This report includes management's discussion and analysis ("MD&A") of the consolidated financial position and financial performance ofPopular, 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 theBoard of Governors of theFederal Reserve System . The Corporation has operations inPuerto Rico ,the United States ("U.S.") mainland and theU.S. andBritish Virgin Islands . InPuerto Rico , the Corporation provides retail, mortgage and commercial banking services through its principal banking subsidiary, Banco Popular dePuerto Rico ("BPPR"), as well as investment banking, broker-dealer, auto and equipment leasing and financing, and insurance services through specialized subsidiaries. The Corporation's mortgage origination business is conducted under the brand name Popular Mortgage, a division of BPPR. In theU.S. mainland, the Corporation provides retail, mortgage and commercial banking services through itsNew York -chartered banking subsidiary,Popular Bank ("PB"), which has branches located inNew York ,New Jersey andFlorida . Note 32 to the Consolidated Financial Statements presents information about the Corporation's business segments. The Corporation has several investments which it accounts for under the equity method. As ofSeptember 30, 2021 , the Corporation had a 16.19% interest in EVERTEC, Inc. ("EVERTEC"), whose operating subsidiaries provide transaction processing services throughout theCaribbean andLatin America , and service many of the Corporation's systems infrastructure and transaction processing businesses. During the quarter and nine months endedSeptember 30, 2021 , the Corporation recorded$6.3 million and$20.4 million , respectively, in earnings from its investment in EVERTEC, which had a carrying amount of$105 million as of the end of the quarter. Also, the Corporation had a 15.84% equity interest in Centro Financiero BHD León, S.A. ("BHD León"), one of the largest banking and financial services groups in theDominican Republic . During the quarter and nine months endedSeptember 30, 2021 , the Corporation recorded$7.8 million and$20.4 million , respectively, in earnings from its investment in BHD León, which had a carrying amount of$172 million , as of the end of the quarter. SIGNIFICANT EVENTS Capital Actions Accelerated Share Repurchase OnSeptember 9, 2021 , the Corporation completed its previously announced accelerated share repurchase program for the repurchase of an aggregate$350 million of Popular's common stock. Under the terms of the accelerated share repurchase agreement (the "ASR Agreement"), onMay 4, 2021 , the Corporation made an initial payment of$350 million and received an initial delivery of 3,785,831 shares of Popular's Common Stock (the "Initial Shares"). The transaction was accounted for as a treasury stock transaction. As a result of the receipt of the Initial Shares, the Corporation recognized in shareholders' equity approximately$280 million in treasury stock and$70 million as a reduction in capital surplus. Upon the final settlement of the ASR Agreement, the Corporation received an additional 828,965 shares and recognized$61 million as treasury stock with a corresponding increase in its capital surplus account. The Corporation repurchased a total of 4,614,796 shares at an average purchase price of$75.84 under the ASR Agreement.
Redemption of Trust Preferred Securities
OnNovember 1, 2021 , the Corporation redeemed all outstanding 6.70% Cumulative Monthly Income Trust Preferred Securities (the "Capital Securities") issued by thePopular Capital Trust I (the "Trust") (liquidation amount of$25 per security and amounting to$186,663,800 (or$181,063,250 after excluding the Corporation's participation in the Trust of$5,600,550 ) in the aggregate). The redemption price for the Capital Securities was equal to$25 per security plus accrued and unpaid distributions up to and excluding the redemption date in the amount of$0.139583 per security, for a total payment per security in the amount of$25.139583 . Upon redemption, Popular delisted the Capital Securities of thePopular Capital Trust I (NASDAQ: BPOPN) from the Nasdaq Global Select Market.
Acquisition of
OnOctober 15, 2021 ,Popular Equipment Finance, LLC ("PEF"), a newly-formed wholly-owned subsidiary of PB, completed the acquisition of certain assets and the assumption of certain liabilities ofMinnesota -basedK2 Capital Group LLC's ("K2") equipment 119
-------------------------------------------------------------------------------- leasing and financing business (the "Acquired Business"). PEF made a payment to K2 at closing of approximately$159 million in cash, representing a premium of approximately$40 million over the book value of K2's net assets. An additional approximately$29 million in earnout payments could be payable to K2 over the next three years, contingent upon the achievement of certain agreed-upon financial targets during such period.
Specializing in the healthcare industry, the Acquired Business provides a variety of lease products, including operating and capital leases, and also offers private label vendor finance programs to equipment manufacturers and healthcare organizations. The acquisition provides PB with a national equipment leasing platform that complements its existing healthcare lending business.
As part of the transaction, PEF acquired approximately
OVERVIEW
Table 1 provides selected financial data and performance indicators for the
quarters and nine-month 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 periods endedSeptember 30, 2021 as compared with the same periods in 2020, 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, 2021 , the Corporation recorded net income of$ 248.1 million , compared to net income of$ 168.4 million for the same quarter of the previous year. Net interest margin for the third quarter of 2021 was 2.77%, a decrease of 29 basis points when compared to 3.06% for the same quarter of the previous year, mainly due to earning asset mix driven by higher money market and investment securities which carry a low yield, and the low interest rate environment, partially offset by higher interest and fees from loans under theU.S. Small Business Administration's ("SBA") Paycheck Protection Program ("PPP"), and lower cost of deposits. On a taxable equivalent basis, the net interest margin was of 3.04%, compared to 3.37% for the same quarter of the previous year. The Corporation recorded a release of$61.2 million on its reserve for credit losses, a decrease of$80.3 million when compared to the same quarter of 2020, reflecting changes to the economic outlook, qualitative reserves, and portfolio credit quality. Non-interest income was higher by$40.5 million mostly due to lower unfavorable fair value adjustments on mortgage servicing rights ("MSRs"); the gains from the sale and partial leaseback of two corporate office buildings; higher net earnings from the combined portfolio of investments under the equity method; and higher other service fees due to higher credit and debit card fees in part due to the business disruptions and the waiver of service charges and late fees related to the COVID-19 pandemic during 2020. Operating expenses were higher by$27.1 million principally due to higher personnel costs, mostly related to incentive compensation, and higher professional fees. 120 --------------------------------------------------------------------------------
? Total assets at
? Total deposits atSeptember 30, 2021 increased by$9.1 billion when compared to deposits atDecember 31, 2020 , reflecting growth across various sectors at BPPR, mainly in thePuerto Rico public sector.
? At
? Capital ratios continued to be strong. As ofSeptember 30, 2021 , the Corporation's common equity tier 1 capital ratio was 17.36%, the tier 1 leverage ratio was 7.38%, and the total capital ratio was 19.90%. 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 2020 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 2020 Form 10-K and "Part II - Item 1A" of any subsequent 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) 2021 2020 Variance 2021 30, 2020 Variance Money market investments$ 17,526,238 $ 11,640,880 $ 5,885,358 $ 15,364,275 $ 7,628,941 $ 7,735,334 Investment securities 24,697,876 21,864,184 2,833,692 22,386,777 18,868,073 3,518,704 Loans 28,946,685 29,484,651 (537,966) 29,120,107 28,077,906 1,042,201 Earning assets 71,170,799 62,989,715 8,181,084 66,871,159 54,574,920 12,296,239 Total assets 74,189,163 65,926,000 8,263,163 69,938,785 57,776,191 12,162,594 Deposits 66,013,561 56,866,340 9,147,221 61,864,897 49,875,563 11,989,334 Borrowings 1,263,413 1,346,284 (82,871) 1,314,592 1,340,437 (25,845) Stockholders' equity 5,982,971 6,028,687 (45,716)
5,715,792 5,379,472 336,320
Operating Highlights Quarters ended September 30, Nine months ended September 30, (In thousands, except per 2021 2020 Variance 2021 2020 Variance share information) Net interest income$ 489,393 $ 461,021 $ 28,372 $ 1,456,307 $ 1,384,997 $ 71,310 Provision for credit losses (61,173) 19,138 (80,311) (160,414) 271,318 (431,732) (benefit) Non-interest income 169,258 128,767 40,491 477,451 367,465 109,986 Operating expenses 388,168 361,066 27,102 1,131,881 1,081,905 49,976 Income before income tax 331,656 209,584 122,072 962,291 399,239 563,052 Income tax expense 83,542 41,168 42,374 233,466 68,893 164,573 Net income$ 248,114 $ 168,416 $ 79,698 $ 728,825 $ 330,346 $ 398,479 Net income applicable to$ 247,761 $ 168,064 $ 79,697 $ 727,766 $ 328,941 $ 398,825 common stock Net income per common share$ 3.09 $ 2.01 $ 1.08 $ 8.89 $ 3.80 $ 5.09 - basic Net income per common share$ 3.09 $ 2.00 $ 1.09 $ 8.87 $ 3.80 $ 5.07 - diluted Dividends declared per$ 0.45 $ 0.40 $ 0.05 $ 1.30 $ 1.20 $ 0.10 common share Quarters ended September 30, Nine months ended September 30, Selected Statistical 2021 2020 2021 2020 Information Common Stock Data End market price$ 77.67 36.27$ 77.67 36.27 Book value per common share at period 74.66 69.94 74.66 69.94
end
Profitability Ratios Return on assets 1.34 % 1.06 % 1.39 % 0.76 % Return on common equity 17.10 12.46 17.09 8.21 Net interest spread 2.69 2.93 2.82 3.23 Net interest spread (taxable equivalent) 2.96 3.24 3.13 3.56 - Non-GAAP Net interest margin 2.77 3.06 2.92 3.39 Net interest margin (taxable equivalent) 3.04 3.37 3.23 3.72 - Non-GAAP Capitalization Ratios Average equity to average 7.87 % 8.53 % 8.17 % 9.31 % assets Common equity Tier 1 17.36 15.93 17.36 15.93 capital Tier I capital 17.43 16.01 17.43 16.01 Total capital 19.90 18.49 19.90 18.49 Tier 1 leverage 7.38 7.80 7.38 7.80 122
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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 (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 2020 Form 10-K. Also, refer to Note 2 to the Consolidated Financial Statements included in the 2020 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. 123 --------------------------------------------------------------------------------
OPERATING RESULTS ANALYSIS NET INTEREST INCOME Net interest income for the third quarter of 2021 was$489.4 million , an increase of$28.4 million when compared to$461.0 million for the same quarter of 2020. Taxable equivalent net interest income was$536.3 million for the third quarter of 2021 compared to$506.8 million in the third quarter of 2020, an increase of$29.5 million . Net interest margin for the third quarter of 2021 was 2.77%, a decrease of 29 basis points when compared to 3.06% for the same quarter of the previous year. The decrease in the net interest margin is due to earning assets mix, a higher proportion of money market and investment securities resulting from a higher volume of deposits in the quarter, partially offset by higher loan fees related to loans issued under the SBA PPP and a lower cost of deposits. The net interest margin, on a taxable equivalent basis, for the third quarter of 2021 was 3.04%, a decrease of 33 basis points when compared to 3.37% for the same quarter of 2020. The detailed variances of the increase in net interest income are described below:
Positive variances:
? Higher interest income from money market investments due to both a higher volume and a higher interest rate received on excess reserves at theFederal Reserve by 5 basis points, effective in mid-June,2021. Also, higher trading and investment securities mainly driven by a higher volume of mortgage-backed securities and higher yields fromU.S. Treasury Notes due to renewal of maturities at longer terms. These larger balances resulted from an increase in deposits in most categories; ? Higher interest income from commercial loans driven by interest and fees from PPP loans which increased$11.7 million when compared to the third quarter of 2020, partially offset by lower volume upon the SBA forgiveness of PPP loans. The average balance and yield of PPP loans in the third quarter of 2021 was$852.4 million and 10.10%, respectively, compared to$1.4 billion and 2.88% in the same quarter of 2020; ? The auto and lease financing portfolios increased by$561.2 million or 14% driven by increased demand for automobiles in the quarters after the COVID-19 related lockdown and higher household liquidity resulting from COVID-19 relief federal assistances; ? Mortgage loans increased 8% when compared to the same quarter in 2020, driven by the$807.6 million bulk loan repurchases from our GSE loan servicing portfolios that occurred at the end ofSeptember 2020 , partially offset by lower yields also related to the lower rate of the repurchased portfolio; and ? Lower interest expense on deposits due to the decrease in interest cost by 14 basis points resulting from the decrease in market rates inMarch 2020 and the subsequent effect on these liabilities. In theU.S. the cost of interest-bearing deposits decreased 42 basis points when compared to the same quarter in 2020 and in P.R. the decrease was 7 basis points. The impact from lower rates was partially offset by higher average balance of interest-bearing deposits by$8.2 billon when compared with the same quarter in 2020.
Partially offset by:
? Lower interest income from consumer loans due to lower average volume both on the installment loan and credit card portfolios.
Interest income for the quarter endedSeptember 30, 2021 , included the amortization of deferred loan fees, prepayment penalties, late fees and the amortization of premium/discounts, including the amortization of the discount of PCD loans, amounted to$27.0 million compared to$13.7 million reported in the same quarter of 2020. The increase in this amortization is related to higher amortized fees resulting mainly from the SBA forgiveness of PPP loans of$19.9 million compared to$6.7 million in the third quarter of 2020, partially offset by a lower amortization of the fair value discount of auto and credit card portfolios acquired in previous years. 124 --------------------------------------------------------------------------------
Table 2 - Analysis of Levels & Yields on a Taxable Equivalent Basis (Non-GAAP)
Quarter endedSeptember 30 , Variance Average Volume Average Yields / Costs Interest Attributable to 2021 2020 Variance 2021 2020 Variance 2021 2020 Variance Rate Volume (In millions) (In thousands) Money market$ 18,041 $ 10,853 $ 7,188 0.15 % 0.10 % 0.05 % investments$ 6,914 $ 2,773 $ 4,141 $ 1,781 $ 2,360 Investment securities
23,154 20,405 2,749 2.10 2.22 (0.12) [1]
121,857 113,603 8,254 (6,872) 15,126 84 79 5 4.97 5.44 (0.47) Trading securities 1,051 1,079 (28) (94) 66 Total money market, investment and trading
41,279 31,337 9,942 1.25 1.49 (0.24) securities
129,822 117,455 12,367 (5,185) 17,552
Loans:
13,265 13,669 (404) 5.36 4.95 0.41 Commercial
179,204 170,124 9,080 14,215 (5,135)
854 930 (76) 5.40 5.67 (0.27) Construction
11,621 13,251 (1,630) (583) (1,047)
1,317 1,122 195 5.99 6.08 (0.09) Leasing
19,737 17,069 2,668 (253) 2,921
7,652 7,094 558 5.11 5.40 (0.29) Mortgage
97,806 95,770 2,036 (5,258) 7,294
2,435 2,722 (287) 11.28 11.21 0.07 Consumer
67,749 76,696 (8,947) (1,178) (7,769)
3,372 3,006 366 8.37 9.08 (0.71) Auto
71,171 68,604 2,567 (5,409) 7,976
28,895 28,543 352 6.15 6.16 (0.01) Total loans
447,288 441,514 5,774 1,534 4,240
Interest bearing deposits:
NOW and money
15,621 13,103 2,518 0.16 0.25 (0.09) Savings
6,353 8,328 (1,975) (3,613) 1,638
6,957 7,810 (853) 0.73 1.03 (0.30) Time deposits 12,741 20,164 (7,423) (4,975) (2,448)
Total interest 50,351 42,138 8,213 0.21 0.35 (0.14) bearing deposits 27,029 37,555 (10,526) (12,758) 2,232 87 138 (51) 0.25 1.19 (0.94) Short-term borrowings 54 416 (362) (260) (102) Other medium and 1,197 1,220 (23) 4.57 4.67 (0.10) long-term debt 13,686 14,209 (523) (375) (148) Total interest bearing 51,635 43,496 8,139 0.31 0.48 (0.17) liabilities 40,769 52,180 (11,411) (13,393) 1,982 14,955 12,806 2,149 Demand deposits Other sources of 3,584 3,578 6 funds$ 70,174 $ 59,880 $ 10,294 0.23 % 0.35 % (0.12) % Total source of funds 40,769 52,180 (11,411) (13,393) 1,982 Net interest margin/ income on a taxable equivalent 3.04 % 3.37 % (0.33) % basis (Non-GAAP) 536,341 506,789 29,552$ 9,742 $ 19,810 2.96 % 3.24 % (0.28) % Net interest spread Taxable equivalent adjustment 46,947 45,769 1,178 Net interest margin/ income non-taxable equivalent basis 2.77 % 3.06 % (0.29) % (GAAP)$ 489,394 $ 461,020 $ 28,374 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 inPuerto Rico . 125 -------------------------------------------------------------------------------- Net interest income for the nine-month period endedSeptember 30, 2021 was$1.5 billion , or$71.3 million higher than the same period in 2020. Taxable equivalent net interest income was$1.6 billion for the nine months endedSeptember 30, 2021 , or$90.7 million higher than the same period in 2020. Net interest margin was 2.92%, a decrease of 47 basis points when compared to 3.39% in 2020. The decrease in net interest margin is mainly driven by earning assets mix with a higher volume of money market and investment securities, which resulted in higher interest income but contributed negatively to the decrease in net interest margin due to the low rate of these assets and the low interest rate environment. Net interest margin, on a taxable equivalent basis, for the nine months endedSeptember 30, 2021 , was 3.23%, a decrease of 49 basis points when compared to the 3.72% for the same period of 2020. The drivers of the variances in net interest income for the nine-month period are:
Positive variances:
? Higher interest income from money market, trading and investment securities. Part of the liquidity resulting from the increase in deposits has been used to acquire tax exempt investment securities in P.R.
? Higher interest income from commercial loans driven by interest and fees from PPP loans.
? Higher interest income from the auto and lease financing portfolios due to the
increase in volume of
? Mortgage loans increased 10% when compared to the same period in 2020, driven by the$807.6 million bulk loan repurchases from our GSE loan servicing portfolios that occurred at the end ofSeptember 2020 , partially offset by lower yields also related to the lower rate of the repurchased portfolio. ? Lower interest expense on deposits due to lower interest cost resulting from the decrease in market rates and the subsequent effect on these liabilities, partially offset by higher average balance of deposits.
Negative variances:
? Lower interest income from consumer loans driven by lower volume of credit cards and personal loans.
Net interest income for the nine months endedSeptember 30, 2021 , included the amortization of deferred loan fees, prepayment penalties, late fees and the amortization of premium/discounts, including the amortization of the discount of PCD loans, amounted to$69.7 million , compared to$39.3 million in the same period of 2020. The increase in loan fee income was driven by PPP loan fees, which amounted to$50.8 million for the nine-month periods endedSeptember 30, 2021 versus$18.9 million in the nine-month period endedSeptember 30, 2020 . 126 --------------------------------------------------------------------------------
Table 3 - Analysis of Levels & Yields on a Taxable Equivalent Basis from Continuing Operations (Non-GAAP)
Nine months ended
Variance Average Volume Average Yields / Costs Interest Attributable to 2021 2020 Variance 2021 2020 Variance 2021 2020 Variance Rate Volume (In millions) (In thousands)
22,302 18,804 3,498 2.29 2.45 (0.16) Investment securities [1] 382,280 344,926 37,354 (26,880) 64,234 85 64 21 5.06 6.20 (1.14) Trading securities 3,218 2,960 258 (619) 877 Total money market, investment and trading 37,751 26,497 11,254 1.42 1.84 (0.42) securities 399,798 364,675 35,123 (40,758)
75,881
Loans: 13,475 13,122 353 5.32 5.31 0.01 Commercial 535,126 522,126 13,000 (1,048) 14,048 874 909 (35) 5.39 5.83 (0.44) Construction 35,125 39,649 (4,524) (3,054) (1,470) 1,265 1,092 173 6.01 6.04 (0.03) Leasing 57,055 49,480 7,575 (228) 7,803 7,761 7,054 707 5.08 5.32 (0.24) Mortgage 295,598 281,191 14,407 (12,928) 27,335 2,460 2,916 (456) 11.24 11.40 (0.16) Consumer 206,896 248,912 (42,016) (3,997) (38,019) 3,285 2,985 300 8.55 9.06 (0.51) Auto 209,460 202,372 7,088 (12,551) 19,639 29,120 28,078 1,042 6.16 6.39 (0.23) Total loans 1,339,260 1,343,730 (4,470) (33,806) 29,336$ 66,871 $ 54,575 $ 12,296 3.48 % 4.18 % (0.70) % Total earning assets$ 1,739,058 $ 1,708,405 $ 30,653 $ (74,564) $ 105,217 Interest bearing deposits: NOW and money$ 25,201 $ 18,956 $ 6,245 0.13 % 0.32 % (0.19) % market [2]$ 24,169 $ 45,909 $ (21,740) $ (33,877) $ 12,137 15,128 11,899 3,229 0.18 0.34 (0.16) Savings 20,289 30,239 (9,950) (17,340) 7,390 7,108 8,076 (968) 0.77 1.10 (0.33) Time deposits 40,832 66,287 (25,455) (17,281) (8,174) Total interest bearing 47,437 38,931 8,506 0.24 0.49 (0.25) deposits 85,290 142,435 (57,145) (68,498) 11,353 92 178 (86) 0.38 1.58 (1.20) Short-term borrowings 259 2,109 (1,850) (1,182) (668) Other medium and 1,222 1,162 60 4.54 4.89 (0.35) long-term debt 41,518 42,587 (1,069) (2,816)
1,747
Total
interest bearing
48,751 40,271 8,480 0.35 0.62 (0.27) liabilities 127,067 187,131 (60,064) (72,496) 12,432 14,428 10,945 3,483 Demand deposits 3,692 3,359 333 Other sources of funds$ 66,871 $ 54,575 $ 12,296 0.25 % 0.46 % (0.21) % Total source of funds 127,067 187,131 (60,064) (72,496) 12,432 Net interest margin/ income on a taxable equivalent 3.23 % 3.72 % (0.49) % basis (Non-GAAP) 1,611,991 1,521,274 90,717$ (2,068) $ 92,785 3.13 % 3.56 % (0.43) % Net interest spread Taxable equivalent adjustment 155,684 136,278 19,406 Net interest margin/ income non-taxable equivalent 2.92 % 3.39 % (0.47) % basis (GAAP)$ 1,456,307 $ 1,384,996 $ 71,311
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
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Provision for Credit Losses - Loans Held-in-Portfolio and Unfunded Commitments
For the quarter endedSeptember 30, 2021 , the Corporation recorded a release of$60.2 million for its reserve for credit losses related to loans held-in-portfolio and unfunded commitments. The reserve release related to the loans-held-in-portfolio for the quarter endedSeptember 30, 2021 was$58.6 million , compared to a provision expense of$19.5 million for the quarter endedSeptember 30, 2020 . The decrease reflects the improvements in credit quality, changes in the macroeconomic outlook, and changes in qualitative reserves. The reserve release related to unfunded commitments for the third quarter of 2021 was$1.5 million , compared to a provision expense of$6.6 million for the same period of 2020. For the quarter endedSeptember 30, 2021 , the Corporation recorded a reserve release for the BPPR segment of$36.0 million , compared to a provision expense of$7.7 million for the quarter endedSeptember 30, 2020 , a decrease of$43.7 million . The PopularU.S. segment recorded a reserve release of$22.7 million for the quarter endedSeptember 30, 2021 , a decrease of$34.5 million , compared to a provision expense of$11.8 million for the same quarter in 2020. For the nine-month period endedSeptember 30, 2021 , the Corporation recorded a release of$159.4 million for its reserve for credit losses related to loans held-in-portfolio and unfunded commitments. The reserve release related to the loans-held-in-portfolio for the nine-month period endedSeptember 30, 2021 was$151.9 million , compared to a provision expense of$271.6 million for the nine month period endedSeptember 30, 2020 . The decrease reflects the improvements in credit quality, changes in the macroeconomic outlook, and changes in qualitative reserves. The provision for unfunded commitments for the nine-month period of 2021 reflected a benefit of$7.4 million , compared to a provision expense of$10.0 million for the same period of 2020. The reserve release related to loans held-in-portfolio for the BPPR segment was$98.5 million for the nine-month period endedSeptember 30, 2021 , compared to a provision expense of$181.1 million for the nine-month period endedSeptember 30, 2020 , a decrease of$279.6 million . The reserve release related to loans held-in-portfolio for the PopularU.S. segment was$53.5 million for the nine-month period endedSeptember 30, 2021 , a decrease of$143.9 million , compared to a provision expense of$90.4 million for the same period in 2020. AtSeptember 30, 2021 , the total allowance for credit losses for loans held-in-portfolio amounted to$718.6 million , compared to$896.3 million as ofDecember 31, 2020 . The ratio of the allowance for credit losses to loans held-in-portfolio was 2.49% atSeptember 30, 2021 , compared to 3.05% atDecember 31, 2020 . Refer to Note 8 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, 2021 , the Corporation recorded a reserve release of$1.0 million for each period, compared to a benefit of$0.3 million and$0.2 million , respectively, for the quarter and nine-month period endedSeptember 30, 2020 . AtSeptember 30, 2021 , the total allowance for credit losses for this portfolio amounted to$9.2 million , compared to$10.3 million as ofDecember 31, 2020 . Refer to Note 8 for additional information on the ACL for this portfolio. 128
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Non-Interest Income Non-interest income amounted to$169.3 million for the quarter endedSeptember 30, 2021 , compared to$128.8 million for the same quarter of the previous year. The increase in non-interest income by$40.5 million was primarily driven by: ? higher service charges on deposit accounts by$4.5 million principally due to higher fees on transactional cash management services at BPPR in part due to the business disruptions and the waiver of fees related to the COVID-19 pandemic during 2020; ? higher other service fees by$10.6 million , principally at the BPPR segment, due to higher credit and debit card fees by$7.4 million mainly in interchange income resulting from higher transactional volumes in part due to the business disruptions and the waiver of service charges and late fees related to the COVID-19 pandemic during 2020; ? higher income from mortgage banking activities by$17.8 million mainly due to lower unfavorable fair value adjustments on mortgage servicing rights ("MSRs") by$14.5 million , of which$8.8 million was related to the bulk loan repurchases from the Corporation's GNMA,FNMA and FHLMC loan servicing portfolio during the third quarter of 2020;$10.5 million in interest advanced losses related to the loans repurchased in bulk from GNMA during 2020; partially offset by lower gains on securitization transactions by$3.8 million and lower mortgage servicing fees by$3.6 million mostly due to the collection of fees in arrears at the time of the previously mentioned bulk loan repurchase in 2020; ? a favorable variance in net (loss) gain on sale of loans, including valuation adjustments, of$2.2 million mainly due to a$2.0 million negative valuation adjustment recognized during the third quarter of 2020 on the held-for-sale taxi medallion portfolio at PB; and ? higher other operating income by$13.1 million mostly due to a gain of$7.0 million recognized by BPPR as a result of the sale and partial leaseback of two corporate office buildings and higher net earnings from the combined portfolio of investments under the equity method by$4.7 million ;
partially offset by:
? an unfavorable variance in net (loss) gain on equity securities of
? an unfavorable variance in adjustments to indemnity reserves of$2.1 million mainly due to a$5.1 million recourse reserve release during the third quarter of 2020 related to the bulk loan repurchase fromFNMA and FHLMC.
Non-interest income amounted to
? higher service charges on deposit accounts by$12.4 million principally due to higher fees on transactional cash management services at BPPR in part due to the business disruptions and the waiver of fees related to the COVID-19 pandemic during 2020; ? higher other service fees by$40.7 million , principally at the BPPR segment, due to higher credit and debit card fees by$34.6 million mainly in interchange income resulting from higher transactional volumes in part due to the business disruptions and the waiver of service charges and late fees related to the COVID-19 pandemic during 2020; ? higher income from mortgage banking activities by$32.4 million mainly due to lower unfavorable fair value adjustments on MSRs by$21.7 million and$10.5 million in interest advanced losses recognized as a result of the previously mentioned bulk GNMA repurchase during 2020; and ? higher other operating income by$24.6 million principally due to higher net earnings from the combined portfolio of investments under the equity method by$11.6 million , the previously mentioned$7.0 million gain on sale of two corporate office buildings, and higher daily auto rental revenues by$3.2 million . 129 --------------------------------------------------------------------------------
Operating Expenses Operating expenses amounted to$388.2 million for the quarter endedSeptember 30, 2021 , an increase of$27.1 million when compared with the same quarter of 2020, driven primarily by: ? Higher personnel cost by$21.7 million mainly due to higher incentives related to the profit-sharing plan which is tied to the Corporation's financial performance by$7.2 million and higher commission, incentive and other bonuses by$8.0 million ; ? Higher professional fees by$8.2 million due higher programming, processing and other technology services by$4.3 million mainly due to higher volume of transactions and higher advisory expense by$4.2 million related to corporate initiatives; and
? Higher business promotions by
These increases were partially offset by:
? Lower other operating expenses by$4.9 million mainly due to provision for unfunded commitments by$6.6 million which is included within the provision for credit losses caption for 2021 and lower operational losses by$1.7 million ; partially offset by lower gain on sale of repossessed auto units by$1.7 million and higher credit and debit card processing expenses by$1.2 million due to higher transactional volumes. Operating expenses amounted to$1.1 billion for the nine months endedSeptember 30, 2021 , an increase of$50.0 million when compared with the same period of 2020, driven primarily by: ? Higher personnel cost by$49.4 million mainly due to due to higher incentives related to the profit-sharing plan by$21.9 million and higher commission and incentive by$26.3 million due to performance metrics and salary increases; higher fringe benefits expense, mainly medical insurance by$6.4 million ; partially offset by higher deferred salaries as a result of higher loan originations during 2021;
? Higher professional fees by
? Higher business promotions by
These increases were partially offset by:
? Lower OREO expenses by
? Lower other operating expenses by$11.5 million mainly due to lower pension plan cost by$7.5 million due to annual changes in actuarial assumptions, provision for unfunded commitments by$10.0 million which is included within the provision for credit losses caption for 2021; partially offset by higher credit and debit card processing expenses by$4.4 million due to higher transactional volumes and lower gain on sale of repossessed auto units by$2.2 million . 130 --------------------------------------------------------------------------------
Table 4 - Operating Expenses
Quarters ended September 30, Nine months ended September 30, (In thousands) 2021 2020 Variance 2021 2020 Variance Personnel costs: Salaries$ 95,185 $ 91,891 $ 3,294 $ 274,814 $ 278,116 $ (3,302) Commissions, incentives and other bonuses 25,892 17,849 8,043 85,484 59,183 26,301 Pension, postretirement and medical insurance 13,893 10,639 3,254 38,106 31,669 6,437 Other personnel costs, including payroll taxes 22,677 15,562 7,115 72,926 52,970 19,956 Total personnel costs 157,647 135,941 21,706 471,330 421,938 49,392 Net occupancy expenses 24,896 25,907 (1,011) 75,471 76,552 (1,081) Equipment expenses 22,537 24,088 (1,551) 66,917 66,537 380 Other taxes 14,459 13,918 541 41,623 40,922 701 Professional fees:
Collections, appraisals and other credit related fees 3,166 2,862 304 9,972 9,640 332 Programming, processing and other technology services 69,221 64,876 4,345 202,739 187,082 15,657 Legal fees, excluding collections 2,535 2,707 (172) 7,267 7,877 (610) Other professional fees 29,787 26,029 3,758 85,832 85,493 339 Total professional fees 104,709 96,474 8,235 305,810 290,092 15,718 Communications 6,133 5,694 439 18,971 17,222 1,749 Business promotion 18,116 14,664 3,452 47,148 41,142 6,006 FDIC deposit insurance 7,181 6,568 613 18,891 16,988 1,903 Other real estate owned (OREO) (income) expenses (1,722) (1,615) (107) (10,554) 520 (11,074)
Other operating expenses:
Credit and debit card processing, volume and interchange and other expenses 12,960 11,744 1,216 36,331 31,899 4,432 Operational losses 7,147 8,837 (1,690) 21,571 21,339 232 All other 13,322 17,770 (4,448) 35,283 51,409 (16,126) Total other operating expenses 33,429 38,351 (4,922) 93,185 104,647 (11,462) Amortization of intangibles 783 1,076 (293) 3,089 5,345 (2,256) Total operating expenses$ 388,168 $ 361,066 $ 27,102 $ 1,131,881 $ 1,081,905 $ 49,976 INCOME TAXES For the quarter and nine months endedSeptember 30, 2021 , the Corporation recorded an income tax expense of$83.5 million and$233.5 million with an effective tax rate ("ETR") of 25% and 24%, respectively, compared to$41.2 million and$68.9 million with an ETR of 20% and 17% for the respective period of 2020. The increase in income tax expense was primarily due to higher pre-tax income resulting primarily from a lower provision for credit losses partially offset by higher net exempt interest income and higher income from theU.S. operations subject to lower statutory tax rate. AtSeptember 30, 2021 , the Corporation had a net deferred tax asset amounting to$0.7 billion , net of a valuation allowance of$0.5 billion . The net deferred tax asset related to theU.S. operations was$0.3 billion , net of a valuation allowance of$0.4 billion .
Refer to Note 30 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.
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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 32 to the Consolidated Financial Statements. The Corporate group reported a net income of$7.0 million for the quarter endedSeptember 30, 2021 , compared with a net income of$4.8 million for the same quarter of the previous year. The increase in net income was mainly attributed to higher income from the portfolio of equity method investments, partially offset by higher operating expenses, mainly personnel costs. For the nine months endedSeptember 30, 2021 the Corporate group reported a net income of$15.9 million , an increase of$8.6 million compared to a net income of$7.3 million for the same period of the previous year mainly due to higher income from the portfolio of 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$201.0 million for the quarter endedSeptember 30, 2021 , compared with net income of$153.8 million for the same quarter of the previous year. The increase in net income was principally driven by the benefit of$37.0 million in the reserve for credit losses and unfunded commitments recorded in the quarter endedSeptember 30, 2021 , compared to a provision expense of$7.3 million for the same quarter of the previous year. The additional factors that contributed to the variance in the financial results include the following:
? Higher net interest income by
? higher interest income from money market and investment securities by$15.2 million largely due to higher average balance of money market investments and mortgage-backed securities available-for-sale funded from the increase in deposit balances and higher yields fromU.S. Treasury securities, offset by lower yields on mortgage-backed securities; ? higher interest income from loans by$6.1 million mainly from commercial loans due to higher interest and fees from PPP loans and higher average balance in the mortgage and auto loans portfolio, partially offset by lower average balance in personal and credit card loans portfolio; and
? lower interest expense on deposits by
The net interest margin for the quarter endedSeptember 30, 2021 was 2.75% compared to 3.13% for the same quarter in the previous year. The decrease in net interest margin is driven by earnings assets mix and a lower yield in earning assets, partially offset by a lower cost of deposits.
? Non-interest income was higher by
? Higher service charges on deposit accounts by$4.4 million and higher other service fees by$10.1 million , mainly from debit and credit card fees, from higher transactional volumes due in part to the business disruptions and waiver of fees related to the COVID-19 pandemic in 2020; ? higher income from mortgage banking activities by$18.6 million due to the impact of the bulk loan repurchases from the Corporation's GNMA,FNMA and FHLMC loan servicing portfolio during the third quarter of 2020, which included interest advanced losses of$10.5 million and an unfavorable fair value adjustment on mortgage servicing rights of$8.8 million ; and 132 -------------------------------------------------------------------------------- ? higher other operating income by$7.8 million mostly due to a gain of$7.0 million recognized by BPPR as a result of the sale and partial leaseback of two corporate office buildings; Partially offset by: ? an unfavorable variance in adjustments to indemnity reserves of$2.1 million mainly due a$5.1 million recourse reserve release during the third quarter of 2020 related to the bulk loan repurchase fromFNMA and FHLMC.
? Higher operating expenses by
? Higher personnel costs by
? higher professional fees by
? higher business promotion expenses by
? Higher income tax expense by
For the nine months endedSeptember 30, 2021 , the BPPR reportable segment recorded a net income of$606.5 million , compared to$339.8 million for the same period of the previous year. The increase in net income was principally driven by the benefit of$104.4 million in the reserve for credit losses and unfunded commitments recorded in the period, compared to a provision expense of$180.7 million for the same period of the previous year. The additional factors that contributed to the variance in the financial results include the following:
? Higher net interest income by
? higher interest income from money market and investment securities by$26.2 million largely due to higher average balance of money market investments and mortgage-backed securities available-for-sale funded from the increase in deposit balances, offset by lower average balance ofU.S. Treasuries and lower yields; ? higher income from loans by$3.0 million due to higher interest and fees from PPP commercial loans and higher average balances, mostly in mortgage and auto loans, partially offset by lower yields and lower average balances in personal and credit card loans; and
? lower interest expense on deposits by
The net interest margin for the nine months endedSeptember 30, 2021 was 2.91% compared to 3.53% for the same period of the previous year. The decrease in net interest margin is driven by the earnings assets mix and lower yield, partially offset by a lower cost of deposits.
? Non-interest income was higher by
? Higher service charges on deposit accounts by$12.2 million and higher other service fees by$40.0 million mainly from debit and credit card fees, due to higher transactional volumes due in part to the business disruptions and waiver of fees related to the COVID-19 pandemic in 2020; 133 --------------------------------------------------------------------------------
? higher income from mortgage banking activities by
? a favorable variance in adjustments to indemnity reserves of
? higher other operating income by
? Higher operating expenses by
? Higher personnel costs by
? higher professional fees by
? higher business promotion expenses by
? higher other operating expenses by$10.1 million due higher expenses allocated from the Corporate group, higher credit and debit card processing expenses due to higher transactional volumes, partially offset by lower provision for unfunded commitments, which for 2021 is included within the provision for credit losses. Partially offset by:
? Lower OREO expenses by
? Higher income tax expense by
PopularU.S. For the quarter endedSeptember 30, 2021 , the reportable segment of PopularU.S. reported a net income of$39.6 million , compared with a net income of$9.4 million for the same quarter of the previous year. The increase in net income was principally driven by the benefit of$23.9 million in the reserve for credit losses and unfunded commitments recorded in the quarter endedSeptember 30, 2021 , compared to a provision expense of$11.8 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
? lower interest expense on deposits by
Partially offset by: ? lower interest income from loans by$2.1 million due to lower average balance in personal loans, partially offset by an increase in the commercial portfolio; and
? lower income from money market and investment securities by
The net interest margin for the quarter ended
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? Lower operating expenses by
? lower other operating expenses by$6.2 million due to lower sundry losses and lower provision for unfunded commitments which for 2021 is recorded within the provision for credit losses ? lower net occupancy expenses by$1.7 million due to the lower rent expense related to the benefits of the completed branch optimization initiative in the New York Metro region. Partially offset by
? higher personnel costs by
? Income tax unfavorable variance of
For the nine-month period endedSeptember 30, 2021 , the reportable segment of PopularU.S. reported a net income of$106.1 million , compared with a net loss of$17.0 million for the same period of the previous year. The increase in net income was principally driven by the release of$55.8 million in the reserve for credit losses and unfunded commitments recorded for the period, due to changes in credit quality and credit metrics, compared to a provision expense of$90.4 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
? lower interest expense on deposits by
? Partially offset by:
? lower interest income from loans by
? lower income from money market and investment securities by
The net interest margin for the nine-month period ended
? Lower operating expenses by
? lower occupancy expense by$4.9 million due to lower rent expense related to the benefits of the completed branch optimization initiative in ourNew York Metro region;
? Lower professional fees by
? Lower other operating expenses by$3.3 million mainly due to lower provision for unfunded commitments which for 2021 is recorded within the provision for credit losses, partially offset by higher allocations from the Corporate group, mainly professional services. ? Partially offset by:
? Higher personnel costs by
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? Unfavorable variance in income tax expense of
FINANCIAL CONDITION ANALYSIS
Assets
The Corporation's total assets were
Money market investments and debt securities available-for-sale
Money market investments and debt securities available-for-sale increased by$5.9 billion and$2.8 billion , respectively, atSeptember 30, 2021 . This was largely driven by the additional funds available to invest resulting from the increase in deposits across various sectors, partially offset by paydowns of agency mortgage-backed securities. Refer to Note 5 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 7 in the Consolidated Financial Statements for detailed information about the Corporation's loan portfolio composition and loan purchases and sales.
Loans held-in-portfolio decreased by$0.5 billion to$28.9 billion atSeptember 30, 2021 , mainly due to a decrease in commercial loans at BPPR of$0.3 billion mainly due to the repayment of PPP loans and a decrease in mortgage loans at BPPR of$0.4 billion mainly due to paydowns, partially offset by growth in auto loans and leases at BPPR by$0.4 billion .
Table 5 - Loans Ending Balances (In thousands) September 30, 2021 December 31, 2020 Variance Loans held-in-portfolio: Commercial $ 13,303,671$ 13,614,310 $ (310,639) Construction 801,040 926,208 (125,168) Lease financing 1,348,679 1,197,661 151,018 Mortgage 7,539,152 7,890,680 (351,528) Auto 3,376,694 3,132,228 244,466 Consumer 2,486,136 2,624,109 (137,973) Total loans held-in-portfolio 28,855,372 29,385,196 (529,824) Loans held-for-sale: Commercial - 2,738 (2,738) Mortgage 91,313 96,717 (5,404) Total loans held-for-sale 91,313 99,455 (8,142) Total loans $ 28,946,685$ 29,484,651 $ (537,966) 136
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Other assets
Other assets amounted to$1.6 billion atSeptember 30, 2021 , compared to$1.7 billion atDecember 31, 2020 . Refer to Note 12 for a breakdown of the principal categories that comprise the caption of "Other Assets" in the Consolidated Statements of Financial Condition atSeptember 30, 2021 andDecember 31, 2020 . Liabilities The Corporation's total liabilities were$68.2 billion atSeptember 30, 2021 , an increase of$8.3 billion , compared to$59.9 billion atDecember 31, 2020 , mainly due to increases in deposits as discussed below.
Deposits and Borrowings
The composition of the Corporation's financing to total assets at
Table 6 - Financing to Total Assets
% increase September 30, December 31, (decrease) % of total assets from 2020 to (In millions) 2021 2020 2021 2021 2020 Non-interest bearing deposits$ 15,148 $ 13,129 15.4 % 20.4 % 19.9 % Interest-bearing core deposits 45,981 38,599 19.1 62.0 58.5 Other interest-bearing deposits 4,885 5,138 (4.9) 6.6 7.8 Repurchase agreements 86 121 (28.9) 0.1 0.2 Notes payable 1,177 1,225 (3.9) 1.6 1.9 Other liabilities 929 1,685 (44.9) 1.2 2.6 Stockholders' equity 5,983 6,029 (0.8) 8.1 9.1 Deposits The Corporation's deposits totaled$66.0 billion atSeptember 30, 2021 , compared to$56.9 billion atDecember 31, 2020 . The deposits increase of$9.1 billion was mainly due to higherPuerto Rico public sector deposits by$4.9 billion and higher retail and commercial demand deposits by$3.2 billion at BPPR. Public sector deposit balances, which amounted to$20.0 billion atSeptember 30, 2021 , are expected to decline over the long term. However, the receipt by the P.R. Government of additional COVID-19 and hurricane recovery-related Federal assistance and seasonal tax collections could increase public deposit balances at BPPR in the near term. The rate at which public deposit balances will decline is uncertain and difficult to predict. The amount and timing of any such reduction is likely to be impacted by, for example, the timeline of current debt restructuring efforts under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act ("PROMESA") and the speed at which the COVID-19 federal assistance is distributed. Refer to Table 7 for a breakdown of the Corporation's deposits atSeptember 30, 2021 andDecember 31, 2020 . 137 -------------------------------------------------------------------------------- Table 7 - Deposits Ending Balances (In thousands) September 30, 2021 December 31, 2020 Variance Demand deposits [1] $ 25,495,481$ 22,532,729 $ 2,962,752 Savings, NOW and money market deposits (non-brokered) 32,867,805 26,390,565 6,477,240 Savings, NOW and money market deposits (brokered) 718,155 635,198 82,957 Time deposits (non-brokered) 6,906,509 7,130,749 (224,240) Time deposits (brokered CDs) 25,611 177,099 (151,488) Total deposits $ 66,013,561$ 56,866,340 $ 9,147,221 [1] Includes interest and non-interest bearing demand deposits. Borrowings The Corporation's borrowings remained flat at$1.3 billion atSeptember 30, 2021 andDecember 31, 2020 . Refer to Note 15 to the Consolidated Financial Statements for detailed information on the Corporation's borrowings. Also, refer to the Liquidity section in this MD&A for additional information on the Corporation's funding sources. Other liabilities
The Corporation's other liabilities decreased by
Stockholders' Equity Stockholders' equity totaled$6.0 billion atSeptember 30, 2021 , a decrease of$45.7 million when compared toDecember 31, 2020 , principally due to the impact of the$350.0 million accelerated share repurchase transaction and lower accumulated unrealized gains on debt securities available-for-sale by$343.9 million , offset by net income for the nine months endedSeptember 30, 2021 of$728.8 million , less declared dividends of$106.3 million on common stock and$1.1 million in dividends on preferred stock. Refer to the Consolidated Statements of Financial Condition, Comprehensive Income and of Changes in Stockholders' Equity for information on the composition of stockholders' equity. 138
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REGULATORY CAPITAL The Corporation, BPPR and PB are subject to regulatory capital requirements established by theFederal Reserve Board . The risk-based capital standards applicable to the Corporation, BPPR and PB ("Basel III capital rules") are based on the final capital framework for strengthening international capital standards, known as Basel III, of theBasel Committee on Banking Supervision . As ofSeptember 30, 2021 , the Corporation's, BPPR's and PB's capital ratios continue to exceed the minimum requirements for being "well-capitalized" under the Basel III capital rules. The risk-based capital ratios presented in Table 8, which include common equity tier 1, Tier 1 capital, total capital and leverage capital as ofSeptember 30, 2021 andDecember 31, 2020 .
Table 8 - Capital Adequacy Data
SeptemberDecember 31 , (Dollars in thousands) 30, 2021
2020
Common equity tier 1 capital:
Common stockholders equity - GAAP basis
CECL transitional amount [1] 172,459
218,398
AOCI related adjustments due to opt-out
election 70,871
(261,245)
liability (DTL) (543,799)
(591,931)
Intangible assets, net of associated DTLs (19,657)
(22,466)
Deferred tax assets and other deductions (299,418)
(357,204)
Common equity tier 1 capital$ 5,341,284 $ 4,992,096 Additional tier 1 capital: Preferred stock 22,143 22,143 Additional tier 1 capital$ 22,143 $ 22,143 Tier 1 capital$ 5,363,427 $ 5,014,239 Tier 2 capital:
Trust preferred securities subject to phase in as tier 2 373,737 373,737 Other inclusions (deductions), net 385,047 385,943 Tier 2 capital$ 758,784 $ 759,680 Total risk-based capital$ 6,122,211 $
5,773,919
Minimum total capital requirement to be well capitalized$ 3,076,738 $
3,070,209
Excess total capital over minimum well capitalized
$ 30,767,384 $
30,702,091
Total assets for leverage ratio$ 72,713,570 $
64,305,022
Risk-based capital ratios:
Common equity tier 1 capital 17.36 % 16.26 % Tier 1 capital 17.43 16.33 Total capital 19.90 18.81 Tier 1 leverage 7.38 7.80
[1] The CECL transitional amount includes the impact of Popular's adoption of the new
CECL accounting standard on
139 -------------------------------------------------------------------------------- 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 ofSeptember 30, 2021 , 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 onJanuary 1, 2020 , the Corporation elected to use the five-year transition period option as provided in the final interim regulatory capital rules effectiveMarch 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. OnApril 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 providesFederal 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 ofSeptember 30, 2021 , the Corporation has$670 million in PPP loans and no loans were pledge as collateral for PPPL Facilities. The increase in the common equity Tier I capital ratio, Tier I capital ratio, and total capital ratio as ofSeptember 30, 2021 as compared toDecember 31, 2020 was mainly attributed to the nine months period earnings, partially offset by the accelerated share repurchase agreement to repurchase an aggregate of$350 million of Popular's common stock. The decrease in leverage capital ratio was mainly due to the increase in average total assets, which did not have a significant impact on the risk-weighted assets. 140 --------------------------------------------------------------------------------
Non-GAAP financial measures
The tangible common equity, tangible common equity ratio, tangible assets and tangible book value per common share, which are presented in the table that follows, are non-GAAP measures. Management and many stock analysts use the tangible common equity ratio and tangible book value per common share in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, typically stemming from the use of the purchase accounting method for mergers and acquisitions. Neither tangible common equity nor tangible assets or related measures should be considered in isolation or as a substitute for stockholders' equity, total assets or any other measure calculated in accordance with GAAP. Moreover, the manner in which the Corporation calculates its tangible common equity, tangible assets and any other related measures may differ from that of other companies reporting measures with similar names.
Table 9 provides a reconciliation of total stockholders' equity to tangible
common equity and total assets to tangible assets as of
Table 9 - Reconciliation of Tangible Common Equity and Tangible Assets
(In thousands, except share or per share September December information) 30, 2021 31, 2020 Total stockholders' equity$ 5,982,971 $ 6,028,687 Less: Preferred stock (22,143) (22,143) Less: Goodwill (671,122) (671,122) Less: Other intangibles (19,657) (22,466) Total tangible common equity$ 5,270,049 $ 5,312,956 Total assets$ 74,189,163 $ 65,926,000 Less: Goodwill (671,122) (671,122) Less: Other intangibles (19,657) (22,466) Total tangible assets$ 73,498,384 $ 65,232,412 Tangible common equity to tangible assets 7.17 % 8.14 % Common shares outstanding at end of period 79,841,564
84,244,235
Tangible book value per common share$ 66.01 $ 63.07 Quarterly average Total stockholders' equity [1]$ 5,769,545 $ 5,540,456 Less: Preferred Stock (22,143) (22,143) Less: Goodwill (671,121) (671,121) Less: Other intangibles (20,132) (23,166) Total tangible common equity$ 5,056,149 $ 4,824,026 Return on average tangible common equity 19.44 %
14.50 % [1] Average balances exclude unrealized gains or losses on debt securities available-for-sale.
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OFF-BALANCE SHEET ARRANGEMENTS AND OTHER COMMITMENTS
In the ordinary course of business, the Corporation engages in financial transactions that are not recorded on the balance sheet, or may be recorded on the balance sheet in amounts that are different than the full contract or notional amount of the transaction. As a provider of financial services, the Corporation routinely enters into commitments with off-balance sheet risk to meet the financial needs of its customers. These commitments may include loan commitments and standby letters of credit. These commitments are subject to the same credit policies and approval process used for on-balance sheet instruments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position. Other types of off-balance sheet arrangements that the Corporation enters in the ordinary course of business include derivatives and provision of guarantees, indemnifications, and representation and warranties. Refer to Note 19 in the Consolidated Financial Statements for a detailed discussion related to the Corporation's obligations under credit recourse and representation and warranties arrangements.
Contractual Obligations and Commercial Commitments
The Corporation has various financial obligations, including contractual obligations and commercial commitments, which require future cash payments on debt agreements.
As previously indicated, the Corporation also enters into derivative contracts under which it is required either to receive or pay cash, depending on changes in interest rates. These contracts are carried at fair value on the Consolidated Statement of Financial Condition with the fair value representing the net present value of the expected future cash receipts and payments based on market rates of interest as of the statement of condition date. The fair value of the contract changes daily as interest rates change. The Corporation may also be required to post additional collateral on margin calls on the derivatives and repurchase transactions.
Refer to Note 15 in the Consolidated Financial Statements for a breakdown of long-term borrowings by maturity.
The Corporation utilizes lending-related financial instruments in the normal course of business to accommodate the financial needs of its customers. The Corporation's exposure to credit losses in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit and commercial letters of credit is represented by the contractual notional amount of these instruments. The Corporation uses credit procedures and policies in making those commitments and conditional obligations as it does in extending loans to customers. Since many of the commitments expire without being drawn upon or a default occurring, the total contractual amounts are not representative of the Corporation's actual future credit exposure or liquidity requirements for these commitments.
Table 10 presents the contractual amounts related to the Corporation's
off-balance sheet lending and other activities at
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Table 10 - Off-Balance Sheet Lending and Other Activities
Amount of commitment - Expiration Period Years 2022 - Years 2024 Years 2026 - (In thousands) 2021 2023 - 2025 thereafter Total Commitments to extend credit$ 6,689,881 $ 2,296,037 $ 127,099 $ 150,872 $ 9,263,889 Commercial letters of credit 3,545 1,124 - - 4,669 Standby letters of credit 10,956 12,161 - - 23,117 Commitments to originate or fund mortgage loans 98,295 8,708 - - 107,003 Total$ 6,802,677 $ 2,318,030 $ 127,099 $ 150,872 $ 9,398,678 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 5 and 6 for further information on the debt securities available-for-sale and held-to-maturity portfolios. Debt securities classified as available-for-sale amounted to$24.4 billion as ofSeptember 30, 2021 . Other assets subject to market risk include loans held-for-sale, which amounted to$91 million , mortgage servicing rights ("MSRs") which amounted to$117 million and securities classified as "trading", which amounted to$36 million , as ofSeptember 30, 2021 .
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.
143 -------------------------------------------------------------------------------- The Corporation processes NII simulations under interest rate scenarios in which the yield curve is assumed to rise and decline by the same amount (parallel shifts). The rate scenarios considered in these market risk simulations reflect instantaneous parallel changes of -100, -200, +100, +200 and +400 basis points during the succeeding twelve-month period. Simulation analyses are based on many assumptions, including relative levels of market interest rates across all yield curve points and indexes, interest rate spreads, loan prepayments and deposit elasticity. Thus, they should not be relied upon as indicative of actual results. Further, the estimates do not contemplate actions that management could take to respond to changes in interest rates. By their nature, these forward-looking computations are only estimates and may be different from what may actually occur in the future. The following table presents the results of the simulations atSeptember 30, 2021 andDecember 31, 2020 , assuming a static balance sheet and parallel changes over flat spot rates over a one-year time horizon:
Table 11 - Net Interest Income Sensitivity (One Year Projection)
September 30, 2021 December 31, 2020 (Dollars in thousands) Amount Change Percent Change Amount Change Percent Change Change in interest rate +400 basis points$ 276,317 14.51 % $ 167,474 9.19 % +200 basis points 205,581 10.80 81,690 4.49 +100 basis points 170,207 8.94 39,361 2.16 -100 basis points (72,909) (3.83) (53,952) (2.96) -200 basis points (109,352) (5.74) (71,517) (3.93) As ofSeptember 30, 2021 , NII simulations show the Corporation maintains an asset sensitive position and is expected to benefit from an overall rising rate environment. The increases in sensitivity for the period are primarily driven by the significant deposit increases seen so far in 2021, which have increased the level of cash reserves maintained at theFederal Reserve . These short-term assets reprice immediately, thus increasing the NII benefit in rising rate scenarios. The declining rate scenarios show a smaller impact in sensitivity as rates continue to be close to their lower bound and Popular does not allow rates to turn negative in its IRR simulations. 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, 2021 , the Corporation held trading securities with a fair value of$36 million , representing approximately 0.1% of the Corporation's total assets, compared with$37 million and 0.1%, respectively, atDecember 31, 2020 . As shown in Table 12, the trading portfolio consists principally of mortgage-backed securities which atSeptember 30, 2021 were investment grade securities. As ofSeptember 30, 2021 andDecember 31, 2020 , the trading portfolio also included$0.1 million inPuerto Rico government obligations. Trading instruments are recognized at fair value, with changes resulting from fluctuations in market prices, interest rates 144 --------------------------------------------------------------------------------
or exchange rates reported in current period earnings. The Corporation
recognized a net trading account gain of
Table 12 - Trading Portfolio September 30, 2021 December 31, 2020 Weighted Weighted Average Average (Dollars in thousands) Amount Yield[1] Amount Yield[1] Mortgage-backed securities$ 24,569 4.95 %$ 24,338 5.19 % U.S. Treasury securities 10,780 - 11,506 0.04 Collateralized mortgage obligations 281 5.64 346
5.65
Puerto Rico government obligations 82 0.46 103 0.48 Interest-only strips 352 12.00 381 12.00 Total$ 36,064 3.53 %$ 36,674 3.64 % [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$0.3 million for the last week inSeptember 2021 . 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.
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Liquidity
The objective of effective liquidity management is to ensure that the Corporation has sufficient liquidity to meet all of its financial obligations, finance expected future growth, fund planned capital distributions and maintain a reasonable safety margin for cash commitments under both normal and stressed market conditions. The Board of Directors is responsible for establishing the Corporation's tolerance for liquidity risk, including approving relevant risk limits and policies. The Board of Directors has delegated the monitoring of these risks to the Board's Risk Management Committee and the Asset/Liability Management Committee. The management of liquidity risk, on a long-term and day-to-day basis, is the responsibility of the Corporate Treasury Division. The Corporation's Corporate Treasurer is responsible for implementing the policies and procedures approved by the Board of Directors and for monitoring the Corporation's liquidity position on an ongoing basis. Also, the Corporate Treasury Division coordinates corporate wide liquidity management strategies and activities with the reportable segments, oversees policy breaches and manages the escalation process. The Financial 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 current COVID-19 pandemic, its credit rating is downgraded, or some other event causes counterparties to avoid exposure to the institution. Factors that the Corporation does not control, such as the economic outlook, adverse ratings of its principal markets and regulatory changes, could also affect its ability to obtain funding. Liquidity is managed by the Corporation at the level of the holding companies that own the banking and non-banking subsidiaries. It is also managed at the level of the banking and non-banking subsidiaries. As further explained below, a principal source of liquidity for the bank holding companies (the "BHCs") are dividends received from banking and non-banking subsidiaries. The Corporation has adopted policies and limits to monitor more effectively the Corporation's liquidity position and that of the banking subsidiaries. Additionally, contingency funding plans are used to model various stress events of different magnitudes and affecting different time horizons that assist management in evaluating the size of the liquidity buffers needed if those stress events occur. However, such models may not predict accurately how the market and customers might react to every event, and are dependent on many assumptions. Deposits, including customer deposits, brokered deposits and public funds deposits, continue to be the most significant source of funds for the Corporation, funding 89% of the Corporation's total assets atSeptember 30, 2021 and 86% atDecember 31, 2020 . The ratio of total ending loans to deposits was 44% atSeptember 30, 2021 , compared to 52% atDecember 31, 2020 . In addition to traditional deposits, the Corporation maintains borrowing arrangements, which amounted to approximately$1.3 billion in outstanding balances atSeptember 30, 2021 andDecember 31, 2020 . A detailed description of the Corporation's borrowings, including their terms, is included in Note 15 to the Consolidated Financial Statements. Also, the Consolidated Statements of Cash Flows in the accompanying Consolidated Financial Statements provide information on the Corporation's cash inflows and outflows.
On
OnNovember 1, 2021 , the corporation redeemed all outstanding 6.70% Cumulative Monthly Income Trust Preferred Securities issued by thePopular Capital Trust I , refer to Note 15 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 15 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 146
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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$100,000 , excluding brokered deposits with denominations under$100,000 . Core deposits have historically provided the Corporation with a sizable source of relatively stable and low-cost funds. Core deposits totaled$ 61.1 billion , or 93% of total deposits, atSeptember 30, 2021 , compared with$51.7 billion , or 91% of total deposits, atDecember 31, 2020 . Core deposits financed 86% of the Corporation's earning assets atSeptember 30, 2021 , compared with 82% atDecember 31, 2020 .
The distribution by maturity of certificates of deposits with denominations of
Table 13 - Distribution by Maturity of Certificate of Deposits of$100,000 and Over (In thousands) 3 months or less$ 2,069,982 3 to 6 months 294,714 6 to 12 months 697,634 Over 12 months 1,093,576 Total$ 4,155,906 The Corporation had$ 0.7 billion in brokered deposits atSeptember 30, 2021 , which financed approximately 1% of its total assets (December 31, 2020 -$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 ofSeptember 30, 2021 , total public sector deposits were$20.0 billion , compared to$15.1 billion atDecember 31, 2020 . 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. AtSeptember 30, 2021 , 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 147 -------------------------------------------------------------------------------- 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. 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 arePopular, Inc. (holding company only) and PNA, include cash on hand, investment securities, dividends received from banking and non-banking subsidiaries, asset sales, credit facilities available from affiliate banking subsidiaries and proceeds from potential securities offerings. Dividends from banking and non-banking subsidiaries are subject to various regulatory limits and authorization requirements that are further described below and that may limit the ability of those subsidiaries to act as a source of funding to the BHCs. The principal use of these funds includes the repayment of debt, and interest payments to holders of senior debt and junior subordinated deferrable interest (related to trust preferred securities), the payment of dividends to common stockholders and capitalizing its banking subsidiaries. The BHCs have in the past borrowed in the money markets and in the corporate debt market primarily to finance their non-banking subsidiaries; however, the cash needs of the Corporation's non-banking subsidiaries other than to repay indebtedness and interest are now minimal. These sources of funding 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. 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.
The outstanding balance of notes payable at the BHCs amounted to
The contractual maturities of the BHCs notes payable at
Table 14 - Distribution of BHC's Notes Payable by Contractual Maturity
Year (In thousands) 2023$ 297,525 Later years 384,949 Total$ 682,474 Annual debt service at the BHCs is approximately$44 million , and the Corporation's latest quarterly dividend was$0.45 per share, for a total of$36.3 million for the quarter endedSeptember 30, 2021 . The BHCs liquidity position continues to be adequate with sufficient cash on hand, investments and other sources of liquidity which are expected to be enough to meet all BHCs obligations during the foreseeable future. As ofSeptember 30, 2021 , the BHCs had cash and money markets investments totaling$300 million , borrowing potential of$152 million from its secured facility with BPPR. In addition to these liquidity sources, the stake in EVERTEC had a market value of$533 million as ofSeptember 30, 2021 and it represents an additional source of contingent liquidity. Non-Banking Subsidiaries The principal sources of funding for the non-banking subsidiaries include internally generated cash flows from operations, loan sales, repurchase agreements, capital injections and borrowed funds from their direct parent companies or the holding companies. The principal uses of funds for the non-banking subsidiaries include repayment of maturing debt, operational expenses and payment of dividends to the BHCs. The liquidity needs of the non-banking subsidiaries are minimal since most of them are funded internally from operating cash flows or from intercompany borrowings or capital contributions from their holding companies. During 2021,Popular, Inc. made a capital contribution to its wholly owned subsidiaryPopular Securities amounting to$5 million . Dividends 148
-------------------------------------------------------------------------------- During the nine months endedSeptember 30, 2021 , the Corporation declared cash dividend of$1.30 per common share outstanding to$ 106.4 million . The dividends for the Corporation's Series A preferred stock amounted to$1.1 million . During the quarter endedSeptember 30, 2021 , the BHC's received dividends amounting to$575 million from BPPR,$4 million from PIBI which main source of income is derived from its investment in BHD,$6 million in dividends from its non-banking subsidiaries and$2 million in dividends from EVERTEC. Dividends from BPPR 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 unpledged debt securities amounted to$2.6 billion atSeptember 30, 2021 and$3.4 billion atDecember 31, 2020 . 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.
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. The following summarized financial information presents the financial position of the obligor group, on a combined basis atSeptember 30, 2021 andDecember 31, 2020 , and the results of their operations for the period endedSeptember 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 149
-------------------------------------------------------------------------------- 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 15 - Summarized Statement of Condition (In thousands) September 30, 2021 December 31, 2020 Assets Cash and money market investments $ 301,126 $
190,830
Investment securities 31,167
27,630
Accounts receivables from non-obligor subsidiaries 12,051
16,338
Other loans (net of allowance for credit losses of$123 ) 30,902
31,162
Investment in equity method investees 110,228 88,272 Other assets 48,396 46,547 Total assets $ 533,870 $ 400,779 Liabilities and Stockholders' deficit Accounts payable to non-obligor subsidiaries $ 3,245 $
3,946
Accounts payable to affiliates and related parties 1,025 977 Notes payable 682,473 681,503 Other liabilities 87,909 79,208 Stockholders' deficit (240,782) (364,855) Total liabilities and stockholders' deficit $ 533,870 $
400,779
Table 16 - Summarized Statement of Operations For the period ended (In thousands)September 30, 2021 Income: Dividends from non-obligor subsidiaries $
581,000
Interest income from non-obligor subsidiaries and affiliates 680 Earnings from investments in equity method investees 24,195 Other operating income 3,605 Total income $ 609,480 Expenses: Services provided by non-obligor subsidiaries and affiliates (net of reimbursement by subsidiaries for services provided by parent of ($120,032)) $ 9,820 Other operating expenses 22,712 Total expenses $ 32,532 Net income $ 576,948 During the nine months endedSeptember 30, 2021 , the Obligor group recorded$2.2 million of distribution from its direct equity method investees, of which$1.7 million are related to dividend distributions. 150
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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 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, less any required transfers to surplus or to a fund for the retirement of any preferred stock. In addition, a member bank may not declare or pay a dividend in an amount greater than its undivided profits as reported in its Report of Condition and Income, unless the member bank has received the approval of 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, 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, 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, 2021 that are subject to rating triggers. In addition, certain mortgage servicing and custodial agreements that BPPR has with third parties include rating covenants. In the event of a credit rating downgrade, the third parties have the right to require the institution to engage a substitute cash custodian for escrow deposits and/or increase collateral levels securing the recourse obligations. Also, as discussed in Note 19 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$36 million atSeptember 30, 2021 . 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. 151
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Credit Risk
Geographic and Government Risk
The Corporation is exposed to geographic and government risk. The Corporation's assets and revenue composition by geographical area and by business segment reporting are presented in Note 33 to the Consolidated Financial Statements.
A significant portion of our financial activities and credit exposure is
concentrated in the
COVID-19 Pandemic
OnDecember 2019 , a novel strain of coronavirus (COVID-19) surfaced inWuhan, China and has since spread globally to other countries and jurisdictions, including the mainlandUnited States andPuerto Rico . InMarch 2020 , theWorld Health Organization declared COVID-19 a pandemic. The pandemic has significantly disrupted and negatively impacted the global economy, disrupted global supply chains, created significant volatility in financial markets, and increased unemployment levels worldwide, including in the markets in which we do business. InPuerto Rico , former GovernorWanda Vázquez issued an executive order inMarch 2020 declaring a health emergency, ordering residents to shelter in place, implementing a mandatory curfew, and requiring the closure of non-essential businesses. Although the most restrictive measures have been eased or lifted, allowing for the gradual reopening of the economy, certain measures remain in place and additional measures may be implemented in the future as a result of a resurgence in the spread of the virus or new strains of the virus. Since the beginning of the pandemic, most businesses have had to make significant adjustments to protect customers and employees, including transitioning to telework and suspending or modifying certain operations in compliance with health and safety guidelines.The Puerto Rico Legislative Assembly enacted legislation inApril 2020 requiring financial institutions to offer moratoriums on consumer financial products to clients impacted by the COVID-19 pandemic, which was effective throughAugust 2020 . The Federal Government has also approved several economic stimulus measures that seek to cushion the economic fallout of the pandemic, including providing direct subsidies, expanding eligibility for and increasing unemployment benefits and guaranteeing through the SBA PPP loans to small and medium businesses. The COVID-19 pandemic and the restrictions imposed to curb the spread of the disease have had and may continue to have a material adverse effect on economic activity worldwide, including inPuerto Rico . The extent to which the COVID-19 pandemic will continue to adversely affect economic activity will depend on future developments, which are highly uncertain and difficult to predict, including the scope and duration of the pandemic (including the appearance of new strains of the virus), the restrictions imposed by governmental authorities and other third parties in response to the same, the pace of global vaccination efforts, and the amount of federal and local assistance offered to offset the impact of the pandemic. Pursuant to the 2021 Fiscal Plan (as defined below), economic stimulus measures have more than offset the estimated income loss due to reduced economic activity inPuerto Rico and are estimated to have caused a temporary increase in personal income on a net basis. However, there can be no assurance that these measures will be sufficient to offset the pandemic's economic impact in the medium- and long-term. For a discussion of the impact of the pandemic on the Corporation's operations and financial results during the third quarter of 2021, refer to the MD&A Significant Events section, on the accompanying financial statements. For additional discussion of risk factors related to the impact of the pandemic, see "Part I - Item 1A - Risk Factors" in the Corporation's Form 10-K for the year endedDecember 31, 2020 and "Part II- Item 1A - Risk Factors" of any subsequent Form 10-Q. 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 latestPuerto Rico Planning Board (the "Planning Board") estimates, datedMarch 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, thePlanning 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 152 -------------------------------------------------------------------------------- to the same. ThePlanning 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% GNP growth in the current fiscal year.
Fiscal Crisis
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. As a result, the Commonwealth and certain of its instrumentalities have been unable to make debt service payments on their outstanding bonds and notes since 2016. The escalating fiscal and economic crisis and imminent widespread defaults prompted 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 are currently in the process of restructuring their debts through the debt restructuring mechanisms provided by 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. InAugust 2016 ,President Obama appointed the seven original voting members of the Oversight Board through the process established in PROMESA, which authorizes the President to select the members from several lists required to be submitted by congressional leaders. Such appointments process was recently upheld by theU.S. Supreme Court . The terms of the original Oversight Board members expired inAugust 2019 , but PROMESA allows members to remain in their roles until their successors have been appointed. All of the original members continued to serve on the Oversight Board on holdover status until 2020, when PresidentDonald Trump reappointed three of the original members and appointed four new members to the Oversight Board. InOctober 2016 , the Oversight Board designated the Commonwealth and all of its public corporations and instrumentalities as "covered entities" under PROMESA. The only Commonwealth government entities that were not subject to such initial designation were the Commonwealth's municipalities. InMay 2019 , however, the Oversight Board designated all of the Commonwealth's municipalities as covered entities. At the Oversight Board's request, covered entities are required to submit fiscal plans and annual budgets to 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 for the year endedDecember 31, 2020 .
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 datedApril 23, 2021 (the "2021 Fiscal Plan"). Pursuant to the 2021 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 2021 Fiscal Plan's economic projections incorporate adjustments for these short-term income effects for purposes of estimating tax receipts. For example, the 2021 Fiscal Plan estimates that real GNP contracted by 3% in fiscal year 2020, but estimates the GNP contraction adjusted for short-term income effects to have been approximately 1.1%. For fiscal years 2021 and 2022, the 2021 Fiscal Plan projects that real GNP will grow 1% and 0.6%, respectively, but projects that growth adjusted for income effects for such years will be approximately 3.8% and 1.5%, respectively.
The 2021 Fiscal Plan projects that, if the fiscal measures and structural reforms contemplated by the plan are not successfully implemented, the Commonwealth will have a pre-contractual debt service deficit starting in fiscal year 2023. It estimates that the
153 -------------------------------------------------------------------------------- fiscal measures could drive approximately$10 billion in savings and extra revenue over fiscal years 2022 through 2026 and that the structural reforms could drive a cumulative 0.90% increase in growth by fiscal year 2051 (equal to approximately$30.7 billion ). However, even after the fiscal measures and structural reforms, and before contractual debt service, the 2021 Fiscal Plan projects that there will be an annual deficit starting in fiscal year 2036. The 2021 Fiscal Plan provides for the gradual reduction and the ultimate elimination of Commonwealth budgetary subsidies to municipalities, which constitute a material portion of the operating revenues of some municipalities. Since fiscal year 2017, Commonwealth appropriations to municipalities have decreased by approximately 64% (from approximately$370 million in fiscal year 2017 to approximately$132 million in fiscal year 2020). In response to the COVID-19 crisis, reductions in appropriations to municipalities were paused in fiscal year 2021. Municipalities have also received extraordinary appropriations and other funds from federally-funded programs during the current fiscal year, which has helped temporarily offset the impact of the reduced Commonwealth support. However, the 2021 Fiscal Plan contemplates additional reductions in appropriations to municipalities starting in fiscal year 2022, before eventually phasing out all appropriations in fiscal year 2025. Further, while the Commonwealth had enacted legislation in 2019 suspending the municipality's obligations to contribute to the Commonwealth's health plan and pay-as-you go retirement system, such legislation was challenged by the Oversight Board and eventually declared null by the Title III court inApril 2020 . As a result, municipalities are required to cover their own employees' healthcare costs and retirement benefits and had to reimburse the Commonwealth for such costs corresponding to the period during which the law in effect. Finally, the 2021 Fiscal Plan notes that municipalities have made little or no progress towards implementing fiscal discipline required to reduce reliance on Commonwealth appropriations and that this lack of fiscal management threatens the ability of 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. OnApril 23, 2021 , 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.
Pending 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 has 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 , 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 Eight Amended Title III Joint Plan of Adjustment for the Commonwealth, et. al. in the pending debt restructuring proceedings under Title III of PROMESA. The proposed plan, which has substantial support from several creditor constituencies but is still subject to confirmation in the Title III proceeding, seeks to restructure approximately$35 billion of debt and other claims against the Commonwealth, PBA and ERS. InOctober 2021 , the Commonwealth's government enacted legislation establishing the framework for the issuance of new securities by the Commonwealth in connection with the proposed plan. The final hearings for the confirmation of the plan of adjustment are scheduled to begin onNovember 8, 2021 and continue as necessary throughNovember 23, 2021 . 154 --------------------------------------------------------------------------------
Seismic Activity
OnJanuary 7, 2020 ,Puerto Rico was struck by a magnitude 6.4 earthquake, which caused island-wide power outages and significant damage to infrastructure and property in the southwest region of the island. The 6.4 earthquake was preceded by foreshocks and followed by aftershocks. The Commonwealth's government has estimated total earthquake-related damages at approximately$1 billion .
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. The effects of the prolonged recession have been reflected in limited loan demand, an increase in the rate of foreclosures and delinquencies on loans granted inPuerto Rico . While PROMESA provided a process to address the Commonwealth's fiscal crisis, the complexity and uncertainty of the Title III proceedings for the Commonwealth and various of its instrumentalities and the adjustment measures required by the fiscal plans still present significant economic risks. In addition, the COVID-19 outbreak has affected many of our individual customers and customers' businesses. This, when added toPuerto Rico's ongoing fiscal crisis and recession, could cause credit losses that adversely affect us and may negatively affect consumer confidence, result in reductions in consumer spending, and adversely impact our interest and non-interest revenues. If global or local economic conditions worsen or the Government ofPuerto Rico and the Oversight Board are unable to adequately manage the Commonwealth's fiscal and economic challenges, including by controlling the COVID-19 pandemic and consummating an orderly restructuring of the Commonwealth's debt obligations while continuing to provide essential services, these adverse effects could continue or worsen in ways that we are not able to predict. AtSeptember 30, 2021 , the Corporation's direct exposure to thePuerto Rico government's instrumentalities and municipalities totaled$365 million of which$346 million were outstanding, compared to$377 million atDecember 31, 2020 which was fully outstanding on such date. Further deterioration of 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,$316 million consists of loans and$30 million are securities ($342 million and$35 million , respectively, atDecember 31, 2020 ). Substantially all of the amount outstanding atSeptember 30, 2021 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, 2021 , 75% of the Corporation's exposure to municipal loans and securities was concentrated in the municipalities of San Juan, Guaynabo, Carolina and Bayamón. OnJuly 1, 2021 , the Corporation received scheduled principal payments amounting to$32 million from various obligations fromPuerto Rico municipalities. For additional discussion of the Corporation's direct exposure to thePuerto Rico government and its instrumentalities and municipalities, refer to Note 20 - Commitments and Contingencies. In addition, atSeptember 30, 2021 , the Corporation had$284 million in loans insured or securities issued byPuerto Rico governmental entities, but for which the principal source of repayment is non-governmental ($317 million atDecember 31, 2020 ). These included$240 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, 2020 -$260 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, 2021 ,$44 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, 2020 -$46 million ). In the event that the mortgage loans insured by HFA and held by the Corporation directly or those serving as collateral for the HFA bonds default and the collateral is insufficient to satisfy the outstanding balance of this loans, HFA's ability to honor its insurance will depend, among other factors, on the financial condition of HFA at the time such obligations become due and payable. The Corporation does not consider the government guarantee when estimating the credit losses associated with this portfolio. Although the Governor is currently authorized by local legislation to impose a temporary moratorium on the financial obligations of the HFA, a moratorium on such obligations has not been imposed as of the date hereof. BPPR's commercial loan portfolio also includes loans to private borrowerswho are service providers, lessors, suppliers or have other relationships with the government. These borrowers could be negatively affected by the Commonwealth's fiscal crisis and the ongoing Title III proceedings under PROMESA described above. Similarly, BPPR's mortgage and consumer loan portfolios include 155 --------------------------------------------------------------------------------
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.
BPPR also has a significant amount of deposits from the Commonwealth, its instrumentalities, and municipalities. The amount of such deposits may fluctuate depending on the financial condition and liquidity of such entities, as well as on the ability of BPPR to maintain these customer relationships.
The Corporation may also have direct exposure with regards to avoidance and other causes of action initiated by the Oversight Board on behalf of the Commonwealth or other Title III debtors. For additional information regarding such exposure, refer to Note 20 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 maybe 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. AtSeptember 30, 2021 , the Corporation's direct exposure to USVI instrumentalities and public corporations amounted to approximately$72 million , of which$69 million is outstanding (compared to$105 million and$70 million , respectively, atDecember 31, 2020 ). The amount outstanding included approximately$42 million in loans to a government-owned company that owns and operates a cruise ship pier and shopping mall complex inSt. Thomas ,$20 million in loans to theVirgin Islands Water and Power Authority , a public corporation of the USVI that operates USVI's water production and electric generation plants and$6 million in loans to theVirgin Islands Porth Authority (compared to$43 million ,$20 million , and$4 million , respectively, atDecember 31, 2020 ).British Virgin Islands 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, 2020 it has a loan portfolio amounting to approximately$226 million comprised of various retail and commercial clients, compared to a loan portfolio of$251 million atDecember 31, 2020 , which included a$19 million loan with the BVI Government that was paid off during the second quarter of 2021.U.S. Government As further detailed in Notes 5 and 6 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,$1.6 billion of residential mortgages,$670 million of SBA loans under the PPP and$65 million commercial loans were insured or guaranteed by theU.S. Government or its agencies atSeptember 30, 2021 (compared to$1.8 billion ,$1.3 billion and$60 million , respectively, atDecember 31, 2020 ).The United States federal government, through legislation, has created a limit on the amount of debt that it may issue, commonly referred to as the "debt ceiling." The Bipartisan Budget Act of 2019 and subsequent legislation have suspended and/or temporarily increased the debt ceiling throughDecember 2021 . Failure byCongress to further suspend or increase the debt ceiling may impact the federal government's ability to incur additional debt and pay its existing debt instruments or other obligations. 156 --------------------------------------------------------------------------------
Non-Performing Assets Non-performing assets include primarily past-due loans that are no longer accruing interest, renegotiated loans, and real estate property acquired through foreclosure. A summary, including certain credit quality metrics, is presented in Table 17. The Corporation adopted the CECL accounting standard effectiveJanuary 1, 2020 . This framework requires management to estimate credit losses over the full remaining expected life of the loan using economic forecasts over a reasonable and supportable period, and historical information thereafter. During the third quarter of 2021, the Corporation's assets continued to exhibit favorable credit quality and low credit costs, outperforming pre-pandemic trends. These improvements have been aided by the significant government stimulus and the rebound in the economy. We will continue to closely monitor post COVID-19 risks and the effects of the receding stimulus on macroeconomic conditions and on borrower performance. However, management believes that the improvement over the last few years in the risk profile of the Corporation's loan portfolios, positions Popular to operate successfully under the current environment. Total NPAs decreased by$114 million when compared withDecember 31, 2020 . Total non-performing loans held-in-portfolio ("NPLs") decreased by$105 million fromDecember 31, 2020 . BPPR's NPLs decreased by$92 million , mainly driven by lower mortgage NPLs by$60 million , as inflows continue trending lower than pre-COVID levels, and lower commercial NPLs by$21 million , mostly driven by repayment activity. BPPR's construction NPLs decreased by$7 million mostly due to a previously reserved loan that was partially charged-off during the first quarter of 2021. PopularU.S. NPLs decreased by$13 million fromDecember 31, 2020 , mostly related to a$7 million construction loan sold and$6 million commercial loan pay-off. AtSeptember 30, 2021 , the ratio of NPLs to total loans held-in-portfolio was 2.2% compared to 2.5% in the fourth quarter of 2020. In addition, other real estate owned loans ("OREOs") decreased by$6 million , mostly related to sales activity, combined with the suspension of foreclosure activity due to the COVID-19 pandemic. AtSeptember 30, 2021 , NPLs secured by real estate amounted to$522 million in thePuerto Rico operations and$23 million in PopularU.S. These figures were$630 million and$34 million , respectively, atDecember 31, 2020 . The Corporation's commercial loan portfolio secured by real estate ("CRE") amounted to$8.1 billion atSeptember 30, 2021 , of which$1.8 billion was secured with owner occupied properties, compared with$7.8 billion and$1.9 billion , respectively, atDecember 31, 2020 . CRE NPLs amounted to$134 million atSeptember 30, 2021 , compared with$173 million atDecember 31, 2020 . The CRE NPL ratios for the BPPR and PopularU.S. segments were 3.34% and 0.03%, respectively, atSeptember 30, 2021 , compared with 4.51% and 0.07%, respectively, atDecember 31, 2020 . In addition to the NPLs included in Table 17, atSeptember 30, 2021 , there were$200 million of performing loans, mostly commercial loans, which in management's opinion, are currently subject to potential future classification as non-performing and are considered impaired (December 31, 2020 -$228 million ). For the quarter endedSeptember 30, 2021 , total inflows of NPLs held-in-portfolio, excluding consumer loans, decreased by approximately$60 million , when compared to the inflows for the same period in 2020. Inflows of NPLs held-in-portfolio at the BPPR segment decreased by$37 million compared to the same period in 2020, driven by lower construction and commercial inflows by$22 million and$13 million , respectively. Inflows of NPLs held-in-portfolio at the PopularU.S. segment decreased by$23.2 million from the same period in 2020, mostly due to lower commercial NPL inflows. 157 --------------------------------------------------------------------------------
Table 17 - Non-Performing Assets
September 30, 2021 December 31, 2020 As a % As a % of loans of loans Popular Popular, HIP by Popular Popular, HIP by (Dollars in thousands) BPPR U.S. Inc. category BPPR U.S. Inc. category Commercial$ 183,394 $ 2,787 $ 186,181 1.4 %$ 204,092 $ 5,988 $ 210,080 1.5 % Construction 14,877 - 14,877 1.9 21,497 7,560 29,057 3.1 Leasing 2,542 - 2,542 0.2 3,441 - 3,441 0.3 Mortgage 354,555 14,488 369,043 4.9 414,343 14,864 429,207 5.4 Auto 17,345 - 17,345 0.5 15,736 - 15,736 0.5 Consumer 36,158 6,689 42,847 1.7 41,268 8,985 50,253 1.9 Total non-performing loans held-in-portfolio 608,871 23,964 632,835 2.2 % 700,377 37,397 737,774 2.5 % Non-performing loans held-for-sale [1] - - - - 2,738 2,738 Other real estate owned ("OREO") 75,369 1,459 76,828 81,512 1,634 83,146 Total non-performing assets$ 684,240 $ 25,423 $ 709,663 $ 781,889 $ 41,769 $ 823,658 Accruing loans past due 90 days or more[2]$ 549,784 $ 1 $ 549,785 $ 1,028,061 $ 3 $ 1,028,064 Ratios: Non-performing assets to total assets 1.08 % 0.23 % 0.96 % 1.42 % 0.38 % 1.25 % Non-performing loans held-in-portfolio to loans held-in-portfolio 2.88 0.31 2.19 3.25 0.48 2.51 Allowance for credit losses to loans held-in-portfolio 2.92 1.32 2.49 3.43 2.00 3.05 Allowance for credit losses to non-performing loans, excluding held-for-sale 101.30 424.79 113.55 105.62 418.48 121.48 HIP = "held-in-portfolio" [1] There were no non-performing loans held-for-sale as ofSeptember 30, 2021 (December 31, 2020 -$3 million in commercial loans). [2] It is the Corporation's policy to report delinquent residential mortgage loans insured by FHA or guaranteed by theVA 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$12 million atSeptember 30, 2021 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, 2020 -$57 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$350 million of residential mortgage loans insured by FHA or guaranteed by theVA that are no longer accruing interest as ofSeptember 30, 2021 (December 31, 2020 -$329 million ). Furthermore, the Corporation has approximately$53 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, 2020 -$60 million ). 158
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Table 18 - Activity in Non-Performing Loans Held-in-Portfolio (Excluding Consumer Loans)
For the nine months ended
For the quarter ended September 30, 2021 2021 Popular Popular (Dollars in thousands) BPPR U.S. Popular, Inc. BPPR U.S. Popular, Inc. Beginning balance$ 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 Loans Held-in-Portfolio (Excluding Consumer Loans)
For the nine months ended
For the quarter ended September 30, 2020 2020 Popular Popular (Dollars in thousands) BPPR U.S. Popular, Inc. BPPR U.S. Popular, Inc. Beginning balance$ 651,152 $ 23,383 $ 674,535 $ 431,082 $ 16,621 $ 447,703 Transition of PCI to PCD loans under CECL - - - 245,703 18,547 264,250 Plus: New non-performing loans 83,277 28,843 112,120 260,944 42,442 303,386 Advances on existing non-performing loans - 106 106 - 414 414 Less: Non-performing loans transferred to OREO (531) - (531) (10,969) - (10,969) Non-performing loans charged-off (4,738) (463) (5,201) (20,880) (1,392) (22,272) Loans returned to accrual status / loan collections (95,602) (20,562) (116,164) (272,322) (34,646) (306,968) Loans transferred to held-for-sale - - - - (10,679) (10,679) Ending balance NPLs$ 633,558 $ 31,307 $ 664,865 $ 633,558 $ 31,307 $ 664,865
Table 20 - Activity in Non-Performing Commercial Loans Held-in-Portfolio
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$ 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 $ 186,181 159
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Table 21 - Activity in Non-Performing Commercial Loans Held-in-Portfolio
For the nine months ended
For the quarter ended September 30, 2020 2020 Popular Popular (Dollars in thousands) BPPR U.S. Popular, Inc. BPPR U.S. Popular, Inc. Beginning balance$ 253,890 $ 9,239 $ 263,129 $ 147,255 $ 5,504 $ 152,759 Transition of PCI to PCD loans under CECL - - - 112,517 18,547 131,064 Plus: New non-performing loans 20,250 12,877 33,127 39,391 15,029 54,420 Advances on existing non-performing loans - 58 58 - 303 303 Less: Non-performing loans transferred to OREO (39) - (39) (2,241) - (2,241) Non-performing loans charged-off (1,000) (452) (1,452) (4,548) (1,374) (5,922) Loans returned to accrual status / loan collections (31,117) (13,968) (45,085) (50,390) (19,576) (69,966) Loans transferred to held-for-sale - - - - (10,679) (10,679) Ending balance NPLs$ 241,984 $ 7,754 $ 249,738 $ 241,984 $ 7,754 $ 249,738
Table 22 - Activity in Non-Performing Construction Loans Held-in-Portfolio
For the quarter endedSeptember 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
Table 23 - Activity in Non-Performing Construction Loans Held-in-Portfolio
For the quarter endedSeptember 30 , For
the nine months ended September
2020
30, 2020
Popular Popular Popular, (Dollars in thousands) BPPR U.S. Popular, Inc. BPPR U.S. Inc. Beginning balance $ - $ - $ -$ 119 $ 26 $ 145 Plus:
New non-performing loans 21,514 9,069 30,583 21,514 9,069 30,583 Less:
Loans returned to accrual
status / loan collections - - - (119) (26) (145) Ending balance NPLs$ 21,514 $ 9,069 $ 30,583 $ 21,514 $ 9,069 $ 30,583 160
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Table 24 - Activity in Non-Performing Mortgage Loans Held-in-Portfolio
For the quarter endedSeptember 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
Table 25 - Activity in Non-Performing Mortgage Loans Held-in-Portfolio
For the quarter endedSeptember 30 ,
For the nine months ended
2020 2020 Popular Popular (Dollars in thousands) BPPR U.S. Popular, Inc. BPPR U.S. Popular, Inc. Beginning balance$ 397,262 $ 14,144 $ 411,406 $ 283,708 $ 11,091 $ 294,799 Transition of PCI to PCD loans under CECL - - - 133,186 - 133,186 Plus: New non-performing loans 41,513 6,897 48,410 200,039 18,344 218,383 Advances on existing non-performing loans - 48 48 - 111 111 Less: Non-performing loans transferred to OREO (492) - (492) (8,728) - (8,728) Non-performing loans charged-off (3,738) (11) (3,749) (16,332) (18) (16,350)
Loans returned to accrual
status / loan collections (64,485) (6,594) (71,079)
(221,813) (15,044) (236,857) Ending balance NPLs$ 370,060 $ 14,484 $ 384,544 $ 370,060 $ 14,484 $ 384,544 161
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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, 2021 andDecember 31, 2020 , are presented below.
Table 26 - Loan Delinquencies
(Dollars in thousands) September 30, 2021 December 31, 2020 Total Total delinquencies as delinquencies Loans delinquent a percentage of Loans delinquent as a percentage 30 days or more Total loans total
loans 30 days or more Total loans of total loans Commercial
$ 241,967 $ 13,303,671 1.82
%
29,855 801,040 3.73 50,369 926,208 5.44 Leasing 12,704 1,348,679 0.94 14,009 1,197,661 1.17 Mortgage [1] 1,189,198 7,539,152 15.77
1,775,902 7,890,680 22.51 Consumer
158,598 5,862,830 2.71 179,789 5,756,337 3.12 Loans held-for-sale 391 91,313 0.43 3,108 99,455 3.13 Total$ 1,632,713 $ 28,946,685 5.64
%
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, 2021 , the allowance for credit losses amounted to$719 million , a decrease of$178 million , when compared withDecember 31, 2020 , mainly prompted by improvements in credit quality and the macroeconomic outlook. Since theDecember 31, 2020 scenarios, updated economic assumptions have included a more optimistic view of the economy, prompting substantial reductions in reserves across different portfolios, also contributing to lower qualitative reserves. The ACL for BPPR decreased by$123 million to$617 million , when compared toDecember 31, 2020 . The ACL for PopularU.S. decreased by$55 million to$102 million , when compared toDecember 31, 2020 , mainly driven by a reduction in the qualitative reserve for commercial real estate loans, influenced by the changes in the macroeconomic scenarios The provision for credit losses for the quarter endedSeptember 30, 2021 amounted to a benefit of$58.6 million , a favorable variance of$78.1 million from the same period in the prior year, driven by improved credit quality and macroeconomic outlook, and lower NCOs. Refer to Note 8 - Allowance for credit losses - loans held-in-portfolio, and to the Provision for Credit Losses section of this MD&A for additional information. 162
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Table 27 - Allowance for Credit Losses - Loan Portfolios
September 30, 2021
(Dollars in thousands) Commercial Construction Mortgage Leasing Consumer Total Total ACL
$ 234,814 $ 9,850 $ 170,378 $ 11,634 $ 291,899 $ 718,575 Total loans held-in-portfolio$ 13,303,671 $ 801,040 $ 7,539,152 $ 1,348,679 $ 5,862,830 $ 28,855,372 ACL to loans held-in-portfolio 1.77 % 1.23 % 2.26 % 0.86 % 4.98 % 2.49 %
Table 28 - Allowance for Credit Losses - Loan Portfolios
December 31, 2020
(Dollars in thousands) Commercial Construction Mortgage Leasing Consumer Total Total ACL
$ 333,380 $ 14,237 $ 215,716 $ 16,863 $ 316,054 $ 896,250 Total loans held-in-portfolio$ 13,614,310 $ 926,208 $ 7,890,680 $ 1,197,661 $ 5,756,337 $ 29,385,196 ACL to loans held-in-portfolio 2.45 % 1.54 % 2.73 % 1.41 % 5.49 % 3.05 %
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 29 - Annualized Net Charge-offs (Recoveries) to Average Loans Held-in-Portfolio Quarters ended September 30, 2021 September 30, 2020 BPPR Popular U.S. Popular Inc. BPPR Popular U.S. Popular Inc. Commercial 0.23 % (0.03) % 0.12 % (0.10) % 0.02 % (0.05) % Construction (6.82) - (1.05) (0.33) - (0.07) Mortgage (0.13) (0.02) (0.11) 0.13 - 0.11 Leasing 0.09 - 0.09 (0.12) - (0.12) Consumer 0.64 - 0.62 1.06 3.09 1.19 Total annualized net charge-offs (recoveries) to average loans held-in-portfolio 0.18 % (0.03) % 0.12 % 0.26 % 0.16 % 0.24 % Nine months ended September 30, 2021 September 30, 2020 BPPR Popular U.S. Popular Inc. BPPR Popular U.S. Popular Inc. Commercial (0.12) % (0.02) % (0.08) % - % (0.01) % (0.01) % Construction 3.01 0.02 0.51 (0.29) (0.03) (0.08) Mortgage 0.14 (0.06) 0.11 0.34 - 0.29 Leasing 0.09 - 0.09 0.78 - 0.78 Consumer 0.56 1.41 0.60 2.78 3.16 2.81 Total annualized net charge-offs to average loans held-in-portfolio 0.17 % 0.02 % 0.13 % 0.88 % 0.16 % 0.69 % NCOs for the quarter endedSeptember 30, 2021 amounted to$8.8 million , decreasing by$8.0 million when compared to the same period in 2020. NCOs have remained at low levels, aided by measures taken by the Corporation to control the impact of the pandemic, as well as theU.S. government stimulus programs. 163 --------------------------------------------------------------------------------
. Troubled Debt Restructurings The Corporation's troubled debt restructurings ("TDRs") loans amounted to$1.7 billion atSeptember 30, 2021 , increasing by$18 million , fromDecember 31, 2020 , mainly related to mortgage borrowers that needed additional COVID-19 extensions past the original 6-month moratorium period. TDRs in the BPPR segment increased by$20 million , mostly related to higher mortgage TDRs by$59 million , of which$54 million were related to government guaranteed loans, in part offset by a combined decrease of$30 million in the commercial and construction TDRs. The PopularU.S. segment TDRs have remained essentially flat sinceDecember 31, 2020 . TDRs in accruing status increased by$54 million fromDecember 31, 2020 , mostly related to an increase of$75 million in BPPR's mortgage TDRs, in part offset by a decrease of$14 million in BPPR's commercial TDRs, while non-accruing TDRs decreased by$36 million .
Refer to Note 8 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.
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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