POPULAR, INC.
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.
In the U.S. mainland, the Corporation provides retail, mortgage, equipment
leasing and financing, 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 and its subsidiaries. In addition,
BPPR provides certain lending activities in the U.S. through its New York
Branch. Note 33 to the Consolidated Financial Statements presents information
about the Corporation's business segments.
SIGNIFICANT EVENTS
Acquisition of Key Customer Channels and Amendments to Commercial Contracts with Evertec and Subsequent Sale of Remaining Ownership Stake in Evertec
OnJuly 1, 2022 , BPPR completed its previously announced acquisition of certain assets fromEvertec Group, LLC ("Evertec Group "), a wholly owned subsidiary of Evertec, Inc. ("Evertec"), to service certain BPPR channels ("Business Acquisition Transaction"). As a result of the closing of the Business Acquisition Transaction, BPPR acquired fromEvertec Group certain critical channels, including BPPR's retail and business digital banking and commercial cash management applications. In connection with the Business Acquisition Transaction, BPPR also entered into amended and restated service agreements withEvertec Group pursuant to whichEvertec Group will continue to provide various information technology and transaction processing services to Popular, BPPR and their respective subsidiaries. Under the amended service agreements,Evertec Group no longer has exclusive rights to provide certain of Popular's technology services. The amended service agreements include discounted pricing and lowered caps on contractual pricing escalators tied to the Consumer Price Index. As part of the transaction, BPPR and Evertec also entered into a revenue sharing structure for BPPR in connection with its merchant acquiring relationship with Evertec. Under the terms of the amended and restated Master Servicing Agreement ("MSA"), Evertec will be entitled to receive monthly payments from the Corporation to the extent that Evertec's revenues, covered under the MSA, fall below certain agreed annualized minimum amounts. As consideration for the Business Acquisition Transaction, BPPR delivered toEvertec Group 4,589,169 shares of Evertec common stock valued at closing at$169.2 million (based on Evertec's stock price onJune 30, 2022 of$36.88 ). A total of$144.8 million of the consideration for the transaction was attributed to the acquisition of the critical channels of which$28.7 million were attributed to Software Intangible Assets and$116.1 million were attributed to goodwill. The transaction was accounted for as a business combination. The remaining$24.2 million was attributed to the renegotiation of the Master Services Agreement ("MSA") with Evertec and was recorded as an expense. The Corporation also recorded a credit of$6.9 million in Evertec billings under the MSA during the third quarter of 2022 as a result of the Business Acquisition Transaction, resulting in a net expense charge for the quarter of$17.3 million . OnAugust 15, 2022 , the Corporation completed the sale of its remaining 7,065,634 shares of common stock of Evertec (the "Evertec Stock Sale", and collectively with the Business Acquisition Transaction, the "Evertec Transactions"). Following the Evertec Stock Sale, Popular no longer owns any Evertec common stock. The impact of the gain on the sale of Evertec shares used as consideration for the Business Acquisition Transaction in exchange for the acquired applications onJuly 1, 2022 and the net expense associated with the renegotiation of the MSA resulted in an after-tax gain of$97.9 million , while the Evertec Stock Sale and 123 --------------------------------------------------------------------------------
the related accounting adjustments resulted in an after-tax gain of
Capital Actions OnJuly 12, 2022 , the Corporation completed its previously announced accelerated share repurchase ("ASR") program for the repurchase of an aggregate$400 million of Popular's common stock, for which an initial 3,483,942 shares were delivered inMarch 2022 (the "March ASR Agreement"). Upon the final settlement of the March ASR Agreement, the Corporation received an additional 1,582,922 shares of common stock and recognized approximately$120 million as treasury stock with a corresponding increase in its capital surplus account. The Corporation repurchased a total of 5,066,864 shares at an average purchase price of$78.9443 under the March ASR Agreement. OnAugust 25, 2022 , the Corporation announced that, onAugust 24, 2022 , it entered into another ASR agreement to repurchase an aggregate of$231 million of Popular's common stock (the "August ASR Agreement"). The$231 million in Popular's common stock being repurchased pursuant to the August ASR Agreement is equal to the sum of the remaining$100 million in common stock repurchases contemplated as part of the Corporation's 2022 capital actions, announced onJanuary 12, 2022 , and the after-tax gain recognized by the Corporation as a result of the sale of its remaining shares common stock of Evertec, announced onAugust 15, 2022 . Under the terms of the August ASR Agreement, onAugust 26, 2022 , the Corporation made an initial payment of$231 million and received an initial delivery of 2,339,241 shares of Popular's common stock (the "Initial Shares"). The transaction was accounted for as a treasury stock transaction. Furthermore, as a result of the receipt of the Initial Shares, the Corporation recognized in stockholders' equity approximately$185 million in treasury stock and$46 million as a reduction of capital surplus. Upon the final settlement of the August ASR Agreement, the Corporation expects to further adjust its treasury stock and capital surplus accounts to reflect the final delivery or receipt of cash or shares, which will depend on the volume-weighted average price of the Corporation's common stock during the term of the August ASR Agreement, less a discount. The final settlement of the August ASR Agreement is expected to occur no later than the fourth quarter of 2022.
Hurricanes Fiona and Ian
OnSeptember 18, 2022 , Hurricane Fiona made landfall in the southwest area ofPuerto Rico as a Category 1 hurricane, bringing record rainfall and flooding throughout the island and affecting communities where BPPR does business. Hurricane Fiona's rain and winds caused a complete blackout on the island and caused considerable damage to certain sectors in the southwest region.President Biden issued a disaster declaration for the island. While the impact to BPPR's operation was not material, certain customers, highly concentrated in certain municipalities, were impacted by the disaster. As part of hurricane relief efforts on the island, the Corporation waived late-payment fees on individual lending products fromSeptember 16 through October 31, 2022 . Popular also waived, throughSeptember 30 , withdrawal fees payable by our customers at ATMs outside of the Popular network and fees payable by customers of other banking institutions at Popular's ATMs. In addition, the Corporation has offered to clients impacted by the hurricane a moratorium of up to three monthly payments, up toDecember 31, 2022 , on personal and commercial credit cards, auto loans, leases and personal loans, subject to certain eligibility requirements. Mortgage clients may also benefit from different payment relief alternatives available, depending on their type of loan. Loan relief options for commercial clients are reviewed on a case-by-case basis. Separately, onSeptember 28, 2022 , Hurricane Ian made a landfall on the west coast of centralFlorida as a Category 4 hurricane, causing extensive floods and destruction in the impacted areas inFlorida .President Biden made a major disaster declaration for certain counties in centralFlorida . PB and BPPR do not have significant operations in the area but have some limited retail and commercial clients who reside or have business activities in the impacted areas. For clients impacted by the hurricane that reside in counties inFlorida declared as disaster zones byPresident Biden , Popular has offered a moratorium for up to three payments, up toJanuary 31, 2023 , subject to certain eligibility requirements. As in the case ofPuerto Rico , relief options for commercial clients are reviewed on a case-by-case basis. The Corporation is still evaluating the impact of Hurricanes Fiona and Ian. However, given the hurricanes' limited impact in the markets in which Popular does business and low level of assistance requests received by the Corporation to date, the effect on credit risk should not be significant. 124 --------------------------------------------------------------------------------
Transfer of Securities from Available-for Sale to Held-To-Maturity
InOctober 2022 , the Corporation transferredU.S. Treasury securities with a fair value of$6.5 billion (par value of$7.4 billion ) from its available-for-sale portfolio to its held-to-maturity portfolio. This transaction was accounted for during the fourth quarter of 2022, when management changed its intent to hold these securities to maturity to reduce the impact on accumulated other comprehensive income ("AOCI") and tangible capital of further increases in interest rates. The Corporation has the intent and ability to hold these securities to maturity. The securities were reclassified at fair value at the time of the transfer. At the date of the transfer, these securities had pre-tax unrealized losses of$873.1 million recorded in AOCI. This fair value discount will be accreted to interest income and the unrealized loss remaining in AOCI will be amortized, offsetting each other through the remaining life of the securities. There were no realized gains or losses recorded as a result of this transfer.
While changes in the amount of unrealized gains and losses in AOCI have an impact on the Corporation's and its wholly-owned banking subsidiaries' tangible capital ratios, a non-GAAP measure, they do not impact regulatory capital ratios, in accordance with the regulatory framework.
OVERVIEW
Table 1 provides selected financial data and performance indicators for the
quarters and nine months-periods ended
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 inPuerto Rico . The main sources of tax-exempt interest income are certain investments in obligations of theU.S. Government , its agencies and sponsored entities, certain obligations of theCommonwealth 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 byPuerto 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 2 and 3, along with the reconciliation to net interest income (GAAP), for the quarter and nine month-period endedSeptember 30, 2022 as compared with the same period in 2021, 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
? For the quarter endedSeptember 30, 2022 , the Corporation recorded net income of$ 422.4 million , compared to net income of$ 248.1 million for the same quarter of the previous year. Net interest margin for the third quarter of 2022 was 3.32%, an increase of 55 basis points when compared to 2.77% for the same quarter of the previous year, mainly due to higher volume of loans, higher interest rate environment, and the change in mix of the money markets and investment portfolio. On a taxable equivalent basis, the net interest margin was of 3.71%, compared to 3.04% for the same quarter of the previous year. The Corporation recorded a provision for credit losses of$39.6 million , compared to a benefit of$61.2 million for the same quarter of the previous year. The higher provision for 2022 is attributed to the macroeconomic outlook and portfolio growth. The 2021 125 -------------------------------------------------------------------------------- period also included releases of credit loss reserves related to the macroeconomic uncertainty related to the Covid-19 pandemic. Non-interest income was$426.5 million for the quarter, an increase of$257.2 million when compared to the quarter endedSeptember 30, 2021 mainly due to the gain of$257.7 million from the Evertec Transactions, discussed above. Operating expenses were higher by$87.9 million principally due to higher personnel costs, professional fees,$17.3 million expenses associated with the Evertec Transactions and a goodwill impairment charge of$9 million . ? Total assets atSeptember 30, 2022 amounted to$70.7 billion , compared to$75.1 billion , atDecember 31, 2021 . The decrease was mainly due to lower money market investments, due to a decrease in deposits, partially offset by higher debt securities available-for-sale and held-to-maturity and loan growth. ? Total deposits atSeptember 30, 2022 decreased by$2.2 billion when compared to deposits atDecember 31, 2021 , mainly due to lowerPuerto Rico public sector deposits by$2.9 billion , partially offset by growth in other deposits sectors. ? Stockholders' equity totaled$3.7 billion atSeptember 30, 2022 , a decrease of$2.3 billion when compared toDecember 31, 2021 , principally due to an increase in accumulated unrealized losses on debt securities available-for-sale by$2.4 billion due to a decline in fair value of fixed-rate debt securities as a result of the rising interest rate environment, the impact of the$400 million March ASR Agreement, the$231 million August ASR Agreement, declared quarterly common stock dividends, and preferred stock dividends, partially offset by the net income of$845.5 million for the nine months endedSeptember 30, 2022 .
? At
? Capital ratios continued to be strong. As ofSeptember 30, 2022 , the Corporation's common equity tier 1 capital ratio was 16.04%, the tier 1 leverage ratio was 7.65%, and the total capital ratio was 17.92%. Refer to Table 8 for capital ratios. Refer to the Operating Results Analysis and Financial Condition Analysis within this MD&A for additional discussion of significant quarterly variances and items impacting the financial performance of the Corporation. As a financial services company, the Corporation's earnings are significantly affected by general business and economic conditions in the markets which we serve. Lending and deposit activities and fee income generation are influenced by the level of business spending and investment, consumer income, spending and savings, capital market activities, competition, customer preferences, interest rate conditions and prevailing market rates on competing products. The Corporation operates in a highly regulated environment and may be adversely affected by changes in federal and local laws and regulations. Also, competition with other financial institutions could adversely affect its profitability. The Corporation continuously monitors general business and economic conditions, industry-related indicators and trends, competition, interest rate volatility, credit quality indicators, loan and deposit demand, operational and systems efficiencies, revenue enhancements and changes in the regulation of financial services companies. The description of the Corporation's business contained in Item 1 of the Corporation's 2021 Form 10-K, while not all inclusive, discusses additional information about the business of the Corporation. Readers should also refer to "Part I - Item 1A" of the 2021 Form 10-K and "Part II - Item 1A" of this Form 10-Q for a discussion of certain risks and uncertainties to which the Corporation is subject, many beyond the Corporation's control that, in addition to the other information in this Form 10-Q, readers should consider.
The Corporation's common stock is traded on the NASDAQ Global Select Market under the symbol BPOP.
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Table 1 - Financial
Highlights
Financial Condition
Highlights
Ending balances at Average for the nine months ended
September 30, December 31, September 30, September
(In thousands) 2022 2021 Variance 2022 30, 2021 Variance
Money market investments
$ 10,969,361 $ 15,364,275 $ (4,394,914) Investment securities 30,434,052 25,267,418 5,166,634 29,429,998 22,386,777 7,043,221 Loans 31,531,253 29,299,725 2,231,528 29,965,064 29,120,107 844,957 Earning assets 65,940,353 72,103,862 (6,163,509) 70,364,423 66,871,159 3,493,264 Total assets 70,729,675 75,097,899 (4,368,224) 73,456,562 69,938,785 3,517,777 Deposits 64,819,327 67,005,088 (2,185,761) 65,486,523 61,864,897 3,621,626 Borrowings 1,300,984 1,155,166 145,818 1,046,350 1,314,592 (268,242) Stockholders' equity 3,674,838 5,969,397 (2,294,559)
5,957,864 5,715,792 242,072 Note: 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 2022 2021 Variance 2022 2021 Variance share information) Net interest income$ 579,619 $ 489,393 $ 90,226 $ 1,607,793 $ 1,456,307 $ 151,486 Provision for credit losses 39,637 (61,173) 100,810 33,499 (160,414) 193,913 (benefit) Non-interest income 426,494 169,258 257,236 738,597 477,451 261,146 Operating expenses 476,095 388,168 87,927 1,284,712 1,131,881 152,831 Income before income tax 490,381 331,656 158,725 1,028,179 962,291 65,888 Income tax expense 67,986 83,542 (15,556) 182,677 233,466 (50,789) Net income$ 422,395 $ 248,114 $ 174,281 $ 845,502 $ 728,825 $ 116,677 Net income applicable to$ 422,042 $ 247,761 $ 174,281 $ 844,443 $ 727,766 $ 116,677 common stock Net income per common share$ 5.71 $ 3.09 $ 2.62$ 11.09 $ 8.89 $ 2.20 - basic Net income per common share$ 5.70 $ 3.09 $ 2.61$ 11.07 $ 8.87 $ 2.20 - diluted Dividends declared per$ 0.55 $ 0.45 $ 0.10$ 1.65 $ 1.30 $ 0.35 common share Quarters ended September 30, Nine months ended September 30, Selected Statistical 2022 2021 2022 2021 Information Common Stock Data End market price$ 72.06 77.67$ 72.06 77.67 Book value per common share at period end 50.26 74.66 50.26 74.66 Profitability Ratios Return on assets 2.31 % 1.34 % 1.54 % 1.39 % Return on common equity 27.72 17.10 19.02 17.09 Net interest spread 3.16 2.69 2.95 2.82 Net interest spread (taxable equivalent) 3.55 2.96 3.29 3.13 - Non-GAAP Net interest margin 3.32 2.77 3.05 2.92 Net interest margin (taxable equivalent) 3.71 3.04 3.39 3.23 - Non-GAAP Capitalization Ratios Average equity to average 8.36 % 7.87 % 8.11 % 8.17 %
assets
Common equity Tier 1 capital 16.04 17.36 16.04 17.36
Tier I capital 16.10 17.43 16.10 17.43
Total capital 17.92 19.90 17.92 19.90
Tier 1 leverage 7.65 7.38 7.65 7.38
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CRITICAL ACCOUNTING POLICIES / ESTIMATES
The accounting and reporting policies followed by the Corporation and its subsidiaries conform to generally accepted accounting principles inthe 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 Other Intangible Assets; 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 inPopular, Inc.'s 2021 Form 10-K. Also, refer to Note 2 to the Consolidated Financial Statements included in the 2021 Form 10-K for a summary of the Corporation's significant accounting policies and to Note 3 to the Consolidated Financial Statements included in this Form 10-Q for information on recently adopted accounting standard updates. OPERATING RESULTS ANALYSIS NET INTEREST INCOME Net interest income for the third quarter of 2022 was$579.6 million , an increase of$90.2 million when compared to$489.4 million for the same quarter of 2021. Taxable equivalent net interest income was$646.6 million for the third quarter of 2022 compared to$536.3 million in the third quarter of 2021, an increase of$110.3 million . Net interest margin for the third quarter of 2022 was 3.32%, an increase of 55 basis points when compared to 2.77% for the same quarter of the previous year. The increase in the net interest margin is mainly due to higher earning assets yields due to a higher interest rate environment, partially offset by an increase in deposit cost. The net interest margin, on a taxable equivalent basis, for the third quarter of 2022 was 3.71%, an increase of 67 basis points when compared to 3.04% for the same quarter of 2021. The detailed variances of the increase in net interest income are described below:
Positive variances:
? Higher interest income from money market, investment and trading securities by$94.6 million mainly due to a higher yield at 2.31% compared to 1.25% in the third quarter of 2021 related to a higher interest rate environment and the investment inU.S. Treasury securities which are exempt for income tax purposes under thePuerto Rico's Internal Revenue Code. The interest rate received on excess reserves at theFederal Reserve increased by to 2.18% compared to 0.15% in the same quarter in 2021; ? Higher interest income from commercial loans by$26.0 million due to a higher average volume by$1.5 billion and higher yield by 16 basis points related to the impact of higher interest rates on variable rate loans and originations.
