CONTENTS ÍNDICE LETTER FROM THE PRESIDENT & CHIEF EXECUTIVE OFFICER 25-YEAR HISTORICAL FINANCIAL SUMMARY MANAGEMENT & BOARD OF DIRECTORS 3 6 8 CARTA DEL PRESIDENTE Y PRINCIPAL OFICIAL EJECUTIVO RESUMEN FINANCIERO HISTÓRICO (25 AÑOS) GERENCIA Y JUNTA DE DIRECTORES 9 12 14 Popular, Inc. (NASDAQ: BPOP) is the leading financial institution by both assets and deposits in Puerto Rico and ranks among the top 50 U.S. bank holding companies by assets. Founded in 1893, Banco Popular de Puerto Rico, Popular’s principal subsidiary, provides retail, mortgage and commercial banking services in Puerto Rico and the U.S. Virgin Islands. Popular also offers in Puerto Rico auto and equipment leasing and financing, investment banking, broker-dealer and insurance services through specialized subsidiaries. In the mainland United States, Popular provides retail, mortgage and commercial banking services through its New York-chartered banking subsidiary, Popular Bank, which has branches located in New York, New Jersey and Florida. Popular, Inc. (NASDAQ: BPOP) es la institución bancaria líder en depósitos y activos en Puerto Rico y se encuentra entre las primeras 50 entidades tenedoras de instituciones bancarias por número de activos. Fundado en 1893, Banco Popular de Puerto Rico, la principal subsidiaria de Popular, brinda servicios de banca individual, hipotecas y banca comercial en Puerto Rico e Islas Vírgenes estadounidenses. Popular también ofrece en Puerto Rico servicios de financiamiento de autos y equipo, inversiones y seguros a través de subsidiarias especializadas. En Estados Unidos, Popular provee servicios de banca individual, hipotecas y banca comercial a través de su filial bancaria en Nueva York, Popular Bank, la cual cuenta con sucursales localizadas en Nueva York, Nueva Jersey y Florida. CORPORATE INFORMATION INFORMACIÓN CORPORATIVA Independent Registered Public Accounting Firm: PricewaterhouseCoopers LLP The company’s Form 10-K, proxy statement and any other financial information is available on popular.com/en/investor-relations/annual-reports/ Firma registrada de Contabilidad Pública Independiente: PricewaterhouseCoopers LLP El Formulario 10-K, el proxy y otra información financiera están disponibles en popular.com/accionistas/informe-anual/ ANNUAL MEETING The 2021 Annual Stockholders’ Meeting of Popular, Inc. will be held on Thursday, May 6, 2021, at 9:00 a.m. AST by means of remote communication, in a virtual format only through www.virtualshareholdermeeting.com/BPOP2021. REUNIÓN ANUAL La Reunión Anual de Accionistas de Popular, Inc. se celebrará el jueves 6 de mayo de 2021 a las 9:00 a.m. AST exclusivamente vía comunicación remota, mediante formato virtual a través de www.virtualshareholdermeeting.com/BPOP2021. 2 | POPULAR, INC. POPULAR, INC. YEAR IN REVIEW DEAR SHAREHOLDERS: The year 2020 was certainly a challenging one, starting with the earthquakes in the southwestern part of Puerto Rico, which were shortly followed by an unexpected global pandemic. Yet, despite all the professional and personal difficulties, we continued serving our customers, delivering value to our shareholders, supporting our colleagues, and providing much- needed services and assistance to our communities. We generated net income for the year of $507 million, 24% lower than the previous year. The decrease was largely driven by a higher provision expense, lower fees and lower net interest income related to the economic disruption caused by the pandemic. However, as business restrictions were loosened, the economy began to improve. results throughout Credit quality the year, remained positive notwithstanding the economic impact of the pandemic. We granted payment deferral assistance to approximately 132,000 customer accounts, representing $8.3 billion of loans or 28% of the total loan balance. At year-end, 97% of customers had exited payment relief programs and approximately 94% of these accounts remained current. While pleased with our results, given the uncertainty related to the pandemic, we continue to closely monitor developments in the health and economic fronts and their impact on our business. Capital levels remained strong with a year-end Common Equity Tier 1 ratio of 16.3%. Our robust capital position allowed us to increase the quarterly common stock dividend from $0.30 to $0.40 per share in the first quarter of 2020 and return $500 million to our shareholders through stock repurchases. Even with these actions, our tangible book value increased by nearly $8 or 14% per share to $63.07. Our stock closed 2020 at $56.32, 4% lower than in 2019. This performance compares favorably against the KBW Nasdaq Regional Banking Index, which decreased by 12%, but underperformed versus our U.S. peers, who experienced an increase of 8% in their stock price. Faced with the pandemic, we acted decisively to ensure the safety of our employees and customers while continuing to offer essential banking services. We adapted our operations in a rapidly evolving situation, leveraged the strength of our digital channels and provided support and relief to our customers in multiple ways. One of the most important efforts revolved around the Small Business Administration’s Paycheck Protection Program (PPP). Aware of the importance of the program for small and mid-sized businesses, we mobilized all resources at our disposal to process as many applications as possible. The year 2020 was certainly a challenging one, starting with the earthquakes in the southwestern part of Puerto Rico, which were shortly followed by an unexpected global pandemic. 2020 ANNUAL REPORT | 3 Despite the efforts devoted to managing pandemic-related matters, we continued strengthening our business and executing our strategy, which is structured around four pillars. SUSTAINABLE AND PROFITABLE GROWTH In Puerto Rico, we grew loans by 7%, driven by an increase in commercial, auto and mortgage loans. Deposits increased by 35%, registering growth in retail, commercial and public deposits. We expanded our customer base on the island, adding 106,000 new customers during the year. In the United States, our loan portfolio grew by 8% and deposits by 2%. We continued to expand niche businesses, mainly community association banking and health care lending, and also achieved strong growth in our residential mortgage program. SIMPLICITY We continued to streamline our operations to achieve efficiencies. We realigned our New York Metro branch network, closing 11 branches, which will allow us to reduce operating expenses and leverage resources to focus on small and medium size businesses. After a pre-tax charge of $23 million in 2020, we expect annual savings of approximately $12 million moving forward. the areas CUSTOMER FOCUS We of reinforcing continued communication, recognition, and collaboration among our employees to ensure the sustainability our service framework. We also leveraged the strength of our digital channels and saw an accelerated adoption that we believe will remain after the pandemic passes. In Puerto Rico, we reached 1.1 million active customers in our digital banking platform, an increase of 154,000 customers from 2019. In addition, we captured 67% of deposit transactions through digital channels, up from 52% in the previous year. FIT FOR THE FUTURE Given the COVID-19 pandemic, we focused on the well-being of our employees on all fronts. implemented protective health measures, We ensured constant communication, and enabled development opportunities through our virtual learning offering. In the area of internal controls, we continued strengthening our compliance program, with an enhanced focus on our first line of defense, and bolstering our cybersecurity program. We also executed a series of initiatives to support a safe remote working environment. 4 | POPULAR, INC. We drew on talent from across the organization, developed new digital tools and streamlined our processes to provide the much-needed help to our customers. In the first round, we funded $1.4 billion in loans, representing 28,000 small and medium sized businesses and 278,000 employees. Last year, I shared that we had embarked on a process to formalize our priorities regarding environmental, social, and governance (ESG) practices. As part of this process, we committed to establish specific targets, track our progress, and communicate our results regularly. During 2020, we published our first Corporate Sustainability Report, an important milestone in our journey towards greater transparency and accountability. Another key achievement was the approval of a series of revisions to our commercial credit policy which formally incorporate ESG considerations into the credit analysis and evaluation processes. We believe these changes will result in more sustainable credit decisions for the long-term well-being of our markets. While we are satisfied with our progress on this front, we acknowledge there are opportunities to continue expanding our efforts. To this end, we have created the Corporate Communications and Public Affairs Group to integrate several existing functions at the company to achieve a unified and more impactful approach for strategic communications, government affairs, and ESG strategy. To lead this group, María Cristina González Noguera is joining Popular as our Chief Communications and Public Affairs Officer. María Cristina has extensive experience in both the public and private sectors. Most recently, she was the SVP of Global Public Affairs at The Estée Lauder Companies and was previously the Director of Communication to First Lady Michelle Obama and Special Assistant to President Barack Obama. We are confident she will bring critical insights that will help us solidify our position as a leader in corporate sustainability. I am extremely proud of our accomplishments during 2020. I am especially proud of our colleagues’ remarkable commitment to serve our customers and their ability to adapt to a rapidly changing environment, whether on the frontline or working from home. We are blessed to have a team of talented and dedicated colleagues who met these challenges with courage and resilience. We are also grateful for our Board of Director’s counsel and support as we charted our way in these trying times. POPULAR’S COVID-19 RESPONSE SUPPORTING OUR CUSTOMERS • Continued providing essential banking services, always protecting the health of our customers and employees. • Leveraged our wide array of digital services, eliminating some charges and relaxing limits on ATMs and selected transactions to promote their use as a safe alternative to branch visits. • Offered payment relief for mortgage, personal, auto loans, credit cards, and commercial loans. • Helped our business customers take advantage of federal assistance programs, such as the SBA Paycheck Protection Program (PPP). CARING FOR OUR EMPLOYEES • Continued to pay our employees their full salary, even when at home and unable to work. • Offered two special payments to front-line employees working on-site. • Implemented alternative work arrangements for more than half of our employee base. • Extended health plan coverage to new hires who were still on the regular three-month probation period and to part-time employees. • Encouraged their emotional well-being, offering services such as the Employee Assistance Program and live online mindfulness courses. BACKING OUR COMMUNITIES • Established a $1 million fund. • Donated personal protective equipment (PPE) to medical personnel and supported local research projects related to COVID-19. • Supported small and medium businesses through donations to nonprofit partners that provide guidance, coaching and emergency grants and offered virtual workshops in relevant areas such as financial planning, customer acquisition through social media and the management of human resources in a virtual environment. • Offered a simple online financial education module that allows individuals to assess their situation and provides guidance and tools. • Provided emergency grants to nonprofit organizations to ensure the continuity of their services. • Coordinated with local authorities to promote and facilitate COVID-19 vaccination efforts, including the use our facilities as vaccination centers. Reflecting on the learnings of 2020, I believe that three factors helped us thrive in such uncertain times. First, the optimism of our leadership team kept our colleagues focused and engaged. This confidence on our ability to manage pandemic-related and other challenges stems from recent experiences, such as the hurricanes in 2017, that have shown us that, in difficult situations, our colleagues come together and go the extra mile. Second, in every decision we made sure to put people first, thinking about their safety, needs and concerns. Finally, we put our purpose over our plans. The world changed very quickly, and we adapted. We adjusted our plans, but we remained true to our purpose, which is to promote the welfare and prosperity of our customers, colleagues, shareholders, and communities. We are convinced that our purpose provides the foundation for the long-term success of our company and our ability to deliver value to our shareholders. Good organizations make it through difficult times. Great organizations thrive and emerge stronger as a result. I have no doubt that Popular today is even stronger than a year ago. Despite the uncertainty facing all of us, we begin 2021 on a solid footing and optimistic about the opportunities that lie ahead. Thank you for your continued support. IGNACIO ALVAREZ President and Chief Executive Officer Popular, Inc. 25-YEAR HISTORICAL FINANCIAL SUMMARY (Dollars in millions, except per share data) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Selected Financial Information Net Income (Loss) Assets Gross Loans Deposits Stockholders’ Equity Market Capitalization Return on Average Assets (ROAA) Return on Average Common Equity (ROACE) Per Common Share1 Net Income (Loss) - Basic Net Income (Loss) - Diluted Dividends (Declared) Book Value Market Price Assets by Geographical Area Puerto Rico United States Caribbean and Latin America Total Traditional Delivery System Banking Branches Puerto Rico Virgin Islands United States2 Subtotal Non-Banking Offices Popular Financial Holdings Popular Cash Express Popular Finance Popular Auto (including Reliable) Popular Leasing, U.S.A. Popular Mortgage Popular Securities Popular One Popular Insurance and Popular Risk Services Popular Insurance Agency, U.S.A. Popular Insurance V.I. E-LOAN EVERTEC Subtotal Total Electronic Delivery System ATMs Owned Puerto Rico Virgin Islands United States Total $185.2 $209.6 $232.3 $257.6 $276.1 $304.5 $351.9 $470.9 $489.9 $540.7 $357.7 16,764.1 19,300.5 23,160.4 25,460.5 28,057.1 30,744.7 33,660.4 36,434.7 44,401.6 48,623.7 47,404.0 9,779.0 11,376.6 13,078.8 14,907.8 16,057.1 18,168.6 19,582.1 22,602.2 28,742.3 31,710.2 32,736.9 10,763.3 11,749.6 13,672.2 14,173.7 14,804.9 16,370.0 17,614.7 18,097.8 20,593.2 22,638.0 24,438.3 1,262.5 1,503.1 1,709.1 1,661.0 1,993.6 2,272.8 2,410.9 2,754.4 3,104.6 3,449.2 3,620.3 $2,230.5 $3,350.3 $4,611.7 $3,790.2 $3,578.1 $3,965.4 $4,476.4 $5,960.2 $7,685.6 $5,836.5 $5,003.4 1.14% 1.14% 1.14% 1.08% 1.04% 1.09% 1.11% 1.36% 1.23% 1.17% 0.74% 16.17% 15.83% 15.41% 15.45% 15.00% 14.84% 16.29% 19.30% 17.60% 17.12% 9.73% $6.69 6.69 1.83 43.98 84.38 74% 22% 4% $7.51 7.51 2.00 51.83 $8.26 8.26 2.50 59.32 123.75 170.00 74% 23% 3% 71% 25% 4% $9.19 9.19 3.00 57.54 139.69 71% 25% 4% $9.85 $10.87 $13.05 $17.36 $17.95 $19.78 $12.41 9.85 3.20 69.62 131.56 72% 26% 2% 10.87 3.80 79.67 13.05 4.00 91.02 17.36 5.05 96.60 17.92 6.20 109.45 145.40 169.00 224.25 288.30 68% 30% 2% 66% 32% 2% 62% 36% 2% 55% 43% 2% 19.74 6.40 118.22 211.50 53% 45% 2% 12.41 6.40 123.18 179.50 52% 45% 3% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 178 8 44 230 102 39 8 3 1 153 383 327 9 53 389 201 8 63 272 117 44 10 7 3 2 183 455 391 17 71 479 198 8 89 295 128 51 48 10 8 11 2 258 553 421 59 94 574 199 8 91 298 137 102 47 12 10 13 2 4 327 625 442 68 99 609 199 8 95 302 136 132 61 12 11 21 3 2 4 382 684 478 37 109 624 196 8 96 300 149 154 55 20 13 25 4 2 1 4 427 727 524 39 118 681 195 8 96 299 153 195 36 18 13 29 7 2 1 1 5 460 759 539 53 131 723 193 8 97 298 181 129 43 18 11 32 8 2 1 1 5 431 729 557 57 129 743 192 8 128 328 183 114 43 18 15 30 9 2 1 1 5 421 749 568 59 163 790 194 8 136 338 212 4 49 17 14 33 12 2 1 1 1 5 191 8 142 341 158 52 15 11 32 12 2 1 1 1 7 351 689 292 633 583 61 181 825 605 65 192 862 Employees (full-time equivalent) 7,996 8,854 10,549 11,501 10,651 11,334 11,037 11,474 12,139 13,210 12,508 6 | POPULAR, INC. 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 $(64.5) $(1,243.9) $(573.9) $137.4 $151.3 $245.3 $599.3 $(313.5) $895.3 $216.7 $107.7 $618.2 $671.1 $506.6 44,411.4 38,882.8 34,736.3 38,815.0 37,348.4 36,506.9 35,748.8 33,086.8 35,761.7 38,661.6 44,277.3 47,604.6 52,115.3 65,926.0 29,911.0 26,268.9 23,803.9 26,458.9 25,314.4 25,093.6 24,706.7 22,053.2 23,129.2 23,435.4 24,942.5 26,559.3 27,466.1 29,484.7 28,334.4 27,550.2 25,924.9 26,762.2 27,942.1 27,000.6 26,711.1 24,807.5 27,209.7 30,496.2 35,453.5 39,710.0 43,758.6 56,866.3 3,581.9 3,268.4 2,538.8 3,800.5 3,918.8 4,110.0 4,626.2 4,267.4 5,105.3 5,198.0 5,103.9 5,435.1 6,016.8 6,028.7 $2,968.3 $1,455.1 $1,445.4 $3,21 1.4 $1,426.0 $2,144.9 $2,970.6 $3,523.4 $2,936.6 $4,548.1 $3,622.4 $4,719.3 $5,615.9 $4,744.6 -0.14% -3.04% -1.57% 0.36% 0.40% 0.68% 1.65% -0.89% 2.54% 0.58% 0.26% 1.33% 1.33% 0.85% -2.08% -44.47% -32.95% 4.37% 4.01% 6.37% 14.43% -7.04% 19.16% 4.07% 1.96% 11.39% 11.78% 9.36% $(2.73) $(45.51) $2.39 $(0.62) (2.73) 6.40 121.24 106.00 59% 38% 3% (45.51) 4.80 63.29 51.60 64% 33% 3% 2.39 0.20 38.91 22.60 65% 32% 3% (0.62) - 36.67 31.40 74% 23% 3% $1.44 1.44 - 37.71 13.90 74% 23% 3% $2.36 2.35 - 39.35 20.79 73% 24% 3% $5.80 $(3.08) $8.66 $2.06 $1.02 $6.07 $6.89 $5.88 5.78 (3.08) - 44.26 28.73 72% 25% 3% - 40.76 34.05 80% 17% 3% 8.65 0.30 48.79 28.34 75% 22% 3% 2.06 0.60 49.60 43.82 75% 23% 2% 1.02 1.00 49.51 35.49 76% 22% 2% 6.06 1.00 53.88 47.22 77% 21% 2% 6.88 1.20 62.42 58.75 78% 20% 2% 5.87 1.60 71.30 56.32 82% 17% 1% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 196 8 147 351 134 51 12 24 32 13 2 1 1 1 9 280 631 615 69 187 871 179 8 139 326 2 9 12 22 32 7 1 1 1 1 9 97 423 605 74 176 855 173 9 50 232 9 24 3 6 2 1 1 173 8 101 185 8 96 183 9 94 175 9 92 171 9 90 168 9 47 282 289 286 276 270 224 171 9 51 231 168 9 51 228 163 9 51 223 10 33 6 1 1 1 9 61 343 571 77 136 784 10 36 6 1 1 1 10 37 4 4 1 1 1 10 37 4 5 1 1 1 9 38 3 6 1 1 1 9 25 3 6 1 1 1 9 17 2 5 2 1 1 9 14 2 5 2 1 1 55 344 58 344 59 335 59 329 46 270 46 278 37 268 34 262 624 17 138 779 613 20 135 768 597 20 134 751 599 22 132 753 602 21 83 706 622 21 87 730 635 20 101 756 633 22 110 765 12 14 2 5 2 1 36 259 619 22 115 756 164 10 51 225 12 14 2 5 2 1 36 261 622 23 119 764 162 10 50 222 11 15 2 6 2 1 37 259 619 23 118 760 12,303 10,587 9,407 8,277 8,329 8,072 8,059 7,752 7,810 7,828 7,784 8,474 8,560 8,522 1 Per common share data adjusted for stock splits and reverse stock split executed in May 2012. 2 Excludes a Banco Popular de Puerto Rico branch operating in New York. 2020 ANNUAL REPORT | 7 POPULAR, INC. MANAGEMENT & BOARD OF DIRECTORS SENIOR MANAGEMENT TEAM IGNACIO ALVAREZ President & Chief Executive Officer Popular, Inc. CAMILLE BURCKHART Executive Vice President Chief Information & Digital Strategy Officer Innovation, Technology & Operations Group Popular, Inc. BEATRIZ CASTELLVÍ ARMAS Executive Vice President & Chief Security Officer Corporate Security Group Popular, Inc. LUIS CESTERO Executive Vice President Retail Banking Group Banco Popular de Puerto Rico MANUEL A. CHINEA Executive Vice President Popular, Inc. Chief Operating Officer Popular Bank JAVIER D. FERRER Executive Vice President, Chief Legal Officer & General Counsel, Corporate Secretary & Chief Strategic Officer Popular, Inc. JUAN O. GUERRERO Executive Vice President Financial & Insurance Services Group Banco Popular de Puerto Rico GILBERTO MONZÓN Executive Vice President Individual Credit Group Banco Popular de Puerto Rico EDUARDO J. NEGRÓN Executive Vice President Administration Group Popular, Inc. ELI S. SEPÚLVEDA Executive Vice President Commercial Credit Group Banco Popular de Puerto Rico LIDIO V. SORIANO Executive Vice President & Chief Risk Officer Corporate Risk Management Group Popular, Inc. CARLOS J. VÁZQUEZ Executive Vice President & Chief Financial Officer Corporate Finance Group Popular, Inc. BOARD OF DIRECTORS RICHARD L. CARRIÓN Chairman Popular, Inc. IGNACIO ALVAREZ President and Chief Executive Officer Popular, Inc. JOAQUÍN E. BACARDÍ, III Chairman Edmundo B. Fernández, Inc. ALEJANDRO M. BALLESTER President Ballester Hermanos, Inc. ROBERT CARRADY President Caribbean Cinemas JOHN W. DIERCKSEN Principal Greycrest, LLC MARÍA LUISA FERRÉ President & Chief Executive Officer FRG, Inc. C. KIM GOODWIN Private Investor MYRNA M. SOTO Chief Strategy and Trust Officer Forcepoint, LLC CARLOS A. UNANUE President Goya de Puerto Rico 8 | POPULAR, INC. POPULAR, INC. RESUMEN DEL AÑO ESTIMADOS ACCIONISTAS: El año 2020 fue ciertamente uno retante, comenzando con los terremotos en el suroeste de Puerto Rico, seguidos poco después por una inesperada pandemia mundial. Sin embargo, a pesar de todas las dificultades profesionales y personales, continuamos sirviendo a nuestros clientes, creando valor para nuestros accionistas, apoyando a nuestros compañeros y proporcionando ayuda muy necesaria a nuestras comunidades. Generamos un ingreso neto de $507 millones, un 24% menos que el año anterior. El descenso se debió en gran medida a una mayor provisión para pérdidas en préstamos, menores comisiones y una reducción en los ingresos netos por intereses, todo relacionado con la perturbación económica causada por la pandemia. Sin embargo, a medida que se relajaron las restricciones comerciales, la economía comenzó a mejorar. Los resultados de calidad de crédito se mantuvieron positivos durante todo el año, a pesar del impacto económico de la pandemia. Concedimos moratorias de pago a unas 132,000 cuentas de clientes, que representan $8,300 millones en préstamos, o el 28% del total de préstamos. A finales de año, el 97% de los clientes habían salido de los programas de asistencia y aproximadamente el 94% de estas cuentas estaban al día. Aunque estamos satisfechos con nuestros resultados, dada la incertidumbre relacionada a la pandemia, seguimos vigilando de cerca los desarrollos en el área de salud y en la economía, y su impacto en nuestro negocio. Los niveles de capital se mantuvieron sólidos, con una relación de capital “Tier 1 Common” de 16.3% al final del año. Nuestra sólida posición de capital nos permitió aumentar el dividendo trimestral de las acciones ordinarias de $0.30 a $0.40 por acción en el primer trimestre del 2020 y devolver $500 millones a nuestros accionistas mediante la recompra de acciones. Incluso con estas medidas, nuestro valor tangible en libros aumentó en casi $8 o un 14% por acción, alcanzando $63.07. Nuestras acciones cerraron el 2020 en $56.32, un 4% menos que en 2019. Este rendimiento compara favorablemente con el índice KBW Nasdaq Regional Banking, que disminuyó un 12%, pero estuvo por debajo de nuestros bancos pares en los Estados Unidos, que experimentaron un aumento del 8% en el precio de sus acciones. Ante la pandemia, actuamos decisivamente para garantizar la seguridad de nuestros empleados y clientes, mientras continuamos ofreciendo servicios bancarios esenciales. Adaptamos nuestras operaciones en una situación de rápida evolución, aprovechamos la fuerza de nuestros canales digitales y brindamos apoyo y alivio a nuestros clientes de múltiples maneras. Uno de los esfuerzos más importantes giró en torno al Programa de Protección de Nómina (PPP) de la Administración de Pequeños Negocios (SBA, por sus siglas en inglés). Conscientes de la importancia del programa para pequeñas y medianas empresas, movilizamos todos los recursos a nuestra disposición para procesar el mayor número de solicitudes posible. El año 2020 fue ciertamente uno retante, comenzando con los terremotos en el suroeste de Puerto Rico, seguidos poco después por una inesperada pandemia mundial. INFORME ANUAL 2020 | 9 A pesar de la atención dedicada a los esfuerzos relacionados con la pandemia, continuamos fortaleciendo nuestro negocio y ejecutando nuestra estrategia, estructurada en torno a cuatro pilares. CRECIMIENTO RENTABLE Y SOSTENIBLE En Puerto Rico, aumentamos los préstamos un 7%, impulsados por crecimiento en préstamos comerciales, de automóviles e hipotecarios. Los depósitos aumentaron un 35%, registrando crecimiento en depósitos de individuos, comerciales y públicos. Ampliamos nuestra base de clientes en la isla, añadiendo 106,000 nuevos clientes durante el año. En los Estados Unidos, nuestra cartera de préstamos creció un 8% y los depósitos un 2%. Continuamos expandiendo nuestro negocio en nichos específicos, principalmente servicios a asociaciones de condominios y préstamos al sector de la salud, y logramos un fuerte crecimiento en nuestro programa de hipotecas residenciales. SIMPLICIDAD Seguimos agilizando nuestras operaciones para lograr una mayor eficiencia. Reorganizamos nuestra red de sucursales del área metropolitana de Nueva York, cerrando 11 sucursales, lo que nos permitirá reducir los gastos operacionales y aprovechar los recursos para enfocarnos en las pequeñas y medianas empresas. Tras un cargo antes de impuestos de $23 millones en el 2020, esperamos un ahorro anual de aproximadamente $12 millones en el futuro. ENFOQUE EN EL CLIENTE Seguimos reforzando las áreas de comunicación, reconocimiento y colaboración entre nuestros empleados para garantizar la sustentabilidad de nuestro marco de servicio. También, aprovechamos la fuerza de nuestros canales digitales y vimos una adopción acelerada que creemos que se mantendrá después de que pase la pandemia. En Puerto Rico, alcanzamos 1.1 millones de clientes activos en nuestra plataforma de banca digital, un aumento de 154,000 clientes desde el 2019. Además, captamos un 67% de las transacciones de depósitos a través de canales digitales, comparado con un 52% el año anterior. PREPARADOS PARA EL FUTURO Ante la situación del COVID-19, nos enfocamos en el bienestar de nuestros empleados en todos los frentes. Implementamos medidas de protección de la salud, aseguramos una comunicación constante y facilitamos oportunidades de desarrollo a través de nuestra oferta de aprendizaje virtual. En el ámbito de los controles internos, seguimos reforzando nuestro programa de cumplimiento, con un mayor enfoque en nuestra primera línea de defensa, y reforzando nuestro programa de ciberseguridad. Además, ejecutamos una serie de iniciativas para apoyar un entorno de trabajo remoto seguro. Aprovechamos talento de toda la organización, desarrollamos nuevas herramientas digitales y agilizamos nuestros procesos para brindar la ayuda tan necesaria a nuestros clientes. En la primera ronda, financiamos $1,400 millones en préstamos, que representan 28,000 pequeñas y medianas empresas y 278,000 empleados. El año pasado les compartí que habíamos iniciado un proceso para formalizar nuestras prioridades en temas de prácticas ambientales, sociales y de gobernanza (ESG, por sus siglas en inglés). Como parte de este proceso, nos comprometimos a establecer objetivos específicos, darle seguimiento a nuestro progreso y comunicar nuestros resultados regularmente. En el 2020, publicamos nuestro primer Informe de Sustentabilidad Corporativa, un hito importante en nuestro camino hacia una mayor transparencia y responsabilidad. Otro logro clave, fue la aprobación de una serie de revisiones a nuestra política de crédito comercial que incorporan formalmente las consideraciones de ESG en el proceso de análisis y evaluación de crédito. Confiamos que estos cambios darán lugar a decisiones crediticias más sustentables para el bienestar a largo plazo de nuestros mercados. Aunque satisfechos con nuestro progreso en este frente, reconocemos que hay oportunidades para seguir ampliando nuestros esfuerzos. Con este fin, creamos el Grupo de Comunicaciones Corporativas y Asuntos Públicos, integrando varias funciones existentes en la compañía para unificar y lograr un mayor impacto en nuestras comunicaciones estratégicas, asuntos gubernamentales y la estrategia ambiental, social y de gobernanza (ESG). Para liderar este grupo, María Cristina González Noguera se une a Popular como nuestra Directora de Comunicaciones y Asuntos Públicos. María Cristina tiene una amplia experiencia tanto en el sector público como en el privado. Más recientemente, fue primera vicepresidenta de Asuntos Públicos Globales en The Estée Lauder Companies y anteriormente fue Directora de Comunicación de la primera dama Michelle Obama y Asistente Especial del presidente Barack Obama. Estamos seguros de que aportará conocimientos fundamentales que nos ayudarán a consolidar nuestra posición como líder en sustentabilidad corporativa. Estoy sumamente orgulloso de nuestros logros durante el 2020. Siento un orgullo especial por el notable compromiso de nuestros compañeros en servir a nuestros clientes y de su capacidad para adaptarse a un entorno rápidamente cambiante, ya sea en la primera línea o trabajando desde casa. Somos afortunados de contar con un equipo de compañeros de gran talento y dedicación que enfrentaron estos retos con valor y resiliencia. También, agradecemos el consejo y el apoyo de nuestra Junta de Directores mientras trazábamos nuestro camino en estos tiempos difíciles. 10 | POPULAR, INC. RESPUESTA DE POPULAR AL COVID-19 APOYAMOS A NUESTROS CLIENTES • Continuamos proporcionando servicios bancarios esenciales, protegiendo siempre la salud de nuestros clientes y empleados. • Aprovechamos nuestra amplia gama de servicios digitales, eliminando algunos cargos y relajando límites en cajeros automáticos y determinadas transacciones, para promover el uso de estos canales como una alternativa segura a las visitas a las sucursales. • Ofrecimos facilidades de pago para préstamos hipotecarios, personales, de autos, tarjetas de crédito y préstamos comerciales. • Ayudamos a nuestros clientes comerciales a aprovechar las ayudas federales, como el Programa de Protección de Nómina (PPP) de la SBA. CUIDAMOS A NUESTROS EMPLEADOS • Continuamos pagando el salario completo a nuestros empleados, incluso cuando están en casa y no pueden trabajar. • Ofrecimos dos pagos especiales a empleados de primera línea trabajando de forma presencial. • Implantamos modalidades de trabajo alternativas para más de la mitad de nuestros empleados. • Ampliamos la cobertura del plan de salud a las nuevas contrataciones, que aún estaban en el periodo de prueba habitual de tres meses, y a los empleados a tiempo parcial. • Fomentamos el bienestar emocional, ofreciendo servicios como el Programa de Asistencia al Empleado y cursos de bienestar (mindfulness) en línea. APOYAMOS A NUESTRAS COMUNIDADES • Establecimos un fondo de $1 millón. • Donamos equipos de protección a personal locales de médico y apoyamos proyectos investigación relacionados con el COVID-19. • Apoyamos a las pequeñas y medianas empresas mediante donaciones a socios sin fines de lucro, que proporcionan orientación, asesoramiento y subvenciones de emergencia. Además, ofrecimos talleres virtuales en áreas relevantes como la planificación financiera, la captación de clientes a través de los medios sociales, y la gestión de recursos humanos en un entorno virtual. • Ofrecimos un módulo sencillo de educación financiera en línea, que permite a los usuarios evaluar su situación y les provee orientación y herramientas. • Proporcionamos donativos de emergencia a organizaciones sin fines de lucro para garantizar la continuidad de sus servicios. • Coordinamos con autoridades locales para promover y facilitar esfuerzos de vacunación contra el COVID-19, incluyendo el uso de nuestras instalaciones como centros de vacunación. INFORME ANUAL 2020 | 11 Al reflexionar sobre lo aprendido en el 2020, creo que hay tres factores que nos ayudaron a prosperar en tiempos tan inciertos. En primer lugar, el optimismo de nuestro equipo gerencial mantuvo a nuestros compañeros enfocados y comprometidos. Esta confianza en nuestra capacidad para abordar los retos relacionados con la pandemia y otros desafíos proviene de experiencias recientes, como los huracanes de 2017, que nos han demostrado que, en situaciones difíciles, nuestros compañeros se unen y dan la milla extra. En segundo lugar, en cada decisión nos aseguramos de poner a las personas en primer lugar, pensando en su seguridad, necesidades y preocupaciones. Por último, pusimos nuestro propósito por encima de nuestros planes. El mundo cambió muy rápidamente y nos adaptamos. Ajustamos nuestros planes, pero nos mantuvimos fieles a nuestro propósito, que es promover el bienestar y la prosperidad de nuestros clientes, compañeros, accionistas y comunidades. Estamos convencidos de que nuestro propósito constituye la base de nuestro éxito a largo plazo y de nuestra capacidad para aportar valor a nuestros accionistas. Las buenas organizaciones superan los tiempos difíciles. Las grandes organizaciones prosperan y salen fortalecidas de ellas. No tengo ninguna duda de que Popular es hoy aún más fuerte que hace un año. A pesar de la incertidumbre a la que todos nos enfrentamos, comenzamos el año 2021 con una base sólida y optimistas sobre las oportunidades que nos esperan. Gracias por su continuo apoyo. IGNACIO ÁLVAREZ Presidente y Principal Oficial Ejecutivo Popular, Inc. 25 AÑOS RESUMEN FINANCIERO HISTÓRICO (Dólares en millones, excepto información por acción) Información Financiera Seleccionada Ingreso neto (Pérdida Neta) Activos Préstamos Brutos Depósitos Capital de Accionistas Valor agregado en el mercado Rendimiento de Activos Promedio (ROAA) Rendimiento de Capital Común Promedio (ROACE) Por Acción Común1 Ingreso neto (Pérdida Neta) - Básico Ingreso neto (Pérdida Neta) - Diluido Dividendos (Declarados) Valor en los Libros Precio en el Mercado Activos por Área Geográfica Puerto Rico Estados Unidos Caribe y Latinoamérica Total Sistema de Distribución Tradicional Sucursales Bancarias Puerto Rico Islas Vírgenes Estados Unidos2 Subtotal Oficinas No Bancarias Popular Financial Holdings Popular Cash Express Popular Finance Popular Auto (incluyendo Reliable) Popular Leasing, U.S.A. Popular Mortgage Popular Securities Popular One Popular Insurance y Popular Risk Services Popular Insurance Agency, U.S.A. Popular Insurance V.I. E-LOAN EVERTEC Subtotal Total Sistema Electrónico de Distribución Cajeros Automáticos Propios y Administrados Puerto Rico Islas Vírgenes Estados Unidos Total Empleados (equivalente a tiempo completo) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 $185.2 $209.6 $232.3 $257.6 $276.1 $304.5 $351.9 $470.9 $489.9 $540.7 $357.7 16,764.1 19,300.5 23,160.4 25,460.5 28,057.1 30,744.7 33,660.4 36,434.7 44,401.6 48,623.7 47,404.0 9,779.0 11,376.6 13,078.8 14,907.8 16,057.1 18,168.6 19,582.1 22,602.2 28,742.3 31,710.2 32,736.9 10,763.3 11,749.6 13,672.2 14,173.7 14,804.9 16,370.0 17,614.7 18,097.8 20,593.2 22,638.0 24,438.3 1,262.5 1,503.1 1,709.1 1,661.0 1,993.6 2,272.8 2,410.9 2,754.4 3,104.6 3,449.2 3,620.3 $2,230.5 $3,350.3 $4,611.7 $3,790.2 $3,578.1 $3,965.4 $4,476.4 $5,960.2 $7,685.6 $5,836.5 $5,003.4 1.14% 1.14% 1.14% 1.08% 1.04% 1.09% 1.11% 1.36% 1.23% 1.17% 0.74% 16.17% 15.83% 15.41% 15.45% 15.00% 14.84% 16.29% 19.30% 17.60% 17.12% 9.73% $6.69 6.69 1.83 43.98 84.38 74% 22% 4% $7.51 7.51 2.00 51.83 123.75 74% 23% 3% $8.26 8.26 2.50 59.32 170.00 71% 25% 4% $9.19 9.19 3.00 57.54 139.69 71% 25% 4% $9.85 $10.87 $13.05 $17.36 $17.95 $19.78 $12.41 9.85 3.20 69.62 131.56 72% 26% 2% 10.87 3.80 79.67 13.05 4.00 91.02 17.36 5.05 17.92 6.20 96.60 109.45 145.40 169.00 224.25 288.30 68% 30% 2% 66% 32% 2% 62% 36% 2% 55% 43% 2% 19.74 6.40 118.22 211.50 53% 45% 2% 12.41 6.40 123.18 179.50 52% 45% 3% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 178 8 44 230 102 39 8 3 1 153 383 327 9 53 389 201 8 63 272 117 44 10 7 3 2 183 455 391 17 71 479 198 8 89 295 128 51 48 10 8 11 2 258 553 421 59 94 574 199 8 91 298 137 102 47 12 10 13 2 4 327 625 442 68 99 609 199 8 95 302 136 132 61 12 11 21 3 2 4 382 684 478 37 109 624 196 8 96 300 149 154 55 20 13 25 4 2 1 4 427 727 524 39 118 681 195 8 96 299 153 195 36 18 13 29 7 2 1 1 5 460 759 539 53 131 723 193 8 97 298 181 129 43 18 11 32 8 2 1 1 5 431 729 557 57 129 743 192 8 128 328 183 114 43 18 15 30 9 2 1 1 5 421 749 568 59 163 790 194 8 136 338 212 4 49 17 14 33 12 2 1 1 1 5 191 8 142 341 158 52 15 11 32 12 2 1 1 1 7 351 689 292 633 583 61 181 825 605 65 192 862 7,996 8,854 10,549 11,501 10,651 11,334 11,037 11,474 12,139 13,210 12,508 12 | POPULAR, INC. 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 $(64.5) $(1,243.9) $(573.9) $137.4 $151.3 $245.3 $599.3 $(313.5) $895.3 $216.7 $107.7 $618.2 $671.1 $506.6 44,411.4 38,882.8 34,736.3 38,815.0 37,348.4 36,506.9 35,748.8 33,086.8 35,761.7 38,661.6 44,277.3 47,604.6 52,115.3 65,926.0 29,911.0 26,268.9 23,803.9 26,458.9 25,314.4 25,093.6 24,706.7 22,053.2 23,129.2 23,435.4 24,942.5 26,559.3 27,466.1 29,484.7 28,334.4 27,550.2 25,924.9 26,762.2 27,942.1 27,000.6 26,711.1 24,807.5 27,209.7 30,496.2 35,453.5 39,710.0 43,758.6 56,866.3 3,581.9 3,268.4 2,538.8 3,800.5 3,918.8 4,110.0 4,626.2 4,267.4 5,105.3 5,198.0 5,103.9 5,435.1 6,016.8 6,028.7 $2,968.3 $1,455.1 $1,445.4 $3,21 1.4 $1,426.0 $2,144.9 $2,970.6 $3,523.4 $2,936.6 $4,548.1 $3,622.4 $4,719.3 $5,615.9 $4,744.6 -0.14% -3.04% -1.57% 0.36% 0.40% 0.68% 1.65% -0.89% 2.54% 0.58% 0.26% 1.33% 1.33% 0.85% -2.08% -44.47% -32.95% 4.37% 4.01% 6.37% 14.43% -7.04% 19.16% 4.07% 1.96% 11.39% 11.78% 9.36% $(2.73) $(45.51) $2.39 $(0.62) (2.73) 6.40 121.24 106.00 59% 38% 3% (45.51) 4.80 63.29 51.60 64% 33% 3% 2.39 0.20 38.91 22.60 65% 32% 3% (0.62) - 36.67 31.40 74% 23% 3% $1.44 1.44 - 37.71 13.90 74% 23% 3% $2.36 2.35 - 39.35 20.79 73% 24% 3% $5.80 $(3.08) $8.66 $2.06 $1.02 $6.07 $6.89 $5.88 5.78 (3.08) - 44.26 28.73 72% 25% 3% - 40.76 34.05 80% 17% 3% 8.65 0.30 48.79 28.34 75% 22% 3% 2.06 0.60 49.60 43.82 75% 23% 2% 1.02 1.00 49.51 35.49 76% 22% 2% 6.06 1.00 53.88 47.22 77% 21% 2% 6.88 1.20 62.42 58.75 78% 20% 2% 5.87 1.60 71.30 56.32 82% 17% 1% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 196 8 147 351 134 51 12 24 32 13 2 1 1 1 9 280 631 615 69 187 871 179 8 139 326 2 9 12 22 32 7 1 1 1 1 9 97 423 605 74 176 855 173 9 50 232 9 24 3 6 2 1 1 173 8 101 185 8 96 183 9 94 175 9 92 171 9 90 168 9 47 282 289 286 276 270 224 171 9 51 231 168 9 51 228 163 9 51 223 10 33 6 1 1 1 9 61 343 571 77 136 784 10 36 6 1 1 1 10 37 4 4 1 1 1 10 37 4 5 1 1 1 9 38 3 6 1 1 1 9 25 3 6 1 1 1 9 17 2 5 2 1 1 9 14 2 5 2 1 1 55 344 58 344 59 335 59 329 46 270 46 278 37 268 34 262 624 17 138 779 613 20 135 768 597 20 134 751 599 22 132 753 602 21 83 706 622 21 87 730 635 20 101 756 633 22 110 765 12 14 2 5 2 1 36 259 619 22 115 756 164 10 51 225 12 14 2 5 2 1 36 261 622 23 119 764 162 10 50 222 11 15 2 6 2 1 37 259 619 23 118 760 12,303 10,587 9,407 8,277 8,329 8,072 8,059 7,752 7,810 7,828 7,784 8,474 8,560 8,522 1Los datos de las acciones comunes han sido ajustados por las divisiones en acciones y la división de acciones a la inversa realizada en mayo 2012. 2Excluye una sucursal de Banco Popular de Puerto Rico en Nueva York. INFORME ANUAL 2020 | 13 POPULAR, INC. GERENCIA Y JUNTA DE DIRECTORES GERENCIA IGNACIO ÁLVAREZ Presidente y Principal Oficial Ejecutivo Popular, Inc. CAMILLE BURCKHART Vicepresidenta Ejecutiva, Principal Oficial de Informática y Estrategia Digital Grupo de Innovación, Tecnología y Operaciones Popular, Inc. BEATRIZ CASTELLVÍ ARMAS Vicepresidenta Ejecutiva y Principal Oficial de Seguridad Grupo de Seguridad Corporativa Popular, Inc. LUIS CESTERO Vicepresidente Ejecutivo Grupo de Banca Individual Banco Popular de Puerto Rico MANUEL A. CHINEA Vicepresidente Ejecutivo Popular, Inc. Principal Oficial de Operaciones Popular Bank JAVIER D. FERRER Vicepresidente Ejecutivo, Principal Oficial Legal, Asesor General, Secretario Corporativo y Principal Oficial Estratégico Popular, Inc. JUAN O. GUERRERO Vicepresidente Ejecutivo Grupo de Servicios Financieros y Seguros Banco Popular de Puerto Rico GILBERTO MONZÓN Vicepresidente Ejecutivo Grupo de Crédito a Individuo Banco Popular de Puerto Rico EDUARDO J. NEGRÓN Vicepresidente Ejecutivo Grupo de Administración Popular, Inc. ELI S. SEPÚLVEDA Vicepresidente Ejecutivo Grupo de Crédito Comercial Banco Popular de Puerto Rico LIDIO V. SORIANO Vicepresidente Ejecutivo y Principal Oficial de Riesgo Grupo Corporativo de Manejo de Riesgo Popular, Inc. CARLOS J. VÁZQUEZ Vicepresidente Ejecutivo y Principal Oficial Financiero Grupo de Finanzas Corporativas Popular, Inc. JUNTA DE DIRECTORES RICHARD L. CARRIÓN Presidente de la Junta de Directores Popular, Inc. IGNACIO ÁLVAREZ Presidente y Principal Oficial Ejecutivo Popular, Inc. JOAQUÍN E. BACARDÍ, III Presidente Edmundo B. Fernández, Inc. ALEJANDRO M. BALLESTER Presidente Ballester Hermanos, Inc. ROBERT CARRADY Presidente Caribbean Cinemas JOHN W. DIERCKSEN Principal Greycrest, LLC MARÍA LUISA FERRÉ Presidenta y Principal Oficial Ejecutiva FRG, Inc. C. KIM GOODWIN Inversionista Privada MYRNA M. SOTO Principal Oficial de Estrategia y Fiducia Forcepoint, LLC CARLOS A. UNANUE Presidente Goya de Puerto Rico 14 | POPULAR, INC. Financial Review and Supplementary Information Statistical Summaries Report of Management on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm Consolidated Statements of Financial Condition as of December 31, 2020 and 2019 Consolidated Statements of Operations for the years ended December 31, 2020, 2019 and 2018 Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018 Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2020, 2019 and 2018 Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018 Notes to Consolidated Financial Statements 53-57 58 59 62 63 64 65 66 67 POPULAR, INC. 2020 ANNUAL REPORT 1 Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements Overview Critical Accounting Policies / Estimates Statement of Operations Analysis Net Interest Income Provision for Credit Losses Non-Interest Income Operating Expenses Income Taxes Fourth Quarter Results Reportable Segment Results Statement of Financial Condition Analysis Assets Liabilities Stockholders’ Equity Regulatory Capital Off-Balance Sheet Arrangements and Other Commitments Contractual Obligations and Commercial Commitments Risk Management Market / Interest Rate Risk Liquidity Enterprise Risk Management Adoption of New Accounting Standards and Issued but Not Yet Effective Accounting Standards Statistical Summaries Statements of Financial Condition Statements of Operations Average Balance Sheet and Summary of Net Interest Income Quarterly Financial Data 2 POPULAR, INC. 2020 ANNUAL REPORT 3 4 10 15 15 17 18 19 20 20 20 22 22 23 24 24 26 26 27 27 33 51 52 53 54 55 57 Inc.’s limitation, statements about Popular results of operations, plans, objectives, FORWARD-LOOKING STATEMENTS The information included in this report contains certain forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, including, without (the “Corporation,” “Popular,” “we,” “us,” “our”) business, financial future condition, performance and the effects of the COVID-19 pandemic on our business. Forward-looking statements in this Annual Report also include the expected benefits of the Popular Bank New related York branches optimization strategy, as well as estimates of pre-tax charges and anticipated annual operating expense savings. 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 the Puerto Rico Oversight, proceedings under Title III of 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 assessments; taken by governmental authorities private borrowers could be directly affected by governmental action; the amount of Puerto Rico public sector deposits held at the Corporation, whose future balances are uncertain and difficult to predict and may be impacted by factors such as the amount of Federal funds received by the P.R. Government in connection with the COVID-19 pandemic and the rate of expenditure of such funds, as well as the timeline and outcome of current Puerto Rico debt restructuring proceedings under Title III of PROMESA; the scope and duration of the COVID-19 pandemic, actions in response to the pandemic, and the direct and indirect impact of the pandemic on us, our customers, service providers and third parties; 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”) regulatory approvals that may be necessary to undertake certain actions or consummate strategic transactions such as acquisitions and dispositions; unforeseen or catastrophic events, including extreme weather events, other natural disasters, man-made disasters or the emergence of pandemics epidemics and other health-related crises, which could cause a disruption in our operations or other adverse consequences for our business; the relative strength or weakness of the consumer and commercial credit sectors and of the real estate markets in Puerto Rico and the other markets 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., transaction processing and our provider of core financial 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 results or performance to differ materially from those expressed in these forward-looking statements include the following: negative economic conditions that adversely affect housing prices, the job market, consumer confidence and spending habits which may affect, among other things, the level of non-performing assets, charge-offs and provision expense; changes in market rates and prices which may adversely impact the value of financial assets and liabilities; potential judgments, claims, damages, penalties, fines, enforcement actions and reputational future litigation and damage resulting from pending or regulatory or government investigations or actions, including as in which borrowers are located; could cause events or factors that POPULAR, INC. 2020 ANNUAL REPORT 3 a result of our participation in and execution of government programs related to the COVID-19 pandemic; changes in accounting standards, rules and interpretations; our ability to grow our core businesses; decisions to downsize, sell or close units or otherwise change our business mix; and management’s ability to identify and manage these and other risks. Further, the COVID-19 the potential effects of statements about pandemic on our business, financial condition, liquidity and results of operation may constitute forward-looking statements and are subject to the risk that actual effects may differ, possibly materially, from what is reflected in those forward- looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control, including actions taken by governmental authorities in response to the pandemic and the direct and indirect impact of the pandemic on us, our customers, service providers and third parties. Moreover, legal and regulatory proceedings, as discussed in “Part I, Item 3. Legal Proceedings” ended of December 31, 2020, is inherently uncertain and depends on judicial interpretations of law and the findings of regulators, judges and/or juries. The description of the Corporation’s business and risk factors contained in Part I, Items 1 and 1A of the Corporation’s Form 10-K for the year ended December 31, 2020 discusses additional information about the business of the Corporation and the material risk factors and uncertainties to which the Corporation is subject that, in addition to the other information in this report, readers should consider. the Corporation’s Form 10-K for the outcome of year the All forward-looking statements included in this report are based upon information available to the Corporation as of the date of this report, 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. OVERVIEW The Corporation is a diversified, publicly-owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation has operations in Puerto Rico, the United States (“U.S.”) mainland, and the U.S. and British Virgin Islands. In Puerto Rico, the Corporation provides retail, mortgage, and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as investment banking, broker- dealer, auto and equipment leasing and financing, and insurance services through specialized subsidiaries. In the U.S. mainland, the Corporation provides retail, mortgage and commercial banking services through its New York-chartered banking subsidiary, Popular Bank (“PB” or “Popular U.S.”) which has branches located in New York, New Jersey and Florida. Note 36 to the Consolidated Financial Statements presents information about the Corporation’s business segments. 4 POPULAR, INC. 2020 ANNUAL REPORT The Corporation has several investments which it accounts for under the equity method. These include the 16.16% interest in EVERTEC, a 15.84% interest in Centro Financiero BHD Leon, S.A. (“BHD Leon”), among other investments in limited partnerships which mainly hold loans and investment securities. EVERTEC provides transaction processing services throughout the Caribbean and Latin America, and also provides to the Corporation core banking and transaction processing and other services. BHD León is a diversified financial services institution operating in the Dominican Republic. For the year the Corporation recorded ended December approximately $43.3 million in earnings from these investments on an aggregate basis. The carrying amounts of these investments as of December 31, 2020 were $250.5 million. 31, 2020, SIGNIFICANT EVENTS Coronavirus (COVID-19) Pandemic In December 2019, a novel strain of coronavirus (COVID-19) surfaced in Wuhan, China and has since spread globally to other countries and jurisdictions, including the mainland United States and Puerto Rico. In March 2020, the World Health Organization declared COVID-19 to be a pandemic. The COVID-19 pandemic has significantly disrupted and negatively impacted the global economy, disrupted global supply chains, created significant volatility and disruption in financial markets, levels increased worldwide and decreased consumer confidence and commercial activity generally, including in the markets in which we do business, leading to an increased risk of delinquencies, defaults and foreclosures. unemployment significantly The disruptions related to the COVID-19 pandemic had an impact on the macroeconomic environment and therefore on the financial results of the Corporation. Although certain measures initially imposed in response to the pandemic by the governments of Puerto Rico, the United States and United States Virgin Islands, including lockdowns, business closures, mandatory curfews and limits to public activities, were thereafter gradually relaxed throughout 2020 to allow for the gradual reopening of the economy, certain restrictions remain in place, which result in many businesses not being able to operate at their full capacity. The Corporation’s results for the third and fourth quarters of 2020 reflect the benefit of increased economic activity resulting from such reopening and the related improvement in the macroeconomic environment, as well as the impact of the various government stimulus programs launched in response to the pandemic. Beginning in March 2020, the Corporation implemented several financial relief programs in response to the pandemic, including of payment moratoriums, foreclosures and other collection activity, as well as waivers of certain fees and service charges. suspensions loan The following is a summary of the Corporation undertook in response to the COVID-19 outbreak: the main steps Employees • Broadened remote working capabilities through the use of technology; • Executed actions to support employees working in our including sanitation measures, social distance, offices, staggered shifts and the distribution of masks and gloves; • Provided special compensation incentives to front-line employees (in our branches and call centers); and • Expanded health insurance benefits, including free COVID-19 tests telephone consultations to employees and covered family members. Extended health insurance part-time employees. availability of and the coverage to Customers • Published dedicated phoneline and online tool to request financial assistance for customers impacted by COVID-19; • Offered payment moratoriums for eligible customers in mortgage, consumer loans, credit cards, auto loans and leases and certain commercial credit facilities, subject to certain terms and conditions; • Suspended residential property foreclosures and evictions, as well as most other collection activity; • Waived ATM fees and early withdrawal penalties on Certificates of Deposits; • Offered expedited lines of credit of up to $100,000 for BPPR commercial clients with favorable terms; and • Mobilized to offer Small Business Administration loans under the Paycheck Protection Program (“PPP”) to affected businesses; funded approximately $1.4 billion of PPP loans. Community • Established a fund with an initial contribution of $1 million to support efforts in three primary areas: a) medical equipment and healthcare projects that combat and medium COVID-19; small and business businesses, providing financial advice continuity support; and c) non-profit organizations to ensure the continuity of their services. entrepreneurs, b) During the third quarter of 2020, the Corporation reinstated the imposition of the fees it elected to waive in connection with such financial relief programs and resumed delinquent loan collection efforts. During 2020, the Corporation had granted loan payment moratoriums to 127,117 eligible retail customers with an aggregate book value of $4.4 billion, and to 5,099 eligible commercial clients with an aggregate book value of $3.9 billion as detailed below. These include loan payment moratoriums of government guaranteed loans that qualified for disaster relief programs as well as other available alternatives. While COVID-19-related moratoriums were offered beginning in March of 2020, certain clients benefitted from loan payment moratoriums offered by the Corporation since mid-January 2020 as a result of seismic activity in the Southern region of the island in January 2020. At December 31, 2020, 127,857 loans with an aggregate book value of $7.8 billion had already completed their payment moratorium period, while 4,359 loans with an aggregate book value of $0.5 billion remained under the moratorium. As of the end of the year, 97% of COVID-19 payment deferrals had expired. After excluding government guaranteed loans, 115,079 of remaining loans, or 94%, with an aggregate book value of $6.9 billion were current on their payments as of December 31, 2020. Loans considered current exclude for which the COVID-19 related modification has expired but have subsequently been subject to other loss mitigation alternatives. Certain hardhit sectors, such as the hospitality sector, may require additional concessions in 2021. Refer to the Credit Risk section of the MD&A for additional information regarding the moratoriums granted by loan portfolio. those loans The delinquency status of loans subject to the Corporation’s payment moratorium programs remains unaltered during the payment deferral period and the Corporation continues to accrue interest income during such term. our capital, and financial liquidity results of operations regulatory The extent to which the pandemic further impacts our condition business, (including and realizability of deferred tax assets), as well as the operations of our clients, customers, service providers and suppliers, will depend on future developments, which are highly uncertain, including the scope and duration of the pandemic, the speed and strength of economic recovery and actions taken by governmental authorities and other third parties in response thereto. ratios Impact of the adoption of the current expected credit loss model (“CECL”) The Corporation adopted the new CECL accounting standard effective on January 1, 2020, as discussed in Note 3- “New Accounting Pronouncements”. As a result of the adoption of the CECL model, the Corporation recorded a net increase in its loan portfolio, allowance for credit unfunded commitments guarantees amounting to $306 million. The Corporation also recognized an allowance for credit losses of approximately $13 million related to portfolio. The debt adjustments to reflect the increase in the allowance for credit losses was recorded as a decrease to the opening balance of retained earnings at January 1, 2020, net of deferred tax asset, losses related to its held-to-maturity and credit securities recourse its POPULAR, INC. 2020 ANNUAL REPORT 5 under the ASR. The Corporation accounted for the ASR as a treasury stock transaction. This transaction increased by $2.20 the Corporation’s tangible book value per share. Redemption of Series B Preferred Stock On February 24, 2020, the Corporation redeemed all outstanding shares of its 8.25% Non-Cumulative Monthly Income Preferred Stock, Series B (“Series B Preferred Stock”). The Series B Preferred Stock was redeemed at the redemption price of $25.00 per share, plus $0.1375 in accrued and unpaid dividends on each share, for a total payment per share in the amount of $25.1375 and a total aggregate payment of $28.2 million. Increase in Common Stock Dividends On January 9, 2020, the Corporation announced an increase in its quarterly common stock dividend from $0.30 to $0.40 per share, payable commencing in the second quarter of 2020, subject to the approval of the Corporation’s Board of Directors. The quarterly cash dividend of $0.40 per share has been paid on April 1, 2020, July 1, 2020, October 1, 2020 and January 4, 2021 to shareholders of the Corporation’s Board of Directors approved a $0.40 quarterly cash dividend per share to be paid on April 1, 2021 to shareholders of record at the close of business on March 18, 2021. record. On February 26, 2021, (“FNMA’’) Loan Repurchase Transaction During the quarter ended September 30, 2020, the Corporation from its Ginnie Mae completed bulk loan repurchases (“GNMA’’), Fannie Mae and Freddie Mac (‘’FHMLC’’) (combined ‘’GSEs’’) loan servicing portfolios with an aggregate balance of $807.6 million. At September 30, 2020, loans with an aggregate unpaid principal balance of $106 million, corresponding to the portfolio acquired from FNMA and FHMLC, had the Corporation’s COVID-19 relief or other loss mitigation programs. been modified under The following table presents a summary of the impact of the transactions, excluding the effects on operations subsequent to the acquisition. The transactions were executed to limit future exposures to principal and interest advances as well as sundry losses and to deploy liquidity to increase interest income. except for approximately $17 million related to purchased credit impaired (“PCI”) loans previously accounted under ASC Subtopic 310-30, which resulted in a reclassification between certain contra loan balance accounts to the allowance for credit losses. As part of the adoption of CECL, the Corporation made the election to break the existing pools of PCI loans, which were excluded from non-performing status, in accordance with the applicable accounting guidance. Upon being measured at the individual loan level, these loans are no longer excluded from non-performing status, resulting in an increase of $278 million in NPLs as of January 1, 2020. This increase included $144 million in loans that were over 90 days past due and $134 million in loans that were not delinquent in their payment terms but were reported as non-performing due to other credit quality considerations. The Corporation availed itself of the option to phase in over a period of three years, beginning on January 1, 2022, the day-one effects on regulatory capital arising from the adoption of CECL. Refer to the Regulatory Capital section of this MD&A for additional information on regulatory capital. Common Stock Repurchase Plan On May 27, 2020, the Corporation completed a $500 million accelerated share repurchase transaction (“ASR”) with respect to its common stock. On March 19, 2020 (the “early the dealer counterparty to the ASR termination date”), exercised its right under the ASR agreement to terminate the transaction because the trading price of the Corporation’s common stock fell below a specified level due to the effects of the COVID-19 pandemic on the global markets. As a result of such early termination, the final settlement of the ASR, which was originally expected to occur during the fourth quarter of 2020, occurred during the second quarter of 2020. Under the ASR, the Corporation prepaid $500 million and received from the dealer counterparty an initial delivery of 7,055,919 shares of common stock on February 3, 2020. As part of the final settlement of the ASR, the Corporation received an additional 4,763,216 shares of common stock after the early the Corporation repurchased termination date. 11,819,135 shares at an average price per share of $42.3043 In total, 6 POPULAR, INC. 2020 ANNUAL REPORT Table 1 - Loan Repurchase Transaction Transaction highlights (in thousands) Balance Sheet: Repurchased mortgage loans Loan premium [2] Allowance for credit losses (“ACL’’) [2] Advanced interest receivable Income Statement: Adjustments to indemnity reserves Mortgage banking activities: Mortgage servicing fees Mortgage servicing rights fair value adjustments Losses on repurchased loans, including interest advances Total mortgage banking activities Pre-tax income (loss) FHLMC & FNMA GNMA [1] Total $119,764 6,297 (4,144) 816 $687,871 – – 20,575 $807,635 6,297 (4,144) 21,391 $ 5,052 $ – $ 5,052 208 (936) – (728) 3,145 (7,819) (10,548) (15,222) 3,353 (8,755) (10,548) (15,950) $ 4,324 $ (15,222) $ (10,898) [1] A portion of the acquired loans amounting to $324 million was already recorded as part of the Corporation’s loan portfolio balance, in accordance with U.S. GAAP, due to the delinquency status of the loans and the Corporation’s right but not the obligation to repurchase the assets. [2] The repurchased FNMA loans were previously sold with credit recourse and are considered Purchased Credit Deteriorated (“PCD”) at the time of repurchase. Therefore, the establishment of the related ACL is recorded as an addition to the purchase price and the loan premium amortized (decrease interest income) over the life of the loan. Popular Bank’s New York Branches Realignment On October 27, 2020, Popular Bank (“PB”), the United States mainland banking subsidiary of the Corporation, authorized and approved a strategic realignment of its New York Metro branch network that resulted in eleven (11) branch closures and related staffing reductions. The branch closures were completed on January 29, 2021. This strategic realignment, which will allow PB to reduce its operating expenses, leverage resources to enhance its focus on small and medium size businesses, as well as support changing customer behaviors, was approved after an assessment of PB’s current branch network, including its usage, proximity to its other branches and customer needs. PB will maintain in its New York Metro region its largest regional retail network in the located mainland US, with twenty-seven (27) branches throughout Brooklyn, Bronx, Manhattan and Queens, as well as in northern New Jersey. During the fourth quarter of 2020, the Corporation recorded a total pre-tax charge of approximately $23.2 million related to the branch realignment. This aggregate pre-tax charge included approximately $2.1 million associated with severance and related benefit costs for the 83 impacted employees and charges of approximately $21.1 million related to the abandonment of real property leases, including the impairment of right-of-use assets. The Corporation expects to incur an additional $2.0 million in expenses during 2021 related to this initiative of expense annual and approximately $12.3 million as a result of this strategic realignment. anticipates operating savings Refer to Table 2 for selected financial data for the past five years. POPULAR, INC. 2020 ANNUAL REPORT 7 Table 2 - Selected Financial Data (Dollars in thousands, except per common share data) CONDENSED STATEMENTS OF OPERATIONS Interest income Interest expense Net interest income Provision for credit losses Non-interest income Operating expenses Income tax expense Income from continuing operations Income from discontinued operations, net of tax Net income Net income applicable to common stock PER COMMON SHARE DATA Net income: Basic: From continuing operations From discontinued operations Total Diluted: From continuing operations From discontinued operations Total Dividends declared Common equity per share Market value per common share Outstanding shares: Average - basic Average - assuming dilution End of period AVERAGE BALANCES Net loans [1] Earning assets Total assets Deposits Borrowings Total stockholders’ equity PERIOD END BALANCE Net loans [1] Allowance for loan losses Earning assets Total assets Deposits Borrowings Total stockholders’ equity SELECTED RATIOS 2020 Years ended December 31, 2018 2017 2019 2016 $ 2,091,551 234,938 $ 2,260,793 369,099 $ 2,021,848 286,971 $ 1,725,944 223,980 $ 1,634,573 212,518 1,856,613 292,536 512,312 1,457,829 111,938 506,622 – 506,622 504,864 5.88 – 5.88 5.87 – 5.87 1.60 71.30 56.32 $ $ $ $ $ $ $ 1,891,694 165,779 569,883 1,477,482 147,181 671,135 – 671,135 667,412 6.89 – 6.89 6.88 – 6.88 1.20 62.42 58.75 $ $ $ $ $ $ $ 1,734,877 228,072 652,494 1,421,562 119,579 618,158 – 618,158 614,435 6.07 – 6.07 6.06 – 6.06 1.00 53.88 47.22 $ $ $ $ $ $ $ 1,501,964 325,424 419,167 1,257,196 230,830 107,681 – 107,681 103,958 1.02 – 1.02 1.02 – 1.02 1.00 49.51 35.49 1,422,055 170,016 297,936 1,255,635 78,784 215,556 1,135 216,691 212,968 2.05 0.01 2.06 2.05 0.01 2.06 0.60 49.60 43.82 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 85,882,371 85,975,259 84,244,235 96,848,835 96,997,800 95,589,629 101,142,258 101,308,643 99,942,845 101,966,429 102,045,336 102,068,981 103,275,264 103,377,283 103,790,932 $28,384,981 56,404,607 59,583,455 51,585,779 1,321,772 5,419,938 $29,484,651 896,250 62,989,715 65,926,000 56,866,340 1,346,284 6,028,687 $26,806,368 44,944,793 50,341,827 42,218,796 1,404,459 5,713,517 $27,466,076 477,708 48,674,705 52,115,324 43,758,606 1,294,986 6,016,779 $ 25,062,730 43,275,366 46,639,858 38,487,422 1,879,229 5,444,152 $ 26,559,311 569,348 44,325,489 47,604,577 39,710,039 1,537,673 5,435,057 $ 23,511,293 37,668,573 41,404,139 33,182,522 2,000,840 5,345,244 $ 24,942,463 623,426 40,680,553 44,277,337 35,453,508 2,023,485 5,103,905 $ 23,062,242 33,713,158 37,613,742 29,066,010 2,339,399 5,278,477 $ 23,435,446 540,651 34,861,193 38,661,609 30,496,224 2,055,477 5,197,957 Net interest margin (non-taxable equivalent basis) Net interest margin (taxable equivalent basis) -Non-GAAP Return on assets Return on common equity Tier I capital Total capital [1] Includes loans held-for-sale and covered loans. 3.29% 3.62 0.85 9.36 16.33 18.81 4.03% 4.43 1.33 11.78 17.76 20.31 4.01% 4.34 1.33 11.39 16.90 19.54 3.99% 4.28 0.26 1.96 16.30 19.22 4.22% 4.48 0.58 4.07 16.48 19.48 8 POPULAR, INC. 2020 ANNUAL REPORT Non-GAAP financial measures Net interest income on a taxable equivalent basis Net interest income, on a taxable equivalent basis, is presented with its different components on Table 4 for the year ended December 31, 2020 as compared with the same period in 2019, segregated by major categories of interest earning assets and interest-bearing liabilities. The interest earning assets include investment securities and loans that are exempt from income tax, principally in Puerto Rico. The main sources of tax-exempt interest income are certain investments in obligations of the U.S. Government, its agencies and sponsored entities, and certain obligations of the Commonwealth of Puerto Rico and its agencies and assets held by the Corporation’s international banking entities. To facilitate the comparison of all interest related to these assets, the interest income has been converted to a taxable equivalent basis, using the applicable statutory income tax rates for each period. The taxable equivalent computation considers the interest expense and other related expense disallowances required by the Puerto Rico tax law. Under Puerto Rico tax law, 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 the comparison of revenues arising from taxable and exempt sources. information since facilitates it 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 year ended December 31, 2020 The Corporation’s net income for the year ended December 31, 2020 amounted to $506.6 million, compared to a net income of $671.1 million for 2019. The 24% year-over-year decrease was largely driven by a higher provision expense, lower fees and lower net interest income related to the economic disruption caused by the pandemic. The discussion that follows provides highlights of for the Corporation’s ended December 31, 2020 compared to the results of operations of 2019. It also provides some highlights with respect to the Corporation’s financial condition, credit quality, capital and liquidity. Table 2 presents a five-year the components of net income (loss) as a percentage of average total assets. results of operations summary of the year Table 3 - Components of Net Income as a Percentage of Average Total Assets 2020 2019 2018 2017 2016 Net interest income Provision for credit losses Mortgage banking activities Net gain and valuation adjustments on investment securities Other-than-temporary impairment losses on debt securities Net gain on sale of loans, including valuation adjustments on loans held-for-sale Indemnity reserve on loans sold expense FDIC loss share income (expense) Other non-interest income Total net interest income and non-interest income, net of provision for credit losses Operating expenses Income before income tax Income tax expense Net income 3.12% 3.76% 3.72% 3.63% 3.78% (0.49) (0.49) 0.11 0.02 – 0.01 – – – – (0.03) – 0.20 – 1.12 0.83 (0.79) 0.06 – (0.02) – (0.05) (0.02) 1.05 (0.45) 0.15 – – 0.02 (0.05) (0.55) 1.22 (0.33) 0.06 – – – – – 1.07 3.49 (2.45) 4.56 (2.94) 4.63 (3.05) 3.86 (3.04) 4.12 (3.34) 1.04 0.19 1.62 0.29 1.58 0.26 0.82 0.56 0.78 0.20 0.85% 1.33% 1.32% 0.26% 0.58% Net interest income for the year ended December 31, 2020 was $1.9 billion, a decrease of $35.1 million when compared to 2019. The decrease in net interest income was mainly driven by lower interest income from money market investments and loans (mostly commercial and consumer loans), partially offset by lower interest expense on deposits, despite the higher volume. The net ended interest margin for December 31, 2020 was 3.29% compared to 4.03% for the same period in 2019 and was impacted by declines in market rates as well as the change in the earning assets composition. On a taxable equivalent basis, net interest margin was 3.62% in 2020, the year compared to 4.43% in 2019. Refer to the Net Interest Income section of this MD&A for additional information. The Corporation’s total provision for credit losses amounted to $292.5 million for the year ended December 31, 2020, compared with $165.8 million for 2019. The increase in the provision for credit losses is due to the adoption of the new CECL accounting standard effective January 1, 2020, and deterioration in the economic outlook resulting from the impact totaled $824 million at December 31, 2020, reflecting an increase of $174 million when compared to December 31, 2019. As part of of COVID-19. Non-performing assets POPULAR, INC. 2020 ANNUAL REPORT 9 the adoption of CECL, the Corporation made the election to break the existing pools of PCI loans and measure them on an individual loan level. Refer to the Provision for Credit Losses and Credit Risk sections of this MD&A for information on the allowance for credit losses, non-performing assets, troubled debt restructurings, net charge-offs and credit quality metrics. charges on deposit Non-interest income for the year ended December 31, 2020 amounted to $512.3 million, a decrease of $57.6 million, when compared with 2019, mostly due to lower service fees and service to economic disruptions related to the pandemic, and the waiver of service charges and late fees. Refer to the Non-Interest Income section of information on the major variances of the different categories of non-interest income. this MD&A for additional accounts due Total operating expenses amounted to $1.5 billion for the year 2020, a decrease of $19.7 million, when compared to the same period in 2019 as the Corporation took certain cost saving measures to mitigate the effects of the pandemic on its results of operations. Refer to the Operating Expenses section of this MD&A for additional information. Income tax expense amounted to $111.9 million for the year ended December 31, 2020, compared with an income tax expense of $147.2 million for the previous year. The decrease in income tax expense for the year is mainly due to a lower pre-tax income. Refer to the Income Taxes section in this MD&A and Note 34 to the consolidated financial statements for additional information on income taxes. in debt securities available-for-sale, At December 31, 2020, the Corporation’s total assets were $65.9 billion, compared with $52.1 billion at December 31, 2019. The increase of $13.8 billion is mainly driven higher investments the Corporation deployed the liquidity provided by the increase in deposit balances; and the increase in loans held-in-portfolio mainly driven by loans funded under the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), in addition to the bulk mortgage loan repurchases from the Corporation’s GSEs loan servicing portfolios. Refer to the Statement of Condition Analysis section of this MD&A for additional information. as Deposits amounted to $56.9 billion at December 31, 2020, compared with $43.8 billion at December 31, 2019. Table 8 presents a breakdown of deposits by major categories. The increase in deposits was mainly due to higher Puerto Rico public sector deposits and higher balances in retail and commercial demand and savings deposits accounts. The Corporation’s borrowings remained flat at $1.3 billion at December 31, 2020. Refer to Note 16 to the Consolidated information on the Financial Corporation’s borrowings. Statements detailed for Refer to Table 7 in the Statement of Financial Condition Analysis section of this MD&A for the percentage allocation of the composition of the Corporation’s financing to total assets. Stockholders’ equity remained flat at $6.0 billion at 10 POPULAR, INC. 2020 ANNUAL REPORT available-for-sale offset by capital December 31, 2020, compared with December 31, 2019. The net activity for the year was mainly due to net income of $506.6 million for the year 2020, unrealized gains on debt securities transactions including an accelerated share repurchase and the redemption of 2008 Series B preferred stock completed during 2020. The Corporation and its banking subsidiaries continue to be well- capitalized at December 31, 2020. The Common Equity Tier 1 Capital ratio at December 31, 2020 was 16.26%, compared to 17.76% at December 31, 2019. For financial further discussion of operating results, condition and business risks refer to the narrative and tables included herein. The shares of the Corporation’s common stock are traded on the NASDAQ Global Select Market under the symbol BPOP. CRITICAL ACCOUNTING POLICIES / ESTIMATES followed by the The accounting and reporting policies subsidiaries conform with generally Corporation and its accepted accounting principles in the United States of America (“GAAP”) and general practices within the financial services industry. The Corporation’s significant accounting policies are described in detail in Note 2 to the Consolidated Financial Statements and should be read in conjunction with this section. Critical accounting policies require management to make estimates and assumptions, which involve significant judgment about the effect of matters that are inherently uncertain and that involve a high degree of subjectivity. 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. The following MD&A section is a summary of what management considers the Corporation’s critical accounting policies and estimates. its debt debt basis, trading such as securities, Fair Value Measurement of Financial Instruments The Corporation currently measures at fair value on a recurring basis securities available-for-sale, certain equity securities, derivatives and mortgage servicing rights. Occasionally, the Corporation may fair value other assets on a be required to record at nonrecurring loans held-in-portfolio that are collateral dependent and certain other assets. These nonrecurring fair value adjustments typically lower of cost or fair value result accounting or write-downs of individual assets. assets and liabilities measured at fair value under the three-level hierarchy. The level within the hierarchy is based on whether the inputs to the valuation methodology used for fair value measurement are observable. The Corporation categorizes from the application of loans held-for-sale, its The Corporation requires the use of observable inputs when available, in order to minimize the use of unobservable inputs to determine fair value. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The amount of judgment involved in estimating the fair value of a financial instrument depends upon the availability of quoted market prices or observable market parameters. In addition, it may be affected by other factors such as the type of instrument, the liquidity of the market for the instrument, transparency around the inputs the contractual characteristics of the instrument. to the valuation, as well as Broker quotes used for fair value measurements inherently reflect any lack of liquidity in the market since they represent an exit price from the perspective of the market participants. Financial assets that were fair valued using broker quotes amounted to $6 million at December 31, 2020, of which $1 million were Level 3 assets and $ 5 million were Level 2 assets. Level 3 assets consisted principally of tax-exempt GNMA mortgage-backed securities. Fair value for these securities was based on an internally-prepared matrix derived from local broker quotes. The main input used in the matrix pricing was non-binding local broker quotes obtained from limited trade activity. Therefore, these securities were classified as Level 3. Trading Debt Securities and Debt Securities Available-for-Sale The majority of the values for trading debt securities and debt securities available-for-sale are obtained from third-party pricing services and are validated with alternate pricing sources when available. Securities not priced by a secondary pricing source are documented and validated internally according to their significance to the Corporation’s financial statements. Management has established materiality thresholds according to the investment class to monitor and investigate material deviations in prices obtained from the primary pricing service provider and the secondary pricing source used as support for the valuation results. During the year ended December 31, 2020, the Corporation did not adjust any prices obtained from pricing service providers or broker dealers. including the relative liquidity of Inputs are evaluated to ascertain that they consider current market conditions, the market. When a market quote for a specific security is not available, the pricing service provider generally uses observable data to derive an exit price for the instrument, such as benchmark yield curves and trade data for similar products. To the extent trading data is not available, the pricing service provider relies on specific information including dialogue with brokers, buy side clients, credit ratings, spreads to established benchmarks and transactions on similar securities, to draw the evaluated correlations based on the characteristics of instrument. If for any reason the pricing service provider cannot observe data required to feed its model, it discontinues pricing the instrument. During the year ended December 31, 2020, none of the Corporation’s debt securities were subject to pricing discontinuance by the pricing service providers. The pricing methodology and approach of our primary pricing service providers is concluded to be consistent with the fair value measurement guidance. its Furthermore, management assesses the fair value of portfolio of investment securities at least on a quarterly basis. Securities are classified in the fair value hierarchy according to product type, characteristics and market liquidity. At the end of each period, management assesses the valuation hierarchy for each asset or liability measured. The fair value measurement analysis performed by the Corporation includes validation pricing review of market procedures methodology, assumption and level hierarchy changes, and evaluation of distressed transactions. changes, and Refer to Note 27 to the Consolidated Financial Statements for a description of the Corporation’s valuation methodologies used for the assets and liabilities measured at fair value. Loans and Allowance for Credit Losses Interest on loans is accrued and recorded as interest income based upon the principal amount outstanding. Non-accrual loans are those loans on which the accrual of interest is discontinued. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is charged against interest income and the loan is accounted for either on a cash-basis method or on the cost-recovery method. Loans designated as non-accruing are returned to accrual status when remaining the Corporation expects contractual principal and interest. The determination as to the ultimate collectability of the loan’s balance may involve management’s judgment in the evaluation of the borrower’s financial condition and prospects for repayment. repayment the of Refer to the MD&A section titled Credit Risk, particularly the Non-performing a detailed description of the Corporation’s non-accruing and charge-off policies by major loan categories. sub-section, assets for the loans, adjusted for expected prepayments, One of the most critical and complex accounting estimates is associated with the determination of the allowance for credit losses (“ACL”). Since the adoption of CECL on January 1, 2020, the Corporation establishes an ACL for its loan portfolio based on its estimate of credit losses over the remaining contractual term of in accordance with ASC Topic 326. An ACL is recognized for all loans including originated and purchased loans, since inception, with a corresponding charge to the provision for credit losses, except for purchased credit deteriorated (“PCD”) loans as explained below. The Corporation follows a methodology to establish the ACL which includes a reasonable and supportable considering estimating credit forecast period for quantitative and qualitative factors as well as the economic outlook. As part of this methodology, management evaluates various macroeconomic scenarios provided by third parties. At December 31, 2020, management applied probability weights to the outcome of the selected scenarios. losses, POPULAR, INC. 2020 ANNUAL REPORT 11 is used when repayment The Corporation has designated as collateral dependent loans secured by collateral when foreclosure is probable or when foreclosure is not probable but the practical expedient is used. The practical expedient is expected to be provided substantially by the sale or operation of the collateral and the borrower is experiencing financial difficulty. The ACL of collateral dependent loans is measured based on the fair value of the collateral less costs to sell. The fair value of the collateral is based on appraisals, which may be adjusted due to their age, and the type, location, and condition of the property or area or general market conditions to reflect the expected change in value between the effective date of the appraisal and the measurement date. In addition, refer to the Credit Risk section of this MD&A for detailed information on the Corporation’s collateral value estimation for other real estate. 310-10-35. This methodology Prior to the adoption of CECL, the Corporation followed a systematic methodology to establish and evaluate the adequacy of the ACL to provide for probable losses in the loan portfolio in accordance with the guidance of loss contingencies in ASC Subtopic 450-20 and loan impairment guidance in ASC Section the consideration of factors such as current economic conditions, portfolio risk characteristics, prior loss experience and results of periodic credit reviews of individual loans. Previously, under ASC Section 310-10-35, an allowance for loan impairment was recognized to the extent that the carrying value of an impaired loan exceeded the present value of the expected future cash flows discounted at the loan’s effective rate, the observable market price of the loan, if available, or the fair value of the collateral if the loan was collateral dependent. included that A restructuring constitutes a TDR when the Corporation separately concludes the restructuring constitutes a concession and the debtor is experiencing financial difficulties. For information on the Corporation’s TDR policy, refer to Note impact of 2. The concessions through discounting modified contractual cash flows, both principal and interest, at the loan’s original effective rate. The impact of these concessions is combined with the expected credit losses generated by the quantitative loss models in order to arrive at the ACL. established framework captures the Loans Acquired with Deteriorated Credit Quality PCD loans are defined as those with evidence of a more-than- insignificant deterioration in credit quality since origination. PCD loans are initially recorded at its purchase price plus an estimated ACL. Upon the acquisition of a PCD loan, the Corporation recognizes the estimate of the expected credit losses over the remaining contractual term of each individual loan as an ACL with a corresponding addition to the loan purchase price. The amount of the purchased premium or discount which is not related to credit risk is amortized over the life of the loan through net interest income using the 12 POPULAR, INC. 2020 ANNUAL REPORT effective interest method or a method that approximates the effective interest method. Changes in expected credit losses are recorded as an increase or decrease to the ACL with a corresponding charge (reverse) to the provision for credit losses in the Consolidated Statements of Operations. Upon transition to the individual loan measurement, these loans follow the same nonaccrual policies as non-PCD loans and are therefore no longer excluded from non-performing status. Modifications of PCD loans that meet the definition of a TDR subsequent to the adoption of ASC Topic 326 are accounted and reported as such following the same processes as non-PCD loans. Prior and interest payments to the adoption of CECL, loans acquired with deteriorated credit quality were accounted for under ASC 310-30. Loans accounted for under ASC 310-30 included loans for which it was probable, at the date of acquisition, that the Corporation would not collect all contractually required principal and loans which the Corporation elected to account under ASC 310-30 by analogy. Under ASC Subtopic 310-30, these loans were aggregated into pools based on loans that have common risk characteristics. Once the pools were defined, the Corporation maintained the integrity of the pool of multiple loans accounted for as a single asset. Under ASC Subtopic 310-30, the difference between the undiscounted cash flows expected at acquisition and the fair value in the loans, or the “accretable yield,” was recognized as interest income using the effective yield method over the estimated life of the loan if the timing and amount of the future cash flows of the pool was reasonably estimable. Therefore, these loans were not considered non-performing. Subsequent to the acquisition date, increases in cash flows over those expected at the acquisition date were recognized as a reduction of any ACL established after the acquisition and then as an increase in the accretable yield for the loans prospectively. Decreases in expected cash flows after the acquisition date were recognized by recording an ACL. Charge-offs on loans accounted under ASC Subtopic 310-30 were recorded only to the extent that losses exceeded the non-accretable difference established with purchase accounting. future recognized based on the Income Taxes Income taxes are accounted for using the asset and liability method. Under this method, deferred tax assets and liabilities are tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, and attributable to operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which the temporary differences are expected to be recovered or paid. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the changes are enacted. The calculation of periodic income taxes is complex and requires the use of estimates and judgments. The Corporation has recorded two accruals for income taxes: (i) the net estimated amount currently due or to be received from taxing jurisdictions, including any reserve for potential examination issues, and (ii) a deferred income tax that represents the estimated impact of temporary differences between how the Corporation recognizes assets and liabilities under accounting principles generally accepted in the United States (GAAP), and how such assets and liabilities are recognized under the tax code. Differences in the actual outcome of these future tax consequences could impact the Corporation’s financial position or its results of operations. In estimating taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions taking into consideration statutory, judicial and regulatory guidance. A deferred tax asset should be reduced by a valuation allowance if based on the weight of all available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or the entire deferred tax asset will not be realized. The valuation allowance should be sufficient to reduce the deferred tax asset to the amount that is more likely than not to be realized. The determination of whether a deferred tax asset is realizable is based on weighting all available evidence, including both positive and negative evidence. The realization of deferred tax assets, including carryforwards and deductible temporary differences, depends upon the existence of sufficient taxable income of the same character during the carryback or carryforward period. The realization of deferred tax assets requires the consideration of all sources of taxable income available to realize the deferred tax asset, including the future future taxable reversal of existing temporary differences, reversing temporary differences and income exclusive of carryforwards, and taxable tax-planning strategies. in carryback years income Management evaluates the realization of the deferred tax asset by taxing jurisdiction. The U.S. mainland operations are evaluated as a whole since a consolidated income tax return is filed; on the other hand, the deferred tax asset related to the Puerto Rico operations is evaluated on an entity by entity basis, since no consolidation is allowed in the income tax filing. Accordingly, three major this evaluation is composed of components: U.S. mainland operations, Puerto Rico banking operations and Holding Company. For the evaluation of the realization of the deferred tax asset by taxing jurisdiction, refer to Note 34. Under the Puerto Rico Internal Revenue Code, the Corporation and its subsidiaries are treated as separate taxable entities and are not entitled to file consolidated tax returns. The Code provides a dividends-received deduction of 100% on dividends received from “controlled” subsidiaries subject to taxation in Puerto Rico and 85% on dividends received from other taxable domestic corporations. Changes in the Corporation’s estimates can occur due to changes in tax rates, new business strategies, newly enacted guidance, and resolution of issues with taxing authorities regarding previously taken tax positions. Such changes could affect the amount of accrued taxes. The Corporation has made tax payments in accordance with estimated tax payments rules. Any remaining payment will not have any significant impact on liquidity and capital resources. profitability. The The valuation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in the financial statements or tax returns and future tax consequences represents management’s best estimate of those future events. Changes in management’s current estimates, due to unanticipated events, could have a material impact on the Corporation’s financial condition and results of operations. accounting deferred for tax law, In evaluating a tax position, the position. The Corporation’s estimate of The Corporation establishes tax liabilities or reduces tax assets for uncertain tax positions when, despite its assessment that its tax return positions are appropriate and supportable under local the Corporation believes it may not succeed in realizing the tax benefit of certain positions if challenged. the Corporation determines whether it is more-likely-than-not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the ultimate tax liability contains assumptions based on past experiences, and judgments about potential actions by taxing jurisdictions as well as judgments about the likely outcome of issues that have been raised by taxing jurisdictions. The tax position is measured as the largest amount of benefit that is than 50% likely of being realized upon ultimate greater settlement. The Corporation evaluates these uncertain tax positions each quarter and adjusts the related tax liabilities or assets in light of changing facts and circumstances, such as the progress of a tax audit or the expiration of a statute of limitations. The Corporation believes the estimates and assumptions used to support its evaluation of uncertain tax positions are reasonable. tax rate, was After consideration of the effect on U.S. federal tax of unrecognized U.S. state tax benefits, the total amount of unrecognized tax benefits, including U.S. and Puerto Rico that, if recognized through earnings, would affect the Corporation’s approximately $10.2 million at effective December 31, 2020 and $10.5 million at December 31, 2019. Refer to Note 34 to the Consolidated Financial Statements for further information on this subject matter. The Corporation anticipates a reduction in the total amount of unrecognized tax benefits within the next 12 months, which could amount to approximately $13.6 million, including interest. The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current tax year positions, expiration of open POPULAR, INC. 2020 ANNUAL REPORT 13 income tax returns due to the statutes of limitation, changes in management’s judgment about the level of uncertainty, status of examinations, litigation and legislative activity and the addition or elimination of uncertain tax positions. Although the outcome of tax audits is uncertain, the Corporation believes that adequate amounts of tax, interest and penalties have been provided for any adjustments that are expected to result from open years. From time to time, the Corporation is audited by various federal, state and local authorities regarding income tax matters. Although management believes its approach in determining the appropriate tax treatment is supportable and in accordance with the accounting standards, it is possible that the final tax authority will take a tax position that is different than the tax position reflected in the Corporation’s income tax provision and other tax reserves. As each audit is conducted, adjustments, appropriately recorded in the consolidated financial statement in the period determined. Such differences could have an adverse effect on the Corporation’s income tax provision or benefit, or other tax reserves, in the reporting period in which such determination is made and, consequently, on the Corporation’s results of operations, financial position and / or cash flows for such period. any, are if Goodwill and Other Intangible Assets The Corporation’s goodwill and other identifiable intangible assets having an indefinite useful life are tested for impairment. Intangibles with indefinite lives are evaluated for impairment at least annually, and on a more frequent basis, if events or circumstances indicate impairment could have taken place. Such events could include, among others, a significant adverse change in the business climate, an adverse action by a regulator, an unanticipated change in the competitive environment and a decision to change the operations or dispose of a reporting unit. Other identifiable intangible assets with a finite useful life are evaluated periodically for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill is recognized when the carrying amount of any of the reporting units exceeds its fair value up to the amount of the goodwill. Prior to the adoption of ASU 2017-04 on January 1, 2020, the goodwill impairment test consisted of a two-step process. The first step of the goodwill impairment impairment, test, used to identify potential compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, the goodwill of the reporting unit is not considered impaired and the second step of the impairment test is unnecessary. If needed, the second step consists of comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The Corporation estimates the fair value of each reporting unit, value requirements consistent with a standard, measurements the accounting the of generally impairment using fair 14 POPULAR, INC. 2020 ANNUAL REPORT combination of methods, including market price multiples of comparable companies and transactions, as well as discounted cash flow analyses. Subsequent reversal of goodwill impairment losses is not permitted under applicable accounting standards. No impairment was recognized by the Corporation from the annual test as of July 31, 2020.For a detailed description of the impairment evaluation performed by the annual goodwill Corporation during the third quarter of 2020, refer to Note 14. At December 31, 2020, goodwill amounted to $671 million. Note 14 to the Consolidated Financial Statements provides the assignment of goodwill by reportable segment. Pension and Postretirement Benefit Obligations The Corporation provides pension and restoration benefit plans for certain employees of various subsidiaries. The Corporation also provides certain health care benefits for retired employees of BPPR. The non-contributory defined pension and benefit restoration plans (“the Pension Plans”) are frozen with regards to all future benefit accruals. recorded amounts, The estimated benefit costs and obligations of the Pension Plans and Postretirement Health Care Benefit Plan (“OPEB Plan”) are impacted by the use of subjective assumptions, including which can materially affect expected returns on plan assets, discount rates, termination rates, retirement rates and health care trend rates. Management applies judgment in the determination of these factors, which normally undergo evaluation against current industry practice and the actual experience of the Corporation. The Corporation uses an independent actuarial firm for assistance in the determination of the Pension Plans and OPEB Plan costs and obligations. Detailed information on the Plans and related valuation assumptions are included in Note 29 to the Consolidated Financial Statements. 31, fair value assets at December The Corporation periodically reviews its assumption for the long-term expected return on Pension Plans assets. The Pension 2020 was Plans’ $878.8 million. The expected return on plan assets is determined by considering various factors, including a total fund return estimate based on a weighted-average of estimated returns for each asset class in each plan. Asset class returns are estimated using current and projected economic and market factors such as real rates of return, inflation, credit spreads, equity risk premiums and excess return expectations. As part of the review, the Corporation’s independent consulting actuaries performed an analysis of expected returns based on each plan’s expected asset allocation for the year 2021 using the Willis Towers Watson US Expected Return Estimator. This analysis is reviewed by the Corporation and used as a tool to develop expected rates of return, together with other data. This forecast reflects the actuarial firm’s view of expected long- term rates of return for each significant asset class or economic indicator; for example, 8.5% for large cap stocks, 8.8% for small cap stocks, 8.9% for international stocks, 3.3% for long reviews, corporate bonds and 2.0% for long Treasury bonds at January 1, 2021. A range of expected investment returns is developed, and this range relies both on forecasts and on broad-market historical benchmarks for expected returns, correlations, and volatilities for each asset class. As a consequence of the Corporation recent decreased its expected return on plan assets for year 2021 to 4.60% and 5.50% for the Pension Plans. Expected rates of return of 5.0% and 5.8% had been used for 2020 and 5.3% and 6.0% had been used for 2019 for the Pension Plans. Since the expected return assumption is on a long-term basis, it is not materially impacted by the yearly fluctuations (either positive or negative) in the actual return on assets. The expected return can be materially impacted by a change in the plan’s asset allocation. Net Periodic Benefit Cost (“pension expense”) for the Pension Plans amounted to $6.2 million in 2020. The total pension expense included a benefit of $38.1 million for the expected return on assets. Pension expense is sensitive to changes in the expected return on assets. For example, decreasing the expected rate of return for 2020 from 4.60% to 4.35% would increase the projected 2021 pension expense for the Banco Popular de Puerto Rico Retirement Plan, the Corporation’s largest plan, by approximately $2.0 million. If the projected benefit obligation exceeds the fair value of plan assets, the Corporation shall recognize a liability equal to the unfunded projected benefit obligation and vice versa, if the fair value of plan assets exceeds the projected benefit obligation, the Corporation recognizes an asset equal to the overfunded projected benefit obligation. This asset or liability may result in a taxable or deductible temporary difference and its tax effect shall be recognized as an income tax expense or benefit which shall be allocated to various components of the financial statements, including other comprehensive income. The determination of the fair value of pension plan obligations involves judgment, and any changes in those estimates could impact the Corporation’s Consolidated Statements of Financial Condition. Management believes that the fair value estimates of the Pension Plans assets are reasonable given the valuation methodologies used to measure the investments at fair value as described in Note 27. Also, the compositions of the plan assets are primarily in equity and debt securities, which have readily determinable quoted market prices. The Corporation had recorded a liability for the underfunded pension benefit obligation of $35.6 million at December 31, 2020. The Corporation uses the spot rate yield curve from the Willis Towers Watson RATE: Link (10/90) Model to discount the expected projected cash flows of the plans. The equivalent single weighted average discount rate ranged from 2.41% to 2.48% for the Pension Plans and 2.65% for the OPEB Plan to determine the benefit obligations at December 31, 2020. A 50 basis point decrease to each of the rates in the December 31, 2020 Willis Towers Watson RATE: Link (10/90) Model would increase the projected 2021 expense for the Banco Popular de Puerto Rico Retirement Plan by approximately $2.1 million. The change would not affect the minimum required contribution to the Pension Plans. The OPEB Plan was unfunded (no assets were held by the plan) at December 31, 2020. The Corporation had recorded a liability for the underfunded postretirement benefit obligation of $179.2 million at December 31, 2020. interest influence net including loan fees, STATEMENT OF OPERATIONS ANALYSIS Net Interest Income Net interest income is the difference between the revenue less the generated from earning assets, interest cost of deposits and borrowed money. Several risk factors might income including the economic environment in which we operate, market driven events, changes in volumes, repricing characteristics, loans fees collected, moratoriums granted on loan payments and delay charges, loans, as well as strategic decisions made by the Corporation’s management. Net interest income for the year ended December 31, 2020 was $1.9 billion, a decline of $35.1 million when compared to 2019. Net interest income, on a taxable equivalent basis, for the year ended December 31, 2020 was $2.0 billion compared to $2.1 billion in 2019. interest collected on nonaccrual Due to the Corporation’s current asset sensitive position, low current or expected interest rates will negatively impact our results. See the Risk Management: Market/Interest Rate Risk section of this MD&A for additional information related to the Corporation’s interest rate risk. The average key index rates for the years 2020 and 2019 were as follows: Prime rate Fed funds rate 3-month LIBOR 3-month Treasury Bill 10-year Treasury FNMA 30-year 2020 2019 3.53% 5.28% 0.35 0.65 0.35 0.89 1.01 2.15 2.33 2.09 2.14 2.85 Average outstanding securities balances are based upon amortized cost excluding any unrealized gains or losses on securities available-for-sale. Non-accrual loans have been included in the respective average loans and leases categories. Loan fees collected, and costs incurred in the origination of loans are deferred and amortized over the term of the loan as an adjustment to interest yield. Prepayment penalties, late fees collected and the amortization of premiums / discounts on purchased loans are also included as part of the loan yield. POPULAR, INC. 2020 ANNUAL REPORT 15 components of Interest income for the period ended December 31, 2020 included a favorable impact of $55.3 million, related to those items, compared to $55.9 million for the same period in 2019, excluding the discount accretion on loans accounted for under ASC Subtopic 310-30. The decrease of $0.6 million is mainly due to lower amortization of fees related to the discount portfolio from Reliable. Table 3 presents the the different Corporation’s net interest income, on a taxable equivalent basis, for the year ended December 31, 2020, as compared with the same period in 2019, segregated by major categories of interest earning assets and interest-bearing liabilities. Net interest margin decreased by 74 basis points to 3.29% in 2020, compared to 4.03% in 2019. The lower net interest margin for the year is driven by the decrease of 225 basis points in the Federal Funds Rate that occurred during the second half of 2019 (75 basis points) and in the first quarter of 2020 (150 basis points) and the increase in average deposits by $9.4 billion which were redeployed mostly in overnight Fed Funds, U.S. Treasury and $1.4 billion in loans funded under the SBA PPP Program. These income, are low assets, although accretive to net interest interest margin. yielding assets and compressed the net Management took actions to deploy a portion of this liquidity by acquiring investment securities, including U.S. agency mortgage backed securities and executing the $807.6 million in bulk loan repurchases from its GNMA, FNMA and FHMLC loan servicing portfolios. On a taxable equivalent basis, net interest margin was 3.62% in 2020, compared to 4.43% in 2019. Net interest income decreased by $35.1 million year over year and $36.5 million on a taxable equivalent basis. The main variances in net interest income on a taxable equivalent basis were: and agency debt securities Negative variances: • Lower interest income from money market investments due to lower market rates, partially offset by higher volume driven mainly by the increase in deposits; • Lower interest income from investment securities due to lower rates, partially offset by a higher volume of U.S. Treasuries and U.S. agency mortgage backed agencies to deploy liquidity and to benefit from the Puerto Rico tax exemption of these assets and higher yield; and, • Lower interest income from loans mainly driven by a lower amortization on the discount on the portfolio acquired from Wells Fargo in 2018, waived fees on past due loans associated to the moratorium granted in connection with the COVID-19 pandemic and the impact of the decrease in rates in variable rate loans and new production. These negative variances were partially offset by higher volume of loans, mainly PPP, both in Puerto Rico and the U.S., auto loan financing in BPPR and commercial and mortgage loan growth in PB. Positive variances: • Lower interest expense on deposits driven by lower interest cost, in both BPPR and PB, which resulted from the decrease in market rates, as discussed above and management actions to reduce costs. The cost of interest deposits decreased 47 basis points at the consolidated level and also decreased 47 basis points in BPPR and PB. These decreases in interest expense were partially offset by a higher average balance of interest-bearing deposits in most categories mainly driven by the inflow of deposits from the relief and assistance programs provided by the Puerto Rico and Federal governments in response to the pandemic. 16 POPULAR, INC. 2020 ANNUAL REPORT Table 4 - Analysis of Levels & Yields on a Taxable Equivalent Basis from Continuing Operations (Non-GAAP) Years ended December 31, 2020 Interest 2019 Variance (In thousands) Variance Attributable to Rate Volume Average Volume Average Yields / Costs 2020 2019 Variance 2020 2019 Variance (In millions) $ 8,598 19,353 69 $ 4,166 $4,432 3,448 15,905 1 68 0.23% 2.16% (1.93)% Money market investments 2.42 6.00 Investment securities [1] Trading securities (0.73) (1.55) 3.15 7.55 $ 19,722 $ 467,994 4,165 89,824 $ (70,102) $(119,126) $ 49,024 95,467 501,781 136 5,103 (129,254) (1,074) (33,787) (938) 28,020 20,139 7,881 1.76 2.96 (1.20) trading securities 491,881 596,708 (104,827) (249,454) 144,627 Total money market, investment and 13,245 913 1,112 7,255 2,839 3,021 28,385 12,171 801 989 7,121 2,885 2,839 1,074 112 123 134 (46) 182 5.23 5.74 6.05 5.23 11.34 8.97 6.11 6.59 6.06 5.36 11.81 9.59 26,806 1,579 6.29 6.90 (0.88) (0.85) (0.01) (0.13) (0.47) (0.62) (0.61) Loans: Commercial Construction Leasing Mortgage Consumer Auto Total loans 692,372 52,438 67,247 379,794 322,009 271,162 743,682 52,767 59,935 381,493 340,848 272,169 (51,310) (329) 7,312 (1,699) (18,839) (1,007) (113,207) (7,253) (92) (8,823) (14,150) (17,927) 61,897 6,924 7,404 7,124 (4,690) 16,921 1,785,022 1,850,894 (65,872) (161,452) 95,580 $56,405 $46,945 $9,460 4.04% 5.21% (1.17)% Total earning assets $2,276,903 $2,447,602 $(170,699) $(410,906) $240,207 $19,678 12,399 7,971 $15,327 $4,351 2,150 10,249 201 7,770 40,048 33,346 6,702 166 1,178 41,392 11,538 3,475 231 1,194 34,771 8,873 3,301 (65) (16) 6,621 2,665 174 0.28% 0.96% (0.68)% 0.30 1.05 (0.14) (0.40) 0.44 1.45 Interest bearing deposits: NOW and money market [2] Savings Time deposits $ 54,652 $ 146,684 $ (92,032) $(118,302) $ 26,270 10,140 (7,751) 37,765 118 (29,220) 83,438 (17,891) (29,338) 45,516 112,658 0.44 1.48 4.81 0.57 0.91 2.64 4.77 1.06 (0.47) (1.16) 0.04 (0.49) Total deposits 175,855 304,858 (129,003) (165,531) 36,528 Short-term borrowings Other medium and long-term debt 2,457 56,626 6,099 58,142 (3,642) (1,516) (2,101) (933) (1,541) (583) Total interest bearing liabilities 234,938 369,099 (134,161) (168,565) 34,404 Demand deposits Other sources of funds $56,405 $46,945 $9,460 0.42% 0.78% (0.36)% Total source of funds 234,938 369,099 (134,161) (168,565) 34,404 3.62% 4.43% (0.81)% Net interest margin/ income on a taxable equivalent basis (Non-GAAP) 3.47% 4.15% (0.68)% Net interest spread 2,041,965 2,078,503 (36,538) $(242,341) $205,803 Taxable equivalent adjustment 185,353 186,809 (1,456) 3.29% 4.03% (0.74)% non-taxable equivalent basis (GAAP) $1,856,612 $1,891,694 $ (35,082) Net interest margin/ income Note: The changes that are not due solely to volume or rate are allocated to volume and rate based on the proportion of the change in each category. [1] Average outstanding securities balances are based upon amortized cost excluding any unrealized gains or losses on securities available-for-sale. [2] Includes interest bearing demand deposits corresponding to certain government entities in Puerto Rico. for credit provision Provision for Credit Losses - Loan Portfolio losses was The Corporation’s $282.3 million for the year ended December 31, 2020, compared to $165.8 million for the year ended December 31, 2019, an increase of $116.6 million. The increase in the provision for credit losses for the year 2020 when compared to the prior year reflects the impact of the adoption of the new CECL accounting standard, as well as the estimated impact of the COVID-19 pandemic. In addition, the Corporation recorded losses for unfunded loan a provision for estimated credit commitments amounting to $12.6 million, compared to $0.5 million for 2019. As discussed in Note 8, during 2019, the provision for unfunded commitments was recorded as a component of other expenses. The provision for credit losses for the BPPR loan portfolio segment was $205.9 million for the year 2020, compared to $135.8 million for the year 2019, an increase of $70.1 million. The Popular U.S. segment provision for credit losses amounted to $76.5 million for the year 2020, an increase of $46.5 million when compared to $30.0 million for the year 2019. POPULAR, INC. 2020 ANNUAL REPORT 17 As discussed in Note 8 to the Consolidated Financial Statements, within the process to estimate its allowance for credit the Corporation applies probability weights to the outcomes of simulations using Moody’s Analytics’ Baseline, S3 (pessimistic) and S1 (optimistic) scenarios. losses (“ACL”), Refer to the Credit Risk section of this MD&A for a detailed the analysis of net allowance for credit losses and selected loan losses statistics. charge-offs, non-performing assets, Provision for Credit Losses - Investment Securities During the year ended December 31, 2020, the Corporation recorded a release of $2.4 million on its ACL related to its investment from the securities portfolio of obligations Government of Puerto Rico, states and political subdivisions after the adoption of the new CECL accounting standard on January 1st, 2020. At December 31, 2020, the total allowance for credit losses for this portfolio amounted to $10.3 million. Non-Interest Income For the year ended December 31, 2020, non-interest income decreased by $57.6 million, when compared with the previous year primarily driven by: • lower service deposit charges by on $13.1 million, mainly in the BPPR segment, due to lower transactions and the temporary waiver of fees during part of the financial relief programs implemented in response to the COVID-19 pandemic; the year as part of accounts • lower other service fees by $27.3 million, principally at the BPPR segment, due to lower credit and debit card fees by $10.3 million as a result of lower transactional volumes and the temporary waiver of service charges and late charges during part of the pandemic, lower insurance fees by $10.2 million in part insurance commissions by due to lower contingent $7.0 million and lower other fees by $5.9 million in part due to lower retail auto loan servicing fee income; and the year as a result of • lower income from mortgage banking activities by $21.7 million mainly due to higher unfavorable fair value adjustments on mortgage servicing rights by $14.6 million in part due to the $8.8 million negative fair value adjustment recognized during the third quarter of 2020 as a result of the bulk repurchase completed by BPPR from its GNMA, FNMA and FHLMC servicing portfolio; a $10.5 million loss in interest advances related to GNMA loans recognized in connection with the bulk repurchase during the third quarter of 2020; and higher realized losses on closed derivatives positions by $4.3 million; partially offset by higher gains from securitization transactions by $10.1 million; partially offset by: • an increase in net gain on equity securities of $3.8 million mainly related to a $4.1 million gain on sale of certain equity securities at PB during the third quarter of 2020. 18 POPULAR, INC. 2020 ANNUAL REPORT Operating Expenses Table 5 provides a breakdown of operating expenses by major categories. Table 5 - Operating Expenses (In thousands) Personnel costs: Salaries Commissions, incentives and other bonuses Pension, postretirement and medical insurance Other personnel costs, including payroll taxes Total personnel costs Net occupancy expenses Equipment expenses Other taxes Professional fees: Collections, appraisals and other credit related fees Programming, processing and other technology services Legal fees, excluding collections Other professional fees Total professional fees Communications Business promotion FDIC deposit insurance Loss on early extinguishment of debt Other real estate owned (OREO) (income) expenses Other operating expenses: Credit and debit card processing, volume, interchange and other expenses Operational losses All other Total other operating expenses Amortization of intangibles Goodwill and trademark impairment losses Total operating expenses Personnel costs to average assets Operating expenses to average assets Employees (full-time equivalent) Average assets per employee (in millions) Operating expenses for the year ended December 31, 2020 decreased by $19.7 million, when compared with the previous year. The year 2020 reflected $23.2 million in expenses related to PB’s New York branches realignment. Excluding this item, operating expenses would have decreased by $42.9 million. The decrease in operating expenses was driven primarily by: to related profit-sharing • Lower personnel cost by $26.4 million due to lower plan by the incentives $28.8 million and lower commission, incentive and other bonuses by $19.2 million; partially offset by higher salaries by $18.4 million due to annual salary revision and $2.1 million in severance expense related to PB’s branch realignment; Years ended December 31, 2020 2019 2018 2017 2016 $ 370,179 78,582 44,123 71,321 $ 351,788 97,764 41,804 99,269 $ 326,509 90,000 39,660 106,819 $ 313,394 70,099 40,065 53,204 $ 308,135 73,684 41,203 54,373 564,205 119,345 88,932 54,454 12,588 253,565 10,611 117,358 394,122 23,496 57,608 23,868 – (3,480) 590,625 562,988 476,762 477,395 96,339 84,215 51,653 16,300 247,332 12,877 107,902 384,411 23,450 75,372 18,179 – 4,298 88,329 71,788 46,284 14,700 216,128 19,072 99,944 349,844 23,107 65,918 27,757 12,522 23,338 89,194 65,142 43,382 14,415 199,873 11,763 66,437 292,488 22,466 58,445 26,392 – 48,540 85,653 62,225 42,304 14,607 205,466 42,393 60,577 323,043 23,897 53,014 24,512 – 47,119 45,108 26,331 57,443 38,059 21,414 80,097 27,979 35,798 76,584 26,201 39,612 59,194 20,796 35,995 43,737 128,882 139,570 140,361 125,007 100,528 6,397 – 9,370 – 9,326 – 9,378 – 12,144 3,801 $1,457,829 $1,477,482 $1,421,562 $1,257,196 $1,255,635 0.95% 2.45 8,522 6.99 $ 1.17% 2.93 8,560 5.88 $ 1.21% 3.05 8,474 5.50 $ 1.15% 3.04 7,784 5.32 $ 1.27% 3.34 7,828 4.81 $ • Lower business promotions by $17.8 million mainly due to lower advertising expense by $7.9 million as a result of expenses during 2019 associated with the integration of the business acquired from Wells Fargo and adjustments in promotional activity due to the pandemic and lower consumer reward program expense by $4.4 million; • Lower OREO expense by $7.8 million due to the temporary suspension of foreclosure activity as part of the pandemic relief measures; and • Lower other operating expenses by $10.7 million mainly due to lower pension plan cost by $13.4 million due to lower actuarial annual transportation and traveling expenses by $4.0 million due assumptions, changes in POPULAR, INC. 2020 ANNUAL REPORT 19 to the pandemic and lower claims foreclosure expenses by $3.0 million; partially offset by higher credit and debit card processing expenses by $7.0 million and higher reserves for operational losses by $4.9 million. These variances were partially offset by: • Higher net occupancy expense by $23.0 million due to $19.0 million in costs related to the termination of real property leases associated with PB’s New York branch realignment, including the impairment of the right-of-use assets; • Higher equipment expense by $4.7 million due to higher software license costs; • Higher professional fees by $9.7 million mainly due to higher advisory expenses by $8.3 million related to corporate initiatives, higher programming, processing and other technology services by $6.2 million and higher audit and tax services by $3.2 million mainly related to work on new accounting pronouncements; partially offset by lower collections, appraisals and other credit related fees by $3.7 million due to the temporary suspension of collection efforts related to the pandemic and lower legal fees by $4.6 million; and • Higher FDIC deposit insurance by $5.7 million due to an increase in the assessment base. INCOME TAXES For the year ended December 31, 2020, the Corporation recorded an income tax expense of $111.9 million, compared to $147.2 million for the same period of 2019. The income tax expense for the year ended December 31, 2020 reflects the impact of lower pre-tax income, resulting primarily from a higher provision for credit the COVID-19 pandemic. losses and the impact of At December 31,2020, the Corporation had a deferred tax asset amounting to $0.8 billion, net of a valuation allowance of $0.5 billion. The deferred tax asset related to the U.S. operations was $0.3 billion, net of a valuation allowance of $0.4 billion. Refer to Note 34 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. Fourth Quarter Results The Corporation recognized net income of $176.3 million for the quarter ended December 31, 2020, compared with a net income of $166.8 million for the same quarter of 2019. Net interest income for the fourth quarter of 2020 amounted to $471.6 million, compared with $467.4 million for the fourth quarter of 2019, an increase of $4.2 million. The increase in net interest income was mainly due to increase in average balance 20 POPULAR, INC. 2020 ANNUAL REPORT of earning assets, mainly due to increase in deposits. The net interest margin declined by 79 basis points to 3.04% due to declines in market rates and the change in earning assets mix, which were concentrated in overnight Fed Funds, U.S. Treasuries and MBS as well PPP loans, which are all lower yielding assets. The provision for credit losses amounted to $21.2 million for the quarter ended December 31, 20120, calculated under the CECL model, compared to $47.2 million for the fourth quarter of 2019. The provision for loans held-in portfolio at BPPR and PB segments decreased by $16.1 million and $20.4 million, respectively, reflective of improvements in the macroeconomic In addition, the Corporation recognized $12.2 million in provision including a reclassification of for unfunded commitments, $10.0 million from other operating expenses and a reduction to the reserve for credit losses in our investment portfolio of $2.2 million, during the fourth quarter of 2020. scenarios during the fourth quarter. ended December Non-interest income amounted to $144.8 million for the quarter compared with 31, $152.4 million for the same quarter in 2019. The decrease of $7.6 million was mainly due to lower other service fees and lower mortgage banking activities. 2020, Operating expenses totaled $375.9 million for the quarter ended December 31, 2020, compared with $390.6 million for the same quarter in the previous year. The decrease of $14.7 million is mainly related to lower personnel costs, business promotion expenses, and lower other operating expenses due to the reclassification of $10.0 million in provision for unfunded commitments from the other expenses line to the provision for credit losses caption, partially offset by higher net occupancy expenses related to the termination of real property leases associated with PB’s New York branch rationalization, amounting to $19.0 million, including the impairment of the right-of-use assets and related costs. interest Income tax expense amounted to $43.0 million for the quarter ended December 31, 2020, compared with income tax expense of $15.3 million for the same quarter of 2019. The increase is mainly due to higher pre-tax income and lower net ended exempt December 31, 2020, ended December 31, 2019. In addition, during the fourth quarter of 2019, the Corporation recorded a tax benefit of approximately $18 million related to the revision of the amount of exempt income for prior years. The effective tax rate (“ETR”) for the fourth quarter of 2020 was 20%. quarter compared to the quarter income during the REPORTABLE SEGMENT RESULTS The Corporation’s reportable segments for managerial reporting purposes consist of Banco Popular de Puerto Rico and Popular U.S. A Corporate group has been defined to support the reportable segments. For a description of the Corporation’s reportable segments, including additional financial information and the underlying management accounting process, refer to Note 36 to the Consolidated Financial Statements. The Corporate group reported a net income of $8.5 million for the year ended December 31, 2020, compared to a net income of $6.1 million for the previous year. The increase in the net income was mainly attributed to higher non-interest income by $2.5 million and lower operating expenses by $1.0 million mainly due to lower profit-sharing plan expense, partially offset by higher net-interest loss by $1.8 million due to lower income from money market investments. for Highlights on the earnings the reportable results segments are discussed below: Banco Popular de Puerto Rico The Banco Popular de Puerto Rico reportable segment’s net income amounted to $499.0 million for the year ended December 31, 2020, compared with $609.9 million for the year ended December 31, 2019. The results for 2020 were impacted by the COVID-19 pandemic as well as the implementation of the CECL accounting pronouncement. The principal factors that contributed to the variance in the financial results included the following: • Lower net interest income by $40.4 million due to lower interest income from loans by $51.0 million and lower investments and debt income from money market securities by $97.9 million, reflective of lower rates; partially offset by lower interest expense from deposits by $107.6 million. The BPPR segment’s net interest margin was 3.40% for 2020 compared with 4.30% for the same period in 2019; • Higher provision for credit losses by $75.5 million mainly due to the implementation of CECL and the impact of the COVID-19 pandemic in the macroeconomic outlook; • Lower non-interest income by $60.8 million mainly due to: • Lower service charges on deposit accounts by $9.7 million due to lower transactions and the temporary waiver of fees in response to the COVID-19 pandemic; • Lower other service fees by $25.2 million due to lower debit and credit card transactions and the lower contingent temporary waiver of insurance auto loans servicing income; and lower revenues fees, • Lower mortgage by $23.2 million due to unfavorable fair value adjustments on mortgage servicing rights, and activities banking interest losses on GNMA loans as a result of the bulk loan repurchase completed in the third quarter. • Lower operating expenses by $42.8 million, mainly due to: • Lower personnel costs by $20.9 million mainly due to lower profit-sharing plan expense; • Lower professional fees by $19.8 million mainly due to lower consulting and advisory services, as these have been centralized at the Corporate segment; to the • Lower business promotions by $13.2 million mainly due expenses during 2019 associated with the integration of the business acquired from Wells Fargo, lower consumer reward program expense and lower expenses related to product marketing campaigns; • Lower OREO expenses by $9.7 million due to the temporary suspension of foreclosure activity as part of the pandemic relief measures and lower gains on sales of foreclosed properties; Partially offset by: • Higher other operating expenses by $10.4 million due to higher Corporate expense allocations related to consulting and advisory fees, offset by lower pension plan expenses due to changes in the actuarial assumptions and lower traveling and foreclosure claims expenses due to the pandemic. • Lower income tax expense by $22.3 million due to lower income before tax. Popular U.S. For the year ended December 31, 2020, the reportable segment of Popular U.S. reported net loss of $0.7 million, compared with a net income of $55.3 million for the year ended December 31, 2019. The principal factors that contributed to the variance in the financial results included the following: • Higher net interest income by $7.0 million mainly due to lower income from loans by $9.6 million due to lower rates, offset by higher volumes of PPP loans, and lower income from money market investments and debt securities by $12.6 million, reflective of lower market rates, partially offset by lower interest expense from deposits by $26.3 million. The Popular U.S. reportable segment’s net interest margin was 3.21% for 2020 compared with 3.32% for the same period in 2019; • Higher provision for credit losses by $51.5 million mainly due to the implementation of CECL; POPULAR, INC. 2020 ANNUAL REPORT 21 • Higher operating expenses by $24.5 million mainly due to: • Higher occupancy expenses due to the impact of the NY branch rationalization resulting in $19.0 million in lease termination costs, including the impairment of the right of use assets, • Higher other operating expenses by $14.7 million due to higher Corporate expense allocations related to consulting and advisory fees; Partially offset by: • Lower personnel costs by $6.9 million due to lower profit-sharing plan expense and lower medical and other fringe benefits expenses. • Income taxes favorable variance of $11.8 million mainly due to lower income before tax. total assets were STATEMENT OF FINANCIAL CONDITION ANALYSIS Assets The Corporation’s billion at December 31, 2020, compared to $52.1 billion at December 31, 2019. Refer to the Corporation’s Consolidated Statements of Financial Condition at December 31, 2020 and 2019 included in this 2020 Annual Report on Form 10-K. Also, refer to the Statistical Summary 2016-2020 in this MD&A for Condensed Statements of Financial Condition for the past five years. $65.9 Table 6 - Loans Ending Balances (In thousands) Loans not covered under FDIC loss sharing agreements: Commercial Construction Legacy [1] Lease financing Mortgage Consumer Total non-covered loans held-in-portfolio Loans covered under FDIC loss sharing agreements: Mortgage Consumer Loans covered under FDIC loss sharing agreements Total loans held-in-portfolio Loans held-for-sale: Commercial Mortgage Total loans held-for-sale Total loans Money market, trading and investment securities Money market at $11.6 investments December 31, 2020, compared to $3.3 billion at December 31, 2019. The increase was mainly due to an increase in deposits mainly in public funds from the Government of Puerto Rico. totaled billion Debt securities available-for-sale increased by $3.9 billion to $21.6 billion at December 31, 2020 mainly due to purchases of U.S. agency mortgage-backed securities, partially offset by maturities and paydowns of U.S. Treasury securities. Refer to Note 5 to the Consolidated Financial Statements for additional information with respect to the Corporation’s debt securities available-for-sale. Loans Refer to Table 6 for a breakdown of the Corporation’s loan portfolio. 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 increased by $2.0 billion to $29.4 billion at December 31, 2020 mainly driven by growth of commercial loans due to originations of PPP loans at both BPPR and PB and an increase of $0.7 billion in mortgage loans mainly due to bulk loan repurchases from the Corporation’s GSEs loan servicing portfolios. The allowance for credit losses for the loan portfolio increased by $0.4 billion, which includes the impact of the adoption of CECL. Refer to the Credit Quality section of the MD&A for additional information on the Allowance for credit losses for the loan portfolio. 2020 2019 At December 31, 2018 2017 2016 $13,606,280 918,765 15,473 1,197,661 7,890,680 5,756,337 29,385,196 $12,312,751 831,092 22,105 1,059,507 7,183,532 5,997,886 27,406,873 $12,043,019 779,449 25,949 934,773 7,235,258 5,489,441 26,507,889 $11,488,861 880,029 32,980 809,990 7,270,407 3,810,527 24,292,794 $10,798,507 776,300 45,293 702,893 6,696,361 3,754,393 22,773,747 – – – 29,385,196 – – – 27,406,873 – – – 26,507,889 502,930 14,344 517,274 24,810,068 556,570 16,308 572,878 23,346,625 2,738 96,717 99,455 $29,484,651 – 59,203 59,203 $27,466,076 – 51,422 51,422 $26,559,311 – 132,395 132,395 $24,942,463 – 88,821 88,821 $23,435,446 [1] The legacy portfolio is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years at the PB reportable segment. 22 POPULAR, INC. 2020 ANNUAL REPORT Other assets Other assets amounted to $1.7 billion at December 31, 2020, a decrease of $0.1 billion when compared to December 31, 2019. Refer to Note 13 for a breakdown of the principal categories that comprise the caption of “Other Assets” in the Consolidated Statements of Financial Condition at December 31, 2020 and 2019. Liabilities The Corporation’s liabilities were $59.9 billion at December 31, 2020, an increase of $13.8 billion compared to total Table 7 - Financing to Total Assets $46.1 billion at December 31, 2019, mainly due to increases in to the Corporation’s deposits as discussed below. Refer Consolidated Statements of Financial Condition included in this Form 10-K. Deposits and Borrowings The composition of the Corporation’s financing to total assets at December 31, 2020 and 2019 is included in Table 7. (In millions) Non-interest bearing deposits Interest-bearing core deposits Other interest-bearing deposits Repurchase agreements Notes payable Other liabilities Stockholders’ equity $56.9 billion totaled deposits Deposits The Corporation’s at December 31, 2020, compared to $43.8 billion at December 31, 2019.The deposits increase of $13.1 billion was mainly due to an increase at BPPR of retail and commercial demand and savings accounts by $8.2 billion and Puerto Rico public sector deposits by $4.5 billion. Public sector deposit balances are expected to decline over the long term. However, the receipt by the P.R. Government of additional COVID-19-related Federal assistance and seasonal tax collections are likely to increase public deposit balances at BPPR in the near term. The rate at which public deposit balances will decline is uncertain and Table 8 - Deposits Ending Balances (In thousands) Demand deposits [1] Savings, NOW and money market deposits (non-brokered) Savings, NOW and money market deposits (brokered) Time deposits (non-brokered) Time deposits (brokered CDs) Total deposits [1] Includes interest and non-interest bearing demand deposits. December 31, December 31, % increase (decrease) % of total assets 2019 from 2019 to 2020 2020 2020 2019 $13,129 38,599 5,138 121 1,225 1,685 6,029 $ 9,160 29,610 4,988 193 1,102 1,045 6,017 43.3% 30.4 3.0 (37.3) 11.2 61.2 0.2 19.9% 17.6% 58.5 7.8 0.2 1.9 2.6 9.1 56.8 9.6 0.4 2.1 2.0 11.5 difficult to predict. The amount and timing of any such reduction is likely to be impacted by, for example, the timeline of current debt restructuring efforts under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”) and the speed at which the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) assistance is distributed. Generally, these deposits require high credit quality securities as collateral. Therefore, while there can be timing differences between the deposit outflow and the release of collateral, generally the liquidity risks from public deposit outflows are lower. Refer to Table 8 for a breakdown of the Corporation’s deposits at December 31, 2020 and 2019. 2020 2019 2018 2017 2016 $22,532,729 26,390,565 635,198 7,130,749 177,099 $16,566,145 19,169,899 347,765 7,546,621 128,176 $16,077,023 15,616,247 400,004 7,500,544 116,221 $12,460,081 15,054,242 424,307 7,411,140 103,738 $ 9,053,897 13,327,298 405,487 7,486,717 222,825 $56,866,340 $43,758,606 $39,710,039 $35,453,508 $30,496,224 Borrowings The Corporation’s borrowings amounted to $1.3 billion at December 31, 2020 and 2019. Refer to Note 16 to the Consolidated Financial Statements for detailed information on the Corporation’s borrowings. Also, refer to the Off-Balance Sheet Arrangements and Other Commitments section in this MD&A for additional information on the Corporation’s contractual obligations. POPULAR, INC. 2020 ANNUAL REPORT 23 Other liabilities The Corporation’s other liabilities amounted to $1.7 billion at December 31, 2020, an increase of $0.6 billion when compared to December 31, 2019, mainly due to an increase of $0.7 billion in unsettled purchases of debt securities. available-for-sale offset by capital Stockholders’ Equity Stockholders’ equity increased by $11.9 million to $6.0 billion at December 31, 2020, when compared to December 31, 2019. The change in stockholders’ equity was impacted by the net income of $506.6 million and unrealized gains on debt securities transactions including an accelerated share repurchase and the redemption of 2008 Series B preferred stock, as discussed in Note 19. Refer to the Consolidated Statements of Financial Condition, Comprehensive Income and of Changes in Stockholders’ Equity for information on the composition of stockholders’ equity. Also, refer to Note 21 for a detail of accumulated other comprehensive loss, an integral component of stockholders’ equity. REGULATORY CAPITAL The Corporation and its bank subsidiaries are subject to capital adequacy standards established by the Federal Reserve Board. The risk-based capital standards applicable to Popular, Inc. and the Banks, BPPR and PB, are based on the final capital framework of Basel III. The capital rules of Basel III include a “Common Equity Tier 1” (“CET1”) capital measure and specifies that Tier 1 capital consist of CET1 and “Additional Tier 1 Capital” instruments meeting specified requirements. Note 20 to the consolidated financial statements presents further information on the Corporation’s regulatory capital requirements, its depository institutions, BPPR and PB. including the regulatory capital ratios of An institution is considered “well-capitalized” if it maintains a total capital ratio of 10%, a Tier 1 capital ratio of 8%, a CET1 ratio of 6.5% and a leverage ratio of 5%. The capital Corporation’s ratios presented in Table 9 show that the Corporation was “well capitalized” for regulatory purposes, the highest classification, under Basel III for years 2016 through 2020. BPPR and PB were also well-capitalized for all years presented. these minimum risk-weighted asset The Basel III Capital Rules also require an additional 2.5% “capital conservation buffer”, composed entirely of CET1, on top of ratios, which excludes the leverage ratio. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. Popular, BPPR and PB are required to maintain this additional capital conservation buffer of 2.5% of CET1, resulting in minimum ratios of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) Total capital to risk-weighted assets of at least 10.5%. Table 9 presents the Corporation’s capital adequacy information for the years 2016 through 2020. Table 9 - Capital Adequacy Data (Dollars in thousands) Risk-based capital: Common Equity Tier 1 capital Additional Tier 1 Capital Tier 1 capital Supplementary (Tier 2) capital Total capital Total risk-weighted assets Adjusted average quarterly assets Ratios: Common Equity Tier 1 capital Tier 1 capital Total capital Leverage ratio Average equity to assets Average tangible equity to assets Average equity to loans 24 POPULAR, INC. 2020 ANNUAL REPORT 2020 2019 At December 31, 2018 2017 2016 $ 4,992,096 $ 5,121,240 $ 4,631,511 $ 4,226,519 $ 4,121,208 22,143 – – – – $ 5,014,239 759,680 $ 5,121,240 737,375 $ 4,631,511 722,688 $ 4,226,519 758,746 $ 4,121,208 748,007 $ 5,773,919 $ 5,858,615 $ 5,354,199 $ 4,985,265 $ 4,869,215 $30,702,091 $28,840,368 $27,403,718 $25,935,696 $25,001,334 $64,305,022 $51,057,484 $46,876,424 $42,185,805 $37,785,070 16.26% 16.33 18.81 7.80 9.10 8.02 19.09 17.76% 17.76 20.31 10.03 11.35 10.11 21.31 16.90% 16.90 19.54 9.88 11.67 10.37 21.72 16.30% 16.30 19.22 10.02 12.91 11.48 22.73 16.48% 16.48 19.48 10.91 14.03 12.45 22.89 in the On April 1, 2020, the Corporation adopted the final rule issued by the federal banking regulatory agencies pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996 that simplified several requirements in the agencies’ regulatory capital rules. These rules simplified the regulatory capital requirement for mortgage servicing assets (MSAs), deferred tax assets arising from temporary differences and investments capital of unconsolidated financial institutions by raising the CET1 deduction threshold from 10% to 25%. The 15% CET1 deduction threshold which applies to the aggregate amount of such items was eliminated. The rule also requires, among other changes, increasing from 100% to 250% the risk weight to MSAs and temporary difference deferred tax asset not deducted from capital. For investments in institutions, the risk the capital of unconsolidated financial weight would be based on the exposure category of the investment. The decrease in the CET1 capital ratio, Tier 1 capital ratio, total capital ratio and leverage ratio as of December 31, 2020 compared to December 31, 2019 was mostly due to the accelerated common stock repurchase of $500 million and the increase in risk weighted assets driven by the increase from 100% to 250% in the risk weight assets of MSAs and temporary difference deferred tax asset not deducted from capital, resulting aforementioned adoption simplification final rule, partially offset by the year’s earnings. from the the of to banking Pursuant to the adoption of CECL on January 1, 2020, the Corporation elected to use the five-year transition period option as provided in the final interim regulatory capital rules effective March 31,2020. The five-year transition period provision delays for two years the estimated impact of CECL on regulatory capital, followed by a three-year transition period to phase out the aggregate amount of the capital benefits provided during the initial two-year delay. On April 9, 2020, federal banking regulators issued an interim final rule to modify the Basel III regulatory capital rules applicable 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, banking organizations, the Corporation and its Bank subsidiaries, are permitted to assign a zero percent risk weight to PPP loans for purposes of determining risk-weighted assets and risk-based capital ratios. Additionally, in order to facilitate use of the Paycheck Protection Program Liquidity Facility (the “PPPL Facility”), which provides Federal Reserve Bank loans to eligible financial institutions such as the Corporation’s Bank agencies have organizations including clarified that the to subsidiaries to fund PPP loans, the agencies further clarified that, for purposes of determining leverage ratios, a banking organization is permitted to exclude from total average assets PPP loans that have been pledged as collateral for a PPPL Facility. As of December 31, 2020, the Corporation has $1.3 billion in PPP loans and $1 million pledged as collateral for PPPL Facilities. Table 10 reconciles the Corporation’s total common stockholders’ equity to common equity Tier 1 capital. Table 10 - Reconciliation Common Equity Tier 1 Capital (In thousands) At December 31, 2019 2020 Common stockholders’ equity $6,224,942 $5,966,619 AOCI related adjustments due to opt-out election Goodwill, net of associated deferred (261,245) 113,155 tax liability (DTL) (591,931) (596,994) Intangible assets, net of associated DTLs Deferred tax assets and other deductions (22,466) (28,780) (357,204) (332,763) Common equity tier 1 capital $4,992,096 $5,121,237 Common equity tier 1 capital to risk- weighted assets 16.26% 17.76% Non-GAAP financial measures The tangible common equity ratio 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 the intangible assets, purchase accounting method of accounting 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 generally accepted accounting principles in the United States of America (“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. typically stemming from the use of Table 11 provides a reconciliation of total stockholders’ equity to tangible common equity and total assets to tangible assets at December 31, 2020 and 2019 POPULAR, INC. 2020 ANNUAL REPORT 25 Table 11 - Reconciliation Tangible Common Equity and Assets (In thousands, except share or per share information) Total stockholders’ equity Less: Preferred stock Less: Goodwill Less: Other intangibles At December 31, 2020 2019 $ 6,028,687 (22,143) (671,122) (22,466) $ 6,016,779 (50,160) (671,122) (28,780) Total tangible common equity $ 5,312,956 $ 5,266,717 Total assets Less: Goodwill Less: Other intangibles Total tangible assets Tangible common equity to tangible assets Common shares outstanding at end of $65,926,000 (671,122) (22,466) $52,115,324 (671,122) (28,780) $65,232,412 $51,415,422 8.14% 10.24% period 84,244,235 95,589,629 Tangible book value per common share Total stockholders’ equity [1] Less: Preferred Stock Less: Goodwill Less: Other intangibles Total tangible common equity Average return on tangible common equity $ 63.07 $ 55.10 Year-to-date average $ 5,419,938 (26,277) (671,121) (25,154) $ 5,713,517 (50,160) (669,200) (23,563) $ 4,697,386 $ 4,970,594 10.75% 13.43% [1] Average balances exclude unrealized gains or losses on debt securities available-for-sale. 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 Table 12 - Contractual Obligations (In thousands) Certificates of deposits Assets sold under agreement to repurchase Long-term debt Operating leases Finance leases Total contractual cash obligations its the financial needs of 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 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, operating leases and provision of guarantees, indemnifications, and representation and warranties. Refer to Note 22 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 and lease 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 fair value on the consolidated contracts are carried at statements of value condition with the financial 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. fair At December 31, 2020, the aggregate contractual cash obligations, including borrowings, by maturities, are presented in Table 12. Less than 1 year $4,486,877 121,303 50,040 34,322 3,897 Payments Due by Period 3 to 5 years 1 to 3 years After 5 years $1,622,562 – 443,991 47,962 6,894 $1,130,140 – 231,864 40,648 7,290 $ 68,269 – 499,086 51,807 8,850 Total $7,307,848 121,303 1,224,981 174,739 26,931 $4,696,439 $2,121,409 $1,409,942 $628,012 $8,855,802 Under the Corporation’s repurchase agreements, Popular is required to deposit cash or qualifying securities to meet margin the value of securities requirements. To the extent previously pledged as collateral declines because of changes in that interest rates, the Corporation will be required to deposit additional cash or securities to meet its margin requirements, thereby adversely affecting its liquidity. 26 POPULAR, INC. 2020 ANNUAL REPORT At December 31, 2020, the Corporation’s liability on its pension, restoration and postretirement benefit plans amounted to approximately $215 million, compared with $221 million at December 31, 2019. The Corporation’s expected contributions to the pension and benefit restoration plans are minimal, while the expected contributions to the postretirement benefit plan to fund current benefit payment requirements are estimated at $6.3 million for 2021. Obligations to these plans are based on current and projected obligations of the plans, performance of the plan assets, if applicable, and any participant contributions. Refer to Note 29 to the consolidated financial statements for further information on these plans. Management believes that the effect of the pension and postretirement plans on liquidity is not financial condition. The BPPR’s non-contributory defined pension and benefit restoration plans are frozen with regards to all future benefit accruals. to the Corporation’s overall significant At December 31, 2020, the liability for uncertain tax positions was $14.7 million, compared with $16.3 million as of the end of 2019. This liability represents an estimate of tax positions that the Corporation has taken in its tax returns which may ultimately not be sustained upon examination by the tax authorities. The ultimate amount and timing of any future cash settlements is difficult to predict with reasonable limitations, the liability for certainty. Under the statute of Table 13 - Off-Balance Sheet Lending and Other Activities uncertain tax positions expires as follows: 2021 - $11.3 million, 2022 - $1.1 million and 2023 - $1.1 million. Additionally, $1.4 million is not subject to the statute of limitations. As a result of examinations, the Corporation anticipates a reduction in the total amount of unrecognized tax benefits within the next 12 months, which approximately $13.6 million, including interests. amount could to The Corporation also 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 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 credit the Corporation’s exposure or liquidity requirements for these commitments. in making those commitments future actual The following table presents the contractual amounts related lending and other to the Corporation’s off-balance sheet activities at December 31, 2020: (In thousands) Commitments to extend credit Commercial letters of credit Standby letters of credit Commitments to originate or fund mortgage loans 2021 $8,258,033 1,864 21,516 96,645 $798,038 – 750 141 Total $8,378,058 $798,929 $142,469 – – – $142,469 $90,891 – – – $90,891 Total $9,289,431 1,864 22,266 96,786 $9,410,347 Amount of commitment - Expiration Period Years 2026 - Years 2024 - Years 2022 - thereafter 2025 2023 Refer to Note 23 to the Consolidated Financial Statements and information on credit commitments for additional contingencies. 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 $21.6 billion as of December 31, 2020. Other assets subject risk include loans held-for-sale, which amounted to $99 million, mortgage servicing rights (“MSRs”) which amounted to $118 million and securities to $37 million, as of December 31, 2020. “trading”, which amounted to market classified as Interest Rate Risk (“IRR”) The Corporation’s net interest income is subject to various categories of interest rate risk, including repricing, basis, yield rate risk, curve and option risks. 