtesting is performed to compare actual results against maximum estimated losses, in order to evaluate model and assumptions accuracy.

In the opinion of management, the size and composition of the trading portfolio does not represent a significant source of market risk for the Corporation.

FAIR VALUE MEASUREMENT OF FINANCIAL INSTRUMENTS

The Corporation currently measures at fair value on a recurring basis its trading debt securities, debt securities available-for-sale, certain equity securities, derivatives and mortgage servicing rights. Occasionally, the Corporation may be required to record at fair value other assets on a nonrecurring basis, such as loans held-for-sale, loans held-in-portfolio that are collateral dependent and certain other assets. These nonrecurring fair value adjustments typically result from the application of lower of cost or fair value accounting or write-downs of individual assets.

The Corporation categorizes its assets and liabilities measured at fair value under the three-level hierarchy. The level within the hierarchy is based on whether the inputs to the valuation methodology used for fair value measurement are observable.

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 30 to the Consolidated Financial Statements in the 2019 Form 10-K. Also, refer to the Critical Accounting Policies / Estimates in the 2019 Form 10-K for additional information on the accounting guidance and the Corporation’s policies or procedures related to fair value measurements.

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Liquidity

The objective of effective liquidity management is to ensure that the Corporation has sufficient liquidity to meet all of its financial obligations, finance expected future growth, fund planned capital distributions and maintain a reasonable safety margin for cash commitments under both normal and stressed market conditions. The Board of Directors is responsible for establishing the Corporation’s tolerance for liquidity risk, including approving relevant risk limits and policies. The Board of Directors has delegated the monitoring of these risks to the Board’s Risk Management Committee and the Asset/Liability Management Committee. The management of liquidity risk, on a long-term and day-to-day basis, is the responsibility of the Corporate Treasury Division. The Corporation’s Corporate Treasurer is responsible for implementing the policies and procedures approved by the Board of Directors and for monitoring the Corporation’s liquidity position on an ongoing basis. Also, the Corporate Treasury Division coordinates corporate wide liquidity management strategies and activities with the reportable segments, oversees policy breaches and manages the escalation process. The Financial and Operational Risk Management Division is responsible for the independent monitoring and reporting of adherence with established policies.

An institution’s liquidity may be pressured if, for example, it experiences a sudden and unexpected substantial cash outflow due to exogenous events such as the current COVID-19 pandemic, its credit rating is downgraded, or some other event causes counterparties to avoid exposure to the institution. Factors that the Corporation does not control, such as the economic outlook, adverse ratings of its principal markets and regulatory changes, could also affect its ability to obtain funding.

Liquidity is managed by the Corporation at the level of the holding companies that own the banking and non-banking subsidiaries. It is also managed at the level of the banking and non-banking subsidiaries. As further explained below, a principal source of liquidity for the bank holding companies (the “BHCs”) are dividends received from banking and non-banking subsidiaries. The Corporation has adopted policies and limits to monitor more effectively the Corporation’s liquidity position and that of the banking subsidiaries. Additionally, contingency funding plans are used to model various stress events of different magnitudes and affecting different time horizons that assist management in evaluating the size of the liquidity buffers needed if those stress events occur. However, such models may not predict accurately how the market and customers might react to every event, and are dependent on many assumptions.

Deposits, including customer deposits, brokered deposits and public funds deposits, continue to be the most significant source of funds for the Corporation, funding 85% of the Corporation’s total assets at September 30, 2020 and 84% at December 31, 2019. The ratio of total ending loans to deposits was 53% at September 30, 2020, compared to 63% at December 31, 2019. In addition to traditional deposits, the Corporation maintains borrowing arrangements, which amounted to approximately $1.4 billion at September 30, 2020 (December 31, 2019 - $1.3 billion). A detailed description of the Corporation’s borrowings, including their terms, is included in Note 16 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.

As previously mentioned, during 2020 the Corporation executed actions corresponding to its capital and liquidity strategic plans. These included the $500 million accelerated share repurchase transaction with respect to its common stock and an increase in quarterly common stock dividend from $0.30 per share to $0.40 per share. Refer to additional details of these transactions in Notes 18 - Stockholders Equity and Note 26 - Net Income Per Common Share.

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 34 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.

Banking Subsidiaries

Primary sources of funding for the Corporation’s banking subsidiaries (BPPR and PB or, collectively, “the banking subsidiaries”) include retail, commercial and public sector deposits, brokered deposits, unpledged investment securities, mortgage loan securitization and, to a lesser extent, loan sales. In addition, the Corporation maintains borrowing facilities with the FHLB and at the discount window of the Federal Reserve Bank of New York (the “FRB”) and has a considerable amount of collateral pledged that can be used to raise funds under these facilities.

Refer to Note 16 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

166

 

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 8 for a breakdown of deposits by major types. Core deposits are generated from a large base of consumer, corporate and public sector customers. Core deposits include all non-interest bearing deposits, savings deposits and certificates of deposit under $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 $ 50.6 billion, or 90% of total deposits, at September 30, 2020, compared with $38.8 billion, or 89% of total deposits, at December 31, 2019. Core deposits financed 80% of the Corporation’s earning assets at September 30, 2020, compared with 80% at December 31, 2019.

The distribution by maturity of certificates of deposits with denominations of $100,000 and over at September 30, 2020 is presented in the table that follows:

 

Table 14 - Distribution by Maturity of Certificate of Deposits of $100,000 and Over

 

 

 

(In thousands)

 

 

 

3 months or less

 

$

2,640,267

3 to 6 months

 

 

389,274

6 to 12 months

 

 

465,745

Over 12 months

 

 

1,272,386

Total

 

$

4,767,672

 

The Corporation had $ 0.7 billion in brokered deposits at September 30, 2020, which financed approximately 1% of its total assets (December 31, 2019 - $0.5 billion and 1%, respectively). In the event that any of the Corporation’s banking subsidiaries’ regulatory capital ratios fall below those required by a well-capitalized institution or are subject to capital restrictions by the regulators, that banking subsidiary faces the risk of not being able to raise or maintain brokered deposits and faces limitations on the rate paid on deposits, which may hinder the Corporation’s ability to effectively compete in its retail markets and could affect its deposit raising efforts.

Deposits from the public sector represent an important source of funds for the Company. As of September 30, 2020, total public sector deposits were $14.6 billion. Generally, these deposits require that the bank pledge high credit quality securities as collateral; therefore liquidity risks arising from public sector deposit outflows are lower given that the bank receives its collateral in return. However, there are some timing differences between the time the deposit outflow occurs and when the bank receives its collateral. This, now unpledged, collateral can either be financed via repurchase agreements or sold for cash.

At September 30, 2020, 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

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will be severely constrained if the banking subsidiaries are unable to maintain access to funding or if adequate financing is not available to accommodate future financing needs at acceptable interest rates. The banking subsidiaries also are required to deposit cash or qualifying securities to meet margin requirements. To the extent that the value of securities previously pledged as collateral declines because of market changes, the Corporation will be required to deposit additional cash or securities to meet its margin requirements, thereby adversely affecting its liquidity. Finally, if management is required to rely more heavily on more expensive funding sources to meet its future growth, revenues may not increase proportionately to cover costs. In this case, profitability would be adversely affected.

Bank Holding Companies

The principal sources of funding for the BHCs, which are Popular, Inc. (holding company only) and PNA, include cash on hand, investment securities, dividends received from banking and non-banking subsidiaries, asset sales, credit facilities available from affiliate banking subsidiaries and proceeds from potential securities offerings. Dividends from banking and non-banking subsidiaries are subject to various regulatory limits and authorization requirements that are further described below and that may limit the ability of those subsidiaries to act as a source of funding to the BHCs.

The principal use of these funds includes the repayment of debt, and interest payments to holders of senior debt and junior subordinated deferrable interest (related to trust preferred securities), the payment of dividends to common stockholders and capitalizing its banking subsidiaries.

The BHCs have in the past borrowed in the money markets and in the corporate debt market primarily to finance their non-banking subsidiaries; however, the cash needs of the Corporation’s non-banking subsidiaries other than to repay indebtedness and interest are now minimal. These sources of funding have become more costly due to the Corporation’s principal credit rating being 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 BHCs amounted to $681 million at September 30, 2020 and $680 million at December 31, 2019.

The contractual maturities of the BHCs notes payable at September 30, 2020 are presented in Table 15.

 

Table 15 - Distribution of BHC's Notes Payable by Contractual Maturity

 

 

 

 

 

Year

 

(In thousands)

2023

$

296,257

Later years

 

384,923

Total

$

681,180

 

Annual debt service at the BHCs is approximately $44 million per annum, and the Company’s latest quarterly dividend was $0.40 per share. The BHCs liquidity position continues to be adequate with sufficient cash on hand, investments and other sources of liquidity which are expected to be enough to meet all BHCs obligations during the foreseeable future. As of September 30, 2020, the BHCs had cash and money markets investments totaling $250 million, borrowing potential of $149 million from its secured facility with BPPR. In addition to these liquidity sources, the stake in EVERTEC had a market value of $405 million as of September 30, 2020 and it represents an additional source of contingent liquidity.

Non-Banking Subsidiaries

The principal sources of funding for the non-banking subsidiaries include internally generated cash flows from operations, loan sales, repurchase agreements, capital injections and borrowed funds from their direct parent companies or the holding companies. The principal uses of funds for the non-banking subsidiaries include repayment of maturing debt, operational expenses and payment of dividends to the BHCs. The liquidity needs of the non-banking subsidiaries are minimal since most of them are funded internally from operating cash flows or from intercompany borrowings or capital contributions from their holding companies.

Dividends

168

 

During the nine months ended September 30, 2020, the Corporation declared quarterly dividends on its outstanding common stock of $0.40 per share, for a year-to-date total of $ 102.9 million. The dividends for the Corporation’s Series A and Series B preferred stock amounted to $1.4 million. On February 24, 2020, the Corporation redeemed all the outstanding shares of 2008 Series B Preferred Stock. Refer to Note 18 for additional information. During the nine months ended September 30, 2020, the BHC’s received dividends amounting to $578 million from BPPR, $13 million from PIBI which main source of income is derived from its investment in BHD, $6 million in dividends from its non-banking subsidiaries and $2 million in dividends from EVERTEC. Dividends from BPPR constitute Popular, Inc.’s primary source of liquidity.

