Popular(BPOP) - 2023 Q4 - Annual Report

PART I Business Popular, Inc, a diversified financial holding company, primarily generates revenue from interest on its loan portfolio concentrated in Puerto Rico and the mainland US General Overview - Popular, Inc is the largest financial institution based in Puerto Rico, with consolidated assets of $70.8 billion and total deposits of $63.6 billion as of December 31, 2023, ranking among the 50 largest U.S. bank holding companies[168] - The company operates in two principal markets: Puerto Rico, through its main subsidiary Banco Popular de Puerto Rico (BPPR), and the Mainland United States (New York, New Jersey, Florida) through Popular Bank (PB)[177][178] - A significant, multi-year technological and business process transformation was launched in the second half of 2022 to enhance digital experience and improve efficiency, targeting a 14% return on tangible common equity by the end of 2025[170] Lending Activities - Lending activities are concentrated in commercial, mortgage, consumer, construction, and lease financing[182][192][171][183] Loan Portfolio Distribution as of December 31, 2023 | Loan Category | Amount (in millions) | Percentage | |---|---|---| | Commercial & Industrial (C&I) | $7,126 | 20% | | Commercial Real Estate (CRE) | $10,583 | 30% | | Construction | $959 | 3% | | Leasing | $1,732 | 5% | | Consumer | $6,969 | 20% | | Mortgage | $7,696 | 22% | | Total | $35,065 | 100% | - Approximately 55% of the loan portfolio as of December 31, 2023, consisted of real estate-related loans, including residential mortgage, construction, and commercial real estate loans[184] Competition - The company operates in a highly competitive financial services industry, facing pressure on pricing, service range, and convenience[202] - In Puerto Rico, primary competitors include local commercial banks, large U.S. and foreign banks, and specialized non-bank entities like credit unions ('cooperativas'), brokerage firms, and mortgage companies[213][214] - In the U.S. mainland, competition comes from a large number of community, regional, and national banking institutions in the New York City/Northern New Jersey and Miami metropolitan markets[191] Human Capital Management - As of December 31, 2023, Popular had approximately 9,237 employees and focuses on attracting, developing, and retaining talent through programs promoting wellness, diversity, inclusion, and learning[205] - The company has a strong focus on Diversity, Equity, and Inclusion (DEI), with 64.5% of its workforce being female as of year-end 2023; women held 63% of first and mid-level management positions and 36.6% of executive-level roles[212] - Employee engagement initiatives have contributed to a reduction in the turnover rate to 7.9% at the end of 2023, a 2.9 percentage point improvement from 2022[222] - The Talent and Compensation Committee of the Board of Directors oversees human capital management, including compensation philosophy, talent development, succession planning, and DEI initiatives[223] Regulation and Supervision - Popular, Inc and its subsidiaries are subject to extensive regulation by federal and state authorities, including the Federal Reserve Board, FDIC, NYSDFS, and the Office of the Commissioner of Financial Institutions of Puerto Rico[224][232] - As of December 31, 2023, with $70.8 billion in assets, Popular is subject to requirements for institutions with $50 billion or more under the Dodd-Frank Act's Tailoring Rules[233] - The company is subject to various consumer protection laws and regulations enforced by the Consumer Financial Protection Bureau (CFPB), which has broad powers to identify and prohibit unfair, deceptive, or abusive acts or practices[10] - Compliance with anti-money laundering laws, such as the Bank Secrecy Act (BSA) and the USA PATRIOT Act, is a major focus of governmental policy, with significant compliance and due diligence obligations[257][8] - New SEC rules adopted in July 2023 require registrants like Popular to report material cybersecurity incidents on Form 8-K and disclose cybersecurity policies, procedures, and governance in their annual Form 10-K[12] Risk Factors The company faces significant risks from its business concentration in Puerto Rico, interest rate sensitivity, credit exposure, cyber threats, and regulatory compliance Economic and Market Risks - A significant portion of the business is concentrated in Puerto Rico, accounting for approximately 77% of assets and 81% of deposits as of December 31, 2023, making the company highly dependent on the local economy[46] - Changes in interest rates can materially impact financial performance, resulting in significant unrealized mark-to-market losses on the available-for-sale securities portfolio, which stood at $1.4 billion as of December 31, 2023[57] - The Puerto Rico economy is highly susceptible to changes in federal public policy, as it has historically received significant federal funds for disaster relief, stimulus, and health insurance programs[46] Business Risks - As of December 31, 2023, approximately 55% of the loan portfolio consisted of loans secured by real estate collateral, making the company vulnerable to declines in property values[59] - The company has direct lending and investment exposure to Puerto Rico government entities, including $362 million in direct lending to municipalities and $238 million in loans insured or securities issued by governmental entities as of December 31, 2023[59] - The company is exposed to credit risk from $0.6 billion in residential mortgage loans sold or serviced subject to recourse arrangements, primarily with Fannie Mae and Freddie Mac, as