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. In managing interest POPULAR, INC. 2020 ANNUAL REPORT 27 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, and policy management objectives, market constraints. expectations 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 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. the Corporation’s IRR. NII 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 implied forwards, and parallel and non-parallel rate rates, The asset shocks. Management also performs analyses to isolate and measure basis and prepayment risk exposures. group perform and liability management 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. in risk simulations these market 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 reflect instantaneous parallel changes of -100, -200, +100, +200 and +400 basis points during the succeeding twelve-month period. Simulation analyses are based on many assumptions, including relative levels of market interest rates across all yield curve points and indexes, interest rate spreads, loan prepayments and deposit elasticity. Thus, they should not be relied upon as indicative of actual results. Further, the estimates do not contemplate actions that management could take to respond to changes in interest rates. By their nature, these forward-looking computations are only estimates and may be different from what may actually occur in the future. The following table presents the results of the simulations at December 31, 2020 and December 31, 2019, assuming a static balance sheet and parallel changes over flat spot rates over a one-year time horizon: Table 14 - Net Interest Income Sensitivity (One Year Projection) (Dollars in thousands) Change in interest rate +400 basis points +200 basis points +100 basis points -100 basis points -200 basis points As of December 31, 2020, NII simulations show the Corporation maintains an asset sensitive position and is expected to benefit from an overall rising rate environment. The changes in sensitivity for the period are primarily driven by large deposit increases of over $13 billion along with reductions in the rates paid for deposit products. Overall, rates are now considered to be close to their “lower bound” because we currently assume, in our interest risk models, that rates will not reach negative values. This has the effect of reducing sensitivity in most products given that rates are close to zero in most curve tenors and therefore have little room to fall further in the declining rates scenarios. We would expect this “flooring” effect on sensitivity to declining rates to reverse itself if rates were to 28 POPULAR, INC. 2020 ANNUAL REPORT December 31, 2020 December 31, 2019 Amount Change Percent Change Amount Change Percent Change $167,474 81,690 39,361 (53,952) (71,517) 9.19% 4.49 2.16 (2.96) (3.93) $ 64,351 32,766 16,379 (35,213) (131,874) 3.37% 1.72 0.86 (1.84) (6.91) rise, because it would mean that rates would once again have more room to fall. In contrast, the sensitivity to rising rate scenarios notably increased as most of the increase in deposits remained in short-term assets and cash at the close of the quarter. The Corporation’s loan and investment portfolios are subject to prepayment risk, which results from the ability of a third- party to repay debt obligations prior to maturity. Prepayment risk also could have a significant impact on the duration of collateralized mortgage mortgage-backed obligations lower prepayments could extend) the weighted average life of these portfolios. could shorten (or since prepayments securities and Table 15 - Interest Rate Sensitivity (Dollars in thousands) 0-30 days After three months but within six months Within 31 - 90 days At December 31, 2020 By repricing dates After nine months but within one year After one year but within two years After six months but within nine months After two years Non-interest bearing funds Total Assets: Money market investments Investment and trading securities Loans Other assets Total Liabilities and stockholders’ equity: Savings, NOW and money market and other interest bearing demand deposits Certificates of deposit Federal funds purchased and assets sold under agreements to repurchase Notes payable Non-interest bearing deposits Other non-interest bearing liabilities Stockholders’ equity $11,640,880 $ – $ – $ – $ – $ – $ – $ – $11,640,880 1,818,381 2,588,213 4,941,389 2,079,245 – – 784,071 1,343,712 – 862,936 1,209,007 – 854,535 3,435,958 11,122,995 1,239,635 5,265,158 13,562,962 – – – 386,834 21,853,923 (156,457) 29,484,651 2,946,546 2,946,546 18,400,650 4,667,458 2,127,783 2,071,943 2,094,170 8,701,116 24,685,957 3,176,923 65,926,000 17,598,227 2,267,508 828,430 597,874 1,157,540 728,850 1,063,674 428,325 978,445 515,564 3,202,224 11,601,253 1,704,913 1,064,814 – 36,429,793 7,307,848 – 71,738 1,000 39,586 – 9,979 47,000 – – – – – – – – – – – – – – – 2,040 – 104,156 – 1,070,785 – – 121,303 1,224,981 – – – – – – – – – 13,128,699 13,128,699 1,684,689 6,028,687 1,684,689 6,028,687 Total $19,938,473 $1,465,890 $1,943,369 $1,491,999 $1,496,049 $4,371,194 $14,376,951 $ 20,842,075 $65,926,000 Interest rate sensitive gap Cumulative interest rate (1,537,823) 3,201,568 184,414 579,944 598,121 4,329,922 10,309,006 (17,665,152) sensitive gap (1,537,823) 1,663,745 1,848,159 2,428,103 3,026,224 7,356,146 17,665,152 Cumulative interest rate sensitive gap to earning assets (2.45)% 2.65% 2.95% 3.87% 4.82% 11.72% 28.15% – – – – – POPULAR, INC. 2020 ANNUAL REPORT 29 Table 16, which presents the maturity distribution of earning assets, takes into consideration prepayment assumptions. Table 16 - Maturity Distribution of Earning Assets As of December 31, 2020 Maturities After one year through five years Fixed interest rates Variable interest rates After five years Fixed interest rates Variable interest rates Total One year or less $11,640,880 6,964,725 – $11,926,420 $ – 18,044 – $2,764,145 $ – 6,852 $11,640,880 21,680,186 3,488,348 728,477 368,549 1,715,735 890,422 4,618,758 12,877 821,595 2,995,186 2,951,385 2,689,723 167,137 – 247,122 149,145 1,708,516 – 7,517 146,600 3,976,529 1,119,146 10,274 – 651,694 19,916 13,624,491 918,765 1,197,661 5,756,337 7,987,397 7,191,531 11,399,801 3,253,127 5,839,162 1,801,030 29,484,651 $25,797,136 $23,326,221 $3,271,171 $8,603,307 $1,807,882 $62,805,717 (In thousands) Money market securities Investment and trading securities Loans: Commercial Construction Lease financing Consumer Mortgage Subtotal loans Total earning assets Note: Equity securities available-for-sale and other investment securities, including Federal Reserve Bank stock and Federal Home Loan Bank stock held by the Corporation, are not included in this table. Loans held-for-sale have been allocated according to the expected sale date. trading activities to meet Securities’ Trading The Corporation engages in trading activities in the ordinary its subsidiaries, BPPR and Popular course of business at consist Securities. Popular primarily of market-making activities expected customers’ needs related to its retail brokerage business, and purchases and sales of U.S. Government and government sponsored securities with the objective of realizing gains from expected short-term price movements. BPPR’s trading activities consist primarily of holding U.S. Government sponsored mortgage-backed securities classified as “trading” and hedging the related market risk with “TBA” (to-be-announced) market transactions. The objective is to derive spread income from the portfolio and not 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. to benefit At December 31, 2020, the Corporation held trading securities with a fair value of $37 million, representing approximately 0.1% of the Corporation’s total assets, compared with $40 million and 0.1%, respectively, at December 31, 2019. As shown in Table 17, the trading portfolio consists principally of mortgage-backed securities which at December 31, 2020 were investment grade securities. As of December 31, 2020, the trading portfolio also included $0.1 million in Puerto Rico government obligations ($0.6 million as of December 31, 2019). Trading instruments are recognized at fair value, with changes resulting from fluctuations in market prices, interest rates or exchange rates reported in current period earnings. The Corporation recognized a net trading account gain of $1 million for the year ended December 31, 2020 and a net trading account gain of $994 thousand for the year ended December 31, 2019. 30 POPULAR, INC. 2020 ANNUAL REPORT Table 17 - Trading Portfolio (Dollars in thousands) Mortgage-backed securities U.S. Treasury securities Collateralized mortgage obligations Puerto Rico government obligations Interest-only strips Other Total [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. are numerous The Corporation’s trading portfolio had a 5-day VAR of approximately $0.8 million for the last week in December 31, 2020. There 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. assumptions 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. Derivatives Derivatives may be used by the Corporation as part of its overall interest rate risk management strategy to minimize significant unexpected fluctuations in earnings and cash flows that are caused by fluctuations in interest rates. Derivative instruments that the Corporation may use include, among others, interest rate swaps, caps, floors, indexed options, and forward contracts. The Corporation does not use highly leveraged derivative instruments rate risk management strategy. The Corporation enters into interest rate swaps, interest rate caps and foreign exchange contracts for the benefit of commercial customers. Credit risk embedded in these transactions is reduced by requiring appropriate collateral from counterparties and entering into netting agreements whenever possible. All outstanding derivatives are recognized in the Corporation’s consolidated statement of condition at their fair value. Refer to Note 25 to the consolidated financial statements for further information on the Corporation’s involvement in derivative instruments and hedging activities. interest in its The Corporation’s derivative activities are entered primarily to offset the impact of market volatility on the economic value December 31, 2020 Weighted Average Yield [1] Amount December 31, 2019 Weighted Average Yield [1] Amount $24,338 11,506 346 103 381 — $36,674 5.19% $28,556 7,083 0.04 606 5.65 633 0.48 440 12.00 3,003 — 3.64% $40,321 5.28% 1.22 5.72 2.60 12.05 2.79 4.42% of assets or liabilities. The net effect on the market value of potential changes in interest rates of derivatives and other financial instruments is analyzed. The effectiveness of these the Corporation is hedges is monitored to ascertain that reducing market risk as expected. Derivative transactions are generally executed with instruments with a high correlation to liability. The underlying index or the hedged asset or the derivatives used by the Corporation is instrument of selected based on its similarity to the asset or liability being hedged. As a result of interest rate fluctuations, fixed and variable interest rate hedged assets and liabilities will appreciate or depreciate in fair value. The effect of this unrealized appreciation or depreciation is expected to be substantially offset by the Corporation’s gains or losses on the derivative instruments that are linked to these hedged assets and liabilities. Management will assess if circumstances warrant replacing the derivatives position in the liquidating or hypothetical event that high correlation is reduced. Based on the Corporation’s derivative at December 31, 2020, it is not anticipated that such a scenario would have a material impact on the Corporation’s financial condition or results of operations. instruments outstanding Certain derivative contracts also present credit risk and liquidity risk because the counterparties may not comply with the terms of the contract, or the collateral obtained might be illiquid or become so. The Corporation controls credit risk through approvals, limits and monitoring procedures, and through master netting and collateral agreements whenever possible. Further, as applicable under the terms of the master agreements, the Corporation may obtain collateral, where appropriate, to reduce credit risk. The credit risk attributed to the counterparty’s nonperformance risk is incorporated in the fair value of the derivatives. Additionally, as required by the fair value measurements guidance, the fair value of the Corporation’s own credit standing is considered in the fair value of the derivative liabilities. For information on the gain (loss) resulting from the inclusion of the credit risk in the fair value of the derivatives, refer to Note 25 to the consolidated financial statements. POPULAR, INC. 2020 ANNUAL REPORT 31 the financial The Corporation performs appropriate due diligence and that condition of monitors represent a significant volume of credit exposure. Additionally, the Corporation has exposure limits to prevent any undue funding exposure. counterparties Cash Flow Hedges The Corporation manages the variability of cash payments due to interest rate fluctuations by the effective use of derivatives designated as cash flow hedges and that are linked to specified hedged assets and liabilities. The cash flow hedges relate to forward contracts or TBA mortgage-backed securities that are sold and bought for future settlement to hedge mortgage- backed securities and loans prior to securitization. The seller agrees to deliver on a specified future date a specified instrument at a specified price or yield. These securities are hedging a forecasted transaction and are designated for cash flow hedge accounting. The notional amount of derivatives designated as cash flow hedges at December 31, 2020 amounted to $ 189 million (2019 - $ 98 million). Refer to Note 25 to the consolidated financial statements for information on these derivative quantitative additional contracts. Fair Value Hedges The Corporation did not have any derivatives designated as fair value hedges during the years ended December 31, 2020 and 2019. Trading and Non-Hedging Derivative Activities The Corporation enters into derivative positions based on from price differentials market expectations or to benefit between financial to economically hedge a related asset or liability. The Corporation also enters into various derivatives to provide these types of free-standing derivative derivatives are carried at fair value with changes in fair value recorded as part of the results of operations for the period. and markets mostly customers. These instruments products to Following is a description of the most significant of the Corporation’s derivative activities that are not designated for hedge accounting. Refer to Note 25 to the consolidated financial statements for additional quantitative and qualitative information on these derivative instruments. The Corporation has over-the-counter option contracts which are utilized in order to limit the Corporation’s exposure on customer deposits whose returns are tied to the S&P 500 or to certain other equity securities or commodity indexes. The Corporation offers certificates of deposit with returns linked to these indexes to its retail customers, principally in connection with individual retirement accounts (IRAs), and certificates of deposit. At December 31, 2020, these deposits amounted to $63 million (2019 - $ 67 million), or less than 1% (2019 – less In these than 1%) of the Corporation’s total deposits. 32 POPULAR, INC. 2020 ANNUAL REPORT the customer’s principal certificates, is guaranteed by the Corporation and insured by the FDIC to the maximum extent permitted by law. The instruments pay a return based on the increase of these indexes, as applicable, during the term of the instrument. Accordingly, this product gives customers the opportunity to invest in a product that protects the principal invested but allows the customer the potential to earn a return based on the performance of the indexes. is indexes applicable The risk of issuing certificates of deposit with returns tied to the economically hedged by the Corporation. Indexed options are purchased from financial institutions with strong credit standings, whose return is designed to match the return payable on the certificates of deposit issued. By hedging the risk in this manner, the effective cost of these deposits is fixed. The contracts have a maturity and an index equal to the terms of the pool of retail deposits that they are economically hedging. The purchased option contracts are initially accounted for at cost (i.e., amount of premium paid) and recorded as a derivative asset. The derivative asset is marked-to-market on a quarterly basis with changes in fair value charged to earnings. The deposits are hybrid instruments containing embedded options that must be bifurcated in accordance with the derivatives and hedging activities guidance. The initial value of the embedded option (component of the deposit contract that pays a return based on changes in the applicable indexes) is bifurcated from the related certificate of deposit and is initially recorded as a derivative liability and a corresponding discount on the certificate of deposit is recorded. Subsequently, the discount on the deposit is accreted and included as part of interest is marked-to-market with changes in fair value charged to earnings. bifurcated expense option while the The purchased indexed options are used to economically hedge the bifurcated embedded option. These option contracts do not qualify for hedge accounting, and therefore, cannot be designated as accounting hedges. At December 31, 2020, the notional indexed options on deposits approximated $ 69 million (2019 - $ 69 million) with a fair value of $ 21 million (asset) (2019 - $ 18 million) while the embedded options had a notional value of $63 million (2019 - $ 67 million) with a fair value of $ 18 million (liability) (2019 - $ 16 million). amount of the Refer to Note 25 to the consolidated financial statements for a description of other non-hedging derivative activities utilized by the Corporation during 2020 and 2019. Foreign Exchange The Corporation holds an interest in BHD León in the Dominican Republic, which is an investment accounted for under the equity method. The Corporation’s carrying value of the equity interest in BHD León approximated $153.1 million at December 31, 2020. This business is conducted in the country’s foreign currency. The resulting foreign currency translation adjustment, from operations for which the functional currency is other than the U.S. dollar, is reported in accumulated other comprehensive loss in the consolidated statements of condition, except for highly-inflationary environments in which the effects would be included in the consolidated statements of operations. At December 31, 2020, the Corporation had approximately $71 million in an unfavorable foreign currency translation adjustment as part of accumulated other comprehensive income (loss), compared with an unfavorable adjustment of $ 57 million at December 31, 2019 and $ 50 million at December 31, 2018. finance expected future growth, Liquidity The objective of effective liquidity management is to ensure that the Corporation has sufficient liquidity to meet all of its financial obligations, fund planned capital distributions and maintain a reasonable safety margin for cash commitments under both normal and stressed market conditions. The Board of Directors is responsible for establishing the Corporation’s tolerance for liquidity risk, including approving relevant risk limits and policies. The Board of Directors has delegated the monitoring of these risks to the Board’s Risk Management Committee and the Asset/Liability Management Committee. The management of liquidity risk, on a long-term and day-to-day basis, is the responsibility of the Corporate Treasury Division. The Corporation’s Corporate Treasurer is responsible for implementing the policies and procedures approved by the Board of Directors and for monitoring the Corporation’s liquidity position on an ongoing basis. Also, the Corporate Treasury Division coordinates corporate wide liquidity management strategies and activities with the reportable segments, oversees policy breaches and manages the escalation process. The Financial and Operational Risk Management Division is responsible for the independent monitoring and reporting of adherence with established policies. An institution’s liquidity may be pressured if, for example, it experiences a sudden and unexpected substantial cash outflow due to exogenous events such as the current COVID-19 pandemic, its credit rating is downgraded, or some other event causes counterparties to avoid exposure to the institution. Factors that the Corporation does not control, such as the economic outlook, adverse ratings of its principal markets and regulatory changes, could also affect its ability to obtain funding. Liquidity is managed by the Corporation at the level of the holding companies that own the banking and non-banking subsidiaries. It is also managed at the level of the banking and non-banking subsidiaries. As further explained below, a principal source of liquidity for the bank holding companies received from banking and (the “BHCs”) are dividends non-banking subsidiaries. The Corporation has adopted policies and limits to monitor more effectively the Corporation’s the banking subsidiaries. liquidity position and that of 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, funds for the Corporation, including customer deposits, brokered deposits and public funds deposits, continue to be the most significant source of funding 86% of the Corporation’s total assets at December 31, 2020 and 84% at December 31, 2019. The ratio of total ending loans to deposits was 52% at December 31, 2020, compared to 63% at December 31, 2019. In addition to traditional deposits, the Corporation maintains arrangements, which borrowing amounted to approximately $1.3 billion at December 31, 2020 (December 31, 2019 - $1.3 billion). A detailed description of the Corporation’s borrowings, including their terms, is included in Note 16 to the Consolidated Financial Statements. Also, the Consolidated Statements of Cash Flows in the accompanying Consolidated Financial Statements provide information on the Corporation’s cash inflows and outflows. As previously mentioned, during 2020 the Corporation executed actions corresponding to its capital and liquidity strategic plans. These included the $500 million accelerated share repurchase transaction with respect to its common stock and an increase in quarterly common stock dividend from $0.30 per share to $0.40 per share. Refer to additional details of these transactions in Notes 19 - Stockholders Equity and Note 30 - Net Income Per Common Share. The following sections provide further information on the Corporation’s major funding activities and needs, as well as the risks involved in these activities. Banking Subsidiaries Primary sources of funding for the Corporation’s banking subsidiaries (BPPR and PB or, collectively, “the banking subsidiaries”) include retail, commercial and public sector deposits, brokered deposits, unpledged investment securities, mortgage loan securitization and, to a lesser extent, loan sales. In addition, the Corporation maintains borrowing facilities with the FHLB and at the discount window of the Federal Reserve Bank of New York (the “FRB”) and has a considerable amount of collateral pledged that can be used to raise funds under these facilities. Refer to Note 16 to the Consolidated Financial Statements, the Corporation’s borrowing for additional facilities available through its banking subsidiaries. information of The principal uses of funds for the banking subsidiaries include loan originations, investment portfolio purchases, loan outstanding purchases repurchases, repayment and of POPULAR, INC. 2020 ANNUAL REPORT 33 commitments, expenses. Also, and operational recourse provisions, obligations (including deposits), advances on certain serviced the banking portfolios subsidiaries assume liquidity risk related to collateral posting requirements for certain activities mainly in connection with contractual 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 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 recognized credit agencies), rating all of the Corporation’s banking subsidiaries are federally insured (subject to FDIC limits) and this is expected to mitigate the potential effect of a downgrade in the credit ratings. Deposits are a key source of funding as they tend to be less volatile than institutional borrowings and their cost is less sensitive to changes in market rates. Refer to Table 8 for a breakdown of deposits by major types. Core deposits are generated from a large base of consumer, corporate and public sector customers. Core deposits include all non-interest bearing deposits, savings deposits and certificates of deposit under $100,000, excluding brokered deposits with denominations under $100,000. Core deposits have historically provided the Corporation with a sizable source of relatively stable and low-cost funds. Core deposits totaled $ 51.7 billion, or 91% of compared with at December 31, 2020, total deposits, $38.8 billion, or 89% of total deposits, at December 31, 2019. Core deposits financed 82% of the Corporation’s earning assets at December 31, 2020, compared with 80% at December 31, 2019. The distribution by maturity of certificates of deposits with denominations of $100,000 and over at December 31, 2020 is presented in the table that follows: Table 18 - Distribution by Maturity of Certificate of Deposits of $100,000 and Over (In thousands) 3 months or less 3 to 6 months 6 to 12 months Over 12 months Total $2,390,610 285,597 484,180 1,229,761 $4,390,148 Average deposits, including brokered deposits, for the year ended December 31, 2020 represented 91% of average earning assets, compared with 94% for the year ended December 31, 2019. Table 19 summarizes average deposits for the past five years. Table 19 - Average Total Deposits (In thousands) 2020 For the years ended December 31, 2017 2018 2019 2016 Non-interest bearing demand deposits $11,537,700 $ 8,872,897 $ 8,790,314 $ 7,338,455 $ 6,607,639 Savings accounts 12,620,755 10,425,345 9,621,162 8,268,969 7,528,057 NOW, money market and other interest bearing demand accounts 19,466,357 15,159,364 12,516,921 9,958,772 7,024,810 Certificates of deposit Total interest bearing deposits Total average deposits 7,960,967 7,761,190 7,559,024 7,616,326 7,905,504 40,048,079 33,345,899 29,697,107 25,844,067 22,458,371 $51,585,779 $42,218,796 $38,487,421 $33,182,522 $29,066,010 34 POPULAR, INC. 2020 ANNUAL REPORT The Corporation had $ 0.8 billion in brokered deposits at December 31, 2020, which financed approximately 1% of its total assets(December 31, 2019 - $0.5 billion and 1%, respectively). In the event that any of the Corporation’s banking subsidiaries’ regulatory capital ratios fall below those required by a well-capitalized institution or are subject to capital restrictions by the regulators, that banking subsidiary faces the risk of not being able to raise or maintain brokered deposits and faces limitations on the rate paid on deposits, which may hinder the Corporation’s ability to effectively compete in its retail markets and could affect its deposit raising efforts. Deposits from the public sector represent an important source of funds for the Corporation. As of December 31, 2020, total public sector deposits were $15.1 billion, compared to $10.6 billion at December 31, 2019. 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. the At December 31, 2020, management believes that banking subsidiaries had sufficient current and projected liquidity sources to meet their anticipated cash flow obligations, as well as special needs and off-balance sheet commitments, in the ordinary course of business and have sufficient liquidity resources to address a stress event. Although the banking subsidiaries have historically been able to replace maturing deposits and advances, no assurance can be given that they would be able to replace those funds in the future if the Corporation’s financial condition or general market conditions were to deteriorate. The Corporation’s financial flexibility will be severely constrained if the banking subsidiaries are unable to maintain access to funding or if adequate financing is not available to accommodate future financing needs at acceptable interest rates. The banking subsidiaries also are required to deposit to meet margin cash or qualifying the value of securities requirements. To the extent 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 is adversely affecting its liquidity. Finally, 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. securities that if management Bank Holding Companies The principal sources of funding for the BHCs, which are Popular, Inc. (holding company only) and PNA, include cash received from on hand, securities, dividends investment 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 cash needs of The BHCs have in the past borrowed in the money markets and in the corporate debt market primarily to finance their the non-banking subsidiaries; however, Corporation’s non-banking subsidiaries other than to repay indebtedness and interest are now minimal. These sources of funding have become more costly due to the Corporation’s principal credit rating being below “investment grade”, which affects the Corporation’s ability to raise funds in the capital markets. The Corporation has an automatic shelf registration statement filed and effective with the Securities and Exchange Commission, which permits the Corporation to issue an unspecified amount of debt or equity securities. The outstanding balance of notes payable at the BHCs amounted to $682 million at December 31, 2020 and $680 million at December 31, 2019. The contractual maturities of the BHCs notes payable at December 31, 2020 are presented in Table 20. Table 20 - Distribution of BHC’s Notes Payable by Contractual Maturity Year 2023 Later years Total (In thousands) 296,574 384,929 $681,503 is at service the BHCs Annual debt approximately $44 million, and the Corporation’s latest quarterly dividend was $0.40 per share. The BHCs liquidity position continues to be adequate with sufficient cash on hand, investments and other sources of liquidity which are expected to be enough to meet all future. As of BHCs obligations during the December 31, 2020, the BHCs had cash and money markets investments totaling $191 million, borrowing potential of $153 million from its secured facility with BPPR. In addition to these liquidity sources, the stake in EVERTEC had a market value of $458 million as of December 31, 2020 and it represents an additional source of contingent liquidity. foreseeable POPULAR, INC. 2020 ANNUAL REPORT 35 sources of funding for Non-Banking Subsidiaries The principal 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 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 2020, Popular Securities received capital contributions amounting to $10 million from Popular, Inc. funds for Dividends During the year ended December 31, 2020, the Corporation declared quarterly dividends on its outstanding common stock of $0.40 per share, for a year-to-date total of $ 136.6 million. The dividends for the Corporation’s Series A and Series B preferred stock amounted to $1.8 million. On February 24, 2020, the Corporation redeemed all the outstanding shares of 2008 Series B Preferred Stock. Refer to Note 19 for additional information. During the year ended December 31, 2020, the BHC’s received dividends amounting to $578 million from BPPR, $13 million from PIBI which main source of income is derived from its investment in BHD, $8 million in dividends from its non-banking subsidiaries and $2 million in dividends from EVERTEC. Dividends from BPPR constitute Popular, Inc.’s primary source of liquidity. Other Funding Sources and Capital The debt securities portfolio provides an additional source of liquidity, which may be realized through either securities sales or repurchase agreements. The Corporation’s debt securities portfolio consists primarily of liquid U.S. government debt securities, U.S. government sponsored agency debt securities, U.S. government sponsored agency mortgage-backed securities, and U.S. government sponsored agency collateralized mortgage obligations that can be used to raise funds in the repo markets. The availability of the repurchase agreement would be subject to having sufficient unpledged collateral available at the time the transactions are to be consummated, in addition to overall liquidity and risk appetite of the various counterparties. The to debt Corporation’s $3.4 billion at December 31, 2020 and $5.4 billion at December 31, 2019. A substantial portion of these debt securities could be used to raise financing in the U.S. money markets or from secured lending sources. unpledged amounted securities 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. 36 POPULAR, INC. 2020 ANNUAL REPORT Financial information of guarantor and issuers of registered guaranteed securities The Corporation (not including any of its subsidiaries, “PIHC”) is the parent holding company of Popular North America “PNA” and has other subsidiaries through which it conducts its financial services operations. PNA is an operating, 100% subsidiary of Popular, Inc. Holding Company (“PIHC”) and is the holding company of its wholly-owned subsidiaries: Equity One, Inc. and Popular Bank, including Popular Bank’s wholly- owned subsidiaries Popular Equipment Finance, Inc., Popular Insurance Agency, U.S.A., and E-LOAN, Inc. As described in Note 17, Trust Preferred Securities, PNA has issued junior subordinated debentures guaranteed by PIHC the “obligor group”) purchased by (together with PNA, the Corporation. These statutory 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. established by 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 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 the guaranteed party may sue the guarantor to enforce its rights under the respective guarantee without suing any other person or entity. such payments. PIHC’s guarantee of PNA’s that received dividends from their The principal sources of funding for PIHC and PNA have included 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. banking The following summarized financial information presents the financial position of the obligor group, on a combined basis at December 31, 2020 and the results of their operations for the period ended December 31, 2020. Investments in and equity in the earnings from the other subsidiaries and affiliates that are not members of the obligor group have been excluded. The summarized financial information of the obligor group is presented on a combined basis with intercompany balances and transactions between entities in the obligor group eliminated. The obligor group’s amounts due from, amounts due to and transactions with subsidiaries and affiliates have been presented in separate line items, if they are material. In addition, related parties transactions are presented separately. Table 21 - Summarized Statement of Condition (In thousands) December 31, 2020 Assets Cash and money market investments Investment securities Accounts receivables from non-obligor subsidiaries Other loans (net of allowance for credit losses of $311) Investment in equity method investees Other assets Total assets Liabilities and Stockholders’ deficit Accounts payable to non-obligor subsidiaries Accounts payable to affiliates and related parties Notes payable Other liabilities Stockholders’ deficit Total liabilities and stockholders’ deficit $ 190,830 27,630 16,338 31,162 88,272 46,547 $ 400,779 $ 3,946 977 681,503 79,208 (364,855) $ 400,779 Table 22 - Summarized Statement of Operations (In thousands) December 31, 2020 Income: Dividends from non-obligor subsidiaries Interest income from non-obligor subsidiaries and affiliates Earnings from investments in equity method investees Other operating income Total income Expenses: Services provided by non-obligor subsidiaries and affiliates (net of reimbursement by subsidiaries for services provided by parent of $138,729) Other operating expenses Total expenses Net income $586,000 2,383 17,912 4,340 $610,635 $ 13,191 29,652 $ 42,843 $567,792 Obligor group received dividend distributions from its direct equity method investees amounting to $2.3 million for the year ended December 31, 2020 and dividend distributions from a non-obligor subsidiary amounting to $12.5 million which was recorded as a reduction to the investment. leverage 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 regulatory creditworthiness, 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 the collateral requirements may increase, thereby reducing the balance of unpledged securities. requirements. As their fair value increases, ratios other and for The importance of the Puerto Rico market the Corporation is an additional risk factor that could affect its financing activities. In the case of a deterioration in economic and fiscal conditions in Puerto Rico, the credit quality of the Corporation could be affected and result in higher credit costs. Refer to the Geographic and Government Risk section of this MD&A for some highlights on the current status of the Puerto Rico economy and the ongoing fiscal crisis. Factors that the Corporation does not control, such as the economic outlook and credit ratings of its principal markets and regulatory changes, could also affect its ability to obtain funding. In order to prepare for the possibility of such scenario, management has raising financing under stress scenarios when important sources of funds temporarily fully are 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. adopted contingency plans are usually available that for The credit ratings of Popular’s debt obligations are a relevant factor for liquidity because they impact the Corporation’s ability to borrow in the capital markets, its cost and access to funding sources. Credit ratings are based on the financial strength, credit quality and concentrations in the loan portfolio, the level and volatility of earnings, capital adequacy, the quality of management, geographic concentration in Puerto Rico, the liquidity of the balance sheet, the availability of a significant base of and the Corporation’s ability to access a broad array of wholesale funding sources, among other factors. and commercial deposits, retail core Furthermore, various statutory provisions limit the amount of dividends an insured depository institution may pay to its holding company without regulatory approval. A member bank must obtain the approval of the Federal Reserve Board for any dividend, if the total of all dividends declared by the member POPULAR, INC. 2020 ANNUAL REPORT 37 bank during the calendar year would exceed the total of its net income for that year, combined with its retained net income for the preceding two years, less any required transfers to surplus or to a fund for the retirement of any preferred stock. In addition, a member bank may not declare or pay a dividend in an amount greater than its undivided profits as reported in its Report of Condition and Income, unless the member bank has received the approval of the Federal Reserve Board. A member bank also may not permit any portion of its permanent capital to be withdrawn unless the withdrawal has been approved by the Federal Reserve Board. Pursuant to these requirements, PB may not declare or pay a dividend without the prior approval of the Federal Reserve Board and the NYSDFS. The ability of a bank subsidiary to up-stream dividends to its BHC could thus thus potentially be impacted by its financial performance, 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 received preferred $578 million in dividends from BPPR during year ended December 31, 2020 and its ability to continue receiving dividends from BPPR will depend on such banking subsidiary’s financial condition and results of operation. example. Popular, stock, Inc. for The Corporation’s banking subsidiaries have historically not used unsecured capital market borrowings to finance its operations, and therefore are less sensitive to the level and changes in the Corporation’s overall credit ratings. Obligations Subject to Rating Triggers or Collateral Requirements The Corporation’s banking subsidiaries currently do not use borrowings that are rated by the major rating agencies, as these banking subsidiaries are funded primarily with deposits and secured borrowings. The banking subsidiaries had $9 million in deposits at December 31, 2020 that are subject to rating triggers. In addition, certain mortgage servicing and custodial agreements that BPPR has with third parties include rating covenants. In the event of a credit rating downgrade, the third parties have the right to require the institution to engage a substitute cash custodian for escrow deposits and/or increase collateral levels securing the recourse obligations. Also, as discussed in Note 22 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 amounted to approximately $50 million at December 31, 2020. The Corporation could be required to post additional collateral under the agreements. Management expects that it would be able to meet additional collateral requirements if and when needed. The requirements recourse obligations 38 POPULAR, INC. 2020 ANNUAL REPORT to post collateral under certain agreements or the loss of escrow deposits could reduce the Corporation’s liquidity resources and impact its operating results. Credit Risk Geographic and Government Risk The Corporation is exposed to geographic and government risk. The Corporation’s composition by geographical area and by business segment reporting are presented in Note 33 to the Consolidated Financial Statements. and revenue assets Commonwealth of Puerto Rico A significant portion of our financial activities and credit exposure is concentrated in the Commonwealth of Puerto Rico (the “Commonwealth” or “Puerto Rico”), which faces severe economic and fiscal challenges. COVID-19 Pandemic On December 2019, a novel strain of coronavirus (COVID-19) surfaced in Wuhan, China and has since spread globally to other countries and jurisdictions, including the mainland United States and Puerto Rico. In March 2020, the World Health Organization declared 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. In Puerto Rico, former Governor Wanda Vázquez issued an executive order on March 15, 2020 declaring a health emergency, ordering residents to shelter in place, implementing a mandatory curfew, and requiring the closure of for businesses that provide essential all businesses, except services, institutions with respect to certain services. While many of the restrictions have been gradually lifted, a mandatory curfew is still in effect and most businesses have had to make significant adjustments to protect customers and employees, including transitioning to telework and suspending or modifying certain operations in compliance with health and safety guidelines. including banking and financial The extent to which the COVID-19 pandemic will continue to have an adverse effect on economic activity in Puerto Rico in the long-term will depend on future developments, which are highly uncertain and is difficult to predict, including the scope and duration of the pandemic, the restrictions imposed by governmental authorities and other third parties in response to the same and the amount of federal and local assistance offered to offset the impact of the pandemic. However, the COVID-19 pandemic and the actions taken by governments in response to the same have had a material adverse effect on economic activity worldwide, including in Puerto Rico, and there can be no assurance that measures taken by governmental authorities will be sufficient to offset the pandemic’s economic impact. In the case of mortgage loans, to offer moratoriums on consumer In response to the pandemic, on April 2020 the Puerto Rico Legislative Assembly enacted legislation requiring financial institutions financial products to clients impacted by the COVID-19 pandemic through June 2020. the moratorium period was extended through August 2020. The Federal Government has also approved several economic stimulus measures, including the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) that seek to cushion the economic fallout of the pandemic, including expanding eligibility for unemployment benefits and guaranteeing through the Small Business Administration’s Paycheck Protection Program (the “PPP”) loans to small and medium businesses. to the MD&A Significant Events For a discussion of the impact of the pandemic on the Corporation’s operations and financial results during 2020, refer 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 this Form 10-K. For information regarding the projections of the 2020 Fiscal Plan (defined below) with respect to the impact of the pandemic, see Fiscal Plans, Commonwealth Fiscal Plan, below. Economic Performance The Commonwealth’s economy entered a recession in the fourth quarter of fiscal year 2006 and its gross national product (“GNP”) contracted (in real terms) every fiscal year between 2007 and 2018, with the exception of fiscal year 2012. Pursuant to the latest Puerto Rico Planning Board (the “Planning Board”) estimates, dated June 2020, the Commonwealth’s real GNP for fiscal years 2017 and 2018 decreased by 3.2% and 4.2%, respectively. The Planning Board estimates that real GNP increased approximately 1.5% in fiscal year 2019 due to the influx of federal funds and private insurance payments to repair damage caused by Hurricanes Irma and María, and that it decreased approximately -5.4% in fiscal year 2020 due primarily to the adverse impact of the COVID-19 pandemic and the measures taken by the government in response to the same. Finally, the Planning Board projected that the negative effects of COVID-19 would continue through fiscal year 2021, resulting in a contraction in real GNP of approximately -2% in the current fiscal year. Fiscal Crisis The Commonwealth remains in the midst of a profound fiscal crisis affecting the central government and many of its instrumentalities, public corporations and municipalities. This fiscal crisis has been primarily the result of economic contraction, persistent and significant budget deficits, a high debt burden, unfunded legacy obligations, and lack of access to the capital markets, among other factors. As a result of the crisis, the Commonwealth and certain of its instrumentalities have been unable to make debt service payments on their crisis outstanding bonds and notes since 2016. The escalating fiscal and imminent widespread defaults and economic prompted the U.S. Congress to enact the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”) in June 2016. As further discussed below under “Pending Title III Proceedings,” its instrumentalities are currently in the process of restructuring their debts restructuring mechanisms provided by PROMESA. the Commonwealth through the debt several and of for and established two mechanisms 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 the restructuring of the obligations of such entities. Pursuant to PROMESA, the Oversight Board will remain in place until market access is restored and balanced budgets, in accordance with modified accrual accounting, are produced for at least four consecutive years. In August 2016, President Obama appointed the seven voting members of the Oversight Board through the the process established in PROMESA, which authorizes President to select the members from several lists required to be submitted by congressional leaders and which process was recently upheld by the U.S. Supreme Court. The terms of the original Oversight Board members expired in August 2019, but PROMESA allows members to remain in their roles until their successors have been appointed. All of the original members continued to serve on the Oversight Board on holdover status until 2020, when President Donald Trump reappointed three of the original members and appointed four new members to the Oversight Board. its public corporations In October 2016, the Oversight Board designated the Commonwealth and all of and instrumentalities as “covered entities” under PROMESA. The only Commonwealth government entities that were not subject to such initial designation were the Commonwealth’s municipalities. In May 2019, however, the Oversight Board designated all of the Commonwealth’s municipalities as covered entities. At the Oversight Board’s request, covered entities are required to submit fiscal plans and annual budgets to the Oversight Board for its review and approval. They are also required to seek Oversight Board approval to issue, guarantee or modify their debts and to enter into contracts with an aggregate value of $10 million or more. Finally, covered entities are potentially eligible to avail the debt restructuring processes provided by PROMESA. themselves of 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 POPULAR, INC. 2020 ANNUAL REPORT 39 In January 2021, however, Oversight Board is dated May 27, 2020 (the “2020 Fiscal the Oversight Board Plan”). established a schedule for a proposed revision to the 2020 Fiscal Plan to incorporate new information regarding Puerto Rico’s macroeconomic environment and government revenues and expenditures and to incorporate the impact of expenses related to the potential certification of a plan of adjustment for the Commonwealth under Title III of PROMESA. Pursuant to the schedule, the Governor is required to submit a proposed updated fiscal plan to the Oversight Board by February 20, 2021, and the Oversight Board expects to certify a revised updated fiscal plan by April 23, 2021. The 2020 Fiscal Plan estimates that the economy of Puerto Rico will contract by 4% in real terms in fiscal year 2020, largely due to the COVID-19 pandemic, with a limited recovery of 0.5% in fiscal year 2021. The 2020 Fiscal Plan estimates that this economic contraction will exacerbate the Commonwealth government’s fiscal challenges. As a result of these changes, the 2020 Fiscal Plan projects that the Commonwealth will have a pre-contractual debt service deficit each year through 2025 if the measures and structural reforms contemplated by the plan are not the proposed fiscal measures and structural reforms will drive approximately $10 billion in savings and extra revenue through 2025 and a cumulative 0.88% increase in growth by fiscal year 2049. However, even after the fiscal measures and structural reforms, and before contractual debt service, the 2020 Fiscal Plan’s projections reflect an annual deficit starting in fiscal year 2032. successfully implemented. It estimates that The 2020 Fiscal Plan provides for the gradual reduction and the ultimate elimination of Commonwealth budgetary subsidies to municipalities, which constitute a material portion of the operating revenues of certain municipalities. Since fiscal year 2017, Commonwealth appropriations to municipalities have been reduced by approximately 64% (from approximately $370 million in fiscal year 2017 to approximately $132 million in fiscal year 2020). In response to the COVID-19 crisis, the 2020 Fiscal Plan provided for a one-year pause on reductions to appropriations to municipalities. Accordingly, appropriations to municipalities for fiscal year 2021 remained at $132 million, rather than declining by $44 million as contemplated by the prior fiscal plan. In addition, the Governor signed an executive order that adopts the “Strategic Plan for Disbursement” of the $2.2 billion allocated to Puerto Rico by the Coronavirus Relief Fund created by the Federal Government through the CARES Act. Such plan assigns $100 million to municipalities for eligible expenses related to COVID-19. The 2020 Fiscal Plan to reductions contemplates municipalities starting in fiscal year 2022, before eventually phasing out all appropriations in fiscal year 2025. The 2020 Fiscal Plan notes that municipalities have made little or no progress towards implementing fiscal discipline required to in appropriations additional 40 POPULAR, INC. 2020 ANNUAL REPORT reduce reliance on Commonwealth appropriations and better address the impact of declining populations and that, as currently operating, many municipalities are not fiscally sustainable. electric power utility, Other Fiscal Plans. Pursuant to PROMESA, the Oversight Board has also requested and certified fiscal plans for several public corporations and instrumentalities. The certified fiscal plan for the Puerto Rico Electric Power Authority (“PREPA”), Puerto Rico’s contemplated the transformation of Puerto Rico’s electric system through, among other things, the establishment of a public-private partnership with respect to PREPA’s transmission and distribution system, and calls for significant structural reforms at PREPA. The procurement process for the establishment of a public-private transmission and partnership with respect distribution system (the “T&D System”) was completed in June 2020. The selected proponent, LUMA Energy LLC (“LUMA”), and PREPA entered into a 15-year agreement whereby LUMA will be responsible for operating, maintaining and modernizing the T&D System. to PREPA’s (“CRIM”), On June 26, 2020, the Oversight Board certified a fiscal plan (the “CRIM Fiscal Plan”) for the Municipal Revenue Collection the government entity responsible for Center collecting property taxes and distributing them among the municipalities. The CRIM Fiscal Plan outlines a series of measures centered around improving the competitiveness of Puerto Rico’s property tax regime and the enhancement of property tax collections, including identifying and appraising new properties as well as improvements to existing properties, and implementing operational and technological initiatives. the Oversight Board, on behalf of Pending Title III Proceedings On May 3, 2017, the Commonwealth, filed a petition in the U.S. District Court to restructure the Commonwealth’s liabilities under Title III of subsequently filed PROMESA. The Oversight Board has analogous petitions with respect to the Puerto Rico Sales Tax Financing Corporation (“COFINA”), the Employees Retirement System of the Government of the Commonwealth of Puerto Rico (“ERS”), the Puerto Rico Highways and Transportation Authority, PREPA and the Puerto Rico Public Buildings Authority (“PBA”). On February 12, 2019, the government completed a restructuring of COFINA’s debts pursuant to a plan of adjustment confirmed by the U.S. District Court. On September 27, 2019, the Oversight Board filed a plan of adjustment for the Commonwealth, ERS and PBA in the pending debt restructuring proceedings under Title III of the Oversight Board PROMESA. On February 9, 2020, announced that it had reached a new agreement with certain bondholders on a new framework for a plan of adjustment and, on February 28, 2020, the Oversight Board filed an amended plan of adjustment reflecting such new agreement. In light of the Oversight Board the COVID-19 pandemic, however, the Government requested that the court adjourn proceedings related to the Proposed Plan of Adjustment so as to allow for the Government and the Oversight Board to prioritize the health and safety of the people of Puerto Rico and to gain a better understanding of the economic and fiscal impact of the pandemic. The Oversight Board, the Commonwealth recently resumed negotiations on the economic terms of a proposed plan of adjustment under a court-ordered mediation. On February 23, 2021, the Oversight Board and certain creditors of the Commonwealth announced that they executed a new plan support agreement, which establishes the terms of a proposed plan of adjustment. The Title III court set March 8, 2021 as the deadline for the filing of the new proposed plan of adjustment by the Oversight Board. and certain creditors of PROMESA Adversary Proceeding In 2019, the Oversight Board commenced an adversary proceeding against the Commonwealth seeking to invalidate Act 29-2019 (“Act 29”), which eliminated the obligation of municipalities to contribute to the Commonwealth’s health plan and pay-as-you-go retirement system, on the grounds that Act 29 was inconsistent with the Commonwealth’s fiscal plan. On April 15, 2020, the Judge ruled in favor of the Oversight Board and declared Act 29 “unenforceable and of no effect.” Judge Swain delayed the effective date of the opinion and order for three weeks, through May 6, 2020, to provide time for the Government and the Oversight Board to agree on a mechanism for the reimbursement to the Commonwealth of approximately $166 million and $32 million, respectively, on account of retirement and health plan obligations due by municipalities as a result of the invalidation of Act 29. Subsequent to the Court’s decision, the Oversight Board, the Government and CRIM, which is the entity primarily responsible for the collection of property taxes for the municipalities, made various proposals to resolve the immediate fiscal impact of Act 29’s invalidation. On May 6, 2020, the Government filed a motion informing the Court that CRIM had agreed to accept a proposal by the Oversight Board to reverse a $132 million transfer from the Commonwealth to the municipalities in the Commonwealth’s fiscal year 2020 budget (to be allocated among municipalities) to offset approximately $198 million obligation of municipalities for the health plan and pay-as-you go retirement system payments remaining $66 million would have to be repaid by municipalities by the end of fiscal year 2022 from other sources of revenue. There continue to be differences between the Government and the Oversight Board as to the calculation of the municipalities obligation for the health plan and retirement system payments, as well as to long-term solutions to the fiscal consequences to the municipalities of Act 29’s invalidation. The effect of the court’s decision and the implementation of the offset proposal finances is likely to vary described above on municipal significantly across municipalities. fiscal year 2020. The the for Seismic Activity On January 7, 2020, Puerto Rico was struck by a magnitude 6.4 earthquake, which caused island-wide power outages and significant damage to infrastructure and property in the southwest region of the island. The 6.4 earthquake was preceded by foreshocks and followed by aftershocks. The earthquake- Commonwealth’s government related damages at approximately $1 billion. estimates total to address a process Exposure of the Corporation The credit quality of BPPR’s loan portfolio reflects, among other things, the general economic conditions in Puerto Rico and other adverse conditions affecting Puerto Rico consumers and businesses. The effects of the prolonged recession have been reflected in limited loan demand, an increase in the rate of foreclosures and delinquencies on loans granted in Puerto Rico. While PROMESA provides the Commonwealth’s fiscal crisis, the length and complexity of the Title III proceedings for the Commonwealth and various of its instrumentalities and the adjustment measures required by the fiscal plans present significant economic risks. In addition, the COVID-19 outbreak has affected many of our individual customers and customers’ businesses. This, when added to Puerto Rico’s ongoing fiscal crisis and recession, could cause credit losses that adversely affect us and may negatively affect consumer confidence, in consumer spending, and adversely impact our interest and non-interest revenues. If global or local economic conditions worsen or the Government of Puerto Rico and the Oversight Board are unable to adequately manage the Commonwealth’s fiscal and economic challenges, including by controlling the adverse impact of the orderly COVID-19 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. consummating in reductions pandemic result and an respectively, which amounts were the At December 31, 2020 and December 31, 2019, Corporation’s direct exposure to the Puerto Rico government’s instrumentalities and municipalities totaled $377 million and fully $432 million, outstanding on such dates. On July 1, 2020 the Corporation received principal payments amounting to $58 million from various obligations from Puerto Rico municipalities. Further the Commonwealth’s fiscal and economic deterioration of situation could adversely affect the value of our Puerto Rico government obligations, resulting in losses to us. Of the amount outstanding, $342 million consists of loans and $35 million are securities ($391 million and $41 million, respectively, at December 31, 2019). Substantially all of the amount outstanding at December 31, 2020 were obligations from various Puerto Rico municipalities. In most cases, these were “general obligations” of a municipality, to which the applicable municipality has pledged its good faith, credit and POPULAR, INC. 2020 ANNUAL REPORT 41 “special obligations” of unlimited taxing power, or a municipality, to which the applicable municipality has pledged other the revenues. At December 31, 2020, 74% of Corporation’s exposure to municipal loans and securities was concentrated in the municipalities of San Juan, Guaynabo, Carolina and Bayamón. For additional discussion of the Corporation’s direct exposure to the Puerto Rico government and its instrumentalities and municipalities, refer to Note 23 – Commitments and Contingencies. a is repayment ($350 million In addition, at December 31, 2020, the Corporation had $317 million in loans insured or securities issued by Puerto Rico governmental entities, but for which the principal source of at non-governmental December 31, 2019). These included $260 million in residential mortgage loans insured by the Puerto Rico Housing Finance Authority (“HFA”), a governmental instrumentality that has been designated as covered entity under PROMESA (December 31, 2019 - $276 million). These mortgage loans are secured by first mortgages on Puerto Rico residential properties and the HFA insurance covers losses in the event of a borrower default and upon the satisfaction of certain other conditions. The Corporation also had, at December 31, 2020, $46 million in bonds issued by HFA which are secured by second mortgage loans on Puerto Rico residential properties, and for which HFA also provides insurance to cover losses in the event of a borrower default, and upon the satisfaction of certain other conditions (December 31, 2019 - $46 million). In the event that the mortgage loans insured by HFA and held by the Corporation directly or those serving as collateral for the HFA bonds default and the collateral is insufficient to satisfy the outstanding balance of this loans, HFA’s ability to honor its insurance will depend, among other factors, on the financial condition of HFA at the time such obligations become due and payable. The Corporation does not consider the government guarantee when estimating the credit losses associated with this portfolio. Although the Governor is currently authorized by legislation to impose a temporary moratorium on the local financial obligations of the HFA, a moratorium on such obligations has not been imposed as of the date hereof. In the Corporation had addition, $11 million of commercial issued by government entities but that are payable from rent paid by non-governmental parties (December 31, 2019 - $21 million). the Corporation received a payment On January 1, 2020, amounting to $7 million upon the maturity of securities issued by HFA which had been economically defeased and refunded and for which securities consisting of U.S. agencies and Treasury obligations had been escrowed (December 31, 2019 - $7 million). at December 31, 2020, real estate notes BPPR’s commercial loan portfolio also includes loans to private borrowers who are service providers, lessors, suppliers relationships with the government. These or have other borrowers could be negatively affected by the fiscal measures to 42 POPULAR, INC. 2020 ANNUAL REPORT be implemented to address the Commonwealth’s fiscal crisis and the ongoing Title III proceedings under PROMESA described above. Similarly, BPPR’s mortgage and consumer loan portfolios include loans to current and former government employees which could also be negatively affected by fiscal measures such as employee layoffs or furloughs or reductions in pension benefits. BPPR also has a significant amount of deposits from the Commonwealth, its instrumentalities, and municipalities. The amount of such deposits may fluctuate depending on the financial condition and liquidity of such entities, as well as on the ability of BPPR to maintain these customer relationships. The Corporation may also have direct exposure with regards to avoidance and other causes of action initiated by the Oversight Board on behalf of the Commonwealth or other Title III debtors. For such exposure, refer to Note 23 of the Consolidated Financial Statements. information regarding additional United States Virgin Islands The Corporation has operations in the United States Virgin Islands (the “USVI”) and has credit exposure to USVI government entities. the effects of 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 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, the U.S. Congress or the Government of the USVI may enact legislation allowing for the restructuring of the financial obligations of USVI government entities or imposing a stay on creditor remedies, including by making PROMESA applicable to the USVI. the At December 31, 2020, the Corporation’s direct exposure to USVI instrumentalities and public corporations amounted to approximately $105 million, of which $70 million is outstanding (compared to $71 million and $67 million, respectively, amount at December 31, 2019). Of outstanding, approximately (i) $43 million represents loans to the West Indian Company LTD, a government-owned company that owns and operates a cruise ship pier and shopping mall complex in St. Thomas, (ii) $20 million represents loans to the Virgin Islands Water and Power Authority, a public corporation of the USVI that operates USVI’s water production and electric generation plants, (iii) $3 million represents loans to the Virgin Islands Public Finance Authority (“VI PFA” ), a public corporation of the USVI created for the purpose of raising capital for public projects and (iv) $4 million in loans to the Virgin Islands Porth Authority (compared to $42 million, $17 million, $8 million, and $0, respectively, at December 31, 2019). The increase in the exposure to the VI PFA from December 31, 2019 to December 31, 2020 is due to the purchase by BPPR of $30 million of Series 2020A-1 Tax Revenue Anticipation Notes of the VI PFA in December 2020, which are secured by a statutory lien on income taxes real property taxes and, on a subordinated basis, gross receipt taxes. British Virgin Islands The Corporation has operations in the British Virgin Islands (“BVI”), which has been negatively affected by the COVID-19 pandemic, particularly as a reduction in the tourism activity which accounts for a significant portion of its economy. Although the Corporation has no significant exposure to a single borrower in the BVI, it has a loan portfolio amounting to approximately $251 million comprised of various retail and commercial approximately $19 million with the government of the BVI (compared to $258 million and $22 million, respectively, as of December 31, 2019). including loan of clients, a represented exposure U.S. Government As further detailed in Notes 5 and 6 to the Consolidated Financial Statements, a substantial portion of the Corporation’s securities investment to the U.S. in the form of U.S. Government sponsored Government entities, as well as agency mortgage-backed and U.S. Treasury securities. In addition, $1.8 billion of residential mortgages, $1.3 billion of SBA loans under the PPP program and $60 million commercial loans were insured or guaranteed by the U.S. Government or its agencies at December 31, 2020 (compared to $1.1 billion, $0 and $66 million, respectively, at December 31, 2019). Non-Performing Assets Non-performing assets (“NPAs”) include primarily past-due loans that are no longer accruing interest, renegotiated loans, and real estate property acquired through foreclosure. A summary, including certain credit quality metrics, is presented in Table 23. The Corporation adopted the CECL accounting standard effective January 1, 2020. This framework requires management to estimate credit losses over the full remaining expected life of the loan using economic forecasts over a reasonable and supportable period, and historical information thereafter. The year 2020 was impacted by the unprecedented events that have unfolded as a result of the COVID-19 pandemic. Notwithstanding, the Corporation’s credit quality remained stable, aided by payment deferrals and government stimulus measures instituted in response to the COVID-19 pandemic. The financial relief granted to eligible borrowers in response to the COVID-19 pandemic, comprised mainly of payment deferrals of up to six months, largely ended during the third quarter of 2020. Management continues to closely follow macroeconomic conditions and although the outlook indicates improvements, the full effects of the pandemic and the pace of the recovery remains uncertain. The improvement over the last few years in the risk profile of the Corporation’s loan portfolios positions Popular to operate successfully under the ongoing challenging environment. We will continue to carefully monitor the exposure of the portfolios to the COVID-19 pandemic related risks, changes in the economic outlook of the regions in which Popular operates and how delinquencies and NCOs evolve. loans impaired (“PCI’) Total NPAs increased by $174 million when compared with December 31, 2019. Total non-performing loans held-in-portfolio increased by $210 million from December 31, 2019, impacted by the adoption of the CECL methodology during the first quarter of 2020. Following existing accounting guidance, purchased credit loans were excluded from non-performing status due to the estimation of cash flows at the pool level. Under CECL, these loans are accounted for on an individual loan basis under PCD accounting methodology and are no longer excluded from non-performing status. BPPR’s NPLs increased by $201 million, transition impact of mostly related to the PCI $260 million, while Popular Bank’s NPLs increased by $9 million. Excluding this impact, BPPR’s NPLs decreased by $59 million, mainly due to lower commercial and consumer (mostly auto) NPLs of $56 million and $21 million, respectively. The decrease in commercial NPLs was mostly related to loans charged-off during the period, combined with payment activity. The decrease in the consumer NPLs was mostly related to auto loans, aided by payment deferrals, government resumption of collection efforts. These NPLs reductions were in part offset by the addition of a $22 million construction relationship. Popular Bank’s NPLs increase of $9 million was mostly driven by a $9 million construction NPL inflow during the third quarter of 2020, related to a single borrower from the New York region. At December 31, 2020, loans held-in-portfolio was 2.5% compared to 1.9% at the end of 2019. In addition, non-performing loans-held-for-sale (“LHFS’) increased by $3 million, driven by taxi medallion loans, and (“OREOs”) decreased by other foreclosure $39 million, mostly due to the suspension of activity due to the COVID-19 pandemic. the ratio of NPLs to total real estate owned loans stimulus measures and the At December 31, 2020, NPLs secured by real estate amounted to $630 million in the Puerto Rico operations and $34 million in PB. These figures were $406 million and $26 million, respectively, at December 31, 2019. The Corporation’s commercial loan portfolio secured by real estate (“CRE”) amounted to $7.8 billion at December 31, 2020, of which $1.9 billion was secured with owner occupied properties, compared with $7.7 billion and $1.9 billion, POPULAR, INC. 2020 ANNUAL REPORT 43 respectively, at December 31, 2019. CRE NPLs amounted to compared with $173 million at December 31, 2020, $113 million at December 31, 2019. The CRE NPL ratios for the BPPR and PB segments were 4.51% and 0.07%, respectively, at December 31, 2020, compared with 2.88% and 0.07%, respectively, at December 31, 2019. In addition to the NPLs included in Table 23, at December 31, 2020, there were $228 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, 2019 - $207 million). For the year ended December 31, 2020, total inflows of NPLs held-in-portfolio, excluding consumer loans, increased by Table 23 - Non-Performing Assets further explained below, $123 million, or 42%, when compared to the inflows for the at same period in 2019. As December 31, 2020, 94% of loans, after excluding government guaranteed loans, for which the COVID-19 moratoriums had expired were current on their payments. Inflows of NPLs held-in-portfolio at the BPPR segment increased by $89 million, or 32%, compared to the year ended 2019, driven by higher mortgage inflows by $87 million, mostly due to the delinquency progression at the payment moratorium. Inflows of NPLs held-in-portfolio at the PB segment increased by $35 million, or 173%, from the same period in 2019, mostly due to higher mortgage and construction inflows of $18 million and $9 million, respectively. The construction increase was driven by the single borrower mentioned above. the expiration of (Dollars in thousands) Non-accrual loans: Commercial [1] Construction Legacy [2] Leasing Mortgage [1] Consumer [1] Total non-performing loans held-in-portfolio Non-performing loans held-for-sale [3] Other real estate owned (“OREO”) December 31, 2020 Popular U.S. Popular, Inc. BPPR December 31, 2019 Popular U.S. Popular, Inc. BPPR December 31, 2018 Popular U.S. Popular, Inc. BPPR $ 204,092 $ 4,477 $ 208,569 $147,255 119 – 3,657 283,708 64,461 29,057 1,511 3,441 429,207 65,989 21,497 – 3,441 414,343 57,004 7,560 1,511 – 14,864 8,985 $ 3,505 26 1,999 – 11,091 12,020 $150,760 145 1,999 3,657 294,799 76,481 $182,950 1,788 – 3,313 323,565 56,482 $ 1,076 12,060 2,627 – 11,033 16,193 $184,026 13,848 2,627 3,313 334,598 72,675 700,377 37,397 737,774 499,200 28,641 527,841 568,098 42,989 611,087 – 2,738 2,738 – – – – – – 81,512 1,634 83,146 120,011 2,061 122,072 134,063 2,642 136,705 Total non-performing assets $ 781,889 $41,769 $ 823,658 $619,211 $30,702 $649,913 $702,161 $45,631 $747,792 Accruing loans past-due 90 days or more [4] [5] $1,028,061 $ 3 $1,028,064 $460,133 $ – $460,133 $612,543 $ – $612,543 Non-performing loans to loans held-in-portfolio Interest lost 2.51% $ 45,040 1.93% $ 29,469 2.31% $ 35,170 [1] The increase in non-accrual loans during 2020 includes the initial impact of $278 million related to the adoption of CECL on the portfolio of previously purchased credit deteriorated loans. This included mortgage loans for $133 million, commercial loans for $131 million and $14 million in consumer loans. [2] The legacy portfolio is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years at the PB reportable segment. [5] [3] There were $3 million in non-performing commercial loans held-for-sale as of December 31, 2020 and none for the years December 31, 2019 and 2018. [4] The carrying value of loans accounted for under ASC Subtopic 310-30 that are contractually 90 days or more past due was $153 million at December 31, 2019 (December 31, 2018 - $216 million). This amount is excluded from the above table as the loans’ accretable yield interest recognition is independent from the underlying contractual loan delinquency status. It is the Corporation’s policy to report delinquent residential mortgage loans insured by FHA or guaranteed by the VA as accruing loans past due 90 days or more as opposed to non-performing since the principal repayment is insured. The balance of these loans includes $57 million at December 31, 2020 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, 2019 - $103 million; December 31, 2018 - $134 million). Under the GNMA program, issuers such as BPPR have the option but not the obligation to repurchase loans that are 90 days or more past due. For accounting purposes, these loans subject to the repurchase option are required to be reflected (rebooked) on the financial statements of BPPR with an offsetting liability. While the borrowers for our serviced GNMA portfolio benefited from the moratorium, the delinquency status of these loans continued to be reported to GNMA without considering the moratorium. These balances include $329 million of residential mortgage loans insured by FHA or guaranteed by the VA that are no longer accruing interest as of December 31, 2020 (December 31, 2019 - $213 million; December 31, 2018 - $283 million). Furthermore, the Corporation has approximately $60 million in reverse mortgage loans which are guaranteed by FHA, but which are currently not accruing interest. Due to the guaranteed nature of the loans, it is the Corporation’s policy to exclude these balances from non-performing assets (December 31, 2019 - $65 million; December 31, 2018 - $69 million). 44 POPULAR, INC. 2020 ANNUAL REPORT Table 23 (continued) - Non-Performing Assets (Dollars in thousands) Non-accrual loans: Commercial Legacy [1] Leasing Mortgage Consumer December 31, 2017 Popular U.S. Popular, Inc. BPPR December 31, 2016 Popular U.S. Popular, Inc. BPPR $ 161,226 $ 3,839 $ 165,065 $159,655 – 3,062 318,194 51,597 3,039 2,974 321,549 58,330 – 2,974 306,697 40,543 3,039 – 14,852 17,787 $ 3,693 3,337 – 11,713 6,664 25,407 3,033 $163,348 3,337 3,062 329,907 58,261 557,915 180,445 $28,440 – $738,360 36,044 Total non-performing loans held-in-portfolio, excluding covered loans Other real estate owned (“OREO”), excluding covered OREO 511,440 167,253 39,517 2,007 550,957 169,260 532,508 177,412 Total non-performing assets, excluding covered assets Covered loans and OREO [3] $ 678,693 $41,524 $ 720,217 $709,920 36,044 22,948 22,948 – Total non-performing assets $ 701,641 $41,524 $ 743,165 $745,964 $28,440 $774,404 Accruing loans past-due 90 days or more [4] [5] $1,225,149 $ – $1,225,149 $426,652 $ – $426,652 Excluding covered loans: [6] Non-performing loans to loans held-in-portfolio Including covered loans: Non-performing loans to loans held-in-portfolio Interest lost 2.27% 2.23% $ 29,920 2.45% 2.41% $ 29,385 [1] The legacy portfolio is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years at the PB reportable segment. [2] There were no non-performing loans held-for-sale at December 31, 2017 and 2016. [3] The amount consists of $3 million in non-performing loans accounted for under ASC Subtopic 310-20 and $20 million in covered OREO at December 31, 2017 (December 31, 2016 - $4 million and $32 million, respectively). It excludes covered loans accounted for under ASC Subtopic 310-30 as they are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analyses. [5] [4] The carrying value of loans accounted for under ASC Subtopic 310-30 that are contractually 90 days or more past due was $153 million at December 31, 2017 (December 31, 2016 - $282 million). This amount is excluded from the above table as the loans’ accretable yield interest recognition is independent from the underlying contractual loan delinquency status. It is the Corporation’s policy to report delinquent residential mortgage loans insured by FHA or guaranteed by the VA as accruing loans past due 90 days or more as opposed to non-performing since the principal repayment is insured. These balances include $178 million of residential mortgage loans insured by FHA or guaranteed by the VA that are no longer accruing interest as of December 31, 2017 (December 31, 2016 - $181 million). Furthermore, the Corporation has approximately $58 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, 2016 - $68 million). [6] These asset quality ratios have been adjusted to remove the impact of covered loans. Appropriate adjustments to the numerator and denominator have been reflected in the calculation of these ratios. Management believes the inclusion of acquired loans in certain asset quality ratios that include non-performing assets, past due loans or net charge-offs in the numerator and denominator results in distortions of these ratios and they may not be comparable to other periods presented or to other portfolios that were not impacted by purchase accounting. POPULAR, INC. 2020 ANNUAL REPORT 45 Table 24 - Activity in Non-Performing Loans Held-in-Portfolio (Excluding Consumer Loans) (In thousands) Beginning balance Transition of PCI to PCD loans under CECL Plus: New non-performing loans Advances on existing non-performing loans Less: Non-performing loans transferred to OREO Non-performing loans charged-off Loans returned to accrual status / loan collections Loans transferred to held-for-sale Ending balance NPLs [1] [1] Includes $1.5 million of NPLs related to the legacy portfolio. For the year ended December 31, 2020 Popular U.S. Popular, Inc. BPPR $ 431,082 245,703 $ 16,621 18,547 $ 447,703 264,250 362,786 – 54,092 825 (11,762) (44,675) (343,202) – – (3,204) (47,790) (10,679) 416,878 825 (11,762) (47,879) (390,992) (10,679) $ 639,932 $ 28,412 $ 668,344 Table 25 - Activity in Non-Performing Loans Held-in-Portfolio (Excluding Consumer Loans) (In thousands) Beginning balance Plus: New non-performing loans Advances on existing non-performing loans Less: Non-performing loans transferred to OREO Non-performing loans charged-off Loans returned to accrual status / loan collections Non-performing loans sold Ending balance NPLs [1] [1] Includes $2.0 million of NPLs related to the legacy portfolio. Table 26 - Activity in Non-Performing Commercial Loans Held-In-Portfolio (In thousands) Beginning balance - NPLs Transition of PCI to PCD loans under CECL Plus: New non-performing loans Advances on existing non-performing loans Less: Non-performing loans transferred to OREO Non-performing loans charged-off Loans returned to accrual status / loan collections Loans transferred to held-for-sale Ending balance - NPLs 46 POPULAR, INC. 2020 ANNUAL REPORT For the year ended December 31, 2019 Popular U.S. Popular, Inc. BPPR $ 508,303 $ 26,796 $ 535,099 274,135 – (32,481) (59,191) (254,847) (4,837) 19,651 501 (601) (4,825) (14,867) (10,034) 293,786 501 (33,082) (64,016) (269,714) (14,871) $ 431,082 $ 16,621 $ 447,703 For the year ended December 31, 2020 BPPR Popular U.S. Popular, Inc. $147,255 112,517 $ 3,505 18,547 $ 150,760 131,064 50,834 – (2,304) (23,755) (80,455) – 15,496 228 – (1,646) (20,974) (10,679) 66,330 228 (2,304) (25,401) (101,429) (10,679) $204,092 $ 4,477 $ 208,569 Table 27 - Activity in Non-Performing Commercial Loans Held-in-Portfolio (In thousands) Beginning balance - NPLs Plus: New non-performing loans Advances on existing non-performing loans Less: Non-performing loans transferred to OREO Non-performing loans charged-off Loans returned to accrual status / loan collections Non-performing loans sold Ending balance - NPLs Table 28 - Activity in Non-Performing Construction Loans Held-In-Portfolio (In thousands) Beginning balance - NPLs Plus: New non-performing loans Less: Non-performing loans charged-off Loans returned to accrual status / loan collections Ending balance - NPLs Table 29 - Activity in Non-Performing Construction Loans Held-in-Portfolio (In thousands) Beginning balance - NPLs Plus: Advances on existing non-performing loans Less: Non-performing loans charged-off Loans returned to accrual status / loan collections Non-performing loans sold Ending balance - NPLs Table 30 - Activity in Non-Performing Mortgage Loans Held-in-Portfolio (In thousands) Beginning balance - NPLs Transition of PCI to PCD loans under CECL Plus: New non-performing loans Advances on existing non-performing loans Less: Non-performing loans transferred to OREO Non-performing loans charged-off Loans returned to accrual status / loan collections Ending balance - NPLs For the year ended December 31, 2019 BPPR $182,950 71,063 – (7,692) (33,562) (60,667) (4,837) $147,255 Popular U.S. Popular, Inc. $ 1,076 $184,026 7,564 80 – (2,074) (3,141) – $ 3,505 78,627 80 (7,692) (35,636) (63,808) (4,837) $150,760 For the year ended December 31, 2020 BPPR 119 $ Popular U.S. Popular, Inc. $ 26 $ 145 21,514 9,069 30,583 – (136) $21,497 (1,509) (26) $ 7,560 (1,509) (162) $29,057 For the year ended December 31, 2019 BPPR $ 1,788 Popular U.S. Popular, Inc. $ 12,060 $ 13,848 – 215 215 – (1,669) – 119 $ (2,215) – (10,034) 26 $ (2,215) (1,669) (10,034) 145 $ For the year ended December 31, 2020 BPPR $ 283,708 133,186 Popular U.S. Popular, Inc. $ 11,091 – $ 294,799 133,186 290,438 – 29,527 192 319,965 192 (9,458) (20,920) (262,611) $ 414,343 – (49) (25,897) $ 14,864 (9,458) (20,969) (288,508) $ 429,207 POPULAR, INC. 2020 ANNUAL REPORT 47 Table 31 - Activity in Non-Performing Mortgage Loans Held-in-Portfolio (In thousands) Beginning balance - NPLs Plus: New non-performing loans Advances on existing non-performing loans Less: Non-performing loans transferred to OREO Non-performing loans charged-off Loans returned to accrual status / loan collections Ending balance - NPLs For the year ended December 31, 2019 BPPR Popular U.S. Popular, Inc. $ 323,565 $ 11,033 $ 334,598 203,072 – (24,789) (25,629) (192,511) 11,877 158 (601) (539) (10,837) 214,949 158 (25,390) (26,168) (203,348) $ 283,708 $ 11,091 $ 294,799 Loan Delinquencies Another key measure used to evaluate and monitor the Corporation’s asset quality is loan delinquencies. Loans delinquent 30 days or more and delinquencies, as a percentage of their related portfolio category at December 31, 2020 and 2019, are presented below. Table 32 - Loan Delinquencies (Dollars in thousands) 2020 2019 Loans delinquent 30 days or more Total loans Total delinquencies as a percentage of total loans Loans delinquent 30 days or more Total loans Total delinquencies as a percentage of total loans Commercial Construction Legacy Leasing Mortgage [1] Consumer Loans held-for-sale Total $ 247,961 50,369 1,523 14,009 1,775,902 179,789 3,108 $2,272,661 $13,606,280 918,765 15,473 1,197,661 7,890,680 5,756,337 99,455 $29,484,651 1.82% 5.48 9.84 1.17 22.51 3.12 3.13 7.71% $ 231,692 1,700 2,056 18,724 1,299,443 249,987 – $1,803,602 $12,312,751 831,092 22,105 1,059,507 7,183,532 5,997,886 59,203 $27,466,076 1.88% 0.20 9.30 1.77 18.09 4.17 – 6.57% [1] At December 31, 2020, mortgage loans 90 days or more past due included approximately $1.0 billion which were insured by the Federal Housing Administration (“FHA”), or guaranteed by the U.S. Department of Veterans Affairs (“VA”) (December 31, 2019 - $441 million). Allowance for Credit Losses (“ACL”) The Corporation adopted the new CECL accounting standard effective on January 1, 2020. The allowance for credit losses (“ACL”), represents management’s estimate of expected credit losses through the remaining contractual life of the different loan segments, impacted by expected prepayments. The ACL is maintained at a sufficient level to provide for estimated credit losses on collateral dependent loans as well as troubled debt the loan restructurings separately from the remainder of portfolio. The Corporation’s management 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. evaluates 48 POPULAR, INC. 2020 ANNUAL REPORT lifetime changes expected losses, 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 in underwriting standards, financial accounting standards and loan impairment measurements, among others. Changes in the financial condition of in economic conditions, and in the condition of the various markets in which collateral may be sold, may also affect the required level of the allowance for loan losses. Consequently, the business financial condition, liquidity, capital and results of operations could also be affected. Refer to Note 2 – Summary of significant accounting policies included in this Form 10-K for a description of the Corporation’s allowance for credit losses methodology. individual borrowers, At December 31, 2020, the allowance for credit losses amounted to $896 million, an increase of $419 million, when compared with December 31, 2019, mostly related to the CECL adoption impact in the first quarter of 2020 of $315 million (“Day 1 impact”) in the allowance for credit losses related to loans. Excluding such Day 1 impact, the ACL increase was in the mainly macroeconomic conditions from the COVID-19 pandemic. The BPPR ACL increased by $307 million to $740 million. The PB segment increased by $111 million to $157 million, when attributable significant change the to the year compared to December 31, 2019. The provision for credit losses ended December 31, 2020 amounted to for $282.3 million, increasing by $116.6 million from the same period in the prior year. Refer to Note 2 – Summary of significant accounting policies and Note 8 – Allowance for credit losses included in this Form 10-K for additional information. The following table presents net charge-offs to average loans held-in-portfolio (“HIP”) ratios by loan category for the years ended December 31, 2020, 2019 and 2018: Table 33 - Net Charge-Offs (Recoveries) to Average Loans HIP December 31, 2020 Popular U.S. Popular Inc. BPPR December 31, 2019 Popular U.S. Popular Inc. BPPR December 31, 2018 Popular U.S. Popular Inc. BPPR Commercial Construction Leasing Legacy Mortgage Consumer Total 0.21% (0.04)% 0.11% 0.48% 0.65% (0.07) (0.57) 0.66 0.66 (0.39) – 0.27 0.32 2.48 2.44 0.04 – (0.39) – 3.07 0.32 – (5.85) 0.05 3.27 (2.82) 0.94 – 0.67 2.42 0.54% 0.91% 0.44% (1.54) (0.11) 0.70 0.94 (5.85) – 1.05 0.59 2.64 2.49 0.71 – (6.89) (0.05) 3.68 0.73% 0.49 0.70 (6.89) 0.93 2.74 0.85% 0.13% 0.66% 1.06% 0.68% 0.96% 1.31% 0.61% 1.13% NCOs for the year ended December 31, 2020 amounted to $186.4 million, decreasing by $71.0 million when compared to the same period in 2019. The BPPR segment decreased by $33.6 million mainly driven by lower mortgage and commercial NCOs by $21.7 million and $17.8 million, respectively, due to the effect of the pandemic relief programs, partially offset by higher consumer NCOs by $5.8 million. The PB segment Table 34 - Allowance for Credit Losses - Loan Portfolios decreased by $37.4 million, mainly driven by lower commercial NCOs by $33.6 million, as the prior year included charge-offs from the taxi medallion portfolio. The Corporation continues to be attentive to changes in delinquencies and NCOs, as most deferrals expired during the third quarter of 2020 and given the uncertainty around the outlook of the pandemic. December 31, 2020 (Dollars in thousands) Commercial Construction Legacy [1] Leasing Mortgage Consumer Total Total ACL Total loans held-in-portfolio ACL to loans held-in-portfolio $ 332,269 $13,606,280 $ 13,955 $918,765 $ 1,393 $15,473 $ 16,863 $1,197,661 $ 215,716 $7,890,680 $ 316,054 $ 896,250 $5,756,337 $29,385,196 2.44% 1.52% 9.00% 1.41% 2.73% 5.49% 3.05% [1] The legacy portfolio is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years at the Popular U.S. reportable segment. POPULAR, INC. 2020 ANNUAL REPORT 49 Table 35 - Allowance for Credit Losses - Loan Portfolios (Dollars in thousands) Specific ALLL Impaired loans Specific ALLL to impaired loans General ALLL Loans held-in-portfolio, excluding impaired loans General ALLL to loans held-in-portfolio, excluding impaired loans Total ALLL Total non-covered loans held-in-portfolio December 31, 2019 Commercial Construction Legacy [1] Leasing Mortgage Consumer Total $ $ $ 20,533 399,549 5.14% $ $ 6 119 5.04% 126,519 $ 4,772 $ $ $ – – -% 630 $ $ $ 61 507 12.03% $ 42,804 $ 531,855 21,822 $ $ 85,226 $ 100,791 $ 1,032,821 8.05% 21.65% 8.25% 10,707 $ 78,304 $ 171,550 $ 392,482 $11,913,202 $830,973 $22,105 $1,059,000 $6,651,677 $5,897,095 $26,374,052 1.06% 0.57% 2.85% 1.01% 1.18% 2.91% 1.49% $ 147,052 $ 4,778 $ 630 $ 10,768 $ 121,108 $ 193,372 $ 477,708 $12,312,751 $831,092 $22,105 $1,059,507 $7,183,532 $5,997,886 $27,406,873 ALLL to loans held-in-portfolio 1.19% 0.57% 2.85% 1.02% 1.69% 3.22% 1.74% [1] The legacy portfolio is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years at the Popular U.S. reportable segment. Table 36 details the breakdown of the allowance for loan losses by loan categories. The breakdown is made for analytical purposes, and it is not necessarily indicative of the categories in which future loan losses may occur. Table 36 - Allocation of the Allowance for Credit Losses - Loans 2020 At December 31, 2019 2018 2017 2016 % of loans in each category to total loans % of loans in each category to total loans ACL % of loans in each category to total loans % of loans in each category to total loans ACL ACL ACL 46.3% $147.0 4.8 3.1 0.6 0.1 10.8 4.1 121.1 26.8 193.4 19.6 44.9% $239.1 7.4 3.0 1.0 0.1 11.5 3.9 147.4 26.2 162.9 21.9 45.5% $215.7 8.4 2.9 0.8 0.1 12.0 3.5 163.6 27.3 189.7 20.7 47.3% $202.7 9.5 3.6 1.3 0.2 3.3 7.7 147.9 29.9 141.2 15.7 % of loans in each category to total loans 47.4% 3.4 0.2 3.1 29.4 16.5 100.0% $477.7 100.0% $569.3 100.0% $590.2 100.0% $510.3 100.0% ACL $332.3 14.0 1.4 16.9 215.7 316.0 $896.3 (Dollars in millions) Commercial Construction Legacy Leasing Mortgage Consumer Total [1] [1] Note: For purposes of this table the term loans refers to loans held-in-portfolio excluding covered loans and held-for-sale. Troubled debt restructurings The Corporation’s troubled debt restructurings (“TDRs”) loans amounted to $1.7 billion at December 31, 2020, increasing by $81 million, or approximately 5.08%, from December 31, 2019, mainly due to borrowers that needed additional loss mitigation alternatives, beyond the 6-month moratorium period granted under the COVID-19 program. TDRs in the BPPR segment increased by $82 million, mostly related to higher mortgage TDRs by $56 million, of which $30 million were related to government guaranteed loans, coupled with a combined increase of $35 million in the commercial and construction TDRs, mainly due to a $21 million construction loan, partially offset by a decrease of $9 million in the consumer portfolio. The PB segment decreased by $2 million from the prior year. TDRs in accruing status increased by $61 million from December 31, 2019, mostly related to BPPR mortgage TDRs, while non-accruing TDRs increased by $20 million. In response to the COVID-19 pandemic, since March 2020 the Corporation has entered into loan modifications with eligible customers in mortgage, personal loans, credit cards, auto loans and leases and certain commercial credit facilities, comprised mainly of payment deferrals of up to six months, subject to certain terms and conditions. In addition, certain participating clients impacted by the seismic activity in the Southern region of the island also benefitted from other loan payment moratoriums offered by the Corporation since 50 POPULAR, INC. 2020 ANNUAL REPORT to clients to mortgage through August financial products mid-January 2020. These loan modifications do not affect the asset quality measures as the deferred payments are not deemed to be delinquent and the Corporation continues to accrue interest on these loans. The Puerto Rico Legislative Assembly enacted legislation in April 2020 that required financial institutions to offer through June 2020 moratoriums on impacted by the consumer COVID-19 pandemic and in July 2020 extended the relief with respect 2020. products Additionally, the CARES Act, signed by the President of the United States as part of an economic stimulus package, provides relief related to U.S. GAAP requirements for loan modifications related to COVID-19 relief measures. This relief was subsequently extended until the earlier of January 1, 2022 or 60 days after the national COVID-19 emergency ends. In addition, the Federal Reserve, along with other U.S. banking regulators, also issued interagency guidance to financial institutions that offers some practical expedients for evaluating whether loan in response to the COVID-19 modifications pandemic are TDRs. According to the interagency guidance, COVID-19 related short-term modifications (i.e., six months or less) granted to consumer or commercial loans that were current as of the date of the loan modification are not TDRs, since the lender can conclude that the borrower is current on their loan and thus not experiencing financial difficulties and the deferral granted does not furthermore the period of that occur represent a more than insignificant concession on the part of the lender. In addition, a modification or deferral program that is mandated by the federal government or a state government (e.g., a state program that requires all institutions within that state to suspend mortgage payments for a specified period) does not represent a TDR. Out of the approximately $8.3 billion in loans modified under this program, approximately $35 million have been classified as TDRs. In making this determination, the Corporation considered the criteria of whether the borrower was in financial difficulty at the time of the deferral and whether the deferral period was more than insignificant. loans those At December 31, 2020, $7.8 billion, or 97%, of COVID-19 payment deferrals had expired. After excluding government guaranteed loans, 115,079 of remaining loans, or 94%, with an aggregate book value of $6.9 billion were current on their payments as of December 31, 2020. Loans considered current exclude for which the COVID-19 related modification has expired but have subsequently been subject to loss mitigation alternatives. The Corporation will other continue to monitor and assess the post-moratorium payment behavior of these borrowers to recognize any deterioration in these loans, and potential loss exposure, in a timely manner. loan modifications Refer to Table 37 for a breakdown of completed by the Corporation as part of the COVID-19 relief measures as of December 31, 2020. Table 37 - COVID-Related Moratoriums Loan portfolio affected by COVID-related moratoriums Loan count Book Value (In thousands) Percentage by portfolio Loan count Book Value (In thousands) Percentage by portfolio Total Moratoriums Granted Active Moratoriums Mortgage Auto loans Lease financing Credit cards Other consumer loans Commercial Total 24,378 48,819 10,803 19,615 23,502 5,099 $ 2,862,684 790,798 365,198 96,045 307,746 3,880,818 132,216 $ 8,303,289 36.3% 25.2% 30.5% 10.4% 18.1% 26.7% 28.3% 4,248 – – – 91 20 4,359 $ 442,329 – – – 1,077 61,634 $ 505,040 5.6% –% –% –% 0.1% 0.4% 1.7% Refer to Note 8 to the Consolidated Financial Statements for additional information on modifications considered TDRs, including certain qualitative and quantitative data about TDRs performed in the past twelve months. Enterprise Risk Management The Corporation’s Board of Directors has established a Risk Management Committee (“RMC”) to, among other things, assist the Board in its (i) oversight of the Corporation’s overall risk framework and (ii) to monitor, review, and approve policies to measure, limit and manage the Corporation’s risks. activities, components of The Corporation has established a three lines of defense framework: (a) business line management constitutes the first line of defense by identifying and managing the risks associated the Risk (b) with business Management Group and the Corporate Security Group, among others, act as the second line of defense by, among other things, measuring and reporting on the Corporation’s risk activities, and (c) the Corporate Auditing Division, as the third line of defense, reporting directly to the Audit Committee of the Board, by independently providing assurance regarding the effectiveness of the risk framework. POPULAR, INC. 2020 ANNUAL REPORT 51 (“ERM”) framework, The Enterprise Risk Management Committee (the “ERM Committee”) is a management committee whose purpose is to: (a) monitor the principal risks as defined in the Risk Appetite Statement (“RAS”) of the Risk Management Policy affecting our and within the Corporation’s Enterprise Risk business review key risk Management (b) the business level indicators and related developments at consistent with the RAS, and (c) lead the incorporation of a uniform Governance, Risk and Compliance framework across the Corporation. The ERM Committee and the Market Risk Unit in the Financial and Operational Risk Management Division (the “FORM Division”), in coordination with the Chief Risk Officer, create the framework to identify and manage multiple and cross-enterprise risks, and to articulate the RAS risk management program and supporting metrics. Our interest rate, monitors the following principal risks: credit, market, liquidity, operational, cyber and information security, legal, regulatory affairs, regulatory and financial compliance, financial crimes compliance, strategic and reputational. The Market Risk Unit has established a process to ensure that an appropriate standard readiness assessment is performed before we launch a new product or service. Similar procedures are followed with the Treasury Division for transactions involving the purchase and sale of assets, and by the Mergers and Acquisitions Division for acquisition transactions. The Asset/Liability Committee (“ALCO”), composed of senior management representatives from the business lines and corporate functions, and the Corporate Finance Group, are responsible for planning and executing the Corporation’s market, interest rate risk, funding activities and strategy, as well as for implementing approved policies and procedures. The ALCO also reviews the Corporation’s capital policy and the attainment of the capital management objectives. In addition, the Market Risk Unit independently measures, monitors and reports compliance with liquidity and market risk policies, and oversees controls surrounding interest risk measurements. The Corporate Compliance Committee, comprised of senior team members and representatives from the management Regulatory and Financial Compliance Division, the Financial Crimes Compliance Division and the Corporate Risk Services Division, among others, are responsible for overseeing and assessing the adequacy of the risk management processes that identifying, underlie Popular’s assessing, measuring, monitoring, testing, mitigating, and reporting compliance risks. They also supervise Popular’s reporting obligations under the compliance program so as to the ensure the adequacy, consistency and timeliness of reporting of compliance-related risks across the Corporation. compliance program for The Regulatory Affairs team is responsible for maintaining an open dialog with the banking regulatory agencies in order to ensure regulatory risks are properly identified, measured, monitored, as well as communicated to the appropriate regulatory agency as necessary to keep them apprised of material matters within the purview of these agencies. The Credit Strategy Committee, composed of senior level lines and from the business representatives management 52 POPULAR, INC. 2020 ANNUAL REPORT corporate functions, and the Corporate Credit Risk Management Division, are responsible for managing the Corporation’s overall and credit guidelines that define, quantify and monitor credit risk and assessing the adequacy of the allowance for loan losses. establishing policies, exposure by standards The Corporation’s Operational Risk Committee (“ORCO”) and the Cyber Security Committee, which are composed of senior level management representatives from the business lines and corporate functions, provide executive oversight to facilitate consistency of effective policies, best practices, controls and monitoring tools for managing and assessing all types of operational risks across the Corporation. The FORM Division, within the Risk Management Group, serves as ORCO’s operating arm and is responsible for establishing baseline processes to measure, monitor, limit and manage operational risk. The Corporate Security Group (“CSG”), under the direction of the Chief Security Officer, leads all efforts pertaining to cybersecurity, enterprise fraud and data privacy, including developing strategies and oversight processes with policies and strategic, that mitigate compliance, operational, programs financial the and Corporation’s and our customers’ data and assets. The CSG also leads the Cyber Security Committee. The Corporate Legal Division, in this context, has the responsibility of assessing, monitoring, managing and reporting with respect to legal risks, including those related to litigation, investigations and other material legal matters. associated with reputational risks risk are on-going processes The processes of strategic risk planning and the evaluation of reputational through which continuous data gathering and analysis are performed. In order to ensure strategic risks are properly identified and monitored, the Corporate Strategic Planning Division performs periodic assessments regarding corporate strategic priority initiatives as well as emerging issues. The Acquisitions and Corporate Investments Division continuously assesses potential strategic transactions. The Corporate Communications Division is responsible for the monitoring, management and implementation of action plans with respect to reputational risk issues. capital process planning Popular’s integrates the Corporation’s risk profile as well as its strategic focus, operating environment, and other factors that could materially affect capital adequacy in hypothetical highly-stressed business scenarios. Capital into consideration the different risks evaluated under Popular’s risk management framework. ratio targets and triggers take In addition to establishing a formal process to manage risk, to an effective risk our corporate culture is also critical management the Corporation provides a framework for all our employees to conduct themselves with the highest integrity. function. Through our Code of Ethics, 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. Statistical Summary 2016-2020 Statements of Financial Condition (In thousands) Assets: Cash and due from banks Money market investments: Securities purchased under agreements to resell Time deposits with other banks Total money market investments Trading account debt securities, at fair value Debt securities available-for-sale, at fair value Debt securities held-to-maturity, at amortized cost Less – Allowance for credit losses Debt securities held-to-maturity, net Equity securities Loans held-for-sale, at lower of cost or fair value Loans held-in-portfolio: Loans not covered under loss-sharing agreements with the FDIC Loans covered under loss-sharing agreements with the FDIC Less – Unearned income Allowance for loan losses Total loans held-in-portfolio, net FDIC loss-share asset Premises and equipment, net Other real estate not covered under loss-sharing agreements with the FDIC Other real estate covered under loss-sharing agreements with the FDIC Accrued income receivable Mortgage servicing rights, at fair value Other assets Goodwill Other intangible assets Total assets Liabilities and Stockholders’ Equity Liabilities: Deposits: Non-interest bearing Interest bearing Total deposits Assets sold under agreements to repurchase Other short-term borrowings Notes payable Other liabilities Total liabilities Stockholders’ equity: Preferred stock Common stock Surplus Retained earnings Treasury stock – at cost Accumulated other comprehensive income (loss), net of tax Total stockholders’ equity Total liabilities and stockholders’ equity 2020 2019 At December 31, 2018 2017 2016 $ 491,065 $ 388,311 $ 394,035 $ 402,857 $ 362,394 – 11,640,880 11,640,880 36,674 21,561,152 92,621 10,261 82,360 173,737 99,455 – 3,262,286 3,262,286 40,321 17,648,473 97,662 – 97,662 159,887 59,203 – 4,171,048 4,171,048 37,787 13,300,184 101,575 – 101,575 155,584 51,422 – 5,255,119 5,255,119 33,926 10,176,923 107,019 – 107,019 165,103 132,395 23,637 2,866,580 2,890,217 52,034 8,207,684 111,299 – 111,299 164,513 88,821 29,588,430 27,587,856 26,663,713 24,423,427 22,895,172 – 203,234 896,250 28,488,946 – 510,241 – 180,983 477,708 26,929,165 – 556,650 – 155,824 569,348 25,938,541 – 569,808 517,274 130,633 623,426 24,186,642 45,192 547,142 572,878 121,425 540,651 22,805,974 69,334 543,981 83,146 122,072 136,705 169,260 180,445 – 209,320 118,395 1,737,041 671,122 22,466 $ 65,926,000 – 180,871 150,906 1,819,615 671,122 28,780 $ 52,115,324 – 166,022 169,777 1,714,134 671,122 26,833 $ 47,604,577 19,595 213,844 168,031 1,991,323 627,294 35,672 $ 44,277,337 32,128 138,042 196,889 2,145,510 627,294 45,050 $ 38,661,609 $ 13,128,699 43,737,641 56,866,340 121,303 – 1,224,981 1,684,689 59,897,313 $ 9,160,173 34,598,433 43,758,606 193,378 – 1,101,608 1,044,953 46,098,545 $ 9,149,036 30,561,003 39,710,039 281,529 42 1,256,102 921,808 42,169,520 $ 8,490,945 26,962,563 35,453,508 390,921 96,208 1,536,356 1,696,439 39,173,432 $ 6,980,443 23,515,781 30,496,224 479,425 1,200 1,574,852 911,951 33,463,652 22,143 1,045 4,571,534 2,260,928 (1,016,954) 189,991 6,028,687 $ 65,926,000 50,160 1,044 4,447,412 2,147,915 (459,814) (169,938) 6,016,779 $ 52,115,324 50,160 1,043 4,365,606 1,651,731 (205,509) (427,974) 5,435,057 $ 47,604,577 50,160 1,042 4,298,503 1,194,994 (90,142) (350,652) 5,103,905 $ 44,277,337 50,160 1,040 4,255,022 1,220,307 (8,286) (320,286) 5,197,957 $ 38,661,609 POPULAR, INC. 2020 ANNUAL REPORT 53 Statistical Summary 2016-2020 Statements of Operations (In thousands) Interest income: Loans Money market investments Investment securities Total interest income Less - Interest expense Net interest income Provision for credit losses 2020 For the years ended December 31, 2017 2018 2019 2016 $ 1,742,390 19,721 329,440 $ 1,802,968 89,823 368,002 $ 1,645,736 111,288 264,824 $ 1,478,765 51,495 195,684 $ 1,459,720 16,428 158,425 2,091,551 234,938 1,856,613 292,536 2,260,793 369,099 1,891,694 165,779 2,021,848 286,971 1,734,877 228,072 1,725,944 223,980 1,501,964 325,424 1,634,573 212,518 1,422,055 170,016 Net interest income after provision for losses 1,564,077 1,725,915 1,506,805 1,176,540 1,252,039 Mortgage banking activities Net gain (loss) on sale of debt securities Other-than-temporary impairment losses on debt securities Net gain (loss), including impairment on equity securities Net profit (loss) on trading account debt securities Net gain (loss) on sale of loans, including valuation adjustments on loans held-for-sale Adjustment (expense) to indemnity reserves on loans sold FDIC loss-share income (expense) Other non-interest income Total non-interest income Operating expenses: Personnel costs All other operating expenses Total operating expenses Income from continuing operations, before income tax Income tax expense Income from continuing operations Income from discontinued operations, net of income tax Net Income 10,401 41 – 6,279 1,033 1,234 390 – 492,934 512,312 564,205 893,624 32,093 (20) – 2,506 994 – (343) – 534,653 569,883 52,802 – – (2,081) (208) 33 (12,959) 94,725 520,182 652,494 25,496 83 (8,299) 251 (817) (420) (22,377) (10,066) 435,316 419,167 56,538 38 (209) 1,924 (785) 8,245 (17,285) (207,779) 457,249 297,936 590,625 886,857 562,988 858,574 476,762 780,434 477,395 778,240 1,457,829 1,477,482 1,421,562 1,257,196 1,255,635 618,560 111,938 818,316 147,181 737,737 119,579 338,511 230,830 294,340 78,784 $ 506,622 – $ 671,135 – $ 618,158 – $ 107,681 – $ 215,556 1,135 $ 506,622 $ 671,135 $ 618,158 $ 107,681 $ 216,691 Net Income Applicable to Common Stock $ 504,864 $ 667,412 $ 614,435 $ 103,958 $ 212,968 54 POPULAR, INC. 2020 ANNUAL REPORT Statistical Summary 2016-2020 Average Balance Sheet and Summary of Net Interest Income On a Taxable Equivalent Basis* (Dollars in thousands) Assets Interest earning assets: Money market investments U.S. Treasury securities Obligations of U.S. Government sponsored entities Obligations of Puerto Rico, States and political subdivisions Collateralized mortgage obligations and mortgage-backed securities Other Total investment securities Trading account securities Loans (net of unearned income) Total interest earning assets/ Interest income Total non-interest earning assets Total assets from continuing operations Total assets Liabilities and Stockholders’ Equity Interest bearing liabilities: Savings, NOW, money market and other interest bearing demand accounts Time deposits Short-term borrowings Notes payable Total interest bearing liabilities/ Interest expense Total non-interest bearing liabilities Total liabilities from continuing operations Total liabilities from discontinued operations Total liabilities Stockholders’ equity Total liabilities and stockholders’ equity Net interest income on a taxable equivalent basis Cost of funding earning assets Net interest margin Effect of the taxable equivalent adjustment Net interest income per books 2020 2019 2018 Average Balance Interest Average Rate Average Balance Interest Average Rate Average Balance Interest Average Rate $ 8,597,652 $ 12,107,819 19,723 0.23% $ 4,166,293 $ 257,308 2.13 9,823,518 89,824 2.16% $ 5,943,442 $ 111,289 1.87% 6,189,239 302,025 3.07 168,885 2.73 70,424 82,051 2,818 4.00 5,705 6.95 6,913,416 178,818 19,352,528 69,446 28,384,981 194,794 2.82 7,369 4.12 467,994 2.42 4,165 6.00 1,785,022 6.29 234,553 5,911 2.52 515,870 10,664 2.07 93,313 6,394 6.85 96,801 6,816 7.04 5,582,051 171,223 15,904,658 67,596 26,806,368 178,964 3.21 8,487 4.96 501,781 3.15 5,103 7.55 1,850,894 6.90 5,216,728 174,095 12,192,733 76,461 25,062,730 168,565 3.23 9,432 5.42 364,362 2.99 5,772 7.55 1,681,540 6.71 $56,404,607 $ 2,276,904 4.04% $ 46,944,915 $ 2,447,602 5.21% $ 43,275,366 $ 2,162,963 5.00% 3,178,848 $59,583,455 $59,583,455 $32,077,578 $ 7,970,474 165,617 1,178,169 3,396,912 $ 50,341,827 $ 50,341,827 3,364,492 $ 46,639,858 $ 46,639,858 92,417 0.29% $ 25,575,455 $ 192,200 0.75% $ 22,127,223 $ 112,543 0.51% 83,438 1.05 2,457 1.48 56,626 4.81 112,658 1.45 6,099 2.64 58,142 4.77 91,722 1.21 7,210 2.01 75,496 4.96 7,569,884 358,418 1,520,812 7,770,430 231,268 1,194,119 41,391,838 234,938 0.57 34,771,272 369,099 1.06 31,576,337 286,971 0.91 12,771,679 54,163,517 – 54,163,517 5,419,938 $59,583,455 – – 9,857,038 44,628,310 – 44,628,310 5,713,517 – – 9,621,378 41,197,715 – 41,197,715 5,442,143 $ 50,341,827 $ 46,639,858 – – $ 2,041,966 $ 2,078,503 $ 1,875,992 0.42% 3.62% 0.78% 4.43% 0.66% 4.34% 185,353 $ 1,856,613 186,809 $ 1,891,694 141,116 $ 1,734,876 * Shows the effect of the tax exempt status of some loans and investments on their yield, using the applicable statutory income tax rates. The computation considers the interest expense disallowance required by the Puerto Rico Internal Revenue Code. This adjustment is shown in order to compare the yields of the tax exempt and taxable assets on a taxable basis. Note: Average loan balances include the average balance of non-accruing loans. No interest income is recognized for these loans in accordance with the Corporation’s policy. POPULAR, INC. 2020 ANNUAL REPORT 55 Statistical Summary 2016-2020 Average Balance Sheet and Summary of Net Interest Income On a Taxable Equivalent Basis (Dollars in thousands) Assets Interest earning assets: Money market investments U.S. Treasury securities Obligations of U.S. Government sponsored entities Obligations of Puerto Rico, States and political subdivisions Collateralized mortgage obligations and mortgage- backed securities Other Total investment securities Trading account securities Loans (net of unearned income) 2017 2016 Average Balance Interest Average Rate Average Balance Interest Average Rate $ 4,480,651 $ 2,969,635 667,140 51,496 49,916 13,593 1.15% $ 3,103,390 $ 1.68 2.04 1,567,364 810,568 16,428 21,835 15,743 0.53% 1.39 1.94 111,455 7,409 6.65 127,694 8,496 6.65 5,667,586 185,672 9,601,488 75,111 182,485 9,290 262,693 5,728 23,511,293 1,515,092 3.22 5.00 2.74 7.63 6.44 4,735,418 188,145 7,429,189 118,341 147,097 8,944 202,115 8,083 23,062,242 1,495,639 3.11 4.75 2.72 6.83 6.49 Total interest earning assets/Interest income $ 37,668,543 $ 1,835,009 4.87% $ 33,713,162 $ 1,722,265 5.11% Total non-interest earning assets Total assets from continuing operations Total assets Liabilities and Stockholders’ Equity Interest bearing liabilities: Savings, NOW, money market and other interest bearing demand accounts Time deposits Short-term borrowings Notes payable 3,735,596 $ 41,404,139 $ 41,404,139 3,900,580 $ 37,613,742 $ 37,613,742 $ $ 18,218,583 7,625,484 452,205 1,548,635 57,714 84,150 5,725 76,392 $ 0.32% $ 14,548,307 7,910,063 1.10 763,496 1.27 1,575,903 4.93 Total interest bearing liabilities/Interest expense Total non-interest bearing liabilities Total liabilities from continuing operations 27,844,907 8,214,703 36,059,610 223,981 0.80 Total liabilities from discontinued operations – – – Total liabilities Stockholders’ equity Total liabilities and stockholders’ equity 36,059,610 5,344,529 $ 41,404,139 24,797,769 7,535,742 32,333,511 1,754 32,335,265 5,278,477 $ 37,613,742 45,550 82,027 7,812 77,129 0.31% 1.04 1.02 4.89 212,518 0.86 – – Net interest income on a taxable equivalent basis $ 1,611,028 $ 1,509,747 Cost of funding earning assets Net interest margin Effect of the taxable equivalent adjustment Net interest income per books 0.59% 4.28% 0.63% 4.48% 109,065 $ 1,501,963 87,692 $ 1,422,055 * Shows the effect of the tax exempt status of loans and investments on their yield, using the applicable statutory income tax rates. The computation considers the interest expense disallowance required by the Puerto Rico Internal Revenue Code. This adjustment is shown in order to compare the yield of the tax exempt and taxable assets on a taxable basis. Note: Average loan balances include the average balance of non-accruing loans. No interest income is recognized for these loans in accordance with the Corporation’s policy. 56 POPULAR, INC. 2020 ANNUAL REPORT Statistical Summary 2019-2020 Quarterly Financial Data (In thousands, except per common share information) Fourth Quarter Third Quarter Second Quarter First Quarter Fourth Quarter Third Quarter Second Quarter First Quarter 2020 2019 Summary of Operations Interest income Interest expense Net interest income Provision for credit losses Mortgage banking activities Net (gain) loss, on sale of debt securities Net gain, including impairment on equity securities Net profit on trading account debt securities Net gain on sale of loans, including valuation $ 519,423 $ 513,201 $ 508,569 $ 550,358 $ 559,869 $ 571,976 $ 570,979 $ 557,969 87,006 94,985 77,263 52,180 57,688 94,663 92,445 47,807 471,616 21,218 9,730 – 1,410 440 461,021 19,138 (9,526) 41 5,150 20 450,881 62,449 3,777 – 2,447 82 473,095 189,731 6,420 – (2,728) 491 467,424 47,224 13,448 – 332 17 476,991 36,539 10,492 (20) 213 295 476,316 40,191 (1,773) – 528 422 470,963 41,825 9,926 – 1,433 260 adjustments on loans held-for-sale 253 (2,198) 2,222 957 – – – – Adjustments (expense) to indemnity reserves on loans sold Other non-interest income Operating expenses Income before income tax Income tax expense Net income 2,160 130,854 375,924 219,321 43,045 4,183 131,097 361,066 209,584 41,168 (1,160) 104,687 348,231 152,256 24,628 (4,793) 126,296 372,608 37,399 3,097 1,321 137,297 390,572 182,043 15,258 (3,411) 135,143 376,475 206,689 41,370 1,840 137,309 363,015 211,436 40,330 (93) 124,904 347,420 218,148 50,223 $ 176,276 $ 168,416 $ 127,628 $ 34,302 $ 166,785 $ 165,319 $ 171,106 $ 167,925 Net income applicable to common stock $ 175,923 $ 168,064 $ 127,275 $ 33,632 $ 165,854 $ 164,389 $ 170,175 $ 166,994 Net income per common share - basic Net income per common share - diluted Dividends declared per common share $ $ $ 2.10 $ 2.01 $ 1.49 $ 0.37 $ 1.72 $ 1.71 $ 1.77 $ 2.10 $ 2.00 $ 1.49 $ 0.37 $ 1.72 $ 1.70 $ 1.76 $ 0.40 $ 0.40 $ 0.40 $ 0.40 $ 0.30 $ 0.30 $ 0.30 $ 1.69 1.69 0.30 Selected Average Balances (In millions) Total assets Loans Interest earning assets Deposits Interest bearing liabilities Selected Ratios Return on assets Return on common equity $ 64,966 $ 63,120 $ 58,797 $ 51,354 $ 51,974 $ 50,941 $ 49,775 $ 48,627 26,492 45,265 40,527 33,043 28,543 59,880 54,944 43,496 26,733 46,397 41,715 34,295 26,892 47,506 42,822 35,438 28,280 55,636 50,984 41,314 27,405 48,149 43,649 35,971 29,300 61,854 56,678 44,729 27,081 48,546 43,785 36,236 1.08% 12.68 1.06% 12.46 0.87% 9.74 0.27% 2.50 1.27% 11.27 1.29% 11.44 1.38% 12.31 1.40% 12.17 Note: Because each reporting period stands on its own the sum of the net income per common share for the quarters may not equal to the net income per common share for the year. POPULAR, INC. 2020 ANNUAL REPORT 57 Report of Management on Internal Control Over Financial Reporting The management of Popular, Inc. (the “Corporation”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a - 15(f) and 15d - 15(f) under the Securities Exchange Act of 1934 and for our assessment of internal control over financial reporting. The Corporation’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America, and includes controls over the preparation of financial statements in accordance with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C) to comply with the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA). The Corporation’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Corporation; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Corporation are being made only in accordance with authorizations of management and directors of the Corporation; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Corporation’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The management of Popular, Inc. has assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2020. In making this assessment, management used the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment, management concluded that the Corporation maintained effective internal control over financial reporting as of December 31, 2020 based on the criteria referred to above. The Corporation’s independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2020, as stated in their report dated March 1, 2021 which appears herein. Ignacio Alvarez President and Chief Executive Officer Carlos J. Vázquez Executive Vice President and Chief Financial Officer 58 POPULAR, INC. 2020 ANNUAL REPORT Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Popular, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated statements of financial condition of Popular, Inc. and its subsidiaries (the “Corporation”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Corporation’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Corporation as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Change in Accounting Principle As discussed in Note 3 to the consolidated financial statements, the Corporation changed the manner in which it accounts for its allowance for credit losses in 2020. Basis for Opinions The Corporation’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Corporation’s consolidated financial statements and on the Corporation’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. POPULAR, INC. 2020 ANNUAL REPORT 59 Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management’s assessment and our audit of Popular, Inc.’s internal control over financial reporting also included controls over the preparation of financial statements in accordance with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C) to comply with the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA). A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Allowance for Credit Losses on Loans Held-in-Portfolio – Quantitative Models, and Qualitative Adjustments to the Puerto Rico Portfolios As described in Notes 2 and 8 to the consolidated financial statements, the Corporation follows the current expected credit loss (“CECL”) model, to establish and evaluate the adequacy of the allowance for credit losses (“ACL”) to provide for expected losses in the loan portfolio. As of December 31, 2020, the allowance for credit losses was $896 million on total loans of $29 billion. This CECL model establishes a forward-looking methodology that reflects the expected credit losses over the lives of financial assets. The quantitative modeling framework includes competing risk models to generate lifetime defaults and prepayments, and other this methodology, management evaluates various loan level modeling techniques to estimate loss severity. As part of macroeconomic scenarios, and may apply probability weights to the outcome of the selected scenarios. The ACL also includes a qualitative framework that addresses losses that are expected but not captured within the quantitative modeling framework. In order to identify potential losses that are not captured through the models, management evaluated model limitations as well as the different risks covered by the variables used in each quantitative model. To complement the analysis, management also evaluated sectors that have low levels of historical defaults, but current conditions show the potential for future losses. The principal considerations for our determination that performing procedures relating to the allowance for credit losses on loans held-in-portfolio quantitative models, and qualitative adjustments to the Puerto Rico portfolios is a critical audit matter are (i) the significant judgment by management in determining the allowance for credit losses, including qualitative adjustments to the Puerto Rico portfolios, which in turn led to a high degree of auditor effort, judgment, and subjectivity in performing procedures and evaluating audit evidence relating to the allowance for credit losses, including management’s selection of macroeconomic scenarios and probability weights applied; and (ii) the audit effort involved the use of professionals with specialized skill and knowledge. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the allowance for credit losses for loans held-in-portfolio, including qualitative adjustments to the Puerto Rico portfolios. These procedures also included, among others, testing management’s process for estimating the allowance for credit losses by (i) evaluating the appropriateness of the methodology, including models used for estimating the ACL; (ii) evaluating the reasonableness of management’s selection of various macroeconomic scenarios including probability weights applied to the expected loss outcome of the selected macroeconomic scenarios; (iii) evaluating the reasonableness of the qualitative adjustments to Puerto Rico portfolios allowance for credit losses; and (iv) testing the data used in the allowance for credit losses. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the methodology and models, the reasonableness of management’s selection and weighting of macroeconomic scenarios used to estimate current expected credit 60 POPULAR, INC. 2020 ANNUAL REPORT losses and reasonableness of the qualitative adjustments to Puerto Rico portfolios allowance for credit losses. Goodwill Annual Impairment Assessment – Banco Popular de Puerto Rico and Popular Bank Reporting Units As described in Note 14 to the consolidated financial statements, the Corporation’s consolidated goodwill balance was $671 million as of December 31, 2020, of which a significant portion relates to the Banco Popular de Puerto Rico (“BPPR”) and Popular Bank (“PB”) reporting units. Management conducts an impairment test as of July 31 of each year and on a more frequent basis if events or circumstances indicate an impairment could have taken place. In determining the fair value of each reporting unit, management generally uses a combination of methods, including market price multiples of comparable companies and transactions, as well as discounted cash flow analysis. Management evaluates the particular circumstances of each reporting unit in order to determine the most appropriate valuation methodology and the weights applied to each valuation methodology, as applicable. The computations require management to make estimates, assumptions and calculations related to: (i) a selection of comparable publicly traded companies, based on the nature of business, location and size; (ii) calculation of average price multiples of relevant value drivers from a group of selected comparable companies; (iii) the discount rate applied to future earnings, based on an estimate of the cost of equity; (iv) the potential future earnings of the reporting units; and (v) the market growth and new business assumptions. Furthermore, as part of the analyses, management performed a reconciliation of the aggregate fair values determined for the reporting units to the market capitalization of the Corporation concluding that the fair value results determined for the reporting units were reasonable. The principal considerations for our determination that performing procedures relating to goodwill annual impairment assessments of the Banco Popular de Puerto Rico and Popular Bank reporting units is a critical audit matter are (i) the significant judgment by management when determining the fair value measurements of the reporting units which led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating evidence relating to the calculation of average price multiples of relevant value drivers from a group of selected comparable companies; the potential future earnings of the reporting unit; the estimated cost of equity; and the market growth and new business assumptions; and (ii) the audit effort involved the use of professionals with specialized skill and knowledge. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment process, including controls over the valuation of Banco Popular de Puerto Rico and Popular Bank reporting units. These procedures also included, among others, (i) testing management’s process for determining the fair value estimates of Banco Popular de Puerto Rico and Popular Bank reporting units; (ii) evaluating the appropriateness of the discounted cash flow analyses and market price multiples of comparable companies methods including the weights applied to each valuation method; (iii) testing the underlying data used in the estimates; (iv) evaluating the appropriateness of the calculation of average price multiples of relevant value drivers from a group of selected comparable companies; and (v) evaluating the potential future earnings of the reporting units; the estimated cost of equity; and the market growth and new business assumptions, including whether the assumptions used by management were reasonable considering, as applicable, (i) the current and past performance of the reporting units; (ii) the consistency with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the methods and the reasonableness of certain significant assumptions. San Juan, Puerto Rico March 1, 2021 We have served as the Corporation’s auditor since 1971, which includes periods before the Corporation became subject to SEC reporting requirements. CERTIFIED PUBLIC ACCOUNTANTS (OF PUERTO RICO) License No. LLP-216 Expires Dec. 1, 2022 Stamp E427540 of the P.R. Society of Certified Public Accountants has been affixed to the file copy of this report POPULAR, INC. 2020 ANNUAL REPORT 61 POPULAR, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, 2020 (In thousands, except share information) December 31, 2019 Assets: Cash and due from banks Money market investments: Time deposits with other banks Total money market investments Trading account debt securities, at fair value: Pledged securities with creditors’ right to repledge Other trading account debt securities Debt securities available-for-sale, at fair value: Pledged securities with creditors’ right to repledge Other debt securities available-for-sale Debt securities held-to-maturity, at amortized cost (fair value 2020 - $94,891; 2019 - $105,110) Less – Allowance for credit losses Debt securities held-to-maturity, net Equity securities (realizable value 2020 - $173,929; 2019 - $165,952) Loans held-for-sale, at lower of cost or fair value Loans held-in-portfolio Less – Unearned income Allowance for credit losses Total loans held-in-portfolio, net Premises and equipment, net Other real estate Accrued income receivable Mortgage servicing rights, at fair value Other assets Goodwill Other intangible assets Total assets Liabilities and Stockholders’ Equity Liabilities: Deposits: Non-interest bearing Interest bearing Total deposits Assets sold under agreements to repurchase Notes payable Other liabilities Total liabilities Commitments and contingencies (Refer to Note 23) Stockholders’ equity: Preferred stock, 30,000,000 shares authorized; 885,726 shares issued and outstanding (2019 - 2,006,391) Common stock, $0.01 par value; 170,000,000 shares authorized;104,508,290 shares issued (2019 - 104,392,222) and 84,244,235 shares outstanding (2019 - 95,589,629) Surplus Retained earnings Treasury stock - at cost, 20,264,055 shares (2019 - 8,802,593) Accumulated other comprehensive income (loss), net of tax Total stockholders’ equity Total liabilities and stockholders’ equity The accompanying notes are an integral part of these Consolidated Financial Statements. 62 POPULAR, INC. 2020 ANNUAL REPORT $ 491,065 $ 388,311 11,640,880 11,640,880 3,262,286 3,262,286 241 36,433 598 39,723 125,819 21,435,333 202,585 17,445,888 92,621 10,261 82,360 173,737 99,455 97,662 – 97,662 159,887 59,203 29,588,430 203,234 896,250 27,587,856 180,983 477,708 28,488,946 26,929,165 510,241 83,146 209,320 118,395 1,737,041 671,122 22,466 556,650 122,072 180,871 150,906 1,819,615 671,122 28,780 $65,926,000 $52,115,324 $13,128,699 43,737,641 $ 9,160,173 34,598,433 56,866,340 43,758,606 121,303 1,224,981 1,684,689 193,378 1,101,608 1,044,953 59,897,313 46,098,545 22,143 50,160 1,045 4,571,534 2,260,928 (1,016,954) 189,991 6,028,687 1,044 4,447,412 2,147,915 (459,814) (169,938) 6,016,779 $65,926,000 $52,115,324 POPULAR, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share information) Interest income: Loans Money market investments Investment securities Total interest income Interest expense: Deposits Short-term borrowings Long-term debt Total interest expense Net interest income Provision for credit losses Net interest income after provision for credit losses Service charges on deposit accounts Other service fees Mortgage banking activities (Refer to Note 9) Net gain (loss) on sale of debt securities Net gain (loss), including impairment on equity securities Net profit (loss) on trading account debt securities Net gain on sale of loans, including valuation adjustments on loans held-for-sale Adjustments (expense) to indemnity reserves on loans sold FDIC loss-share income Other operating income Total non-interest income Operating expenses: Personnel costs Net occupancy expenses Equipment expenses Other taxes Professional fees Communications Business promotion FDIC deposit insurance Loss on early extinguishment of debt Other real estate owned (OREO) (income) expenses Other operating expenses Amortization of intangibles Total operating expenses Income before income tax Income tax expense Net Income Net Income Applicable to Common Stock Net Income per Common Share – Basic Net Income per Common Share – Diluted The accompanying notes are an integral part of these consolidated financial statements. Years ended December 31, 2019 2018 2020 $1,742,390 19,721 329,440 $1,802,968 89,823 368,002 $1,645,736 111,288 264,824 2,091,551 2,260,793 2,021,848 175,855 2,457 56,626 234,938 304,858 6,100 58,141 369,099 204,265 7,210 75,496 286,971 1,856,613 292,536 1,891,694 165,779 1,734,877 228,072 1,564,077 1,725,915 1,506,805 147,823 257,892 10,401 41 6,279 1,033 1,234 390 – 87,219 512,312 564,205 119,345 88,932 54,454 394,122 23,496 57,608 23,868 – (3,480) 128,882 6,397 160,933 285,206 32,093 (20) 2,506 994 – (343) – 88,514 569,883 590,625 96,339 84,215 51,653 384,411 23,450 75,372 18,179 – 4,298 139,570 9,370 150,677 258,020 52,802 – (2,081) (208) 33 (12,959) 94,725 111,485 652,494 562,988 88,329 71,788 46,284 349,844 23,107 65,918 27,757 12,522 23,338 140,361 9,326 1,457,829 1,477,482 1,421,562 618,560 111,938 818,316 147,181 737,737 119,579 $ 506,622 $ 671,135 $ 618,158 $ 504,864 $ 667,412 $ 614,435 $ $ 5.88 5.87 $ $ 6.89 6.88 $ $ 6.07 6.06 POPULAR, INC. 2020 ANNUAL REPORT 63 POPULAR, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years ended December 31, 2019 2020 2018 $ 506,622 $ 671,135 $ 618,158 – (50) (605) (14,471) (9,032) 21,447 – 419,993 (41) (8,872) 6,379 415,403 (55,474) (6,847) (21,874) 23,508 – 286,063 20 (5,741) 3,882 278,961 (20,925) (6,902) (15,497) 21,542 (3,470) (71,255) – 536 (1,110) (76,761) (561) 359,929 258,036 (77,322) $ 866,551 $ 929,171 $ 540,836 Years ended December 31, 2018 2019 2020 $ 3,387 (8,042) – $ 8,203 (8,817) – (51,213) 6 2,472 (2,084) (20,113) (4) 1,302 (1,496) $ 6,044 (8,401) 1,354 219 – (210) 433 $(55,474) $(20,925) $ (561) (In thousands) Net income Reclassification to retained earnings due to cumulative effect of accounting change Other comprehensive income (loss) before tax: Foreign currency translation adjustment Adjustment of pension and postretirement benefit plans Amortization of net losses Amortization of prior service credit Unrealized holding gains (losses) on debt securities arising during the period Reclassification adjustment for (gains) losses included in net income Unrealized net (losses) gains on cash flow hedges Reclassification adjustment for net losses (gains) included in net income Other comprehensive income (loss) before tax Income tax expense Total other comprehensive income (loss), net of tax Comprehensive income, net of tax Tax effect allocated to each component of other comprehensive income (loss): (In thousands) Adjustment of pension and postretirement benefit plans Amortization of net losses Amortization of prior service credit Unrealized holding gains (losses) on debt securities arising during the period Reclassification adjustment for (gains) losses included in net income Unrealized net (losses) gains on cash flow hedges Reclassification adjustment for net losses (gains) included in net income Income tax expense The accompanying notes are an integral part of these consolidated financial statements. 64 POPULAR, INC. 2020 ANNUAL REPORT POPULAR, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (In thousands) Balance at December 31, 2017 Cumulative effect of accounting change Net income Issuance of stock Dividends declared: Common stock[1] Preferred stock Common stock purchases[2] Common stock reissuance Stock based compensation Other comprehensive loss, net of tax Transfer to statutory reserve Balance at December 31, 2018 Cumulative effect of accounting change Net income Issuance of stock Dividends declared: Common stock[1] Preferred stock Common stock purchases[3] Common stock reissuance Stock based compensation Other comprehensive income, net of tax Transfer to statutory reserve Balance at December 31, 2019 Cumulative effect of accounting change Net income Issuance of stock Dividends declared: Common stock[1] Preferred stock Common stock purchases[4] Common stock reissuance Preferred Stock, Redemption Amount[5] Stock based compensation Other comprehensive income, net of tax Transfer to statutory reserve Balance at December 31, 2020 Accumulated other comprehensive income (loss) Total 5,103,905 1,935 618,158 3,341 $(350,652) Common stock $1,042 Preferred stock $ 50,160 Retained earnings Treasury stock Surplus $4,298,503 $1,194,994 $ (90,142) 1 3,340 1,935 618,158 (101,293) (3,723) (86) 351 5,158 (127,379) 3,576 8,436 58,340 (58,340) (77,322) (101,293) (3,723) (127,465) 3,927 13,594 (77,322) – $1,043 $ 50,160 $4,365,606 $1,651,731 $ (205,509) $(427,974) 5,435,057 1 3,496 4,905 671,135 (116,022) (3,723) 15,740 374 2,085 (271,752) 4,848 12,599 60,111 (60,111) 258,036 4,905 671,135 3,497 (116,022) (3,723) (256,012) 5,222 14,684 258,036 – $1,044 $ 50,160 $4,447,412 $2,147,915 $ (459,814) $(169,938) 6,016,779 1 4,262 (205,842) 506,622 (136,561) (1,758) (28,017) 76,335 (1,192) (4,731) (580,507) 6,022 17,345 49,448 (49,448) 359,929 (205,842) 506,622 4,263 (136,561) (1,758) (504,172) 4,830 (28,017) 12,614 359,929 – $1,045 $ 22,143 $4,571,534 $2,260,928 $(1,016,954) $ 189,991 6,028,687 [1] Dividends declared per common share during the year ended December 31, 2020 - $1.60 (2019 - $1.20; 2018 - $1.00). [2] During the year ended December 31, 2018, the Corporation completed a $125 million accelerated share repurchase transaction with respect to its common stock, which was accounted for as a treasury stock transaction. Refer to Note 19 for additional information. [3] During the year ended December 31, 2019, the Corporation completed 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 19 for additional information. [4] During the year ended December 31, 2020, the Corporation completed a $500 million accelerated share repurchase transaction with respect to its common stock, which was accounted for as a treasury stock transaction. Refer to Note 19 for additional information. [5] On February 24, 2020, the Corporation redeemed all the outstanding shares of 2008 Series B Preferred Stock. Refer to Note 19 for additional information. Disclosure of changes in number of shares: Preferred Stock: Balance at beginning of year Redemption of stocks Balance at end of year Common Stock: Balance at beginning of year Issuance of stock Balance at end of year Treasury stock Common Stock – Outstanding The accompanying notes are an integral part of these consolidated financial statements. Years ended December 31, 2018 2019 2020 2,006,391 (1,120,665) 885,726 2,006,391 – 2,006,391 2,006,391 – 2,006,391 104,392,222 116,068 104,320,303 71,919 104,238,159 82,144 104,508,290 (20,264,055) 104,392,222 (8,802,593) 104,320,303 (4,377,458) 84,244,235 95,589,629 99,942,845 POPULAR, INC. 2020 ANNUAL REPORT 65 POPULAR, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses Amortization of intangibles Depreciation and amortization of premises and equipment Net accretion of discounts and amortization of premiums and deferred fees Interest capitalized on loans subject to the temporary payment moratorium Share-based compensation Impairment losses on right-of-use and long-lived assets Fair value adjustments on mortgage servicing rights FDIC loss-share income Adjustments to indemnity reserves on loans sold Earnings from investments under the equity method, net of dividends or distributions Deferred income tax expense (benefit) (Gain) loss on: Disposition of premises and equipment and other productive assets Proceeds from insurance claims Early extinguishment of debt Sale of debt securities Sale of loans, including valuation adjustments on loans held-for-sale and mortgage banking activities Sale of foreclosed assets, including write-downs Acquisitions of loans held-for-sale Proceeds from sale of loans held-for-sale Net originations on loans held-for-sale Net decrease (increase) in: Trading debt securities Equity securities Accrued income receivable Other assets Net (decrease) increase in: Interest payable Pension and other postretirement benefits obligation Other liabilities Total adjustments Net cash provided by operating activities Cash flows from investing activities: Net (increase) decrease in money market investments Purchases of investment securities: Available-for-sale Equity Proceeds from calls, paydowns, maturities and redemptions of investment securities: Available-for-sale Held-to-maturity Proceeds from sale of investment securities: Available-for-sale Equity Net disbursements on loans Proceeds from sale of loans Acquisition of loan portfolios Payments to acquire other intangible Net payments to FDIC under loss sharing agreements Payments to acquire businesses, net of cash acquired Return of capital from equity method investments Payments to acquire equity method investments Acquisition of premises and equipment Proceeds from insurance claims Proceeds from sale of: Premises and equipment and other productive assets Foreclosed assets Net cash used in investing activities Cash flows from financing activities: Net increase (decrease) in: Deposits Assets sold under agreements to repurchase Other short-term borrowings Payments of notes payable Principal payments of finance leases Payments for debt extinguishment Proceeds from issuance of notes payable Proceeds from issuance of common stock Payments for repurchase of redeemable preferred stock Dividends paid Net payments for repurchase of common stock Payments related to tax withholding for share-based compensation Net cash provided by financing activities Net increase (decrease) in cash and due from banks, and restricted cash Cash and due from banks, and restricted cash at beginning of period Cash and due from banks, and restricted cash at end of period The accompanying notes are an integral part of these consolidated financial statements. 66 POPULAR, INC. 2020 ANNUAL REPORT Years ended December 31, 2020 2019 2018 $ 506,622 $ 671,135 $ 618,158 292,536 6,397 58,452 (63,300) (95,212) 8,254 18,004 42,055 – (390) (27,738) 75,044 (11,561) (366) – (41) (32,449) (19,958) (227,697) 83,456 (391,537) 493,993 (8,263) (35,616) 114,329 (5,404) 5,898 (106,736) 172,150 678,772 165,779 9,370 58,067 (158,070) – 12,303 2,591 27,771 – 343 (28,011) 141,332 (6,666) (1,205) – 20 (15,888) (21,982) (223,939) 71,075 (289,430) 460,969 (8,032) (8,369) (37,847) (284) 778 (116,443) 34,232 705,367 228,072 9,326 53,300 (87,154) (481) 10,521 272 8,477 (94,725) 12,959 (24,217) (12,320) 15,984 (20,147) 12,522 – (9,681) 6,833 (232,264) 66,687 (254,582) 458,447 (1,622) 49,288 265,322 (9,786) 4,558 (226,244) 229,345 847,503 (8,378,577) 905,558 1,083,515 (21,033,807) (30,794) (18,733,295) (16,300) (10,050,165) (13,068) 18,224,362 6,733 14,650,440 5,913 5,103 25,206 (875,941) 84,385 (1,138,276) (83) – – 959 (1,778) (60,073) 366 99,445 20,030 (641,029) 110,534 (619,737) (10,382) – – 6,942 – (75,665) 1,205 26,548 77,521 (13,068,146) 18,608 107,881 (4,169,852) 13,102,028 (72,076) – (139,920) (3,145) – 261,999 9,093 (28,017) (133,645) (500,479) (3,693) 12,492,145 102,771 394,323 497,094 $ 4,043,955 (88,151) (41) (210,377) (1,726) – 75,000 8,719 – (115,810) (250,581) (5,431) 3,455,557 (8,928) 403,251 394,323 $ $ 6,946,209 7,280 – 24,209 (6,665) 29,669 (601,550) – (25,012) (1,843,333) 4,090 – (80,549) 20,147 9,185 105,371 (4,390,667) 4,259,651 (109,391) (96,167) (755,966) – (12,522) 473,819 7,268 – (105,441) (125,264) (2,201) 3,533,786 (9,378) 412,629 403,251 Notes to Consolidated Financial Statements Note 1 - Nature of Operations Note 2 - Summary of Significant Accounting Policies Note 3 - New Accounting Pronouncements Note 4 - Restrictions on Cash and Due from Banks and Certain Securities Note 5 - Debt Securities Available-For-Sale Note 6 - Debt Securities Held-to-Maturity Note 7 - Loans Note 8 - Allowance for Credit Losses – Loans Held-In-Portfolio Note 9 - Mortgage Banking Activities Note 10 - Transfers of Financial Assets and Mortgage Servicing Assets Note 11 - Premises and Equipment Note 12 - Other Real Estate Owned Note 13 - Other Assets Note 14 - Goodwill and Other Intangible Assets Note 15 - Deposits Note 16 - Borrowings Note 17 - Trust Preferred Securities Note 18 - Other Liabilities Note 19 - Stockholders’ Equity Note 20 - Regulatory Capital Requirements Note 21 - Other comprehensive Income (Loss) Note 22 - Guarantees Note 23 - Commitments and Contingencies Note 24- Non-consolidated Variable Interest Entities Note 25 - Derivative Instruments and Hedging Activities Note 26 - Related Party Transactions Note 27 - Fair Value Measurement Note 28 - Fair Value of Financial Instruments Note 29 - Employee Benefits Note 30 - Net Income per Common Share Note 31 - Revenue from Contracts with Customers Note 32 - Leases Note 33 - Stock-Based Compensation Note 34 - Income Taxes Note 35 - Supplemental Disclosure on the Consolidated Statements of Cash Flows Note 36 - Segment Reporting Note 37 - Popular, Inc. (Holding company only) Financial Information 68 68 78 82 82 85 87 94 113 114 116 116 117 118 120 121 123 124 124 125 127 128 130 136 136 139 142 149 151 156 157 158 159 161 166 166 169 POPULAR, INC. 2020 ANNUAL REPORT 67 Note 1 - Nature of operations Popular, Inc. (the “Corporation or “Popular”) is a diversified, publicly-owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation has operations in Puerto Rico, the mainland United States (“U.S.”) and the U.S. and British Virgin Islands. In Puerto Rico, the Corporation provides retail, mortgage and commercial banking services, through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as investment banking, broker- leasing and financing, and dealer, auto and equipment insurance services through specialized subsidiaries. In the mainland U.S., the Corporation provides retail, mortgage and commercial banking services through its New York-chartered banking subsidiary, Popular Bank (“PB” or “Popular U.S.”), which has branches located in New York, New Jersey and Florida. Note 2 - Summary of significant accounting policies The accounting and financial reporting policies of Popular, Inc. and its conform with accounting principles generally accepted in the United States of America and with prevailing practices within the financial services industry. “Corporation”) subsidiaries (the The following is a description of the most significant of these policies: Principles of consolidation The consolidated financial statements include the accounts of Popular, Inc. and its subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. In accordance with the consolidation guidance for variable interest entities, the Corporation would also consolidate any variable interest entities (“VIEs”) for which it has a controlling financial interest; and therefore, it is the primary beneficiary. Assets held in a fiduciary capacity are not assets of the Corporation and, accordingly, are not included in the Consolidated Statements of Financial Condition. Unconsolidated investments, in which there is at least 20% ownership and / or the Corporation exercises significant influence, are generally accounted for by the equity method with earnings recorded in other operating income. Limited partnerships are also accounted for by the equity method unless the investor’s interest is so “minor” that the limited partner may have virtually no influence over partnership operating and financial policies. These investments are included in other assets and the Corporation’s proportionate share of income or loss is included in other operating income. Statutory business trusts that are wholly-owned by the Corporation and are issuers of trust preferred securities are not consolidated in the Corporation’s Consolidated Financial Statements. 68 POPULAR, INC. 2020 ANNUAL REPORT requires management 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 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. to make estimates Fair value measurements The Corporation determines the fair values of its financial instruments based on the fair value framework established in the guidance for Fair Value Measurements in ASC Subtopic 820-10, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The standard describes three levels of inputs that may be used to measure fair value which are (1) quoted market prices for active markets, (2) observable market-based inputs or unobservable inputs that are corroborated by market data, and (3) unobservable inputs that are not corroborated by market data. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. liabilities identical assets or in The guidance in ASC Subtopic 820-10 also addresses measuring fair value in situations where markets are inactive and transactions are not orderly. Transactions or quoted prices for assets and liabilities may not be determinative of fair value when transactions are not orderly, and thus, may require adjustments to estimate fair value. Price quotes based on transactions that are not orderly should be given little, if any, weight in measuring fair value. Price quotes based on transactions that are orderly shall be considered in determining fair value, and the weight given is based on facts and information is not available to circumstances. If sufficient determine if price quotes are based on orderly transactions, less weight should be given to the price quote relative to other transactions that are known to be orderly. Investment securities Investment securities are classified in four categories and accounted for as follows: • Debt securities that the Corporation has the intent and ability to hold to maturity are classified as debt securities held-to-maturity and reported at amortized cost. Since the adoption of CECL on January 1, 2020, an ACL is the the expected credit established for losses over on the uncollectible, remaining term of debt securities held-to-maturity. The Corporation has established a methodology to estimate credit losses which considers qualitative factors, including internal credit ratings and the underlying source of repayment in determining the amount of expected credit losses. Debt securities held-to-maturity are written-off through the ACL when a portion or the entire amount is deemed information based considered to develop expected credit losses through the life of the asset. The ACL is estimated by leveraging the expected loss framework for mortgages in the case of securities collateralized by 2nd lien loans and the commercial C&I models for municipal bonds. As part of this factors are stressed, as a qualitative adjustment, to reflect current conditions that are not necessarily captured within the historical loss experience. The modeling framework includes a 2-year reasonable and supportable period gradually reverting, over a 1-year horizon, to historical information at the model level. The Corporation may not sell or transfer held-to-maturity securities without calling into question its intent to hold other debt securities to maturity, unless a nonrecurring or unusual event that could not have been reasonably anticipated has occurred. framework, internal input • Debt securities classified as trading securities are reported at fair value, with unrealized and realized gains and losses included in non-interest income. • Debt securities classified as available-for-sale are reported at fair value. Declines in fair value below the securities’ amortized cost which are not related to estimated credit losses are recorded through other comprehensive income or loss, net of taxes. If the Corporation intends to sell or believes it is more likely than not that it will be required to sell the debt security, it is written down to fair value through earnings. Since the adoption of CECL on January 1, 2020, credit losses relating to available-for-sale debt securities are recorded through an ACL, which are limited to the difference between the amortized cost and the fair value of the asset. The ACL is established for the expected credit losses over the remaining term of debt security. The Corporation’s portfolio of available-for-sale securities is comprised mainly of U.S. Treasury notes and obligations from the U.S. Government. These securities have an explicit or implicit guarantee from the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. Accordingly, the Corporation applies a zero-credit loss assumption and no ACL for these securities has been established. The Corporation monitors its securities portfolio composition and credit performance on a quarterly basis to determine if any allowance is considered necessary. Debt securities available-for-sale are written-off when a portion or the entire amount is deemed uncollectible, based on the information considered to develop expected credit losses through the life of the asset. The specific identification method is used to determine realized gains and losses on debt securities available-for-sale, which are included in net in the Consolidated Statements of Operations. (loss) gain on sale of debt securities • Equity securities that have readily available fair values are reported at fair value. Equity securities that do not have readily available fair values are measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Stock that is owned by the Corporation to comply with regulatory requirements, such as Federal Reserve Bank and Federal Home Loan Bank (“FHLB”) stock, is included in this category, and their realizable value equals their cost. Unrealized and realized gains and losses and any impairment on equity securities are included in net gain (loss), including impairment on equity securities in the Consolidated Statements of Operations. Dividend income from investments in equity securities is included in interest income. The amortization of premiums is deducted and the accretion of discounts is added to net interest income based on the interest method over the outstanding period of the related securities. Purchases and sales of securities are recognized on a trade date basis. Derivative financial instruments All derivatives are recognized on the Statements of Financial Condition at fair value. The Corporation’s policy is not to offset the fair value amounts recognized for multiple derivative instruments executed with the same counterparty under a master netting arrangement nor to offset the fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from the same master netting arrangement as the derivative instruments. comprehensive For a cash flow hedge, changes in the fair value of the derivative instrument are recorded net of taxes in accumulated other subsequently reclassified to net income (loss) in the same period(s) that the hedged transaction impacts free-standing derivative instruments, changes in fair values are reported in current period earnings. earnings. For income/(loss) and the documents Prior to entering a hedge transaction, the Corporation between hedging formally instruments and hedged items, as well as the risk management objective various hedge transactions. This process linking all derivative instruments to specific assets and liabilities on the Statements for undertaking and strategy relationship includes POPULAR, INC. 2020 ANNUAL REPORT 69 of Financial Condition or to specific forecasted transactions or firm commitments along with a formal assessment, at both inception of the hedge and on an ongoing basis, as to the effectiveness of the derivative instrument in offsetting changes in fair values or cash flows of the hedged item. Hedge accounting is discontinued when the derivative instrument is not highly effective as a hedge, a derivative expires, is sold, terminated, when it is unlikely that a forecasted transaction will occur or when it is determined that it is no longer appropriate. When hedge accounting is discontinued the derivative continues to be carried at fair value with changes in fair value included in earnings. quotes, For non-exchange traded contracts, fair value is based on flow dealer the methodologies determination of fair value may require significant management judgment or estimation. pricing models, or cash for which discounted techniques similar The fair value of derivative instruments considers the risk of non-performance by the counterparty or the Corporation, as applicable. The Corporation obtains or pledges collateral in connection the with its derivative activities when applicable under agreement. as are loans classified Loans Loans held-in-portfolio when management has the intent and ability to hold the loan for the foreseeable future, or until maturity or payoff. The foreseeable future is a management judgment which is determined based upon the type of loan, business strategies, current market conditions, balance sheet management and liquidity needs. Management’s view of the foreseeable future may change based on changes in these conditions. When a decision is made to sell or securitize a loan that was not originated or initially acquired with the intent to sell or securitize, the loan is reclassified from held-in-portfolio into held-for-sale. Due to changing market conditions or other strategic initiatives, management’s intent with respect to the disposition of the loan may change, and accordingly, loans previously classified as held-for-sale may be reclassified into held-in-portfolio. Loans transferred between loans held-for-sale and held-in-portfolio classifications are recorded at the lower of cost or fair value at the date of transfer. Purchased loans with no evidence of credit deterioration since origination are recorded at fair value upon acquisition. Credit discounts are included in the determination of fair value. Loans held-for-sale are stated at the lower of cost or fair value, cost being determined based on the outstanding loan balance less unearned income, and fair value determined, generally in the aggregate. Fair value is measured based on current market prices for similar loans, outstanding investor commitments, prices of recent sales or discounted cash flow analyses which utilize inputs and assumptions which are believed to be consistent with market participants’ views. The 70 POPULAR, INC. 2020 ANNUAL REPORT cost basis also includes consideration of deferred origination fees and costs, which are recognized in earnings at the time of sale. Upon reclassification to held-for-sale, credit related fair value adjustments are recorded as a reduction in the ACL. To the extent that the loan’s reduction in value has not already been provided for in the ACL, an additional provision for credit to Subsequent losses held-for-sale, the amount, by which cost exceeds fair value, if any, is accounted for as a valuation allowance with changes therein included in the determination of net income (loss) for the period in which the change occurs. reclassification recorded. to is Loans held-in-portfolio are reported at their outstanding principal balances net of any unearned income, charge-offs, unamortized deferred fees and costs on originated loans, and premiums or discounts on purchased loans. Fees collected and costs incurred in the origination of new loans are deferred and amortized using the interest method or a method which approximates the interest method over the term of the loan as an adjustment to interest yield. The past due status of a loan is determined in accordance with its contractual repayment terms. Furthermore, loans are reported as past due when either interest or principal remains unpaid for 30 days or more in accordance with its contractual repayment terms. Non-accrual loans are those loans on which the accrual of interest is discontinued. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is charged against interest income and the loan is accounted for either on a cash-basis method or on the cost-recovery method. Loans designated as non-accruing are returned to accrual status when the Corporation expects remaining contractual principal and interest. repayment the of interest deemed Recognition of income on commercial uncollectible) in any event, not and construction loans is discontinued when the loans are 90 days or more in arrears on payments of principal or interest or when the collection of principal and other factors indicate that interest is doubtful. The portion of a secured loan deemed uncollectible is charged-off no later than 365 days past due. However, in the case of a collateral dependent loan, the excess of the recorded investment over the fair value of the collateral (portion promptly charged-off, but later than the quarter following the quarter in which such excess was first recognized. Commercial unsecured loans are charged-off no later than 180 days past due. Recognition of interest income on mortgage loans is generally discontinued when loans are 90 days or more in arrears on payments of principal or interest. The portion of a mortgage loan deemed uncollectible is charged-off when the loan is 180 days past due. The Corporation discontinues the recognition of interest on residential mortgage loans insured by the Federal Housing Administration (“FHA”) or guaranteed by (“VA”) when the U.S. Department of Veterans Affairs 15-months delinquent as to principal or interest. The principal generally is repayment on these loans is insured. Recognition of interest income on closed-end consumer loans and home equity lines of credit is discontinued when the loans are 90 days or more in arrears on payments of principal or interest. Income is generally recognized on open-end consumer loans, except for home equity lines of credit, until the loans are charged-off. Recognition of interest income for lease financing is ceased when loans are 90 days or more in arrears. Closed-end consumer loans and leases are charged-off when they are 120 days in arrears. Open-end (revolving credit) consumer loans are in arrears. Commercial and charged-off when 180 days consumer overdrafts are generally charged-off no later than 60 days past their due date. A loan classified as a troubled debt restructuring (“TDR”) is typically in non-accrual status at the time of the modification. The TDR loan continues in non-accrual status until the borrower has demonstrated a willingness and ability to make the restructured loan payments (at least six months of sustained performance after the modification (or one year for loans and providing for quarterly or management has concluded that the borrower would not be in payment default in the foreseeable future. semi-annual payments)) is probable that it Lease financing The Corporation leases passenger and commercial vehicles and equipment to individual and corporate customers. The finance method of accounting is used to recognize revenue on lease contracts that meet the criteria specified in the guidance for leases in ASC Topic 842. Aggregate rentals due over the term of the leases less unearned income are included in finance lease contracts receivable. Unearned income is amortized using a method which results in approximate level rates of return on the principal amounts outstanding. Finance lease origination fees and costs are deferred and amortized over the average life of the lease as an adjustment to the interest yield. Revenue for other leases is recognized as it becomes due under the terms of the agreement. Loans acquired with deteriorated credit quality Purchased credit deteriorated (“PCD”) loans are defined as those with evidence of a more-than-insignificant deterioration in credit quality since origination. PCD loans are initially recorded at its purchase price plus an estimated allowance for credit losses (“ACL”). Upon the acquisition of a PCD loan, the Corporation makes an estimate of the expected credit losses over the remaining contractual term of each individual loan. The estimated credit losses over the life of the loan are recorded as an ACL with a corresponding addition to the loan purchase price. The amount of the purchased premium or discount which is not related to credit risk is amortized over the life of the loan through net interest income using the effective interest method or a method that approximates the effective interest method. Changes in expected credit losses are recorded as an increase or decrease to the ACL with a corresponding charge (reverse) to the provision for credit losses in the Consolidated Statement of Operations. Upon transition to the individual loan measurement, these loans follow the same nonaccrual policies as non-PCD loans and are therefore no longer excluded from non-performing status. Modifications of PCD loans that meet the definition of a TDR subsequent to the adoption of ASC Topic 326 are accounted and reported as such following the same processes as non-PCD loans. Prior and interest payments to the adoption of CECL, loans acquired with deteriorated credit quality were accounted for under ASC 310-30. Loans accounted for under ASC 310-30 included loans for which it was probable, at the date of acquisition, that the Corporation would not collect all contractually required principal and loans which the Corporation elected to account under ASC 310-30 by analogy. Under ASC Subtopic 310-30, these loans were aggregated into pools based on loans that have common risk characteristics. Each loan pool was accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Characteristics considered in pooling loans included loan type, interest rate type, accruing status, amortization type, rate index and source type. Once the pools were defined, the Corporation maintained the integrity of the pool of multiple loans accounted for as a single asset. Under ASC Subtopic 310-30, the difference between the undiscounted cash flows expected at acquisition and the fair value in the loans, or the “accretable yield,” was recognized as interest income using the effective yield method over the estimated life of the loan if the timing and amount of the future cash flows of the pool was loans were not reasonably considered non-performing. The non-accretable difference represents the difference between contractually required principal and interest and the cash flows expected to be collected. Subsequent to the acquisition date, increases in cash flows over the acquisition date were recognized as a reduction of any ACL established after the acquisition and then as an increase in the accretable yield for the loans prospectively. Decreases in expected cash flows after the acquisition date were recognized by recording an ACL. Charge-offs on loans accounted under ASC Subtopic 310-30 were recorded only to the extent that losses exceeded the non- accretable difference established with purchase accounting. estimable. Therefore, those expected at these Refer to Note 7 to the Consolidated Financial Statements for information with respect to loans acquired with additional deteriorated credit quality. Accrued interest receivable The amortized basis for loans and investments in debt securities is presented exclusive of accrued interest receivable. The Corporation has elected not to establish an ACL for accrued interest receivable for loans and investments in debt securities, POPULAR, INC. 2020 ANNUAL REPORT 71 given the Corporation’s non-accrual policies, in which accrual of interest is discontinued and reversed based on the asset’s delinquency status. Allowance for credit losses – loans portfolio Since the adoption of CECL on January 1, 2020, the Corporation establishes an ACL for its loan portfolio based on its estimate of credit losses over the remaining contractual term of the loans, adjusted for expected prepayments. An ACL is recognized for all loans including originated and purchased loans, since inception, with a corresponding charge to the provision for credit losses, except for PCD loans for which the ACL at acquisition is recorded as an addition to the purchase price with subsequent changes recorded in earnings. Loan losses are charged and recoveries are credited to the ACL. The Corporation follows a methodology to estimate the ACL which includes a reasonable and supportable forecast period for estimating credit losses, considering quantitative and qualitative this factors as well as the economic outlook. As part of methodology, management evaluates various macroeconomic scenarios provided by third parties. At December 31, 2020, management applied probability weights to the outcome of the selected scenarios. This evaluation includes benchmarking procedures as well as careful analysis of the underlying assumptions used to build the scenarios. The application of probability weights include baseline, optimistic and pessimistic scenarios. The weights applied are subject to evaluation on a quarterly basis as part of the ACL’s governance process. The Corporation considers additional macroeconomic scenarios as part of its qualitative adjustment framework. of The macroeconomic variables chosen to estimate credit losses were selected by combining quantitative procedures with expert judgment. These variables were determined to be the best predictors losses within the expected credit Corporation’s loan portfolios and include drivers such as unemployment rate, different measures of employment levels, house prices, gross domestic product and measures of disposable income, amongst others. The loss estimation framework includes a reasonable and supportable period of 2 years for PR portfolios, gradually reverting, over a 1-year horizon, to historical macroeconomic variables at the model input level. For the US portfolio the reasonable and supportable period considers the contractual life of the asset, impacted by prepayments, except for the US CRE portfolio. The US CRE portfolio utilizes a 2-year reasonable and supportable period gradually reverting, over a 1-year horizon, to historical information at the output level. The Corporation developed loan level quantitative models distributed by geography and loan type. This segmentation was determined by evaluating their risk characteristics, which include default patterns, source of repayment, type of collateral, amongst others. The modeling and lending framework includes competing risk models to generate lifetime channels, 72 POPULAR, INC. 2020 ANNUAL REPORT defaults and prepayments, and other loan level modeling techniques to estimate loss severity. Recoveries on future losses are contemplated as part of the loss severity modeling. These parameters are estimated by combining internal risk factors with macroeconomic expectations. In order to generate the expected credit losses, the output of these models is combined with loan level repayment information. The internal risk factors contemplated within the models may include borrowers’ credit scores, loan-to-value, delinquency status, risk ratings, interest rate, loan term, loan age and type of collateral, amongst others. The ACL also includes a qualitative framework that addresses two main components: losses that are expected but not captured within the quantitative modeling framework, and model imprecision. In order to identify potential losses that are not captured through the models, management evaluated model limitations as well as the different risks covered by the variables used in each quantitative model. The Corporation considered additional macroeconomic scenarios to address these risks. This assessment took into consideration factors listed as part of ASC 326-20-55-4. To complement the analysis, management also evaluated sectors that have low levels of historical defaults, but current conditions show the potential for future losses. This in the type of qualitative adjustment commercial portfolios. The model imprecision component of the qualitative adjustments is determined after evaluating model performance for these portfolios through different time periods. This type of qualitative adjustment mainly impacts consumer portfolios. is more prevalent is used when repayment The Corporation has designated as collateral dependent loans secured by collateral when foreclosure is probable or when foreclosure is not probable but the practical expedient is is used. The practical expedient expected to be provided substantially by the sale or operation of the collateral and the borrower is experiencing financial difficulty. The ACL of collateral dependent loans is measured based on the fair value of the collateral less costs to sell. The fair value of the collateral is based on appraisals, which may be adjusted due to their age, and the type, location, and condition of the property or area or general market conditions to reflect the expected change in value between the effective date of the appraisal and the measurement date. In the case of troubled debt restructurings (“TDRs”), the established framework captures the impact of concessions through discounting modified contractual cash flows, both principal and interest, at the loan’s original effective rate. The impact of these concessions is combined with the expected credit losses generated by the quantitative loss models in order to arrive at the ACL. As a result, the ACL related to TDRs is impacted by the expected macroeconomic conditions. The Credit Cards portfolio, due to its revolving nature, does not have a specified maturity date. To estimate the average remaining term of this segment, management evaluated the portfolios payment behavior based on internal historical data. further behaviors were These payment classified into sub-categories that accounted for delinquency history and differences between transactors, revolvers and customers that have exhibited mixed transactor/revolver behavior. Transactors are defined as active accounts without any finance charge in the last 6 months. The paydown curves generated for each sub-category are applied to the outstanding exposure at the measurement (FIFO) the methodology. These amortization patterns are combined with loan level default and loss severity modeling to arrive at the ACL. first-in first-out date using included guidance 310-10-35. accounting impairment This methodology Prior to the adoption of CECL, the Corporation followed a systematic methodology to establish and evaluate the adequacy of the ACL to provide for probable losses in the loan portfolio in accordance with the guidance of loss contingencies in ASC Subtopic 450-20 and loan impairment guidance in ASC Section the consideration of factors such as current economic conditions, portfolio risk characteristics, prior loss experience and results of periodic credit reviews of individual loans. According to the loan ASC Section 310-10-35, a loan is impaired when, based on current information and events, it is probable that the principal and/or interest are not going to be collected according to the original contractual terms of the loan agreement. Current information and events include “environmental” factors, e.g. existing industry, geographical, economic and political factors. Probable means the future event or events which will confirm the loss or impairment of the loan is likely to occur. Previously, under ASC Section 310-10-35, an allowance for loan impairment was recognized to the extent that the carrying value of an impaired loan exceeded the present value of the expected future cash flows discounted at the loan’s effective rate, the observable market price of the loan, if available, or the fair value of the collateral if the loan was collateral dependent. in Troubled debt restructurings A restructuring constitutes a TDR when the Corporation separately concludes that both of the following conditions exist: 1) the restructuring constitute a concession and 2) the debtor is experiencing financial difficulties. The concessions stem from an agreement between the Corporation and the debtor or are imposed by law or a court. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. A concession has been granted when, as a result of the restructuring, the Corporation does not expect to the collect all amounts due, original contract rate. If the payment of principal is dependent on the value of collateral, the current value of the collateral is taken into consideration in determining the amount of principal to be collected; therefore, all factors that changed are considered to determine if a concession was granted, including including interest accrued at its debt involves a degree of the change in the fair value of the underlying collateral that loan may be used to repay the loan. Classification of modifications as TDRs judgment. Indicators that the debtor is experiencing financial difficulties which are considered include: (i) the borrower is currently in default on any of its debt or it is probable that the borrower in the would be in payment default on any of foreseeable future without the modification; (ii) the borrower has declared or is in the process of declaring bankruptcy; (iii) there is significant doubt as to whether the borrower will continue to be a going concern; (iv) the borrower has securities that have been delisted, are in the process of being delisted, or are under threat of being delisted from an exchange; (v) based on estimates the borrower’s current business capabilities, it is forecasted that the entity-specific cash flows will be insufficient to service the debt (both interest and principal) in accordance with the contractual through maturity; and terms of the borrower cannot (vi) absent obtain funds from sources other than the existing creditors at an effective interest rate equal to the current market interest rate a non-troubled debtor. The identification of TDRs is critical in the determination of the adequacy of the ACL. Loans classified as TDRs may be excluded from TDR status if performance under the restructured terms exists for a reasonable period (at twelve months of sustained performance) and the loan yields a market rate. the current modification, the existing agreement that only encompass and projections similar debt least for for A loan may be restructured in a troubled debt restructuring into two (or more) loan agreements, for example, Note A and Note B. Note A represents the portion of the original loan principal amount that is expected to be fully collected along with contractual interest. Note B represents the portion of the original loan that may be considered uncollectible and charged-off, but the obligation is not forgiven to the borrower. Note A may be returned to accrual status provided all of the conditions for a TDR to be returned to accrual status are met. The modified loans are considered TDRs. Refer to Note 8 to the Consolidated Financial Statements for the on TDRs qualitative and additional Corporation’s determination of the ACL. information for reserve establishes an allowance Reserve for unfunded commitments The Corporation unfunded a commitments, based on the estimated losses over the remaining the facility. Since the adoption of CECL on term of January 1, 2020, established for commitments that are unconditionally cancellable by the established for Corporation. Accordingly, no reserve unfunded commitments related to its credit cards portfolio. Reserve for the unfunded portion of credit commitments is presented within other in the Consolidated Statements of Financial Condition. Net adjustments to the reserve for unfunded commitments are reflected in the liabilities is not is POPULAR, INC. 2020 ANNUAL REPORT 73 Consolidated Statements of Operations as provision for credit losses for the current year and as other operating expenses for prior years. Transfers and servicing of financial assets The transfer of an entire financial asset, a group of entire financial assets, or a participating interest in an entire financial asset in which the Corporation surrenders control over the assets is accounted for as a sale if all of the following conditions set forth in ASC Topic 860 are met: (1) the assets must be isolated from creditors of the transferor, (2) the transferee must obtain the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the transferor cannot maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. When the Corporation transfers financial assets and the transfer fails any one of these criteria, the Corporation is prevented from derecognizing the transferred financial assets and the transaction is accounted for as a secured borrowing. For federal and Puerto Rico income tax purposes, the Corporation treats the transfers of loans which do not qualify as “true sales” under the applicable accounting guidance, as sales, recognizing a deferred tax asset or liability on the transaction. sold; For transfers of financial assets that satisfy the conditions to be accounted for as sales, the Corporation derecognizes all recognizes all assets obtained and liabilities assets incurred in consideration as proceeds of the sale, including servicing assets and servicing liabilities, if applicable; initially measures at fair value assets obtained and liabilities incurred in a sale; and recognizes in earnings any gain or loss on the sale. The guidance on transfer of financial assets requires a true sale analysis of the treatment of the transfer under state law as if the Corporation was a debtor under the bankruptcy code. A true sale legal analysis includes several legally relevant factors, such as the nature and level of recourse to the transferor, and the nature of retained interests in the loans sold. The analytical conclusion as to a true sale is never absolute and unconditional, but contains qualifications based on the inherent equitable powers of a bankruptcy court, as well as the unsettled state of the common law. Once the legal isolation test has been met, other factors concerning the nature and extent of the transferor’s control over the transferred assets are taken into account in order to determine whether derecognition of assets is warranted. The Corporation sells mortgage loans to the Government National Mortgage Association (“GNMA”) in the normal course of business and retains the servicing rights. The GNMA programs under which the loans are sold allow the Corporation to repurchase individual delinquent loans that meet certain criteria. At the Corporation’s option, and without GNMA’s prior authorization, the Corporation may repurchase the delinquent loan for an amount equal to 100% of the remaining principal the balance of the Corporation has loan. Once the 74 POPULAR, INC. 2020 ANNUAL REPORT unconditional ability to repurchase the delinquent loan, the Corporation is deemed to have regained effective control over the loan and recognizes the loan on its balance sheet as well as an offsetting liability, regardless of the Corporation’s intent to repurchase the loan. the servicer loans originated by others. Whenever Servicing assets The Corporation periodically sells or securitizes loans while retaining the obligation to perform the servicing of such loans. In addition, the Corporation may purchase or assume the right the to service Corporation undertakes an obligation to service a loan, management assesses whether a servicing asset or liability should be recognized. A servicing asset is recognized whenever the compensation for servicing is expected to more than adequately compensate for performing the servicing. Likewise, a servicing liability would be recognized in the event that servicing fees to be received are not expected to adequately compensate the Corporation for its expected cost. Mortgage servicing assets recorded at fair value are separately presented on the Consolidated Statements of Financial Condition. All separately recognized servicing assets are initially recognized at fair value. For subsequent measurement of servicing rights, the Corporation has elected the fair value method for mortgage loans servicing rights (“MSRs”). Under the fair value measurement method, MSRs are recorded at fair value each reporting period, and changes in fair value are reported in mortgage banking activities in the Consolidated Statement of Operations. Contractual servicing fees including ancillary income and late fees, as well as fair value adjustments, are reported in mortgage banking activities in the Consolidated Statement of Operations. Loan servicing fees, which are based on a percentage of the principal balances of the loans serviced, are credited to income as loan payments are collected. The fair value of servicing rights is estimated by using a cash flow valuation model which calculates the present value of estimated future net taking into consideration actual and expected loan prepayment rates, discount rates, servicing costs, and other economic factors, which are determined based on current market conditions. servicing cash flows, Premises and equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed on a straight-line basis over the estimated useful life of each type of asset. Amortization of leasehold improvements is computed over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Costs of maintenance and repairs which do not improve or extend the life of the respective assets are expensed as incurred. Costs of renewals and betterments are capitalized. When assets are disposed of, their cost and related accumulated depreciation are removed from the accounts and any gain or loss is reflected in earnings as realized or incurred, respectively. incurred during The Corporation capitalizes interest cost incurred in the construction of significant real estate projects, which consist primarily of facilities for its own use or intended for lease. The amount of interest cost capitalized is to be an allocation of the the period required to cost interest substantially complete for interest capitalization purposes is to be based on a weighted average rate on the Corporation’s outstanding borrowings, unless there is a specific new borrowing associated with the asset. Interest cost capitalized for the years ended December 31, 2020, 2019 and 2018 was not significant. asset. The rate the right-of-use assets The Corporation recognizes (“ROU assets”) and lease liabilities relating to operating and finance lease arrangements in its Consolidated Statements of Financial Condition within other assets and other liabilities, respectively. For finance leases, interest is recognized on the lease liability separately from the amortization of the ROU asset, whereas for operating leases a single lease cost is recognized so that the cost of the lease is allocated over the lease term on a straight-line basis. Impairments on ROU assets are evaluated under the guidance for impairment or disposal of long-lived assets. The Corporation recognizes gains on sale and leaseback transactions in earnings when the transfer constitutes a sale, and the transaction was at to Note 32 to the fair value. Refer Consolidated Financial Statements for additional information on operating and finance lease arrangements. Impairment of long-lived assets The Corporation evaluates for impairment its long-lived assets to be held and used, and long-lived assets to be disposed of, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Other real estate Other real estate, received in satisfaction of a loan, is recorded at fair value less estimated costs of disposal. The difference between the carrying amount of the loan and the fair value less cost to sell is recorded as an adjustment to the ACL. Subsequent to foreclosure, any losses in the carrying value arising from periodic re-evaluations of the properties, and any gains or losses on the sale of these properties are credited or charged to expense in the period incurred and are included as OREO expenses. The cost of maintaining and operating such properties is expensed as incurred. Updated appraisals are obtained to adjust the value of the other real estate assets. The frequency depends on the loan type and total credit exposure. The appraisal for a commercial or construction other real estate property with a book value equal to or greater than $1 million is updated annually and if lower than $1 million it is updated every two years. For residential mortgage properties, the Corporation requests appraisals annually. to age, adjusted due Appraisals may be collateral inspections, property profiles, or general market conditions. The adjustments applied are based upon internal information such as other appraisals for the type of properties and/or loss severity information that can provide historical trends in the real estate market, and may change from time to time based on market conditions. if events or circumstances Goodwill and other intangible assets Goodwill is recognized when the purchase price is higher than the fair value of net assets acquired in business combinations under the purchase method of accounting. Goodwill is not amortized but is tested for impairment at least annually or more frequently indicate possible impairment. If the carrying amount of any of the reporting units exceeds its fair value, the Corporation would be required to record an impairment charge for the difference up to the amount of the goodwill. Prior to the adoption of ASU 2017-04 on January 1, 2020, the goodwill impairment test consisted of a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, the goodwill of the reporting unit is not considered impaired and the second step of the impairment test is unnecessary. If needed, the second step consists of comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. In determining the fair value of each reporting unit, the Corporation generally uses a combination of methods, including market price multiples of comparable companies and transactions, as well as discounted cash flow analysis. Goodwill impairment losses are recorded as part of operating expenses in the Consolidated Statements of Operations. Other intangible assets deemed to have an indefinite life are not amortized, but are tested for impairment using a one-step process which compares the fair value with the carrying amount of the asset. In determining that an intangible asset has an indefinite life, the Corporation considers expected cash competitive, inflows economic and other factors, which could limit the intangible asset’s useful life. contractual, and legal, regulatory, Other identifiable intangible assets with a finite useful life, mainly core deposits, are amortized using various methods over the periods benefited, which range from 5 to 10 years. These intangibles are evaluated periodically for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairments on intangible assets with a finite useful life are evaluated under the guidance for impairment or disposal of long-lived assets. POPULAR, INC. 2020 ANNUAL REPORT 75 Assets sold / purchased under agreements to repurchase / resell Repurchase and resell agreements are treated as collateralized financing transactions and are carried at the amounts at which the assets will be subsequently reacquired or resold as specified in the respective agreements. to agreements resell. However, It is the Corporation’s policy to take possession of securities purchased under the counterparties to such agreements maintain effective control over such securities, and accordingly those securities are not reflected in the Corporation’s Consolidated Statements of Financial Condition. The Corporation monitors the fair value of the underlying securities as compared to the related receivable, including accrued interest. It is the Corporation’s policy to maintain effective control over assets sold under agreements to repurchase; accordingly, such securities continue to be carried on the Consolidated Statements of Financial Condition. The Corporation may require counterparties to deposit return collateral pledged, when collateral or additional appropriate. stated at cost, Software Capitalized software is less accumulated amortization. Capitalized software includes purchased software and capitalizable application development costs associated with internally-developed software. Amortization, computed on a straight-line method, the estimated useful life of the software. Capitalized software is included in “Other assets” in the Consolidated Statement of Financial Condition. is charged to operations over Guarantees, including indirect guarantees of indebtedness to others The estimated losses to be absorbed under the credit recourse arrangements are recorded as a liability when the loans are sold and are updated by accruing or reversing expense (categorized in the line item “Adjustments (expense) to indemnity reserves on loans sold” in the Consolidated Statements of Operations) throughout the life of the loan, as necessary, when additional relevant information becomes available. The recourse liability is estimated using loan level statistical techniques. Internal factors that are evaluated include customer credit scores, refreshed loan age, and outstanding balance, amongst loan-to-values, others. The methodology leverages the expected loss framework for mortgage loans and includes macroeconomic expectations based on a 2-year reasonable and supportable period, gradually reverting over a 1-year horizon to historical macroeconomic variables level. Estimated future defaults, prepayments and loss severity are combined with loan level repayment information in order to estimate lifetime expected losses for this portfolio. The reserve for the estimated losses under the credit recourse arrangements is presented separately input the at 76 POPULAR, INC. 2020 ANNUAL REPORT within other liabilities in the Consolidated Statements of Financial Condition. Refer to Note 22 to the Consolidated Financial Statements for further disclosures on guarantees. Treasury stock Treasury stock is recorded at cost and is carried as a reduction of stockholders’ equity in the Consolidated Statements of Financial Condition. At the date of retirement or subsequent reissue, the treasury stock account is reduced by the cost of such stock. At retirement, the excess of the cost of the treasury stock over its par value is recorded entirely to surplus. At reissuance, the difference between the consideration received upon issuance and the specific cost is charged or credited to surplus. Revenues from contract with customers Refer to Note 31 for a detailed description of the Corporation’s policies on the recognition and presentation of revenues from contract with customers. Foreign exchange Assets and liabilities denominated in foreign currencies are translated to U.S. dollars using prevailing rates of exchange at the end of the period. Revenues, expenses, gains and losses are translated using weighted average rates for the period. The resulting from operations for which the functional currency is other than the U.S. dollar is reported in accumulated other comprehensive loss, except for highly inflationary environments in which the effects are included in other operating expenses. translation adjustment foreign currency The Corporation holds interests in Centro Financiero BHD León, S.A. (“BHD León”) in the Dominican Republic. The business of BHD León is mainly conducted in their country’s foreign currency. The resulting foreign currency translation adjustment from these operations is reported in accumulated other comprehensive loss. Refer to the disclosure of accumulated other comprehensive loss included in Note 21. Income taxes The Corporation recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Corporation’s financial statements or tax are returns. Deferred income determined for differences between financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. The computation is based on enacted tax laws and rates applicable to periods in which the temporary differences are expected to be recovered or settled. and liabilities tax assets The guidance for income taxes requires a reduction of the carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not (defined as a likelihood of more than 50 percent) that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically by the Corporation based on the more likely than not realization threshold criterion. In the assessment for a valuation allowance, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among others, all sources of taxable income available to realize the deferred tax asset, including the future reversal of existing temporary differences, the future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in carryback years and tax-planning strategies. In making such assessments, significant weight is given to evidence that can be objectively verified. The valuation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in the Corporation’s financial statements or tax returns and future profitability. The Corporation’s accounting for deferred tax consequences represents management’s best estimate of those future events. to by taxing challenge Positions taken in the Corporation’s tax returns may be subject authorities upon the examination. Uncertain tax positions are initially recognized in the financial statements when it is more likely than not (greater than 50%) that the position will be sustained upon examination by the tax authorities, assuming full knowledge of the position and all relevant facts. The amount of unrecognized tax benefit may increase or decrease in the future for various reasons including adding amounts for current tax year positions, expiration of open income tax returns due to the statute of limitations, changes in management’s judgment about the level of uncertainty, including addition or elimination of uncertain tax positions, status of examinations, litigation, settlements with tax authorities and legislative activity. The Corporation accounts for the taxes collected from customers and remitted to governmental authorities on a net basis (excluded from revenues). Income tax expense or benefit for the year is allocated among continuing operations, discontinued operations, and other comprehensive income, as applicable. The amount allocated to continuing operations is the tax effect of the pre-tax income or loss from continuing operations that occurred during the year, plus or minus income tax effects of (a) changes in circumstances that cause a change in judgment about the realization of deferred tax assets in future years, (b) changes in tax and (d) tax-deductible dividends paid to shareholders, subject to certain exceptions. changes in tax status, rates, laws (c) or Employees’ retirement and other postretirement benefit plans Pension costs are computed on the basis of accepted actuarial methods and are charged to current operations. Net pension costs are based on various actuarial assumptions regarding future experience under the plan, which include costs for services rendered during the period, interest costs and return on plan assets, as well as deferral and amortization of certain items such as actuarial gains or losses. The funding policy is to contribute to the plan, as necessary, to provide for services to date and for those expected to be earned in the future. To the extent that these requirements are fully covered by assets in the plan, a contribution may not be made in a particular year. The cost of postretirement benefits, which is determined based on actuarial assumptions and estimates of the costs of providing these benefits in the future, is accrued during the years that the employee renders the required service. The guidance for compensation retirement benefits of ASC Topic 715 requires the recognition of the funded status of each defined pension benefit plan, retiree health care and other postretirement benefit plans on the Consolidated Statements of Financial Condition. Stock-based compensation The Corporation opted to use the fair value method of recording stock-based compensation as described in the guidance for employee share plans in ASC Subtopic 718-50. Comprehensive income Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances, except those resulting from investments owners. and Comprehensive income (loss) is separately presented in the Consolidated Statements of Comprehensive Income. distributions owners by to Net income per common share Basic income per common share is computed by dividing net including income adjusted for preferred stock dividends, undeclared or unpaid dividends if cumulative, and charges or credits related to the extinguishment of preferred stock or induced conversions of preferred stock, by the weighted average number of common shares outstanding during the year. Diluted income per common share takes into consideration the weighted average common shares adjusted for the effect of stock options, shares and restricted stock, performance warrants, if any, using the treasury stock method. Statement of cash flows For purposes of reporting cash flows, cash includes cash on hand and amounts due from banks, including restricted cash. POPULAR, INC. 2020 ANNUAL REPORT 77 Note 3 - New accounting pronouncements Recently Adopted Accounting Standards Updates Standard FASB ASU 2021-01, Reference Rate Reform (Topic 848): Scope FASB ASU 2020-03, Codification Improvements to Financial Instruments FASB ASU 2019-08, Compensation – Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements – Share- Based Consideration Payable to a Customer FASB ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606 FASB ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities Description Date of adoption Effect on the financial statements The FASB issued ASU 2021-01 in January 2021 which, among others, permits entities to elect certain optional expedients and exceptions in Topic 848 when accounting for derivative contracts and certain hedging relationships affected by the discounting transition. The FASB issued ASU 2020-03 in March 2020, which, among other things, provides clarification on issues related to the term that should be used to measure expected credit losses of net investments in leases and that an allowance for credit losses should be recorded once control of financial assets has been regained. The FASB issued ASU 2019-08 in November 2019, which requires that an entity measure and classify share-based payment awards granted to a customer in accordance with Topic 718. Therefore, the grant-date fair value of the share-based payment awards will be the basis for the reduction of the transaction price. December 31, 2020 The Corporation was not impacted by the adoption of ASU 2021-01 since it does not hold derivatives affected by the discounting transition. January 1, 2020 The Corporation was not impacted by the adoption of ASU 2020-03 during the first quarter of 2020. January 1, 2020 The Corporation was not impacted by the adoption of ASU 2019-08 during the first quarter of 2020 since it does not grant its shared-based payments customers. awards to in The FASB issued ASU 2018-18 November 2018 which, among other things, provides guidance on how to assess whether certain collaborative arrangement transactions should be accounted for under Topic 606. January 1, 2020 The Corporation was not impacted by the adoption of ASU 2018-18 during the first quarter of 2020 since it does not have collaborative arrangements. The FASB issued ASU 2018-17 in October 2018, which requires entities to consider interests held through related indirect common control on a parties under proportional basis the equivalent of a direct interest in its entirety when determining whether a decision- making fee is a variable interest. than as rather January 1, 2020 The Corporation was not impacted by the adoption of ASU 2018-17 during the first quarter of 2020. 78 POPULAR, INC. 2020 ANNUAL REPORT Description Date of adoption Effect on the financial statements January 1, 2020 The FASB issued ASU 2018-15 in August 2018 which, among other things, aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software, and clarifies the term over which such capitalized implementation costs should be amortized. existing guidance impacted, since and The Corporation adopted ASU 2018-15 during the first quarter of 2020 and was not it significantly applied the capitalized implementation costs of cloud computing implementation arrangements. Capitalized costs of cloud computing arrangements are presented as part of “Other assets”. Refer to amended disclosures on Note 13, Other assets. The FASB issued ASU 2017-04 in January 2017, which simplifies the accounting for goodwill impairment by removing Step 2 of the two-step goodwill impairment test under the current guidance. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. The in FASB issued ASU 2017-03 January 2017, which incorporates into the Accounting Standards Codification recent SEC guidance about certain investments in qualified affordable housing and disclosing under SEC SAB Topic 11.M the effect on financial statements of adopting the revenue, leases and credit losses standards. January 1, 2020 The Corporation adopted ASU 2017-04 during the first quarter of 2020 and, as such, considered this guidance when performing the annual test during 2020. Refer to Note 14, Goodwill and other intangible assets, for additional information. impairment January 1, 2020 The Corporation has considered the guidance in this Update in its disclosures on the effect in its consolidated financial statements of adoption of the new Credit Loss Standard, discussed below. Standard FASB ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract FASB ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment FASB ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings (SEC Update) FASB ASUs Financial Instruments - Credit Losses (Topic 326) Since June 2016, the FASB has issued a series of ASUs mainly related to credit losses (Topic 326), which replace the incurred loss model with a current expected credit loss (“CECL”) model. The CECL model applies to financial assets measured at amortized cost that are subject to credit losses and certain off-balance a forward-looking methodology that reflects the expected credit losses over the lives of financial assets, starting when such assets are first acquired or originated. Under the revised methodology, credit losses will be measured based on past events, current conditions and reasonable and supportable forecasts that affect the collectability of financial assets. CECL losses for also revises the approach to recognizing credit establishes exposures. CECL sheet for credit allowance available-for-sale securities by replacing the direct write-down approach with the allowance approach and limiting the allowance to the amount at which the security’s fair value is less than the amortized cost. In addition, CECL provides that the losses on purchased credit initial deteriorated (“PCD”) financial assets will be recorded as an increase to the purchase price, with subsequent changes to the allowance recorded as a credit loss expense. The amendments to Topic 326 include the areas of accrued interest receivable, transfers of loans and debt securities between classifications and the inclusion of expected recoveries in the allowance for credit losses including PCD assets. The standards also expand credit quality disclosures. These accounting standards updates were effective on January 1, 2020. POPULAR, INC. 2020 ANNUAL REPORT 79 The Corporation adopted the new CECL accounting standard effective on January 1, 2020. As a result of the adoption, the Corporation recorded an increase in its allowance for credit losses related to its loan portfolio of $315 million, and a decrease of $9 million in the allowance for credit losses for unfunded commitments and credit recourse guarantees which recorded in Other Liabilities. The Corporation also is recognized an allowance for credit losses of approximately $13 million related to its held-to-maturity debt securities portfolio. The adoption of CECL was recognized under the modified retrospective approach. Therefore, the adjustments to record the increase in the allowance for credit losses was recorded as a decrease to the opening balance of retained earnings of the year of implementation, net of income taxes, approximately $17 million related to loans except previously accounted under ASC Subtopic 310-30, which resulted in a reclassification between certain contra loan balance accounts to the allowance for credit losses. The total impact to retained earnings, net of tax, related to the adoption of CECL was of $205.8 million. for As part of the adoption of CECL, the Corporation has made the election to break the existing pools of purchased credit impaired (“PCI”) loans previously accounted for under the ASC Accounting Standards Updates Not Yet Adopted PCI excluded previously loans were loan basis under Subtopic 310-30 guidance. These loans are now accounted for the PCD accounting on an individual methodology under CECL. Following the applicable accounting guidance, from non-performing status. Upon transition to the individual loan measurement, these loans are no longer excluded from non-performing status, resulting in an increase of $278 million in NPLs at January 1, 2020. This increase included $144 million in loans that were over 90 days past due and $134 million in loans that were not delinquent in their payment terms but were reported as non-performing due to other credit quality considerations. The Corporation availed itself of the option to phase in over a period of three years, beginning on January 1, 2022, the day-one effects on regulatory capital arising from the adoption of CECL. The Corporation was also impacted by the additional disclosures required by CECL. The CECL accounting standard also requires additional disclosures related to delinquencies, loans and collateral investments. Refer to Note 6, Debt securities held- to- maturity, Note 7 -Loans and Note 8- Allowance for credit losses - loans held-in-portfolio additional disclosures provided in for compliance with the new CECL standard. types and other credit metrics for Standard FASB ASU 2020-10, Codification Improvements FASB ASU 2020-08, Codification Improvements to Subtopic 310-20 – Receivables – Nonrefundable Fees and Other Costs Description Date of adoption Effect on the financial statements The FASB issued ASU 2020-10 in October 2020 which moves all disclosure guidance to the appropriate codification section and makes other improvements and technical corrections. December 31, 2021 The Corporation does not expect to be impacted as a result of the adoption of this accounting pronouncement. January 1, 2021 The FASB issued ASU 2020-08 in October 2020 which clarifies that a reporting entity a callable debt should assess whether security purchased at a premium is within scope of ASC 310-20-35-33 each the reporting the amortization period for nonrefundable fees and other costs. period, which impacts the adoption The Corporation will not be impacted by accounting pronouncement since it does not currently hold purchased callable debt securities at a premium. this of 80 POPULAR, INC. 2020 ANNUAL REPORT Standard FASB ASU 2020-06, Debt – Debt with Conversion and other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity FASB ASU 2020-04, Reference Rate Reform (Topic 848) FASB ASU 2020-01, Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323 and Topic 815 FASB ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes Description Date of adoption Effect on the financial statements The FASB issued ASU 2020-06 in August 2020 which, among other things, simplifies the accounting for convertible instruments and contracts in an entity’s own equity and amends the diluted EPS computation for these instruments. January 1, 2022 this standard, Upon adoption of the these will Corporation amendments in its evaluation of contracts in its own equity, including accelerated share repurchase transactions. consider December 31, 2022 The Corporation is currently in the process of identifying its LIBOR-based contracts that will be impacted by the cessation of LIBOR, incorporating fallback language in negotiated contracts and incorporating non-LIBOR reference rate and/or fallback language in new contracts to prepare for these changes. Notwithstanding these efforts, the Corporation expects to utilize the optional expedients provided by ASU 2020-04 for contracts left unmodified. January 1, 2021 The Corporation does not expect to be materially impacted by these amendments. The FASB issued ASU 2020-04 in March 2020, which provides accounting relief from the cessation of the future impact of LIBOR by, among other things, providing optional contract modifications resulting from such reference rate reform as a continuation of the existing contract and for hedging relationships to not be de-designated resulting from such changes provided certain criteria are met. expedients treat to observable transactions accounting for The FASB issued ASU 2020-01 in January 2020, which clarifies that an entity should consider that require it to either apply or discontinue the the equity method of purposes of applying the measurement alternative in accordance with Topic 321 and includes for that hold certain non-derivative entities forward contracts and purchased options to acquire upon settlement of the forward contract or exercise of the purchase option, would be accounted for under the equity method of accounting. considerations securities equity scope that, January 1, 2021 in The FASB issued ASU 2019-12 the 2019, which simplifies December accounting for income taxes by removing certain exceptions such as the incremental approach for intraperiod tax allocation and interim period income tax accounting for year-to-date losses that exceed anticipated losses. the ASU simplifies GAAP in a number of areas such as when separate financial statements of legal entities are not subject to tax and enacted changes in tax laws in interim periods. In addition, adoption The Corporation does not anticipate that accounting of the pronouncement will have a material effect on its Consolidated Statements of Financial Condition and Results of Operations. this POPULAR, INC. 2020 ANNUAL REPORT 81 Note 4 - Restrictions on cash and due from banks and certain securities The Corporation’s banking subsidiaries, BPPR and PB, are required by federal and state regulatory agencies to maintain average reserve balances with the Federal Reserve Bank of New York (the “Fed”) or other banks. Those required average reserve balances amounted to $ 2.3 billion at December 31, 2020 (December 31, 2019 - $ 1.6 billion). Cash and due from banks, as well as other highly liquid securities, are used to cover the required average reserve balances. At December 31, 2020, the Corporation held $39 million in funds deposited in money restricted assets in the form of market accounts, debt securities available for sale and equity securities (December 31, 2019 - $ 52 million). The restricted assets held in debt securities available for sale and equity securities consist primarily of assets held for the Corporation’s non-qualified retirement plans and fund deposits guaranteeing possible liens or encumbrances over the title of insured properties. Note 5 - 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 December 31, 2020 and December 31, 2019. (In thousands) U.S. Treasury securities Within 1 year After 1 to 5 years After 5 to 10 years Total U.S. Treasury securities Obligations of U.S. Government sponsored entities Within 1 year After 1 to 5 years Total obligations of U.S. Government sponsored entities Collateralized mortgage obligations - federal agencies After 1 to 5 years After 5 to 10 years After 10 years Total collateralized mortgage obligations - federal agencies Mortgage-backed securities Within 1 year After 1 to 5 years After 5 to 10 years After 10 years Total mortgage-backed securities Other After 1 to 5 years Total other At December 31, 2020 Gross unrealized losses Gross unrealized gains Fair value Weighted average yield Amortized cost $ $ 4,900,055 5,007,223 567,367 $ 16,479 259,399 37,517 10,474,645 313,395 59,993 90 60,083 1,388 61,229 318,292 380,909 5,616 50,393 454,880 9,608,860 10,119,749 101 – 101 14 1,050 10,202 11,266 56 1,735 20,022 180,844 202,657 224 224 11 11 – – – – – – – – – 43 43 – – 6 1,839 1,845 – – $ 4,916,534 5,266,622 604,884 0.69% 2.05 1.68 10,788,040 1.40 60,094 90 60,184 1,402 62,279 328,451 392,132 5,672 52,128 474,896 9,787,865 10,320,561 235 235 1.46 5.64 1.47 2.97 1.56 2.04 1.97 2.83 2.35 1.91 1.94 1.94 3.62 3.62 Total debt securities available-for-sale [1] $21,035,610 $527,430 $1,888 $21,561,152 1.66% [1] Includes $18.2 billion pledged to secure government and trust deposits, assets sold under agreements to repurchase, credit facilities and loan servicing agreements that the secured parties are not permitted to sell or repledge the collateral, of which $16.9 billion serve as collateral for public funds. 82 POPULAR, INC. 2020 ANNUAL REPORT (In thousands) U.S. Treasury securities Within 1 year After 1 to 5 years After 5 to 10 years Total U.S. Treasury securities Obligations of U.S. Government sponsored entities Within 1 year After 1 to 5 years Total obligations of U.S. Government sponsored entities Obligations of Puerto Rico, States and political subdivisions Within 1 year Total obligations of Puerto Rico, States and political subdivisions Collateralized mortgage obligations - federal agencies Within 1 year After 1 to 5 years After 5 to 10 years After 10 years Total collateralized mortgage obligations - federal agencies Mortgage-backed securities Within 1 year After 1 to 5 years After 5 to 10 years After 10 years Total mortgage-backed securities Other After 1 to 5 years Total other At December 31, 2019 Gross unrealized losses Gross unrealized gains Fair value Weighted average yield Amortized cost $ 5,071,201 5,137,804 1,778,568 $ 3,262 75,597 429 $ 567 3,435 6,604 $ 5,073,896 5,209,966 1,772,393 1.58% 2.19 1.70 11,987,573 79,288 10,606 12,056,255 1.86 62,492 60,021 122,513 6,975 6,975 236 350 85,079 504,391 590,056 16 36,717 350,373 4,447,561 4,834,667 341 341 2 – 2 – – – 1 31 3,640 3,672 – 852 1,958 60,384 63,194 9 9 21 90 111 – – – – 1,180 6,373 7,553 – 1 1,303 20,243 21,547 – – 62,473 59,931 122,404 6,975 6,975 236 351 83,930 501,658 586,175 16 37,568 351,028 4,487,702 4,876,314 350 350 1.45 1.48 1.47 – – 1.83 2.16 1.63 2.08 2.02 2.13 3.38 2.02 2.60 2.57 3.62 3.62 Total debt securities available-for-sale [1] $17,542,125 $146,165 $39,817 $17,648,473 2.05% [1] Includes $12.2 billion pledged to secure government and trust deposits, assets sold under agreements to repurchase, credit facilities and loan servicing agreements that the secured parties are not permitted to sell or repledge the collateral, of which $10.9 billion serve as collateral for public funds. The weighted securities available-for-sale is based on amortized cost; therefore, it does not give effect to changes in fair value. average yield debt on The following table presents the aggregate amortized cost at available-for-sale value of debt and fair December 31, 2020 by contractual maturity. securities 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. (In thousands) Within 1 year After 1 to 5 years After 5 to 10 years After 10 years Total debt securities available-for-sale Amortized cost Fair value $ 4,965,664 5,059,318 1,083,476 9,927,152 $ 4,982,300 5,320,477 1,142,059 10,116,316 $21,035,610 $21,561,152 POPULAR, INC. 2020 ANNUAL REPORT 83 During the years ended December 31, 2020 and 2019, the Corporation sold U.S. Treasury Notes and U.S. Treasury Bills, respectively. The proceeds from these sales were $5 million and $99 million, respectively. Gross realized gains and losses on the sale of debt securities available-for-sale for the years ended December 31, 2020, 2019 and 2018 were as follows: (In thousands) Gross realized gains Gross realized losses Net realized gains (losses) on sale of debt securities available-for-sale 2020 $41 – 2019 $ – (20) $41 $(20) 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 December 31, 2020 and 2019. (In thousands) Collateralized mortgage obligations - federal agencies Mortgage-backed securities Total debt securities available-for-sale in an unrealized loss position Less than 12 months At December 31, 2020 12 months or more Total Fair value $ 4,029 886,432 $890,461 Gross unrealized losses $ 43 1,834 $1,877 Fair value $ – 555 $555 Gross unrealized losses $ – 11 $11 Fair value $ 4,029 886,987 $891,016 Gross unrealized losses $ 43 1,845 $1,888 (In thousands) Less than 12 months Gross unrealized losses Fair value At December 31, 2019 12 months or more Gross unrealized losses Fair value U.S. Treasury securities Obligations of U.S. Government sponsored entities Collateralized mortgage obligations - federal agencies Mortgage-backed securities $2,439,114 9,973 114,603 179,312 $ 9,798 4 537 693 $ 452,784 99,846 310,315 1,784,414 $ 808 107 7,016 20,854 Total Fair value $2,891,898 109,819 424,918 1,963,726 Gross unrealized losses $10,606 111 7,553 21,547 Total debt securities available-for-sale in an unrealized loss position $2,743,002 $11,032 $2,647,359 $28,785 $5,390,361 $39,817 As of December 31, 2020, the portfolio of available-for-sale debt securities reflects gross unrealized losses of approximately $2 million, driven mainly by mortgage-backed securities. The following table states the name of issuers, and the aggregate amortized cost and fair value of the debt securities of such issuer (includes available-for-sale and held-to-maturity debt securities), in which the aggregate amortized cost of such equity. This securities information excludes debt securities backed by the full faith and credit of the U.S. Government. Investments in obligations stockholders’ 10% of exceeds issued by a state of the U.S. and its political subdivisions and agencies, which are payable and secured by the same source of revenue or taxing authority, other than the U.S. Government, are considered securities of a single issuer. 2020 2019 (In thousands) FNMA Freddie Mac Amortized cost $2,242,121 3,616,238 Fair value $2,338,897 3,675,679 Amortized cost $3,113,373 1,623,116 Fair value $3,129,538 1,638,796 84 POPULAR, INC. 2020 ANNUAL REPORT Note 6 - Debt securities held-to-maturity The following tables present the amortized cost, gross unrealized gains and losses, approximate fair value, weighted average yield and contractual maturities of debt securities held-to-maturity at December 31, 2020 and 2019. (In thousands) Obligations of Puerto Rico, States and political subdivisions Within 1 year After 1 to 5 years After 5 to 10 years After 10 years Total obligations of Puerto Rico, States and political subdivisions Collateralized mortgage obligations - federal agencies After 1 to 5 years Total collateralized mortgage obligations - federal agencies Securities in wholly owned statutory business trusts After 10 years Total securities in wholly owned statutory business trusts Total debt securities held-to-maturity At December 31, 2020 Amortized cost Allowance for Credit Losses Net of Allowance Gross unrealized gains Gross unrealized losses Fair value Weighted average yield $ 3,990 16,030 14,845 46,164 $ 50 710 573 8,928 $ 3,940 15,320 14,272 37,236 $ 47 710 295 11,501 $ – – 23 – $ 3,987 16,030 14,544 48,737 6.05% 6.16 2.77 1.58 81,029 10,261 70,768 12,553 23 83,298 2.93 31 31 11,561 11,561 $92,621 – – – – 31 31 11,561 11,561 1 1 – – – – – – $10,261 $82,360 $12,554 $23 32 32 6.44 6.44 11,561 6.51 11,561 $94,891 6.51 3.38% (In thousands) Obligations of Puerto Rico, States and political subdivisions Within 1 year After 1 to 5 years After 5 to 10 years After 10 years Total obligations of Puerto Rico, States and political subdivisions Collateralized mortgage obligations - federal agencies After 1 to 5 years Total collateralized mortgage obligations - federal agencies Securities in wholly owned statutory business trusts After 10 years Total securities in wholly owned statutory business trusts Other Within 1 year Total other Amortized cost $ 3,745 17,580 18,195 46,036 85,556 45 45 11,561 11,561 500 500 At December 31, 2019 Gross unrealized losses Gross unrealized gains Fair value Weighted average yield $ – – – 9,384 9,384 $ 11 320 1,607 – 1,938 $ 3,734 17,260 16,588 55,420 6.01% 6.11 3.11 1.67 93,002 3.08 2 2 – – – – – – – – – – 47 47 11,561 11,561 500 500 6.44 6.44 6.51 6.51 2.97 2.97 Total debt securities held-to-maturity $97,662 $9,386 $1,938 $105,110 3.49% Securities not due on a single contractual maturity date, such as collateralized mortgage obligations, are classified in the period of final contractual maturity. The expected maturities of collateralized mortgage obligations and certain other securities may differ from their contractual maturities because they may be subject to prepayments or may be called by the issuer. POPULAR, INC. 2020 ANNUAL REPORT 85 The following table presents the aggregate amortized cost and fair value of debt securities held-to-maturity at December 31, 2020 by contractual maturity. (In thousands) Within 1 year After 1 to 5 years After 5 to 10 years After 10 years Total debt securities held-to-maturity Amortized cost Fair value $ 3,990 16,061 14,845 57,725 $92,621 $ 3,987 16,062 14,544 60,298 $94,891 The following tables present the Corporation’s fair value and gross unrealized losses of debt securities held-to-maturity, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2019. (In thousands) Obligations of Puerto Rico, States and political subdivisions Total debt securities held-to-maturity in an unrealized loss position Credit Quality Indicators The following describes the credit quality indicators by major security type that the Corporation considers in its’ estimate to develop the allowance for credit losses for investment securities held-to-maturity. The “Obligations of Puerto Rico, States and political subdivisions” classified as held-to-maturity at December 31, 2020 includes securities issued by municipalities of Puerto Rico that are generally not rated by a credit rating agency. This includes $35 million of general and special obligation bonds issued by three municipalities of Puerto Rico, which are payable primarily from certain property taxes imposed by the issuing municipality. In the case of general obligations, they also benefit from a pledge of the full faith, credit and unlimited taxing power of the issuing municipality, which is required by law to levy property taxes in an amount sufficient for the payment of debt service on such general obligation bonds. The Corporation performs periodic credit quality reviews of these securities and internally assigns standardized credit risk ratings based on its evaluation. The Corporation considers these ratings in its estimate to develop the allowance for credit losses associated with these securities. For the definitions of the obligor risk ratings, refer to the Credit Quality section of Note 8. The following presents the amortized cost basis of securities held by the Corporation issued by municipalities of Puerto Rico aggregated by the internally assigned standardized credit risk rating: 86 POPULAR, INC. 2020 ANNUAL REPORT Less than 12 months Fair value $17,544 $17,544 Gross unrealized losses $291 $291 At December 31, 2019 12 months or more Fair value $12,673 $12,673 Gross unrealized losses $1,647 $1,647 Total Fair value $30,217 $30,217 Gross unrealized losses $1,938 $1,938 (In thousands) Watch Total At December 31, 2020 Securities issued by Puerto Rico municipalities $35,315 $35,315 The portfolio of “Obligations of Puerto Rico, States and political subdivisions” also includes $46 million in securities issued by the Puerto Rico Housing Finance Authority (“HFA”), a government instrumentality, for which the underlying source of payment is second mortgage loans in Puerto Rico residential properties (not the government), but for which HFA, provides a guarantee in the event of default and upon the satisfaction of certain other conditions. These securities are not rated by a credit rating agency. The Corporation assesses the credit risk associated with these securities by evaluating the refreshed FICO scores of a representative sample of the underlying borrowers. The average refreshed FICO score for the representative sample, comprised of 66% of the nominal value of the securities, used for the December 31, 2020 loss estimate was of 697. The loss estimates for this portfolio was based on the methodology established under CECL for similar loan obligations. The Corporation does not consider the government guarantee when estimating the credit losses associated with this portfolio. A further deterioration of the Puerto Rico economy or of the fiscal health of the Government of Puerto Rico and/or its instrumentalities (including if any of the issuing municipalities become subject to a debt restructuring proceeding under PROMESA) could further affect the value of these securities, resulting in losses to the Corporation. Refer to Note 23 for additional information on the Corporation’s exposure to the Puerto Rico Government. Delinquency status At December 31, 2020 there are no securities held-to-maturity in past due or non-performing status. Allowance for credit losses on debt securities held-to-maturity The following table provides the activity in the allowance for credit losses related to debt securities held-to-maturity by security type for the year ended December 31, 2020. (In thousands) Allowance for credit losses: Beginning balance, January 1, 2020 Impact of adopting CECL Provision for credit loss expense (reversal of provision) Securities charged-off Recoveries Ending Balance For the year ended December 31, 2020 Obligations of Puerto Rico, States and political subdivisions $ – 12,654 (2,393) – – $10,261 The allowance for credit losses for the Obligations of Puerto Rico, States and political subdivisions, includes $1.4 million for securities issued by municipalities of Puerto Rico, and $8.9 million for bonds issued by the Puerto Rico HFA, which are secured by second mortgage loans on Puerto Rico residential properties. Note 7 - Loans For a summary of the accounting policies related to loans, interest recognition and allowance for credit losses refer to Note 2 - Summary of Significant Accounting Policies of this Form 10-K. During the year ended December 31, 2020, the Corporation recorded purchases (including repurchases) of mortgage loans amounting to $1.3 billion including $160 million in PCD loans, included a bulk repurchase consumer loans of $56 million and commercial loans of $26 million; compared to purchases (including repurchases) of mortgage loans of $423 million and consumer loans of $359 million including the acquisition of a credit card portfolio with an unpaid principal balance of $74 million, and loans of $141 million, during the year ended commercial these mortgage loan December 31, 2019. During 2020, repurchases transaction of $688 million in GNMA loans, of which $684 million were included in the 90 days past due category. This included $324 million which were part of the Corporation’s ending portfolio balance at June 30, 2020, since due to the delinquency status of the loans the Corporation had the right but not the obligation to repurchase the assets and was required to recognize (rebook) these loans in accordance with U.S. GAAP. The bulk loan repurchases also included $120 million in loans from the FNMA and FHMLC servicing portfolio, subject to credit recourse which were considered PCD loans. The Corporation performed whole-loan sales involving approximately $150 million of residential mortgage loans and $32 million of commercial loans during the year ended December 31, 2020 (December 31, 2019 - $64 million of residential mortgage and $114 million of commercial and construction loans). Also, during the year ended December 31, 2020, the Corporation securitized approximately $332 million of mortgage into Government National Mortgage Association (“GNMA”) mortgage-backed securities and $ 176 million of mortgage loans into Federal National Mortgage Association (“FNMA”) mortgage-backed securities, compared to $347 million and $ 111 million, respectively, during the year ended December 31, 2019. loans Delinquency status The following table presents the amortized cost basis of loans held-in-portfolio (“HIP”), net of unearned income, by past due including those that are in status, and by loan class non-performing status or that are accruing interest but are past due 90 days or more at December 31, 2020 and December 31, 2019. POPULAR, INC. 2020 ANNUAL REPORT 87 December 31, 2020 Puerto Rico Past due 30-59 days 60-89 days 90 days or more [1] Total past due Current Loans HIP Past due 90 days or more Accruing Non-accrual loans loans $ 796 $ – $ 505 $ 1,301 $ 150,979 $ 152,280 $ 505 $ 2,189 8,270 10,223 – 195,602 9,141 6,550 184 11,255 53,186 304 3,503 1,218 775 – 87,726 1,427 4,619 – 8,097 12,696 483 77,137 92,001 35,012 21,497 1,428,824 3,441 12,798 48 26,387 15,736 15,052 82,829 101,489 46,010 21,497 1,712,152 14,009 23,967 232 45,739 81,618 15,839 1,924,504 1,497,406 4,183,098 135,609 5,057,991 1,183,652 895,968 3,947 1,232,008 3,050,610 110,826 2,007,333 1,598,895 4,229,108 157,106 6,770,143 1,197,661 919,935 4,179 1,277,747 3,132,228 126,665 77,137 92,001 34,449 21,497 414,343 3,441 – – 26,387 15,736 14,881 – – – 563 – 1,014,481[2] – 12,798 48 – – 171 (In thousands) Commercial multi-family Commercial real estate: Non-owner occupied Owner occupied Commercial and industrial Construction Mortgage Leasing Consumer: Credit cards Home equity lines of credit Personal Auto Other Total $297,700 $120,544 $1,728,438 $2,146,682 $19,426,598 $21,573,280 $700,377 $1,028,061 [1] [2] Loans included as 90 days or more past due include loans that that are not delinquent in their payment terms but that are reported as non-performing due to other credit quality considerations. As part of the adoption of CECL, at January 1, 2020, the Corporation reclassified to this category $134 million of acquired loans with credit deterioration that were previously accounted for under ASC 310-30 and were excluded from non-performing status. In addition, as part of the CECL transition, an additional $125 million of loans that were 90 days or more past due previously accounted for under ASC 310-30 and excluded from non-performing status are now included as non-performing. It is the Corporation’s policy to report delinquent residential mortgage loans insured by FHA or guaranteed by the VA as accruing loans past due 90 days or more as opposed to non-performing since the principal repayment is insured. These include $57 million in loans rebooked under the GNMA program at December 31, 2020, in which issuers such as BPPR have the option but not the obligation to repurchase loans that are 90 days or more past due. (In thousands) Commercial multi-family Commercial real estate: Non-owner occupied Owner occupied Commercial and industrial Construction Mortgage Legacy Consumer: Credit cards Home equity lines of credit Personal Other December 31, 2020 Popular U.S. Past due 30-59 days 60-89 days 90 days or more Total past due Current Loans HIP Past due 90 days or more Accruing Non-accrual loans loans $ 5,273 $ – $ 1,894 $ 7,167 $1,736,544 $1,743,711 $ 1,894 $– 924 191 1,112 21,312 33,422 5 – 236 1,486 – 3,640 650 65 – 15,464 7 – 342 1,342 – 669 334 1,580 7,560 14,864 1,511 3 7,491 1,474 20 5,233 1,175 2,757 28,872 63,750 1,523 3 8,069 4,302 20 1,988,577 343,205 1,534,006 732,787 1,056,787 13,950 28 86,502 194,936 1,723 1,993,810 344,380 1,536,763 761,659 1,120,537 15,473 31 94,571 199,238 1,743 669 334 1,580 7,560 14,864 1,511 – 7,491 1,474 20 – – – – – – 3 – – – Total $63,961 $21,510 $37,400 $122,871 $7,689,045 $7,811,916 $37,397 $3 88 POPULAR, INC. 2020 ANNUAL REPORT December 31, 2020 Popular, Inc. Past due 30-59 days 60-89 days 90 days or more [3] Total past due Current Loans HIP [4] [5] Past due 90 days or more Accruing Non-accrual loans loans $ 6,069 $ – $ 2,399 $ 8,468 $ 1,887,523 $ 1,895,991 $ 2,399 $ 3,113 8,461 11,335 21,312 229,024 9,141 5 6,550 420 12,741 53,186 304 7,143 1,868 840 – 103,190 1,427 7 4,619 342 9,439 12,696 483 77,806 92,335 36,592 29,057 1,443,688 3,441 1,511 12,801 7,539 27,861 15,736 15,072 88,062 102,664 48,767 50,369 1,775,902 14,009 1,523 23,970 8,301 50,041 81,618 15,859 3,913,081 1,840,611 5,717,104 868,396 6,114,778 1,183,652 13,950 895,996 90,449 1,426,944 3,050,610 112,549 4,001,143 1,943,275 5,765,871 918,765 7,890,680 1,197,661 15,473 919,966 98,750 1,476,985 3,132,228 128,408 77,806 92,335 36,029 29,057 429,207 3,441 1,511 – 7,491 27,861 15,736 14,901 – – – 563 – 1,014,481[6] – – 12,801 48 – – 171 (In thousands) Commercial multi-family Commercial real estate: Non-owner occupied Owner occupied Commercial and industrial Construction Mortgage [1] Leasing Legacy [2] Consumer: Credit cards Home equity lines of credit Personal Auto Other Total $361,661 $142,054 $1,765,838 $2,269,553 $27,115,643 $29,385,196 $737,774 $1,028,064 [1] It is the Corporation’s policy to report delinquent residential mortgage loans insured by FHA or guaranteed by the VA as accruing loans past due 90 days or more as opposed to non-performing since the principal repayment is insured. [2] The legacy portfolio is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part [3] [4] [5] [6] of restructuring efforts carried out in prior years at the Popular U.S. segment. Loans included as 90 days or more past due include loans that that are not delinquent in their payment terms but that are reported as non-performing due to other credit quality considerations. As part of the adoption of CECL, at January 1, 2020, the Corporation reclassified to this category $134 million of acquired loans with credit deterioration that were previously accounted for under ASC 310-30 and were excluded from non-performing status. In addition, as part of the CECL transition, an additional $144 million of loans that were 90 days or more past due previously accounted for under ASC 310-30 and excluded from non-performing status are now included as non-performing. Loans held-in-portfolio are net of $203 million in unearned income and exclude $99 million in loans held-for-sale. Includes $6.5 billion pledged to secure credit facilities and public funds that the secured parties are not permitted to sell or repledge the collateral, of which $4.1 billion were pledged at the Federal Home Loan Bank (“FHLB”) as collateral for borrowings and $2.4 billion at the Federal Reserve Bank (“FRB”) for discount window borrowings. It is the Corporation’s policy to report delinquent residential mortgage loans insured by FHA or guaranteed by the VA as accruing loans past due 90 days or more as opposed to non-performing since the principal repayment is insured. These include loans rebooked, which were previously pooled into GNMA securities amounting to $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 the repurchase option are required to be reflected (rebooked)on the financial statements of BPPR with an offsetting liability. Loans in our serviced GNMA portfolio benefit from payment forbearance programs but continue to reflect the contractual delinquency until the borrower repays deferred payments or completes a payment deferral modification or other borrower assistance alternative. POPULAR, INC. 2020 ANNUAL REPORT 89 December 31, 2019 Puerto Rico Past due 30-59 days 60-89 days 90 days or more Total past due Current Loans HIP Past due 90 days or more Accruing Non-accrual loans [1] loans $ 2,941 $ 129 $ 1,512 $ 4,582 $ 143,267 $ 147,849 $ 1,473 $ – 10,439 5,704 8,780 1,555 285,006 12,014 11,358 – 13,481 81,169 358 5,244 3,978 1,646 – 146,197 3,053 7,928 85 9,352 23,182 1,418 43,664 84,537 37,156 119 837,651 3,657 19,461 – 20,296 31,148 14,189 59,347 94,219 47,582 1,674 1,268,854 18,724 38,747 85 43,129 135,499 15,965 2,048,871 1,492,110 3,371,152 135,796 4,897,894 1,040,783 1,085,053 4,953 1,325,021 2,782,023 124,902 2,108,218 1,586,329 3,418,734 137,470 6,166,748 1,059,507 1,123,800 5,038 1,368,150 2,917,522 140,867 39,968 69,276 36,538 119 283,708 3,657 – – 19,529 31,148 13,784 – – 544 – 439,662 – 19,461 – 61 – 405 (In thousands) Commercial multi-family Commercial real estate: Non-owner occupied Owner occupied Commercial and industrial Construction Mortgage Leasing Consumer: Credit cards Home equity lines of credit Personal Auto Other Total $432,805 $202,212 $1,093,390 $1,728,407 $18,451,825 $20,180,232 $499,200 $460,133 [1] Loans HIP of $134 million accounted for under ASC Subtopic 310-30 are excluded from the above table as they are considered to be performing due to the application of the accretion method, in which these loans would accrete interest income over the remaining life of the loans using estimated cash flow analysis. (In thousands) Commercial multi-family Commercial real estate: Non-owner occupied Owner occupied Commercial and industrial Construction Mortgage Legacy Consumer: Credit cards Home equity lines of credit Personal Other December 31, 2019 Popular U.S. Past due 30-59 days 60-89 days 90 days or more Total past due Current Loans HIP Past due 90 days or more Accruing Non-accrual loans [1] loans $ 9 $ – $ 2,097 $ 2,106 $1,645,204 $1,647,310 $ 2,097 $– 1,047 1,750 454 – 15,474 49 – 404 2,286 3 – – 128 – 4,024 8 – 267 1,582 – 281 251 19,945 26 11,091 1,999 – 9,954 2,066 – 1,328 2,001 20,527 26 30,589 2,056 – 10,625 5,934 3 1,868,968 337,134 1,174,353 693,596 986,195 20,049 36 106,718 318,506 687 1,870,296 339,135 1,194,880 693,622 1,016,784 22,105 36 117,343 324,440 690 281 251 876 26 11,091 1,999 – 9,954 2,066 – – – – – – – – – – – Total $21,476 $6,009 $47,710 $75,195 $7,151,446 $7,226,641 $28,641 $– [1] Loans HIP of $19 million accounted for under ASC Subtopic 310-30 are excluded from the above table as they are considered to be performing due to the application of the accretion method, in which these loans would accrete interest income over the remaining life of the loans using estimated cash flow analysis. 90 POPULAR, INC. 2020 ANNUAL REPORT December 31, 2019 Popular, Inc. Past due 30-59 days 60-89 days 90 days or more Total past due Current Loans HIP [3] [4] Past due 90 days or more Accruing Non-accrual loans [5] loans $ 2,950 $ 129 $ 3,609 $ 6,688 $ 1,788,471 $ 1,795,159 $ 3,570 $ – 11,486 7,454 9,234 1,555 300,480 12,014 49 11,358 404 15,767 81,169 361 5,244 3,978 1,774 – 150,221 3,053 8 7,928 352 10,934 23,182 1,418 43,945 84,788 57,101 145 848,742 3,657 1,999 19,461 9,954 22,362 31,148 14,189 60,675 96,220 68,109 1,700 1,299,443 18,724 2,056 38,747 10,710 49,063 135,499 15,968 3,917,839 1,829,244 4,545,505 829,392 5,884,089 1,040,783 20,049 1,085,089 111,671 1,643,527 2,782,023 125,589 3,978,514 1,925,464 4,613,614 831,092 7,183,532 1,059,507 22,105 1,123,836 122,381 1,692,590 2,917,522 141,557 40,249 69,527 37,414 145 294,799 3,657 1,999 – 9,954 21,595 31,148 13,784 – – 544 – 439,662 – – 19,461 – 61 – 405 (In thousands) Commercial multi-family Commercial real estate: Non-owner occupied Owner occupied Commercial and industrial Construction Mortgage [1] Leasing Legacy [2] Consumer: Credit cards Home equity lines of credit Personal Auto Other Total $454,281 $208,221 $1,141,100 $1,803,602 $25,603,271 $27,406,873 $527,841 $460,133 [1] It is the Corporation’s policy to report delinquent residential mortgage loans insured by FHA or guaranteed by the VA as accruing loans past due 90 days or more as opposed to non-performing since the principal repayment is insured. [2] The legacy portfolio is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part [3] [4] [5] of restructuring efforts carried out in prior years at the Popular U.S. segment. Loans held-in-portfolio are net of $181 million in unearned income and exclude $59 million in loans held-for-sale. Includes $6.7 billion pledged to secure credit facilities and public funds that the secured parties are not permitted to sell or repledge the collateral, of which $4.6 billion were pledged at the FHLB as collateral for borrowings and $2.1 billion at the FRB for discount window borrowings. Loans HIP of $153 million accounted for under ASC Subtopic 310-30 are excluded from the above table as they are considered to be performing due to the application of the accretion method, in which these loans would accrete interest income over the remaining life of the loans using estimated cash flow analysis. Recognition of interest income on mortgage loans is generally discontinued when loans are 90 days or more in arrears on payments of principal or interest. The Corporation discontinues the recognition of interest income on residential mortgage loans insured by the Federal Housing Administration (“FHA”) or guaranteed by the U.S. Department of Veterans Affairs (“VA”) when 15 months delinquent as to principal or interest, since the principal repayment on these loans is insured. At December 31, 2020, mortgage loans held-in-portfolio include $2.1 billion (December 31, 2019 - $1.4 billion) of loans insured by the Federal Housing Administration (“FHA”), or guaranteed by the U.S. Department of Veterans Affairs (“VA”) of which $1.0 billion (December 31, 2019 - $441 million) are 90 days or more past due. These balances include $655 million in loans modified under a TDR (December 31, 2019 - $625 million), that are presented as accruing loans. The portfolio of U.S. guaranteed loans includes $329 million of residential mortgage loans in Puerto Rico that are no longer accruing interest as of December 31, 2020 (December 31, 2019 - $213 million). The Corporation has approximately $60 million in reverse mortgage loans in Puerto Rico which are guaranteed by FHA, but which are currently not accruing interest at December 31, 2020 (December 31, 2019 - $65 million). Loans with a delinquency status of 90 days past due as of December 31, 2020 include $57 million in loans previously pooled into GNMA securities (December 31, 2019 - $103 million). Under the GNMA program, issuers such as BPPR have the option but not the obligation to repurchase loans that are 90 days or more past due. For accounting purposes, these loans subject to the repurchase option are required to be reflected on the financial statements of BPPR with an offsetting liability. Loans in our serviced GNMA portfolio benefit from payment forbearance programs but continue to reflect the contractual delinquency until the borrower repays deferred payments or completes a payment deferral modification or other borrower assistance alternative. The components of the net financing leases receivable at December 31, 2020 and 2019 were as follows: (In thousands) Total minimum lease payments Estimated residual value of leased property (unguaranteed) Deferred origination costs, net of fees Less - Unearned financing income Net minimum lease payments Less - Allowance for credit losses Net minimum lease payments, net of 2020 2019 $ 957,367 $ 863,755 419,024 18,141 196,788 356,560 15,422 176,121 1,197,744 16,863 1,059,616 10,768 allowance for credit losses $1,180,881 $1,048,848 POPULAR, INC. 2020 ANNUAL REPORT 91 At December 31, 2020, future minimum lease payments are expected to be received as follows: (In thousands) 2021 2022 2023 2024 2025 and thereafter Total $60,939 90,701 150,169 212,591 442,967 $957,367 The following table presents the amortized cost basis of non-accrual loans as of December 31, 2020 by class of loans and the related interest income recognized on these loans: December 31, 2020 Non-accrual with no allowance Puerto Rico Non-accrual with allowance Interest income recognized Non-accrual with no allowance Popular U.S. Non-accrual with allowance Interest income recognized Non-accrual with no allowance Popular, Inc. Non-accrual with allowance Interest income recognized (In thousands) Commercial multi-family $ – $ 505 $ 3 $ – $ 1,894 $ 1 $ – $ 2,399 $ 4 Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Construction Mortgage Leasing Legacy Consumer: HELOCs Personal Auto Other 35,968 41,169 276 14,825 77,176 697 1,148 – 141,737 – – – 9,265 – – 33,301 21,497 272,606 3,441 – – 17,122 15,736 14,881 148 – 1,843 24 – – 234 185 133 – – – – 517 – – – – – – 669 4 35,968 41,838 280 334 1,580 7,560 14,347 – 1,511 7,491 1,474 – 20 – – 78 27 – – – – – – 14,825 77,510 697 1,148 – 142,254 – – – 9,265 – – 34,881 29,057 286,953 3,441 1,511 7,491 18,596 15,736 14,901 148 78 1,870 24 – – 234 185 133 Total $202,943 $497,434 $3,543 $517 $36,880 $110 $203,460 $534,314 $3,653 location, and condition of the to their age, and the type, property or area or general market conditions to reflect the expected change in value between the effective date of the appraisal and the measurement date. Appraisals are updated every one to two years depending on the type of loan and the total exposure of the borrower. The following table present the amortized cost basis of loans and type of loans by class of collateral-dependent collateral as of December 31, 2020: in non-accrual Loans $203 million in collateral dependent loans. status with no allowance include for which it applies the practical expedient The Corporation has designated loans classified as collateral dependent to measure the ACL based on the fair value of the collateral less cost to sell, when the repayment is expected to be provided substantially by the sale or operation of the collateral and the borrower is experiencing financial difficulty. The fair value of the collateral is based on appraisals, which may be adjusted due 92 POPULAR, INC. 2020 ANNUAL REPORT (In thousands) Puerto Rico Commercial multi-family Commercial real estate: Non-owner occupied Owner occupied Commercial and industrial Construction Mortgage Consumer: Personal Auto Total Puerto Rico Popular U.S. Commercial multi-family Commercial and industrial Construction Mortgage Total Popular U.S. Popular, Inc. Commercial multi-family Commercial real estate: Non-owner occupied Owner occupied Commercial and industrial Construction Mortgage Consumer: Personal Auto Total Popular, Inc. Real Estate Auto Equipment December 31, 2020 Taxi Medallions Accounts Receivables Other Total $ 1,301 $– $ – $ 299,223 79,769 7,577 21,497 181,648 7,414 – – – – – – – 4 – – 1,438 – – – – $ 598,429 $4 $1,438 $ 1,755 – 7,560 855 $ 10,170 $– – – – $– $ 3,056 $– 299,223 79,769 7,577 29,057 182,503 7,414 – – – – – – – 4 $ $ $ – – – – – – – – 1,438 – – – – – – – – – – – – – – 1,545 – – $ $ $1,545 $ – – – 1,545 – – – – $ – $ – $ 1,301 – – 10,989 – – – – – – 12,046 – – 299,223 79,769 32,050 21,497 181,648 – – 7,414 4 $10,989 $12,046 $ 622,906 $ $ $ – – – – – – $ $ $ – – – – – – $ 1,755 1,545 7,560 855 $ 11,715 $ 3,056 – – 10,989 – – – – – – 12,046 – – 299,223 79,769 33,595 29,057 182,503 – – 7,414 4 $ 608,599 $4 $1,438 $1,545 $10,989 $12,046 $ 634,621 Purchased Credit Deteriorated Loans (PCD) The Corporation has purchased loans during the year, for which there was, at acquisition, evidence of more than insignificant deterioration of credit quality since origination. The carrying amount of those loans is as follows: (In thousands) December 31, 2020 Purchase price of loans at acquisition Allowance for credit losses at acquisition Non-credit premium at acquisition Par value of acquired loans at acquisition $152,667 7,512 (6,542) $153,637 Loans acquired with deteriorated credit quality accounted for under ASC 310-30 The following provides information of loans acquired with evidence of credit deterioration as of the acquisition date, accounted for under the guidance of ASC 310-30 in 2019. The outstanding principal balance of acquired loans to ASC Subtopic 310-30, amounted accounted pursuant $1.9 billion at December 31, 2019. The carrying amount of these loans consisted of loans determined to be impaired at the time of acquisition, which are accounted for in accordance with ASC Subtopic 310-30 (“credit impaired loans”), and loans that were considered to be performing at the acquisition date, accounted for by analogy to ASC Subtopic 310-30 (“non-credit impaired loans”). POPULAR, INC. 2020 ANNUAL REPORT 93 The following table provides the carrying amount of acquired loans accounted for under ASC 310-30 by portfolio at December 31, 2019. Carrying amount (In thousands) Commercial real estate Commercial and industrial Mortgage Consumer Carrying amount Allowance for loan losses Carrying amount, net of allowance December 31, 2019 $ 670,566 104,756 856,618 11,778 1,643,718 (74,039) $1,569,679 At December 31, 2019, none of the acquired loans accounted for under ASC Subtopic 310-30 were considered non-performing loans. Therefore, through accretion of the difference between the carrying amount of the loans and the expected cash flows, was recognized on all acquired loans. income, interest Changes in the carrying amount and the accretable yield for the loans accounted pursuant to the ASC Subtopic 310-30, for the year ended December 31, 2019, were as follows: Carrying amount of acquired loans accounted for pursuant to ASC 310-30 (In thousands) Beginning balance Additions Accretion Collections / loan sales / charge-offs Ending balance [1] Allowance for loan losses Ending balance, net of ALLL [1] At December 31, 2019, includes $1.2 billion of loans considered non-credit impaired at the acquisition date. Activity in the accretable yield of acquired loans accounted for pursuant to ASC 310-30 (In thousands) Beginning balance Additions Accretion Change in expected cash flows Ending balance [1] For the year ended December 31, 2019 $1,883,556 39,492 144,976 (424,306) $1,643,718 (74,039) $1,569,679 For the year ended December 31, 2019 $1,092,504 23,556 (144,976) 30,258 $1,001,342 [1] At December 31, 2019, includes $0.7 billion for loans considered non-credit impaired at the acquisition date. Note 8 - Allowance for credit losses - loans held-in-portfolio The Corporation follows the current expected credit loss (“CECL”) model, to establish and evaluate the adequacy of the allowance for credit losses (“ACL”) to provide for expected losses in the loan portfolio. This model establishes a forward- looking methodology that reflects the expected credit losses over the lives of financial assets, starting when such assets are first acquired or originated. In addition, CECL provides that the initial ACL on purchased credit deteriorated (“PCD”) financial assets will be recorded as an increase to the purchase price, with subsequent changes to the allowance recorded as a credit loss expense. The provision for credit losses charged to current operations is based on this methodology. Loan losses are charged and recoveries are credited to the ACL. Refer to Note 2 - Summary of significant accounting policies, for a description of the Corporation’s methodology to estimate the ACL. to the outcomes of At December 31, 2020, the Corporation applied probability weights simulations using Moody’s Analytics’ Baseline, S3 (pessimistic) and S1 (optimistic) scenarios. The Baseline scenario carried the highest weight. The remaining weights were assigned based on the evaluation of risks to the Baseline scenario. The S3 (pessimistic) scenario had the second highest probability given the uncertainties in the economic outlook and downside risk. 94 POPULAR, INC. 2020 ANNUAL REPORT The following tables present the changes in the ACL of loans held-in-portfolio and unfunded commitments for the years ended December 31, 2020 and 2019. (In thousands) Allowance for credit losses - loans: Beginning balance Impact of adopting CECL Provision Initial allowance for credit losses - PCD Loans Charge-offs Recoveries Ending balance - loans Allowance for credit losses - unfunded commitments: Beginning balance Impact of adopting CECL Provision (reversal of provision) Ending balance - unfunded commitments [1] For the year ended December 31, 2020 Puerto Rico Commercial Construction Mortgage Leasing Consumer Total $131,063 62,393 48,756 – (27,731) 10,842 $225,323 $ 678 1,158 3,077 $ 4,913 $ 574 115 3,228 – – 954 $4,871 $116,281 86,081 5,318 7,512 (30,080) 10,445 $ 10,768 (713) 14,172 – (10,447) 3,083 $ 173,965 122,492 134,391 – (170,023) 36,311 $ 432,651 270,368 205,865 7,512 (238,281) 61,635 $195,557 $ 16,863 $ 297,136 $ 739,750 $ 294 (185) 4,501 $4,610 $ $ – – – – $ $ – – – – $ $ 7,467 (7,467) – $ 8,439 (6,494) 7,578 – $ 9,523 [1] Allowance for credit losses of unfunded commitments is presented as part of Other Liabilities in the Consolidated Statements of Financial Condition. For the year ended December 31, 2020 Popular U.S. Commercial Construction Mortgage Legacy Consumer Total (In thousands) Allowance for credit losses - loans: Beginning balance Impact of adopting CECL Provision Charge-offs Recoveries Ending balance - loans Allowance for credit losses - unfunded commitments: Beginning balance $ Impact of adopting CECL Provision (reversal of provision) 152 453 1,148 Ending balance - unfunded commitments [1] $ 1,753 $ 15,989 29,103 59,711 (1,976) 4,119 $106,946 $ 4,204 (2,986) 8,155 (1,509) 1,220 $ 9,084 $ 119 584 3,765 $ 4,468 $ 4,827 10,431 4,891 (59) 69 $ 630 382 309 (102) 174 $ 19,407 7,809 3,405 (17,404) 5,701 $ 45,057 44,739 76,471 (21,050) 11,283 $20,159 $1,393 $ 18,918 $156,500 $ $ – – – – $ $ 6 (2) (4) – $ $ 1 (1) 106 106 $ 278 1,034 5,015 $ 6,327 [1] Allowance for credit losses of unfunded commitments is presented as part of Other Liabilities in the Consolidated Statements of Financial Condition. POPULAR, INC. 2020 ANNUAL REPORT 95 (In thousands) Commercial Construction Mortgage Legacy Leasing Consumer Total For the year ended December 31, 2020 Popular, Inc. Allowance for credit losses - loans: Beginning balance Impact of adopting CECL Provision Initial allowance for credit losses - PCD Loans Charge-offs Recoveries Ending balance - loans $147,052 91,496 108,467 – (29,707) 14,961 $332,269 Allowance for credit losses - unfunded commitments: Beginning balance $ Impact of adopting CECL Provision (reversal of provision) 830 1,611 4,225 Ending balance - unfunded commitments [1] $ 6,666 $ 4,778 (2,871) 11,383 – (1,509) 2,174 $13,955 $ 413 399 8,266 $ 9,078 $121,108 96,512 10,209 7,512 (30,139) 10,514 $ 630 382 309 – (102) 174 $ 10,768 (713) 14,172 – (10,447) 3,083 $ 193,372 130,301 137,796 – (187,427) 42,012 $ 477,708 315,107 282,336 7,512 (259,331) 72,918 $215,716 $1,393 $ 16,863 $ 316,054 $ 896,250 $ $ – – – – $ $ 6 (2) (4) – $ $ – – – – $ $ 7,468 (7,468) 106 $ 8,717 (5,460) 12,593 106 $ 15,850 [1] Allowance for credit losses of unfunded commitments is presented as part of Other Liabilities in the Consolidated Statements of Financial Condition. For the year ended December 31, 2019 Puerto Rico (In thousands) Commercial Construction Mortgage Leasing Consumer Total Allowance for credit losses - loans: Beginning balance Provision (reversal of provision) Charge-offs Recoveries Ending balance - loans Specific ACL General ACL $ 207,214 (41,440) (53,852) 19,141 $ 131,063 $ 20,533 $ 110,530 Allowance for credit losses - unfunded commitments: Beginning balance $ Provision (reversal of provision) Ending balance - unfunded commitments [1] $ 742 (64) 678 $ $ $ $ $ $ 886 (3,417) (109) 3,214 574 6 568 42 252 294 $ 142,978 14,658 (47,577) 6,222 $ 116,281 $ $ $ $ 40,596 75,685 – – – $ $ $ $ $ $ 11,486 8,619 (11,834) 2,497 $ 144,594 157,331 (167,983) 40,023 10,768 $ 173,965 61 $ 20,259 10,707 $ 153,706 – – – $ $ 7,199 268 7,467 $ $ $ $ $ $ 507,158 135,751 (281,355) 71,097 432,651 81,455 351,196 7,983 456 8,439 Loans held-in-portfolio: Impaired loans Loans held-in-portfolio excluding impaired loans $ 397,452 6,863,678 $ 119 137,351 $ 522,469 5,644,279 $ 507 1,059,000 $ 91,157 5,464,220 $ 1,011,704 19,168,528 Total loans held-in-portfolio $7,261,130 $137,470 $6,166,748 $1,059,507 $5,555,377 $20,180,232 [1] Allowance for credit losses of unfunded commitments is presented as part of Other Liabilities in the Consolidated Statements of Financial Condition. 96 POPULAR, INC. 2020 ANNUAL REPORT For the year ended December 31, 2019 Popular U.S. (In thousands) Allowance for credit losses - loans: Beginning balance Provision (reversal of provision) Charge-offs Recoveries Ending balance - loans Specific ACL General ACL Allowance for credit losses - unfunded commitments: Beginning balance Provision (reversal of provision) Ending balance - unfunded commitments [1] Loans held-in-portfolio: Impaired loans Loans held-in-portfolio excluding impaired loans Commercial Construction Mortgage Legacy Consumer Total $ $ $ $ $ $ 31,901 15,496 (40,329) 8,921 $ 6,538 (127) (2,215) 8 15,989 $ 4,204 – $ – 15,989 $ 4,204 132 20 152 $ $ 101 18 119 $ $ $ $ $ $ 4,434 828 (605) 170 4,827 2,208 2,619 – – – $ $ $ $ $ $ 969 (1,738) 105 1,294 $ 18,348 15,569 (21,280) 6,770 630 $ 19,407 – $ 1,563 630 $ 17,844 – 6 6 $ $ – 1 1 $ $ $ $ $ $ 62,190 30,028 (64,324) 17,163 45,057 3,771 41,286 233 45 278 $ 2,097 5,049,524 $ – 693,622 $ 9,386 1,007,398 $ – 22,105 $ 9,634 432,875 $ 21,117 7,205,524 Total loans held-in-portfolio $5,051,621 $693,622 $1,016,784 $22,105 $442,509 $7,226,641 [1] Allowance for credit losses of unfunded commitments is presented as part of Other Liabilities in the Consolidated Statements of Financial Condition. (In thousands) Commercial Construction Mortgage Legacy Leasing Consumer Total For the year ended December 31, 2019 Popular, Inc. Allowance for credit losses - loans: Beginning balance Provision (reversal of provision) Charge-offs Recoveries Ending balance - loans Specific ACL General ACL $ $ $ $ Allowance for credit losses - unfunded commitments: Beginning balance $ Provision (reversal of provision) Ending balance - unfunded commitments [1] Loans held-in-portfolio: Impaired loans Loans held-in-portfolio excluding impaired 239,115 (25,944) (94,181) 28,062 $ 7,424 (3,544) (2,324) 3,222 $ 147,412 15,486 (48,182) 6,392 147,052 $ 4,778 $ 121,108 20,533 $ 6 126,519 $ 4,772 874 (44) $ $ 830 399,549 143 270 413 $ $ $ $ $ $ $ 42,804 78,304 – – – $ $ $ $ $ $ $ 969 (1,738) 105 1,294 630 – 630 – 6 6 – $ $ $ $ $ $ $ 11,486 8,619 (11,834) 2,497 $ 162,942 172,900 (189,263) 46,793 10,768 $ 193,372 61 $ 21,822 10,707 $ 171,550 $ $ $ $ $ 569,348 165,779 (345,679) 88,260 477,708 85,226 392,482 8,216 501 7,199 269 – – – $ $ 7,468 $ 8,717 119 $ 531,855 507 $ 100,791 $ 1,032,821 loans 11,913,202 830,973 6,651,677 22,105 1,059,000 5,897,095 26,374,052 Total loans held-in-portfolio $12,312,751 $831,092 $7,183,532 $22,105 $1,059,507 $5,997,886 $27,406,873 [1] Allowance for credit losses of unfunded commitments is presented as part of Other Liabilities in the Consolidated Statements of Financial Condition. POPULAR, INC. 2020 ANNUAL REPORT 97 The following table provides the activity in the allowance for credit losses related to loans accounted for pursuant to ASC Subtopic 310-30. (In thousands) Balance at beginning of period Provision Net charge-offs Balance at end of period a a loan constitutes Modifications troubled debt A modification of restructuring when a borrower is experiencing financial difficulty and the modification constitutes a concession. For a summary of the accounting policy related to troubled debt restructurings (“TDRs”), refer to the Summary of Significant Accounting Policies included in Note 2 to these Consolidated Financial Statements. The outstanding balance of loans classified as TDRs amounted to $ 1.7 billion at December 31, 2020 (December 31, 2019 - $ 1.6 billion). The amount of outstanding commitments to lend additional funds to debtors owing receivables whose terms have been modified in TDRs amounted to $14 million related to the commercial loan portfolio at December 31, 2020 (December 31, 2019 - $14 million). In response to the COVID-19 pandemic, the Corporation has entered into loan modifications with eligible customers in mortgage, personal loans, credit cards, auto loans and leases and certain commercial credit facilities, comprised mainly of payment deferrals of up to six months, subject to certain terms and conditions. These loan modifications do not affect the asset quality measures as the deferred payments are not deemed to be delinquent and the Corporation continues to accrue interest on these loans. The Puerto Rico Legislative Assembly enacted legislation in April 2020 that required financial institutions to offer through June 2020 moratoriums on consumer financial products to clients impacted by the COVID-19 pandemic and extended relief with respect to mortgage products through August 2020. Additionally, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), signed by the President of the United States as part of an economic stimulus package, provides relief related to U.S. GAAP requirements for loan modifications related to COVID-19 relief measures. This relief was subsequently extended until the earlier of January 1, 2022 or 60 days after the national COVID-19 emergency ends. In addition, the Federal Reserve, along with other U.S. banking regulators, also issued interagency guidance to financial institutions that offers some practical expedients for evaluating whether loan modifications that occur in response to the COVID-19 pandemic are TDRs. According to the interagency guidance, COVID-19 related short-term modifications (i.e., six months or less) granted to consumer or commercial loans that 98 POPULAR, INC. 2020 ANNUAL REPORT ASC 310-30 For the year ended December 31, 2019 $122,135 1,119 (49,215) $ 74,039 were current as of the date of the loan modification are not TDRs, since the lender can conclude that the borrower is current on their loan and thus not experiencing financial difficulties and furthermore the period of the deferral granted does not represent a more than insignificant concession on the part of the lender. In addition, a modification or deferral program that is mandated by the federal government or a state government (e.g., a state program that requires all institutions within that state to suspend mortgage payments for a specified period) does not represent a TDR. The Corporation implemented a relief program to work with customers affected by the COVID-19 pandemic in March 2020. As of December 31, 2020, the Corporation had granted loan payment moratoriums under the program to 127,117 eligible retail customers with an aggregate book value of $4.4 billion, and to 5,099 eligible commercial clients with an aggregate book value of $3.9 billion. In addition, certain participating clients impacted by the seismic activity in the Southern region of the island also benefitted from other loan payment moratoriums offered by the Corporation since mid-January 2020. As of December 31, 2020, 127,857 loans in the COVID-19 relief program with an aggregate book value of $7.8 billion had already completed their payment moratorium period, while 4,359 loans with an aggregate book value of $0.5 billion are still under the moratorium. Out of the approximately $8.3 billion in loans modified under this program, approximately $35 million have been classified as TDRs. In making this determination, the Corporation considered the criteria of whether the borrower was in financial difficulty at the time of the deferral and whether the deferral period was more than insignificant, as discussed above. At December 31, 2020, 97% of COVID-19 payment deferrals had expired. After excluding government guaranteed loans, 115,079 of remaining loans, or 94%, with an aggregate book value of $6.9 billion were current on their payments as of December 31, 2020. Loans considered current exclude those loans for which the COVID-19 related modification has expired but have subsequently been subject to other loss mitigation alternatives. The Corporation will continue to monitor and assess these the post-moratorium payment behavior of borrowers to recognize any deterioration in these loans, and potential loss exposure, in a timely manner. The following table presents the outstanding balance of loans classified as TDRs according to their accruing status and the related allowance at December 31, 2020 and 2019. (In thousands) Loans held-in-portfolio: Commercial Construction Mortgage[1] Leases Consumer Loans held-in-portfolio December 31, 2020 December 31, 2019 Accruing Non-Accruing Total Allowance Accruing Non-Accruing Total Related Related Allowance $ 259,246 – 1,060,193 392 74,707 $1,394,538 $103,551 21,497 135,772 218 12,792 $273,830 21,497 1,195,965 610 87,499 $ 362,797 $ 15,236 $ 237,861 4,397 – 71,018 1,013,561 150 264 82,205 22,508 $1,668,368 $113,309 $1,333,891 $111,587 119 126,036 243 15,808 $253,793 $ 349,448 119 1,139,597 507 98,013 $1,587,684 $16,443 6 42,012 61 21,404 $79,926 [1] At December 31, 2020, accruing mortgage loan TDRs include $655 million guaranteed by U.S. sponsored entities at BPPR, compared to $625 million at December 31, 2019. The following tables present the loan count by type of modification for those loans modified in a TDR during the years ended December 31, 2020 and 2019. Loans modified as TDRs for the U.S. operations are considered insignificant to the Corporation. For the year ended December 31, 2020 Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Construction Mortgage Leasing Consumer: Credit cards HELOCs Personal Auto Other Total Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Mortgage Leasing Consumer: Credit cards HELOCs Personal Auto Other Total Combination of reduction in interest rate and extension of maturity date – – – – – 331 5 Extension of maturity date 2 10 37 50 1 68 – – 2 5 2 – 177 – 1 1 2 – 340 Reduction in interest rate – 2 – 3 – 3 – 659 – 355 – 3 1,025 For the year ended December 31, 2019 Combination of reduction in interest rate and extension of maturity date – – – – 672 2 Extension of maturity date 3 13 29 67 130 1 – 16 4 6 – 269 2 12 – 2 – 690 Reduction in interest rate – – 1 2 37 – 515 – 668 – 31 1,254 Other – 1 – – – 411 17 93 – 1 38 – 561 Other – – – – 6 – 189 – 3 – – 198 POPULAR, INC. 2020 ANNUAL REPORT 99 The following tables present, by class, quantitative information related to loans modified as TDRs during the years ended December 31, 2020 and 2019. (Dollars in thousands) Loan count Pre-modification outstanding recorded investment Post-modification outstanding recorded investment Increase (decrease) in the allowance for credit losses as a result of modification Popular, Inc. For the year ended December 31, 2020 Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Construction Mortgage Leasing Consumer: Credit cards HELOCs Personal Auto Other Total 2 13 37 53 1 813 22 752 3 362 42 3 $ 1,133 25,217 10,955 3,140 21,514 102,559 720 7,048 510 6,194 836 25 $ 1,115 22,065 10,914 3,178 21,514 85,394 732 7,097 396 6,188 838 25 $ (18) (969) 137 34 4,370 6,875 65 286 33 1,043 131 6 2,103 $179,851 $159,456 $11,993 Popular, Inc. For the year ended December 31, 2019 (Dollars in thousands) Loan count Pre-modification outstanding recorded investment Post-modification outstanding recorded investment Increase (decrease) in the allowance for credit losses as a result of modification Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Mortgage Leasing Consumer: Credit cards HELOCs Personal Auto Other Total 3 13 30 69 845 3 706 28 675 8 31 $ 346 58,142 7,533 14,991 83,833 264 5,702 2,725 10,831 121 206 $ 295 58,116 7,249 15,435 77,308 266 5,867 2,423 10,835 128 206 $ (40) 2,811 81 1,368 2,814 7 554 364 3,023 21 30 2,411 $184,694 $178,128 $11,033 During the year ended December 31, 2020, ten loans with an aggregate unpaid principal balance of $ 35.1 million were restructured into multiple notes (“Note A / B split”), of which a discounted payoff for one loan with an aggregate unpaid principal balance of $1.7 million was completed after the restructuring, compared to four loans with an aggregate unpaid principal balance of $9.1 million during the year ended December 31, 2019. The Corporation recorded $0.3 million in charge-offs as part of Note A / B restructurings during 2020, compared to $0 million in charge-offs during 2019. The recorded investment on these commercial TDRs amounted to approximately $32.9 million at December 31, 2020, compared to $9.0 million at December 31, 2019. These loans were restructured after analyzing the borrowers’ capacity to repay the debt, collateral and ability to perform under the modified terms. 100 POPULAR, INC. 2020 ANNUAL REPORT The following tables present, by class, TDRs that were subject to payment default and that had been modified as a TDR during the twelve months preceding the default date. Payment default is defined as a restructured loan becoming 90 days past due after being modified, foreclosed or charged-off, whichever occurs first. The recorded investment as of period end is inclusive of all partial paydowns and charge-offs since the modification date. Loans modified as a TDR that were fully paid down, charged-off or foreclosed upon by period end are not reported. (Dollars in thousands) Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Construction Mortgage Consumer: Credit cards Personal Other Total (Dollars in thousands) Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Mortgage Leasing Consumer: Credit cards HELOCs Personal Auto Other Total Defaulted during the year ended December 31, 2020 Loan count Recorded investment as of first default date 1 6 4 1 249 317 99 2 679 $ 1,700 933 141 21,497 26,925 2,560 1,660 1 $55,417 Defaulted during the year ended December 31, 2019 Loan count Recorded investment as of first default date 1 3 9 63 1 302 1 197 2 3 582 $ 47 495 7,281 4,424 22 2,808 135 5,640 24 8 $20,884 Commercial, consumer and mortgage loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. loans modified in a TDR If subsequently default, the allowance for credit losses may be increased or partial charge-offs may be taken to further write- down the carrying value of the loan. classified considering their delinquency status at the end of the reporting period. The Corporation’s obligor risk rating scales range from rating 1 (Excellent) to rating 14 (Loss). The obligor risk rating reflects the risk of payment default of a borrower in the ordinary course of business. Credit Quality The Corporation has defined a risk rating system to assign a rating to all credit exposures, particularly for the commercial and construction loan portfolios. Risk ratings in the aggregate provide the Corporation’s management the asset quality profile for the loan portfolio. The risk rating system provides for the assignment of ratings at the obligor level based on the financial condition of the borrower. The risk rating analysis process is performed at least once a year or more frequently if events or conditions change which may deteriorate the credit quality. In the case of consumer and mortgage loans, these loans are Pass Credit Classifications: Pass (Scales 1 through 8) - Loans classified as pass have a well defined primary source of repayment, with no apparent risk, strong financial position, minimal operating risk, profitability, liquidity and strong capitalization. Watch (Scale 9) - Loans classified as watch have acceptable business credit, but borrower’s operations, cash flow or financial condition evidence more than average levels of supervision and attention from Loan Officers. requires average above risk, POPULAR, INC. 2020 ANNUAL REPORT 101 Special Mention (Scale 10) - Loans classified as special that deserve mention have potential weaknesses management’s close attention. left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Corporation’s credit position at some future date. If Adversely Classified Classifications: Substandard (Scales 11 and 12) - Loans classified as substandard are deemed to be inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Loans classified as such have well-defined weaknesses that the debt. They are jeopardize the liquidation of the characterized by the distinct possibility that institution will sustain some loss if the deficiencies are not corrected. the weaknesses inherent Doubtful (Scale 13) - Loans classified as doubtful have in those classified as all substandard, with the additional characteristic that the weaknesses make the collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loss (Scale 14) - Uncollectible and of such little value that continuance as a bankable asset is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be effected in the future. Risk ratings scales 10 through 14 conform to regulatory ratings. The assignment of the obligor risk rating is based on relevant information about the ability of borrowers to service their debts such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The following table presents the amortized cost basis, net of unearned income, of loans held-in-portfolio based on the Corporation’s assignment of obligor risk ratings as defined at December 31, 2020 by vintage year. 102 POPULAR, INC. 2020 ANNUAL REPORT December 31, 2020 Term Loans Amortized Cost Basis by Origination Year 2020 2019 2018 2017 2016 Revolving Loans Amortized Cost Basis Prior Years Revolving Loans Converted to Term Loans Amortized Cost Basis (In thousands) Puerto Rico Commercial: Commercial multi-family Watch Special mention Substandard Pass $ – $ – – 5,216 – $ – – 36,433 – $ – – 26,051 – $ – – 2,106 – $ – – 2,563 460 $ 4,160 400 74,791 – – 100 – 100 Total commercial multi-family $ 5,216 $ 36,433 $ 26,051 $ 2,106 $ 2,563 $ 79,811 $ Commercial real estate non-owner occupied Watch Special Mention Substandard Pass Total commercial real estate non-owner occupied $ 160,960 $ 73,561 $ 27,592 $ 40,654 $ 33,277 $ 197,912 $ 2,100 836 29,711 95 4,932 3,352 60,585 62,839 130,218 527,282 19,895 29,974 124,643 124,560 26,799 39,814 26,331 74,303 53,385 – 43,399 88,324 $ 292,683 $227,580 $218,765 $135,882 $207,789 $ 918,251 $ 6,383 Commercial real estate owner occupied $ Watch Special Mention Substandard Doubtful Pass Total commercial real estate 96,046 $ 10,319 $ 14,412 $ 9,760 $ 9,584 $ 146,445 $ 2,627 – 6,571 – 1,878 – – 10,861 57,854 172,078 145,193 1,714 417,376 282 27,094 – 128,392 249 37,686 – 31,917 6,638 2,181 – 54,274 850 1,774 – 204,840 owner occupied $ 303,510 $ 73,412 $ 84,264 $ 76,063 $165,352 $ 882,806 $ 13,488 Commercial and industrial Watch Special Mention Substandard Doubtful Loss Pass Total commercial and industrial Construction Watch Substandard Pass Total construction Mortgage Substandard Pass Total mortgage Leasing Substandard Pass Total leasing $ 131,556 $ 77,821 $182,776 $ 40,318 $ 63,968 $ 267,856 $243,335 86,263 45,861 49,036 26,769 1 1 13 – 520,865 168,174 28,310 32,941 – – 1,181,399 28,507 55,220 54 – 218,716 19,220 26,921 – – 119,709 10,297 2,180 67 – 492,778 910 1,824 – – 105,442 $1,374,206 $583,143 $348,626 $281,123 $172,144 $ 570,353 $899,513 – $ – 15,723 105 $ 4,895 $ – $ – 22,408 – 3,423 21,497 63,582 15,723 $ 22,513 $ 8,318 $ 85,079 $ – $ – – – $ – $ – – 960 – 24,513 – $ 25,473 754 $ 903 $ 1,172 $ 3,129 $ 4,374 $ 159,359 $ 263,473 224,390 177,537 212,650 225,824 5,496,578 $ 264,227 $225,293 $178,709 $215,779 $230,198 $5,655,937 $ $ 200 $ 822 $ 748 $ 913 $ 617 $ 136 $ 480,964 315,022 209,340 109,708 63,955 15,236 $ 481,164 $315,844 $210,088 $110,621 $ 64,572 $ 15,372 $ – – – – – – $ $ $ Total $ 460 4,160 500 147,160 $ 152,280 $ 536,056 264,172 309,720 897,385 $2,007,333 $ 289,193 186,668 215,806 1,714 905,514 $1,598,895 $1,007,630 219,368 194,891 123 13 2,807,083 $4,229,108 $ 5,960 21,497 129,649 $ 157,106 $ 169,691 6,600,452 $6,770,143 $ 3,436 1,194,225 $1,197,661 $– – – – $– $– – – – $– $– – – – – $– $– – – – – – $– $– – – $– $– – $– $– – $– POPULAR, INC. 2020 ANNUAL REPORT 103 December 31, 2020 Term Loans Amortized Cost Basis by Origination Year 2020 2019 2018 2017 2016 Revolving Loans Amortized Cost Basis Prior Years Revolving Loans Converted to Term Loans Amortized Cost Basis Total (In thousands) Puerto Rico Consumer: Credit cards Substandard Pass Total credit cards HELOCs Pass Total HELOCs Personal Substandard Pass $ $ $ $ $ – $ – – $ – $ – $ – $ – – $ – $ – $ – $ – – $ – $ – $ – $ – – $ – $ – $ – $ – – $ – $ – $ – $ – 12,798 907,137 – $ 919,935 540 $ 540 $ 1,288 $ 4,782 $ 1,741 $ 323,170 413,973 168,142 1,022 $ 99,768 971 $ 57,319 18,647 $ 137,693 Total Personal $ 324,458 $ 418,755 $ 169,883 $ 100,790 $ 58,290 $ 156,340 $ Auto Substandard Pass $ 1,975 $ 6,029 $ 3,612 $ 1,760 $ 1,369 $ 990 $ 1,064,082 881,343 628,657 299,677 168,157 74,577 Total Auto $1,066,057 $ 887,372 $ 632,269 $ 301,437 $ 169,526 $ 75,567 $ Other consumer Substandard Pass $ – $ 16 $ 16,912 15,698 1,376 $ 13,158 240 $ 174 $ 4,966 2,828 13,075 $ 3,785 – 54,437 Total Other consumer $ 16,912 $ 15,714 $ 14,534 $ 5,206 $ 3,002 $ 16,860 $ 54,437 3,639 3,639 152 2,144 2,296 – – – $ $ $ $ – – – – – $ 1,545 45,390 $ $ $ $ $ 12,798 907,137 919,935 4,179 4,179 30,148 1,247,599 $46,935 $ 1,277,747 $ $ $ $ – – – – – – $ 15,735 3,116,493 $ 3,132,228 $ $ 14,881 111,784 126,665 Total Puerto Rico $4,144,156 $2,806,059 $1,891,507 $1,314,086 $1,073,436 $8,371,837 $1,925,264 $46,935 $21,573,280 104 POPULAR, INC. 2020 ANNUAL REPORT December 31, 2020 Term Loans Amortized Cost Basis by Origination Year 2020 2019 2018 2017 2016 Revolving Loans Amortized Cost Basis Prior Years Revolving Loans Converted to Term Loans Amortized Cost Basis (In thousands) Popular U.S. Commercial: Commercial multi-family Watch Special mention Substandard Pass $ 1,643 $ 16,787 $ 39,980 $ 39,713 $ 52,989 $ 61,369 $ 3,122 – 326,008 30,708 17,376 289,652 4,380 21,771 163,812 19,593 1,755 100,555 37,745 20,085 132,400 20,463 6,247 332,709 – – – 2,849 Total commercial multi-family $330,773 $354,523 $229,943 $161,616 $243,219 $420,788 $ 2,849 Commercial real estate non-owner occupied Watch Special Mention Substandard Pass Total commercial real estate non-owner occupied $ 10,057 $ 23,877 $ 76,629 $ 56,112 $ 49,166 $ 62,766 $ 1,055 350 14,623 – 11,007 5,651 236,008 4,760 18,642 231,904 70,224 40,528 142,432 20,028 28,984 214,495 15,304 36,495 224,256 – 771 397,686 $408,514 $279,183 $352,684 $317,750 $302,350 $326,273 $ 7,056 Commercial real estate owner occupied $ Watch Special Mention Substandard Pass Total commercial real estate 393 $ 8,266 $ 7,941 $ 4,060 $ 16,689 $ 16,108 $ 4,222 – – – – 461 28,761 1,467 20,305 68,739 192 2,361 47,451 – 1,152 47,484 – 1,348 18,296 – – 48,684 owner occupied $ 49,077 $ 56,902 $ 57,945 $ 32,821 $ 36,333 $106,619 $ 4,683 Commercial and industrial Watch Special Mention Substandard Pass $ 16,126 $ 1,973 $ 14,056 2,029 410,265 – 6,568 196,958 30 $ 3,621 $ 1,196 $ 7,557 $ 3,972 1,637 – 2,394 – 101,250 198,249 1,634 – 132,993 4,807 – 123,762 4,577 2,232 298,877 Total commercial and industrial $442,476 $205,499 $198,279 $138,248 $129,765 $313,243 $109,253 Construction Watch Special Mention Substandard Pass $ 8,451 $ – – 79,489 – $ – – 288,865 – $ 37,015 $ – 20,655 168,411 3,089 9,372 99,814 – $ – 7,560 8,392 – $ 30,083 – 463 Total construction $ 87,940 $288,865 $189,066 $149,290 $ 15,952 $ 30,546 $ Mortgage Substandard Pass Total mortgage Legacy Watch Special Mention Substandard Pass Total legacy $ 29 $ 356,839 – $ 1,221 $ 103,160 275,289 – $ 328 $ 13,287 $ 9,337 9,530 351,517 $356,868 $275,289 $104,381 $ 9,337 $ 9,858 $364,804 $ $ $ – $ – – 84 84 $ – $ – – – – $ – $ – – – – $ – $ – – – – $ – $ 2,996 $ – – – 179 3,748 7,347 – – – 1,119 – $ 14,270 $ 1,119 – – – – – – – – $– – – – $– $– – – – $– $– – – – $– $– – – – $– $– – – – $– $– – $– $– – – – $– Total $ 212,481 116,011 67,234 1,347,985 $1,743,711 $ 279,662 125,289 136,427 1,452,432 $1,993,810 $ 57,679 1,659 25,166 259,876 $ 344,380 $ 34,475 26,711 13,223 1,462,354 $1,536,763 $ 45,466 33,172 37,587 645,434 $ 761,659 $ 14,865 1,105,672 $1,120,537 $ 2,996 179 3,748 8,550 $ 15,473 POPULAR, INC. 2020 ANNUAL REPORT 105 December 31, 2020 Term Loans Amortized Cost Basis by Origination Year 2020 2019 2018 2017 2016 Revolving Loans Amortized Cost Basis Prior Years Revolving Loans Converted to Term Loans Amortized Cost Basis – $ – $ – $ – – – $ – $ – $ – $ – – – $ – $ – $ – $ – – – $ – $ – $ – $ – – – $ – $ – $ – $ – – – $ – $ – $ 31 31 112 $ 156 11,907 – – 39,366 $ $ $ – – 357 6,867 35,806 12,175 $ 39,366 $43,030 83 $ – 40,539 784 $ 17 109,606 165 $ 63 27,693 74 $ 12 9,623 18 $ 6 1,855 6 $ 244 8,256 40,622 $ 110,407 $ 27,921 $ 9,709 $ 1,879 $ 8,506 $ – 2 192 194 – – $ – $ – – $ – $ – – $ – $ – – $ – $ – – $ – $ 20 – – $ 1,723 – $ 1,743 $ $ $ $ – – – – – – – Total $ $ $ $ $ 31 31 469 7,023 87,079 94,571 1,130 344 197,764 $ 199,238 20 1,723 1,743 $ $ (In thousands) Popular U.S. Consumer: Credit cards Pass Total credit cards HELOCs Substandard Loss Pass Total HELOCs Personal Substandard Loss Pass Total Personal Other consumer Substandard Pass Total Other consumer $ $ $ $ $ $ $ $ $ Total Popular U.S. $1,716,354 $1,570,668 $1,160,219 $818,771 $739,356 $1,597,224 $166,294 $43,030 $7,811,916 106 POPULAR, INC. 2020 ANNUAL REPORT December 31, 2020 Term Loans Amortized Cost Basis by Origination Year 2020 2019 2018 2017 2016 Revolving Loans Amortized Cost Basis Prior Years Revolving Loans Converted to Term Loans Amortized Cost Basis (In thousands) Popular, Inc. Commercial: Commercial multi-family Watch Special mention Substandard Pass $ – – 100 2,849 2,949 3,155 1,186 95 9,003 1,643 $ 16,787 $ 39,980 $ 39,713 $ 52,989 $ 4,380 3,122 21,771 – 189,863 331,224 19,593 1,755 102,661 30,708 17,376 326,085 37,745 20,085 134,963 61,829 $ 24,623 6,647 407,500 Total commercial multi-family $ 335,989 $390,956 $255,994 $163,722 $245,782 $ 500,599 $ Commercial real estate non-owner occupied Watch Special Mention Substandard Pass $ 171,017 $ 97,438 $104,221 $ 96,766 $ 82,443 $ 260,678 $ – 44,170 486,010 31,091 92,945 285,289 139,864 63,294 264,070 44,334 15,939 296,593 90,119 70,502 267,075 82,867 159,202 741,777 Total commercial real estate non-owner occupied $ 701,197 $506,763 $571,449 $453,632 $510,139 $1,244,524 $ 13,439 Commercial real estate owner occupied Watch Special Mention Substandard Doubtful Pass $ 96,439 $ 18,585 $ 22,353 $ 13,820 $ 26,273 $ 162,553 $ 850 1,774 – 253,524 6,638 3,333 – 101,758 441 40,047 – 79,368 6,571 1,878 – 86,615 282 28,442 – 146,688 173,545 165,498 1,714 486,115 6,849 – – – 11,322 Total commercial real estate owner occupied $ 352,587 $130,314 $142,209 $108,884 $201,685 $ 989,425 $ 18,171 Commercial and industrial Watch Special Mention Substandard Doubtful Loss Pass Total commercial and industrial $ 147,682 $ 79,794 $182,806 $ 43,939 $ 65,164 $ 275,413 $ 247,307 87,900 47,495 51,430 26,769 1 1 13 – 622,115 301,167 42,366 34,970 – – 1,591,664 19,220 26,921 – – 317,958 33,084 57,452 54 – 517,593 10,297 8,748 67 – 689,736 5,717 1,824 – – 229,204 $1,816,682 $788,642 $546,905 $419,371 $301,909 $ 883,596 $1,008,766 $– – – – $– $– – – – $– $– – – – – $– $– – – – – – $– Total $ 212,941 120,171 67,734 1,495,145 $1,895,991 $ 815,718 389,461 446,147 2,349,817 $4,001,143 $ 346,872 188,327 240,972 1,714 1,165,390 $1,943,275 $1,042,105 246,079 208,114 123 13 4,269,437 $5,765,871 POPULAR, INC. 2020 ANNUAL REPORT 107 December 31, 2020 Term Loans Amortized Cost Basis by Origination Year 2020 2019 2018 2017 2016 Revolving Loans Amortized Cost Basis Prior Years Revolving Loans Converted to Term Loans Amortized Cost Basis $ 8,451 $ – – 95,212 105 $ 4,895 $ 37,015 $ – 20,655 171,834 3,089 30,869 163,396 – – 311,273 – $ – 7,560 8,392 – 30,083 – 463 $ 960 – – 24,513 Total construction $103,663 $311,378 $197,384 $234,369 $ 15,952 $ 30,546 $25,473 Total $ 51,426 33,172 59,084 775,083 $ 918,765 $ 184,556 7,706,124 $7,890,680 $ 2,996 179 3,748 8,550 $ 15,473 $ 3,436 1,194,225 $1,197,661 $– – – – $– $– – $– $– – – – $– $– – $– $ 783 $ 620,312 903 $ 2,393 $ 3,129 $ 4,702 $ 172,646 5,848,095 280,697 221,987 235,354 499,679 $621,095 $500,582 $283,090 $225,116 $240,056 $6,020,741 – $ – – 84 84 $ – $ – – – – $ – $ – – – – $ – $ – – – – $ – $ – – – – $ 2,996 179 3,748 7,347 14,270 $ 1,119 200 $ 822 $ 748 $ 913 $ 617 $ 480,964 315,022 209,340 109,708 63,955 136 15,236 $481,164 $315,844 $210,088 $110,621 $ 64,572 $ 15,372 $ $ $ – – – – – – 1,119 $ $ – – – $ $ $ (In thousands) Popular, Inc. Construction Watch Special Mention Substandard Pass Mortgage Substandard Pass Total mortgage Legacy Watch Special Mention Substandard Pass Total legacy Leasing Substandard Pass Total leasing 108 POPULAR, INC. 2020 ANNUAL REPORT December 31, 2020 Term Loans Amortized Cost Basis by Origination Year 2020 2019 2018 2017 2016 Revolving Loans Amortized Cost Basis Prior Years Revolving Loans Converted to Term Loans Amortized Cost Basis – $ – – $ – $ – – – $ – $ – – $ – $ – – – $ – $ – – $ – $ – – – $ – $ – – $ – $ – – – $ – $ – – $ – $ – – – $ – $ – 12,798 907,168 – $ 919,966 112 $ 156 12,447 – – 43,005 $ $ $ – – – 357 6,867 35,806 12,715 $ 43,005 $43,030 1,371 $ – 363,709 5,566 $ 17 523,579 1,906 $ 63 195,835 1,096 $ 12 109,391 989 $ 6 59,174 18,653 $ 244 145,949 $ 1,545 – 45,390 Total $ $ $ $ $ 12,798 907,168 919,966 469 7,023 91,258 98,750 31,278 344 1,445,363 (In thousands) Popular, Inc. Consumer: Credit cards Substandard Pass Total credit cards HELOCs Substandard Loss Pass Total HELOCs Personal Substandard Loss Pass $ $ $ $ $ Total Personal $ 365,080 $ 529,162 $ 197,804 $ 110,499 $ 60,169 $ 164,846 $ Auto Substandard Pass $ 1,975 $ 6,029 $ 3,612 $ 1,760 $ 1,369 $ 990 $ 1,064,082 881,343 628,657 299,677 168,157 74,577 Total Auto $1,066,057 $ 887,372 $ 632,269 $ 301,437 $ 169,526 $ 75,567 $ Other consumer Substandard Pass Total Other consumer $ $ – $ 16 $ 16,912 15,698 1,376 $ 13,158 240 $ 174 $ 4,966 2,828 13,075 $ 3,785 20 56,160 16,912 $ 15,714 $ 14,534 $ 5,206 $ 3,002 $ 16,860 $ 56,180 $46,935 $ 1,476,985 $ $ $ $ – – – – – – $ 15,735 3,116,493 $ 3,132,228 $ $ 14,901 113,507 128,408 Total Popular Inc. $5,860,510 $4,376,727 $3,051,726 $2,132,857 $1,812,792 $9,969,061 $2,091,558 $89,965 $29,385,196 POPULAR, INC. 2020 ANNUAL REPORT 109 152 2 2,336 2,490 – – – The following table presents the outstanding balance, net of unearned income, of loans held-in-portfolio based on the Corporation’s assignment of obligor risk ratings as defined at December 31, 2019. December 31, 2019 Watch Special Mention Substandard Doubtful Loss Sub-total Pass Total (In thousands) Puerto Rico Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Total Commercial Construction Mortgage Leasing Consumer: Credit cards HELOCs Personal Auto Other Total Consumer Total Puerto Rico Popular U.S. Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Total Commercial Construction Mortgage Legacy Consumer: Credit cards HELOCs Personal Other Total Consumer Total Popular U.S. Popular, Inc. Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Total Commercial Construction Mortgage Legacy Leasing Consumer: Credit cards HELOCs Personal Auto Other Total Consumer Total Popular, Inc. 110 POPULAR, INC. 2020 ANNUAL REPORT $ 1,341 $ 3,870 $ 1,793 $ – $ 492,357 166,810 239,448 192,895 592,861 1,279,454 340 2,187 – – – 77 – 459 536 $1,282,517 184,678 170,183 525,541 649 2,218 – – – – – 11 11 $528,419 183,377 130,872 555,490 20,771 127,621 3,590 19,461 – 19,558 30,775 15,020 84,814 $792,286 3,290 1,629 148 5,067 – – – – – – – – – $5,067 $ 48,359 $ 13,827 $ 8,433 $ 80,608 24,383 100,658 27,298 25,679 181,944 46,644 – 388 5,709 1,460 45,379 17,291 – 202 – – – – – $ 228,976 – – – – – $ 62,872 13,826 20,386 143,303 44,798 11,091 1,528 – 2,024 1,664 – 3,688 $204,408 $ 49,700 $ 17,697 $ 10,226 572,965 191,193 340,106 220,193 618,540 1,461,398 46,984 2,187 388 – – – 77 – 459 536 $1,511,493 190,387 171,643 570,920 17,940 2,218 202 – – – – – 11 11 $591,291 197,203 151,258 698,793 65,569 138,712 1,528 3,590 19,461 2,024 21,222 30,775 15,020 88,502 $996,694 – – – – – – – – – – – – – – – $ $ 3,290 1,629 148 5,067 – – – – – – – – – – $5,067 – – – 16 16 – – 68 – – – 372 53 425 $ 509 $ – – – – – – – – $ 7,004 $ 140,845 $ 147,849 901,905 1,206,313 2,108,218 562,579 894,080 2,365,568 21,760 132,026 3,658 19,461 – 19,635 31,147 15,543 85,786 $2,608,798 1,023,750 2,524,654 4,895,562 115,710 6,034,722 1,055,849 1,586,329 3,418,734 7,261,130 137,470 6,166,748 1,059,507 1,104,339 5,038 1,348,515 2,886,375 125,324 5,469,591 $17,571,434 1,123,800 5,038 1,368,150 2,917,522 140,867 5,555,377 $20,180,232 $ 70,619 $ 1,576,691 $ 1,647,310 205,649 1,664,647 1,870,296 46,833 47,525 370,626 108,733 11,091 2,118 292,302 1,147,355 4,680,995 584,889 1,005,693 19,987 339,135 1,194,880 5,051,621 693,622 1,016,784 22,105 – 7,930 403 – 8,333 $8,333 – 9,954 2,067 – 12,021 $ 504,589 36 107,389 322,373 690 430,488 $ 6,722,052 36 117,343 324,440 690 442,509 $ 7,226,641 $ – – – 16 16 – – – 68 – 7,930 403 372 53 8,758 $8,842 $ 77,623 $ 1,717,536 $ 1,795,159 1,107,554 2,870,960 3,978,514 609,412 941,605 2,736,194 130,493 143,117 2,118 3,658 19,461 9,954 21,702 31,147 15,543 97,807 $3,113,387 1,316,052 3,672,009 9,576,557 700,599 7,040,415 19,987 1,055,849 1,104,375 112,427 1,670,888 2,886,375 126,014 5,900,079 $24,293,486 1,925,464 4,613,614 12,312,751 831,092 7,183,532 22,105 1,059,507 1,123,836 122,381 1,692,590 2,917,522 141,557 5,997,886 $27,406,873 The following table presents the weighted average obligor risk rating at December 31, 2019 for those classifications that consider a range of rating scales. Weighted average obligor risk rating Puerto Rico: Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Total Commercial Construction Popular U.S.: Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Total Commercial Construction Legacy (Scales 11 and 12) Substandard (Scales 1 through 8) Pass 11.82 11.17 11.36 11.26 11.25 11.01 Substandard 11.25 11.00 11.02 11.01 11.02 11.00 11.25 6.02 6.77 7.30 7.20 7.10 7.85 Pass 7.37 6.94 7.48 6.63 7.04 7.74 7.95 For changes in the allowance for credit losses, loan ending balances and whether such loans and the allowance pertained to loans individually or collectively evaluated for impairment for the year ended December 31, 2019, refer to the allowance activity section of this note. Impaired loans The following tables present loans individually evaluated for impairment at December 31, 2019. December 31, 2019 Puerto Rico (In thousands) Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Construction Mortgage Leasing Consumer: Credit cards Personal Auto Other Impaired Loans - With an Allowance Unpaid principal balance Recorded investment Related allowance Impaired Loans With No Allowance Recorded investment Unpaid principal balance Impaired Loans - Total Unpaid principal balance Recorded investment Related allowance $ 1,196 $ 1,229 $ 4 $ 1,017 $ 1,247 $ 2,213 $ 2,476 $ 4 44,975 45,803 12,281 149,587 173,124 194,562 218,927 12,281 105,841 43,640 119 420,949 507 24,475 65,521 310 851 122,814 47,611 119 479,936 507 24,475 65,521 310 851 5,077 3,171 6 40,596 61 2,957 17,142 51 109 26,365 24,831 – 101,520 – 58,540 44,255 – 134,331 – – – – – – – – – 132,206 68,471 119 522,469 507 24,475 65,521 310 851 181,354 91,866 119 614,267 507 24,475 65,521 310 851 5,077 3,171 6 40,596 61 2,957 17,142 51 109 Total Puerto Rico $708,384 $789,176 $81,455 $303,320 $411,497 $1,011,704 $1,200,673 $81,455 POPULAR, INC. 2020 ANNUAL REPORT 111 December 31, 2019 Popular U.S. (In thousands) Commercial multi-family Mortgage Consumer: HELOCs Personal Impaired Loans - With an Allowance Unpaid principal balance Recorded investment Related allowance $ – 6,906 $ – 7,257 $ – 2,208 6,691 26 6,691 26 1,560 3 Recorded investment $2,097 2,480 2,829 88 Unpaid principal balance $2,539 2,844 Impaired Loans - Total Unpaid principal balance Recorded investment Related allowance $ 2,097 9,386 $ 2,539 10,101 $ – 2,208 3,087 88 9,520 114 9,778 114 1,560 3 Impaired Loans With No Allowance Total Popular U.S. $13,623 $13,974 $3,771 $7,494 $8,558 $21,117 $22,532 $3,771 December 31, 2019 Popular, Inc. (In thousands) Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Construction Mortgage Leasing Consumer: Credit cards HELOCs Personal Auto Other Impaired Loans - With an Allowance Unpaid principal balance Recorded investment Related allowance Impaired Loans With No Allowance Recorded investment Unpaid principal balance Impaired Loans - Total Unpaid principal balance Recorded investment Related allowance $ 1,196 $ 1,229 $ 4 $ 3,114 $ 3,786 $ 4,310 $ 5,015 $ 4 44,975 45,803 12,281 149,587 173,124 194,562 218,927 12,281 105,841 43,640 119 427,855 507 24,475 6,691 65,547 310 851 122,814 47,611 119 487,193 507 24,475 6,691 65,547 310 851 5,077 3,171 6 42,804 61 2,957 1,560 17,145 51 109 26,365 24,831 – 104,000 – – 2,829 88 – – 58,540 44,255 – 137,175 – – 3,087 88 – – 132,206 68,471 119 531,855 507 24,475 9,520 65,635 310 851 181,354 91,866 119 624,368 507 24,475 9,778 65,635 310 851 5,077 3,171 6 42,804 61 2,957 1,560 17,145 51 109 Total Popular, Inc. $722,007 $803,150 $85,226 $310,814 $420,055 $1,032,821 $1,223,205 $85,226 112 POPULAR, INC. 2020 ANNUAL REPORT The following table presents the average recorded investment and interest income recognized on impaired loans for the year ended December 31, 2019. For the year ended December 31, 2019 (In thousands) Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Construction Mortgage Leasing Consumer: Credit cards HELOCs Personal Auto Other Puerto Rico Popular U.S. Popular, Inc. Average recorded investment Interest income recognized Average recorded investment Interest income recognized Average recorded investment Interest income recognized $ 1,470 183,233 137,710 71,828 1,151 518,487 823 26,775 – 69,664 823 1,044 $ 50 5,742 6,528 4,097 25 16,810 – – – 282 – – $ 1,343 – 626 – 9,248 9,416 – – 8,988 380 – – $ – – – – – 153 – – – – – – $ 2,813 183,233 138,336 71,828 10,399 527,903 823 26,775 8,988 70,044 823 1,044 $ 50 5,742 6,528 4,097 25 16,963 – – – 282 – – Total Popular, Inc. $1,013,008 $33,534 $30,001 $153 $1,043,009 $33,687 Note 9 - Mortgage banking activities Income from mortgage banking activities includes mortgage servicing fees earned in connection with administering residential mortgage loans and valuation adjustments on mortgage servicing rights. It also includes gain on sales and losses on residential mortgage securitizations of loans, including interest advances, and trading repurchased loans, gains and losses on derivative contracts used to hedge the Corporation’s addition, lower-of-cost-or-market valuation adjustments to residential mortgage loans held for sale, if any, are recorded as part of the mortgage banking activities. securitization activities. In The following table presents the components of mortgage banking activities: (In thousands) Mortgage servicing fees, net of fair value adjustments: Mortgage servicing fees Mortgage servicing rights fair value adjustments Total mortgage servicing fees, net of fair value adjustments Net gain on sale of loans, including valuation on loans held for sale Trading account (loss) profit: Unrealized (losses) gains on outstanding derivative positions Realized (losses) gains on closed derivative positions Total trading account (loss) profit Losses on repurchased loans, including interest advances [1] Total mortgage banking activities Years ended December 31, 2018 2019 2020 $ 43,234 (42,055) $ 46,952 (27,430) $49,532 (8,477) 1,179 31,215 19,522 18,817 41,055 9,424 – (10,586) (10,586) (11,407) – (6,246) (6,246) – (253) 2,576 2,323 – $ 10,401 $ 32,093 $52,802 [1] The Corporation, from time to time, repurchases delinquent loans from its GNMA servicing portfolio, in compliance with Guarantor guidelines, and may incur in losses related to previously advanced interest on delinquent loans. During the quarter ended September 30, 2020 the Corporation repurchased $687.9 million of GNMA loans and recorded a loss of $10.5 million for previously advanced interest on delinquent loans. Effective for the quarter ended September 30, 2020, the Corporation has determined to present these losses as part of its Mortgage Banking Activities, which were previously presented within the indemnity reserves on loans sold component of non-interest income. The amount of these losses for prior years were considered immaterial for reclassification. POPULAR, INC. 2020 ANNUAL REPORT 113 Note 10 - Transfers of financial assets and mortgage servicing assets The Corporation typically transfers conforming residential mortgage loans in conjunction with GNMA and FNMA securitization transactions whereby the loans are exchanged for cash or the Corporation has made certain representations and warranties with respect to the originally transferred loans and, in the past, has sold certain loans with credit recourse to a government- sponsored entity, namely FNMA. Refer to Note 22 to the Consolidated Financial Statements for a description of such arrangements. and servicing rights. As securities seller, a result of incurred as No liabilities were these securitizations during the years ended December 31, 2020 and 2019 because they did not contain any credit recourse arrangements. The Corporation recorded a net gain of $27.3 million and $17.2 million, respectively, during the years ended December 31, 2020 and 2019 related to the residential mortgage loans securitized. The following tables present the initial fair value of the assets obtained as proceeds from residential mortgage loans securitized during the years ended December 31, 2020 and 2019: Proceeds Obtained During the Year Ended December 31, 2020 Level 1 Level 2 Level 3 Initial fair value $– – $– $– $– $332,207 175,864 $508,071 $ – $508,071 $ $ – – – $7,236 $7,236 $332,207 175,864 $508,071 $ 7,236 $515,307 Proceeds Obtained During the Year Ended December 31, 2019 Level 1 Level 2 Level 3 Initial fair value $– – $– $– $– $347,396 111,362 $458,758 $ – $458,758 $ $ – – – $8,185 $8,185 $347,396 111,362 $458,758 $ 8,185 $466,943 The Corporation uses a discounted cash flow model to estimate the fair value of MSRs. The discounted cash flow model incorporates assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, prepayment considerations. Prepayment speeds are adjusted for the Corporation’s loan characteristics and portfolio behavior. among other and late fees, (In thousands) Assets Trading account debt securities: Mortgage-backed securities - GNMA Mortgage-backed securities - FNMA Total trading account debt securities Mortgage servicing rights Total (In thousands) Assets Trading account debt securities: Mortgage-backed securities - GNMA Mortgage-backed securities - FNMA Total trading account debt securities Mortgage servicing rights Total During the year ended December 31, 2020, the Corporation retained servicing rights on whole loan sales involving approximately $147 million in principal balance outstanding (2019 - $63 million), with net realized gains of approximately $3.9 million (2019 - $1.6 million). All loan sales performed during the years ended December 31, 2020 and 2019 were without credit recourse agreements. The Corporation recognizes as assets the rights to service loans for others, whether these rights are purchased or result from asset transfers such as sales and securitizations. These mortgage servicing rights (“MSR”) are measured at fair value. 114 POPULAR, INC. 2020 ANNUAL REPORT The following table presents the changes in MSRs measured using the fair value method for the years ended December 31, 2020 and 2019. Residential MSRs (In thousands) Fair value at beginning of period Additions Changes due to payments on loans [1] Reduction due to loan repurchases Changes in fair value due to changes in valuation model inputs or assumptions Other disposals December 31, 2020 December 31, 2019 $150,906 9,544 (11,692) (11,060) $169,777 9,143 (11,549) (1,777) (19,327) 24 (14,190) (498) Fair value at end of period $118,395 $150,906 [1] Represents changes due to collection / realization of expected cash flows over time. Residential mortgage loans serviced for others were $12.9 billion at December 31, 2020 (2019 - $14.8 billion). activities Net mortgage servicing fees, a component of mortgage banking of in the Consolidated Operations, include the changes from period to period in the fair value of the MSRs, including changes due to collection / realization of expected cash flows. The banking subsidiaries Statements receive servicing fees based on a percentage of the outstanding loan balance. These servicing fees are credited to income when they are collected. At December 31, 2020, those weighted average mortgage servicing fees were 0.31% (2019 – 0.30%). Under these servicing agreements, the banking subsidiaries do not generally earn significant prepayment penalty fees on the underlying loans serviced. During the quarter ended June 30, 2020, PB commenced selling whole loans with servicing retained. At December 31, 2020, PB had MSRs amounting to $0.7 million. The section below includes information on assumptions used in the valuation model of the MSRs, originated and purchased. Key economic assumptions used in measuring the servicing rights derived from loans securitized or sold by the Corporation during the years ended December 31, 2020 and 2019 were as follows: Years ended December 31, 2020 December 31, 2019 BPPR PB BPPR 7.6% 21.9% 7.0% 8.7 10.9% 10.5% 3.6 9.5 10.9% PB -% – -% Prepayment speed Weighted average life (in years) Discount rate (annual rate) Key economic assumptions used to estimate the fair value of MSRs derived from sales and securitizations of mortgage loans performed by the banking subsidiaries and servicing rights purchased from other financial institutions, and the sensitivity to immediate changes in those assumptions, were as follows as of the end of the periods reported: (In thousands) Fair value of servicing rights Weighted average life (in years) Weighted average prepayment speed (annual rate) Impact on fair value of 10% adverse change Impact on fair value of 20% adverse change Weighted average discount rate (annual rate) Impact on fair value of 10% adverse change Impact on fair value of 20% adverse change Originated MSRs Purchased MSRs December 31, December 31, December 31, December 31, 2020 $44,129 6.2 6.6% $ (1,115) $ (2,194) 11.3% $ (1,640) $ (3,175) 2019 $58,842 6.7 5.7% $ (1,303) $ (2,568) 11.4% $ (2,381) $ (4,596) 2020 $74,266 5.9 7.1% $ (2,206) $ (4,312) 11.1% $ (2,740) $ (5,301) 2019 $92,064 6.3 6.2% $ (2,306) $ (4,525) 11.0% $ (3,603) $ (6,959) The sensitivity analyses presented in the table above for servicing rights are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10 and 20 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in the sensitivity tables included herein, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities. At December 31, 2020, the Corporation serviced $0.9 billion (2019 - $1.2 billion) in residential mortgage loans with credit recourse to the Corporation, from which $52 million was 60 days or more past due (2019 - $73 million). The reduction was mainly related to a bulk loan repurchase from FNMA and FHLMC loan servicing portfolio discussed in Note 7 - Loans. Also refer to Note 22 for information on changes in the Corporation’s liability of estimated losses related to loans serviced with credit recourse. POPULAR, INC. 2020 ANNUAL REPORT 115 Under individual the GNMA securitizations, the Corporation, as servicer, has the right to repurchase (but not the obligation), at its option and without GNMA’s prior authorization, any loan that is collateral for a GNMA guaranteed mortgage-backed security when certain delinquency criteria are met. At the time that loans meet GNMA’s specified delinquency criteria and are eligible for repurchase, the Corporation is deemed to have regained effective control over these loans if the Corporation was the pool issuer. At December 31, 2020, the Corporation had recorded $57 million in mortgage loans on its Consolidated Statements of Financial Condition related to this buy-back option program (2019 - $103 million). Loans in our serviced GNMA portfolio benefit from payment forbearance programs but continue to reflect the contractual delinquency until the borrower repays deferred payments or completes a payment deferral modification or other borrower assistance alternative. As long as the Corporation continues to service the loans that continue to be collateral in a GNMA guaranteed the MSR is recognized by the mortgage-backed security, Corporation. During the year ended December 31, 2020, the Corporation repurchased approximately $862 million of mortgage loans from its GNMA servicing portfolio (2019 - $104 million). The determination to repurchase these loans was based on the economic benefits of the transaction, which results in a reduction of the servicing costs for these severely delinquent loans, mostly related to principal and interest advances. The reduced due to their risk associated with the loans guaranteed nature. The Corporation may place these loans under COVID-19 modification programs offered by FHA, VA or USDA or other loss mitigation programs offered by the Corporation, and once brought back to current status, these may be either retained in portfolio or re-sold in the secondary market. is Note 11 - Premises and equipment Premises and equipment are stated at cost less accumulated depreciation and amortization as follows: (In thousands) Premises and equipment: Land Buildings Equipment Leasehold improvements Less - Accumulated depreciation and amortization Subtotal Construction in progress Premises and equipment, net Useful life in years 2020 2019 10-50 2-10 3-10 $109,780 $114,481 512,131 350,014 87,289 949,434 574,835 535,602 362,543 92,923 991,068 561,742 374,599 429,326 25,862 12,843 $510,241 $556,650 Depreciation and amortization of premises and equipment for the year 2020 was $58.4 million (2019 -$58.1 million; 2018 - $52.5 million), of which $27.2 million (2019 - $27.3 million; 2018 - $24.3 million) was charged to occupancy expense and $31.2 million (2019 - $30.8 million; 2018 - $28.2 million) was charged to equipment, communications and other operating expenses. Occupancy expense of premises and equipment is net of rental income of $15.5 million (2019 - $19.3 million; 2018 - $28.2 million). For information related to the amortization expense of finance leases, refer to Note 32 - Leases. Note 12 - Other real estate owned The following tables present the activity related to Other Real Estate Owned (“OREO”), for the years ended December 31, 2020, 2019 and 2018. For the year ended December 31, 2020 (In thousands) Balance at beginning of period Write-downs in value Additions Sales Other adjustments Ending balance 116 POPULAR, INC. 2020 ANNUAL REPORT OREO Commercial/Construction OREO Mortgage $16,959 (1,564) 2,223 (4,359) (45) $13,214 $105,113 (3,060) 17,785 (49,797) (109) Total $122,072 (4,624) 20,008 (54,156) (154) $ 69,932 $ 83,146 (In thousands) Balance at beginning of period Write-downs in value Additions Sales Other adjustments Ending balance (In thousands) Balance at beginning of period Write-downs in value Additions Sales Other adjustments Transfer to non-covered status [1] Ending balance For the year ended December 31, 2019 OREO Commercial/Construction OREO Mortgage $21,794 (1,584) 6,801 (9,892) (160) $16,959 $114,911 (4,541) 62,630 (67,137) (750) Total $136,705 (6,125) 69,431 (77,029) (910) $105,113 $122,072 For the year ended December 31, 2018 Non-covered OREO Commercial/Construction Non-covered OREO Mortgage Covered OREO Mortgage $21,411 (2,974) 10,688 (8,108) 777 – $21,794 $147,849 (10,380) 41,167 (78,330) (728) 15,333 $ 19,595 (287) – (3,282) (693) (15,333) Total $188,855 (13,641) 51,855 (89,720) (644) – $114,911 $ – $136,705 [1] Represents the reclassification of OREOs to the non-covered category, pursuant to the Termination Agreement of all shared-loss agreements with the Federal Deposit Insurance Corporation related to loans acquired from Westernbank, that was completed on May 22, 2018. recognizes The Corporation enters in the ordinary course of business into technology hosting arrangements that are service contracts. These arrangements can include capitalizable implementation the hosting costs that are amortized during the term of arrangement. capitalizable The Corporation implementation costs related to hosting arrangements that are service contracts within Others in the table above. As of December 31, 2020, the total capitalized implementation costs amounted to $17.4 million with an accumulated amortization of $4.9 million for a net value of $12.5 million. Total amortization expense for all capitalized implementation costs of hosting arrangements that are service contracts for the year ended December 31, 2020 was $2.2 million. Note 13 - Other assets The caption of other assets in the consolidated statements of financial condition consists of the following major categories: (In thousands) Net deferred tax assets (net of valuation allowance) Investments under the equity method Prepaid taxes Other prepaid expenses Derivative assets Trades receivable from brokers and counterparties Principal, interest and escrow servicing advances Guaranteed mortgage loan claims receivable Operating ROU assets (Note 32) Finance ROU assets (Note 32) Others December 31, 2020 December 31, 2019 $ 851,592 $ 886,353 250,467 32,615 74,572 20,785 65,429 65,671 80,477 131,921 15,464 148,048 237,081 47,226 82,425 17,966 47,049 77,800 108,946 149,849 12,888 152,032 Total other assets $1,737,041 $1,819,615 POPULAR, INC. 2020 ANNUAL REPORT 117 Note 14 - Goodwill and other intangible assets There were no changes in the carrying amount of goodwill for the years ended December 31, 2020 and 2019. At December 31, 2020 and 2019, the Corporation had $6.1 million of identifiable intangible assets with indefinite useful lives, mostly associated with the E-LOAN trademark. The following table reflects the components of other intangible assets subject to amortization: (In thousands) December 31, 2020 Core deposits Other customer relationships Trademark Total other intangible assets December 31, 2019 Core deposits Other customer relationships Trademark Total other intangible assets Gross Carrying Amount Accumulated Amortization Net Carrying Value $12,810 26,397 488 $39,695 $37,224 42,909 488 $80,621 $ 7,473 15,684 236 $23,393 $29,792 28,075 138 $58,005 $ 5,337 10,713 252 $16,302 $ 7,432 14,834 350 $22,616 During the year ended December 31, 2020, $24.4 million in core deposits recognized as part of the Westernbank FDIC- assisted transaction during 2010 and $16.3 million in other customer relationships related to the purchase of the Doral Insurance Agency portfolio during 2015 became fully amortized and thus were removed from the Corporation’s intangible assets. During the year ended December 31, 2019, the Corporation recognized $9.6 million in customer relationship intangibles in connection with the acquisition of a credit card portfolio in Puerto Rico. During the year ended December 31, 2020, the Corporation recognized $ 6.4 million in amortization expense related to other intangible assets with definite useful lives (2019 - $ 9.4 million; 2018 - $9.3 million). The following table presents the estimated amortization of the intangible assets with definite useful lives for each of the following periods: (In thousands) Year 2021 Year 2022 Year 2023 Year 2024 Year 2025 Later years $3,575 2,700 2,659 2,361 1,172 3,835 Results of the Annual Goodwill Impairment Test The Corporation’s goodwill and other identifiable intangible assets having an indefinite useful life are tested for impairment, at least annually and on a more frequent basis if events or circumstances indicate impairment could have taken place. 118 POPULAR, INC. 2020 ANNUAL REPORT Such events could include, among others, a significant adverse change in the business climate, an adverse action by a regulator, an unanticipated change in the competitive environment and a decision to change the operations or dispose of a reporting unit. Management monitors events or changes in circumstances between annual tests to determine if these events or changes in circumstances would more likely than not reduce the fair value of its reporting units below their carrying amounts. The Corporation performed the annual goodwill impairment evaluation for the entire organization during the third quarter of 2020 using July 31, 2020 as the annual evaluation date. The reporting units utilized for this evaluation were those that are one level below the business segments, which are the legal entities within the reportable segment. The Corporation follows push-down accounting, as such all goodwill is assigned to the reporting units when carrying out a business combination. As discussed in Note 3, “New accounting pronouncements”, effective on January 1, 2020, the Corporation adopted ASU accounting for goodwill 2017-04, which simplifies the the two-step goodwill impairment by removing Step 2 of impairment test under the previous guidance. Accordingly, if the carrying amount of any of the reporting units exceeds its fair value, the Corporation would be required to record an impairment charge for the difference up to the amount of the goodwill. In determining the fair value of each reporting unit, the Corporation generally uses combination of methods, a including market price multiples of comparable companies and transactions, as discounted cash flow analysis. Management evaluates the particular circumstances of each reporting unit in order to determine the most appropriate valuation methodology and the weights applied to each as well each under applicable. The Corporation as valuation methodology, valuation obtained results the evaluates methodology to identify and understand the key value drivers in order to ascertain that the results obtained are reasonable and appropriate under the circumstances. Elements considered include current market and economic conditions, developments in specific lines of business, and any particular features in the individual reporting units. The computations require management to make estimates and assumptions. Critical assumptions that are used as part of these evaluations include: • a selection of comparable publicly traded companies, based on nature of business, location and size; • a selection of comparable acquisitions; • the discount rate applied to future earnings, based on an estimate of the cost of equity; • the potential future earnings of the reporting unit; and • the market growth and new business assumptions. comparable the market For purposes of the reporting unit. Management uses judgment companies’ approach, valuations were determined by calculating average price multiples of relevant value drivers from a group of companies that are comparable to the reporting unit being analyzed and applying those price multiples to the value drivers of in the determination of which value drivers are considered more appropriate for each reporting unit. Comparable companies’ price multiples represent minority-based multiples and thus, a control premium adjustment is added to the comparable companies’ market multiples applied to the reporting unit’s comparable value drivers. For purposes of transactions’ valuations had been previously determined by the Corporation by calculating average price multiples of relevant value drivers from a group of transactions for which the target companies are comparable to the reporting unit being analyzed and applying those price multiples to the value drivers of the reporting unit. For the July 31, 2020 annual goodwill impairment test, and after considering the effects of COVID-19 in the M&A market and uncertainties regarding the comparability few transactions completed, management decided to give zero weight to the market comparable transactions approach. and reliability of the market approach, those For purposes of the discounted cash flows (“DCF”) approach, the valuation is based on estimated future cash flows. The financial projections used in the DCF valuation analysis for each reporting unit are based on the most recent (as of the the valuation date) / Liability Management Committee Corporation’s Asset (“ALCO”). The growth assumptions included in these projections are based on management’s expectations for each reporting unit’s financial prospects considering economic and industry conditions as well as particular plans of each entity financial projections presented to (i.e. restructuring plans, de-leveraging, etc.). The cost of equity used to discount the cash flows was calculated using the Ibbotson Build-Up Method and ranged from 10.72% to 15.13% for the 2020 analysis. The Ibbotson Build-Up Method builds up a cost of equity starting with the rate of return of a “risk-free” asset (20-year U.S. Treasury note) and adds to it additional risk elements such as equity risk premium, size premium, industry risk premium, and a specific geographic risk premium (as applicable). The resulting discount rates were analyzed in terms of reasonability given the current market conditions. No impairment was recognized by the Corporation from the annual test as of July 31, 2020. The results of the BPPR annual goodwill impairment test as of July 31, 2020 indicated that the average estimated fair value using the DCF and market comparable companies methodologies exceeded BPPR’s equity value by approximately $282 million or 9% compared to $1.2 billion or 37%, test for the annual goodwill completed as of July 31, 2019. PB’s annual goodwill impairment test results as of such dates indicated that the average estimated fair value using the DCF and market comparable companies methodologies exceeded PB’s equity value by approximately $215 million or 13%, compared to $338 million or 21%, for the annual goodwill impairment test completed as of July 31, 2019. The goodwill balance of BPPR and PB, as legal entities, represented approximately 91% of the Corporation’s total goodwill balance as of the July 31, 2020 valuation date. impairment the as part of Furthermore, analyses, management performed a reconciliation of the aggregate fair values determined for the reporting units to the market capitalization of the fair value results determined for the reporting units in the July 31, 2020 annual assessment were reasonable. the Corporation concluding that The goodwill impairment evaluation process requires the Corporation to make estimates and assumptions with regard to the fair value of the reporting units. Actual values may differ significantly from these estimates. Such differences could result in future impairment of goodwill that would, in turn, negatively impact the Corporation’s results of operations and the reporting units where the goodwill in the is Corporation’s market capitalization and adverse economic conditions sustained over a longer period of time negatively affecting forecasted cash flows could increase the risk of goodwill impairment in the future. recorded. Declines The extent to which the COVID-19 pandemic further impacts our business, results of operations and financial condition, as well as the operations of our clients, customers, service providers and suppliers, will depend on future developments, which are highly uncertain and is difficult to predict, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in the Corporation’s stock price related to global and/or regional the continued weakness in the macroeconomic conditions, thereto. A further decline in response POPULAR, INC. 2020 ANNUAL REPORT 119 Puerto Rico economy and fiscal situation, reduced future earnings estimates, additional expenses and higher credit losses, and the continuance of the current interest rate environment could, individually or in the aggregate, have a material impact on the determination of the fair value of our reporting units, which could in turn result in an impairment of goodwill in the future. An impairment of goodwill would result in a non-cash expense, net of tax impact. A charge to earnings related to a goodwill impact regulatory capital calculations. impairment would not The following tables present the gross amount of goodwill and accumulated impairment losses by reportable segments. (In thousands) Banco Popular de Puerto Rico Popular U.S. Total Popular, Inc. (In thousands) Banco Popular de Puerto Rico Popular U.S. Total Popular, Inc. December 31, 2020 December 31, 2019 Balance at December 31, 2020 (gross amounts) $324,049 515,285 $839,334 Accumulated impairment losses $ 3,801 164,411 $168,212 Balance at December 31, 2020 (net amounts) $320,248 350,874 $671,122 Balance at December 31, 2019 (gross amounts) $324,049 515,285 $839,334 Accumulated impairment losses $ 3,801 164,411 $168,212 Balance at December 31, 2019 (net amounts) $320,248 350,874 $671,122 Note 15 - Deposits Total interest bearing deposits as of the end of the periods presented consisted of: A summary of December 31, 2020 follows: certificates of deposit by maturity at (In thousands) Savings accounts NOW, money market and other interest bearing demand deposits Total savings, NOW, money market and other interest bearing demand deposits Certificates of deposit: Under $100,000 $100,000 and over Total certificates of deposit December 31, 2020 December 31, 2019 $14,031,736 $10,618,629 22,398,057 16,305,007 36,429,793 26,923,636 2,917,700 4,390,148 7,307,848 3,133,840 4,540,957 7,674,797 Total interest bearing deposits $43,737,641 $34,598,433 (In thousands) 2021 2022 2023 2024 2025 2026 and thereafter Total certificates of deposit $4,486,877 964,179 658,383 562,093 568,047 68,269 $7,307,848 At December 31, 2020, the Corporation had brokered deposits amounting to $0.8 billion (December 31, 2019 - $ 0.5 billion). The aggregate amount of overdrafts in demand deposit accounts that were reclassified to loans was $3 million at December 31, 2020 (December 31, 2019 - $4 million) 120 POPULAR, INC. 2020 ANNUAL REPORT At December 31, 2020, public sector deposits amounted to $15.1 billion. These balances are expected to decline over the long term, however, the receipt by the P.R. Government of additional COVID-19 and hurricane relief related Federal assistance, and seasonal tax collections are likely to increase public deposit balances at BPPR in the near term. The rate at which public deposit balances will decline is uncertain and difficult to predict. The amount and timing of any such reduction is likely to be impacted by, for example, the timeline of current debt restructuring efforts under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”) and the speed at which the Coronavirus Aid, Relief and Economic Security Act “CARES Act” assistance is distributed. Note 16 - Borrowings Assets sold under agreements to repurchase amounted to $121 million at December 31, 2020 and $193 million December 31, 2019. The repurchase transactions Corporation’s are overcollateralized with the securities detailed in the table below. The Corporation’s repurchase agreements have a right of set-off with the respective counterparty under the supplemental terms of the master repurchase agreements. In an event of default each party has a right of set-off against the other party for amounts owed in the related agreement and any other amount or obligation owed in respect of any other agreement or transaction between them. Pursuant to the Corporation’s accounting policy, the repurchase agreements are not offset agreements held with the same with other counterparty. repurchase The following table presents information related to the Corporation’s repurchase transactions accounted for as secured borrowings that are collateralized with debt securities available-for-sale, other assets held-for-trading purposes or which have been obtained under agreements to resell. It is the Corporation’s policy to maintain effective control over assets sold under agreements to repurchase; accordingly, such securities continue to be carried on the Consolidated Statements of Financial Condition. Repurchase agreements accounted for as secured borrowings (Dollars in thousands) U.S. Treasury securities Within 30 days After 30 to 90 days After 90 days Total U.S. Treasury securities Mortgage-backed securities Within 30 days After 30 to 90 days Total mortgage-backed securities Collateralized mortgage obligations Within 30 days Total collateralized mortgage obligations Total December 31, 2020 December 31, 2019 Repurchase liability Repurchase liability weighted average interest rate Repurchase liability Repurchase liability weighted average interest rate $ 67,157 39,318 9,979 116,454 3,778 268 4,046 803 803 $121,303 1.16% 1.20 0.33 1.10 0.28 1.50 0.36 0.24 0.24 1.07% $ 88,646 78,061 24,538 191,245 1,235 – 1,235 898 898 $193,378 2.59% 2.36 2.52 2.49 0.30 – 0.30 0.24 0.24 2.46% POPULAR, INC. 2020 ANNUAL REPORT 121 Repurchase agreements in this portfolio are generally short- term, often overnight. As such our risk is very limited. We manage the liquidity risks arising from secured funding by sourcing of counterparties, providing a range of securities collateral and pursuing longer durations, when appropriate. from a globally funding diverse group Assets sold under agreements to repurchase: (Dollars in thousands) 2020 2019 Maximum aggregate balance outstanding at any month-end $195,498 $281,833 Average monthly aggregate balance outstanding Weighted average interest rate: For the year At December 31 $143,718 $222,565 1.63% 1.11% 2.64% 2.50% There were no other short-term borrowings outstanding at December 31, 2020 and December 31, 2019. The following table the Corporation’s other short-term borrowings for the years ended December 31, 2020 and December 31, 2019. information additional presents related to Other short-term borrowings: The following table presents the composition of notes payable at December 31, 2020 and December 31, 2019. (In thousands) Advances with the FHLB with maturities ranging from 2021 through 2029 paying interest at monthly fixed rates ranging from 0.39% to 4.19% (2019 - 1.14% to 4.19%) Advances with the FRB maturing on 2022 paying interest at annual fixed rate of 0.35% Unsecured senior debt securities maturing on 2023 paying interest semiannually at a fixed rate of 6.125%, net of debt issuance costs of $3,426 (2019 - $4,693) Junior subordinated deferrable interest debentures (related to trust preferred securities) with maturities ranging from 2033 to 2034 with fixed interest rates ranging from 6.125% to 6.7%, net of debt issuance costs of $369 (2019 - $396) December 31, 2020 December 31, 2019 $ 542,469 $ 421,399 1,009 – 296,574 295,307 384,929 384,902 $1,224,981 $1,101,608 (Dollars in thousands) 2020 2019 Total notes payable Maximum aggregate balance outstanding at any month-end $100,000 $160,000 Average monthly aggregate balance outstanding Weighted average interest rate: For the year At December 31 $ 21,557 $ 8,703 0.56% 0.73% 2.50% 1.85% 122 POPULAR, INC. 2020 ANNUAL REPORT A breakdown of borrowings by contractual maturities at December 31, 2020 is included in the table below. (In thousands) 2021 2022 2023 2024 2025 Later years Total borrowings At December 31, 2020 and 2019, the Corporation had FHLB borrowing facilities whereby the Corporation could borrow up to $3.0 billion and $3.6 billion, respectively, of which $0.5 billion and $0.4 billion, respectively, were used. In addition, at December 31, 2020 and 2019, the Corporation had placed $0.9 billion of the available FHLB credit facility as collateral for to secure deposits. The FHLB municipal borrowing facilities are collateralized with loans held-in- portfolio, and do not have restrictive covenants or callable features. letters of credit Also, at December 31, 2020, the Corporation has a borrowing facility at the Federal Reserve Bank of New York amounting to $1.4 billion (2019 - $1.1 billion), which remained unused at December 31, 2020 and December 31, 2019. the discount window of Note 17 - Trust preferred securities Statutory trusts established by the Corporation (Popular Capital Trust I, Popular North America Capital Trust I and Popular Assets sold under agreements to repurchase Notes payable Total $121,303 – – – – – $121,303 $ 50,040 104,156 339,835 91,944 139,920 499,086 $ 171,343 104,156 339,835 91,944 139,920 499,086 $1,224,981 $1,346,284 Capital Trust II) had issued trust preferred securities (also referred to as “capital securities”) to the public. The proceeds from such issuances, together with the proceeds of the related issuances of common securities of the trusts (the “common securities”), were used by the trusts to purchase junior subordinated deferrable “junior (the subordinated debentures”) issued by the Corporation. interest debentures The sole assets of the trusts consisted of the junior subordinated debentures of the Corporation and the related accrued interest receivable. These trusts are not consolidated by the Corporation pursuant to accounting principles generally accepted in the United States of America. The junior subordinated debentures are included by the Corporation as notes payable in the Consolidated Statements of Financial Condition, while the common securities issued by the issuer trusts are included as debt securities held-to-maturity. The common securities of each trust are wholly-owned, or indirectly wholly-owned, by the Corporation. The following table presents financial data pertaining to the different trusts at December 31, 2020 and 2019. (Dollars in thousands) Issuer Capital securities Distribution rate Common securities Junior subordinated debentures aggregate liquidation amount Stated maturity date Reference notes Popular Capital Trust I Popular North America Capital Trust I Popular Capital Trust Il $181,063 6.700% $91,651 6.564% $101,023 6.125% $ 5,601 $186,664 November 2033 [2],[4],[5] $ 2,835 $94,486 $ 3,125 $104,148 September 2034 December 2034 [2],[4],[5] [1],[3],[5] Statutory business trust that is wholly-owned by PNA and indirectly wholly-owned by the Corporation. Statutory business trust that is wholly-owned by the Corporation. [1] [2] [3] The obligations of PNA under the junior subordinated debentures and its guarantees of the capital securities under the trust are fully and unconditionally guaranteed on a subordinated basis by the Corporation to the extent set forth in the applicable guarantee agreement. [4] These capital securities are fully and unconditionally guaranteed on a subordinated basis by the Corporation to the extent set forth in the applicable guarantee agreement. [5] The Corporation has the right, subject to any required prior approval from the Federal Reserve, to redeem after certain dates or upon the occurrence of certain events mentioned below, the junior subordinated debentures at a redemption price equal to 100% of the principal amount, plus accrued and unpaid interest to the date of redemption. The maturity of the junior subordinated debentures may be shortened at the option of the Corporation prior to their stated maturity dates (i) on or after the stated optional redemption dates stipulated in the agreements, in whole at any time or in part from time to time, or (ii) in whole, but not in part, at any time within 90 days following the occurrence and during the continuation of a tax event, an investment company event or a capital treatment event as set forth in the indentures relating to the capital securities, in each case subject to regulatory approval. POPULAR, INC. 2020 ANNUAL REPORT 123 At December 31, 2020 and 2019, the Corporation’s $374 million in trust preferred securities outstanding do not qualify for Tier 1 capital treatment, but instead qualify for Tier 2 capital treatment. Note 18 - Other liabilities The caption of other liabilities in the consolidated statements of financial condition consists of the following major categories: (In thousands) Accrued expenses Accrued interest payable Accounts payable Dividends payable Trades payable Liability for GNMA loans sold with an option to repurchase Reserves for loan indemnifications Reserve for operational losses Operating lease liabilities (Note 32) Finance lease liabilities (Note 32) Pension benefit obligation Postretirement benefit obligation Others December 31, 2020 December 31, 2019 $ 235,449 38,622 69,784 33,701 720,212 $ 273,184 44,026 65,688 29,027 4,084 57,189 24,781 41,452 152,588 22,572 35,568 179,211 73,560 102,663 38,074 35,665 165,139 19,810 52,616 168,681 46,296 Total other liabilities $1,684,689 $1,044,953 Note 19 - Stockholders’ equity The Corporation’s common stock ranks junior to all series of preferred stock as to dividend rights and / or as to rights on liquidation, dissolution or winding up of the Corporation. Dividends on each series of preferred stocks are payable if declared. The Corporation’s ability to declare or pay dividends on, or purchase, redeem or otherwise acquire, its common stock is subject to certain restrictions in the event that the Corporation fails to pay or set aside full dividends on the preferred stock for the latest dividend period. The ability of the Corporation to pay dividends in the future is limited by regulatory requirements, legal availability of funds, recent and projected financial results, capital levels and liquidity of the Corporation, general business conditions and other factors deemed relevant by the Corporation’s Board of Directors. The Corporation’s common stock trades on the NASDAQ Stock Market LLC (the “NASDAQ”) under the symbol BPOP. The 2003 Series A Preferred Stock are not listed on NASDAQ. Preferred stocks The Corporation has 30,000,000 shares of authorized preferred stock that may be issued in one or more series, and the shares of each series shall have such rights and preferences as shall be fixed by the Board of Directors when authorizing the issuance of that particular series. The Corporation’s shares of preferred stock at December 31, 2020 consisted of: 124 POPULAR, INC. 2020 ANNUAL REPORT • 6.375% non-cumulative monthly income preferred stock, 2003 Series A, no par value, liquidation preference value of $25 per share. Holders on record of the 2003 Series A Preferred Stock are entitled to receive, when, as and if declared by the Board of Directors of the Corporation or an authorized committee thereof, out of funds legally available, non-cumulative cash dividends at the annual rate per share of 6.375% of their liquidation preference value, or $0.1328125 per share per month. These shares of preferred stock are perpetual, nonconvertible, have no the preferential rights to purchase any securities of Corporation and are redeemable solely at the option of the Corporation with the consent of the Board of Governors of the Federal Reserve System. The redemption price per share is $25.00. The shares of 2003 Series A Preferred Stock have no voting rights, except for certain rights in instances when the Corporation does not pay dividends for a defined period. These shares are not subject to any sinking fund requirement. Cash dividends declared and paid on the 2003 Series A Preferred Stock amounted to $1.4 million for the years ended December 31, 2020, 2019 and 2018. Outstanding shares of 2003 Series A Preferred Stock amounted to 885,726 at December 31, 2020, 2019 and 2018. On February 24, 2020, the Corporation redeemed all the outstanding shares of the 2008 Series B Preferred Stock. The redemption price of the 2008 Series B Preferred Stock was $25.00 per share, plus $0.1375 (representing the amount of accrued and unpaid dividends for the current monthly dividend period to the redemption date), for a total payment per share in the amount of $25.1375. At December 31, 2019 and 2018, the Corporation had 1,120,665 outstanding shares of 2008 Series B Preferred Stock, described as follows: • 8.25% non-cumulative monthly income preferred stock, 2008 Series B, no par value, liquidation preference value of $25 per share. The shares of 2008 Series B Preferred Stock were issued in May 2008. Holders of record of the 2008 Series B Preferred Stock are entitled to receive, when, as and if declared by the Board of Directors of the Corporation or an authorized committee thereof, out of funds legally available, non-cumulative cash dividends at the annual rate per share of 8.25% of their liquidation preferences, or $0.171875 per share per month. These shares of preferred stock are perpetual, nonconvertible, have no preferential rights to purchase any securities of the Corporation and are redeemable solely at the option of the Board of the Corporation with the consent of Governors of the Federal Reserve System beginning on May 28, 2013. Cash dividends declared and paid on the 2008 Series B Preferred Stock amounted to $ 2.3 million for the years ended December 31, 2019 and 2018. Common stocks Dividends During the year 2020, cash dividends of $1.60 (2019 - $1.20; 2018 - $1.00) per common share outstanding were declared amounting to $136.6 million (2019 - $116.0 million; 2018 - $101.3 million) of which $33.7 million were payable to shareholders of common stock at December 31, 2020 (2019 - $29.0 million; 2018 - $25.1 million). The quarterly dividend of $0.40 per share declared to shareholders of record as of the close of business on December 11, 2020, was paid on January 4, 2021. On February 26, 2021, the Corporation’s Board of Directors approved a quarterly cash dividend of $0.40 per share on its outstanding common stock, payable on April 1, 2021 to shareholders of record at the close of business on March 18, 2021. the receipt of the initial 7,055,919 shares, Accelerated share repurchase transaction (“ASR”) On January 30, 2020, the Corporation entered into a $500 million ASR transaction with respect to its common stock, which was accounted for as a treasury stock transaction. As a result of the Corporation recognized in stockholders’ equity approximately $400 million in treasury stock and $100 million as a reduction in capital surplus. On March 19, 2020 (the “early termination date”), the dealer counterparty to the ASR exercised its right to terminate the ASR as a result of the trading price of the Corporation’s common stock falling below a specified level due to the effects of the COVID-19 pandemic on the global markets. As a result of such early termination, the final settlement of the ASR, which was expected to occur during the fourth quarter of 2020, occurred during the second quarter of 2020. The Corporation completed the transaction on May 27, 2020 and received 4,763,216 additional shares of common stock after the early termination date. In total the Corporation repurchased 11,819,135 shares at an average price per share of $42.3043 under the ASR. During the fourth quarter of 2019, the Corporation completed a $250 million ASR. In connection therewith, the Corporation received an initial delivery of 3,500,000 shares of common stock during the first quarter of 2019 and received 1,165,607 additional shares of common stock during the fourth quarter of 2019. The final number of shares delivered at settlement was based on the average daily volume weighted average prince (“VWAP”) of its common stock, net of a discount, during the term of the ASR of $53.58. In connection with the transaction, the Corporation recognized $266 million in treasury stock, offset by $16 million adjustment to capital surplus. During 2018, the Corporation completed a $125 million ASR receiving 2,438,180 shares and recording $125 million in treasury stock. Statutory reserve The Banking Act of the Commonwealth of Puerto Rico requires that a minimum of 10% of BPPR’s net income for the year be transferred to a statutory reserve account until such statutory reserve equals the total of paid-in capital on common and preferred stock. Any losses incurred by a bank must first be charged to retained earnings and then to the reserve fund. Amounts credited to the reserve fund may not be used to pay dividends without the Puerto Rico the prior consent of Commissioner of Financial Institutions. The failure to maintain sufficient statutory reserves would preclude BPPR from paying dividends. BPPR’s statutory reserve fund amounted to $708 million at December 31, 2020 (2019 - $659 million; 2018 - $599 million). During 2020, $49 million was transferred to the statutory reserve account (2019 - $60 million, 2018 - $58 million). BPPR was in compliance with the statutory reserve requirement in 2020, 2019 and 2018. Note 20 - Regulatory capital requirements The Corporation, BPPR and PB are subject to various regulatory capital requirements imposed by the federal banking agencies. Failure to meet minimum capital requirements can lead to certain mandatory and additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s consolidated financial statements. Popular, Inc., BPPR and PB are subject to Basel III capital including also revised minimum and well requirements, capitalized regulatory capital ratios and compliance with the standardized approach for determining risk-weighted assets. The Basel III Capital Rules established a Common Equity Tier I (“CET1”) capital measure and related regulatory capital ratio CET1 to risk-weighted assets. The Basel III Capital Rules provide that a depository institution will be deemed to be well capitalized if it maintained a leverage ratio of at least 5%, a CET1 ratio of at least 6.5%, a Tier 1 risk-based capital ratio of at least 8% and a total risk- based ratio of at least 10%. Management has determined that at December 31, 2020 and 2019, the Corporation exceeded all capital adequacy requirements to which it is subject. The Corporation has been designated by the Federal Reserve Board as a Financial Holding Company (“FHC”) and is eligible to engage in certain financial activities permitted under the Gramm-Leach-Bliley Act of 1999. Pursuant to the adoption of the CECL accounting standard on January 1, 2020, the Corporation elected to use a five-year transition period option as permitted in the final interim regulatory capital rules effective March 31, 2020. The five-year transition period provision delays for two years the estimated impact of the adoption of the CECL accounting standard 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. POPULAR, INC. 2020 ANNUAL REPORT 125 Capital adequacy minimum requirement (including conservation capital buffer) Actual Amount Ratio Amount Ratio 2019 $5,858,615 20.31% $3,028,239 2,220,908 4,226,374 19.98 748,836 1,211,045 16.98 10.500% 10.500 10.500 $5,121,240 17.76% $2,018,826 1,480,605 3,958,518 18.72 499,224 1,165,710 16.35 $5,121,240 17.76% $2,451,431 1,797,878 3,958,518 18.72 606,200 1,165,710 16.35 $5,121,240 10.03% $2,042,299 1,645,851 3,958,518 9.62 378,041 1,165,710 12.33 7.000% 7.000 7.000 8.500% 8.500 8.500 4% 4 4 (Dollars in thousands) Total Capital (to Risk- Weighted Assets): Corporation BPPR PB Common Equity Tier I Capital (to Risk- Weighted Assets): Corporation BPPR PB Tier I Capital (to Risk- Weighted Assets): Corporation BPPR PB Tier I Capital (to Average Assets): Corporation BPPR PB The following table presents the minimum amounts and ratios for the Corporation’s banks to be categorized as well- capitalized. (Dollars in thousands) Amount Ratio Amount Ratio 2020 2019 Total Capital (to Risk- Weighted Assets): BPPR PB Common Equity Tier I Capital (to Risk- Weighted Assets): BPPR PB Tier I Capital (to Risk- Weighted Assets): BPPR PB Tier I Capital (to Average Assets): BPPR PB $2,274,660 739,976 10% $2,115,150 713,177 10 10% 10 $1,478,529 480,985 6.5% $1,374,848 463,565 6.5 6.5% 6.5 $1,819,728 591,981 8% $1,692,120 570,542 8 $2,712,294 482,106 5% $2,057,314 472,551 5 8% 8 5% 5 risk weight On April 9, 2020, federal banking regulators issued an interim final rule to modify the Basel III regulatory capital rules applicable to banking organizations to allow those organizations participating in the Paycheck Protection Program (“PPP”) established under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) to neutralize the regulatory capital effects of participating in the program. Specifically, the agencies have clarified that banking organizations, including the Corporation and its Bank subsidiaries, are permitted to assign a zero percent for purposes of determining risk-weighted assets and risk-based capital ratios. Additionally, in order to facilitate use of the Paycheck Protection Program Liquidity Facility (the “PPPL Facility”), which provides Federal Reserve Bank loans to eligible financial institutions such as the Corporation’s Bank subsidiaries to fund PPP loans, the agencies further clarified that, for purposes of determining leverage ratios, a banking organization is permitted to exclude from total average assets PPP loans that have been pledged as collateral for a PPPL Facility. As of December 31, 2020, the Corporation has $1.3 billion in PPP loans and $1 million pledged as collateral for PPPL Facilities. to PPP loans At December 31, 2020 and 2019, BPPR and PB were well- regulatory framework for prompt the capitalized under corrective action. The following tables present the Corporation’s risk-based capital and leverage ratios at December 31, 2020 and 2019 under the Basel III regulatory guidance. Capital adequacy minimum requirement (including conservation capital buffer) Actual (Dollars in thousands) Amount Ratio Amount Ratio 2020 Total Capital (to Risk- Weighted Assets): Corporation BPPR PB Common Equity Tier I Capital (to Risk- Weighted Assets): Corporation BPPR PB Tier I Capital (to Risk- Weighted Assets): Corporation BPPR PB Tier I Capital (to Average Assets): Corporation BPPR PB $5,773,919 18.81% $3,223,720 2,388,394 4,226,887 18.58 776,975 1,283,332 17.34 10.500% 10.500 10.500 $4,992,096 16.26% $2,149,146 1,592,262 3,940,385 17.32 517,983 1,190,758 16.09 7.000% 7.000 7.000 $5,014,239 16.33% $2,609,678 1,933,461 3,940,385 17.32 628,980 1,190,758 16.09 8.500% 8.500 8.500 $5,014,239 7.80% $2,572,201 2,169,835 3,940,385 7.26 385,685 1,190,758 12.35 4% 4 4 126 POPULAR, INC. 2020 ANNUAL REPORT Note 21 - Other comprehensive income (loss) The following table presents changes in accumulated other comprehensive income (loss) by component for the years ended December 31, 2020, 2019 and 2018. Changes in Accumulated Other Comprehensive Income (Loss) by Component [1] (In thousands) Foreign currency translation Beginning Balance Other comprehensive loss Net change Ending balance Adjustment of pension and postretirement benefit plans Beginning Balance Other comprehensive loss before reclassifications Amounts reclassified from accumulated other comprehensive loss for amortization of net losses Amounts reclassified from accumulated other comprehensive loss for amortization of prior service credit Net change Ending balance Unrealized net holding gains (losses) on debt securities Beginning Balance Other comprehensive income (loss) before reclassifications Amounts reclassified from accumulated other comprehensive income (loss) for (gains) losses on securities Net change Ending balance Unrealized net holding gains on equity securities Beginning Balance Reclassification to retained earnings due to cumulative effect adjustment of accounting change Net change Ending balance Unrealized net losses on cash flow hedges Beginning Balance Reclassification to retained earnings due to cumulative effect adjustment of accounting change Other comprehensive (loss) income before reclassifications Amounts reclassified from accumulated other comprehensive loss Net change Ending balance Total [1] All amounts presented are net of tax. Years ended December 31, 2019 2020 2018 $ (56,783) $ (49,936) $ (43,034) (14,471) (14,471) (6,847) (6,847) (6,902) (6,902) $ (71,254) $ (56,783) $ (49,936) $(202,816) $(203,836) $(205,408) (5,645) (13,671) (9,453) 13,405 14,691 13,141 – 7,760 – 1,020 (2,116) 1,572 $(195,056) $(202,816) $(203,836) $ 92,155 $(173,811) $(102,775) 368,780 265,950 (71,036) (35) 16 – 368,745 265,966 (71,036) 92,155 $(173,811) $ $ $ $ $ 460,900 $ $ $ – – – – (2,494) – (6,400) 4,295 (2,105) $ $ $ – – – – (391) (50) (4,439) 2,386 (2,103) 605 (605) (605) – (40) – 326 (677) (351) (391) $ (4,599) $ (2,494) $ $ 189,991 $(169,938) $(427,974) POPULAR, INC. 2020 ANNUAL REPORT 127 The following table presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the years ended December 31, 2020, 2019, and 2018. Reclassifications Out of Accumulated Other Comprehensive Income (Loss) Years ended December 31, 2018 2019 2020 Affected Line Item in the Consolidated Statements of Operations (In thousands) Adjustment of pension and postretirement benefit plans Amortization of net losses Amortization of prior service credit Other operating expenses Other operating expenses Total before tax Income tax benefit Total net of tax Unrealized holding gains (losses) on debt securities Realized gain (loss) on sale of debt securities Net gain (loss) on sale of debt securities Unrealized net losses on cash flow hedges Forward contracts Interest rate swaps Total before tax Income tax (expense) benefit Total net of tax Mortgage banking activities Other operating income Total before tax Income tax benefit (expense) Total net of tax $(21,447) $(23,508) $(21,542) 3,470 – – (21,447) (23,508) (18,072) 8,042 8,817 7,047 $(13,405) $(14,691) $(11,025) $ $ 41 41 (6) $ (20) $ (20) 4 35 $ (16) $ – – – – $ (5,559) $ (3,992) $ 1,110 (820) 110 (6,379) (3,882) 2,084 1,496 – 1,110 (433) $ (4,295) $ (2,386) $ 677 Total reclassification adjustments, net of tax $(17,665) $(17,093) $(10,348) Note 22 - Guarantees The Corporation has obligations upon the occurrence of certain events under guarantees provided in certain contractual agreements as summarized below. financial If institutions, The Corporation issues financial standby letters of credit and has risk participation in standby letters of credit issued by in each case to guarantee the other financial performance of various customers to third parties. the customers failed to meet its financial or performance obligation to the third party under the terms of the contract, then, upon their request, the Corporation would be obligated to make the payment to the guaranteed party. At December 31, 2020, the Corporation recorded a liability of $0.2 million (December 31, 2019 - $0.3 million), which represents the unamortized balance of the obligations undertaken in issuing the guarantees under the standby letters of credit. In accordance with the provisions of ASC Topic 460, the Corporation recognizes at fair value the obligation at inception of the standby letters of credit. The fair value approximates the fee received from the customer for issuing such commitments. These fees are deferred and are the commitment period. The contracted recognized over amounts at credit December 31, 2020 and 2019, shown in Note 23, represent the maximum potential amount of the Corporation could be required to make under the guarantees in future payments that in standby outstanding letters of the event of nonperformance by the customers. These standby letters of credit are used by the customers as a credit enhancement and typically expire without being drawn upon. The Corporation’s standby letters of credit are generally secured, and in the event of nonperformance by the customers, the Corporation has to the underlying collateral provided, which normally includes cash, marketable securities, real estate, receivables, and others. Management does not anticipate any material losses related to these instruments. rights Also, from time to time, from time to time, the Corporation securitized mortgage loans into guaranteed mortgage-backed securities subject in certain instances, to lifetime credit recourse on the loans that serve as collateral for the mortgage-backed securities. The Corporation has not sold any mortgage loans subject to credit recourse since 2009. Also, the Corporation may sell, in bulk sale transactions, residential mortgage loans and Small Business Administration (“SBA”) commercial to credit recourse or to certain representations and warranties from the Corporation to the purchaser. These representations and warranties may relate, for example, to borrower creditworthiness, loan documentation, collateral, prepayment and early payment defaults. The Corporation may be required to repurchase the loans under the credit recourse agreements or representation and warranties. loans subject 128 POPULAR, INC. 2020 ANNUAL REPORT the recourse arrangements At December 31, 2020, the Corporation serviced $0.9 billion (December 31, 2019 - $1.2 billion) in residential mortgage loans subject to credit recourse provisions, principally loans associated with FNMA and FHLMC residential mortgage loan securitization programs. In the event of any customer default, pursuant to the credit recourse provided, the Corporation is required to repurchase the loan or reimburse the third party investor for the incurred loss. The maximum potential amount of future payments that the Corporation would be required to make under in the event of nonperformance by the borrowers is equivalent to the total outstanding balance of the residential mortgage loans serviced with recourse and interest, if applicable. During 2020, the Corporation repurchased approximately $161 million of unpaid to the credit principal balance in mortgage loans subject recourse provisions (2019 - $57 million). These included $120 million as part of the bulk loan repurchase from FNMA and FHLMC during the third quarter of 2020, for which the Corporation recorded a release of $5.1 million in its reserve for In the event of nonperformance by the credit borrower, to the underlying collateral securing the mortgage loan. The Corporation suffers losses on these loans when the proceeds from a foreclosure sale of the property underlying a defaulted mortgage loan are less than the outstanding principal balance of the loan plus any uncollected interest advanced and the costs of holding and disposing the related property. At December 31, 2020, the Corporation’s liability established to cover the estimated credit loss exposure related to loans sold or serviced with credit recourse amounted to $22 million (December 31, 2019 - $35 million). The following table shows the changes in the Corporation’s liability of estimated losses from these credit recourses agreements, included in the consolidated statements of financial condition during the years ended December 31, 2020 and 2019. the Corporation has recourse. rights (In thousands) Balance as of beginning of period Impact of adopting CECL Provision (reversal) for recourse liability Net charge-offs Years ended December 31, 2019 2020 $34,862 (3,831) (104) (8,443) $ 56,230 – 2,122 (23,490) liability is a function of the recourse arrangements given and considers a variety of factors, which include actual defaults and historical loss experience, foreclosure rate, estimated future defaults and the probability that a loan would be delinquent. Statistical methods are used to estimate the recourse liability. Expected loss rates are applied to different loan segmentations. The expected loss, which represents the amount expected to be lost on a given loan, considers the probability of default and loss the probability that a loan in good standing would become 90 days twelve-month period. following delinquent within the Regression analysis quantifies the relationship between the default event and loan-specific characteristics, including credit scores, loan-to-value ratios, and loan aging, among others. severity. The probability of default represents the loans characteristics When the Corporation sells or securitizes mortgage loans, it generally makes customary representations and warranties the regarding sold. The of Corporation’s mortgage operations in Puerto Rico group conforming mortgage loans into pools which are exchanged for FNMA and GNMA mortgage-backed securities, which are generally sold to private investors, or are sold directly to FNMA for cash. As required under the government agency programs, quality review procedures are performed by the Corporation to ensure that asset guideline qualifications are met. To the extent the loans do not meet specified characteristics, the Corporation may be required to repurchase such loans or indemnify for losses and bear any subsequent loss related to the loans. There were no repurchases under BPPR’s representation and warranty arrangements during the years ended December 31, 2020 and 2019. A substantial amount of reinstate to performing status or have mortgage insurance, and thus the ultimate losses on the loans are not deemed significant. these loans The During the second quarter of 2019, the Corporation recorded the release of a $4.4 million reserve taken in connection with a sale of loans completed during the year 2013. in the Corporation’s liability for estimated losses associated with the indemnifications and representations and warranties related to loans sold during the years ended December 31, 2020 and 2019. following presents changes table the Balance as of end of period $22,484 $ 34,862 (In thousands) The estimated losses to be absorbed under the credit recourse arrangements are recorded as a liability when the loans are sold and are updated by accruing or reversing expense (categorized in the line item “Adjustments (expense) to indemnity reserves on loans consolidated statements of operations) throughout the life of the loan, as information becomes necessary, when additional available. The methodology used to estimate the recourse relevant in the sold” Balance as of beginning of period Provision (reversal) for representation and warranties Net charge-offs Settlements paid Balance as of end of period Years ended December 31, 2019 2020 $3,212 $10,837 (915) – – (5,020) (75) (2,530) $2,297 $ 3,212 POPULAR, INC. 2020 ANNUAL REPORT 129 Servicing agreements relating to the mortgage-backed securities programs of FNMA and GNMA, and to mortgage loans sold or serviced to certain other investors, including FHLMC, require the Corporation to advance funds to make scheduled payments of principal, interest, taxes and insurance, if such payments have not been received from the borrowers. At December 31, 2020, the Corporation serviced $12.9 billion in mortgage loans for third-parties, including the loans serviced with credit recourse (December 31, 2019 - $14.8 billion). The Corporation generally recovers funds advanced pursuant to these arrangements from the mortgage owner, from liquidation proceeds when the mortgage loan is foreclosed or, in the case of FHA/VA loans, under the applicable FHA and VA insurance and guarantees programs. However, the Corporation must absorb the cost of the funds it advances during the time the advance is outstanding. The Corporation must also bear the costs of attempting to collect on delinquent and defaulted mortgage loans. In addition, if a defaulted loan is not cured, the mortgage loan would be canceled as part of the foreclosure proceedings and the Corporation would not receive any future servicing income with respect to that loan. At December 31, 2020, the outstanding balance of funds advanced such mortgage loan servicing by the Corporation under agreements was approximately $66 million (December 31, 2019 - $78 million). To the extent the mortgage loans underlying the Corporation’s increased delinquencies, the Corporation would be required to dedicate additional cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts. in the meantime, experience servicing portfolio guarantees Inc. Holding Company (“PIHC”) Popular, fully and certain borrowing obligations unconditionally issued by certain of its 100% owned consolidated subsidiaries amounting to $94 million at both December 31, 2020 and December 31, 2019, at both respectively. December 31, 2020 and December 31, 2019, PIHC fully and unconditionally guaranteed on a subordinated basis $374 million of capital securities (trust preferred securities) issued by wholly-owned issuing trust entities to the extent set forth in the applicable guarantee agreement. Refer to Note 17 to the consolidated financial statements for further information on the trust preferred securities. In addition, the financial needs of Note 23 - Commitments and contingencies Off-balance sheet risk The Corporation is a party to financial instruments with off- balance sheet credit risk in the normal course of business to its customers. These financial meet instruments include loan commitments, letters of credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. 130 POPULAR, INC. 2020 ANNUAL REPORT The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit and financial guarantees is represented by the contractual notional amounts of those instruments. The Corporation uses the same credit policies in making these commitments and conditional obligations as it does for those reflected on the consolidated statements of financial condition. Financial instruments with off-balance sheet credit risk, whose contract amounts represent potential credit risk as of the end of the periods presented were as follows: (In thousands) Commitments to extend credit: Credit card lines Commercial and construction December 31, 2020 December 31, 2019 $5,226,660 $4,889,694 lines of credit 3,805,459 3,205,306 Other consumer unused credit commitments Commercial letters of credit Standby letters of credit Commitments to originate or fund 257,312 1,864 22,266 262,516 2,629 75,186 mortgage loans 96,786 96,653 At December 31, 2020 and December 31, 2019, the Corporation maintained a reserve of approximately $16 million and $9 million, respectively, for potential losses associated with unfunded loan commitments related to commercial and consumer lines of credit. Other commitments the At December 31, 2020, Corporation’s also maintained other non-credit commitments for approximately $1.4 million and $2.5 million, respectively, primarily for the acquisition of other investments. and December 31, 2019, the and, residential Business concentration Since the Corporation’s business activities are concentrated primarily in Puerto Rico, its results of operations and financial condition are dependent upon the general trends of the Puerto and Rico economy in particular, commercial real estate markets. The concentration of the Corporation’s operations in Puerto Rico exposes it to greater risk than other banking companies with a wider geographic base. Its asset and revenue composition by geographical area is presented in Note 36 to the Consolidated Financial Statements. Puerto Rico remains in the midst of a profound fiscal and economic crisis. In response to such crisis, the U.S. Congress enacted the Puerto Rico Oversight Management and Economic Stability Act (“PROMESA”) in 2016, which, among other things, established a Fiscal Oversight and Management Board for Puerto Rico (the “Oversight Board”) and a framework for its the restructuring of the Commonwealth, the debts of of its instrumentalities have instrumentalities and municipalities. The Commonwealth and commenced debt several restructuring proceedings under PROMESA. As of the date of this report, while municipalities have been recently designated as covered entities under PROMESA, no municipality has commenced, or has been authorized by the Oversight Board to commence, any such debt restructuring proceeding under PROMESA. the At December 31, 2020 and December 31, 2019, Corporation’s direct exposure to the Puerto Rico government totaled $377 and its million and $432 million, respectively, which amounts were fully outstanding on such dates. Of this amount, $342 million consists of loans and $35 million are securities ($391 million instrumentalities and municipalities cases, these were “general obligations” of and $ 41 million at December 31, 2019). Substantially all of the amount outstanding at December 31, 2020 and December 31, 2019 were obligations from various Puerto Rico municipalities. In most a municipality, to which the applicable municipality has pledged its good faith, credit and unlimited taxing power, or “special to which the applicable obligations” of a municipality, municipality has pledged other revenues. At December 31, 2020, 74% of the Corporation’s exposure to municipal loans and securities was concentrated in the municipalities of San Juan, Guaynabo, Carolina and Bayamón. On July 1, 2020 and July 1, 2019 the Corporation received principal payments amounting to $58 million and $22 million, respectively, from various obligations from Puerto Rico municipalities. The following table details the loans and investments representing the Corporation’s direct exposure to the Puerto Rico government according to their maturities as of December 31, 2020: Investment Portfolio Loans Total Outstanding Total Exposure (In thousands) Central Government After 1 to 5 years After 5 to 10 years After 10 years Total Central Government Municipalities Within 1 year After 1 to 5 years After 5 to 10 years After 10 years Total Municipalities Total Direct Government Exposure a governmental In addition, at December 31, 2020, the Corporation had $317 million in loans insured or securities issued by Puerto Rico governmental entities but for which the principal source of repayment is non-governmental ($350 million at December 31, 2019). These included $260 million in residential mortgage loans insured by the Puerto Rico Housing Finance Authority (“HFA”), instrumentality that has been designated as a covered entity under PROMESA (December 31, 2019 - $276 million). These mortgage loans are secured by first mortgages on Puerto Rico residential properties and the HFA insurance covers losses in the event of a borrower default and conditions. The upon the Corporation also had at December 31, 2020, $46 million in bonds issued by HFA which are secured by second mortgage loans on Puerto Rico residential properties, and for which HFA also provides insurance to cover losses in the event of a borrower default and upon the satisfaction of certain other conditions (December 31, 2019 - $46 million). In the event that the mortgage loans insured by HFA and held by the Corporation directly or those serving as collateral for the HFA satisfaction of certain other $ 11 14 35 60 3,990 16,030 14,845 450 35,315 $ – – – – 17,147 133,445 120,935 70,478 342,005 $ 11 14 35 60 21,137 149,475 135,780 70,928 377,320 $ 11 14 35 60 21,137 149,475 135,780 70,928 377,320 $35,375 $342,005 $377,380 $377,380 bonds default and the collateral is insufficient to satisfy the outstanding balance of these loans, HFA’s ability to honor its insurance will depend, among other factors, on the financial condition of HFA at the time such obligations become due and payable. The Corporation does not consider the government guarantee when estimating the credit losses associated with this portfolio. Although the Governor is currently authorized by legislation to impose a temporary moratorium on the local financial obligations of the Governor has not the HFA, exercised this power as of the date hereof. In addition, at December 31, 2020, the Corporation had $11 million of commercial real estate notes issued by government entities but that are payable from rent paid by non-governmental parties (December 31, 2019 - $21 million). On January 1, 2020, the Corporation received a payment amounting to $7 million upon the maturity of securities issued by HFA which had been economically defeased and refunded and for which securities consisting of U.S. agencies and Treasury obligations had been escrowed (December 31, 2019 - $7 million). POPULAR, INC. 2020 ANNUAL REPORT 131 BPPR’s commercial loan portfolio also includes loans to private borrowers who are service providers, lessors, suppliers or have other relationships with the government. These borrowers could be negatively affected by the fiscal measures to be implemented to address the Commonwealth’s fiscal crisis and the ongoing Title III proceedings under PROMESA described above. Similarly, BPPR’s mortgage and consumer loan portfolios include loans to government employees which could also be negatively affected by fiscal measures such as employee layoffs or furloughs. In addition, $1.8 billion of residential mortgages, $1.3 billion of SBA loans under the PPP program and $60 million commercial loans were insured or guaranteed by the U.S. Government or its agencies at December 31, 2020 (compared to $1.1 billion, $0 and $66 million, respectively, at December 31, 2019). The Corporation has operations in the United States Virgin Islands (the “USVI”) and has approximately $105 million in direct exposure to USVI government entities. The USVI has been experiencing a number of fiscal and economic challenges that could adversely affect the ability of its public corporations and instrumentalities their outstanding debt obligations. to service The Corporation has operations in the British Virgin Islands (“BVI”), which has been negatively affected by the COVID-19 pandemic, particularly as a reduction in the tourism activity its economy. which accounts for a significant portion of Although the Corporation has no significant exposure to a single borrower in the BVI, it has a loan portfolio amounting to approximately $251 million comprised of various retail and commercial clients, including a loan of approximately $19 million with the government of the BVI. In certain cases, exposure to loss exists in excess of the accrual to the extent such loss is reasonably possible, but not probable. Management believes and estimates that the range of reasonably possible losses (with respect to those matters where such limits may be determined, in excess of amounts accrued) for current Legal Proceedings ranged from $0 to approximately $33.9 million as of December 31, 2020. In certain cases, management cannot reasonably estimate the possible loss at this time. Any estimate involves significant judgment, given the varying stages of the Legal Proceedings (including the fact that many of them are currently in preliminary stages), the existence of multiple defendants the current Legal Proceedings whose share of liability has yet to be determined, the Legal the numerous unresolved issues the various Proceedings, and the inherent uncertainty of potential outcomes of such Legal Proceedings. Accordingly, management’s estimate will change from time-to-time, and actual losses may be more or less than the current estimate. in several of in many of and available While the outcome of Legal Proceedings is inherently uncertain, based on information currently available, advice of counsel, coverage, management insurance believes that the amount it has already accrued is adequate and any incremental liability arising from the Legal Proceedings in matters in which a loss amount can be reasonably estimated will not have a material adverse effect on the Corporation’s consolidated financial position. However, in the event of unexpected future developments, it is possible that the ultimate resolution of these matters in a reporting period, if unfavorable, could have a material adverse effect on the Corporation’s consolidated financial position for that period. Set forth below is a description of the Corporation’s significant Legal Proceedings. Legal Proceedings The nature of Popular’s business ordinarily generates claims, litigation, investigations, and legal and administrative cases and proceedings (collectively, “Legal Proceedings”). When the Corporation determines that it has meritorious defenses to the claims asserted, it vigorously defends itself. The Corporation will consider the settlement of cases (including cases where it has meritorious defenses) when, in management’s judgment, it is in the best interest of the Corporation and its shareholders to do so. On at least a quarterly basis, Popular assesses its liabilities and contingencies relating to outstanding Legal Proceedings utilizing the most current information available. For matters where it is probable that the Corporation will incur a material loss and the amount can be reasonably estimated, the loss. Once Corporation establishes established, the accrual is adjusted on at least a quarterly basis to reflect any relevant developments, as appropriate. For matters where a material loss is not probable, or the amount of is the loss cannot be reasonably estimated, no accrual established. an accrual the for BANCO POPULAR DE PUERTO RICO Hazard Insurance Commission-Related Litigation Popular, Inc., BPPR and Popular Insurance, LLC (the “Popular Defendants”) have been named defendants in a class action complaint captioned Pérez Díaz v. Popular, Inc., et al, filed before the Court of First Instance, Arecibo Part. The complaint seeks damages and preliminary and permanent injunctive relief on behalf of the class against the Popular Defendants, as well as Antilles Insurance Company and MAPFRE-PRAICO Insurance Company (the “Defendant Insurance Companies”). Plaintiffs allege that the Popular Defendants have been unjustly enriched by failing to reimburse them for commissions paid by the Defendant Insurance Companies to the insurance agent and/or mortgagee for policy years when no claims were filed against the their reimbursement to the purported “class” of an estimated $400 “good experience” million plus interest, commissions allegedly paid by the Defendant Insurance time period, as well as Companies during the relevant injunctive relief seeking to enjoin the Defendant Insurance insurance policies. demand hazard They legal the for 132 POPULAR, INC. 2020 ANNUAL REPORT Companies from paying commissions to the insurance agent/ mortgagee and ordering them to pay those fees directly to the insured. A motion for dismissal on the merits filed by the Defendant Insurance Companies was denied with a right to replead following limited targeted discovery. Each of the Puerto Rico Court of Appeals and the Puerto Rico Supreme Court denied the Popular Defendants’ request to review the lower court’s denial of the motion to dismiss. In December 2017, plaintiffs amended the complaint, and, in January 2018, defendants filed an answer thereto. Separately, in October 2017, the Court entered an order whereby it broadly certified the class, after which the Popular Defendants filed a certiorari petition before the Puerto Rico Court of Appeals in relation to the class certification, which the Court declined to entertain. In November 2018 and in January 2019, plaintiffs filed voluntary against MAPFRE-PRAICO Insurance dismissal respectively, Company and Antilles leaving the Popular Defendants remaining defendants in the action. Insurance Company, as petitions sole the In April 2019, the Court amended the class definition to limit it to individual homeowners whose residential units were subject to a mortgage from BPPR who, in turn, obtained risk Insurance or MAPFRE insurance policies with Antilles Insurance through Popular Insurance from 2002 to 2015, and who did not make insurance claims against said policies during their effective term. The Court approved on September 24, 2020 the notice to the class, which is yet to be published, by Plaintiffs, and set the deadline for the filing of dispositive motions for May 2021, the Pre-Trial hearing for August 2021 and several dates for trial between the end of August and the beginning of October 2021. Expert discovery remains ongoing. Mortgage-Related Litigation and Claims BPPR has been named a defendant in a putative class action captioned Lilliam González Camacho, et al. v. Banco Popular de Puerto Rico, et al., filed before the United States District Court for the District of Puerto Rico on behalf of mortgage-holders who have allegedly been subjected to illegal foreclosures and/or loan modifications through their mortgage servicers. Plaintiffs maintain that when they sought to reduce their loan payments, defendants failed to provide them with such reduced loan payments, instead subjecting them to lengthy loss mitigation processes while filing foreclosure claims against them in parallel (or dual tracking). Plaintiffs assert that such actions violate the Home Affordable Modification Program (“HAMP”), the Home Affordable Refinance Program (“HARP”) and other federally sponsored loan modification programs, as well as the Puerto Rico Mortgage Debtor Assistance Act and the Truth in Lending Act (“TILA”). For the alleged violations stated above, plaintiffs request that all defendants (over 20, including all local banks) be held jointly and severally liable in an amount no less than $400 million. BPPR filed a motion to dismiss in August in March 2018, the 2017, as did most co-defendants, and, District Court dismissed the complaint in its entirety. After being denied reconsideration by the District Court, in August 2018, plaintiffs filed a Notice of Appeal to the U.S. Court of Appeals for the First Circuit. On July 21, 2020, the U.S. Court of Appeals for the First Circuit affirmed the District Court’s decision dismissing the complaint. On September 4, 2020, the Appellants filed a petition for rehearing and for rehearing en banc, which was denied on December 9, 2020. Proceedings before the First Circuit Court of Appeals have concluded, although Plaintiffs have until March 9, 2021 to seek certiorari review before the U.S. Supreme Court. BPPR has also been named a defendant in another putative class action captioned Yiries Josef Saad Maura v. Banco Popular, et al., filed by the same counsel who filed the González Camacho action referenced above, on behalf of residential customers of the defendant banks who have allegedly been subject to illegal foreclosures and/or loan modifications through their mortgage servicers. As in González Camacho, plaintiffs contend that when they sought to reduce their loan payments, defendants failed to provide them with such reduced loan payments, instead subjecting them to lengthy loss mitigation processes while filing foreclosure claims against them in parallel, all in violation of TILA, the Real Estate Settlement Procedures Act (“RESPA”), the Equal Credit Opportunity Act (“ECOA”), the Fair Credit Reporting Act (“FCRA”), the Fair Debt Collection Practices Act (“FDCPA”) and other consumer- protection laws and regulations. Plaintiffs did not include a specific amount of damages in their complaint. After waiving service of process, BPPR filed a motion to dismiss the complaint on the same grounds as those asserted in the González Camacho action (as did most co-defendants, separately). BPPR further filed a motion to oppose class certification, which the Court granted in September 2018. In April 2019, the Court entered an Opinion and Order granting BPPR’s and several other defendants’ motions to dismiss with prejudice. Plaintiffs filed a Motion for Reconsideration in April 2019, which Popular timely opposed. issued an Amended Opinion and Order dismissing plaintiffs’ claims against all defendants, denying the reconsideration requests and other pending motions, and issuing final judgment. In October 2019, plaintiffs filed a Motion for Reconsideration of the Court’s Amended Opinion and Order, which was denied in December 2019. On January 13, 2020, plaintiffs filed a Notice of Appeal to the U.S. Court of Appeals for the First Circuit. Plaintiffs filed their appeal brief on July 8, 2020, Appellees filed their brief on September 21, 2020, and Appellants filed their reply brief on January 21, 2021. The appeal is now fully briefed and pending resolution. In September 2019, the Court Insufficient Funds and Overdraft Fees Class Actions In February 2020, BPPR was served with a putative class action complaint captioned Soto-Melendez v. Banco Popular de Puerto filed before the United States District Court for the Rico, POPULAR, INC. 2020 ANNUAL REPORT 133 District of Puerto Rico. The complaint alleges breach of contract due to BPPR’s purported practice of (a) assessing more than one insufficient funds fee (“NSF Fees”) on the same “item” or transaction and (b) charging both NSF Fees and overdraft fees (“OD Fees”) on the same item or transaction, and is filed on behalf of all persons who during the applicable statute of limitations period were charged NSF Fees and/or OD Fees pursuant to these purported practices. In April 2020, BPPR filed a Motion to Dismiss in the case, which is now fully briefed and pending resolution. seeking damages, funds are held for settlement. Popular has been also named as a defendant on a putative class action complaint captioned Golden v. Popular, Inc. filed in March 2020 before the U.S. District Court for the Southern District of New York, restitution and injunctive relief. Plaintiff alleges breach of contract, violation of the covenant of good faith and fair dealing, unjust enrichment and violation of New York consumer protection law due to Popular’s purported practice of charging OD Fees on transactions that, under plaintiffs’ theory, do not overdraw the account. Plaintiff describes Popular’s purported practice of charging OD Fees as “Authorize Positive, Purportedly Settle Negative Transactions” (“APPSN”) and states that Popular assesses OD Fees over authorized transactions for which sufficient In August 2020, Popular filed a Motion to Dismiss on several grounds, including failure to state a claim against Popular, Inc. and improper venue. On October 2, 2020, Plaintiffs filed a Notice of Voluntary Dismissal before the U.S. District Court for the Southern District of New York and, on that same date, filed an identical complaint in the U.S. District Court for the District of the Virgin Islands against Popular, Inc., Popular Bank and BPPR. On October 27, 2020, a Motion to Dismiss was filed on behalf of Popular, Inc. and Popular Bank, arguing failure to state a claim and lack of minimum contacts of such parties with the U.S.V.I. district court jurisdiction. On November 23, 2020, Plaintiffs filed a Notice of Voluntary Dismissal against Popular, Inc. and Popular Bank following the Motion to Dismiss. Banco Popular de Puerto Rico, the only defendant remaining in the case, was served with process on November 13, 2020 and filed a Motion to Dismiss on January 4, 2021. Plaintiff opposed to such Motion to Dismiss on February 8, 2021 and BPPR expects to reply on or before March 8, 2021. (the “Lenders”) proceeding Other Proceedings In June 2017, a syndicate comprised of BPPR and other local filed an involuntary Chapter 11 banks bankruptcy and against Betteroads Asphalt Betterecycling Corporation (the “Involuntary Debtors”). This filing followed attempts by the Lenders to restructure and resolve the Involuntary Debtors’ obligations and outstanding defaults under a certain credit agreement, first through good faith negotiations and subsequently, through the filing of a collection action against the Involuntary Debtors in local court. 134 POPULAR, INC. 2020 ANNUAL REPORT subsequently Involuntary Debtors The counterclaimed, asserting damages in excess of $900 million. The Lenders ultimately joined in the commencement of these involuntary bankruptcy proceedings against to preserve and recover the Involuntary Debtors’ assets, having confirmed that the Involuntary Debtors were transferring assets out of their estate for little or no consideration. the Debtors in order The Involuntary Debtors filed a motion to dismiss the proceedings and for damages against the syndicate, arguing both that this petition was filed in bad faith and that there was a bona fide dispute as to the petitioners’ claims, as set forth in the counterclaim filed by the Involuntary Debtors in local court. After the Court held hearings in June and July 2019 to consider whether the involuntary petitions were filed in bad faith, that is, for an improper purpose that constitutes an abuse of the bankruptcy process in October 2019, the Court entered an Opinion and Order determining that the involuntary petitions were not filed in bad faith and issued an order for relief under the U.S. Bankruptcy Code granting the Chapter 11 of involuntary petitions. In October 2019, the debtors filed a Notice of Appeal to the U.S. District Court. On November 30, 2020, the U.S. District Court issued an opinion affirming the order for relief issued by the Bankruptcy Court under Chapter 11 of the U.S. Bankruptcy Code granting the involuntary petitions. On January 2, 2021, Debtors filed a Notice of Appeal from this decision before the U.S. Court of Appeals for the First Circuit. The Court of Appeals has not yet set a briefing schedule. In February 2020, the Debtors initiated an adversary proceeding seeking in excess of $80 million in damages, alleging that in 2016 the Lenders illegally foreclosed on their accounts receivable and as a result illegally interfered with contracts entered with third parties, forcing the Debtors into bankruptcy. Debtors further seek a judgment declaring that Lenders do not possess security interests over certain personal property of the Debtors because either such security interests were not adequately perfected according to Puerto Rico law, or the security interests were lost upon the lapsing date of the financing statements that the Lenders had originally perfected in connection with such interests. Debtors amended their adversary complaint to include references to the Lenders’ Syndicate and Banco Popular’s proof of claims and formally object to such proof of claims, as well as to demand that the the Bankruptcy Court, entertains the District Court, not complaint, requesting trial by jury on all counts. Lenders filed a Motion to dismiss in June 2020. On September 18, 2020, the Court granted the parties an extension of all pending deadlines for 30 days in furtherance of settlement negotiations, and, thereafter, the Court has granted, at the request of the parties, multiple additional 30-day extensions to continue settlement conversations. Parties now have until the result of such March 19, 2021 to inform the Court negotiations. the parties for local and state POPULAR BANK Employment-Related Litigation In July 2019, Popular Bank (“PB”) was served in a putative class complaint in which it was named as a defendant along with five (5) current PB employees (collectively, the “AB Defendants”), captioned Aileen Betances, et al. v. Popular Bank, et al., filed before the Supreme Court of the State of New York (the “AB Action”). The complaint, filed by five (5) current and former PB employees, seeks to recover damages for the AB Defendants’ alleged violation of sexual harassment, discrimination and retaliation laws. Additionally, in July 2019, PB was served in a putative class complaint in which it was named as a defendant along with six (6) current PB employees (collectively, the “DR Defendants”), captioned Damian Reyes, et al. v. Popular Bank, et al., filed before the Supreme Court of the State of New York (the “DR Action”). The DR Action, filed by three (3) current and former PB employees, seeks to recover damages for the DR Defendants’ alleged violation of local and state discrimination and retaliation laws. Plaintiffs in both complaints are represented by the same legal counsel, and five of the six named individual defendants in the DR Action are the same named individual defendants in the AB Action. Both complaints are related, among other things, to allegations of purported sexual harassment and/or misconduct by a former PB employee as well as PB’s actions in connection thereto and seek no less than $100 million in damages each. In October 2019, PB and the other defendants filed several Motions to Dismiss. Plaintiffs opposed the motions in December 2019 and PB and the other defendants replied in January 2020. In July 2020, a hearing to discuss the motions to dismiss filed by PB in both actions was held, at which the Court dismissed one of the causes of action included by plaintiffs in the AB Action and ordered the parties to submit a copy of the court reporter’s transcript. The parties submitted a copy of the court reporter’s transcript in August 2020 and the motions to dismiss are pending resolution. POPULAR SECURITIES Puerto Rico Bonds and Closed-End Investment Funds The volatility in prices and declines in value that Puerto Rico municipal bonds and closed-end investment companies that invest primarily in Puerto Rico municipal bonds have experienced since August 2013 have led to regulatory inquiries, customer complaints and arbitrations for most broker-dealers in Puerto Rico, including Popular Securities. Popular Securities has received customer complaints and, as of December 31, 2020, is named as a respondent (among other broker-dealers) in 137 pending arbitration proceedings with aggregate claimed amounts of including one arbitration with claimed damages of approximately $30 million. While Popular Securities believes it has meritorious defenses to it has often the claims asserted in these proceedings, determined that it is in its best interest to settle certain claims approximately $141 million, rather than expend the money and resources required to see such cases to completion. The Puerto Rico Government’s defaults and non-payment of its various debt obligations, as well as the Commonwealth’s and the Financial Oversight Management Board’s (the “Oversight Board”) decision to pursue restructurings under Title III and Title VI of PROMESA, have impacted the number of customer complaints (and claimed damages) filed against Popular Securities concerning Puerto Rico bonds and closed-end investment companies that invest primarily in Puerto Rico bonds. An adverse result in the arbitration proceedings described above, or a significant increase in customer complaints, could have a material adverse effect on Popular. PROMESA Title III Proceedings In 2017, the Oversight Board engaged the law firm of Kobre & Kim to carry out an independent investigation on behalf of the Oversight Board regarding, among other things, the causes of Inc., BPPR and the Puerto Rico financial crisis. Popular, Popular Securities (collectively, the “Popular Companies”) were served by, and cooperated with, the Oversight Board in connection with requests for the preservation and voluntary production of certain documents and witnesses with respect to Kobre & Kim’s independent investigation. On August 20, 2018, Kobre & Kim issued its Final Report, which contained various references to the Popular Companies, including an allegation that Popular Securities participated as an underwriter in the Commonwealth’s 2014 issuance of government obligation bonds notwithstanding having allegedly advised against it. The report noted that such allegation could give rise to an unjust enrichment claim against the Corporation and could also serve as a basis to equitably subordinate claims filed by the Corporation in the Title III proceeding to other third-party claims. filed various avoidance, After the publication of the Final Report, the Oversight Board created a special claims committee (“SCC”) and, before the end of the applicable two-year statute of limitations for the filing of such claims pursuant to the U.S. Bankruptcy Code, the SCC, along with the Commonwealth’s Unsecured Creditors’ fraudulent (“UCC”), Committee third parties, transfer and other claims against including government vendors and financial institutions and other professionals involved in bond issuances being challenged as invalid by the SCC and the UCC. The Popular Companies, the SCC and the UCC have entered into a tolling agreement with respect to potential claims the SCC and the UCC, on behalf of the Commonwealth or other Title III debtors, may assert against the Popular Companies for the avoidance and recovery of payments and/or transfers made to the Popular Companies or as a result of any role of the Popular Companies in the offering of the aforementioned challenged bond issuances. POPULAR, INC. 2020 ANNUAL REPORT 135 Note 24 – Non-consolidated variable interest entities The Corporation is involved with three statutory trusts which it established to issue trust preferred securities to the public. These trusts are deemed to be variable interest entities (“VIEs”) since the equity investors at risk have no substantial decision- making rights. The Corporation does not hold any variable in the trusts, and therefore, cannot be the trusts’ interest primary beneficiary. Furthermore, the Corporation concluded that it did not hold a controlling financial interest in these trusts since the decisions of the trusts are predetermined through the trust documents and the guarantee of the trust preferred securities is irrelevant since in substance the sponsor is guaranteeing its own debt. Also, the Corporation is involved with various special purpose entities mainly in guaranteed mortgage securitization transactions, including GNMA and FNMA. These special purpose entities are deemed to be VIEs since they lack equity investments at risk. The Corporation’s continuing involvement includes owning in these guaranteed loan securitizations certain beneficial interests in the form of securities as well as the servicing rights retained. The Corporation is not required to provide additional financial support to any of the variable interest entities to which it has transferred the financial assets. The mortgage-backed securities, to the extent retained, are classified in the Corporation’s Consolidated Statements of Financial Condition as available-for-sale or trading securities. these entities The Corporation concluded that, essentially, (FNMA and GNMA) control the design of their respective VIEs, dictate the quality and nature of the collateral, require the underlying insurance, set the servicing standards via the servicing guides and can change them at will, and can remove a primary servicer with cause, and without cause in the case of FNMA. Moreover, through their guarantee obligations, agencies (FNMA and GNMA) have the obligation to absorb losses that could be potentially significant to the VIE. The Corporation holds variable interests in these VIEs in the form of agency mortgage-backed securities and collateralized mortgage obligations, including those securities originated by the Corporation and those acquired from third parties. Additionally, the Corporation holds agency mortgage-backed securities and agency collateralized mortgage obligations issued by third party VIEs in which it has no other form of continuing involvement. Refer to Note 27 to the Consolidated Financial Statements for additional information on the debt securities outstanding at December 31, 2020 and 2019, which are classified as available-for-sale and trading securities in the Corporation’s Consolidated Statements of Financial Condition. In addition, the Corporation holds variable interests in the form of servicing fees, since it retains the right to service the transferred loans in those government-sponsored special purpose entities (“SPEs”) and may also purchase the right to service loans in other government-sponsored SPEs that were transferred to those SPEs by a third-party. 136 POPULAR, INC. 2020 ANNUAL REPORT The following table presents the carrying amount and classification of the assets related to the Corporation’s variable interests in non-consolidated VIEs and the maximum exposure to loss as a result of the Corporation’s involvement as servicer of GNMA and FNMA loans at December 31, 2020 and 2019. (In thousands) Assets Servicing assets: Mortgage servicing rights Total servicing assets Other assets: Servicing advances Total other assets Total assets Maximum exposure to loss December 31, 2020 December 31, 2019 $90,273 $90,273 $ 8,769 $ 8,769 $99,042 $99,042 $115,718 $115,718 $ 29,212 $ 29,212 $144,930 $144,930 The size of in which the the non-consolidated VIEs, Corporation has a variable interest in the form of servicing fees, measured as the total unpaid principal balance of the loans, amounted to $8.7 billion at December 31, 2020 (December 31, 2019 - $9.9 billion). The Corporation determined that the maximum exposure to loss includes the fair value of the MSRs and the assumption that the servicing advances at December 31, 2020 and 2019 will not be recovered. The agency debt securities are not included as part of the maximum exposure to loss since they are guaranteed by the related agencies. should be made to determine whether ASU 2009-17 requires that an ongoing primary beneficiary the assessment Corporation is the primary beneficiary of any of the VIEs it is involved with. The conclusion on the assessment of these non- consolidated VIEs has not changed since their initial evaluation. The Corporation concluded that it is still not the primary beneficiary of these VIEs, and therefore, these VIEs are not required to be consolidated in the Corporation’s financial statements at December 31, 2020. Note 25 - Derivative instruments and hedging activities The use of derivatives the incorporated as part of is Corporation’s overall interest rate risk management strategy to minimize significant unplanned fluctuations in earnings and cash flows that are caused by interest rate volatility. The Corporation’s goal is to manage interest rate sensitivity by modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities so that the net interest income is not materially affected by movements in interest rates. The Corporation uses derivatives in its trading activities to facilitate customer transactions, and as a means of risk management. As a result of interest rate fluctuations, hedged fixed and variable interest rate assets and liabilities will appreciate or depreciate in fair value. The effect of this unrealized appreciation or depreciation is expected to be substantially offset by the Corporation’s gains or losses on the derivative instruments that are linked to these hedged assets and liabilities. As a matter of policy, the Corporation does not use highly leveraged derivative instruments for interest rate risk management. Market risk is the adverse effect that a change in interest rates, currency exchange rates, or implied volatility rates might have on the value of a financial instrument. The Corporation manages the market risk associated with interest rates and, to a limited extent, with fluctuations in foreign currency exchange rates by establishing and monitoring limits for the types and degree of risk that may be undertaken. the fair value of By using derivative instruments, the Corporation exposes itself to credit and market risk. If a counterparty fails to fulfill its performance obligations under a derivative contract, the Corporation’s credit risk will equal the derivative asset. Generally, when the fair value of a derivative contract is positive, this indicates that the counterparty owes risk for the the Corporation, Corporation. To manage the risk, the Corporation deals with counterparties of good credit standing, enters into master netting agreements whenever possible and, when appropriate, obtains collateral. On the other hand, when the fair value of a derivative contract the Corporation owes the counterparty and, therefore, the fair thus creating a repayment is negative, level of credit value of derivatives liabilities incorporates nonperformance risk or the risk that the obligation will not be fulfilled. as to the risk The credit attributed required by the counterparty’s nonperformance risk is incorporated in the fair value of the derivatives. Additionally, fair value measurements guidance, the fair value of the Corporation’s own credit standing is considered in the fair value of the derivative liabilities. During the year ended December 31, 2020, inclusion of the credit risk in the fair value of the derivatives resulted in a gain of $0.7 million from the Corporation’s credit standing adjustment. During the years ended December 31, 2019 and 2018, the Corporation recognized a gain of $0.2 million and a loss of $0.6 million, respectively, from the Corporation’s credit standing adjustment. The Corporation’s derivatives are subject to agreements which allow a right of set-off with each respective counterparty. In an event of default each party has a right of set-off against the other party for amounts owed in the related agreement and any other amount or obligation owed in respect of any other agreement or transaction between them. Pursuant to the Corporation’s accounting policy, the fair value of derivatives is not offset with the fair value of other derivatives held with the same counterparty even if these agreements allow a right of set- off. In addition, the fair value of derivatives is not offset with the amounts for the right to reclaim financial collateral or the obligation to return financial collateral. Financial instruments designated as cash flow hedges or non-hedging derivatives outstanding at December 31, 2020 and 2019 were as follows: Notional amount Derivative assets Derivative liabilities At December 31, 2019 2020 Statement of condition classification Fair value at December 31, 2019 2020 Statement of condition classification Fair value at December 31, 2019 2020 (In thousands) Derivatives designated as hedging instruments: Forward contracts Total derivatives designated as hedging instruments $188,800 $ 97,600 $188,800 $ 97,600 Other assets $ $ – – $ $ 32 Other liabilities $ 1,267 32 $ 1,267 $ $ 264 264 Derivatives not designated as hedging instruments: Interest rate caps Indexed options on deposits 29,248 69,054 169,962 Other assets 69,354 Other assets – 20,785 Bifurcated embedded options 63,121 66,755 – – 17,933 1 Other liabilities – Interest bearing deposits – Total derivatives not designated as hedging instruments $161,423 $306,071 Total derivative assets and liabilities $350,223 $403,671 $20,785 $17,934 $20,785 $17,966 – – 1 – 17,658 16,354 $17,658 $16,355 $18,925 $16,619 POPULAR, INC. 2020 ANNUAL REPORT 137 Cash Flow Hedges The Corporation utilizes forward contracts to hedge the sale of mortgage-backed securities with duration terms over one month. Interest rate forwards are contracts for the delayed delivery of securities, which the seller agrees to deliver on a specified future date at a specified price or yield. These forward contracts are hedging a forecasted transaction and thus qualify for cash flow hedge accounting. Changes in the fair value of the derivatives are recorded in other comprehensive income (loss). The amount included in accumulated other comprehensive income (loss) corresponding to these forward contracts is expected to be reclassified to earnings in the next twelve months. These contracts have a maximum remaining maturity of 77 days at December 31, 2020. For cash flow hedges, net gains (losses) on derivative contracts that are reclassified from accumulated other comprehensive income (loss) to current period earnings are included in the line item in which the hedged item is recorded and during the period in which the forecasted transaction impacts earnings, as presented in the tables below. Year ended December 31, 2020 Amount of net gain (loss) recognized in OCI on derivatives (effective portion) $(6,594) $(6,594) (In thousands) Forward contracts Total Classification in the statement of operations of the net gain (loss) reclassified from AOCI into income (effective portion and ineffective portion) Mortgage banking activities Amount of net gain (loss) reclassified from AOCI into income (effective portion) Amount of net gain (loss) recognized in income on derivatives (ineffective portion) $(5,559) $(5,559) $– $– Year ended December 31, 2019 Amount of net gain (loss) recognized in OCI on derivatives (effective portion) $(3,502) $(3,502) Classification in the statement of operations of the net gain (loss) reclassified from AOCI into income (effective portion and ineffective portion) Mortgage banking activities Amount of net gain (loss) reclassified from AOCI into income (effective portion) Amount of net gain (loss) recognized in income on derivatives (ineffective portion) $(3,992) $(3,992) $– $– (In thousands) Forward contracts Total Year ended December 31, 2018 Amount of net gain (loss) recognized in OCI on derivatives (effective portion) $536 $536 (In thousands) Forward contracts Total Classification in the statement of operations of the net gain (loss) reclassified from AOCI into income (effective portion and ineffective portion) Mortgage banking activities Amount of net gain (loss) reclassified from AOCI into income (effective portion) Amount of net gain (loss) recognized in income on derivatives (ineffective portion) $1,202 $1,202 $(92) $(92) Fair Value Hedges At December 31, 2020 and 2019, there were no derivatives designated as fair value hedges. 138 POPULAR, INC. 2020 ANNUAL REPORT Non-Hedging Activities For the year ended December 31, 2020, the Corporation recognized a loss of $3.0 million (2019 – loss of $ 1.2 million; 2018 – gain of $ 1.3 million) related to its non-hedging derivatives, as detailed in the table below. (In thousands) Forward contracts Interest rate caps Indexed options on deposits Bifurcated embedded options Total Amount of Net Gain (Loss) Recognized in Income on Derivatives Classification of Net Gain (Loss) Recognized in Income on Derivatives Year ended December 31, 2020 Year ended December 31, 2019 Year ended December 31, 2018 Mortgage banking activities Other operating income Interest expense Interest expense $(5,027) – 5,462 (3,417) $(2,982) $(2,254) (5) 7,898 (6,883) $(1,244) $1,213 (4) 114 (50) $1,273 Forward Contracts The Corporation has forward contracts to sell mortgage-backed securities, which are accounted for as trading derivatives. Changes in their fair value are recognized in mortgage banking activities. Interest Rate Caps The Corporation enters an intermediary on behalf of its customers and simultaneously takes offsetting positions under the same terms and conditions, thus minimizing its market and credit risks. into interest caps rate as Indexed and Embedded Options The Corporation offers certain customers’ deposits whose return are tied to the performance of the Standard and Poor’s (“S&P 500”) stock market indexes, and other deposits whose returns are tied to other stock market indexes or other equity securities performance. The Corporation bifurcated the related options embedded within these customers’ deposits from the host contract in accordance with ASC Subtopic 815-15. In order to limit the Corporation’s exposure to changes in these indexes, the Corporation purchases indexed options which returns are tied to the same indexes from major broker dealer companies in the over the counter market. Accordingly, the embedded options and the related indexed options are marked-to-market through earnings. Note 26 - Related party transactions The Corporation grants loans to its directors, executive officers, including certain related individuals or organizations, and affiliates in the ordinary course of business. The activity and balance of these loans were as follows: (In thousands) Balance at December 31, 2018 New loans Payments Other changes, including existing loans to new related parties Balance at December 31, 2019 New loans Payments Other changes, including existing loans to new related parties Balance at December 31, 2020 $133,319 1,491 (1,800) 44 $133,054 8,360 (16,839) 316 $124,891 New loans and payments include disbursements and collections from existing lines of credit. The Corporation has had loan transactions with the Corporation’s directors, executive officers, including certain related individuals or organizations, and affiliates, and proposes to continue such transactions in the ordinary course of its business, on substantially the same terms, including interest rates and collateral, as those prevailing for comparable loan transactions with third parties. Except as discussed below, the extensions of credit have not involved and do not currently involve more than normal risks of collection or present other unfavorable features. In addition, during 2020, in response to the coronavirus (COVID-19) pandemic, BPPR implemented loan payment moratorium programs with respect to consumer and commercial loans which were made available to all qualifying customers to provide financial relief during the pandemic. Certain Related Parties participated in this moratorium programs under the same terms and conditions offered to other unrelated third parties. In June 2006, family members of a director of the Corporation, obtained a $0.8 million mortgage loan from Popular Mortgage, Inc., now a division of BPPR, secured by a residential property. The director was not a director of the Corporation at the time the loan was made. In March, 2012 the loan was restructured under BPPR’s loss mitigation program. the borrower defaulted on his payment During 2017, POPULAR, INC. 2020 ANNUAL REPORT 139 obligations under the restructured loan and as of December 31, 2018 the loan was 670 days past due. On October 2019, the Corporation completed a short sale of this loan which resulted in a charge-off of $0.4 million. In 2010, as part of the Westernbank FDIC assisted transaction, BPPR acquired five commercial loans made to entities that were wholly owned by one brother-in-law of a director of the Corporation. The loans were secured by real estate and personally guaranteed by the director’s brother-in- law. The loans were originated by Westernbank between 2001 and 2005 and had an aggregate outstanding principal balance of approximately $33.5 million when they were acquired by BPPR in 2010. Between 2011 and 2014, the loans were restructured to consist of (i) five notes with an aggregate outstanding principal balance of $19.8 million with a 6% annual interest rate (“Notes A”) and (ii) five notes with an aggregate outstanding balance of $13.5 million with a 1% annual interest rate, to be paid upon maturity (“Notes B”). The restructured notes had an original maturity of September 30, 2016 and, thereafter, various interim renewals were approved to allow for the re-negotiation of a longer-term extension. The most these interim renewals were approved on February, April and August 2020. These renewals, among other things, decreased the interest rate applicable to the Notes A to 4.25% and maintained the Notes B at an interest rate of 1%. During 2020, the Audit Committee also authorized two separate 90-day principal and interest moratoriums, from March to May and from June to August, as financial relief in response to the coronavirus (COVID-19) pandemic. On September 2020, in accordance with the Related Party Transaction Policy and after being approved by the Audit Committee, facilities was extended until April 2022, fixing the interest rate at 4.25% for Notes A and at 1% for Notes B during such term. The aggregate outstanding balance on the loans as of December 31, 2020 was approximately $31.4 million, of which approximately $17.9 million corresponded to Notes A and $13.5 million to Notes B. the maturity date of the credit recent of The brother of an executive officer of the Corporation and his wife have three outstanding loans, each secured by the borrowers’ principal residence, where BPPR acts as either lender or servicer. The aggregate original amount of these loans was of $0.7 million, comprised of one mortgage loan of approximately $0.5 million, which is owned by a third-party investor and in which BPPR is the servicer, one mortgage loan of $0.1 million secured by a second mortgage and another mortgage loan of $0.1 million secured by a third mortgage. The borrowers entered into default with their respective obligations under all of these loan agreements. In February 2019, and pursuant to the terms of the Related Party Policy, the Audit Committee approved a series of transactions related to the aforementioned mortgages. With respect to the first mortgage, on February 2020, the parties entered into a deed in lieu of foreclosure pursuant to which the property was transferred to the investor free and clear of liens, resulting in the cancellation 140 POPULAR, INC. 2020 ANNUAL REPORT of the first mortgage loan. In connection therewith, BPPR released the second and third mortgages over the residential property. As part of the transaction, the borrowers made a cash contribution of $30 thousand to reduce the principal amount of the second mortgage loan and issue, for the benefit of BPPR, a promissory note in the amount of $82 thousand in order to grant BPPR the right to collect from borrowers the balance of the debt. The borrowers are required to make monthly payments of approximately $1 thousand until the maturity date of this unsecured promissory note. During 2020, the borrowers did not make payments on this promissory note. With respect to the third mortgage BPPR is currently negotiating with the borrower to establish a repayment plan in connection with the $92 thousand outstanding balance of such third mortgage. In April 2010, in connection with the acquisition of the Westernbank assets from the FDIC, as receiver, BPPR acquired a term loan to a corporate borrower partially owned by an investment corporation in which the Corporation’s Chairman, at that time the Chief Executive Officer, as well as certain of his family members, are the owners. In addition, the Chairman’s sister and brother-in-law are owners of an entity that holds an ownership interest in the borrower. At the time the loan was acquired by BPPR, it had an unpaid principal balance of $40.2 million. In May 2017, this loan was sold by BPPR to Popular, Inc., holding company (“PIHC”). At the time of sale, the loan had an unpaid principal balance of $37.9 million. PIHC paid $37.9 million to BPPR for the loan, of which $6.0 million was recognized by BPPR as a capital contribution representing the difference between the fair value and the book value of the loan at the time of transfer. Immediately upon being acquired by PIHC, the loan’s maturity was extended by 90 days (under the same terms as originally contracted) to provide the PIHC additional time to evaluate a refinancing or long-term extension of the loan. In August 2017, the credit facility was refinanced with a stated maturity in February 2019. During 2017, the facility was subject to the loan payment moratorium offered as part of the hurricane relief efforts. As such, interest payments amounting to approximately $0.5 million were deferred and capitalized as part of the loan balance. In February 2019, the Audit Committee approved, under the Related Party Policy, a 36-month renewal of the loan at an interest rate of 5.75% and a 30-year amortization schedule. As of December 31, 2020, the unpaid principal balance amounted to $36.6 million. In April 2010, a private trust and a sister-in-law of a director, as co-borrowers, obtained a $0.2 million mortgage loan from Popular Mortgage, then a subsidiary of BPPR, secured by a residential property. The loan was a fully amortizing 40-year mortgage loan with a fixed annual rate of 2.99% for the first 5 years, and thereafter an annual rate of 5.875%. From March to August 2020, the borrowers participated in the COVID-19 forbearance program offered by BPPR to qualifying mortgage customers in response to the coronavirus (COVID-19) pandemic. After the expiration of such moratorium period, borrowers did not make any payments under the loan during the months of September and October 2020, thereby defaulting on the indebtedness. On November 2020, the borrowers requested and were granted, an additional 3-month loan payment moratorium pursuant to BPPR’s ordinary course loss mitigation program, which expired in January 2021. Since the expiration of this 3-month loan payment forbearance the borrowers have failed to make the monthly loan payments when due. The outstanding balance of the loan as of December 31, 2020 was approximately $0.2 million. association with the Corporation. Management believes the terms of such arrangements are consistent with arrangements entered into with independent third parties. For the year ended December 31, 2020, the Corporation made contributions of approximately $1.6 million to Fundación Banco Popular and Popular Bank Foundation, which are not- for-profit corporations dedicated to philanthropic work (2019 - $1.1 million). The Corporation also provided human and operational resources to support the activities of the Fundación Banco Popular which in 2020 amounted to approximately $1.4 million (2019- $1.4 million). In August 2018, BPPR acquired certain assets and assumed certain liabilities of Reliable Financial Services and Reliable Finance Holding Company, Puerto Rico-based subsidiaries of Wells Fargo & Company engaged in the auto finance business in Puerto Rico. As part of the acquisition transaction, the Corporation entered into an agreement with Reliable Financial Services to sublease the space necessary to continue the acquired operations. Reliable Financial Services’ underlying lease agreement was with an entity in which the Chairman of the Corporation’s Board and his family members hold an ownership interest, described in the preceding paragraph as having a loan with the Corporation. This lease expired on April 30, 2019 pursuant the Corporation paid to Reliable Financial Services approximately $0.5 million under the sublease. 31, 2020, the Corporation’s banking subsidiaries held deposits from related parties, excluding EVERTEC, Inc. (“EVERTEC”) amounting to $851 million (2019 - $576 million). to its terms. During 2019, At December From time to time, the Corporation, in the ordinary course of business, obtains services from related parties that have some in EVERTEC, various processing Related party transactions with EVERTEC, as an affiliate Inc. The Corporation has an investment and (“EVERTEC”), which provides information technology services to the Corporation and its subsidiaries and gives BPPR access to the ATH network owned and operated by EVERTEC. As of December 31, 2020, the Corporation’s stake in EVERTEC was 16.16%.The Corporation continues influence over EVERTEC. Accordingly, the investment in EVERTEC is accounted for under the equity method and is evaluated for impairment if events or circumstances indicate that a decrease in value of the investment has occurred that is other than temporary. to have significant The Corporation received $2.3 million in dividend distributions during the year ended December 31, 2020 from its investments in EVERTEC’s holding company (December 31, 2019 - $2.3 million). The Corporation’s equity in EVERTEC is presented in the table which follows and is included as part of “other assets” in the consolidated statement of financial condition. (In thousands) Equity investment in EVERTEC December 31, 2020 December 31, 2019 $86,158 $73,534 The Corporation had the following financial condition balances outstanding with EVERTEC at December 31, 2020 and December 31, 2019. Items that represent liabilities to the Corporation are presented with parenthesis. (In thousands) Accounts receivable (Other assets) Deposits Accounts payable (Other liabilities) Net total December 31, 2020 December 31, 2019 $ 5,678 (125,361) (2,395) $(122,078) $ 7,779 (63,850) (1,290) $(57,361) POPULAR, INC. 2020 ANNUAL REPORT 141 The Corporation’s proportionate share of income from EVERTEC is included in other operating income in the consolidated statements of operations. The following table presents the Corporation’s proportionate share of EVERTEC’s income and changes in stockholders’ equity for the years ended December 31, 2020, 2019 and 2018. (In thousands) Share of income from investment in EVERTEC Share of other changes in EVERTEC’s stockholders’ equity Share of EVERTEC’s changes in equity recognized in income Years ended December 31, 2018 2019 2020 $16,936 865 $16,749 516 $13,892 1,659 $17,801 $17,265 $15,551 The following tables present the impact of transactions and service payments between the Corporation and EVERTEC (as an affiliate) and their impact on the results of operations for the years ended December 31, 2020, 2019 and 2018. Items that represent expenses to the Corporation are presented with parenthesis. (In thousands) Years ended December 31, 2019 2018 2020 Category Interest expense on deposits ATH and credit cards interchange income from services to EVERTEC Rental income charged to EVERTEC Fees on services provided by EVERTEC Other services provided to EVERTEC $ (315) $ (106) $ 22,406 7,305 (223,069) 1,002 29,224 7,418 (219,992) 1,118 (79) 33,658 7,271 (174,048) Interest expense Other service fees Net occupancy Professional fees 1,059 Other operating expenses Total $(192,671) $(182,338) $(132,139) Centro Financiero BHD León At December 31, 2020, the Corporation had a 15.84% equity interest in Centro Financiero BHD León, S.A. (“BHD León”), one of the largest banking and financial services groups in the Dominican Republic. During the year ended December 31, 2020, the Corporation recorded $27.0 million in earnings from its investment in BHD León (December 31, 2019 - $26.6 million), which had a carrying amount of $153.1 million at December 31, 2020 (December 31, 2019 - $151.6 million). The Corporation received $13.2 million in dividend distributions during the year ended December 31, 2020 from its investment in BHD León (December 31, 2019 - $12.6 million). The Corporation, through its subsidiary BPPR, has also entered into certain uncommitted credit facilities with those investment companies. As of December 31, 2020, the available lines of credit facilities amounted to $275 million (December 31, 2019 - $330 million). The aggregate sum of all outstanding balances under all credit facilities that may be made available by BPPR, from time to time, to those investment companies for which BPPR acts as investment advisor or co-investment advisor, shall never exceed the lesser of $200 million or 10% of BPPR’s capital. At December 31, 2020 there was no outstanding balance for these credit facilities. services advisory registered under Investment Companies to several The Corporation provides the Puerto Rico investment companies Investment Companies Act in exchange for a fee. The Corporation also provides administrative, custody and transfer agency services to these investment companies. These fees are calculated at an annual rate of the average net assets of the investment company, as defined in each agreement. Due to its advisory role, the Corporation considers these investment companies as related parties. For the year ended December 31, 2020 administrative fees charged to these investment companies amounted to $6.3 million (December 31, 2019 - $6.4 million) and waived fees amounted to $2.8 million (December 31, 2019 - $2.2 million), for a net fee of $3.5 million (December 31, 2019 - $4.2 million). 142 POPULAR, INC. 2020 ANNUAL REPORT 820-10 “Fair Value Measurements Note 27 - Fair value measurement ASC Subtopic and Disclosures” establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels to increase consistency and comparability in fair value measurements and disclosures. The hierarchy is broken down into three levels based on the reliability of inputs as follows: in order • Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date. Valuation on these instruments does not necessitate a significant degree of judgment since valuations are based on quoted prices that are readily available in an active market. • Level 2 - Quoted prices other than those included in Level 1 that are observable either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or that can be corroborated by observable market data for substantially the full term of the financial instrument. • Level 3 - Inputs are unobservable and significant to the fair value measurement. Unobservable inputs the Corporation’s own judgements about assumptions that market participants would use in pricing the asset or liability. reflect The Corporation maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. Fair value is based upon quoted market prices when available. If listed prices or quotes are not available, the Corporation employs internally- developed models that primarily use market-based inputs including yield curves, interest rates, volatilities, and credit curves, among others. Valuation adjustments are limited to those necessary to ensure that the financial instrument’s fair value is adequately representative of the price that would be received or paid in the marketplace. These adjustments include amounts the counterparty Corporation’s credit standing, constraints on liquidity and unobservable parameters that are applied consistently. quality, reflect credit that The estimated fair value may be subjective in nature and may involve uncertainties and matters of significant judgment for certain financial instruments. Changes in the underlying assumptions used in calculating fair value could significantly affect the results. Fair Value on a Recurring and Nonrecurring Basis The following fair value hierarchy tables present information about the Corporation’s assets and liabilities measured at fair value on a recurring basis at December 31, 2020 and 2019 and on a nonrecurring basis in periods subsequent to initial recognition for the years ended December 31, 2020, 2019, and 2018: At December 31, 2020 (In thousands) RECURRING FAIR VALUE MEASUREMENTS Assets Debt securities available-for-sale: U.S. Treasury securities Obligations of U.S. Government sponsored entities Collateralized mortgage obligations - federal agencies Mortgage-backed securities Other Total debt securities available-for-sale Trading account debt securities, excluding derivatives: U.S. Treasury securities Obligations of Puerto Rico, States and political subdivisions Collateralized mortgage obligations Mortgage-backed securities Other Total trading account debt securities, excluding derivatives Equity securities Mortgage servicing rights Derivatives Total assets measured at fair value on a recurring basis Liabilities Derivatives Total liabilities measured at fair value on a recurring basis Level 1 Level 2 Level 3 Total $3,499,781 – – – – $3,499,781 $ 7,288,259 60,184 392,132 10,319,547 235 $18,060,357 $ – – – 1,014 – $ 1,014 $10,788,040 60,184 392,132 10,320,561 235 $21,561,152 $ 11,506 – – – – 11,506 – – – $3,511,287 $ $ $ – 103 68 24,338 – 24,509 29,590 – 20,785 $18,135,241 $ $ $ – – 278 – 381 659 – 118,395 – $120,068 $ $ $ 11,506 103 346 24,338 381 36,674 29,590 118,395 20,785 $21,766,596 $ $ $ $ – – $ $ (18,925) $ (18,925) $ – – $ $ (18,925) (18,925) POPULAR, INC. 2020 ANNUAL REPORT 143 At December 31, 2019 (In thousands) RECURRING FAIR VALUE MEASUREMENTS Assets Debt securities available-for-sale: U.S. Treasury securities Obligations of U.S. Government sponsored entities Obligations of Puerto Rico, States and political subdivisions Collateralized mortgage obligations - federal agencies Mortgage-backed securities Other Total debt securities available-for-sale Trading account debt securities, excluding derivatives: U.S. Treasury securities Obligations of Puerto Rico, States and political subdivisions Collateralized mortgage obligations Mortgage-backed securities Other Total trading account debt securities, excluding derivatives Equity securities Mortgage servicing rights Derivatives Total assets measured at fair value on a recurring basis Liabilities Derivatives Total liabilities measured at fair value on a recurring basis Level 1 Level 2 Level 3 Total $3,841,715 – – – – – $3,841,715 $ 8,214,540 122,404 6,975 586,175 4,875,132 350 $13,805,576 $ – – – – 1,182 – $ 1,182 $12,056,255 122,404 6,975 586,175 4,876,314 350 $17,648,473 $ 7,081 – – – – 7,081 – – – $3,848,796 $ $ $ 2 633 76 28,556 3,003 32,270 21,327 – 17,966 $13,877,139 $ $ $ – – 530 – 440 970 – 150,906 – $153,058 $ $ $ 7,083 633 606 28,556 3,443 40,321 21,327 150,906 17,966 $17,878,993 $ $ $ $ – – $ $ (16,619) $ (16,619) $ – – $ $ (16,619) (16,619) The fair value information included in the following tables is not as of period end, but as of the date that the fair value measurement was recorded during the years ended December 31, 2020, 2019 and 2018 and excludes nonrecurring fair value measurements of assets no longer outstanding as of the reporting date. (In thousands) Level 1 Level 2 Level 3 Total NONRECURRING FAIR VALUE MEASUREMENTS Year ended December 31, 2020 Assets Loans [1] Loans held-for-sale [2] Other real estate owned [3] Other foreclosed assets [3] ROU assets [4] Leasehold improvements [4] Total assets measured at fair value on a nonrecurring basis Write-downs $– – – – – – $– $ $74,511 2,738 20,123 116 446 126 $74,511 2,738 20,123 116 446 126 $98,060 $98,060 $ (15,290) (1,311) (3,325) (148) (15,920) (2,084) (38,078) $– – – – – – $– [1] Relates mostly to certain impaired collateral dependent loans. The impairment was measured based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations. Costs to sell are excluded from the reported fair value amount. [2] Relates to a quarterly valuation on loans held-for-sale. Costs to sell are excluded from the reported fair value amount. [3] Represents the fair value of foreclosed real estate and other collateral owned that were written down to their fair value. Costs to sell are excluded from the reported fair value amount. [4] The impairment was measured based on the sublease rental value of the branches that were subject to the strategic realignment of PB’s New York Metro Branch network. Refer to Note 32 for additional information. 144 POPULAR, INC. 2020 ANNUAL REPORT (In thousands) Level 1 Level 2 Level 3 Total NONRECURRING FAIR VALUE MEASUREMENTS Year ended December 31, 2019 Assets Loans [1] Other real estate owned [2] Other foreclosed assets [2] Long-lived assets held-for-sale [3] Total assets measured at fair value on a nonrecurring basis Write-downs $– – – – $– $– – – – $– $ $35,363 18,132 1,213 2,500 $35,363 18,132 1,213 2,500 $57,208 $57,208 $ (13,533) (3,526) (156) (2,591) (19,806) [1] Relates mostly to certain impaired collateral dependent loans. The impairment was measured based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations. Costs to sell are excluded from the reported fair value amount. [2] Represents the fair value of foreclosed real estate and other collateral owned that were written down to their fair value. Costs to sell are excluded from the reported fair value amount. [3] Represents the fair value of long-lived assets held-for-sale that were written down to their fair value. (In thousands) Level 1 Level 2 Level 3 Total NONRECURRING FAIR VALUE MEASUREMENTS Year ended December 31, 2018 Assets Loans [1] Other real estate owned [2] Other foreclosed assets [2] Total assets measured at fair value on a nonrecurring basis Write-downs $– – – $– $– – – $– $ 73,893 43,463 1,349 $ 73,893 43,463 1,349 $ $118,705 $118,705 $ (25,745) (9,189) (722) (35,656) [1] Relates mostly to certain impaired collateral dependent loans. The impairment was measured based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations, in accordance with the provisions of ASC Section 310-10-35. Costs to sell are excluded from the reported fair value amount. [2] Represents the fair value of foreclosed real estate and other collateral owned that were written down to their fair value. Costs to sell are excluded from the reported fair value amount. The following tables present the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the years ended December 31, 2020, 2019, and 2018. Year ended December 31, 2020 (In thousands) Balance at January 1, 2020 Gains (losses) included in earnings Gains (losses) included in OCI Additions Settlements Balance at December 31, 2020 MBS classified as debt securities available- for-sale $1,182 – (18) – (150) $1,014 CMOs classified as trading account debt securities Other securities classified as trading account debt securities $ 530 (1) – 4 (255) $ 278 $440 (59) – – – $381 Mortgage servicing rights $150,906 (42,055) – 9,544 – Total assets $153,058 (42,115) (18) 9,548 (405) $118,395 $120,068 Changes in unrealized gains (losses) included in earnings relating to assets still held at December 31, 2020 $ – $ – $ 27 $ (19,327) $ (19,300) POPULAR, INC. 2020 ANNUAL REPORT 145 (In thousands) Balance at January 1, 2019 Gains (losses) included in earnings Gains (losses) included in OCI Additions Settlements Transfers out of Level 3 Balance at December 31, 2019 Year ended December 31, 2019 MBS classified as debt securities available- for-sale $1,233 – (1) – (50) – $1,182 CMOs classified as trading account debt securities MBS classified as trading account debt securities Other securities classified as trading account debt securities $ 611 (1) – 71 (151) – $ 530 $ 43 (1) – 25 (41) (26) $ – $485 (45) – – – – $440 Mortgage servicing rights $169,777 (27,516) – 9,143 (498) – Total assets $172,149 (27,563) (1) 9,239 (740) (26) $150,906 $153,058 Changes in unrealized gains (losses) included in earnings relating to assets still held at December 31, 2019 $ – $ 1 $ – $ 20 $ (14,190) $ (14,169) Year ended December 31, 2018 Other securities classified as trading account debt securities MBS classified as trading account debt securities CMOs classified as trading account debt securities MBS classified as debt securities available- for-sale Mortgage servicing rights Total assets Contingent consideration [1] Total liabilities $1,288 $ 529 $43 $529 $168,031 $170,420 $(164,858) $(164,858) – (5) – (50) 2 – 260 (180) – – – – (44) – – – (8,477) – 10,223 – (8,519) (5) 10,483 (230) (6,112) – – 170,970 (6,112) – – 170,970 (In thousands) Balance at January 1, 2018 Gains (losses) included in earnings Gains (losses) included in OCI Additions Settlements Balance at December 31, 2018 $1,233 $ 611 $43 $485 $169,777 $172,149 Changes in unrealized gains (losses) included in earnings relating to assets still held at December 31, 2018 $ – $ 2 $ – $ 20 $ 8,703 $ 8,725 $ $ – – $ $ – – [1] Effective May 22, 2018, the Corporation entered into a Termination Agreement with the FDIC to terminate the Corporation’s loss share arrangement ahead of their contractual maturities. During the year ended December 31, 2019, certain MBS were transferred from Level 3 to Level 2 due to a change in valuation technique from an internally prepared pricing matrix to a bond’s theoretical value. Gains and losses (realized and unrealized) included in earnings for the years ended December 31, 2020, 2019, and 2018 for Level 3 assets and liabilities included in the previous tables are reported in the consolidated statement of operations as follows: 2020 2019 2018 Total gains (losses) included in earnings Changes in unrealized gains (losses) relating to assets still held at reporting date Total gains (losses) included in earnings Changes in unrealized gains (losses) relating to assets still held at reporting date Total gains (losses) included in earnings Changes in unrealized gains (losses) relating to assets still held at reporting date $ – (42,055) $ – (19,327) $ – (27,516) $ – (14,190) $ (6,112) (8,477) (60) 27 (47) 21 (42) $(42,115) $(19,300) $(27,563) $(14,169) $(14,631) $ – 8,703 22 $8,725 (In thousands) FDIC loss share (expense) income Mortgage banking activities Trading account (loss) profit Total 146 POPULAR, INC. 2020 ANNUAL REPORT The following tables include quantitative information about significant unobservable inputs used to derive the fair value of Level 3 instruments, excluding those instruments for which the unobservable inputs were not developed by the Corporation such as prices of prior transactions and/or unadjusted third-party pricing sources at December 31, 2020 and 2019. (In thousands) CMO’s - trading Other - trading Fair value at December 31, 2020 Valuation technique Unobservable inputs Weighted average (range) [1] $ $ 278 Discounted cash flow model Weighted average life Yield Prepayment speed 381 Discounted cash flow model Weighted average life Yield Prepayment speed 1.2 years (0.6 -1.4 years) 3.6% (3.6% - 4.1%) 17.7% (13.8% - 18.3%) 3.6 years 12.0% 10.8% Mortgage servicing rights $118,395 Discounted cash flow model Loans held-in-portfolio $ 74,347 [2] External appraisal Other real estate owned $ 14,926 [3] External appraisal Prepayment speed Weighted average life Discount rate 6.9% (0.3% - 24.6%) 6.0 years (0.1 - 12.3 years) 11.1% (9.5% - 14.7%) Haircut applied on external appraisals Haircut applied on external appraisals 20.9% (10.0% - 40.0%) 22.1% (5.0% - 30.0%) [1] Weighted average of significant unobservable inputs used to develop Level 3 fair value measurements were calculated by relative fair value. [2] Loans held-in-portfolio in which haircuts were not applied to external appraisals were excluded from this table. [3] Other real estate owned in which haircuts were not applied to external appraisals were excluded from this table. (In thousands) CMO’s - trading Other - trading Fair value at December 31, 2019 Valuation technique Unobservable inputs Weighted average (range) [1] $ $ 530 Discounted cash flow model Weighted average life Yield Prepayment speed 440 Discounted cash flow model Weighted average life Yield Prepayment speed 1.6 years (1.3 -1.8 years) 4.0% (3.9% - 4.4%) 18.3% (14.8% - 20.7%) 3.8 years 12.0% 10.8% Mortgage servicing rights $150,906 Discounted cash flow model Loans held-in-portfolio $ 38,907 [2] External appraisal Other real estate owned $ 16,119 [3] External appraisal Prepayment speed Weighted average life Discount rate 6.0% (0.2% - 18.5%) 6.5 years (0.1 -14.4 years) 11.1% (9.5% - 14.7%) Haircut applied on external appraisals Haircut applied on external appraisals 10.0% 23.8% (5.0% - 35.0%) [1] Weighted average of significant unobservable inputs used to develop Level 3 fair value measurements were calculated by relative fair value. [2] Loans held-in-portfolio in which haircuts were not applied to external appraisals were excluded from this table. [3] Other real estate owned in which haircuts were not applied to external appraisals were excluded from this table. POPULAR, INC. 2020 ANNUAL REPORT 147 the constant prepayment The significant unobservable inputs used in the fair value the Corporation’s collateralized mortgage measurement of obligations and interest-only collateralized mortgage obligation (reported as “other”), which are classified in the “trading” category, are yield, constant prepayment rate, and weighted average life. Significant increases (decreases) in any of those inputs in isolation would result in significantly lower (higher) fair value measurement. Generally, a change in the assumption used for rate will generate a directionally opposite change in the weighted average life. For example, as the average life is reduced by a higher constant prepayment rate, a lower yield will be realized, and when there is a reduction in the constant prepayment rate, the average life of these collateralized mortgage obligations will extend, thus resulting in a higher yield. The significant unobservable inputs used in the fair value measurement of the Corporation’s mortgage servicing rights are constant prepayment rates and discount rates. Increases in interest rates may result in lower prepayments. Discount rates vary according to products and / or portfolios depending on the perceived risk. Increases in discount rates result in a lower fair value measurement. Following is a description of the Corporation’s valuation methodologies used for assets and liabilities measured at fair value. The disclosure requirements exclude certain financial instruments and all non-financial instruments. Accordingly, the instruments aggregate fair value amounts of the disclosed do not represent management’s estimate of underlying value of the Corporation. the financial Trading account debt securities and debt securities available- for-sale • U.S. Treasury securities: The fair value of U.S. Treasury notes is based on yields that are interpolated from the constant maturity treasury curve. These securities are classified as Level 2. U.S. Treasury bills are classified as Level 1 given the high volume of trades and pricing based on those trades. • Obligations of U.S. Government sponsored entities: The sponsored entities Obligations of U.S. Government include U.S. agency securities, which fair value is based on an active exchange market and on quoted market prices for similar securities. The U.S. agency securities are classified as Level 2. • Obligations and States of Puerto Rico, political subdivisions: Obligations of Puerto Rico, States and political subdivisions include municipal bonds. The bonds are segregated and the like characteristics divided into specific sectors. Market inputs used in the evaluation process include all or some of the following: trades, bid price or spread, two sided markets, quotes, benchmark curves including but not limited to Treasury benchmarks, 148 POPULAR, INC. 2020 ANNUAL REPORT LIBOR and swap curves, market data feeds such as those obtained from municipal market sources, discount and capital rates, and trustee reports. The municipal bonds are classified as Level 2. • Mortgage-backed securities: Certain agency mortgage- backed securities (“MBS”) are priced based on a bond’s theoretical value derived from similar bonds defined by credit quality and market fair value incorporates an option adjusted spread. The agency MBS are classified as Level 2. Other agency MBS such as GNMA Puerto Rico Serials are priced using an internally- prepared pricing matrix with quoted prices from local brokers dealers. These particular MBS are classified as Level 3. sector. Their • Collateralized mortgage obligations: Agency collateralized mortgage obligations (“CMOs”) are priced based on a bond’s theoretical value derived from similar bonds defined by credit quality and market sector and for which fair value incorporates an option adjusted spread. The option adjusted spread model includes prepayment and volatility assumptions, ratings (whole loans collateral) and spread adjustments. These CMOs are classified as Level 2. Other CMOs, due to their limited liquidity, are classified as Level 3 due to the insufficiency of inputs such as executed trades, credit information and cash flows. • Corporate securities (included as in the “available-for-sale” category): Given that the quoted prices are for similar instruments, these securities are classified as Level 2. “other” • Corporate securities and interest-only strips (included as “other” in the “trading account debt securities” category): For corporate securities, quoted prices for these security types are obtained from broker dealers. Given that the quoted prices are for similar instruments or do not trade in highly liquid markets, these securities are classified as Level 2. Given that the fair value was estimated based on a discounted cash flow model using unobservable inputs, interest-only strips are classified as Level 3. Equity securities Equity securities are comprised principally of shares in closed- funds and other equity ended and open-ended mutual securities. Closed-end funds are traded on the secondary market at the shares’ market value. Open-ended funds are considered to be liquid, as investors can sell their shares continually to the fund and are priced at NAV. Mutual funds are classified as Level 2. Other equity securities that do not trade in highly liquid markets are also classified as Level 2. incorporates assumptions Mortgage servicing rights Mortgage servicing rights (“MSRs”) do not trade in an active market with readily observable prices. MSRs are priced internally using a discounted cash flow model. The discounted cash flow model that market participants would use in estimating future net servicing characteristics, prepayments income, assumptions, discount rates, delinquency and foreclosure rates, late charges, other ancillary revenues, cost to service and other economic factors. Prepayment speeds are adjusted for the Corporation’s loan characteristics and portfolio behavior. Due to the unobservable nature of certain valuation inputs, the MSRs are classified as Level 3. including portfolio Derivatives Interest rate caps and indexed options are traded in over-the- counter active markets. These derivatives are indexed to an observable interest rate benchmark, such as LIBOR or equity indexes, and are priced using an income approach based on present value and option pricing models using observable inputs. Other derivatives are liquid and have quoted prices, such as forward contracts or “to be announced securities” (“TBAs”). All of these derivatives are classified as Level 2. The non-performance risk is determined using internally-developed models that consider the collateral held, the remaining term, and the creditworthiness of the entity that bears the risk, and uses available public data or internally-developed data related to current spreads that denote their probability of default. Loans held-in-portfolio that are collateral dependent The impairment is measured based on the fair value of the take into collateral, which is derived from appraisals that consideration prices in observed transactions involving similar assets in similar locations and which could be subject to internal adjustments. These collateral dependent loans are classified as Level 3. Loans measured at fair value pursuant to lower of cost or fair value adjustments Loans measured at fair value on a nonrecurring basis pursuant to lower of cost or fair value were priced based on secondary market prices and discounted cash flow models which incorporate internally-developed assumptions for prepayments and credit loss estimates. These loans are classified as Level 3. Other real estate owned and other foreclosed assets Other real estate owned includes real estate properties securing mortgage, consumer, and commercial loans. Other foreclosed assets include primarily automobiles securing auto loans. The fair value of foreclosed assets may be determined using an external appraisal, broker price opinion, or an internal valuation. These foreclosed assets are classified as Level 3 since they are subject to internal adjustments. ROU assets and leasehold improvements The impairment was measured based on the sublease rental to the strategic value of realignment of PB’s New York Metro Branch network. These ROU assets and leasehold improvements are classified as Level 3. the branches that were subject Note 28 - Fair value of financial instruments The fair value of financial instruments is the amount at which an asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. For those financial instruments with no quoted market prices available, fair values have been estimated using present value calculations or other valuation techniques, as well to current as management’s best economic conditions, including discount rates, estimates of future cash flows, and prepayment assumptions. Many of these estimates vary significantly from amounts that could be realized in actual transactions. judgment with respect assumptions and may involve various The fair values reflected herein have been determined based on the prevailing rate environment at December 31, 2020 and December 31, 2019, as applicable. In different interest rate fair value estimates can differ significantly, environments, especially for certain fixed rate financial In addition, the fair values presented do not attempt to estimate the value of the Corporation’s fee generating businesses and they do not anticipated future business activities, represent the Corporation’s value as a going concern. instruments. that is, POPULAR, INC. 2020 ANNUAL REPORT 149 The following tables present the carrying amount and estimated fair values of financial instruments with their corresponding level in the fair value hierarchy. The aggregate fair value amounts of the financial instruments disclosed do not represent management’s estimate of the underlying value of the Corporation. (In thousands) Financial Assets: Cash and due from banks Money market investments Trading account debt securities, excluding derivatives[1] Debt securities available-for-sale[1] Debt securities held-to-maturity: Obligations of Puerto Rico, States and political subdivisions Collateralized mortgage obligation-federal agency Securities in wholly owned statutory business trusts Total debt securities held-to-maturity Equity securities: FHLB stock FRB stock Other investments Total equity securities Loans held-for-sale Loans held-in-portfolio Mortgage servicing rights Derivatives (In thousands) Financial Liabilities: Deposits: Demand deposits Time deposits Total deposits Assets sold under agreements to repurchase Notes payable: FHLB advances Unsecured senior debt securities Junior subordinated deferrable interest debentures (related to trust preferred securities) FRB advances Total notes payable Derivatives December 31, 2020 Carrying amount Level 1 Level 2 Level 3 Fair value $ 491,065 11,640,880 36,674 21,561,152 $ 491,065 11,634,851 11,506 3,499,781 $ – 6,029 24,509 18,060,357 $ $ $ $ $ $ – – 659 1,014 $ 491,065 11,640,880 36,674 21,561,152 83,298 32 – 83,330 – – 1,495 1,495 102,189 27,098,297 118,395 – $ $ $ $ $ 83,298 32 11,561 94,891 49,799 93,045 31,085 173,929 102,189 27,098,297 118,395 20,785 $ $ $ $ $ – – – – – – – – – – – – – – 11,561 11,561 49,799 93,045 29,590 172,434 – – – 20,785 December 31, 2020 Level 1 Level 2 Level 3 Fair value – – – – – – – – – – $49,558,492 7,319,963 $56,878,455 $ $ 121,257 561,977 321,078 395,078 1,009 $ 1,279,142 $ 18,925 $ $ $ $ $ $ $49,558,492 7,319,963 $56,878,455 $ $ 121,257 561,977 321,078 395,078 1,009 $ 1,279,142 $ 18,925 – – – – – – – – – $ $ $ $ $ 70,768 31 11,561 82,360 49,799 93,045 30,893 173,737 99,455 28,488,946 118,395 20,785 Carrying amount $49,558,492 7,307,848 $56,866,340 $ $ 121,303 542,469 296,574 384,929 1,009 $ 1,224,981 $ 18,925 $ $ $ $ $ $ $ $ $ $ $ [1] Refer to Note 27 to the Consolidated Financial Statements for the fair value by class of financial asset and its hierarchy level 150 POPULAR, INC. 2020 ANNUAL REPORT (In thousands) Financial Assets: Cash and due from banks Money market investments Trading account debt securities, excluding derivatives[1] Debt securities available-for-sale[1] Debt securities held-to-maturity: Obligations of Puerto Rico, States and political subdivisions Collateralized mortgage obligation-federal agency Securities in wholly owned statutory business trusts Other Total debt securities held-to-maturity Equity securities: FHLB stock FRB stock Other investments Total equity securities Loans held-for-sale Loans held-in-portfolio Mortgage servicing rights Derivatives (In thousands) Financial Liabilities: Deposits: Demand deposits Time deposits Total deposits Assets sold under agreements to repurchase Notes payable: FHLB advances Unsecured senior debt Junior subordinated deferrable interest debentures (related to trust preferred securities) Total notes payable Derivatives December 31, 2019 Carrying amount Level 1 Level 2 Level 3 Fair value $ 388,311 3,262,286 40,321 17,648,473 $ 388,311 3,256,274 7,081 3,841,715 $ – 6,012 32,270 13,805,576 $ $ $ $ $ $ – – 970 1,182 93,002 47 – – 93,049 – – 7,367 7,367 60,030 25,051,400 150,906 – $388,311 3,262,286 40,321 17,648,473 $ $ $ $ $ 93,002 47 11,561 500 105,110 43,787 93,470 28,695 165,952 60,030 25,051,400 150,906 17,966 $ $ $ $ $ – – – – – – – – – – – – – – – 11,561 500 12,061 43,787 93,470 21,328 158,585 – – – 17,966 December 31, 2019 Level 1 Level 2 Level 3 Fair value – – – – – – – – – $36,083,809 7,598,732 $43,682,541 $ $ 193,271 429,718 323,415 395,216 $ 1,148,349 $ 16,619 $ $ $ $ $ $ – – – – – – – – – $36,083,809 7,598,732 $43,682,541 $ $ 193,271 429,718 323,415 395,216 $ 1,148,349 $ 16,619 $ $ $ $ $ 85,556 45 11,561 500 97,662 43,787 93,470 22,630 159,887 59,203 26,929,165 150,906 17,966 Carrying amount $36,083,809 7,674,797 $43,758,606 $ $ 193,378 421,399 295,307 384,902 $ 1,101,608 $ 16,619 $ $ $ $ $ $ $ $ $ $ $ [1] Refer to Note 27 to the Consolidated Financial Statements for the fair value by class of financial asset and its hierarchy level. The notional amount of commitments to extend credit at December 31, 2020 and December 31, 2019 is $ 9.3 billion and $ 8.4 billion, respectively, and represents the unused portion of credit facilities granted to customers. The notional amount of letters of credit at December 31, 2020 and December 31, 2019 is $ 24 million and $ 78 million respectively, and represents the contractual amount that is required to be paid in the event of nonperformance. The fair value of commitments to extend credit and letters of credit, which are based on the fees charged to enter into those agreements, are not material to Popular’s financial statements. Note 29 - Employee benefits Certain employees of BPPR are covered by three non- contributory defined benefit pension plans, the Banco Popular de Puerto Rico Retirement Plan and two Restoration Plans. Pension benefits are based on age, years of credited service, and final average compensation (the “Pension Plans”). The Pension Plans are currently closed to new hires and the accrual of benefits are frozen to all participants. The Pension Plans’ benefit formula is based on a percentage of average final compensation and years of service as of the plan freeze date. Normal retirement age under the retirement plan is age 65 with POPULAR, INC. 2020 ANNUAL REPORT 151 5 years of service. Pension costs are funded in accordance with minimum funding standards under the Employee Retirement Income Security Act of 1974 (“ERISA”). Benefits under the Pension Plans are subject to the U.S. and Puerto Rico Internal Revenue Code limits on compensation and benefits. Benefits under restoration plans restore benefits to selected employees that are limited under the Banco Popular de Puerto Rico Retirement Plan due to U.S. and Puerto Rico Internal Revenue Code limits and a compensation definition that excludes amounts deferred pursuant to nonqualified arrangements. In addition to providing pension benefits, BPPR provides certain health care benefits for certain retired employees (the “OPEB Plan”). Regular employees of BPPR, hired before February 1, 2000, may become eligible for health care benefits, provided they reach retirement age while working for BPPR. funding policy is The Corporation’s to make annual contributions to the plans, when necessary, in amounts which fully provide for all benefits as they become due under the plans. The Corporation’s pension fund investment strategy is to invest in a prudent manner for the exclusive purpose of providing benefits to participants. A well defined internal structure has been established to develop and implement a risk- controlled investment strategy that is targeted to produce a total return that, when combined with BPPR contributions to the fund, will maintain the fund’s ability to meet all required benefit obligations. Risk is controlled through diversification of asset types, such as investments in domestic and international equities and fixed income. Equity investments include various types of stock and index funds. Also, this category includes Popular, Inc.’s common stock. Fixed income investments include U.S. Government securities and other U.S. agencies’ obligations, corporate bonds, mortgage loans, mortgage-backed securities and index funds, among others. A designated committee periodically reviews the performance of investments and assets allocation. The Trustee and the money managers are allowed to exercise limitations established by the pension plans’ investment policies. The plans forbid money managers to enter into derivative transactions, unless approved by the Trustee. the pension plans’ investment discretion, subject to The overall expected long-term rate-of-return-on-assets assumption reflects the average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the benefit obligation. The assumption has been determined by reflecting expectations regarding future rates of return for the plan assets, with consideration given to the distribution of the investments by asset class and historical rates of return for each individual asset class. This process is reevaluated at least on an annual basis and if market, actuarial and economic conditions change, adjustments to the rate of return may come into place. The Pension Plans weighted average asset allocation as of December 31, 2020 and 2019 and the approved asset allocation ranges, by asset category, are summarized in the table below. Equity Debt securities Popular related securities Cash and cash equivalents Minimum allotment 0% 0% 0% 0% Maximum allotment 70% 100% 5% 100% 2020 2019 38% 36% 60% 62% 1% 1% 1% 1% The following table sets forth by level, within the fair value hierarchy, the Pension Plans’ assets at fair value at December 31, 2020 and 2019. Investments measured at net asset value per share (“NAV”) as a practical expedient have not been classified in the fair value hierarchy, but are presented in order to permit reconciliation of the plans’ assets. 2020 2019 Level 1 Level 2 Level 3 Measured at NAV Total Level 1 Level 2 Level 3 Measured at NAV Total $ – $187,065 $ 326,344 – 101,081 – 38,229 94,009 – – 4,526 – – – – – – 9,626 – – – – 8,180 – – – – – 98,431 – – – – 74 – – – 4,596 – $204,716 $556,164 $3,917 $113,988 $878,785 $175,738 $522,528 $4,670 – $ 7,377 $194,442 $ – – – – – – 70 – 3,847 – $171,744 $ 304,958 – – 116,254 35,559 52,083 – – 4,490 – 5,777 – – – – 7,401 – – 334,524 101,081 132,238 98,431 4,526 – 70 9,626 3,847 7,730 – – 82,030 – – – – – $ 7,239 $178,983 312,688 116,254 87,642 82,030 4,490 5,777 74 7,401 4,596 $96,999 $799,935 (In thousands) Obligations of the U.S. Government, its agencies, states and political subdivisions Corporate bonds and debentures Equity securities - Common Stocks Equity securities - ETF’s Foreign commingled trust funds Mutual fund Mortgage-backed securities Private equity investments Cash and cash equivalents Accrued investment income Total assets 152 POPULAR, INC. 2020 ANNUAL REPORT The closing prices reported in the active markets in which the securities are traded are used to value the investments. Following is a description of the valuation methodologies used for investments measured at fair value: value is recorded at its net realizable value which is affected by the changes in the fair market value of the investments held in the fund. This fund is classified as Level 3. • Obligations of U.S. Government, its agencies, states and political subdivisions - The fair value of Obligations of U.S. Government and its agencies obligations are based on an active exchange market and on quoted market prices for similar securities. U.S. agency structured notes are priced based on a bond’s theoretical value from similar bonds defined by credit quality and market sector and for which the fair value incorporates an option adjusted spread in deriving their fair value. The fair value of municipal bonds are based on trade data on these instruments reported on Municipal Securities Rulemaking Board system or comparable bonds from the same issuer and credit quality. These securities are classified as Level 2, except for the governmental index funds that are measured at NAV. transaction (“MSRB”) reporting • Corporate bonds and debentures - Corporate bonds and debentures are valued at fair value at the closing price reported in the active market in which the bond is traded. These securities are classified as Level 2, except for the corporate bond funds that are measured at NAV. • Equity securities – common stocks - Equity securities with quoted market prices obtained from an active exchange market and high liquidity are classified as Level 1. • Equity securities – ETF’s – Exchange Traded Funds shares with quoted market prices obtained from an active exchange market. Highly liquid ETF’s are classified as Level 1 while less liquid ETF’s are classified as Level 2. • Foreign commingled trust fund- Collective investment funds are valued at the NAV of shares held by the plan at year end. • Mutual funds – Mutual funds are valued at the NAV of shares held by the plan at year end. Mutual funds are classified as Level 2. regularly instruments • Mortgage-backed securities – The fair value is based on trade data from brokers and exchange platforms where trade. Certain agency these mortgage and other asset backed securities (“MBS”) are priced based on a bond’s theoretical value from similar bonds defined by credit quality and market sector. Their fair value incorporates an option adjusted spread and prepayment projections. The agency MBS are classified as Level 2. • Private equity investments - Private equity investments include an investment in a private equity fund. The fund • Cash and cash equivalents - The carrying amount of cash and cash equivalents is a reasonable estimate of the fair value since it is available on demand or due to their short- term maturity. Cash and cash equivalents are classified as Level 1. • