POPULAR, INC. - Quarter Report: 2019 March (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

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

For the quarterly period ended March 31, 2019

Commission File Number: 001-34084

 

 

POPULAR, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Puerto Rico		66-0667416
(State or other jurisdiction of Incorporation or organization)		(IRS Employer Identification Number)
Popular Center Building 209 Muñoz Rivera Avenue Hato Rey, Puerto Rico		00918
(Address of principal executive offices)		(Zip code)

(787) 765-9800

(Registrant’s telephone number, including area code)

NOT APPLICABLE

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    ☐  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒  Yes    ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer		☒		Accelerated filer		☐
Non-accelerated filer		☐		Smaller reporting company		☐
				Emerging growth company		☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  Yes    ☒  No

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

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock ($0.01 par value)		BPOP		The NASDAQ Stock Market
6.70% Cumulative Monthly Income Trust Preferred Securities		BPOPN		The NASDAQ Stock Market
6.125% Cumulative Monthly Income Trust Preferred Securities		BPOPM		The NASDAQ Stock Market

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, $0.01 par value, 96,647,087 shares outstanding as of May 6, 2019.

 

 

 

POPULAR, INC.

INDEX

 

				Page
Part I – Financial Information
Item 1.		Financial Statements
Unaudited Consolidated Statements of Financial Condition at March 31, 2019 and December 31, 2018					5
Unaudited Consolidated Statements of Operations for the quarters ended March 31, 2019 and 2018					6
Unaudited Consolidated Statements of Comprehensive Income (Loss) for the quarters ended March 31, 2019 and 2018					7
Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the quarters ended March 31, 2019 and 2018					8
Unaudited Consolidated Statements of Cash Flows for the quarters ended March 31, 2019 and 2018					9
Notes to Unaudited Consolidated Financial Statements					10
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			99
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			130
Item 4.		Controls and Procedures			130
Part II – Other Information
Item 1.		Legal Proceedings			131
Item 1A.		Risk Factors			131
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			131
Item 3.		Defaults upon Senior Securities			132
Item 4.		Mine Safety Disclosures			132
Item 5.		Other information			132
Item 6.		Exhibits			132
Signatures					133

 

2

Forward-Looking Information

This Form 10-Q contains “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, including, without limitation, statements about Popular Inc.’s (the “Corporation,” “Popular,” “we,” “us,” “our”) business, financial condition, results of operations, plans, objectives and future performance. These statements are not guarantees of future performance, are based on management’s current expectations and, by their nature, involve risks, uncertainties, estimates and assumptions. Potential factors, some of which are beyond the Corporation’s control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. Risks and uncertainties include without limitation the effect of competitive and economic factors, and our reaction to those factors, the adequacy of the allowance for loan losses, delinquency trends, market risk and the impact of interest rate changes, capital markets conditions, capital adequacy and liquidity, and the effect of legal and regulatory proceedings and new accounting standards on the Corporation’s financial condition and results of operations. All statements contained herein that are not clearly historical in nature are forward-looking, and the words “anticipate,” “believe,” “continues,” “expect,” “estimate,” “intend,” “project” and similar expressions and future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions are generally intended to identify forward-looking statements.

Various factors, some of which are beyond Popular’s control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. Factors that might cause such a difference include, but are not limited to:

 

•

the rate of growth or decline in the economy and employment levels, as well as general business and economic conditions in the geographic areas we serve and, in particular, in the Commonwealth of Puerto Rico (the “Commonwealth” or “Puerto Rico”), where a significant portion of our business is concentrated;

 

•

the impact of the current fiscal and economic challenges of Puerto Rico and the measures taken and to be taken by the Puerto Rico Government and the Federally-appointed oversight board on the economy, our customers and our business;

 

•

the impact of the pending debt restructuring proceedings under Title III of the Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”) and of other actions taken or to be taken to address Puerto Rico’s fiscal challenges on the value of our portfolio of Puerto Rico government securities and loans to governmental entities and of our commercial, mortgage and consumer loan portfolios where private borrowers could be directly affected by governmental action;

 

•

the impact of Hurricanes Irma and Maria, and the measures taken to recover from these hurricanes (including the availability of relief funds and insurance proceeds), on the economy of Puerto Rico, the U.S. Virgin Islands and the British Virgin Islands, and on our customers and our business;

 

•

changes in interest rates and market liquidity, which may reduce interest margins, impact funding sources and affect our ability to originate and distribute financial products in the primary and secondary markets;

 

•

the fiscal and monetary policies of the federal government and its agencies;

 

•

changes in federal bank regulatory and supervisory policies, including required levels of capital and the impact of proposed capital standards on our capital ratios;

 

•

additional Federal Deposit Insurance Corporation (“FDIC”) assessments;