Other Funding Sources and Capital

The debt securities portfolio provides an additional source of liquidity, which may be realized through either securities sales or repurchase agreements. The Corporation’s debt securities portfolio consists primarily of liquid U.S. government debt securities, U.S. government sponsored agency debt securities, U.S. government sponsored agency mortgage-backed securities, and U.S. government sponsored agency collateralized mortgage obligations that can be used to raise funds in the repo markets. The availability of the repurchase agreement would be subject to having sufficient unpledged collateral available at the time the transactions are to be consummated, in addition to overall liquidity and risk appetite of the various counterparties. The Corporation’s unpledged debt securities amounted to $4.5 billion at September 30, 2020 and $5.4 billion at December 31, 2019. A substantial portion of these debt securities could be used to raise financing in the U.S. money markets or from secured lending sources.

Additional liquidity may be provided through loan maturities, prepayments and sales. The loan portfolio can also be used to obtain funding in the capital markets. In particular, mortgage loans and some types of consumer loans, have secondary markets which the Corporation could use.

Risks to Liquidity

Total lines of credit outstanding are not necessarily a measure of the total credit available on a continuing basis. Some of these lines could be subject to collateral requirements, standards of creditworthiness, leverage ratios and other regulatory requirements, among other factors. Derivatives, such as those embedded in long-term repurchase transactions or interest rate swaps, and off-balance sheet exposures, such as recourse, performance bonds or credit card arrangements, are subject to collateral requirements. As their fair value increases, the collateral requirements may increase, thereby reducing the balance of unpledged securities.

The importance of the Puerto Rico market for the Corporation is an additional risk factor that could affect its financing activities. In the case of a deterioration in economic and fiscal conditions in Puerto Rico, the credit quality of the Corporation could be affected and result in higher credit costs. Refer to the Geographic and Government Risk section of this MD&A for some highlights on the current status of the Puerto Rico economy and the ongoing fiscal crisis.

Factors that the Corporation does not control, such as the economic outlook and credit ratings of its principal markets and regulatory changes, could also affect its ability to obtain funding. In order to prepare for the possibility of such scenario, management has adopted contingency plans for raising financing under stress scenarios when important sources of funds that are usually fully available are temporarily unavailable. These plans call for using alternate funding mechanisms, such as the pledging of certain asset classes and accessing secured credit lines and loan facilities put in place with the FHLB and the FRB.

The credit ratings of Popular’s debt obligations are a relevant factor for liquidity because they impact the Corporation’s ability to borrow in the capital markets, its cost and access to funding sources. Credit ratings are based on the financial strength, credit quality and concentrations in the loan portfolio, the level and volatility of earnings, capital adequacy, the quality of management, geographic concentration in Puerto Rico, the liquidity of the balance sheet, the availability of a significant base of core retail and commercial deposits, and the Corporation’s ability to access a broad array of wholesale funding sources, among other factors.

Furthermore, various statutory provisions limit the amount of dividends an insured depository institution may pay to its holding company without regulatory approval. A member bank must obtain the approval of the Federal Reserve Board for any dividend, if the total of all dividends declared by the member bank during the calendar year would exceed the total of its net income for that year, combined with its retained net income for the preceding two years, less any required transfers to surplus or to a fund for the retirement of any preferred stock. In addition, a member bank may not declare or pay a dividend in an amount greater than its undivided profits as reported in its Report of Condition and Income, unless the member bank has received the approval of the Federal Reserve Board. A member bank also may not permit any portion of its permanent capital to be withdrawn unless the withdrawal has been approved by the Federal Reserve Board. Pursuant to these requirements, PB may not declare or pay a dividend without the prior approval of the Federal Reserve Board and the NYSDFS. The ability of a bank subsidiary to up-stream dividends to its BHC could thus be impacted by its financial performance, thus potentially limiting the amount of cash moving up to

169

 

the BHCs from the banking subsidiaries. This could, in turn, affect the BHCs ability to declare dividends on its outstanding common and preferred stock, for example. Popular, Inc. received $578 million in dividends from BPPR during the nine months ended September 30, 2020 and its ability to continue receiving dividends from BPPR will depend on such banking subsidiary’s financial condition and results of operation.

The Corporation’s banking subsidiaries have historically not used unsecured capital market borrowings to finance its operations, and therefore are less sensitive to the level and changes in the Corporation’s overall credit ratings.

Obligations Subject to Rating Triggers or Collateral Requirements

The Corporation’s banking subsidiaries currently do not use borrowings that are rated by the major rating agencies, as these banking subsidiaries are funded primarily with deposits and secured borrowings. The banking subsidiaries had $9 million in deposits at September 30, 2020 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 $54 million at September 30, 2020. 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 33 to the Consolidated Financial Statements.

 

Commonwealth of Puerto Rico

 

A significant portion of our financial activities and credit exposure is concentrated in the Commonwealth of Puerto Rico (the “Commonwealth” or “Puerto Rico”), which faces severe economic and fiscal challenges.

 

COVID-19 Pandemic

 

On December 2019, a novel strain of coronavirus (COVID-19) surfaced in Wuhan, China and has since spread globally to other countries and jurisdictions, including the mainland United States and Puerto Rico. In March 2020, the World Health Organization declared the COVID-19 to be a pandemic. The pandemic has significantly disrupted and negatively impacted the global economy, disrupted global supply chains, created significant volatility in financial markets, and increased unemployment levels worldwide, including in the markets in which we do business. In Puerto Rico, the Governor issued an executive order on March 15, 2020 declaring a health emergency, ordering residents to shelter in place, implementing a mandatory curfew, and requiring the closure of all businesses, except for businesses that provide essential services, including banking and financial institutions with respect to certain services. While many of the restrictions have been gradually lifted, a mandatory curfew is still in effect and most businesses have had to make significant adjustments to protect customers and employees, including transitioning to telework and suspending or modifying certain operations in compliance with health and safety guidelines.

 

The extent to which the COVID-19 pandemic will continue to have an adverse effect on economic activity in Puerto Rico in the long-term will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the restrictions imposed by governmental authorities and other third parties in response to the same and the amount of federal and local assistance offered to offset the impact of the pandemic. However, the COVID-19 pandemic and the actions taken by governments in response to the same have had a material adverse effect on economic activity worldwide, including in Puerto Rico, and there can be no assurance that measures taken by governmental authorities will be sufficient to offset the pandemic’s economic impact.

 

In response to the pandemic, on April 2020 the Puerto Rico Legislative Assembly enacted legislation requiring financial institutions to offer moratoriums on consumer financial products to clients impacted by the COVID-19 pandemic through June 2020. In the case of mortgage loans, the moratorium period was extended through August 2020. These moratoriums could, among other things, limit our ability to determine the impact of the COVID-19 pandemic on the financial condition of certain of our customers and the credit quality of our loan portfolio until borrowers that have benefited from such moratoriums are required to resume loan repayments. Additionally, the Federal Government has also approved several economic stimulus measures, including the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) that seek to cushion the economic fallout of the pandemic, including guaranteeing through the Small Business Administration’s Paycheck Protection Program (the “PPP”) loans to small and medium businesses.

 

For a discussion of the impact of the pandemic on the Corporation’s operations and financial results during the second quarter of 2020, refer to the MD&A Significant Events section, on the accompanying financial statements. For additional discussion of risk factors related to the impact of the pandemic, see “Part II – Item 1A – Risk Factors” in this Form 10-Q. For information regarding the projections of the 2020 Fiscal Plan (defined below) with respect to the impact of the pandemic, see Fiscal Plans, Commonwealth Fiscal Plan, below.

 

Economic Performance

 

The Commonwealth’s economy entered a recession in the fourth quarter of fiscal year 2006 and its gross national product (“GNP”) contracted (in real terms) every fiscal year between 2007 and 2018, with the exception of fiscal year 2012. Pursuant to the latest Puerto Rico Planning Board (the “Planning Board”) estimates, dated June 2020, the Commonwealth’s real GNP for fiscal years 2017 and 2018 decreased by 3.2% and 4.2%, respectively. The Planning Board estimates that real GNP increased approximately

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1.5% in fiscal year 2019 due to the influx of federal funds and private insurance payments to repair damage caused by Hurricanes Irma and María. The Planning Board also projects a contraction in real GNP of -5.4% and -2% in fiscal years 2020 and 2021, respectively, due primarily to the adverse impact of the COVID-19 pandemic and the measures taken by the government in response to the same.

 

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 imminent widespread defaults prompted the U.S. Congress to enact the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”) in June 2016. The Commonwealth and several of its instrumentalities are currently in the process of restructuring their debts through the debt restructuring mechanisms provided by PROMESA.

Recent Seismic Activity

 

On January 7, 2020, Puerto Rico was struck by a magnitude 6.4 earthquake, which caused island-wide power outages and significant damage to infrastructure and property in the southwest region of the island. The 6.4 earthquake was preceded by foreshocks and followed by aftershocks. The Commonwealth’s government estimates total earthquake-related damages at approximately $1 billion.

 

PROMESA

 

PROMESA, among other things, created a seven-member federally-appointed oversight board (the “Oversight Board”) with ample powers over the fiscal and economic affairs of the Commonwealth, its public corporations, instrumentalities and municipalities and established two mechanisms for the restructuring of the obligations of such entities. Pursuant to PROMESA, the Oversight Board will remain in place until market access is restored and balanced budgets, in accordance with modified accrual accounting, are produced for at least four consecutive years. In August 2016, President Obama appointed the seven voting members of the Oversight Board through the process established in PROMESA, which authorizes the President to select the members from several lists required to be submitted by congressional leaders and which process was recently upheld by the U.S. Supreme Court. The terms of the original Oversight Board members expired on August 2019, but PROMESA allows members to remain in their roles until their successors have been appointed. All of the original members continued to serve on the Oversight Board on holdover status until earlier this year when three of the original members resigned and one member’s holdover status terminated upon President Donald Trump’s appointment of a new member. The remaining three original members continue serving on holdover status, but their holdover status would terminate upon the appointment of new members through the process established in PROMESA.