of December 31, 2023[59] - A significant portion of deposits comes from the Puerto Rico government and its instrumentalities, totaling $18.1 billion (approximately 28% of total deposits) as of December 31, 2023[60] Operational Risks - The company and its third-party providers are subject to increasingly sophisticated cyber-attacks, with the emergence of AI and quantum computing expected to exacerbate this risk[61][54] - Popular relies heavily on third-party vendors for key business infrastructure, with Evertec being the most important provider for core financial transaction processing and IT services[64] - The transition away from Evertec for certain services is a lengthy and complex process that carries significant business, financial, operational, and cybersecurity risks[66] - Operations are concentrated in regions susceptible to catastrophic events like hurricanes and earthquakes (Caribbean and Florida), which could cause significant disruptions[63] Legal and Regulatory Risks - The business is highly regulated, and compliance with extensive and evolving laws results in significant costs; proposed revisions to capital rules for banking organizations with $100 billion or more in assets could impact future growth strategies[66] - Failure to comply with economic and trade sanctions programs (OFAC) and anti-money laundering laws (Bank Secrecy Act) can lead to serious legal and reputational consequences, including significant civil and criminal penalties[69][71] - The company must meet regulatory capital adequacy requirements, and failure to remain "well-capitalized" could compromise its status as a financial holding company[71] - Increases in FDIC insurance premiums, including a special assessment finalized in November 2023 to recover costs from the 2023 bank failures, may have a material adverse effect on earnings[71][80] Liquidity Risks - Liquidity could be adversely affected by market disruptions or low investor confidence; as of December 31, 2023, the company had $14.6 billion in deposits exceeding the FDIC-insured limit (excluding collateralized public funds)[81] - As a holding company, Popular depends on dividends from its subsidiaries, primarily BPPR and PB, for liquidity, which are limited by law based on the subsidiaries' earnings, capital position, and regulatory approval[75][83] - Credit ratings impact the cost and ability to raise funds; while one rating agency has upgraded the company to "investment grade," two others maintain a "non-investment grade" rating[81] Strategic Risks - The company faces significant and increasing competition from other banks, non-depository institutions, and technology companies, which creates pressure on pricing, fees, and credit standards[78] - The ability to compete effectively depends on adapting to technological changes, which is challenging due to continued dependence on Evertec for technology services[78][87] - The company has embarked on a broad-based, multi-year technological and business process transformation, and failure to achieve the project's goals could adversely affect business, financial condition, and reputation[85] - The ability to attract and retain qualified employees is critical and has become more challenging due to a tighter labor market and regulatory limitations on compensation practices[88] Other Risks - As of December 31, 2023, the company had significant goodwill ($804 million) and net deferred tax assets ($1 billion), and an impairment of these assets could require a significant charge to earnings[95] - Financial statements rely on estimates and assumptions (e.g., for allowance for credit losses, fair value of assets), and incorrect estimates could lead to unexpected losses[90] Unresolved Staff Comments There are no unresolved staff comments - None[91] Cybersecurity The Corporation manages cybersecurity risk through a comprehensive framework overseen by Board and management committees, utilizing a three-lines-of-defense model - Cybersecurity oversight is managed by three committees at the management level and a Board-level Risk Management Committee (RMC), which receives regular briefings on cybersecurity matters[92] - A three-lines-of-defense framework is used to manage cybersecurity threats, involving business line management, the Risk Management and Corporate Security Groups, and the Corporate Auditing Division[93] - The Information Security Program is based on standards from the National Institute of Standards and Technology (NIST) and utilizes the Federal Financial Institutions Examination Council's Cyber Assessment Tool (CAT) to measure preparedness[93] - The company engages third parties for specialized services such as penetration testing, computer forensics, and security monitoring, and maintains an Outsourced Risk Management Policy to manage risks associated with third-party service providers[99] Properties The company operates numerous branches and ATMs across Puerto Rico, the Virgin Islands, and the U.S. mainland, with principal owned properties in Hato Rey and St Thomas - As of December 31, 2023, BPPR operated 162 branches (68 owned, 94 leased) and PB operated 40 branches (3 owned, 37 leased)[101] - The company operated 576 ATMs in Puerto Rico, 23 in the Virgin Islands, and 100 in the U.S. Mainland[101] - Principal owned properties include the Popular Center headquarters in Hato Rey, Puerto Rico, Cupey Center Complex, and the BPPR Virgin Islands Center in St. Thomas[101] Legal Proceedings The company is involved in class action lawsuits concerning overdraft fees, with one case settled and another pending appeal after an arbitration motion was denied - A detailed discussion of legal proceedings is available