 

•

regulatory approvals that may be necessary to undertake certain actions or consummate strategic transactions such as acquisitions and dispositions;

 

•

hurricanes and other weather-related events, as well as man-made disasters, which could cause a disruption in our operations or other adverse consequences for our business;

 

•

the ability to successfully integrate the auto finance business acquired from Wells Fargo & Company, as well as unexpected costs, including as a result of any unrecorded liabilities or issues not identified during the due diligence investigation of the business or that may not be subject to indemnification or reimbursement under the acquisition agreement, and risks that the business may suffer as a result of the transaction, including due to adverse effects on relationships with customers, employees and service providers;

 

3

•

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

 

•

the performance of the stock and bond markets;

 

•

competition in the financial services industry;

 

•

possible legislative, tax or regulatory changes; and

 

•

a failure in or breach of our operational or security systems or infrastructure or those of EVERTEC, Inc., our provider of core financial transaction processing and information technology services, or of other third parties providing services to us, including as a result of cyberattacks, e-fraud, denial-of-services and computer intrusion, that might result in loss or breach of customer data, disruption of services, reputational damage or additional costs to Popular.

Other possible events or factors that could cause results or performance to differ materially from those expressed in these forward-looking statements include the following:

 

•

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

 

•

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

 

•

liabilities resulting from litigation and regulatory investigations;

 

•

changes in accounting standards, rules and interpretations;

 

•

our ability to grow our core businesses;

 

•

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

 

•

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

Moreover, the outcome of legal and regulatory proceedings, as discussed in “Part II, Item 1. Legal Proceedings,” is inherently uncertain and depends on judicial interpretations of law and the findings of regulators, judges and/or juries. Investors should refer to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2018, as well as “Part II, Item 1A” of this Form 10-Q for a discussion of such factors and certain risks and uncertainties to which the Corporation is subject.

All forward-looking statements included in this Form 10-Q are based upon information available to Popular as of the date of this Form 10-Q, and other than as required by law, including the requirements of applicable securities laws, we assume no obligation to update or revise any such forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

 

4

POPULAR, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(UNAUDITED)

 

(In thousands, except share information)		March 31, 2019				December 31, 2018
Assets:
Cash and due from banks		$	376,558			$	394,035
Money market investments:
Time deposits with other banks			4,814,134				4,171,048
Total money market investments			4,814,134				4,171,048
Trading account debt securities, at fair value:
Pledged securities with creditors’ right to repledge			598				598
Other trading account debt securities			38,619				37,189
Debt securities available-for-sale, at fair value:
Pledged securities with creditors’ right to repledge			206,309				280,502
Other debt securities available-for-sale			13,336,386				13,019,682
Debt securities held-to-maturity, at amortized cost (fair value 2019 - $103,457; 2018 - $102,653)			99,455				101,575
Equity securities (realizable value 2019 - $163,550); (2018 - $159,821)			158,507				155,584
Loans held-for-sale, at lower of cost or fair value			43,985				51,422
Loans held-in-portfolio			26,808,287				26,663,713
Less – Unearned income			160,579				155,824
Allowance for loan losses			550,628				569,348
Total loans held-in-portfolio, net			26,097,080				25,938,541
Premises and equipment, net			557,517				569,808
Other real estate			125,478				136,705
Accrued income receivable			162,797				166,022
Mortgage servicing assets, at fair value			167,813				169,777
Other assets			1,799,728				1,714,134
Goodwill			671,122				671,122
Other intangible assets			24,521				26,833
Total assets		$	48,680,607			$	47,604,577
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing		$	9,046,104			$	9,149,036
Interest bearing			31,833,734				30,561,003
Total deposits			40,879,838				39,710,039
Assets sold under agreements to repurchase			200,871				281,529
Other short-term borrowings			42				42
Notes payable			1,176,488				1,256,102
Other liabilities			983,308				921,808
Total liabilities			43,240,547				42,169,520
Commitments and contingencies (Refer to Note 21)
Stockholders’ equity:
Preferred stock, 30,000,000 shares authorized; 2,006,391 shares issued and outstanding			50,160				50,160
Common stock, $0.01 par value; 170,000,000 shares authorized; 104,338,340 shares issued (2018 - 104,320,303) and 96,629,891 shares outstanding (2018 - 99,942,845)			1,043				1,043
Surplus			4,313,040				4,365,606
Retained earnings			1,794,644				1,651,731
Treasury stock - at cost, 7,708,449 shares (2018 - 4,377,458)			(394,848	)			(205,509	)
Accumulated other comprehensive loss, net of tax			(323,979	)			(427,974	)
Total stockholders’ equity			5,440,060				5,435,057
Total liabilities and stockholders’ equity		$	48,680,607			$	47,604,577
The accompanying notes are an integral part of these Consolidated Financial Statements.