 

In October 2016, the Oversight Board designated the Commonwealth and all of its public corporations and instrumentalities as “covered entities” under PROMESA. The only Commonwealth government entities that were not subject to such initial designation were the Commonwealth’s municipalities. In May 2019, however, the Oversight Board designated all of the Commonwealth’s municipalities as covered entities. At the Oversight Board’s request, covered entities are required to submit fiscal plans and annual budgets to the Oversight Board for its review and approval. They are also required to seek Oversight Board approval to issue, guarantee or modify their debts and to enter into contracts with an aggregate value of $10 million or more. Finally, covered entities are potentially eligible to avail themselves of the debt restructuring processes provided by PROMESA.

 

Fiscal Plans

 

Commonwealth Fiscal Plan. The Oversight Board has certified several fiscal plans for the Commonwealth since 2017. The most recent fiscal plan for the Commonwealth certified by the Oversight Board is dated May 27, 2020 (the “2020 Fiscal Plan”). The 2020 Fiscal Plan estimates that the economy of Puerto Rico will contract by 4% in real terms in fiscal year 2020, largely due to the COVID-19 pandemic, with a limited recovery of 0.5% in fiscal year 2021. This new economic outlook exacerbates the

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Commonwealth government’s fiscal challenges. As a result of these changes, the 2020 Fiscal Plan projects that the Commonwealth will have a pre-contractual debt service deficit each year through 2025 if the measures and structural reforms contemplated by the plan are not successfully implemented. It estimates that the proposed fiscal measures and structural reforms will drive approximately $10 billion in savings and extra revenue through 2025 and a cumulative 0.88% increase in growth by fiscal year 2049. However, even after the fiscal measures and structural reforms, and before contractual debt service, the 2020 Fiscal Plan’s projections reflect an annual deficit starting in fiscal year 2032.

The 2020 Fiscal Plan provides for the gradual reduction and the ultimate elimination of Commonwealth budgetary subsidies to municipalities, which constitute a material portion of the operating revenues of certain municipalities. Since fiscal year 2017, Commonwealth appropriations to municipalities have been reduced by approximately 64% (from approximately $370 million in fiscal year 2017 to approximately $132 million in fiscal year 2020). In response to the COVID-19 crisis, the 2020 Fiscal Plan provided for a one-year pause on reductions to appropriations to municipalities. Accordingly, appropriations to municipalities for fiscal year 2021 remained at $132 million, rather than declining by $44 million as contemplated by the prior fiscal plan. In addition, the Governor signed an executive order that adopts the “Strategic Plan for Disbursement” of the $2.2 billion allocated to Puerto Rico by the Coronavirus Relief Fund created by the Federal Government through the Coronavirus Aid, Relief, and Economic Security Act. Such plan assigns $100 million to municipalities for eligible expenses related to COVID-19. The 2020 Fiscal Plan contemplates additional reductions in appropriations to municipalities starting in fiscal year 2022, before eventually phasing out all appropriations in fiscal year 2025. The 2020 Fiscal Plan notes that municipalities have made little or no progress towards implementing fiscal discipline required to reduce reliance on Commonwealth appropriations and better address the impact of declining populations and that, as currently operating, many municipalities are not fiscally sustainable.

 

Other Fiscal Plans. Pursuant to PROMESA, the Oversight Board has also requested and certified fiscal plans for several public corporations and instrumentalities. The certified fiscal plan for the Puerto Rico Electric Power Authority (“PREPA”), Puerto Rico’s electric power utility, contemplated the transformation of Puerto Rico’s electric system through, among other things, the establishment of a public-private partnership with respect to PREPA’s transmission and distribution system, and calls for significant structural reforms at PREPA. The procurement process for the establishment of a public-private partnership with respect to PREPA’s transmission and distribution system (the “T&D System”) was completed in June 2020. The selected proponent, LUMA Energy LLC (“LUMA”), and PREPA entered into a 15-year agreement whereby LUMA will be responsible for operating, maintaining and modernizing the T&D System.

 

On June 26, 2020, the Oversight Board certified a fiscal plan (the “CRIM Fiscal Plan”) for the Municipal Revenue Collection Center, the government entity responsible for collecting property taxes and distributing them among the municipalities. The CRIM Fiscal Plan outlines a series of measures centered around improving the competitiveness of Puerto Rico’s property tax regime and the enhancement of property tax collections, including identifying and appraising new properties as well as improvements to existing properties, and implementing operational and technological initiatives.

 

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Pending Title III Proceedings

 

On May 3, 2017, the Oversight Board, on behalf of the Commonwealth, filed a petition in the U.S. District Court to restructure the Commonwealth’s liabilities under Title III of PROMESA. The Oversight Board 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 (“ERS”), the Puerto Rico Highways and Transportation Authority, PREPA and the Puerto Rico Public Buildings Authority (“PBA”). On February 12, 2019, the government completed a restructuring of COFINA’s debts pursuant to a plan of adjustment confirmed by the U.S. District Court. On September 27, 2019, the Oversight Board filed a plan of adjustment for the Commonwealth, ERS and PBA in the pending debt restructuring proceedings under Title III of PROMESA. On February 9, 2020, the Oversight Board announced that it had reached a new agreement with certain bondholders on a new framework for a plan of adjustment and, on February 28, 2020, the Oversight Board filed an amended plan of adjustment reflecting such new agreement. In light of the COVID-19 pandemic, however, the Oversight Board requested that the court adjourn court proceedings related to the Proposed Plan of Adjustment so as to allow for the Government and the Oversight Board to prioritize the health and safety of the people of Puerto Rico and to gain a better understanding of the economic and fiscal impact of the pandemic.

 

PROMESA Adversary Proceeding

 

In 2019, the Oversight Board commenced an adversary proceeding against the Commonwealth seeking to invalidate Act 29-2019 (“Act 29”), which eliminated the obligation of municipalities to contribute to the Commonwealth’s health plan and pay-as-you-go retirement system, on the grounds that Act 29 was inconsistent with the 2019 Fiscal Plan. On April 15, 2020, the Judge ruled in favor of the Oversight Board and declared Act 29 “unenforceable and of no effect.” Judge Swain delayed the effective date of the opinion and order for three weeks, through May 6, 2020, to provide time for the Government and the Oversight Board to agree on a mechanism for the reimbursement to the Commonwealth of approximately $166 million and $32 million, respectively, on account of retirement and health plan obligations due by municipalities as a result of the invalidation of Act 29. Subsequent to the Court’s decision, the Oversight Board, the Government and the Municipal Revenue Collection Center (“CRIM”), which is the entity primarily responsible for the collection of property taxes for the municipalities, made various proposals to resolve the immediate fiscal impact of Act 29’s invalidation. On May 6, 2020, the Government filed a motion informing the Court that CRIM had agreed to accept a proposal by the Oversight Board to reverse a $132 million transfer from the Commonwealth to the municipalities in the Commonwealth’s fiscal year 2020 budget (to be allocated among municipalities) to offset the approximately $198 million obligation of municipalities for the health plan and pay-as-you go retirement system payments for fiscal year 2020. The remaining $66 million would have to be repaid by municipalities by the end of fiscal year 2022 from other sources of revenue. There continue to be differences between the Government and the Oversight Board as to the calculation of the municipalities obligation for the health plan and retirement system payments, as well as to long-term solutions to the fiscal consequences to the municipalities of Act 29’s invalidation. The effect of the court’s decision and the implementation of the offset proposal described above on municipal finances is likely to vary significantly across municipalities.

 

 

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 have been 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 and the adjustment measures required by the fiscal plans present significant economic risks. In addition, the COVID-19 outbreak has affected many of our individual customers and customers’ businesses. This, when added to Puerto Rico’s ongoing fiscal crisis and recession, could cause credit losses that adversely affect us and may negatively affect consumer confidence, result in reductions in consumer spending, and adversely impact our interest and non-interest revenues. If global or local economic conditions worsen or the Government of Puerto Rico and the Oversight Board are unable to adequately manage the Commonwealth’s fiscal and economic challenges, including by controlling the adverse impact of the COVID-19 pandemic and consummating an orderly restructuring of the Commonwealth’s debt obligations while continuing to provide essential services, these adverse effects could continue or worsen in ways that we are not able to predict.

 

At September 30, 2020 and December 31, 2019, the Corporation’s direct exposure to the Puerto Rico government and its instrumentalities and municipalities totaled $370 million and $432 million, respectively, which amounts were fully outstanding on

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such dates. On July 1, 2020 the Corporation received principal payments amounting to $58 million from various obligations from Puerto Rico municipalities. 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, $335 million consists of loans and $35 million are securities ($391 million and $41 million, respectively, at December 31, 2019). Substantially all of the amount outstanding at September 30, 2020 were obligations from various Puerto Rico municipalities. In most cases, these were “general obligations” of a municipality, to which the applicable municipality has pledged its good faith, credit and unlimited taxing power, or “special obligations” of a municipality, to which the applicable municipality has pledged other revenues. At September 30, 2020, 74% of the Corporation’s exposure to municipal loans and securities was concentrated in the municipalities of San Juan, Guaynabo, Carolina and Bayamón. For additional discussion of the Corporation’s direct exposure to the Puerto Rico government and its instrumentalities and municipalities, refer to Note 21 – Commitments and Contingencies.