? The auto and lease financing portfolios interest income increased by
? Higher interest income from consumer loans by
Partially offset by:
? Higher interest expense on deposits by$33.9 million and higher yield by 29 basis points mainly due to NOW and money market deposits' higher interest expense and yield by$28.5 million and 45 basis points, respectively, driven mainly fromPuerto Rico government and commercial deposits. Prepayment penalties, late fees collected and the amortization of premiums on purchased loans are included as part of the loan yield. Interest income related to these items for the quarters endedSeptember 30, 2022 and 2021 amounted to$7.4 million and 128
--------------------------------------------------------------------------------$27.0 million , respectively. The decrease of$19.6 million is mainly related to lower amortized fees resulting from the forgiveness of PPP loans of$1.9 million compared to$19.9 million in the third quarter of 2021. Approximately 27% of the Corporation's deposits are public fund deposits from the Government ofPuerto Rico , Municipalities and government instrumentalities and corporations. These deposits are indexed to short term market rates and fluctuate in cost with changes in those rates with a one-quarter lag, in accordance with contractual terms. As a result, these deposits' costs have generally lagged variable asset repricing. Based on projected interest rate expectations and deposit volumes, we expect this condition to result in an increase in deposit costs in the fourth quarter of 2022 by approximately 150 basis points from current levels. 129 --------------------------------------------------------------------------------
Table 2 - Analysis of Levels & Yields on a Taxable Equivalent Basis (Non-GAAP)
Quarter endedSeptember 30 , Variance Average Volume Average Yields / Costs Interest Attributable to 2022 2021 Variance 2022 2021 Variance 2022 2021 Variance Rate Volume (In millions) (In thousands) Money market$ 6,721 $ 18,041 $ (11,320) 2.18 % 0.15 % 2.03 % investments$ 36,966 $ 6,914 $ 30,052 $ 36,991 $ (6,939) Investment securities 31,859 23,154 8,705 2.33 2.10 0.23 [1] 186,847 121,857 64,990 14,933 50,057 40 84 (44) 6.09 4.97 1.12 Trading securities 617 1,051 (434) 199 (633) Total money market, investment and trading
38,620 41,279 (2,659) 2.31 1.25 1.06 securities
224,430 129,822 94,608 52,123 42,485
Loans:
14,750 13,265 1,485 5.52 5.36 0.16 Commercial
205,237 179,204 26,033 5,504 20,529
835 854 (19) 6.38 5.40 0.98 Construction
13,431 11,621 1,810 2,074 (264)
1,503 1,317 186 5.90 5.99 (0.09) Leasing
22,154 19,737 2,417 (328) 2,745
7,264 7,652 (388) 5.42 5.11 0.31 Mortgage 98,348 97,806 542 5,641 (5,099)
2,818 2,435 383 11.74 11.28 0.46 Consumer 83,407 67,749 15,658 4,406 11,252
3,562 3,372 190 7.93 8.37 (0.44) Auto 71,226 71,171 55 (3,836) 3,891
30,732 28,895 1,837 6.39 6.15 0.24 Total loans 493,803 447,288 46,515 13,461 33,054
$ 69,352 $ 70,174 $ (822) 4.12 % 3.27 % 0.85 % Total earning assets $ 718,233 $ 577,110 $ 141,123 $ 65,584 $ 75,539
Interest bearing
deposits:
NOW and money
15,514 15,621 (107) 0.20 0.16 0.04 Savings 7,966 6,353 1,613 1,873 (260)
6,957 6,957 - 0.94 0.73 0.21 Time deposits 16,484 12,741 3,743 3,656 87
Total interest
48,464 50,351 (1,887) 0.50 0.21 0.29 bearing deposits 60,898 27,029 33,869 35,233 (1,364)
155 87 68 2.36 0.25 2.11 Short-term borrowings 921 54 867 594 273
Other medium and
913 1,197 (284) 4.29 4.57 (0.28) long-term debt 9,798 13,686 (3,888) (624) (3,264)
Total interest
bearing
49,532 51,635 (2,103) 0.57 0.31 0.26 liabilities 71,617 40,769 30,848 35,203 (4,355)
15,872 14,955 917 Demand deposits
Other sources of
3,948 3,584 364 funds
$ 69,352 $ 70,174 $ (822) 0.41 % 0.23 % 0.18 % Total source of funds 71,617 40,769 30,848 35,203 (4,355)
Net interest margin/
income on a
taxable equivalent
3.71 % 3.04 % 0.67 % basis (Non-GAAP) 646,616 536,341 110,275 $ 30,381 $ 79,894
3.55 % 2.96 % 0.59 % Net interest spread
Taxable equivalent
adjustment 66,997 46,947 20,050
Net interest margin/
income
non-taxable
equivalent basis
3.32 % 2.77 % 0.55 % (GAAP) $ 579,619 $ 489,394 $ 90,225
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 .
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Net interest income for the nine months ended September 30, 2022 was $1.6
billion , or $151.5 million higher than the same period in 2021. Taxable
equivalent net interest income was $1.8 billion for the nine months ended
September 30, 2022 , or $178.3 million higher than the same period in 2021. Net
interest margin was 3.05%, an increase of 13 basis points when compared to 2.92%
in 2021. The increase in net interest margin is mainly driven by a higher yield
of money market, investment and trading securities due to a higher interest rate
environment. Net interest margin, on a taxable equivalent basis, for the nine
months ended September 30, 2022 , was 3.39%, an increase of 16 basis points when
compared to the 3.23% for the same period of 2021. The drivers of the variances
in net interest income for the nine months ended September 30, 2022 were:
Positive variances:
? Higher interest income from money market, investment, and trading securities by$145.2 million due to a higher average volume by$2.6 billion mainly due to purchases ofU.S. Treasury securities, which are exempt for income tax purposes under thePuerto Rico's Internal Revenue Code, and higher yield by 38 basis points mainly due to higher interest rate received on excess reserves at theFederal Reserve by 70 basis points. The increase in investments results from higher volume of deposits by$3.6 billion as a result of Covid-19U.S. Government stimulus and other aids;
? Higher interest income from commercial loans by
? Higher interest income from the auto and lease financing portfolios by
? Higher interest income from consumer loans by
Partially offset by:
? Lower interest income from mortgage loans by
? Higher interest expense from deposits by
Prepayment penalties, late fees collected and the amortization of premiums on purchased loans are included as part of the loan yield. Interest income related to these items for the nine-months endedSeptember 30, 2022 , amounted to$36.3 million , compared to$69.7 million in the same period of 2021. The decrease in loan fee income was driven by PPP loan fees, which amounted to$16.6 million for the nine-months period endedSeptember 30, 2022 versus$50.8 million in the nine months endedSeptember 30, 2021 and lower amortization recorded from the prepayment of previously purchased credit deteriorated loans and lower amortization on the auto loans portfolios acquired in previous years. 131 --------------------------------------------------------------------------------
Table 3 - Analysis of Levels & Yields on a Taxable Equivalent Basis from Continuing Operations (Non-GAAP)
Nine months ended
Variance
Average Volume Average Yields / Costs Interest Attributable to
2022 2021 Variance 2022 2021 Variance 2022 2021 Variance Rate Volume
(In millions) (In thousands)
29,371 22,302 7,069 2.16 2.29 (0.13) Investment securities [1] 475,088 382,280 92,808 (14,297) 107,105
59 85 (26) 6.23 5.06 1.17 Trading securities 2,725 3,218 (493) 651 (1,144)
Total money market,
investment and
trading
40,399 37,751 2,648 1.80 1.42 0.38 securities 544,985 399,798 145,187 44,429 100,758
Loans:
14,245 13,475 770 5.26 5.32 (0.06) Commercial 560,408 535,126 25,282 (5,047) 30,329
781 874 (93) 5.87 5.39 0.48 Construction 34,305 35,125 (820) 3,099 (3,919)
1,447 1,265 182 5.92 6.01 (0.09) Leasing 64,225 57,055 7,170 (914) 8,084
7,315 7,761 (446) 5.33 5.08 0.25 Mortgage 292,253 295,598 (3,345) 14,103 (17,448)
2,670 2,460 210 11.44 11.24 0.20 Consumer 228,401 206,896 21,505 2,723 18,782
3,507 3,285 222 8.03 8.55 (0.52) Auto 210,623 209,460 1,163 (12,582) 13,745
29,965 29,120 845 6.20 6.16 0.04 Total loans 1,390,215 1,339,260 50,955 1,382 49,573
$ 70,364 $ 66,871 $ 3,493 3.67 % 3.48 % 0.19 % Total earning assets $ 1,935,200 $ 1,739,058 $ 196,142 $ 45,811 $ 150,331
Interest bearing deposits:
NOW and money
$ 26,385 $ 25,201 $ 1,184 0.26 % 0.13 % 0.13 % market [2] $ 52,072 $ 24,169 $ 27,903 $ 27,428 $ 475
16,100 15,128 972 0.18 0.18 - Savings 21,430 20,289 1,141 (339) 1,480
6,913 7,108 (195) 0.77 0.77 - Time deposits 40,005 40,832 (827) 979 (1,806)
Total interest bearing
49,398 47,437 1,961 0.31 0.24 0.07 deposits 113,507 85,290 28,217 28,068 149
124 92 32 1.34 0.38 0.96 Short-term borrowings 1,249 259 990 627 363
Other medium and
948 1,222 (274) 4.25 4.54 (0.29) long-term debt 30,168 41,518 (11,350) (11) (11,339)
Total interest bearing
50,470 48,751 1,719 0.38 0.35 0.03 liabilities 144,924 127,067 17,857 28,684 (10,827)
16,088 14,428 1,660 Demand deposits
3,806 3,692 114 Other sources of funds
$ 70,364 $ 66,871 $ 3,493 0.28 % 0.25 % 0.03 % Total source of funds 144,924 127,067 17,857 28,684 (10,827)
Net interest margin/ income
on a taxable equivalent
3.39 % 3.23 % 0.16 % basis (Non-GAAP) 1,790,276 1,611,991 178,285 $ 17,127 $ 161,158
3.29 % 3.13 % 0.16 % Net interest spread
Taxable equivalent
adjustment 182,483 155,684 26,799
Net interest margin/ income
non-taxable equivalent
3.05 % 2.92 % 0.13 % basis (GAAP) $ 1,607,793 $ 1,456,307 $ 151,486 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
132
--------------------------------------------------------------------------------Provision for Credit Losses - Loans Held-in-Portfolio and Unfunded Commitments
For the quarter endedSeptember 30, 2022 , the Corporation recorded an expense of$39.9 million for its reserve for credit losses related to loans held-in-portfolio and unfunded commitments. The provision for credit loss related to the loans-held-in-portfolio for the quarter endedSeptember 30, 2022 was$39.5 million , compared to the reserve release of$58.6 million for the quarter endedSeptember 30, 2021 . The provision expense was mainly driven by higher loan volumes and changes in the macroeconomic scenarios. The provision related to unfunded commitments for the third quarter of 2022 was$0.4 million , compared to the reserve release related to unfunded commitments of$1.5 million for the same period of 2021. For the quarter endedSeptember 30, 2022 , the Corporation recorded a provision for credit loss of$28.7 million for loans-held-in-portfolio for the BPPR segment, compared to a reserve release of$36.0 million for the quarter endedSeptember 30, 2021 . The PopularU.S. segment recorded a provision of$10.8 million for the quarter endedSeptember 30, 2022 , compared to a reserve release of$22.7 million for the same quarter in 2021. For the nine months endedSeptember 30, 2022 , the Corporation recorded a provision of$34.4 million for its reserve for credit losses related to loans held-in-portfolio and unfunded commitments. The provision related to the loans-held-in-portfolio for the nine months endedSeptember 30, 2022 was$35.0 million , compared to the reserve release of$151.9 million for the nine months endedSeptember 30, 2021 . The higher reserve release in 2021 reflected the improvements in the macroeconomic environment and outlook, at the time, and the related release of reserves accumulated during early stages of the Covid-19 pandemic. The provision for unfunded commitments for the nine months endedSeptember 30, 2022 reflected a benefit of$0.6 million , compared to a provision benefit of$7.5 million for the same period of 2021. The provision for credit losses for the BPPR segment was an expense of$25.2 million for the nine months endedSeptember 30, 2022 , compared to a benefit of$98.5 million for the nine months endedSeptember 30, 2021 . The PopularU.S. segment recorded a provision of$9.8 million for the nine months endedSeptember 30, 2022 , compared to a reserve release of$53.5 million for the same period in 2021. AtSeptember 30, 2022 , the total allowance for credit losses for loans held-in-portfolio amounted to$703.1 million , compared to$695.4 million as ofDecember 31, 2021 . The ratio of the allowance for credit losses to loans held-in-portfolio was 2.23% atSeptember 30, 2022 , compared to 2.38% atDecember 31, 2021 . As discussed in Note 9 to the Consolidated Financial Statements, within the process to estimate its allowance for credit losses ("ACL"), the Corporation applies probability weightings to the outcomes of simulations using Moody's Analytics' Baseline, S3 (pessimistic) and S1 (optimistic) scenarios. The baseline scenario is assigned the highest probability, followed by the pessimistic scenario given the uncertainties in the economic outlook and downside risk. Refer to Note 9 to the Consolidated Financial Statements, for additional information on the Corporation's methodology to estimate its allowance for credit losses ("ACL"). Refer to the Credit Risk section of this MD&A for a detailed analysis of net charge-offs, non-performing assets, the allowance for credit losses and selected loan losses statistics.