 

5

POPULAR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		Quarters ended March 31,
(In thousands, except per share information)		2019				2018
Interest income:
Loans		$	447,713			$	373,584
Money market investments			29,220				22,285
Investment securities			81,036				57,209
Total interest income			557,969				453,078
Interest expense:
Deposits			70,826				38,688
Short-term borrowings			1,600				2,013
Long-term debt			14,580				19,330
Total interest expense			87,006				60,031
Net interest income			470,963				393,047
Provision for loan losses - non-covered loans			41,825				69,333
Provision for loan losses - covered loans			—				1,730
Net interest income after provision for loan losses			429,138				321,984
Service charges on deposit accounts			38,691				36,455
Other service fees			64,307				60,602
Mortgage banking activities (Refer to Note 11)			9,926				12,068
Net gain (loss), including impairment, on equity securities			1,433				(646	)
Net profit (loss) on trading account debt securities			260				(198	)
Adjustments (expense) to indemnity reserves on loans sold			(93	)			(2,926	)
FDIC loss share expense (Refer to Note 29)			—				(8,027	)
Other operating income			21,906				16,169
Total non-interest income			136,430				113,497
Operating expenses:
Personnel costs			143,117				125,852
Net occupancy expenses			23,537				22,802
Equipment expenses			19,705				17,206
Other taxes			11,662				10,902
Professional fees			87,466				82,985
Communications			5,849				5,906
Business promotion			14,674				12,009
FDIC deposit insurance			4,806				6,920
Other real estate owned (OREO) expenses			2,677				6,131
Other operating expenses			31,615				28,964
Amortization of intangibles			2,312				2,325
Total operating expenses			347,420				322,002
Income before income tax			218,148				113,479
Income tax expense			50,223				22,155
Net Income		$	167,925			$	91,324
Net Income Applicable to Common Stock		$	166,994			$	90,393
Net Income per Common Share - Basic		$	1.69			$	0.89
Net Income per Common Share - Diluted		$	1.69			$	0.89
The accompanying notes are an integral part of these Consolidated Financial Statements.

 

6

POPULAR, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

 

		Quarters ended March 31,
(In thousands)		2019				2018
Net income		$	167,925			$	91,324
Reclassification to retained earnings due to cumulative effect of accounting change			(50	)			(605	)
Other comprehensive income (loss) before tax:
Foreign currency translation adjustment			(1,238	)			93
Amortization of net losses of pension and postretirement benefit plans			5,876				5,386
Amortization of prior service credit of pension and postretirement benefit plans			—				(867	)
Unrealized holding gains (losses) on debt securities arising during the period			109,863				(121,189	)
Unrealized net (losses) gains on cash flow hedges			(682	)			1,225
Reclassification adjustment for net losses (gains) included in net income			1,030				(1,267	)
Other comprehensive income (loss) before tax			114,799				(117,224	)
Income tax (expense) benefit			(10,804	)			5,038
Total other comprehensive income (loss), net of tax			103,995				(112,186	)
Comprehensive income (loss), net of tax		$	271,920			$	(20,862	)
Tax effect allocated to each component of other comprehensive income (loss):		Quarters ended March 31,
(In thousands)		2019				2018
Amortization of net losses of pension and postretirement benefit plans		$	(2,203	)		$	(2,101	)
Amortization of prior service credit of pension and postretirement benefit plans			—				338
Unrealized holding gains (losses) on debt securities arising during the period			(8,460	)			6,785
Unrealized net (losses) gains on cash flow hedges			245				(478	)
Reclassification adjustment for net losses (gains) included in net income			(386	)			494
Income tax (expense) benefit		$	(10,804	)		$	5,038
The accompanying notes are an integral part of these Consolidated Financial Statements.

 

7

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

(In thousands)		Common stock				Preferred stock				Surplus				Retained earnings				Treasury stock				Accumulated other comprehensive loss				Total
Balance at December 31, 2017		$	1,042			$	50,160			$	4,298,503			$	1,194,994			$	(90,142	)		$	(350,652	)		$	5,103,905
Cumulative effect of accounting change															1,935												1,935
Net income															91,324												91,324
Issuance of stock			1								880																881
Dividends declared:
Common stock [1]															(25,547	)											(25,547	)
Preferred stock															(931	)											(931	)
Common stock purchases																			(1,328	)							(1,328	)
Common stock reissuance											(16	)							738								722
Stock based compensation											1,569								4,565								6,134
Other comprehensive income, net of tax																							(112,186	)			(112,186	)
Balance at March 31, 2018		$	1,043			$	50,160			$	4,300,936			$	1,261,775			$	(86,167	)		$	(462,838	)		$	5,064,909
Balance at December 31, 2018		$	1,043			$	50,160			$	4,365,606			$	1,651,731			$	(205,509	)		$	(427,974	)		$	5,435,057
Cumulative effect of accounting change															4,905												4,905
Net income															167,925												167,925
Issuance of stock											793																793
Dividends declared:
Common stock [1]															(28,986	)											(28,986	)
Preferred stock															(931	)											(931	)
Common stock purchases [2]											(52,670	)							(200,449	)							(253,119	)
Common stock reissuance											178								2,005								2,183
Stock based compensation											(867	)							9,105								8,238
Other comprehensive income, net of tax																							103,995				103,995
Balance at March 31, 2019		$	1,043			$	50,160			$	4,313,040			$	1,794,644			$	(394,848	)		$	(323,979	)		$	5,440,060

 

[1]	Dividends declared per common share during the quarter ended March 31, 2019 - $0.30 (2018 - $0.25).

[2]	On February 28, 2019, the Corporation entered into a $250 million accelerated share repurchase transaction with respect to its common stock, which was accounted for as a treasury stock transaction. Refer to Note 18 for additional information.

Disclosure of changes in number of shares:		March 31, 2019				March 31, 2018
Preferred Stock:
Balance at beginning and end of period			2,006,391				2,006,391
Common Stock – Issued:
Balance at beginning of period			104,320,303				104,238,159
Issuance of stock			18,037				25,760
Balance at end of period			104,338,340				104,263,919
Treasury stock			(7,708,449	)			(2,074,005	)
Common Stock – Outstanding			96,629,891				102,189,914
The accompanying notes are an integral part of these Consolidated Financial Statements.

 

8

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		Quarters ended March 31,
(In thousands)		2019				2018
Cash flows from operating activities:
Net income		$	167,925			$	91,324
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			41,825				71,063
Amortization of intangibles			2,312				2,325
Depreciation and amortization of premises and equipment			14,295				12,836
Net accretion of discounts and amortization of premiums and deferred fees			(38,813	)			(7,006	)
Share-based compensation			6,930				3,112
Impairment losses on long-lived assets			—				272
Fair value adjustments on mortgage servicing rights			3,825				4,307
FDIC loss share expense			—				8,027
Adjustments (expense) to indemnity reserves on loans sold			93				2,926
Earnings from investments under the equity method, net of dividends or distributions			(9,027	)			(7,370	)
Deferred income tax expense			45,796				10,758
Gain on:
Disposition of premises and equipment and other productive assets			(2,265	)			(72	)
Proceeds from insurance claims			—				(258	)
Sale of loans, including valuation adjustments on loans held-for-sale and mortgage banking activities			(4,058	)			(1,116	)
Sale of foreclosed assets, including write-downs			(3,772	)			(99	)
Acquisitions of loans held-for-sale			(44,748	)			(47,335	)
Proceeds from sale of loans held-for-sale			13,802				12,036
Net originations on loans held-for-sale			(53,231	)			(48,375	)
Net decrease (increase) in:
Trading debt securities			105,838				93,998
Equity securities			(4,362	)			(130	)
Accrued income receivable			3,224				56,504
Other assets			28,709				36,272
Net (decrease) increase in:
Interest payable			(6,915	)			(10,614	)
Pension and other postretirement benefits obligation			5,297				1,225
Other liabilities			(100,585	)			(94,529	)
Total adjustments			4,170				98,757
Net cash provided by operating activities			172,095				190,081
Cash flows from investing activities:
Net increase in money market investments			(643,117	)			(1,728,858	)
Purchases of investment securities:
Available-for-sale			(3,123,508	)			(1,311,382	)
Equity			(1,239	)			(9,730	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale			3,006,779				1,016,203
Held-to-maturity			2,587				2,639
Proceeds from sale of investment securities:
Equity			2,679				9,745
Net (disbursements) repayments on loans			(78,969	)			93,482
Proceeds from sale of loans			7,806				—
Acquisition of loan portfolios			(129,875	)			(161,295	)
Net payments (to) from FDIC under loss sharing agreements			—				(1,263	)
Return of capital from equity method investments			1,371				—
Acquisition of premises and equipment			(19,438	)			(13,046	)
Proceeds from insurance claims			—				258
Proceeds from sale of:
Premises and equipment and other productive assets			5,975				3,033
Foreclosed assets			26,119				25,746
Net cash used in investing activities			(942,830	)			(2,074,468	)
Cash flows from financing activities:
Net increase (decrease) in:
Deposits			1,169,706				1,678,029
Assets sold under agreements to repurchase			(80,659	)			(10,860	)
Other short-term borrowings			1				89,992
Payments of notes payable			(59,526	)			(12,680	)
Principal payments of finance leases			(439	)			—
Proceeds from issuance of notes payable			—				40,000
Proceeds from issuance of common stock			2,976				4,712
Dividends paid			(25,713	)			(26,138	)
Net payments for repurchase of common stock			(250,314	)			(193	)
Payments related to tax withholding for share-based compensation			(2,805	)			(1,223	)
Net cash provided by financing activities			753,227				1,761,639
Net decrease in cash and due from banks, and restricted cash			(17,508	)			(122,748	)
Cash and due from banks, and restricted cash at beginning of period			403,251				412,629
Cash and due from banks, and restricted cash at the end of the period		$	385,743			$	289,881
The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 

9

Notes to Consolidated Financial

Statements (Unaudited)

 

Note 1 - Nature of operations			11
Note 2 - Basis of presentation and summary of significant accounting policies			12
Note 3 - New accounting pronouncements			13
Note 4 - Business combination			15
Note 5 - Restrictions on cash and due from banks and certain securities			16
Note 6 - Debt securities available-for-sale			17
Note 7 - Debt securities held-to-maturity			20
Note 8 - Loans			22
Note 9 - Allowance for loan losses			27
Note 10 - FDIC loss share asset and true-up payment obligation			39
Note 11 - Mortgage banking activities			41
Note 12 - Transfers of financial assets and mortgage servicing assets			42
Note 13 - Other real estate owned			45
Note 14 - Other assets			46
Note 15 - Goodwill and other intangible assets			47
Note 16 - Deposits			49
Note 17 - Borrowings			50
Note 18 - Stockholders’ equity			52
Note 19 - Other comprehensive loss			53
Note 20 - Guarantees			55
Note 21 - Commitments and contingencies			57
Note 22 - Non-consolidated variable interest entities			63
Note 23 - Related party transactions			65
Note 24 - Fair value measurement			68
Note 25 - Fair value of financial instruments			72
Note 26 - Net income per common share			75
Note 27 - Revenue from contracts with customers			76
Note 28 - Leases			78
Note 29 - FDIC loss share expense			80
Note 30 - Pension and postretirement benefits			81
Note 31 - Stock-based compensation			82
Note 32 - Income taxes			84
Note 33 - Supplemental disclosure on the consolidated statements of cash flows			87
Note 34 - Segment reporting			88
Note 35 - Condensed consolidating financial information of guarantor and issuers of registered guaranteed securities			91

 

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Note 1 – Nature of operations

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

 

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Note 2 – Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The consolidated interim financial statements have been prepared without audit. The Consolidated Statement of Financial Condition data at December 31, 2018 was derived from audited financial statements. The unaudited interim financial statements are, in the opinion of management, a fair statement of the results for the periods reported and include all necessary adjustments, all of a normal recurring nature, for a fair statement of such results.

Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from the unaudited financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these financial statements should be read in conjunction with the audited Consolidated Financial Statements of the Corporation for the year ended December 31, 2018, included in the Corporation’s 2018 Form 10-K. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

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Note 3 – New accounting pronouncements

Recently Adopted Accounting Standards Updates

FASB Accounting Standards Updates (“ASUs”), Leases (Topic 842)

The FASB has issued a series of ASUs which, among other things, supersede ASC Topic 840 and set out the principles for the recognition, measurement, presentation and disclosure of leases for both lessors and lessees. The new guidance requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset (“ROU asset”) and a lease liability for all leases with a term greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases.

In addition, the new leases standard requires lessors, among other things, to present lessor costs paid by the lessee to the lessor on a gross basis.

The Corporation adopted the new leases standard during the first quarter of 2019 using the modified retrospective approach. The Corporation elected the practical expedients to not reassess at the date of adoption whether any existing contracts were or contained leases, their lease classification, and initial direct costs. The Corporation also elected the optional transition method that allows application of the transition provisions of the new leases standard at the adoption date, instead of at the earliest comparative period presented. Therefore, comparative periods will continue to be presented in accordance with ASC Topic 840. The Corporation also elected the optional practical expedients that permit the use of hindsight in evaluating lessee options to extend or terminate a lease, and to not apply ASC Topic 842 to all classes of short-term leases. On the other hand, the Corporation did not elect the practical expedient on not separating lease components from nonlease components.

As of January 1, 2019, the Corporation recognized ROU assets of $139 million, net of deferred rent liability of $15 million and lease liabilities of $154 million on its operating leases. In addition, the Corporation recorded a positive cumulative effect adjustment of $4.8 million to retained earnings as a result of the reclassification of previously deferred gains on sale and operating lease back transactions.

In addition, the Corporation early adopted ASU 2019-01 which, among other things, reinstates the specific fair value guidance in ASC Topic 840 for lessors that are not manufacturers or dealers to continue to measure the fair value of an underlying asset at its cost and clarifies that lessors that are depository or lending institutions in the scope of ASC Topic 942 are required to present the principal portion of lessee payments received from sales-type or direct financing leases as cash flows from investing activities. The Corporation was not impacted by the adoption of ASU 2019-01.

FASB Accounting Standards Update (“ASU”) 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes

The FASB issued ASU 2018-16 in October 2018 which permits use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to other permissible U.S. benchmark rates.

The Corporation adopted ASU 2018-16 during the first quarter of 2019. As such, the Corporation will consider this guidance for qualifying new hedging relationships entered into on or after the effective date.

FASB Accounting Standards Update (“ASU”) 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

The FASB issued ASU 2018-02 in February 2018, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. These stranded tax effects result from recognizing in income the impact of changes in tax rates even when the related tax effects were recognized in accumulated other comprehensive income. The amendments also require certain disclosures about stranded tax effects.

 

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The Corporation adopted ASU 2018-02 during the first quarter of 2019. As of December 31, 2018, the Corporation maintained a full valuation allowance on the deferred tax assets, which were recognized in accumulated other comprehensive income related to its U.S. operations. As such, the Corporation was not impacted by the adoption of this accounting pronouncement during the first quarter of 2019.

FASB Accounting Standards Update (“ASU”) 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities

The FASB issued ASU 2017-12 in August 2017, which makes more financial and nonfinancial hedging strategies eligible for hedge accounting and changes how companies assess effectiveness by, among other things, eliminating the requirement for entities to recognize hedge ineffectiveness each reporting period for cash flow hedges and requiring presentation of the changes in fair value of cash flow hedges in the same income statement line item(s) as the earnings effect of the hedged items when the hedged item affects earnings.

The Corporation adopted ASU 2017-12 during the first quarter of 2019. The cumulative effect adjustment recorded to retained earnings to reverse the hedge ineffectiveness as of December 31, 2018 was not significant. There were no changes in presentation since the earnings effect of the hedges and the hedged items are already presented in the same income statement line item. In addition, the Corporation elected to continue to perform subsequent assessments of hedge effectiveness quantitatively.

Additionally, adoption of the following standards effective during the first quarter of 2019 did not have a significant impact on the Corporation’s Consolidated Financial Statements:

 

•

FASB Accounting Standards Update (“ASU”) 2018-09, Codification Improvements

 

•

FASB Accounting Standards Update (“ASU”) 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting

 

•

FASB Accounting Standards Update (“ASU”) 2017-11, Earnings per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): Part I: Accounting for Certain Financial Instruments with Down Round Features; Part II: Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception

 

•

FASB Accounting Standards Update (“ASU”) 2017-08, Receivables– Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities

Recently Issued Accounting Standards Updates

FASB Accounting Standards Update (“ASU”) 2019-04, Codification Improvements to Topic 326, Financial Instruments– Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments

The FASB issued ASU 2019-04 in April 2019, which clarifies areas of guidance related to the recently issued standards on credit losses (Topic 326), derivatives and hedging (Topic 815), and recognition and measurement of financial instruments (Topic 825). Amendments to Topic 326 are mainly in the areas of accrued interest receivable, transfers of loans and debt securities between classifications, inclusion of expected recoveries in the allowance for credit losses, and permitting a prepay-adjusted effective interest rate except for TDRs. Amendments to Topic 815 and Topic 825 are mainly in the areas of fair value hedges and equity securities accounted for under the measurement alternative, respectively.

The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

The Corporation is currently evaluating the impact that the amendments to Topic 326 will have on the CECL implementation. Nonetheless, the Corporation does not anticipate that the amendments to Topic 815 and Topic 825 will have a material effect on its Consolidated Financial Statements.

For other recently issued Accounting Standards Updates not yet effective, refer to Note 3 to the Consolidated Financial Statements included in the 2018 Form 10-K.

 

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Note 4 – Business combination

On August 1, 2018, Popular, Inc., through its subsidiary Popular Auto, LLC (“Popular Auto”), acquired and assumed from Reliable Financial Services, Inc. and Reliable Finance Holding Co. (“Reliable”), subsidiaries of Wells Fargo & Company, certain assets and liabilities related to their auto finance business in Puerto Rico (the “Reliable Transaction” or “Transaction”). Popular Auto acquired approximately $1.6 billion in retail auto loans and $341 million in primarily auto-related commercial loans. Reliable has continued operating as a Division of Popular Auto in parallel with Popular Auto’s existing operations to provide continuity of service to Reliable customers while allowing Popular to assess best practices before completing the integration of the two operations. The Corporation expects to complete the integration of these operations during the second quarter of 2019 and continue to operate this business under the name of Popular Auto.

Wells Fargo retained approximately $398 million in retail auto loans as part of the Transaction and subsequently sold the same to a third party. Popular Auto has entered into a separate servicing agreement with respect to such loans.

Popular entered into the Transaction as part of its growth strategy to increase its market share in the auto finance business in Puerto Rico.    

The following table presents the fair values of the consideration and major classes of identifiable assets acquired and liabilities assumed by the Corporation as of August 1, 2018, net of cumulative measurement period adjustments as of period end.

 

(In thousands)		Book value prior to purchase accounting adjustments				Fair value adjustments				Measurement period adjustments				As recorded by Popular, Inc.
Cash consideration		$	1,843,256			$	—			$	—			$	1,843,256
Assets:
Loans		$	1,912,866			$	(126,908	)[1]		$	16,505	[1]		$	1,802,463
Premises and equipment			1,246				—				—				1,246
Accrued income receivable			1,466				—				—				1,466
Other assets			5,020				—				(91	)			4,929
Trademark			—				488				—				488
Total assets		$	1,920,598			$	(126,420	)		$	16,414			$	1,810,592
Liabilities:
Other liabilities		$	11,164			$	—			$	—			$	11,164
Total liabilities		$	11,164			$	—			$	—			$	11,164
Net assets acquired		$	1,909,434			$	(126,420	)		$	16,414			$	1,799,428
Goodwill on acquisition														$	43,828

 

[1]	The fair value discount is comprised of $106 million related to the retail auto loans portfolio and $4 million related to the commercial loans portfolio.

During the fourth quarter of 2018, measurement period adjustments, amounting to $16.5 million, were made to the estimated fair values of the loans acquired as part of the Transaction to reflect new information obtained about facts and circumstances that existed as of the acquisition date. The increase in the fair value of retail auto loans and commercial loans by $12.2 million and $4.3 million, respectively, was mainly attributed to decreases in credit loss expectations. The related cumulative adjustment to the amortization of the fair value discounts for the retail and commercial portfolios offset each other, resulting in an immaterial impact to the Corporation’s results.

Contractual cash flows for retail auto loans and commercial loans amounted to $1.8 billion and $348 million, respectively, from which $105 million and $3 million, respectively, are not expected to be collected.

For a description of the methods used to determine the fair values of significant assets acquired on the Reliable Transaction, refer to Note 4 of the Consolidated Statements included in the 2018 Form 10-K.

 

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Note 5 – Restrictions on cash and due from banks and certain securities

The Corporation’s banking subsidiaries, BPPR and PB, are required by federal and state regulatory agencies to maintain average reserve balances with the Federal Reserve Bank of New York (the “Fed”) or other banks. Those required average reserve balances amounted to $ 1.6 billion at March 31, 2019 (December 31, 2018 - $ 1.6 billion). Cash and due from banks, as well as other highly liquid securities, are used to cover the required average reserve balances.

At March 31, 2019, the Corporation held $ 47 million in restricted assets in the form of funds deposited in money market accounts, debt securities available for sale and equity securities (December 31, 2018 - $ 62 million). The restricted assets held in debt securities available for sale and equity securities consist primarily of assets held for the Corporation’s non-qualified retirement plans and fund deposits guaranteeing possible liens or encumbrances over the title of insured properties.

 

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Note 6 – Debt securities available-for-sale

The following tables present the amortized cost, gross unrealized gains and losses, approximate fair value, weighted average yield and contractual maturities of debt securities available-for-sale at March 31, 2019 and December 31, 2018.

 

		At March 31, 2019
(In thousands)		Amortized cost				Gross unrealized gains				Gross unrealized losses				Fair value				Weighted average yield
U.S. Treasury securities
Within 1 year		$	3,453,820			$	677			$	4,064			$	3,450,433				2.06	%
After 1 to 5 years			4,559,672				34,676				16,420				4,577,928				2.31
After 5 to 10 years			2,988				138				—				3,126				3.06
Total U.S. Treasury securities			8,016,480				35,491				20,484				8,031,487				2.20
Obligations of U.S. Government sponsored entities
Within 1 year			181,084				3				980				180,107				1.45
After 1 to 5 years			85,737				7				1,180				84,564				1.49
Total obligations of U.S. Government sponsored entities			266,821				10				2,160				264,671				1.46
Obligations of Puerto Rico, States and political subdivisions
Within 1 year			6,975				—				166				6,809				—
Total obligations of Puerto Rico, States and political subdivisions			6,975				—				166				6,809				—
Collateralized mortgage obligations - federal agencies
After 1 to 5 years			1,082				—				8				1,074				2.01
After 5 to 10 years			107,033				—				3,502				103,531				1.68
After 10 years			612,396				2,260				17,495				597,161				2.10
Total collateralized mortgage obligations - federal agencies			720,511				2,260				21,005				701,766				2.04
Mortgage-backed securities
Within 1 year			135				1				—				136				4.15
After 1 to 5 years			14,133				206				1				14,338				3.14
After 5 to 10 years			347,822				1,156				5,621				343,357				2.15
After 10 years			4,238,051				19,949				78,307				4,179,693				2.55
Total mortgage-backed securities			4,600,141				21,312				83,929				4,537,524				2.52
Other
After 5 to 10 years			433				5				—				438				3.62
Total other			433				5				—				438				3.62
Total debt securities available-for-sale[1]		$	13,611,361			$	59,078			$	127,744			$	13,542,695				2.29	%

 

[1]	Includes $10 billion pledged to secure public and trust deposits, assets sold under agreements to repurchase, credit facilities and loan servicing agreements that the secured parties are not permitted to sell or repledge the collateral, of which $8.9 billion serve as collateral for public funds.

 

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		At December 31, 2018
(In thousands)		Amortized cost				Gross unrealized gains				Gross unrealized losses				Fair value				Weighted average yield
U.S. Treasury securities
Within 1 year		$	3,565,571			$	108			$	5,319			$	3,560,360				2.10	%
After 1 to 5 years			4,483,741				13,647				35,213				4,462,175				2.25
After 5 to 10 years			245,891				3,770				—				249,661				2.84
Total U.S. Treasury securities			8,295,203				17,525				40,532				8,272,196				2.21
Obligations of U.S. Government sponsored entities
Within 1 year			212,951				—				1,406				211,545				1.44
After 1 to 5 years			123,857				1				2,094				121,764				1.51
Total obligations of U.S. Government sponsored entities			336,808				1				3,500				333,309				1.47
Obligations of Puerto Rico, States and political subdivisions
After 1 to 5 years			6,926				—				184				6,742				0.70
Total obligations of Puerto Rico, States and political subdivisions			6,926				—				184				6,742				0.70
Collateralized mortgage obligations - federal agencies
After 1 to 5 years			749				—				7				742				1.92
After 5 to 10 years			115,744				1				4,715				111,030				1.71
After 10 years			638,995				1,584				23,680				616,899				2.10
Total collateralized mortgage obligations - federal agencies			755,488				1,585				28,402				728,671				2.04
Mortgage-backed securities
Within 1 year			431				4				—				435				4.30
After 1 to 5 years			6,762				43				1				6,804				2.74
After 5 to 10 years			365,727				1,090				8,499				358,318				2.19
After 10 years			3,710,731				10,679				128,189				3,593,221				2.45
Total mortgage-backed securities			4,083,651				11,816				136,689				3,958,778				2.43
Other
After 5 to 10 years			486				2				—				488				3.62
Total other			486				2				—				488				3.62
Total debt securities available-for-sale[1]		$	13,478,562			$	30,929			$	209,307			$	13,300,184				2.25	%

 

[1]	Includes $8.9 billion pledged to secure public and trust deposits, assets sold under agreements to repurchase, credit facilities and loan servicing agreements that the secured parties are not permitted to sell or repledge the collateral, of which $7.9 billion serve as collateral for public funds.

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

Debt securities not due on a single contractual maturity date, such as mortgage-backed securities and collateralized mortgage obligations, are classified in the period of final contractual maturity. The expected maturities of collateralized mortgage obligations, mortgage-backed securities and certain other securities may differ from their contractual maturities because they may be subject to prepayments or may be called by the issuer.

There were no debt securities sold during the quarters ended March 31, 2019 and March 31, 2018.

The following tables present the Corporation’s fair value and gross unrealized losses of debt securities available-for-sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2019 and December 31, 2018.

 

		At March 31, 2019
		Less than 12 months								12 months or more								Total
(In thousands)		Fair value				Gross unrealized losses				Fair value				Gross unrealized losses				Fair value				Gross unrealized losses
U.S. Treasury securities		$	1,473,943			$	76			$	2,604,306			$	20,408			$	4,078,249			$	20,484
Obligations of U.S. Government sponsored entities			—				—				263,499				2,160				263,499				2,160
Obligations of Puerto Rico, States and political subdivisions			—				—				6,809				166				6,809				166
Collateralized mortgage obligations - federal agencies			3,447				5				480,426				21,000				483,873				21,005
Mortgage-backed securities			18,074				220				3,460,223				83,709				3,478,297				83,929
Total debt securities available-for-sale in an unrealized loss position		$	1,495,464			$	301			$	6,815,263			$	127,443			$	8,310,727			$	127,744

 

 

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