 

In addition, at September 30, 2020, the Corporation had $321 million in loans insured or securities issued by Puerto Rico governmental entities, but for which the principal source of repayment is non-governmental ($350 million at December 31, 2019). These included $264 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, 2019 - $276 million). These mortgage loans are secured by first mortgages on Puerto Rico residential properties and the HFA insurance covers losses in the event of a borrower default and upon the satisfaction of certain other conditions. The Corporation also had, at September 30, 2020, $46 million in bonds issued by HFA which are secured by second mortgage loans on Puerto Rico residential properties, and for which HFA also provides insurance to cover losses in the event of a borrower default, and upon the satisfaction of certain other conditions (December 31, 2019 - $46 million). In the event that the mortgage loans insured by HFA and held by the Corporation directly or those serving as collateral for the HFA bonds default and the collateral is insufficient to satisfy the outstanding balance of 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. The Corporation does not consider the government guarantee when estimating the credit losses associated with this portfolio. Although the Governor is currently authorized by local legislation to impose a temporary moratorium on the financial obligations of the HFA, she has not exercised this power as of the date hereof. In addition, at September 30, 2020, the Corporation had $11 million of commercial real estate notes issued by government entities but that are payable from rent paid by non-governmental parties (December 31, 2019 - $21 million). On January 1, 2020, the Corporation received a payment amounting to $7 million upon the maturity of securities issued by HFA which had been economically defeased and refunded and for which securities consisting of U.S. agencies and Treasury obligations had been escrowed (December 31, 2019 - $7 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, which have been and maybe be further exacerbated as a result of the effects of the COVID-19 pandemic, that could adversely affect the ability of its public corporations and instrumentalities to service their outstanding debt obligations. PROMESA does not apply to the USVI and, as such, there is currently no federal legislation permitting the restructuring of the debts of the USVI and its public corporations and instrumentalities.

 

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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 September 30, 2020, the Corporation’s direct exposure to USVI instrumentalities and public corporations amounted to approximately $76 million, of which $67 million is outstanding (compared to $71 million and $67 million, respectively, at December 31, 2019). 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) $20 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) $5 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, $17 million and $8 million, respectively, at December 31, 2019).

 

British Virgin Islands

 

The Corporation has operations in the British Virgin Islands (“BVI”), which has been negatively affected by the COVID-19 pandemic, particularly as a reduction in the tourism activity which accounts for a significant portion of its economy. Although the Corporation has no significant exposure to a single borrower in the BVI, it has a loan portfolio amounting to approximately $253 million comprised of various retail and commercial clients, including a loan of approximately $19 million with the government of the BVI.

 

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, $1.8 billion of residential mortgages, $1.4 billion of SBA loans under the PPP program and $61 million commercial loans were insured or guaranteed by the U.S. Government or its agencies at September 30, 2020 (compared to $1.1 billion, $0 and $66 million, respectively, at December 31, 2019).

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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 16.

The Corporation adopted the CECL accounting standard effective January 1, 2020. This framework requires management to estimate credit losses over the full remaining expected life of the loan using economic forecasts over a reasonable and supportable period, and historical information thereafter.

The Corporation’s credit performance remained stable during the third quarter of 2020, aided by payment deferrals, government stimulus measures instituted in response to the COVID-19 pandemic and the resumption of collection efforts. Notwithstanding these indicators and the increase in economic activity experienced during the quarter, the effect of the pandemic and the full extent of its economic disruption remains uncertain. Management believes that the improvement over the last few years in the risk profile of the Corporation’s loan portfolios better positions Popular to operate successfully under the ongoing challenging environment. Management will continue to carefully monitor the exposure of the portfolios to the COVID-19 pandemic related risks, changes in the economic outlook of the regions in which we operate and how delinquencies and NCOs evolve during the next several quarters.

At September 30, 2020, total non-performing assets (“NPAs”) increased by $189 million when compared with December 31, 2019. Total non-performing loans held-in-portfolio increased by $207 million from December 31, 2019, impacted by the adoption of the CECL methodology during the first quarter of 2020. Following existing accounting guidance, purchased credit impaired (“PCI’) loans were excluded from non-performing status due to the estimation of cash flows at the pool level. Under CECL, these loans are accounted for on an individual loan basis under PCD accounting methodology and are no longer excluded from non-performing status. BPPR’s NPLs increased by $194 million, mostly related to the PCI loans transition impact of $260 million, while Popular Bank’s NPLs increased by $12 million. Excluding this impact, BPPR’s NPLs decreased by $66 million, mainly due to lower mortgage and consumer NPLs of $47 million and $22 million, respectively, aided by payment deferrals, government stimulus measures and the resumption of collection efforts. These NPL reductions were in part offset by the addition of a $22 million construction relationship. Popular Bank’s NPLs increase of $12 million was mostly driven by a $9 million construction NPL inflow during the quarter related to a single borrower from the New York region. At September 30, 2020, the ratio of NPLs to total loans held-in-portfolio was 2.5% compared to 1.9% in the fourth quarter of 2019. In addition, non-performing loans-held-for-sale (“LHFS’) increased by $4 million, driven by taxi medallion loans, and other real estate owned loans (“OREOs”) decreased by $21 million, mostly due to the suspension of foreclosure activity due to the COVID-19 pandemic.

At September 30, 2020, NPLs secured by real estate amounted to $615 million in the Puerto Rico operations and $35 million in the Popular U.S. operations. These figures were $406 million and $26 million, respectively, at December 31, 2019.

The Corporation’s commercial loan portfolio secured by real estate (“CRE”) amounted to $7.8 billion at September 30, 2020, of which $1.9 billion was secured with owner occupied properties, compared with $7.7 billion and $1.9 billion, respectively, at December 31, 2019. CRE NPLs amounted to $200 million at September 30, 2020, compared with $113 million at December 31, 2019. The CRE NPL ratios for the BPPR and Popular U.S. segments were 5.22% and 0.06%, respectively, at September 30, 2020, compared with 2.88% and 0.07%, respectively, at December 31, 2019.

In addition to the NPLs included in Table 16, at September 30, 2020, there were $241 million of performing loans, mostly commercial loans, which in management’s opinion, are currently subject to potential future classification as non-performing (December 31, 2019 - $207 million).

Inflows of NPLs held-in-portfolio, excluding consumer loans, increased by $14.0 million, when compared to the inflows for the same quarter in 2019, mostly due to higher inflows in the construction portfolio of $30.4 million, driven by two relationships in the BPPR and PB construction segments of $21.5 million and $9.1 million, respectively, coupled with higher PB commercial inflows of $12.1 million related to an administrative delinquency on a performing loan that matured and reached 90 days during its renewal process. These increases were offset in part by lower commercial inflows of $23 million in the BPPR segment, as the prior year was impacted by certain troubled debt restructured commercial real estate loans.

 

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Table 16 - Non-Performing Assets

 

September 30, 2020

 

 

December 31, 2019

 

(Dollars in thousands)

 

BPPR

 

Popular U.S.

 

Popular, Inc.

 

As a % of loans HIP by category

 

 

BPPR

 

Popular U.S.

 

Popular, Inc.

 

As a % of loans HIP by category

 

Commercial[1]

$

241,984

$

6,394

$

248,378

 

1.8

%

$

147,255

$

3,505

$

150,760

 

1.2

%

Construction

 

21,514

 

9,069

 

30,583

 

3.3

 

 

119

 

26

 

145

 

-

 

Legacy[2]

 

-

 

1,360

 

1,360

 

8.4

 

 

-

 

1,999

 

1,999

 

9.0

 

Leasing

 

3,217

 

-

 

3,217

 

0.3

 

 

3,657

 

-

 

3,657

 

0.3

 

Mortgage[1]

 

370,060

 

14,484

 

384,544

 

4.9

 

 

283,708

 

11,091

 

294,799

 

4.1

 

Auto

 

13,454

 

-

 

13,454

 

0.4

 

 

31,148

 

-

 

31,148

 

1.1

 

Consumer [1]

 

43,447

 

9,385

 

52,832

 

2.0

 

 

33,313

 

12,020

 

45,333

 

1.5

 

Total non-performing loans held-in-portfolio

 

693,676

 

40,692

 

734,368

 

2.5

%

 

499,200

 

28,641

 

527,841

 

1.9

%

Non-performing loans held-for-sale [3]

 

-

 

4,070

 

4,070

 

 

 

 

-

 

-

 

-

 

 

 

Other real estate owned (“OREO”)

 

98,958

 

1,634

 

100,592

 

 

 

 

120,011

 

2,061

 

122,072

 

 

 

Total non-performing assets

$

792,634

$

46,396

$

839,030

 

 

 

$

619,211

$

30,702

$

649,913

 

 

 

Accruing loans past due 90 days or more[4] [5]

$

1,212,944

$

3

$

1,212,947

 

 

 

$

460,133

$

-

$

460,133

 

 

 

Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-performing assets to total assets

 

1.44

%

0.43

%

1.27

%

 

 

 

1.49

%

0.29

%

1.25

%

 

 

Non-performing loans held-in-portfolio to loans held-in-portfolio

 

3.20

 

0.53

 

2.50

 

 

 

 

2.47

 

0.40

 

1.93

 

 

 

Allowance for credit losses to loans held-in-portfolio

 

3.48

 

2.22

 

3.15

 

 

 

 

2.14

 

0.62

 

1.74

 

 

 

Allowance for credit losses to non-performing loans, excluding held-for-sale

 

108.77

 

421.05

 

126.07

 

 

 

 

86.67

 

157.32

 

90.50

 

 

 

HIP = “held-in-portfolio”

[1] The increase in non-accrual loans includes the initial impact of $278 million related to the adoption of CECL on the portfolio of previously purchased credit deteriorated loans. This includes mortgage loans for $133 million, commercial loans for $131 million and $14 million in consumer loans.

[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] There were $4 million in non-performing commercial loans held-for-sale as of September 30, 2020, none for the quarter ended December 31, 2019.

[4] 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. During the third quarter the Corporation purchased $688 million in GNMA loans of which $684 million are included in the 90 days past due category including $324 million previously accounted under the repurchase option at June 30, 2020. These include loans rebooked this quarter, which were previously pooled into GNMA securities amounting to $161 million (December 31, 2019 - $103 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 repurchases option are required to be reflected (rebooked) on the financial statements of BPPR with an offseting liability. Loans in our serviced GNMA portfolio benefit from payment forbearance programs but continue to reflect the contractual delinquency until the borrower repays deferred payments or completes a payment deferral modification or other borrower assistance alternative. Additionally, these balances include $318 million of residential mortgage loans insured by FHA or guaranteed by the VA that are no longer accruing interest as of September 30, 2020 (December 31, 2019 - $213 million). Furthermore, the Corporation has approximately $60 million in reverse mortgage loans which are guaranteed by FHA, but which are currently not accruing interest. Due to the guaranteed nature of the loans, it is the Corporation’s policy to exclude these balances from non-performing assets (December 31, 2019 - $65 million).

[5] The carrying value of loans accounted for under ASC Sub-topic 310-30 that are contractually 90 days or more past due was $153 million at December 31, 2019. This amount is excluded from the above table as the loans’ accretable yield interest recognition is independent from the underlying contractual loan delinquency status.

 

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Table 17 - Activity in Non-Performing Loans Held-in-Portfolio (Excluding Consumer Loans)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the quarter ended September 30, 2020

 

For the nine months ended September 30, 2020

(Dollars in thousands)

 

BPPR

 

Popular U.S.

Popular, Inc.

 

BPPR

 

Popular U.S.

Popular, Inc.

Beginning balance

$

651,152

$

23,383

$

674,535

$

431,082

$

16,621

$

447,703

Transition of PCI to PCD loans under CECL

 

-

 

-

 

-

 

245,703

 

18,547

 

264,250

Plus:

 

 

 

 

 

 

 

 

 

 

 

 

 

New non-performing loans

 

83,277

 

28,843

 

112,120

 

260,944

 

42,442

 

303,386

 

Advances on existing non-performing loans

 

-

 

106

 

106

 

-

 

414

 

414

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-performing loans transferred to OREO

 

(531)

 

-

 

(531)

 

(10,969)

 

-

 

(10,969)

 

Non-performing loans charged-off

 

(4,738)

 

(463)

 

(5,201)

 

(20,880)

 

(1,392)

 

(22,272)

 

Loans returned to accrual status / loan collections

 

(95,602)

 

(20,562)

 

(116,164)

 

(272,322)

 

(34,646)

 

(306,968)

 

Loans transferred to held-for-sale

 

-

 

-

 

-

 

-

 

(10,679)

 

(10,679)

Ending balance NPLs[1]

$

633,558

$

31,307

$

664,865

$

633,558

$

31,307

$

664,865

[1] Includes $1.4 million of NPLs related to the legacy portfolio.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table 18 - Activity in Non-Performing Loans Held-in-Portfolio (Excluding Consumer Loans)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the quarter ended September 30, 2019

 

For the nine months ended September 30, 2019

(Dollars in thousands)

 

BPPR

 

Popular U.S.

Popular, Inc.

 

BPPR

 

Popular U.S.

Popular, Inc.

Beginning balance

$

459,973

$

30,088

$

490,061

$

508,303

$

26,796

$

535,099

Plus:

 

 

 

 

 

 

 

 

 

 

 

 

 

New non-performing loans

 

93,910

 

4,040

 

97,950

 

204,106

 

14,480

 

218,586

 

Advances on existing non-performing loans

 

-

 

290

 

290

 

-

 

380

 

380

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-performing loans transferred to OREO

 

(7,713)

 

(197)

 

(7,910)

 

(20,484)

 

(490)

 

(20,974)

 

Non-performing loans charged-off

 

(10,738)

 

(3,514)

 

(14,252)

 

(43,683)

 

(4,783)

 

(48,466)

 

Loans returned to accrual status / loan collections

 

(72,767)

 

(5,481)

 

(78,248)

 

(185,577)

 

(11,157)

 

(196,734)

Ending balance NPLs[1]

$

462,665

$

25,226

$

487,891

$

462,665

$

25,226

$

487,891

[1] Includes $2.3 million of NPLs related to the legacy portfolio.

 

Table 19 - Activity in Non-Performing Commercial Loans Held-in-Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the quarter ended September 30, 2020

 

For the nine months ended September 30, 2020

(Dollars in thousands)

 

BPPR

 

Popular U.S.

 

Popular, Inc.

 

 

BPPR

 

Popular U.S.

 

Popular, Inc.

Beginning balance

$

253,890

$

7,238

$

261,128

 

$

147,255

$

3,505

$

150,760

Transition of PCI to PCD loans under CECL

 

-

 

-

 

-

 

 

112,517

 

18,547

 

131,064

Plus:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New non-performing loans

 

20,250

 

12,877

 

33,127

 

 

39,391

 

15,029

 

54,420

 

Advances on existing non-performing loans

 

-

 

-

 

-

 

 

-

 

195

 

195

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-performing loans transferred to OREO

 

(39)

 

-

 

(39)

 

 

(2,241)

 

-

 

(2,241)

 

Non-performing loans charged-off

 

(1,000)

 

(452)

 

(1,452)

 

 

(4,548)

 

(1,374)

 

(5,922)

 

Loans returned to accrual status / loan collections

 

(31,117)

 

(13,269)

 

(44,386)

 

 

(50,390)

 

(18,829)

 

(69,219)

 

Loans transferred to held-for-sale

 

-

 

-

 

-

 

 

-

 

(10,679)

 

(10,679)

Ending balance NPLs

$

241,984

$

6,394

$

248,378

 

$

241,984

$

6,394

$

248,378

179

 

Table 20 - Activity in Non-Performing Commercial Loans Held-in-Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the quarter ended September 30, 2019

 

For the nine months ended September 30, 2019

(Dollars in thousands)

 

BPPR

 

Popular U.S.

 

Popular, Inc.

 

 

BPPR

 

Popular U.S.

 

Popular, Inc.

Beginning balance

$

149,139

$

6,209

$

155,348

 

$

182,950

$

1,076

$

184,026

Plus:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New non-performing loans

 

43,650

 

734

 

44,384

 

 

56,413

 

7,316

 

63,729

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-performing loans transferred to OREO

 

(972)

 

-

 

(972)

 

 

(3,683)

 

-

 

(3,683)

 

Non-performing loans charged-off

 

(2,005)

 

(1,302)

 

(3,307)

 

 

(22,854)

 

(2,032)

 

(24,886)

 

Loans returned to accrual status / loan collections

 

(23,446)

 

(2,310)

 

(25,756)

 

 

(46,460)

 

(3,029)

 

(49,489)

Ending balance NPLs

$

166,366

$

3,331

$

169,697

 

$

166,366

$

3,331

$

169,697

 

Table 21 - Activity in Non-Performing Construction Loans Held-in-Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the quarter ended September 30, 2020

 

For the nine months ended September 30, 2020

(Dollars in thousands)

 

BPPR

 

Popular U.S.

 

Popular, Inc.

 

 

BPPR

 

Popular U.S.

 

Popular, Inc.

Beginning balance

$

-

$

-

$

-

 

$

119

$

26

$

145

Plus:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New non-performing loans

 

21,514

 

9,069

 

30,583

 

 

21,514

 

9,069

 

30,583

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans returned to accrual status / loan collections

 

-

 

-

 

-

 

 

(119)

 

(26)

 

(145)

Ending balance NPLs

$

21,514

$

9,069

$

30,583

 

$

21,514

$

9,069

$

30,583

 

Table 22 - Activity in Non-Performing Construction Loans Held-in-Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the quarter ended September 30, 2019

 

For the nine months ended September 30, 2019

(Dollars in thousands)

 

BPPR

 

Popular U.S.

 

Popular, Inc.

 

 

BPPR

 

Popular U.S.

 

Popular, Inc.

Beginning balance

$

1,788

$

12,060

$

13,848

 

$

1,788

$

12,060

$

13,848

Plus:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advances on existing non-performing loans

 

-

 

215

 

215

 

 

-

 

215

 

215

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-performing loans charged-off

 

-

 

(2,215)

 

(2,215)

 

 

-

 

(2,215)

 

(2,215)

 

Loans returned to accrual status / loan collections

 

(1,514)

 

-

 

(1,514)

 

 

(1,514)

 

-

 

(1,514)

Ending balance NPLs

$

274

$

10,060

$

10,334

 

$

274

$

10,060

$

10,334

180

 

Table 23 - Activity in Non-Performing Mortgage Loans Held-in-Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the quarter ended September 30, 2020

 

For the nine months ended September 30, 2020

(Dollars in thousands)

 

BPPR

 

Popular U.S.

 

Popular, Inc.

 

 

BPPR

 

Popular U.S.

 

Popular, Inc.

Beginning balance

$

397,262

$

14,144

$

411,406

 

$

283,708

$

11,091

$

294,799

Transition of PCI to PCD loans under CECL

 

-

 

-

 

-

 

 

133,186

 

-

 

133,186

Plus:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New non-performing loans

 

41,513

 

6,897

 

48,410

 

 

200,039

 

18,344

 

218,383

 

Advances on existing non-performing loans

 

-

 

48

 

48

 

 

-

 

111

 

111

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-performing loans transferred to OREO

 

(492)

 

-

 

(492)

 

 

(8,728)

 

-

 

(8,728)

 

Non-performing loans charged-off

 

(3,738)

 

(11)

 

(3,749)

 

 

(16,332)

 

(18)

 

(16,350)

 

Loans returned to accrual status / loan collections

 

(64,485)

 

(6,594)

 

(71,079)

 

 

(221,813)

 

(15,044)

 

(236,857)

Ending balance NPLs

$

370,060

$

14,484

$

384,544

 

$

370,060

$

14,484

$

384,544

Table 24 - Activity in Non-Performing Mortgage loans Held-in-Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the quarter ended September 30, 2019

 

For the nine months ended September 30, 2019

(Dollars in thousands)

 

BPPR

 

Popular U.S.

 

Popular, Inc.

 

 

BPPR

 

Popular U.S.

 

Popular, Inc.

Beginning balance

$

309,046

$

9,350

$

318,396

 

$

323,565

$

11,033

$

334,598

Plus:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New non-performing loans

 

50,260

 

3,306

 

53,566

 

 

147,693

 

6,954

 

154,647

 

Advances on existing non-performing loans

 

-

 

37

 

37

 

 

-

 

119

 

119

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-performing loans transferred to OREO

 

(6,741)

 

(197)

 

(6,938)

 

 

(16,801)

 

(490)

 

(17,291)

 

Non-performing loans charged-off

 

(8,733)

 

-

 

(8,733)

 

 

(20,829)

 

(539)

 

(21,368)

 

Loans returned to accrual status / loan collections

 

(47,807)

 

(2,979)

 

(50,786)

 

 

(137,603)

 

(7,560)

 

(145,163)

Ending balance NPLs

$

296,025

$

9,517

$

305,542

 

$

296,025

$

9,517

$

305,542

Loan Delinquencies

Another key measure used to evaluate and monitor the Corporation’s asset quality is loan delinquencies. Loans delinquent 30 days or more, as a percentage of their related portfolio category at September 30, 2020 and December 31, 2019, are presented below.

 

Table 25 - Loan Delinquencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

September 30, 2020

 

 

December 31, 2019

 

Loans delinquent 30 days or more

Total loans

Total delinquencies as a percentage of total loans

Loans delinquent 30 days or more

Total loans

Total delinquencies as a percentage of total loans

Commercial

$

303,067

$

13,611,374

 

2.23

%

$

231,692

$

12,312,751

 

1.88

%

Construction

 

35,478

 

936,274

 

3.79

 

 

1,700

 

831,092

 

0.20

 

Legacy

 

1,417

 

16,168

 

8.76

 

 

2,056

 

22,105

 

9.30

 

Leasing

 

13,921

 

1,153,108

 

1.21

 

 

18,724

 

1,059,507

 

1.77

 

Mortgage [1]

 

1,987,098

 

7,924,441

 

25.08

 

 

1,299,443

 

7,183,532

 

18.09

 

Consumer

 

170,993

 

5,751,145

 

2.97

 

 

249,987

 

5,997,886

 

4.17

 

Loans held-for-sale

 

4,278

 

102,760

 

4.16

 

 

-

 

59,203

 

-

 

Total

$

2,516,252

$

29,495,270

 

8.53

%

$

1,803,602

$

27,466,076

 

6.57

%

[1] Loans delinquent 30 days or more includes $1.3 billion of residential mortgage loans insured by FHA or guaranteed by the VA as of September 30, 2020 (December 31, 2019 - $617 million). Refer to Note 8 to the Consolidated Financial Statements for additional information of guaranteed loans.

181

 

Allowance for Credit Losses Loans Held-in-Portfolio

The Corporation adopted the new CECL accounting standard effective on January 1, 2020. The allowance for credit losses (“ACL”), represents management’s estimate of expected credit losses through the remaining contractual life of the different loan segments, impacted by expected prepayments. The ACL is maintained at a sufficient level to provide for estimated credit losses on collateral dependent loans as well as troubled debt restructurings separately from the remainder of the loan portfolio. The Corporation’s management evaluates the adequacy of the ACL on a quarterly basis. In this evaluation, management considers current conditions, macroeconomic economic expectations through a reasonable and supportable period, historical loss experience, portfolio composition by loan type and risk characteristics, results of periodic credit reviews of individual loans, and regulatory requirements, amongst other factors.

 

The Corporation must rely on estimates and exercise judgment regarding matters where the ultimate outcome is unknown, such as economic developments affecting specific customers, industries or markets. Other factors that can affect management’s estimates are recalibration of statistical models used to calculate lifetime expected losses, changes in underwriting standards, financial accounting standards and loan impairment measurements, among others. Changes in the financial condition of individual borrowers, in economic conditions, and in the condition of the various markets in which collateral may be sold, may also affect the required level of the allowance for loan losses. Consequently, the business financial condition, liquidity, capital and results of operations could also be affected. Refer to Note 4 – Summary of significant accounting policies included in this Form 10-Q for a description of the Corporation’s allowance for credit losses methodology.

 

At September 30, 2020, the allowance for credit losses increased by $448 million from the fourth quarter of 2019 to $926 million, mostly related to the CECL adoption impact in the first quarter of 2020 of $315 million (“Day 1 impact”) in the allowance for credit losses related to loans. Excluding such Day 1 impact, the ACL increase was mainly attributable to the significant change in the macroeconomic conditions from the COVID-19 pandemic. Incremental reserves in the first quarter of 2020 related to the pandemic amounted to $134 million.

For the third quarter of 2020, the ACL incorporated the current economic outlook using Moody’s Analytics’ September scenarios, as well as the effect of the credit risk rating downgrades of certain commercial borrowers during the quarter, the hotel industry representing the largest impacted segment. As discussed in Note 9 to the Consolidated Financial Statements, within the process to estimate its ACL, in the third quarter of 2020 the Corporation applied probability weights to the outcomes of simulations using Moody’s Analytics’ Baseline, S3 (pessimistic) and S1 (optimistic) scenarios. The Baseline scenario carried the highest weight. The remaining weights were assigned based on the evaluation of risks to the Baseline scenario. The potential impacts of alternative scenarios, in addition to the changes within the Baseline scenario when compared to Moody’s second quarter Baseline scenario, resulted in an increase in estimated reserves of approximately $31 million. This effect was partially offset by the net impact of net charge-offs, changes to portfolio balances and credit quality.

 

The ratio of the allowance for credit losses to loans held-in-portfolio was 3.15% at September 30, 2020, compared to 1.74% at December 31, 2019. The ratio of the allowance for credit losses to NPLs held-in-portfolio stood at 126.1% compared to 90.5% in the fourth quarter of 2019.

The BPPR ACL increased by $322 million to $755 million, or 3.48% of loan-held-in portfolio, from December 31, 2019, mainly driven by the Day 1 impact of $270 million. Consumer and mortgage loans accounted for $122 million and $86 million, respectively of this impact. The Popular U.S. ACL increased by $126 million to $171 million, or 2.22% of loan held-in-portfolio, from December 31, 2019, of which $45 million was related to the CECL adoption impact. Excluding the Day 1 impact, incremental reserves for both regions were mainly due to the expected economic impact of COVID-19.

 

The provision for credit losses for the third quarter of 2020 amounted to $19.5 million, compared to $36.5 million in the same period in the prior year, a decrease of $17.1 million, reflective of lower NCOs during the quarter. Refer to the Provision for Credit Losses section of this MD&A for additional information.

 

The following tables present the breakdown of the allowance for credit losses by loan categories for the periods ended September 30, 2020 and December 31, 2019.

182

 

Table 26 - Allowance for Credit Losses - Loan Portfolios

September 30, 2020

(Dollars in thousands)

Commercial

Construction

 

Legacy [1]

 

Leasing

 

Mortgage

Consumer

Total

 

Total ACL

$

330,276

 

$

12,334

 

$

1,905

$

15,168

 

$

225,338

 

$

340,829

 

$

925,850

 

Total loans held-in-portfolio

$

13,611,374

 

$

936,274

 

$

16,168

$

1,153,108

 

$

7,924,441

 

$

5,751,145

 

$

29,392,510

 

ACL to loans held-in-portfolio

 

2.43

%

 

1.32

%

 

11.78

%

1.32

%

 

2.84

%

 

5.93

%

 

3.15

%

[1] 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. reportable segment.

 

Table 27 - Allowance for Credit Losses - Loan Portfolios

December 31, 2019

(Dollars in thousands)

Commercial

Construction

 

Legacy [1]

 

Leasing

 

Mortgage

Consumer

Total

 

Specific ALLL

$

20,533

 

$

6

 

$

-

$

61

 

$

42,804

 

$

21,822

 

$

85,226

 

Impaired loans

$

399,549

 

$

119

 

$

-

$

507

 

$

531,855

 

$

100,791

 

$

1,032,821

 

Specific ALLL to impaired loans

 

5.14

%

 

5.04

%

 

-

%

12.03

%

 

8.05

%

 

21.65

%

 

8.25

%

General ALLL

$

126,519

 

$

4,772

 

$

630

$

10,707

 

$

78,304

 

$

171,550

 

$

392,482

 

Loans held-in-portfolio, excluding impaired loans

$

11,913,202

 

$

830,973

 

$

22,105

$

1,059,000

 

$

6,651,677

 

$

5,897,095

 

$

26,374,052

 

General ALLL to loans held-in-portfolio, excluding impaired loans

 

1.06

%

 

0.57

%

 

2.85

%

1.01

%

 

1.18

%

 

2.91

%

 

1.49

%

Total ALLL

$

147,052

 

$

4,778

 

$

630

$

10,768

 

$

121,108

 

$

193,372

 

$

477,708

 

Total loans held-in-portfolio

$

12,312,751

 

$

831,092

 

$

22,105

$

1,059,507

 

$

7,183,532

 

$

5,997,886

 

$

27,406,873

 

ALLL to loans held-in-portfolio

 

1.19

%

 

0.57

%

 

2.85

%

1.02

%

 

1.69

%

 

3.22

%

 

1.74

%

[1] 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. reportable segment.

183

 

Table 28 - Annualized Net Charge-offs (Recoveries) to Average Loans Held-in-Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarters ended

 

 

September 30, 2020

 

September 30, 2019

 

 

BPPR

 

Popular U.S.

 

Popular Inc.

 

BPPR

 

Popular U.S.

 

Popular Inc.

 

Commercial

 

(0.10)

%

0.03

%

(0.05)

%

0.59

%

0.29

%

0.47

%

Construction

 

(0.33)

 

―

 

(0.07)

 

(10.43)

 

1.29

 

(0.39)

 

Leases

 

(0.12)

 

―

 

(0.12)

 

1.38

 

―

 

1.38

 

Legacy

 

―

 

(1.22)

 

(1.22)

 

―

 

(5.01)

 

(5.01)

 

Mortgage

 

0.13

 

―

 

0.11

 

0.82

 

(0.01)

 

0.71

 

Consumer

 

1.06

 

3.09

 

1.19

 

2.71

 

2.13

 

2.66

 

Total annualized net charge-offs to average loans held-in-portfolio

 

0.26

%

0.16

%

0.24

%

1.21

%

0.45

%

1.01

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

September 30, 2020

 

September 30, 2019

 

 

BPPR

 

Popular U.S.

 

Popular Inc.

 

BPPR

 

Popular U.S.

 

Popular Inc.

 

Commercial

 

―

%

(0.01)

%

(0.01)

%

0.50

%

0.34

%

0.44

%

Construction

 

(0.29)

 

(0.03)

 

(0.08)

 

(3.97)

 

0.42

 

(0.14)

 

Leases

 

0.78

 

―

 

0.78

 

0.90

 

―

 

0.90

 

Legacy

 

―

 

(0.27)

 

(0.27)

 

―

 

(7.05)

 

(7.05)

 

Mortgage

 

0.34

 

―

 

0.29

 

0.70

 

0.07

 

0.62

 

Consumer

 

2.78

 

3.16

 

2.81

 

2.24

 

3.21

 

2.31

 

Total annualized net charge-offs to average loans held-in-portfolio

 

0.88

%

0.16

%

0.69

%

1.02

%

0.47

%

0.88

%

 

Net charge-offs (“NCOs”) for the quarter ended September 30, 2020 amounted to $16.9 million, decreasing by $51.0 million, when compared to the same quarter in 2019. This decrease was mainly driven by lower NCOs in the BPPR segment, mostly due to decreases in the consumer, commercial and mortgage NCOs of $21.9 million, $12.6 million and $10.7 million, respectively, aided by the pandemic relief programs, as well as the resumption of collection and repossession activity. The Corporation continues to be attentive to changes in delinquencies and NCOs, as most deferrals expired during the third quarter of 2020 and given the uncertainty around the outlook of the pandemic.

 

Troubled Debt Restructurings

The Corporation’s TDR loans amounted to $1.7 billion at September 30, 2020, increasing by $77 million from December 31, 2019, mainly due to borrowers that needed additional COVID-19 extensions past the original 6-month moratorium window. TDRs in the BPPR segment increased by $78 million, mostly driven by higher mortgage TDRs of $50 million, coupled with a combined increase of $34 million in the commercial and construction portfolios. At September 30, 2020, the mortgage TDR loans include $650 million guaranteed by U.S. sponsored entities at BPPR, compared to $625 million at December 31, 2019. TDRs in accruing status increased by $84 million from December 31, 2019, while non-accruing TDRs decreased by $6 million.

In response to the COVID-19 pandemic, since March 2020 the Corporation has entered into loan modifications with eligible customers in mortgage, personal loans, credit cards, auto loans and leases and certain commercial credit facilities, comprised mainly of payment deferrals of up to six months, subject to certain terms and conditions. In addition, certain participating clients impacted by the seismic activity in the southern region of the island also benefitted from other loan payment moratoriums offered by the Corporation since mid-January 2020. These loan modifications do not affect the asset quality measures as the deferred payments are not deemed to be delinquent and the Corporation continues to accrue interest on these loans. The Puerto Rico Legislative Assembly enacted legislation in April 2020 that required financial institutions to offer through June 2020 moratoriums on

184

 

consumer financial products to clients impacted by the COVID-19 pandemic and in July 2020 extended the relief with respect to mortgage products through August 2020. The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), signed by the President of the United States as part of an economic stimulus package, provided relief related to U.S. GAAP requirements for loan modifications related to COVID-19 relief measures. In addition, the Federal Reserve, along with other U.S. banking regulators, also issued interagency guidance to financial institutions that offers some practical expedients for evaluating whether loan modifications that occur in response to the COVID-19 pandemic are TDRs. According to the interagency guidance, COVID-19 related short-term modifications (i.e., six months or less) granted to consumer or commercial loans that were current as of the date of the loan modification are not TDRs, since the lender can conclude that the borrower is current on their loan and thus not experiencing financial difficulties and furthermore the period of the deferral granted does not represent a more than insignificant concession on the part of the lender. In addition, a modification or deferral program that is mandated by the federal government or a state government (e.g., a state program that requires all institutions within that state to suspend mortgage payments for a specified period) does not represent a TDR. Out of the approximately $8.6 billion in loans modified under this program, approximately $30 million have been classified as TDRs. In making this determination, the Corporation considered the criteria of whether the borrower was in financial difficulty at the time of the deferral and whether the deferral period was more than insignificant, as discussed above.

At September 30, 2020, 95% of COVID-19 payment deferrals had expired. After excluding government guaranteed mortgage loans that are still pending to complete their COVID-19 related modifications, 95% of the remaining loans were current on their payments as of quarter end. Given the recent expiration of the payment moratorium, the Corporation will continue to monitor and assess the post-moratorium payment behavior of these borrowers to recognize any deterioration in these loans, and potential loss exposure, in a timely manner. Refer to Table 29 for a breakdown of loan modifications completed by the Corporation as part of the COVID-19 relief measures as of September 30, 2020.

 

Table 29 - COVID-Related Moratoriums

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan portfolio affected by Covid-related moratoriums

Total Moratoriums Granted

Active Moratoriums

Loan count

Book Value

(In thousands)

Percentage by portfolio

 

Loan count

Book Value

(In thousands)

Percentage by portfolio

Mortgage

23,209

$

2,812,171

35.5

%

 

5,240

$

552,095

7.0

%

Auto loans

48,819

 

860,419

28.3

%

 

-

 

-

-

%

Lease financing

10,803

 

402,258

34.9

%

 

-

 

-

-

%

Credit cards

19,615

 

100,711

10.8

%

 

18

 

95

-

%

Other consumer loans

23,290

 

340,561

19.2

%

 

595

 

8,706

0.5

%

Commercial

5,063

 

4,064,352

27.9

%

 

62

 

137,470

0.9

%

Total

130,799

$

8,580,472

29.2

%

 

5,915

$

698,366

2.4

%

 

Refer to Note 9 to the Consolidated Financial Statements for additional information on modifications considered TDRs, including certain qualitative and quantitative data about TDRs performed in the past twelve months.

 

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

 

185

 

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 2019 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 September 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

186

 

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 2019 Form 10-K and under “Part II – Item 1A - Risk Factors” of any subsequent Quarterly Report on Form 10-Q. 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 the risk factors below and in our 2019 Form 10-K and any subsequent Quarterly Reports on Form 10-Q.

 

The risks described in our 2019 Form 10-K and in our Quarterly Reports on Form 10-Q 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.

 

There have been no material changes to the risk factors previously disclosed under “Part I - Item 1- A - Risk Factors” in our 2019 Form 10-K, except for the risks included below which supplement the risk factors described in our 2019 Form 10-K.

 

The coronavirus (COVID-19) pandemic has significantly disrupted the global economy and the markets in which we operate, which has adversely impacted, and is likely to continue to adversely impact, our business, financial condition and results of operation. Its continued impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the direct and indirect impact of the pandemic on our employees, customers, clients, counterparties and service providers, as well as other market participants, and actions taken by governmental authorities and other third parties in response to the pandemic.

 

The COVID-19 pandemic has significantly disrupted and negatively impacted the global economy, disrupted global supply chains, created significant volatility in the financial markets, significantly increased unemployment levels worldwide and decreased consumer confidence and commercial activity generally, including in the markets in which we do business, leading to an increased risk of delinquencies, defaults and foreclosures. In response to the pandemic, governments across the world ordered the temporary closure of many businesses and the institution of social distancing, shelter in place and other health and safety requirements. While some of these restrictions have been relaxed in certain jurisdictions, in some areas they have been subject to reinstitution in response to a resurgence in the spread of the virus. The COVID-19 pandemic also contributed to:

 

In the short run, higher and more volatile credit loss expense and potential for increased charge-offs;

Loan and credit ratings downgrades, credit deterioration and defaults in many industries;

A sudden and significant reduction in the valuation of the equity, fixed-income and commodity markets and the significant increase in the volatility of those markets; and

A decrease in the rates and yields on U.S. Treasury securities and other investment securities which has led to decreased net interest income.

 

In Puerto Rico, our primary market, the Governor issued several executive orders beginning on March 15, 2020 that declared a health emergency, ordered residents to shelter in place, implemented a mandatory curfew and limited business activity, including the temporary closure or partial operation of businesses, except for certain businesses that provide essential services, including banking and financial institutions. The governments of the United States Virgin Islands (“USVI”) and the British Virgin Islands (“BVI”), as well as state governments in the United States mainland, including New York, New Jersey and Florida, where Popular Bank (“PB”) has branches, also declared states of emergency as a result of the pandemic, ordered the temporary closure of non-essential businesses , and ordered its citizens to remain sheltered in place and to observe social distancing, causing a similar significant

187

 

economic disruption. Although many of these restrictive measures have been eased or lifted, allowing for the gradual reopening of the economy, certain restrictive measures remain in place, some have been reinstated, and additional restrictive measures may be implemented in the future as a result of a resurgence in the spread of the virus.

 

The restrictions imposed by governments in response to the outbreak caused significant disruption to economic activity and an increase in unemployment in Puerto Rico, which has been facing significant fiscal and economic challenges for over a decade, as well as in the other markets in which we operate. For more information, refer to the Geographic and Government Risk section of the MD&A in this Quarterly Report on Form 10Q. Further deterioration of the Puerto Rico, USVI, BVI and the broader U.S. economy would be expected to adversely affect the ability of our borrowers to comply with their financial obligations and adversely impact demand for our products and services. The disruption in economic activity would be expected to further adversely affect the financial condition of government entities in Puerto Rico, the USVI and BVI to which we have exposure.

 

The COVID-19 pandemic has significantly disrupted our operations and negatively impacted our business, financial condition and operations. Many of BPPR’s and PB’s branches were temporarily closed in response to the pandemic. Currently, approximately 91% of BPPR’s branches are operating and nearly all PB’s branches are operating, albeit subject to measures to preserve the health and safety of our employees and customers. Furthermore, due to restrictions on non-essential business activities imposed on some of our third-party service providers, certain of BPPR’s lines of business, including mortgage originations, were suspended from mid-March to early May 2020. To protect the health and safety of our workforce, we have facilitated a significant portion of our workforce to work remotely, which further exposes the Corporation to heightened risks with respect to cyber-security, information security, other operational incidents and its ability to maintain an effective system of internal controls. Furthermore, although we have implemented a remote work protocol for may of our workers, if significant portions of our workforce, including key personnel, are unable to work effectively because of illness, government actions, or other restrictions imposed in response to the pandemic, the impact of the pandemic on our businesses could be exacerbated. Any disruption to our ability to deliver financial products or services to, or interact with, our clients and customers could also result in losses or increased operational costs, regulatory fines, penalties and other sanctions, or harm our reputation.

 

Furthermore, in response to the pandemic, beginning on March 2020, the Corporation implemented measures to ensure the continuity of our operations and the safety of our employees and customers, while providing financial relief to customers through programs such as payment moratoriums, suspensions of foreclosures and other collection activity, as well as waivers of certain fees and service charges. During the third quarter of 2020, the Corporation reinstated the imposition of these fees and service charges and resumed its delinquent loan collection efforts. Additionally, the Puerto Rico Legislative Assembly enacted legislation in April 2020 that required financial institutions to offer through June 2020 moratoriums on consumer financial products to clients impacted by the COVID-19 pandemic and thereafter extended relief with respect to mortgage products through August 2020. As of September 30, 2020, the Corporation had granted loan payment moratoriums to 125,736 eligible retail customers with an aggregate book value of $4.5 billion, and to 5,063 eligible commercial clients with an aggregate book value of $4.1 billion. These amounts include the loan payment moratoriums offered by the Corporation since mid-January 2020 to certain clients as a result of seismic activity in the Southern region of the island. At September 30, 2020, 124,884 loans with an aggregate book value of $7.9 billion had already completed their payment moratorium period, while 5,915 loans with an aggregate book value of $0.7 billion are still under the moratorium. For more information, refer to the Allowance for Credit Losses Loans Held-in-Portfolio section of the MD&A in this Quarterly Report on Form 10-Q.

 

The Federal Government approved several economic stimulus measures, including the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, that seek to cushion the economic fallout of the pandemic, including guaranteeing loans to small and medium-sized businesses through the Small Business Administration’s (“SBA”) Paycheck Protection Program (the “PPP”). However, there can be no assurance that measures taken by governmental authorities will be sufficient to offset the pandemic’s economic impact. Furthermore, moratoriums imposed by Federal and/or state law or provided voluntarily by the Corporation may limit our ability to determine the impact of the COVID-19 pandemic on the financial condition of certain of our customers and the credit quality of our loan portfolio until borrowers that have benefited from such moratoriums are required to resume loan repayments. Such moratorium and stimulus programs have also imposed significant operational burdens on the Corporation, which also heighten the risk of operational incidents, including undetected errors. Our participation (or lack of participation) in certain governmental programs enacted in response to the pandemic, including the PPP, could further result in reputational harm, litigation and/or regulatory and other government action against the Corporation. For example, the Corporation may be exposed to the risk of litigation, from both customers and non-customers that approached the Corporation regarding PPP loans, regarding its process and procedures used in processing applications under the PPP and may be exposed to adverse action for the improper conduct of its

188

 

employees in connection with such loans. Furthermore, the Corporation may also have credit risk with respect to PPP loans if the SBA determines that there has been some deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Corporation, and denies its liability under the guaranty, reduces the amount of the guaranty or, if it has already paid under the guaranty, seeks recovery of any loss related to the deficiency from the Corporation.

 

The Corporation’s financial results for the first nine months of the year reflect the impact of the business disruption and relief measures described above. For example, the Corporation’s revenue streams were impacted during the first and second quarters of the year as a result of reduced consumer transaction activity, lower interchange income, the waiver of certain late fees and service charges, as well as the suspension in mortgage origination and related securitization and loan sale activities. During the first nine months of the year, the Corporation also incurred additional expenses related to front-line employee bonuses, the enabling of remote access for employees to work from home, the expansion of employee benefits, as well as the impact of specific measures to prevent the spread of the disease and efforts related to customer relief programs, among other related expenses. As a result of the gradual reopening of the economy during the second and third quarter of 2020, the Corporation’s financial results for the third quarter of 2020 reflect the impact of increased economic activity resulting from such reopening and the related improvement in the macroeconomic environment, as well as the impact of the various government stimulus programs launched in response to the pandemic. However, the sustainability of such macroeconomic improvement will depend in part on government health measures taken in response to the pandemic, as well as the nature and length of economic stimulus initiatives. Considering these risks and uncertainties, the Corporation continues to monitor and be attentive to the impact of the COVID-19 pandemic on the markets in which we operate and our results of operations.

 

A continued deterioration in the financial condition of our consumer and commercial borrowers, as well as our customers’ and clients’ ability to fulfill contractual obligations as a result of the economic impact of the pandemic may cause the Corporation’s provision for credit losses and net charge-offs to further increase notwithstanding the incremental reserves taken by the Corporation, including the $134 million recorded in the first quarter of 2020, due to the expected impact of COVID-19. While this provision was based on management’s current best estimate of the impact of the pandemic, there is significant uncertainty with respect to the full extent of its impact and, as a result, the financial impact on the Corporation’s business, financial condition, liquidity, results of operations and capital position may be significantly greater than that estimated by management and reflected in our financial statements as of the end of the third quarter of 2020. The extent to which the COVID-19 pandemic continues to impact our business, results of operations and financial condition (including our regulatory capital, liquidity ratios and the liquidity of the bank holding company and its operating subsidiaries), as well as the operations of our clients, customers, service providers and suppliers, will depend on future developments, which are highly uncertain and cannot be predicted at this time, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.

 

Even after the pandemic subsides, the global economy may continue to experience a recession, and we anticipate our businesses would be materially and adversely affected by a prolonged recession. To the extent the pandemic adversely affects our business, financial condition, liquidity or results of operations, it may also have the effect of heightening many of the other risks described in the section entitled “Risk Factors” in our 2019 Form 10-K and any subsequent Quarterly Reports on Form 10-Q.

 

The COVID-19 pandemic’s impact on our business, financial condition, liquidity, results of operations and capital position may affect the ability of the Corporation to continue paying dividends to its shareholders or repurchase shares of the Corporation’s common stock, as well as the value of the Corporation’s goodwill and its deferred tax assets.

 

As a bank holding company, the Corporation depends primarily on dividends from its banking and other operating subsidiaries to fund its cash needs, as well as declare dividends to its shareholders and to repurchase shares of its common stock. Our banking subsidiaries are limited by law in their ability to make dividend payments and other distributions to the Corporation based on their earnings and capital position. If as a result of the effects of the COVID-19 pandemic the Corporation’s banking subsidiaries fail to generate sufficient net income to make dividend payments to the bank holding company, this would be expected to have a negative impact on the Corporation’s financial condition, liquidity, results of operation and capital position and affect the ability of the Corporation to pay dividends to its shareholders and to repurchase shares of its common stock. Additionally, continued adverse macroeconomic conditions caused by the COVID-19 pandemic could also result in further restrictions from regulators on dividends and/or repurchases of our common stock, which could limit the capital we return to our shareholders.

 

Furthermore, the impact of the COVID-19 pandemic may also adversely affect the Corporation’s goodwill and the realizability of its deferred tax assets. For example, a further decline in the Corporation’s stock price related to global and/or regional macroeconomic

189

 

conditions, the fiscal situation of the government of Puerto Rico and continued weakness in the island’s economy, reduced future earnings estimates and the continuance of the current interest rate environment could have a material impact on the determination of the fair value of our reporting units, which could in turn result in an impairment of goodwill. Similarly, the COVID-19 pandemic’s impact on the expected profitability of our businesses may affect the realizability of our deferred tax assets in our Puerto Rico and U.S. operations. An impairment of goodwill or a write-down of the Corporation’s deferred tax assets would affect the Corporation’s financial condition and results of operation.

190

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The Corporation did not have any unregistered sales of equity securities during the quarter ended September 30, 2020.

Issuer Purchases of Equity Securities

 

The following table sets forth the details of purchases of Common Stock by the Corporation during the quarter ended September 30, 2020:

 

Issuer Purchases of Equity Securities

Not in thousands

 

 

 

 

Period

Total Number of Shares Purchased (1)

Average Price Paid per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs

July 1- July 31

4,104

$

38.15

-

-

August 1- August 31

-

 

-

-

-

September 1- September 30

-

 

-

-

-

Total

4,104

$

38.15

-

-

(1) Includes 4,104 shares of the Corporation’s common stock acquired by the Corporation in connection with the satisfaction of tax withholding obligations on vested awards of restricted stock or restricted stock units granted to directors and certain employees under the Corporation’s Omnibus Incentive Plan. The acquired shares of common stock were added back to treasury stock.

191

 

Item 3. Defaults Upon Senior Securities

None.

 

 

Item 4. Mine Safety Disclosures

Not applicable.

 

 

Item 5. Other Information

None.

 

 

 

Item 6. Exhibits

 

Exhibit Index

 

Exhibit No

Exhibit Description

31.1

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)

31.2

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)

32.1

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1)

32.2

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1)

 

101. INS

 

XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline Document.

101.SCH

Inline Taxonomy Extension Schema Document(1)

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document(1)

101.DEF

Inline XBRL Taxonomy Extension Definitions Linkbase Document(1)

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document(1)

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document(1)

104

 

 

The cover page of Popular, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline XBRL (included within the Exhibit 101 attachments)(1)

 

 

(1) Included herewith

192

 

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.

 

 

POPULAR, INC.

 

(Registrant)

 

 

Date: November 9, 2020

By: /s/ Carlos J. Vázquez

 

Carlos J. Vázquez

 

Executive Vice President &

 

Chief Financial Officer

 

 

Date: November 9, 2020

By: /s/ Jorge J. García

 

Jorge J. García

 

Senior Vice President & Corporate Comptroller

193

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