in Note 24, "Commitments and Contingencies", to the Consolidated Financial Statements[102][117] - The company is a defendant in putative class action lawsuits alleging improper charging of overdraft fees on certain transactions; one case against BPPR has reached a settlement agreement which received final court approval in September 2023[858][1089] - In a separate overdraft fee case against Popular Bank (PB), the court denied PB's Motion to Compel Arbitration, a decision affirmed by the Court of Appeals in January 2024[1090][859] Mine Safety Disclosures This item is not applicable to the company - Not applicable[103] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq as 'BPOP', with cash dividends of $2.27 per share declared in 2023 and share repurchases conducted in 2022 - The Corporation's Common Stock is traded on the Nasdaq Global Select Market under the symbol 'BPOP'; as of February 27, 2024, there were 72,254,015 shares outstanding[103][149] - In 2023, the Corporation declared cash dividends totaling $2.27 per common share, for an aggregate amount of $163.7 million[118] - The company completed two Accelerated Share Repurchase (ASR) programs in 2022: a $400 million program settled in July and a $231 million program settled in December[105][119] - As of December 31, 2023, 3,144,461 shares of common stock remained available for future issuance under the Popular, Inc. 2020 Omnibus Incentive Plan[124][25] Issuer Purchases of Equity Securities (Quarter Ended Dec 31, 2023) | Period | Total Number of Shares Purchased | Average Price Paid per Share | |---|---|---| | October 1 – October 31 | 174 | $62.92 | | November 1 – November 30 | - | - | | December 1 – December 31 | 498 | $67.95 | | Total | 672 | $66.65 | [Reserved] This item is reserved - This item is reserved as per the report's table of contents[115][167] Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations for the year ended December 31, 2023 - The information required by this item is included in the Form 10-K, commencing on page 54[115] Quantitative and Qualitative Disclosures About Market Risk This section provides disclosures about the company's exposure to market risk, primarily interest rate risk - Information regarding market risk is located under the 'Risk Management' caption on page 84 within the Management's Discussion and Analysis of Financial Condition and Results of Operations[116] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements and supplementary financial data - The required financial statements and supplementary data are included in the Form 10-K[133] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with the company's accountants on accounting and financial disclosure - Not Applicable[134] Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls during the fourth quarter of 2023 - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[129] - There were no changes in internal control over financial reporting during the quarter ended December 31, 2023, that have materially affected, or are reasonably likely to materially affect, internal controls[131] Other Information Certain officers and directors may participate in trading arrangements that satisfy the conditions of Rule 10b5-1 - Certain officers or directors participate in dividend reinvestment plans, 401(k) plans, and other arrangements that may constitute Rule 10b5-1 trading plans or other preplanned trading arrangements[144] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[145][134] PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the company's Proxy Statement - The information required by this item is incorporated by reference from the company's Proxy Statement[135] Executive Compensation Information regarding executive and director compensation is incorporated by reference from the company's Proxy Statement - The information required by this item is incorporated by reference from the company's Proxy Statement[42] Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters Information on security ownership is incorporated by reference from the Proxy Statement, with over 3 million securities available for issuance under the incentive plan - Information regarding security ownership is incorporated by reference from the company's Proxy Statement[33] Securities Remaining Available for Future Issuance Under Equity Compensation Plan (as of Dec 31, 2023) | Plan Category | Plan | Number of Securities Remaining Available | |---|---|---| | Equity compensation plan approved by security holders | 2020 Omnibus Incentive Plan | 3,144,461 | Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the company's Proxy Statement - The information required by this item is incorporated by reference from the company's Proxy Statement[24][34] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's Proxy Statement - The information required by this item is incorporated by reference from the company's Proxy Statement[34] PART IV Exhibits and Financial Statement Schedules This section lists the financial statements and exhibits filed with the report, while schedules are omitted as they are not applicable - The report includes the Consolidated Statements of Financial Condition, Operations, Comprehensive Income (Loss), Changes in Stockholders' Equity, and Cash Flows, along with the Notes to Consolidated Financial Statements[26][27][40] - Financial statement schedules are not presented because the information is not applicable or is included within the Consolidated Financial Statements or notes[137] - Exhibits listed in the Exhibit Index are either filed with the report or incorporated by reference[139] Form 10-K Summary No Form 10-K summary is provided - None[138]