Provision for Credit Losses -
The Corporation's provision for credit losses related to its investment securities held-to-maturity is related to the portfolio of obligations from the Government ofPuerto Rico , states and political subdivisions. For the quarter and nine-month period endedSeptember 30, 2022 , the provision for credit losses for investment securities was a reserve release of$0.3 million and$0.9 million , respectively, compared to a$1.0 million reserve release for the quarter and nine months endedSeptember 30, 2021 . AtSeptember 30, 2022 , the total allowance for credit losses for this portfolio amounted to$7.2 million , compared to$8.1 million as ofDecember 31, 2021 . Refer to Note 7 to Consolidated Financial Statements for additional information on the ACL for this portfolio. 133
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Non-Interest Income
Non-interest income amounted to$426.5 million for the quarter endedSeptember 30, 2022 , compared to$169.3 million for the same quarter of the previous year. The results for the third quarter of 2022 included the gain from the Evertec Transactions and the related accounting adjustments of$257.7 million . Other factors that contributed to the variance in non-interest income were:
? higher other service fees by
? higher income from mortgage banking activities by$1.1 million mainly due to a positive variance of$5.5 million in the fair value adjustments on mortgage servicing rights ("MSRs") and lower realized losses on closed derivatives; partially offset by lower gain on sale of mortgage loans and securitization activity by$5.0 million . InAugust 2022 , the Corporation decided to retain in portfolio (held-to-maturity) FHA-insured mortgage originations, rather than sell them as we have done in the past. As a result, our mortgage gain on sale fees will be lower, but our tax-exempt interest income will be higher; and ? a favorable adjustment of$9.2 million in the fair value of the contingent consideration related to purchase price adjustments for the acquisition of theK2 Capital Group LLC business in 2021 (''K2 Acquisition''), as the Corporation updated its estimates related to the realizability of the earnings targets for the contingent payment; partially offset by: ? lower service charges on deposit accounts by$1.3 million mainly due to the Corporation's initiative of eliminating insufficient funds fees and modifying overdraft fees during the quarter; and
? a gain of
? lower earnings from the portfolio of equity method investments by
Non-interest income amounted to
? higher other service fees by
? higher income from mortgage banking activities by
? a favorable adjustment of
partially offset by
? higher losses on equity securities by$9.2 million due mainly to securities held for deferred benefit plans, which have an offsetting positive variance in personnel costs;
? a favorable variance in the adjustments for indemnity reserves for loans
previously sold of
? the gains recorded in 2021 for an aggregate of
134
--------------------------------------------------------------------------------Operating Expenses
Operating expenses amounted to$476.1 million for the quarter endedSeptember 30, 2022 , an increase of$87.9 million , including a$17.3 million charge in connection with the Evertec Transactions and a$9.0 million impairment of goodwill related to the 2021 K2 Acquisition, when compared with the same quarter of 2021. The variance in operating expenses was driven primarily by: ? higher personnel costs by$36.2 million mainly due to higher salaries as a result of market adjustments and annual salary revisions. The remaining increase in personnel costs is mainly related to an increase in medical insurance premiums, and higher incentives related to the profit-sharing and other incentive plans that are tied to the Corporation's financial performance;
? higher net occupancy expenses by
? higher equipment expenses by
? higher business promotion expenses by
? higher other operating expenses by$22.1 million , mainly due to higher legal reserves and the$17.3 million expense related to the Evertec Transactions, net of the$6.9 million in credits received in connection with this transaction;
? a goodwill impairment charge of
? higher other professional fees by
partially offset by:
? lower programming, processing, and other technology services by$9.8 million due to lower application hosting, IT consulting and related expenses and lower merchant processing fees reflecting savings as a result of the Evertec Transactions. Operating expenses amounted to$1.3 billion for the nine months endedSeptember 30, 2022 , an increase of$152.8 million when compared with the same period of 2021, driven primarily by:
? higher personnel cost by
? higher equipment expense by
? higher other operating taxes by
? higher professional fees by
? higher business promotion expenses by
? higher other operating expenses by$27.2 million , mainly due to higher pension plan costs, higher operating insurance expenses, and the$17.3 million expense related to the Evertec Transactions; and
? a goodwill impairment charge of
135
--------------------------------------------------------------------------------Table 4 - Operating Expenses
Quarters ended September 30, Nine months ended September 30,
(In thousands) 2022 2021 Variance 2022 2021 Variance
Personnel costs:
Salaries $ 115,887 $ 95,185 $ 20,702 $ 316,407 $ 274,814 $ 41,593
Commissions, incentives and other
bonuses 32,003 25,892 6,111 93,129 85,484 7,645
Pension, postretirement and medical
insurance 17,120 13,893 3,227 43,633 38,106 5,527
Other personnel costs, including
payroll taxes 28,833 22,677 6,156 76,458 72,926 3,532
Total personnel costs 193,843 157,647 36,196 529,627 471,330 58,297
Net occupancy expenses 27,420 24,896 2,524 78,357 75,471 2,886
Equipment expenses 26,626 22,537 4,089 75,193 66,917 8,276
Other taxes 15,966 14,459 1,507 47,461 41,623 5,838
Professional fees:
Collections, appraisals and other
credit related fees 2,527 3,166 (639) 7,555 9,972 (2,417)
Programming, processing and other
technology services 59,431 69,221 (9,790) 202,110 202,739 (629)
Legal fees, excluding collections 2,830 2,535 295 9,875 7,267 2,608
Other professional fees 47,433 29,787 17,646 116,050 85,832 30,218
Total professional fees 112,221 104,709 7,512 335,590 305,810 29,780
Communications 6,224 6,133 91 18,364 18,971 (607)
Business promotion 24,348 18,116 6,232 60,784 47,148 13,636
FDIC deposit insurance 6,610 7,181 (571) 20,445 18,891 1,554
Other real estate owned (OREO) income (2,444) (1,722) (722) (12,963) (10,554) (2,409)
Other operating expenses:
Credit and debit card processing,
volume and interchange and other
expenses 14,762 12,960 1,802 38,646 36,331 2,315
Operational losses 7,145 7,147 (2) 23,031 21,571 1,460
All other 33,579 13,322 20,257 58,696 35,283 23,413
Total other operating expenses 55,486 33,429 22,057 120,373 93,185 27,188
Amortization of intangibles 795 783 12 2,481 3,089 (608)
Goodwill impairment charge 9,000 - 9,000 9,000 - 9,000
Total operating expenses $ 476,095 $ 388,168 $ 87,927 $ 1,284,712 $ 1,131,881 $ 152,831
Income Taxes
For the quarter and nine months ended September 30, 2022 , the Corporation
recorded an income tax expense of $68.0 million and $182.7 million with an
effective tax rate ("ETR") of 14% and 18%, respectively, compared to $83.5
million and $235.5 million with an ETR of 25% and 24% for the respective periods
of 2021. The decrease in income tax expense was primarily due to the effect of
income subject to preferential tax rates mainly attributed to the gain from the
sale of Evertec shares and to and higher tax exempt income for the quarter and
nine months ended September 30, 2022 .
At September 30, 2022 , the Corporation had a net deferred tax asset amounting to
$0.9 billion , net of a valuation allowance of $0.6 billion . The net deferred tax
asset related to the U.S. operations was $0.2 billion , net of a valuation
allowance of $0.4 billion .
The Inflation Reduction Act of 2022 imposes a new corporate alternative minimum
tax ("AMT"), effective for taxable year 2023, to corporations that meet a dual
three-year average adjusted financial statement income ("AFSI") threshold of $1
billion on a worldwide basis and $100 million for its U.S. operations. The AFSI
is, in general, the GAAP net income per financial statements with certain
adjustments, including foreign taxes and tax depreciation. The Corporation is
still evaluating the application of these adjustments that could be decisive in
whether Popular is subject to the corporate AMT. If it is determined that the
Corporation is subject to the corporate AMT, it is not expected to have a
material impact on the financial statements of the Corporation.
Refer to Note 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.
REPORTABLE SEGMENT RESULTS
The Corporation's reportable segments for managerial reporting purposes consist
of Banco Popular de
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.
136
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The Corporate group reported a net income of $132.3 million for the quarter
ended September 30, 2022 , compared with a net income of $7.0 million for the
same quarter of the previous year. The increase in net income was mainly
attributed to the $128.8 million in after-tax gains recognized by the
Corporation as a result of the Evertec Stock Sale and related accounting
adjustments . For the nine months ended September 30, 2022 the Corporate group
reported net income of $143.4 million , compared to a net income of $15.9 million
for the same period of the previous year. The increase in net income was due to
impact of the Evertec Stock Sale and related accounting adjustments; lower
interest expense from the redemption in the fourth quarter of 2021 of $186.7
million in Trust Preferred Securities issued by Popular Capital Trust I ; and
higher earnings from equity method investments.
Highlights on the earnings results for the reportable segments are discussed below:
Banco Popular dePuerto Rico The Banco Popular dePuerto Rico reportable segment's net income amounted to$263.7 million for the quarter endedSeptember 30, 2022 , compared with net income of$201.0 million for the same quarter of the previous year. The factors that contributed to the variance in the financial results included the following:
? Higher net interest income by
? higher interest income from money market and investment securities by$76.3 million largely due to higher average balances ofU.S. Treasury securities and higher yields from balances maintained at theFederal Reserve . ? higher interest income from loans by$22.5 million mainly from consumer loans due to higher average balance of personal loans and credit cards higher yields; and higher average balance in commercial loans, construction and leases.
partially offset by
? higher interest expense on deposits by
The net interest margin for the quarter endedSeptember 30, 2022 was 3.27% compared to 2.75% for the same quarter in the previous year. The increase in net interest margin is driven by earnings assets mix and the higher rates for money market investments held at theFederal Reserve .
? A provision for loan losses expense of
? Non-interest income was higher by
? Higher other operating income by
? Higher other service fees by
? Higher operating expenses by
? higher personnel costs by$27.9 million driven by higher salaries and benefits due to market salary adjustments and annual salary revisions effective inJuly 2022 ; higher incentive compensation, higher profit sharing expense and increase in headcount; 137
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? higher business promotions by
? higher other operating expenses by$41.2 million due to higher allocations from the Corporate group by$19.0 million , mainly advisory services, and$17.3 million expenses related to Evertec Business Acquisition Transaction.
partially offset by
? lower professional fees by
? Lower income tax expense by
For the nine months endedSeptember 30, 2022 , the BPPR segment recorded net income of$621.8 million compared to a net income of$606.5 million for the same period of the previous year. The factors that contributed to the variance in the financial results included the following:
? Higher net interest income by
? higher interest income from money market and investment securities by$122.1 million due to higher average balances ofU.S. Treasury securities and higher yields from balances maintained at theFederal Reserve ; and ? higher interest income from loans by$8.5 million mainly from consumer loans due to higher average balances of personal loans and credit cards, partially offset by lower income from commercial loans due to average balances from PPP loans and lower yields as well as and lower income from mortgage loans.
partially offset by
? higher interest expense on deposits by
The net interest margin for the nine months endedSeptember 30, 2022 was 2.99% compared to 2.91% for the same period of the previous year. The increase in net interest margin is driven by earnings assets mix. ? An unfavorable variance of$129.4 million on the provision for loan losses, due to the reserve release in 2021, related to the reversal of loan reserves recognized early in the Covid-19 pandemic;
? Non-interest income was higher by
? Higher other operating income by
? Higher other service fees by$17.0 million mainly due to higher merchant acquiring fees related to the revenue sharing agreement entered in connection with the Evertec Business Acquisition Transaction, higher insurance commission fees and credit card fees as a result of higher interchange transactional volumes;
? Higher operating expenses by
138
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? Higher personnel costs by $47.8 driven by higher salaries and benefits due to
market salary adjustments and annual salary revisions effective in July 2022 ;
higher incentive compensation, higher profit sharing expenses and higher
hospital/ life insurance premiums.
? Higher business promotion by
? Higher other expenses by$60.2 million to due to higher allocations from the Corporate group by$34.9 million , mainly advisory services, and$17.3 million expenses related to Evertec Business Acquisition Transaction.
partially offset by
? lower professional fees by
? Lower income tax expense by
Popular
For the quarter endedSeptember 30, 2022 , the reportable segment of PopularU.S. reported a net income of$25.3 million , compared with a net income of$39.6 million for the same quarter of the previous year. The factors that contributed to the variance in the financial results included the following:
? Higher net interest income by
? higher interest income from loans by
partially offset by
? higher interest expense on deposits by
The net interest margin for the quarter ended
? An unfavorable variance of$33.9 million on the provision for loan losses and unfunded commitments due to release of$23.9 million recorded in the quarter endedSeptember 30,2021 , due to the reversal in 2021 of loan loss reserves recognized early in the Covid-19 pandemic; ? Higher non-interest income by$8.4 million mainly due to the positive fair value adjustment of$9.2 million on the contingent liability related to the K2 Acquisition.
? Higher operating expenses by
? higher personnel costs by
? the goodwill impairment charge of
partially offset by
139
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? Lower income tax expense by
For the nine months endedSeptember 30, 2022 the PB segment recorded net income of$80.4 million , compared to a net income of$106.1 million for the same period of the previous year. The factors that contributed to the variance in the financial results included the following:
? Higher net interest income by
? higher interest income from loans by
partially offset by
? higher interest expense on deposits by
The net interest margin for the nine months endedSeptember 30, 2022 was 3.72% compared to 3.35% for the same period in the previous year. The increase in net interest margin is driven by earnings assets mix, including the growth in the loan portfolio
? An unfavorable variance of
? Higher non-interest income by
? Higher operating expenses by
? higher personnel costs by
? higher other expenses by
? the goodwill impairment charge of
? Lower income tax expense by
140
--------------------------------------------------------------------------------FINANCIAL CONDITION ANALYSIS
Assets
The Corporation's total assets were
Money market investments and debt securities available-for-sale
Money market investments decreased by$13.6 billion mainly due to the deployment of liquidity to purchase investment securities and fund loan originations. A reduction in deposits, mainly from thePuerto Rico public sector also led to a reduction in money market balances. Debt securities available-for-sale and held-to-maturity increased by$3.2 billion and$1.9 billion , respectively atSeptember 30, 2022 , due mainly to purchases ofU.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 5 for a breakdown of the Corporation's loan portfolio. Also, refer to Note 8 in the Consolidated Financial Statements for detailed information about the Corporation's loan portfolio composition and loan purchases and sales.
Loans held-in-portfolio increased by$2.3 billion to$31.5 billion atSeptember 30, 2022 , mainly due to an increase in commercial and consumer loans at both BPPR and PB as well as auto and lease financing at BPPR. Table 5 - Loans Ending Balances (In thousands) September 30, 2022 December 31, 2021 Variance Loans held-in-portfolio: Commercial $ 15,366,859$ 13,732,701 $ 1,634,158 Construction 816,290 716,220 100,070 Leasing 1,538,504 1,381,319 157,185 Mortgage 7,311,713 7,427,196 (115,483) Auto 3,528,904 3,412,187 116,717 Consumer 2,960,918 2,570,934 389,984 Total loans held-in-portfolio $ 31,523,188$ 29,240,557 $ 2,282,631 Loans held-for-sale: Mortgage $ 8,065 $ 59,168$ (51,103) Total loans held-for-sale $ 8,065 $ 59,168$ (51,103) Total loans $ 31,531,253$ 29,299,725 $ 2,231,528 141
-------------------------------------------------------------------------------- Other assets Other assets amounted to$1.7 billion atSeptember 30, 2022 , compared to$1.6 billion atDecember 31, 2021 . Refer to Note 13 to the Consolidated Financial Statements for a breakdown of the principal categories that comprise the caption of "Other Assets" in the Consolidated Statements of Financial Condition atSeptember 30, 2022 andDecember 31, 2021 .
Liabilities
The Corporation's total liabilities were$67.1 billion atSeptember 30, 2022 , a decrease of$2.1 billion , compared to$69.1 billion atDecember 31, 2021 , mainly due to lower deposits as discussed below. Deposits and Borrowings The composition of the Corporation's financing to total assets atSeptember 30, 2022 andDecember 31, 2021 is included in Table 6.
Table 6 - Financing to Total Assets
% increase
September 30, December 31, (decrease) % of total assets
from 2021 to
(In millions) 2022 2021 2022 2022 2021
Non-interest bearing deposits $ 17,605 $ 15,684 12.2 % 24.9 % 20.9 %
Interest-bearing core deposits 43,481 47,954 (9.3) 61.5 63.9
Other interest-bearing deposits 3,733 3,367 10.9 5.3 4.5
Repurchase agreements 162 92 76.1 0.2 0.1
Other short-term borrowings 250 75 N.M. 0.3 0.1
Notes payable 889 989 (10.1) 1.3 1.3
Other liabilities 935 968 (3.4) 1.3 1.3
Stockholders' equity 3,675 5,969 (38.4) 5.2 7.9
Deposits
The Corporation's deposits totaled $64.8 billion at September 30, 2022 , compared
to $67.0 billion at December 31, 2021 . The deposits decrease of $2.2 billion was
mainly due to lower Puerto Rico public sector deposits by $2.9 billion at BPPR,
partially offset by growth in other deposits sectors. At September 30, 2022 ,
Puerto Rico public sector deposits amounted to $17.5 billion . These include $1.4
billion transferred out of BPPR at the beginning of October and exclude $727
million in deposits managed by the Corporation's Fiduciary Services Division ,
where it acts as custodian or escrow agent. The receipt by the Puerto Rico
Government of additional COVID-19 pandemic and hurricane recovery related
Federal assistance, and seasonal tax collections, could increase public deposit
balances at BPPR in the near term. However, the rate at which public deposit
balances may decline is uncertain and difficult to predict. The amount and
timing of any such reduction is likely to be impacted by, for example, the speed
at which COVID-19 pandemic and hurricane recovery federal assistance is
distributed, the financial condition, liquidity and cash management practices of
the Puerto Rico Government and its instrumentalities and the implementation of
fiscal and debt adjustment plans approved pursuant to PROMESA or other actions
mandated by the Fiscal Oversight and Management Board for Puerto Rico (the
"Oversight Board").
Approximately 27% of the Corporation's deposits are public fund deposits from
the Government of Puerto Rico , Municipalities and government instrumentalities
and corporations. These deposits are indexed to short term market rates and
fluctuate in cost with changes in those rates with a one-quarter lag, in
accordance with contractual terms. As a result, these deposits' costs have
generally lagged variable asset repricing. Based on projected interest rate
expectations and deposit volumes, we expect this condition to result in an
increase in deposit costs in the fourth quarter of 2022 by approximately 150
basis points from current levels.
Refer to Table 7 for a breakdown of the Corporation's deposits at
142
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Table 7 - Deposits Ending Balances
(In thousands) September 30, 2022 December 31, 2021 Variance
Demand deposits [1] $ 28,773,328 $ 25,889,732 $ 2,883,596
Savings, NOW and money market deposits
(non-brokered) 28,388,057 33,674,134 (5,286,077)
Savings, NOW and money market deposits
(brokered) 728,651 729,073 (422)
Time deposits (non-brokered) 6,731,588 6,685,938 45,650
Time deposits (brokered CDs) 197,703 26,211 171,492
Total deposits $ 64,819,327 $ 67,005,088 $ (2,185,761)
[1] Includes interest and non-interest bearing demand deposits.
Borrowings
The Corporation's borrowings totaled$1.3 billion atSeptember 30, 2022 compared to$1.2 billion atDecember 31, 2021 . 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.
Stockholders' Equity
Stockholders' equity totaled$3.7 billion atSeptember 30, 2022 , a decrease of$2.3 billion when compared toDecember 31, 2021 , principally due to an increase in accumulated unrealized losses on debt securities available-for-sale by$2.4 billion due to a decline in fair value of fixed-rate debt securities as a result of the rising interest rate environment, the impact of the$400 million March ASR Agreement, the$231 million August ASR Agreement, declared quarterly common stock dividends and preferred stock dividends, partially offset by the net income of$845.5 million for the nine months endedSeptember 30, 2022 . Refer to the Consolidated Statements of Financial Condition, Comprehensive Income and of Changes in Stockholders' Equity for information on the composition of stockholders' equity. 143 --------------------------------------------------------------------------------
REGULATORY CAPITAL
The Corporation, BPPR and PB are subject to regulatory capital requirements established by theFederal Reserve Board . The risk-based capital standards applicable to the Corporation, BPPR and PB ("Basel III capital rules") are based on the final capital framework for strengthening international capital standards, known as Basel III, of theBasel Committee on Banking Supervision . As ofSeptember 30, 2022 , the Corporation's, BPPR's and PB's capital ratios continue to exceed the minimum requirements for being "well-capitalized" under the Basel III capital rules. The risk-based capital ratios presented in Table 8, which include common equity tier 1, Tier 1 capital, total capital and leverage capital as ofSeptember 30, 2022 andDecember 31, 2021 .
Table 8 - Capital Adequacy Data
September December 31 ,
(Dollars in thousands) 30, 2022 2021
Common equity tier 1 capital:
Common stockholders equity - GAAP basis
CECL transitional amount [1] 127,127 169,502 AOCI related adjustments due to opt-out election 2,667,370 257,762Goodwill , net of associated deferred tax liability (DTL) (693,927)
(591,703)
Intangible assets, net of associated DTLs (13,738)
(16,219)
Deferred tax assets and other deductions (261,542)
(290,565)
Common equity tier 1 capital$ 5,477,985 $ 5,476,031 Additional tier 1 capital: Preferred stock 22,143 22,143 Additional tier 1 capital$ 22,143 $ 22,143 Tier 1 capital$ 5,500,128 $ 5,498,174 Tier 2 capital:
Trust preferred securities subject to phase in as tier 2 192,674 192,674 Other inclusions (deductions), net 427,796 393,257 Tier 2 capital$ 620,470 $ 585,931 Total risk-based capital$ 6,120,598 $
6,084,105
Minimum total capital requirement to be well capitalized$ 3,416,133 $
3,144,122
Excess total capital over minimum well capitalized
$ 34,161,334 $
31,441,224
Total assets for leverage ratio$ 71,908,096 $
74,238,367
Risk-based capital ratios:
Common equity tier 1 capital 16.04 % 17.42 % Tier 1 capital 16.10 17.49 Total capital 17.92 19.35 Tier 1 leverage 7.65 7.41
[1] The CECL transitional amount includes the impact of Popular's adoption of the new
CECL accounting standard on
144
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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, 2022 , 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. As of September 30, 2022 , the Corporation had phased-in
25% of the cumulative CECL deferral with the remaining impact to be recognized
over the remainder of the three-year transition period.
On April 9, 2020 , federal banking regulators issued an interim final rule to
modify the Basel III regulatory capital rules applicable to banking
organizations to allow those organizations participating in the Paycheck
Protection Program ("PPP") established under the Coronavirus Aid, Relief and
Economic Security Act (the "CARES Act") to neutralize the regulatory capital
effects of participating in the program. Specifically, the agencies have
clarified that banking organizations, including the Corporation and its Bank
subsidiaries, are permitted to assign a zero percent risk weight to PPP loans
for purposes of determining risk-weighted assets and risk-based capital ratios.
Additionally, in order to facilitate use of the Paycheck Protection Program
Liquidity Facility (the "PPPL Facility"), which provides Federal Reserve Bank
loans to eligible financial institutions such as the Corporation's Bank
subsidiaries to fund PPP loans, the agencies further clarified that, for
purposes of determining leverage ratios, a banking organization is permitted to
exclude from total average assets PPP loans that have been pledged as collateral
for a PPPL Facility. As of September 30, 2022 , the Corporation has $47 million
in PPP loans and no loans were pledge as collateral for PPPL Facilities.
The decrease in the common equity Tier I capital ratio, Tier I capital ratio,
and total capital ratio as of September 30, 2022 as compared to December 31,
2021 was mainly attributed to the accelerated share repurchase agreements to
repurchase an aggregate of $400 million and $231 million of Popular's common
stock, and an increase in risk-weighted assets driven by the growth in the
commercial loans portfolio, partially offset by the nine month period earnings.
The increase in leverage capital ratio was mainly due to the decrease in average
total assets, which mostly did not have a significant impact on the
risk-weighted assets.
Non-GAAP financial measures
The tangible common equity, tangible common equity ratio, tangible assets and
tangible book value per common share, which are presented in the table that
follows, are non-GAAP measures. Management and many stock analysts use the
tangible common equity ratio and tangible book value per common share in
conjunction with more traditional bank capital ratios to compare the capital
adequacy of banking organizations with significant amounts of goodwill or other
intangible assets, typically stemming from the use of the purchase accounting
method for mergers and acquisitions. Neither tangible common equity nor tangible
assets or related measures should be considered in isolation or as a substitute
for stockholders' equity, total assets or any other measure calculated in
accordance with GAAP. Moreover, the manner in which the Corporation calculates
its tangible common equity, tangible assets and any other related measures may
differ from that of other companies reporting measures with similar names.
Table 9 provides a reconciliation of total stockholders' equity to tangible
common equity and total assets to tangible assets as of
145
--------------------------------------------------------------------------------Table 9 - Reconciliation of Tangible Common Equity and Tangible Assets
(In thousands, except share or per share September December information) 30, 2022 31, 2021 Total stockholders' equity$ 3,674,838 $ 5,969,397 Less: Preferred stock (22,143) (22,143) Less: Goodwill (827,428) (720,293) Less: Other intangibles (13,738) (16,219) Total tangible common equity$ 2,811,529 $ 5,210,742 Total assets$ 70,729,675 $ 75,097,899 Less: Goodwill (827,428) (720,293) Less: Other intangibles (13,738) (16,219) Total tangible assets$ 69,888,509 $ 74,361,387 Tangible common equity to tangible assets 4.02 % 7.01 % Common shares outstanding at end of period 72,673,344
79,851,169
Tangible book value per common share$ 38.69 $ 65.26 Quarterly average Total stockholders' equity [1]$ 6,061,748 $ 5,777,652 Less: Preferred Stock (22,143) (22,143) Less: Goodwill (759,318) (679,959) Less: Other intangibles (24,039) (20,861) Total tangible common equity$ 5,256,248 $ 5,054,689 Return on average tangible common equity 31.86 %
18.47 % [1] Average balances exclude unrealized gains or losses on debt securities available-for-sale.
146
--------------------------------------------------------------------------------RISK MANAGEMENT
Market / Interest Rate Risk
The financial results and capital levels of the Corporation are constantly exposed to market, interest rate and liquidity risks.
Market risk refers to the risk of a reduction in the Corporation's capital due to changes in the market valuation of its assets and/or liabilities.
Most of the assets subject to market valuation risk are debt securities classified as available-for-sale. Refer to Notes 6 and 7 to the Consolidated Financial Statements for further information on the debt securities available-for-sale and held-to-maturity portfolios. Debt securities classified as available-for-sale amounted to$28.3 billion as ofSeptember 30, 2022 . Other assets subject to market risk include loans held-for-sale, which amounted to$8 million , mortgage servicing rights ("MSRs") which amounted to$131 million and securities classified as "trading", which amounted to$30 million , as ofSeptember 30, 2022 .
Interest Rate Risk ("IRR")
The Corporation's net interest income is subject to various categories of
interest rate risk, including repricing, basis, yield curve and option risks. In
managing interest rate risk, management may alter the mix of floating and fixed
rate assets and liabilities, change pricing schedules, adjust maturities through
sales and purchases of investment securities, and enter into derivative
contracts, among other alternatives.
Interest rate risk management is an active process that encompasses monitoring
loan and deposit flows complemented by investment and funding activities.
Effective management of interest rate risk begins with understanding the dynamic
characteristics of assets and liabilities and determining the appropriate rate
risk position given line of business forecasts, management objectives, market
expectations and policy constraints.
Management utilizes various tools to assess IRR, including Net Interest Income
("NII") simulation modeling, static gap analysis, and Economic Value of Equity
("EVE"). The three methodologies complement each other and are used jointly in
the evaluation of the Corporation's IRR. NII simulation modeling is prepared for
a five-year period, which in conjunction with the EVE analysis, provides
management a better view of long-term IRR.
Net interest income simulation analysis performed by legal entity and on a
consolidated basis is a tool used by the Corporation in estimating the potential
change in net interest income resulting from hypothetical changes in interest
rates. Sensitivity analysis is calculated using a simulation model which
incorporates actual balance sheet figures detailed by maturity and interest
yields or costs.
Management assesses interest rate risk by comparing various NII simulations
under different interest rate scenarios that differ in direction of interest
rate changes, the degree of change and the projected shape of the yield curve.
For example, the types of rate scenarios processed during the quarter include
flat rates, implied forwards, and parallel and non-parallel rate shocks.
Management also performs analyses to isolate and measure basis and prepayment
risk exposures.
The asset and liability management group performs validation procedures on various assumptions used as part of the simulation analyses as well as validations of results on a monthly basis. In addition, the model and processes used to assess IRR are subject to independent validations according to the guidelines established in the Model Governance and Validation policy.
The Corporation processes NII simulations under interest rate scenarios in which the yield curve is assumed to rise and decline by the same magnitude (parallel shifts). The rate scenarios considered in these market risk simulations reflect instantaneous parallel changes of -100, -200, +100, +200 and +400 basis points during the succeeding twelve-month period. Simulation analyses are based on many assumptions, including relative levels of market interest rates across all yield curve points and indexes, interest rate spreads, loan prepayments and deposit elasticity. Thus, they should not be relied upon as indicative of actual results. Further, the estimates do not contemplate actions that management could take to respond to changes in interest rates. Additionally, the Company is also subject to basis risk in the repricing of its assets and liabilities, including the basis related to using different rate indexes for the repricing of assets and liabilities, as well as the effect of pricing lags which may be contractual or due to historical differences in the timing of management responses to changes in the rate environment. By their nature, these forward-looking computations are only estimates and may be different from what may actually occur in the future. The following table presents the results of the simulations atSeptember 30, 2022 andDecember 31, 2021 , assuming a static balance sheet and parallel changes over flat spot rates over a one-year time horizon: 147 --------------------------------------------------------------------------------
Table 10 - Net Interest Income Sensitivity (One Year Projection)
September 30, 2022 December 31, 2021
(Dollars in thousands) Amount Change Percent Change Amount Change Percent Change
Change in interest rate
+400 basis points $ (12,614) (0.56) % $ 257,223 13.21 %
+200 basis points (4,286) (0.19) 197,354 10.14
+100 basis points 190 0.01 166,920 8.57
-100 basis points 34,481 1.53 (78,408) (4.03)
-200 basis points 59,368 2.63 (120,661) (6.20)
As of September 30, 2022 , NII simulations show the Corporation has a neutral to
slightly liability sensitive position driven by the rapid increase in short-term
interest rates throughout the year and its impact on Puerto Rico public sector
deposits which are indexed to market rates, as well as the deployment of cash to
fund loan growth and purchase investments. These results suggest that changes in
net interest income are driven by changes in liability costs, primarily Puerto
Rico public sector deposits. In declining rate scenarios net interest income
would increase as the decline in the cost of these deposits generates a greater
benefit than the changes in asset yields. In rising rate scenarios Popular's
sensitivity profile is also impacted by its large proportion of Puerto Rico
public sector deposits which are indexed to market rates. As short-term rates
have risen, the cost of these deposits now increases in sync with market rates
and therefore reduce the benefit banks typically have in rising rate
environments. As of September 30, 2022 , Popular has a more neutral position as
compared to a substantially asset sensitive position as of December 31, 2021 .
The primary reasons for the reduction in sensitivity are i) the realization of
much of the expected benefit in net interest income given the higher interest
rates observed during the first nine months of 2022 ii) a decrease in cash
balances (which reprice instantaneously) via the deployment into longer term
investments and loans and iii) the market indexed nature of Puerto Rico public
sector deposits which represented $17.5 billion or 27% of deposits as of
September 30, 2022 .
The Corporation's loan and investment portfolios are subject to prepayment risk,
which results from the ability of a third-party to repay debt obligations prior
to maturity. Prepayment risk also could have a significant impact on the
duration of mortgage-backed securities and collateralized mortgage obligations
since prepayments could shorten (or lower prepayments could extend) the weighted
average life of these portfolios.
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 ofU.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 holdingU.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. AtSeptember 30, 2022 andDecember 31, 2021 , the Corporation held trading securities with a fair value of$30 million , representing approximately 0.04% of the Corporation's total assets. As shown in Table 11, the trading portfolio consists principally of mortgage-backed securities andU.S. Treasuries, which atSeptember 30, 2022 were investment grade securities. As ofSeptember 30, 2022 andDecember 31, 2021 , the trading portfolio also included$0.1 million inPuerto Rico government obligations. Trading instruments are recognized at fair value, with changes resulting from fluctuations in market prices, interest rates or exchange rates reported in current period earnings. The Corporation recognized net trading account losses of$274 thousand and a net trading account gain of$58 thousand , respectively, for the quarters endedSeptember 30, 2022 andSeptember 30, 2021 . 148
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Table 11 - Trading Portfolio
September 30,
2022 December 31, 2021
Weighted Weighted
Average Average
(Dollars in thousands) Amount Yield[1] Amount Yield[1]
Mortgage-backed securities $ 14,056 5.80 % $ 22,559 5.12 %
U.S. Treasury securities 15,711 1.92 6,530 0.03
Collateralized mortgage obligations 183 5.55 257 5.61
Puerto Rico government obligations 66 0.46 85 0.47 Interest-only strips 255 12.00 280 12.00 Total$ 30,271 3.83 %$ 29,711 4.06 % [1] Not on a taxable equivalent basis. The Corporation's trading activities are limited by internal policies. For each of the two subsidiaries, the market risk assumed under trading activities is measured by the 5-day net value-at-risk ("VAR"), with a confidence level of 99%. The VAR measures the maximum estimated loss that may occur over a 5-day holding period, given a 99% probability. The Corporation's trading portfolio had a 5-day VAR of approximately$0.4 million for the last week inSeptember 2022 . There are numerous assumptions and estimates associated with VAR modeling, and actual results could differ from these assumptions and estimates. Backtesting is performed to compare actual results against maximum estimated losses, in order to evaluate model and assumptions accuracy.
In the opinion of management, the size and composition of the trading portfolio does not represent a significant source of market risk for the Corporation.
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 andOperational Risk Management Division is responsible for the independent monitoring and reporting of adherence with established policies. An institution's liquidity may be pressured if, for example, it experiences a sudden and unexpected substantial cash outflow due to exogenous events such as the COVID-19 pandemic, its credit rating is downgraded, or some other event causes counterparties to avoid exposure to the institution. Factors that the Corporation does not control, such as the economic outlook, adverse ratings of its principal markets and regulatory changes, could also affect its ability to obtain funding. Liquidity is managed by the Corporation at the level of the holding companies that own the banking and non-banking subsidiaries. It is also managed at the level of the banking and non-banking subsidiaries. As further explained below, a principal source of liquidity for the bank holding companies (the "BHCs") are dividends received from banking and non-banking subsidiaries. The Corporation has adopted policies and limits to monitor more effectively the Corporation's liquidity position and that of the banking subsidiaries. Additionally, contingency funding plans are used to model various stress events of different magnitudes and affecting different time horizons that assist management in evaluating the size of the liquidity buffers needed if those stress events occur. However, such models may not predict accurately how the market and customers might react to every event, and are dependent on many assumptions. 149 -------------------------------------------------------------------------------- Deposits, including customer deposits, brokered deposits and public funds deposits, continue to be the most significant source of funds for the Corporation, funding 92% of the Corporation's total assets atSeptember 30, 2022 and 89% atDecember 31, 2021 . The ratio of total ending loans to deposits was 49% atSeptember 30, 2022 , compared to 44% atDecember 31, 2021 . In addition to traditional deposits, the Corporation maintains borrowing arrangements, which amounted to approximately$1.3 billion in outstanding balances atSeptember 30, 2022 (December 31, 2021 -$1.2 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. OnJuly 12, 2022 , the Corporation completed its previously announced accelerated share repurchase program for the repurchase of an aggregate$400 million of Popular's common stock. In addition, during the quarter endedSeptember 30, 2022 , the Corporation entered into a$231 million ASR and received an initial delivery of 2,339,241 shares of common stock. Refer to Note 18 to the Consolidated Financial Statements for additional information.
The following sections provide further information on the Corporation's major funding activities and needs, as well as the risks involved in these activities.
Banking Subsidiaries
Primary sources of funding for the Corporation's banking subsidiaries (BPPR and PB or, collectively, "the banking subsidiaries") include retail, commercial and public sector deposits, brokered deposits, unpledged investment securities, mortgage loan securitization and, to a lesser extent, loan sales. In addition, the Corporation maintains borrowing facilities with the FHLB and at the discount window of theFederal 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 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 toFDIC limits) and this is expected to mitigate the potential effect of a downgrade in the credit ratings. Deposits are a key source of funding as they tend to be less volatile than institutional borrowings and their cost is less sensitive to changes in market rates. Refer to Table 7 for a breakdown of deposits by major types. Core deposits are generated from a large base of consumer, corporate and public sector customers. Core deposits include all non-interest bearing deposits, savings deposits and certificates of deposit under$250,000 , excluding brokered deposits with denominations under$250,000 . Core deposits have historically provided the Corporation with a sizable source of relatively stable and low-cost funds. Core deposits totaled$61.1 billion , or 94% of total deposits, atSeptember 30, 2022 , compared with$63.6 billion , or 95% of total deposits, atDecember 31, 2021 . Core deposits financed 93% of the Corporation's earning assets atSeptember 30, 2022 , compared with 88% atDecember 31, 2021 .
The distribution by maturity of certificates of deposits with denominations of
150
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Table 12 - Distribution by Maturity of Certificate of Deposits
of $250,000 and Over
(In thousands)
3 months or less $ 1,778,793
Over 3 to 12 months 695,502
Over 1 year to 3 years 226,778
Over 3 years 119,821
Total $ 2,820,894
The Corporation had $0.9 billion in brokered deposits at September 30, 2022 ,
which financed approximately 1% of its total assets (December 31, 2021 - $0.8
billion and 1%, respectively). In the event that any of the Corporation's
banking subsidiaries' regulatory capital ratios fall below those required by a
well-capitalized institution or are subject to capital restrictions by the
regulators, that banking subsidiary faces the risk of not being able to raise or
maintain brokered deposits and faces limitations on the rate paid on deposits,
which may hinder the Corporation's ability to effectively compete in its retail
markets and could affect its deposit raising efforts.
Deposits from the public sector represent an important source of funds for the
Corporation. As of September 30, 2022 , total public sector deposits were $17.5
billion , compared to $20.3 billion at December 31, 2021 . These include $1.4
billion transferred out of BPPR at the beginning of October 2022 and exclude
$727 million in deposits managed by the Corporation's Fiduciary Services
Division , where it acts as custodian or escrow agent. Generally, these deposits
require that the bank pledge high credit quality securities as collateral;
therefore, liquidity risks arising from public sector deposit outflows are lower
given that the bank receives its collateral in return. This, now unpledged,
collateral can either be financed via repurchase agreements or sold for cash.
However, there are some timing differences between the time the deposit outflow
occurs and when the bank receives its collateral. Additionally, the Corporation
mainly utilizes fixed-rate U.S. Treasury Debt Securities as collateral. While
these securities have limited credit risk, they are subject to market value risk
based on changes in the interest rate environment. When interest rates increase,
the value of this collateral decreases and could result in the Corporation
having to provide additional collateral to cover the same amount of deposit
liabilities. This additional collateral could reduce unpledged securities
otherwise available as liquidity sources to the Corporation.
At September 30, 2022 , management believes that the banking subsidiaries had
sufficient current and projected liquidity sources to meet their anticipated
cash flow obligations, as well as special needs and off-balance sheet
commitments, in the ordinary course of business and have sufficient liquidity
resources to address a stress event. Although the banking subsidiaries have
historically been able to replace maturing deposits and advances, no assurance
can be given that they would be able to replace those funds in the future if the
Corporation's financial condition or general market conditions were to
deteriorate. The Corporation's financial flexibility will be severely
constrained if the banking subsidiaries are unable to maintain access to funding
or if adequate financing is not available to accommodate future financing needs
at acceptable interest rates. The banking subsidiaries also are required to
deposit cash or qualifying securities to meet margin requirements on repurchase
agreements and other collateralized borrowing facilities. To the extent that the
value of securities previously pledged as collateral declines because of market
changes, the Corporation will be required to deposit additional cash or
securities to meet its margin requirements, thereby adversely affecting its
liquidity. Finally, if management is required to rely more heavily on more
expensive funding sources to meet its future growth, revenues may not increase
proportionately to cover costs. In this case, profitability would be adversely
affected.
Bank Holding Companies
The principal sources of funding for the BHCs, which are Popular, Inc. (holding
company only) and PNA, include cash on hand, investment securities, dividends
received from banking and non-banking subsidiaries, asset sales, credit
facilities available from affiliate banking subsidiaries and proceeds from
potential securities offerings. Dividends from banking and non-banking
subsidiaries are subject to various regulatory limits and authorization
requirements that are further described below and that may limit the ability of
those subsidiaries to act as a source of funding to the BHCs.
The principal use of these funds includes the repayment of debt, and interest
payments to holders of senior debt and junior subordinated deferrable interest
(related to trust preferred securities), the payment of dividends to common
stockholders, repurchases of the Corporation's securities and capitalizing its
banking subsidiaries.
151
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The outstanding balance of notes payable at the BHCs amounted to
The contractual maturities of the BHCs notes payable at
Table 13 - Distribution of BHC's Notes Payable by Contractual Maturity Year (In thousands) 2023$ 298,793 Later years 198,312 Total$ 497,105 The Corporation's 6.125% unsecured senior debt securities mature in the September of 2023. Annual debt service at the BHCs is approximately$32 million , and the Corporation's latest quarterly dividend was$0.55 per share or approximately$40 million per quarter. 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 debt service and dividend obligations during the foreseeable future. As ofSeptember 30, 2022 , the BHCs had cash and money markets investments totaling$222 million and borrowing potential of$193 million from its secured facility with BPPR. The BHCs have in the past borrowed in the corporate debt market primarily to finance their non-banking subsidiaries and refinance debt obligations. These sources of funding are more costly due to the fact that two out of the three principal credit rating agencies rate the Corporation below "investment grade", which affects the Corporation's cost and ability to raise funds in the capital markets. Factors that the Corporation does not control, such as the economic outlook, interest rate volatility, inflation, disruptions in the debt market, among others, could also affect its ability to obtain funding. The Corporation has an automatic shelf registration statement filed and effective with theSecurities and Exchange Commission , which permits the Corporation to issue an unspecified amount of debt or equity securities. OnJuly 1, 2022 , the Corporation exchanged a portion of Evertec shares as part of a transaction in which it acquired certain critical channels from Evertec and renegotiated several service agreements. The Corporation completed the sale of its remaining shares of Evertec onAugust 15, 2022 . Following the Evertec Stock Sale, Popular no longer owns any Evertec common stock.
Non-Banking Subsidiaries
The principal sources of funding for the non-banking subsidiaries include internally generated cash flows from operations, loan sales, repurchase agreements, capital injections and borrowed funds from their direct parent companies or the holding companies. The principal uses of funds for the non-banking subsidiaries include repayment of maturing debt, operational expenses and payment of dividends to the BHCs. The liquidity needs of the non-banking subsidiaries are minimal since most of them are funded internally from operating cash flows or from intercompany borrowings or capital contributions from their holding companies. During the period endedSeptember 30, 2022 ,Popular, Inc. made capital contributions to its wholly owned subsidiaries of$25 million toPopular Re, Inc. ,$10 million toPopular Securities and$3 million toPopular Impact Fund .
Dividends
During the nine months endedSeptember 30, 2022 , the Corporation declared cash dividends of$1.65 per common share outstanding ($124.2 million in the aggregate). The dividends for the Corporation's Series A preferred stock amounted to$1.1 million . During the nine months endedSeptember 30, 2022 , the BHC's received dividends amounting to$450 million from BPPR,$54 million from PNA,$4 million in dividends from its non-banking subsidiaries and$2 million in dividends from Evertec. In addition, during the nine months endedJune 30, 2022 ,Popular International Bank Inc. , wholly owned subsidiary ofPopular, Inc. , received$16 million in dividends from its investment in BHD. Dividends from BPPR constitutePopular, 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 liquidU.S. government debt securities,U.S. government sponsored agency debt securities,U.S. government sponsored agency mortgage-backed securities, andU.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 152 -------------------------------------------------------------------------------- unpledged debt securities amounted to$10.2 billion atSeptember 30, 2022 and$3.0 billion atDecember 31, 2021 . A substantial portion of these debt securities could be used to raise financing in theU.S. money markets or from secured lending sources. Additional liquidity may be provided through loan maturities, prepayments and sales. The loan portfolio can also be used to obtain funding in the capital markets. In particular, mortgage loans and some types of consumer loans, have secondary markets which the Corporation could use.
Off-Balance Sheet arrangements and other commitments
In the ordinary course of business, the Corporation engages in financial transactions that are not recorded on the balance sheet or may be recorded on the balance sheet in amounts that are different than the full contract or notional amount of the transaction. As a provider of financial services, the Corporation routinely enters into commitments with off-balance sheet risk to meet the financial needs of its customers. These commitments may include loan commitments and standby letters of credit. These commitments are subject to the same credit policies and approval process used for on-balance sheet instruments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position. Refer to Note 21 to the Consolidated Financial Statements for information on the Corporation's commitments to extent credit and other non-credit commitments. Other types of off-balance sheet arrangements that the Corporation enters in the ordinary course of business include derivatives, operating leases and provision of guarantees, indemnifications, and representation and warranties. Refer to Note 28 to the Consolidated Financial Statements for information on operating leases and to Note 20 to the Consolidated Financial Statements for a detailed discussion related to the Corporation's obligations under credit recourse and representation and warranties arrangements. The Corporation monitors its cash requirements, including its contractual obligations and debt commitments. As discussed above, liquidity is managed by the Corporation in order to meet its short- and long-term cash obligations. Note 16 to the Consolidated Financial Statements has information on the Corporation's borrowings by maturity, which amounted to$1.3 billion atSeptember 30, 2022 (December 31, 2021 -$1.2 billion ).
Financial information of guarantor and issuers of registered guaranteed securities
The Corporation (not including any of its subsidiaries, "PIHC") is the parent holding company ofPopular North America "PNA" and has other subsidiaries through which it conducts its financial services operations. PNA is an operating, 100% subsidiary ofPopular, Inc. Holding Company ("PIHC") and is the holding company of its wholly-owned subsidiaries:Equity One, Inc. and PB, including PB's wholly-owned subsidiariesPopular Equipment Finance, LLC ,Popular Insurance Agency, U.S.A. , andE-LOAN, Inc. PNA has issued junior subordinated debentures guaranteed by PIHC (together with PNA, the "obligor group") purchased by statutory trusts established by the Corporation. These debentures were purchased by the statutory trust using the proceeds from trust preferred securities issued to the public (referred to as "capital securities"), together with the proceeds of the related issuances of common securities of the trusts. PIHC fully and unconditionally guarantees the junior subordinated debentures issued by PNA. PIHC's obligation to make a guarantee payment may be satisfied by direct payment of the required amounts to the holders of the applicable capital securities or by causing the applicable trust to pay such amounts to such holders. Each guarantee does not apply to any payment of distributions by the applicable trust except to the extent such trust has funds available for such payments. If PIHC does not make interest payments on the debentures held by such trust, such trust will not pay distributions on the applicable capital securities and will not have funds available for such payments. PIHC's guarantee of PNA's junior subordinated debentures is unsecured and ranks subordinate and junior in right of payment to all the PIHC's other liabilities in the same manner as the applicable debentures as set forth in the applicable indentures? and equally with all other guarantees that the PIHC issues. The guarantee constitutes a guarantee of payment and not of collection, which means that the guaranteed party may sue the guarantor to enforce its rights under the respective guarantee without suing any other person or entity. The principal sources of funding for PIHC and PNA have included dividends received from their banking and non-banking subsidiaries, asset sales and proceeds from the issuance of debt and equity. As further described below, in the Risk to Liquidity section, various statutory provisions limit the amount of dividends an insured depository institution may pay to its holding company without regulatory approval. 153 -------------------------------------------------------------------------------- The following summarized financial information presents the financial position of the obligor group, on a combined basis atSeptember 30, 2022 andDecember 31, 2021 , and the results of their operations for the period endedSeptember 30, 2022 andSeptember 30, 2021 . Investments in and equity in the earnings from the other subsidiaries and affiliates that are not members of the obligor group have been excluded. The summarized financial information of the obligor group is presented on a combined basis with intercompany balances and transactions between entities in the obligor group eliminated. The obligor group's amounts due from, amounts due to and transactions with subsidiaries and affiliates have been presented in separate line items, if they are material. In addition, related parties transactions are presented separately. Table 14 - Summarized Statement of Condition (In thousands) September 30, 2022 December 31, 2021 Assets Cash and money market investments $ 222,406 $
291,540
Investment securities 22,887
25,691
Accounts receivables from non-obligor subsidiaries 13,347
17,634
Other loans (net of allowance for credit losses of$73 (2021 -$96) ) 28,425
29,349
Investment in equity method investees 5,359 114,955 Other assets 47,688 42,251 Total assets $ 340,112 $ 521,420 Liabilities and Stockholders' deficit Accounts payable to non-obligor subsidiaries $ 4,567 $
6,481
Accounts payable to affiliates and related parties - 1,254 Notes payable 497,104 496,134 Other liabilities 112,907 97,172 Stockholders' deficit (274,466) (79,621) Total liabilities and stockholders' deficit $ 340,112 $
521,420
Table 15 - Summarized Statement of
Operations
For the nine months ended
(In thousands) September 30, 2022 September 30, 2021
Income:
Dividends from non-obligor subsidiaries $ 454,000 $ 581,000
Interest income from non-obligor subsidiaries and affiliates 594
680
Earnings from investments in equity method investees 15,698
24,195
Other operating (expense) income 136,140
3,605
Total income $ 606,432 $
609,480
Expenses:
Services provided by non-obligor subsidiaries and affiliates (net of reimbursement by subsidiaries for services provided by parent of$157,754 (2021 -$120,032) ) $ 12,697 $ 9,820 Other operating expenses 19,399 22,712 Total expenses $ 32,096 $ 32,532 Net income (loss) $ 574,336 $ 576,948 154
-------------------------------------------------------------------------------- During the nine months endedSeptember 30, 2022 , the Obligor group recorded$1.5 million of dividend distributions from its direct equity method investees. During the nine months endedSeptember 30, 2021 , the Obligor group recorded$2.2 million of distributions from its direct equity method investees, of which$1.7 million were related to dividend distributions. 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 thePuerto 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 inPuerto 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 thePuerto Rico economy and the ongoing fiscal crisis. Factors that the Corporation does not control, such as the economic outlook and credit ratings of its principal markets and regulatory changes, could also affect its ability to obtain funding. In order to prepare for the possibility of such scenario, management has adopted contingency plans for raising financing under stress scenarios when important sources of funds that are usually fully available are temporarily unavailable. These plans call for using alternate funding mechanisms, such as the pledging of certain asset classes and accessing secured credit lines and loan facilities put in place with the FHLB and the FRB.The Corporation is subject to positive tangible capital requirements to utilize secured loan facilities with the FHLB that could result in a limitation of borrowing amounts or maturity terms, even if the Corporation exceeds well-capitalized regulatory capital levels. The credit ratings of Popular's debt obligations are a relevant factor for liquidity because they impact the Corporation's ability to borrow in the capital markets, its cost and access to funding sources. Credit ratings are based on the financial strength, credit quality and concentrations in the loan portfolio, the level and volatility of earnings, capital adequacy, the quality of management, geographic concentration inPuerto 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 theFederal Reserve Board for any dividend, if the total of all dividends declared by the member bank during the calendar year would exceed the total of its net income for that year, combined with its retained net income for the preceding two years, after considering those years' dividend activity, less any required transfers to surplus or to a fund for the retirement of any preferred stock. During the nine months endedSeptember 30, 2022 , BPPR declared cash dividends of$450 million . AtSeptember 30, 2022 , BPPR would have needed to obtain prior approval of theFederal Reserve Board before declaring a dividend due to its declared dividend activity and transfers to statutory reserves over the latest three years. 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 theFederal 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 theFederal Reserve Board . Pursuant to these requirements, PB may not declare or pay a dividend without the prior approval of theFederal Reserve Board and the NYSDFS. The ability of a bank subsidiary to up-stream dividends to its BHC could thus be impacted by its financial performance and capital, including tangible and regulatory capital, thus potentially limiting the amount of cash moving up to the BHCs from the banking subsidiaries. This could, in turn, affect the BHCs ability to declare dividends on its outstanding common and preferred stock, repurchase its securities or meet its debt obligations, for example.
The Corporation's banking subsidiaries have historically not used unsecured capital market borrowings to finance its operations, and therefore are less sensitive to the level and changes in the Corporation's overall credit ratings.
Obligations Subject to Rating Triggers or Collateral Requirements
The Corporation's banking subsidiaries currently do not use borrowings that are rated by the major rating agencies, as these banking subsidiaries are funded primarily with deposits and secured borrowings. The banking subsidiaries had$9 million in deposits atSeptember 30, 2022 that are subject to rating triggers. 155 -------------------------------------------------------------------------------- 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$31 million atSeptember 30, 2022 . The Corporation could be required to post additional collateral under the agreements. Management expects that it would be able to meet additional collateral requirements if and when needed. The requirements to post collateral under certain agreements or the loss of escrow deposits could reduce the Corporation's liquidity resources and impact its operating results. Credit Risk
Geographic and Government Risk
The Corporation is exposed to geographic and government risk. The Corporation's assets and revenue composition by geographical area and by business segment reporting are presented in Note 33 to the Consolidated Financial Statements.
A significant portion of our financial activities and credit exposure is
concentrated in the
Hurricane Fiona
OnSeptember 18, 2022 , Hurricane Fiona made landfall in the southwest area ofPuerto Rico as a Category 1 hurricane, bringing record rainfall and flooding throughout the island and affecting communities where BPPR does business. The hurricane caused a complete blackout on the island and considerable damage to certain sectors in the southwest region. While the impact to BPPR's operations was not material, customers in certain municipalities of the island were impacted by the disaster. As part of hurricane relief efforts, the Corporation waived late-payment fees on individual lending products fromSeptember 16 through October 31, 2022 . The Corporation also offered to clients impacted by the hurricane a moratorium of up to three monthly payments, untilDecember 31, 2022 , on personal and commercial credit cards, auto loans, leases and personal loans, subject to certain eligibility requirements. Various payment relief alternatives were also made available to certain mortgage customers, depending on their type of loan.
The Corporation is still evaluating the impact of Hurricane Fiona. However, given the low level of assistance requests received by the Corporation to date, the effect on credit risk should not be significant.
Economic Performance
The Commonwealth's economy entered a recession in the fourth quarter of fiscal
year 2006 and its gross national product ("GNP") contracted (in real terms)
every fiscal year between 2007 and 2018, with the exception of fiscal year 2012.
Pursuant to the latest Puerto Rico Planning Board (the "Planning Board")
estimates, dated March 2021 , the Commonwealth's real GNP increased by 1.8% in
fiscal year 2019 due to the influx of federal funds and private insurance
payments to repair damage caused by Hurricanes Irma and María. However, the
Planning Board estimates that the Commonwealth's real GNP decreased by
approximately 3.2% in fiscal year 2020 due primarily to the adverse impact of
the COVID-19 pandemic and the measures taken by the government in response to
the same. The Planning Board projected that the negative effects of COVID-19
would continue through fiscal year 2021, resulting in a contraction in real GNP
of approximately -2%, followed by 0.8% and 1.7% GNP growth in fiscal years 2022
and 2023, respectively.
Certain information regarding current economic activity is available in the form
of the Economic Development Bank for Puerto Rico ("EDB") Economic Activity Index
(the "EDB Economic Activity Index"), a coincident indicator of ongoing economic
activity but not a
156
-------------------------------------------------------------------------------- direct measurement of real GNP. The latest EDB Economic Activity Index reflected a 1.5% increase inAugust 2022 , compared toAugust 2021 . From January toAugust 2022 , the EDB Economic Activity Index reflected a 3.0% increase compared to the same period in calendar year 2021. The Puerto Rico Consumer Price Index, published by theDepartment of Labor and Human Resources of Puerto Rico , was recorded at 130.4 inSeptember 2022 , representing a 6.1% increase when compared toSeptember 2021 and effectively flat versusAugust 2022 . The United States Consumer Price Index, published by theU.S. Bureau of Labor Statistics , increased by 8.2% fromSeptember 2022 and by 0.4% fromAugust 2022 . Increasing inflation or prolonged periods of high inflation may adversely affect our business and results of operations.
Fiscal Challenges
The Commonwealth's central government and many of its instrumentalities, public corporations and municipalities continue to face significant fiscal challenges, which have been primarily the result of economic contraction, persistent and significant budget deficits, a high debt burden, unfunded legacy obligations, and lack of access to the capital markets, among other factors. The escalating fiscal and economic crisis and imminent widespread defaults prompted theU.S. Congress to enact the Puerto Rico Oversight, Management, and Economic Stability Act ("PROMESA") inJune 2016 . As further discussed below under "Pending Title III Proceedings," the Commonwealth and several of its instrumentalities recently emerged from a bankruptcy-like process under PROMESA.
PROMESA
PROMESA, among other things, created a seven-member federally-appointed oversight board (the "Oversight Board") with ample powers over the fiscal and economic affairs of the Commonwealth, its public corporations, instrumentalities and municipalities and established two mechanisms for the restructuring of the obligations of such entities. Pursuant to PROMESA, the Oversight Board will remain in place until market access is restored and balanced budgets, in accordance with modified accrual accounting, are produced for at least four consecutive years. InOctober 2016 , the Oversight Board designated the Commonwealth and all of its public corporations and instrumentalities (except its municipalities) as "covered entities" under PROMESA. InMay 2019 , the Oversight Board also 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 theOversight Board for its review and approval. They are also required to seek Oversight Board approval to issue, guarantee or modify their debts and to enter into contracts with an aggregate value of$10 million or more. Finally, covered entities are potentially eligible to avail themselves of the debt restructuring processes provided by PROMESA. For additional discussion of risk factors related to thePuerto Rico fiscal challenges, see "Part I - Item 1A - Risk Factors" in the Corporation's Form 10-K.
Fiscal Plans
Commonwealth Fiscal Plan. The Oversight Board has certified several fiscal plans for the Commonwealth since 2017. The most recent fiscal plan for the Commonwealth certified by the Oversight Board is datedJanuary 27, 2022 (the "2022 Fiscal Plan"). Pursuant to the 2022 Fiscal Plan, while the COVID-19 pandemic and the measures taken in response to the same severely reduced economic activity and caused an unprecedented increase in unemployment inPuerto Rico , pandemic-related federal and local stimulus funding have more than offset the estimated income loss due to reduced economic activity and are estimated to have caused a temporary increase in personal income on a net basis. The 2022 Fiscal Plan's economic projections incorporate adjustments for these short-term income effects. For example, the 2022 Fiscal Plan estimates that, for fiscal years 2022 and 2023, real GNP will grow 2.6% and 0.9%, respectively, but projects that growth adjusted for income effects for such years will be approximately 5.2% and 0.6%, respectively. The 2022 Fiscal Plan incorporates the debt service costs of the Commonwealth's restructured debt pursuant to the Plan of Adjustment (as defined and further explained below), and projects an unrestricted surplus after debt service averaging$1 billion annually between fiscal years 2022 to 2031. This surplus is projected to decline over time as federal disaster relief funding slows, nominal GNP growth declines, revenues decline, and healthcare expenditures rise. The 2022 Fiscal Plan estimates that fiscal measures could drive approximately$6.3 billion in savings and extra revenue over fiscal years 2022 through 2026 and that structural reforms could drive a cumulative 0.90% increase in growth by fiscal year 2051 (equal to approximately$33 billion ). 157 -------------------------------------------------------------------------------- The 2022 Fiscal Plan provides for the gradual reduction and the ultimate elimination, by fiscal year 2025, of Commonwealth budgetary subsidies to municipalities, which constitute a material portion of the operating revenues of some municipalities. According to the 2022 Fiscal Plan, municipalities have made little or no progress towards implementing the fiscal discipline required to reduce reliance on Commonwealth appropriations and this lack of fiscal management may threaten the ability of certain municipalities to provide necessary services, such as health, sanitation, public safety, and emergency services to their residents, forcing them to prioritize expenditures. 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 thePuerto Rico Electric Power Authority ("PREPA"),Puerto Rico's electric power utility, contemplated the transformation ofPuerto Rico's electric system through, among other things, the establishment of a public-private partnership with respect to PREPA's transmission and distribution system (the "T&D System"), and calls for significant structural reforms at PREPA. The procurement process for the establishment of a public-private partnership with respect to the T&D System was completed inJune 2020 . The selected proponent,LUMA Energy LLC ("LUMA"), and PREPA entered into a 15-year agreement whereby, sinceJune 1, 2021 ,LUMA is responsible for operating, maintaining and modernizing the T&D System (the "T&D Agreement"). The commencement of such 15-year term, however, was conditioned on PREPA's emergence from its debt restructuring process under Title III of PROMESA (the "Title III Exit"), which has not occurred. During this interim period,LUMA has been operating the T&D System pursuant to a supplemental terms agreement (the "Supplemental Agreement"), which expires onNovember 30, 2022 , unless the Title III Exit condition is waived, or the term of the Supplemental Agreement is extended by the parties. Such termination would trigger the commencement of a transition period during whichLUMA would transfer the operations of the T&D System to PREPA or a third-party successor operator. OnMay 20, 2022 , the Oversight Board certified the latest version of the fiscal plan (the "CRIM Fiscal Plan") for the Municipal Revenue Collection Center ("CRIM"), the government entity responsible for collecting property taxes and distributing them among the municipalities. The CRIM Fiscal Plan outlines a series of measures centered around improving the competitiveness ofPuerto 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.
Title III Proceedings
OnMay 3, 2017 , the Oversight Board, on behalf of the Commonwealth, filed a petition in theU.S. District Court to restructure the Commonwealth's liabilities under Title III of PROMESA. The Oversight Board subsequently filed analogous petitions with respect to thePuerto Rico Sales Tax Financing Corporation ("COFINA"), the Employees Retirement System of the Government of theCommonwealth of Puerto Rico ("ERS"), thePuerto Rico Highways and Transportation Authority ("HTA"), PREPA and thePuerto Rico Public Buildings Authority ("PBA"). OnFebruary 12, 2019 , the government completed a restructuring of COFINA's debts pursuant to a plan of adjustment confirmed by theU.S. District Court . OnNovember 3, 2021 , the Oversight Board filed the Eighth Amended Title III Joint Plan of Adjustment for the Commonwealth, ERS and PBA (the "Commonwealth Plan of Adjustment"). OnMarch 15, 2022 , the Plan of Adjustment became effective. The Commonwealth Plan of Adjustment reduced the Commonwealth's debt obligations from approximately$34.3 billion of prepetition debt to approximately$7.4 billion in new general obligation bonds and approximately$8.7 billion in new contingent value instruments. This also resulted in a reduction of the Commonwealth's maximum annual debt service by approximately 73%.
On
Exposure of the Corporation The credit quality of BPPR's loan portfolio reflects, among other things, the general economic conditions inPuerto Rico and other adverse conditions affectingPuerto Rico consumers and businesses. While PROMESA provided a process to address the Commonwealth's fiscal challenges, the adjustment measures required by the fiscal plans still present significant economic risks. Furthermore, if global or local economic conditions worsen or the Government ofPuerto Rico and the Oversight Board are unable to adequately manage the Commonwealth's fiscal and economic challenges, these adverse effects could continue or worsen in ways that we are not able to predict. 158 -------------------------------------------------------------------------------- AtSeptember 30, 2022 , the Corporation's direct exposure to thePuerto Rico government's instrumentalities and municipalities totaled$365 million of which$322 million were outstanding, compared to$367 million atDecember 31, 2021 , of which$349 million were outstanding. A deterioration in the Commonwealth's fiscal and economic situation could adversely affect the value of ourPuerto Rico government obligations, resulting in losses to us. Of the amount outstanding,$297 million consists of loans and$25 million are securities ($319 million and$30 million , respectively, atDecember 31, 2021 ). All of the Corporation's direct exposure outstanding atSeptember 30, 2022 were obligations from variousPuerto 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. AtSeptember 30, 2022 , 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 thePuerto Rico government and its instrumentalities and municipalities, refer to Note 21 - Commitments and Contingencies. In addition, atSeptember 30, 2022 , the Corporation had$256 million in loans insured or securities issued byPuerto Rico governmental entities, but for which the principal source of repayment is non-governmental ($275 million atDecember 31, 2021 ). These included$214 million in residential mortgage loans insured by thePuerto Rico Housing Finance Authority ("HFA"), a governmental instrumentality that has been designated as a covered entity under PROMESA (December 31, 2021 -$232 million ). These mortgage loans are secured by first mortgages onPuerto 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, atSeptember 30, 2022 ,$42 million in bonds issued by HFA which are secured by second mortgage loans onPuerto Rico residential properties, and for which HFA also provides insurance to cover losses in the event of a borrower default, and upon the satisfaction of certain other conditions (December 31, 2021 -$43 million ). In the event that the mortgage loans insured by HFA and held by the Corporation directly or those serving as collateral for the HFA bonds default and the collateral is insufficient to satisfy the outstanding balance of these loans, HFA's ability to honor its insurance will depend, among other factors, on the financial condition of HFA at the time such obligations become due and payable. The Corporation does not consider the government guarantee when estimating the credit losses associated with this portfolio. Although the Governor is currently authorized by local legislation to impose a temporary moratorium on the financial obligations of the HFA, a moratorium on such obligations has not been imposed as of the date hereof. BPPR's commercial loan portfolio also includes loans to private borrowers who are service providers, lessors, suppliers or have other relationships with the government. These borrowers could be negatively affected by the fiscal and economic measures taken by the Commonwealth government. Similarly, BPPR's mortgage and consumer loan portfolios include loans to government employees and retirees, which could also be negatively affected by fiscal measures such as employee layoffs or furloughs or reductions in pension benefits. As ofSeptember 30, 2022 , BPPR had$17.5 billion in deposits from the Commonwealth, its instrumentalities, and municipalities. The rate at which public deposit balances may decline is uncertain and difficult to predict. The amount and timing of any such reduction is likely to be impacted by, for example, the speed at which COVID-19 pandemic and hurricane recovery federal assistance is distributed and the financial condition, liquidity and cash management practices of such entities, as well as on the ability of BPPR to maintain these customer relationships.
The Corporation may also have direct exposure with regards to avoidance and other causes of action initiated by the Oversight Board on behalf of the Commonwealth or other Title III debtors. For additional information regarding such exposure, refer to Note 21 of the Consolidated Financial Statements.
The Corporation has operations in the
The USVI has been experiencing a number of fiscal and economic challenges, which have been and might be further exacerbated as a result of the effects of the COVID-19 pandemic, and which could adversely affect the ability of its public corporations and instrumentalities to service their outstanding debt obligations. PROMESA does not apply to the USVI and, as such, there is currently no federal legislation permitting the restructuring of the debts of the USVI and its public corporations and instrumentalities. To the extent that the fiscal condition of the USVI continues to deteriorate, theU.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. 159
-------------------------------------------------------------------------------- AtSeptember 30, 2022 , the Corporation had approximately$29 million in direct exposure to USVI government entities (December 31, 2021 -$70 million ). The USVI has been experiencing a number of fiscal and economic challenges that could adversely affect the ability of its public corporations and instrumentalities to service their outstanding debt obligations.
The Corporation has operations in theBritish 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, atSeptember 30, 2022 it has a loan portfolio amounting to approximately$216 million comprised of various retail and commercial clients, compared to a loan portfolio of$221 million atDecember 31, 2021 .
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 theU.S. Government in the form ofU.S. Government sponsored entities, as well as agency mortgage-backed andU.S. Treasury securities. In addition,$1.5 billion of residential mortgages,$47 million of SBA loans under the Paycheck Protection Program ("PPP") and$71 million commercial loans were insured or guaranteed by theU.S. Government or its agencies atSeptember 30, 2022 (compared to$1.6 billion ,$353 million and$67 million , respectively, atDecember 31, 2021 ). Non-Performing Assets Non-performing assets ("NPAs") include primarily past-due loans that are no longer accruing interest, renegotiated loans, and real estate property acquired through foreclosure. A summary, including certain credit quality metrics, is presented in Table 16. During the third quarter of 2022, the Corporation showed stable credit quality trends with low levels of NCOs and decreasing NPLs. We continue to closely monitor changes in the macroeconomic environment and on borrower performance, given inflationary pressures and geopolitical uncertainty. However, management continues to believe that the improvement over recent years in the risk profile of the Corporation's loan portfolios positions Popular to operate successfully under the current environment. The impact of Hurricanes Fiona and Ian is still being evaluated but given Fiona's limited impact in the markets that Popular does business and low levels of assistance requests received to date, the effect on credit risk should not be significant. Total NPAs decreased by$86 million atSeptember 30, 2022 when compared withDecember 31, 2021 . Total non-performing loans held-in-portfolio ("NPLs") decreased by$95 million atSeptember 30, 2022 fromDecember 31, 2021 . BPPR's NPLs decreased by$104 million atSeptember 30, 2022 , mainly driven by lower mortgage NPLs by$81 million , due to the combined effects of collection efforts, increased foreclosure activity and the on-going low levels of early delinquency compared with pre-pandemic trends, coupled with a$33 million decrease in the commercial NPLs. PopularU.S. NPLs increased by$10 million atSeptember 30, 2022 solely due to an$11 million commercial borrower within the healthcare industry that was placed in non-accrual status during the quarter due to financial distress. AtSeptember 30, 2022 , the ratio of NPLs to total loans held-in-portfolio was 1.4% compared to 1.9% inDecember 31, 2021 . Other real estate owned loans ("OREOs") increased by$8 million atSeptember 30, 2022 , mainly due to the end of the COVID-19 related foreclosure moratorium period. AtSeptember 30, 2022 , NPLs secured by real estate amounted to$317 million in thePuerto Rico operations and$38 million in PopularU.S. These figures were$428 million and$31 million , respectively, atDecember 31, 2021 . The Corporation's commercial loan portfolio secured by real estate ("CRE") amounted to$9.8 billion atSeptember 30, 2022 , of which$3.1 billion was secured with owner occupied properties, compared with$8.4 billion and$1.8 billion , respectively, atDecember 31, 2021 . During the first quarter of 2022, the Corporation reclassified$0.9 billion of loans from theCommercial Real Estate ("CRE") Non-Owner-Occupied category to the CRE Owner-Occupied category. The selected loans are primarily to skilled and assisted living nursing homes where the majority of the revenues, which are the basis for the repayment of the loans, are generated from medical and related operational activities. These loans meet the type of business and source requirements as defined in the regulatory guidance allowing this classification. CRE NPLs amounted to$61 million atSeptember 30, 2022 , compared with$77 million atDecember 31, 2021 . The CRE NPL ratios for the BPPR and PopularU.S. segments were 1.06% and 0.22%, respectively, atSeptember 30, 2022 , compared with 1.95% and 0.04%, respectively, atDecember 31, 2021 . 160 -------------------------------------------------------------------------------- In addition to the NPLs included in Table 16, atSeptember 30, 2022 , there were$376 million of performing loans, mainly commercial loans, which in management's opinion, were currently subject to potential future classification as non-performing (December 31, 2021 -$214 million ). For the quarter endedSeptember 30, 2022 , total inflows of NPLs held-in-portfolio, excluding consumer loans, increased by approximately$3 million , when compared to the inflows for the same period in 2021. Inflows of NPLs held-in-portfolio at the BPPR segment decreased by$11 million compared to the same period in 2021, mostly driven by lower mortgage inflows by$9 million , in part offset by lower commercial inflows by$2 million . Inflows of NPLs held-in-portfolio at the PopularU.S. increased by$14 million when compared to the same period in 2021, driven by the abovementioned commercial healthcare NPL. 161 --------------------------------------------------------------------------------
Table 16 - Non-Performing Assets
September 30, 2022 December 31, 2021
As a % As a %
of loans of loans
Popular Popular, HIP by Popular Popular, HIP by
(Dollars in thousands) BPPR U.S. Inc.
category BPPR
$ 87,448 $ 16,428 $ 103,876 0.7 %$ 120,047 $ 5,532 $ 125,579 0.9 % Construction - - - - 485 - 485 0.1 Leasing 5,697 - 5,697 0.4 3,102 - 3,102 0.2 Mortgage 252,773 21,533 274,306 3.8 333,887 21,969 355,856 4.8 Auto 34,432 - 34,432 1.0 23,085 - 23,085 0.7 Consumer 29,865 5,243 35,108
1.2 33,683 6,087 39,770 1.5 Total non-performing loans held-in-portfolio 410,215 43,204 453,419
1.4 % 514,289 33,588 547,877 1.9 % Other real estate owned ("OREO")
92,836 403 93,239 83,618 1,459 85,077
Total non-performing
assets[1] $ 503,051 $ 43,607 $ 546,658 $ 597,907 $ 35,047 $ 632,954
Accruing loans past due
90 days or more[2] $ 339,891 $ 612 $ 340,503 $ 480,649 $ 118 $ 480,767
Ratios:
Non-performing assets to
total assets 0.86 % 0.36 % 0.77 % 0.93 % 0.32 % 0.84 %
Non-performing loans
held-in-portfolio to
loans held-in-portfolio 1.84 0.47 1.44 2.46 0.40 1.87
Allowance for credit
losses to loans
held-in-portfolio 2.65 1.21 2.23 2.85 1.21 2.38
Allowance for credit
losses to non-performing
loans, excluding
held-for-sale 144.05 259.61 155.07 115.53 301.31 126.92
HIP = "held-in-portfolio"
[1] There were no non-performing loans held-for-sale as of September 30, 2022 and December 31, 2021 .
[2] It is the Corporation's policy to report delinquent residential mortgage loans insured by FHA or guaranteed by the VA as
accruing loans past due 90 days or more as opposed to non-performing since the principal repayment is insured. The balance of
these loans includes $9 million at September 30, 2022 , related to the rebooking of loans previously pooled into GNMA securities,
in which the Corporation had a buy-back option as further described below (December 31, 2021 - $13 million ). Under the GNMA
program, issuers such as BPPR have the option but not the obligation to repurchase loans that are 90 days or more past due. For
accounting purposes, these loans subject to repurchases option are required to be reflected (rebooked) on the financial statements
of BPPR with an offsetting liability. These balances include $198 million of residential mortgage loans insured by FHA or
guaranteed by the VA that are no longer accruing interest as of September 30, 2022 (December 31, 2021 - $304 million ).
Furthermore, the Corporation has approximately $42 million in reverse mortgage loans which are guaranteed by FHA, but which are
currently not accruing interest. Due to the guaranteed nature of the loans, it is the Corporation's policy to exclude these
balances from non-performing assets (December 31, 2021 - $50 million ).
162
--------------------------------------------------------------------------------Table 17 - Activity in Non-Performing Loans Held-in-Portfolio (Excluding Consumer Loans)
For the nine months ended
For the quarter ended September 30, 2022 2022
Popular Popular
(Dollars in thousands) BPPR U.S. Popular, Inc. BPPR U.S. Popular, Inc.
Beginning balance $ 381,163 $ 27,638 $ 408,801 $ 454,419 $ 27,501 $ 481,920
Plus:
New non-performing loans 35,258 19,704 54,962 117,909 38,621 156,530
Advances on existing
non-performing loans - 67 67 - 2,817 2,817
Less:
Non-performing loans
transferred to OREO (5,956) - (5,956) (30,893) (85) (30,978)
Non-performing loans
charged-off (5,223) (48) (5,271) (7,192) (337) (7,529)
Loans returned to accrual
status / loan collections (65,021) (9,400) (74,421) (194,022) (30,556) (224,578)
Ending balance NPLs $ 340,221 $ 37,961 $ 378,182 $ 340,221 $ 37,961 $ 378,182 Table 18 - Activity in Non-Performing Loans Held-in-Portfolio (Excluding Consumer Loans)
For the nine months ended
For the quarter ended September 30, 2021 2021
Popular Popular
(Dollars in thousands) BPPR U.S. Popular, Inc. BPPR U.S. Popular, Inc.
Beginning balance $ 603,233 $ 21,185 $ 624,418 $ 639,932 $ 28,412 $ 668,344
Plus:
New non-performing loans 46,060 5,701 51,761 195,270 36,202 231,472
Advances on existing
non-performing loans - 12 12 - 35 35
Less:
Non-performing loans
transferred to OREO (11,053) - (11,053) (26,307) - (26,307)
Non-performing loans
charged-off (9,640) - (9,640) (33,185) (1,500) (34,685)
Loans returned to accrual
status / loan collections (75,774) (9,623) (85,397) (222,884) (37,101) (259,985)
Loans transferred to
held-for-sale - - - - (8,773) (8,773)
Ending balance NPLs $ 552,826 $ 17,275 $ 570,101 $ 552,826 $ 17,275 $ 570,101 Table 19 - Activity in Non-Performing Commercial Loans Held-in-Portfolio
For
the nine months ended
For the quarter ended September 30, 2022 2022
Popular Popular
(Dollars in thousands) BPPR U.S. Popular, Inc. BPPR U.S. Popular, Inc.
Beginning balance $ 96,493 $ 7,446 $ 103,939 $ 120,047 $ 5,532 $ 125,579
Plus:
New non-performing loans 5,913 14,965 20,878 13,706 25,289 38,995
Advances on existing
non-performing loans - 12 12 - 2,518 2,518
Less:
Non-performing loans
transferred to OREO (352) - (352) (4,318) - (4,318)
Non-performing loans
charged-off (4,534) (48) (4,582) (5,741) (210) (5,951)
Loans returned to
accrual status / loan
collections (10,072) (5,947) (16,019) (36,246) (16,701) (52,947)
Ending balance NPLs $ 87,448 $ 16,428 $ 103,876 $ 87,448 $ 16,428 $ 103,876
163
--------------------------------------------------------------------------------
Table 20 - Activity in Non-Performing Commercial Loans Held-in-Portfolio
For the quarter ended September 30 , For
the nine months ended
2021 2021
Popular Popular
(Dollars in thousands) BPPR U.S. Popular, Inc. BPPR U.S. Popular, Inc.
Beginning balance $ 217,703 $ 7,862 $ 225,565 $ 204,092 $ 5,988 $ 210,080
Plus:
New non-performing loans 7,454 1,039 8,493 54,835 10,302 65,137
Advances on existing
non-performing loans - 10 10 - 17 17
Less:
Non-performing loans
transferred to OREO (2,069) - (2,069) (8,265) - (8,265)
Non-performing loans
charged-off (8,617) - (8,617) (12,523) (976) (13,499)
Loans returned to accrual
status / loan collections (31,077) (6,124) (37,201) (54,745) (10,771) (65,516)
Loans transferred to
held-for-sale - - - - (1,773) (1,773)
Ending balance NPLs $ 183,394 $ 2,787 $ 186,181 $ 183,394 $ 2,787 $ 186,181 Table 21 - Activity in Non-Performing Construction Loans Held-in-Portfolio
For the quarter ended September For the nine months ended
30, 2022 September 30, 2022
Popular Popular, Popular Popular,
(Dollars in thousands) BPPR U.S. Inc. BPPR U.S. Inc.
Beginning balance $ - $ - $ - $ 485 $ - $ 485
Less:
Loans returned to accrual
status / loan collections - - - (485) - (485)
Ending balance NPLs $ - $ - $ - $ - $ - $ -
Table 22 - Activity in Non-Performing Construction Loans Held-in-Portfolio
For the quarter ended September 30 , For
the nine months ended
2021 2021
Popular Popular
(Dollars in thousands) BPPR U.S. Popular, Inc. BPPR U.S. Popular, Inc.
Beginning balance $ 14,877 $ - $ 14,877 $ 21,497 $ 7,560 $ 29,057
Plus:
New non-performing loans - - - - 12,141 12,141
Less:
Non-performing loans
charged-off - - - (6,620) (523) (7,143)
Loans returned to accrual
status / loan collections - - -
- (12,178) (12,178)
Loans transferred to
held-for-sale - - - - (7,000) (7,000)
Ending balance NPLs $ 14,877 $ - $ 14,877 $ 14,877 $ - $ 14,877
164
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Table 23 - Activity in Non-Performing Mortgage Loans Held-in-Portfolio
For the quarter ended September 30 ,
For the nine months ended
2022 2022
Popular Popular
(Dollars in thousands) BPPR U.S. Popular, Inc. BPPR U.S. Popular, Inc.
Beginning balance $ 284,670 $ 20,192 $ 304,862 $ 333,887 $ 21,969 $ 355,856
Plus:
New non-performing loans 29,345 4,739 34,084 104,203 13,332 117,535
Advances on existing
non-performing loans - 55 55 - 299 299
Less:
Non-performing loans
transferred to OREO (5,604) - (5,604) (26,575) (85) (26,660)
Non-performing loans
charged-off (689) - (689) (1,451) (127) (1,578)Loans returned to accrual
status / loan collections (54,949) (3,453) (58,402)
(157,291) (13,855) (171,146) Ending balance NPLs$ 252,773 $ 21,533 $ 274,306 $ 252,773 $ 21,533 $ 274,306
Table 24 - Activity in Non-Performing Mortgage Loans Held-in-Portfolio
For the quarter ended September 30 ,
For the nine months ended
2021 2021
Popular Popular
(Dollars in thousands) BPPR U.S. Popular, Inc. BPPR U.S. Popular, Inc.
Beginning balance $ 370,653 $ 13,323 $ 383,976 $ 414,343 $ 14,864 $ 429,207
Plus:
New non-performing loans 38,606 4,662 43,268 140,435 13,759 154,194
Advances on existing
non-performing loans - 2 2 - 18 18
Less:
Non-performing loans
transferred to OREO (8,984) - (8,984) (18,042) - (18,042)
Non-performing loans
charged-off (1,023) - (1,023) (14,042) (1) (14,043)Loans returned to accrual
status / loan collections (44,697) (3,499) (48,196)
(168,139) (14,152) (182,291) Ending balance NPLs$ 354,555 $ 14,488 $ 369,043 $ 354,555 $ 14,488 $ 369,043 165
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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 atSeptember 30, 2022 andDecember 31, 2021 , are presented below.
Table 25 - Loan Delinquencies
(Dollars in thousands) September 30, 2022 December 31, 2021
Total Total
delinquencies as delinquencies
Loans delinquent a percentage of Loans delinquent as a percentage
30 days or more Total loans totalloans 30 days or more Total loans of total loans Commercial
$ 144,836 $ 15,366,859 0.94
%
1,087 816,290 0.13 485 716,220 0.07
Leasing 22,924 1,538,504 1.49 14,379 1,381,319 1.04
Mortgage [1] 936,088 7,311,713 12.80 1,141,082 7,427,196 15.36 Consumer
212,139 6,489,822 3.27 173,896 5,983,121 2.91
Loans held-for-sale - 8,065 - - 59,168 -
Total $ 1,317,074 $ 31,531,253 4.18
%
Allowance for Credit Losses Loans Held-in-Portfolio
The Corporation adopted the new CECL accounting standard effective onJanuary 1, 2020 . The allowance for credit losses ("ACL"), represents management's estimate of expected credit losses through the remaining contractual life of the different loan segments, impacted by expected prepayments. The ACL is maintained at a sufficient level to provide for estimated credit losses on collateral dependent loans as well as troubled debt restructurings separately from the remainder of the loan portfolio. The Corporation's management evaluates the adequacy of the ACL on a quarterly basis. In this evaluation, management considers current conditions, macroeconomic economic expectations through a reasonable and supportable period, historical loss experience, portfolio composition by loan type and risk characteristics, results of periodic credit reviews of individual loans, and regulatory requirements, amongst other factors. The Corporation must rely on estimates and exercise judgment regarding matters where the ultimate outcome is unknown, such as economic developments affecting specific customers, industries, or markets. Other factors that can affect management's estimates are recalibration of statistical models used to calculate lifetime expected losses, changes in underwriting standards, financial accounting standards and loan impairment measurements, among others. Changes in the financial condition of individual borrowers, in economic conditions, and in the condition of the various markets in which collateral may be sold, may also affect the required level of the allowance for credit losses. Consequently, the business financial condition, liquidity, capital, and results of operations could also be affected. AtSeptember 30, 2022 , the allowance for credit losses amounted to$703 million , an increase of$8 million , when compared withDecember 31, 2021 . The ACL incorporated updated macroeconomic scenarios forPuerto Rico andthe United States . Given that any one economic outlook is inherently uncertain, the Corporation uses multiple scenarios to estimate its ACL. The baseline scenario continues to be assigned the highest probability, followed by the pessimistic scenario. The Corporation evaluates, at least on an annual basis, the assumptions tied to the CECL accounting framework. These include the reasonable and supportable period as well as the reversion window. This quarter, as part of its evaluation procedures, the Corporation decided to extend the reversion window from 1 year to 3 years. The extension in the reversion period results in a better representation of historical movements for key macroeconomic variables that impact the ACL. This change in assumptions contributed to a reduction of$11 million in the ACL. The reasonable and supportable period assumptions remained unchanged. The baseline scenario assumes an annualized 2022 GDP growth of 3.1% and 1.6% forPuerto Rico andUnited States , respectively, compared to 2.8% for both regions in the previous quarter. The improvement in P.R.'s GDP was mainly due to updated fiscal assumptions, which include the potential impact of the Inflation Reduction Act. As for theU.S. , the reduction in GDP growth was 166 -------------------------------------------------------------------------------- driven by updated data for the second quarter of 2022, which reflected two consecutive quarters of GDP decline. 2023 annualized GDP growth for P.R. andU.S. is of 2.2% and 1.5%, respectively, compared to 2.7% for both regions in the previous quarter. The reduction in 2023 is in part due to tight monetary policy, weaker job growth and persistent inflation. The 2022 average unemployment rate remained largely consistent QoQ forecasted at 6.6% and 3.6% forPuerto Rico andUnited States , respectively, compared to 6.9% and 3.5%, respectively, in the previous forecast. For 2023 the forecasted average unemployment rate for P.R. andU.S. is 7.8% and 3.9%, slightly higher than previous quarter's 7.6% and 3.4% for P.R. andU.S. , respectively. The ACL for BPPR was essentially flat, decreasing by$3 million to$591 million atSeptember 30, 2022 , when compared toDecember 31, 2021 . The ACL for PopularU.S. increased by$11 million atSeptember 30, 2022 , when compared toDecember 31, 2021 , mainly driven by an$8 million reserve recorded for the abovementioned commercial healthcare NPL. The provision for credit losses for the quarter endedSeptember 30, 2022 , amounted to$39.5 million , compared to a net benefit of$58.6 million in the same period in the prior year. The third quarter of 2021 included reductions in reserves due to improvements in the macroeconomic scenarios. Refer to Note 9 - Allowance for credit losses - loans held-in-portfolio, and to the Provision for Credit Losses section of this MD&A for additional information.
Table 26 - Allowance for Credit Losses - Loan Portfolios
September 30, 2022
(Dollars in thousands) Commercial Construction Mortgage Leasing Consumer Total
Total ACL $ 229,857 $ 6,199 $
138,534
816,290 7,311,713 1,538,504 6,489,822 31,523,188 ACL to loans held-in-portfolio
1.50 % 0.76 % 1.89 % 1.29 % 4.76 % 2.23 %
Total non-performing loans
held-in-portfolio $ 103,876 $ - $
274,306
221.28 % N.M. 50.50 % 347.80 % 443.91 % 155.07 % N.M. - Not meaningful.
Table 27 - Allowance for Credit Losses - Loan Portfolios
December 31, 2021
(Dollars in thousands) Commercial Construction Mortgage Leasing Consumer Total
Total ACL $ 215,805 $ 6,363 $
154,478
716,220 7,427,196 1,381,319 5,983,121 29,240,557 ACL to loans held-in-portfolio
1.57 % 0.89 % 2.08 % 1.27 % 5.03 % 2.38 %
Total non-performing loans
held-in-portfolio $ 125,579 $ 485 $ 355,856 $ 3,102 $ 62,855 $ 547,877
ACL to non-performing loans
held-in-portfolio 171.85 % N.M. 43.41 % 566.67 % 479.11 % 126.92 %
N.M. - Not meaningful.
167
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Annualized net charge-offs (recoveries)
The following tables present annualized net charge-offs (recoveries) to average
loans held-in-portfolio ("HIP") by loan category for the quarters and nine
months ended
Table 28 - Annualized Net Charge-offs (Recoveries) to Average Loans Held-in-Portfolio
Quarters ended
September 30, 2022 September 30, 2021
BPPR Popular U.S. Popular Inc. BPPR Popular U.S. Popular Inc.
Commercial (0.06) % (0.03) % (0.05) % 0.23 % (0.03) % 0.12 %
Construction - - - (6.82) - (1.05)
Mortgage (0.14) (0.01) (0.12) (0.13) (0.02) (0.11)
Leasing 0.36 - 0.36 0.09 - 0.09
Consumer 1.34 0.47 1.30 0.64 - 0.62
Total annualized net
charge-offs (recoveries)
to average loans
held-in-portfolio 0.34 % (0.01) % 0.24 % 0.18 % (0.03) % 0.12 %
Nine months ended
September 30, 2022 September 30, 2021
BPPR Popular U.S. Popular Inc. BPPR Popular U.S. Popular Inc.
Commercial (0.15) % (0.02) % (0.09) % (0.12) % (0.02) % (0.08) %
Construction (0.67) (0.24) (0.33) 3.01 0.02 0.51
Mortgage (0.21) - (0.18) 0.14 (0.06) 0.11
Leasing 0.14 - 0.14 0.09 - 0.09
Consumer 1.06 0.44 1.03 0.56 1.41 0.60
Total annualized net
charge-offs (recoveries)
to average loans
held-in-portfolio 0.18 % (0.02) % 0.13 % 0.17 % 0.02 % 0.13 %
NCOs for the quarter ended September 30, 2022 amounted to $18.2 million , an
unfavorable variance by $9.4 million when compared to the same period in 2021.
The BPPR segment increased by $9.1 million mainly driven by higher consumer NCOs
by $11.4 million . The consumer NCOs increase was mainly related to post-pandemic
normalization, as NCOs continue at historical low levels. The PB segment NCOs
remained essentially flat. The low level of NCOs was due to the effect of a
favorable economic environment and continued borrower performance, as reflected
in the ongoing low level of delinquencies and NPLs when compared to pre-pandemic
trends.
Troubled Debt Restructurings
The Corporation's troubled debt restructurings ("TDRs") loans amounted to $1.6
billion at September 30, 2022 , decreasing by $16 million , from December 31,
2021 . A total of $725 million of these TDRs are related to guaranteed loans,
which are in accruing status. TDRs in the BPPR segment amounted to $1.6 billion ,
a decrease of $16 million , mainly related to decreases of $11 million and $3
million in the consumer and mortgage TDRs, respectively. The Popular U.S.
segment TDRs remained flat at $14 million from December 31, 2021 . TDRs in
accruing status increased by $20 million from December 31, 2021 , while
non-accruing TDRs decreased by $35 million , mostly related to mortgage TDRs.
Refer to Note 9 to the Consolidated Financial Statements for additional information on modifications considered TDRs, including certain qualitative and quantitative data about troubled debt restructurings performed in the past twelve months.
168
--------------------------------------------------------------------------------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.
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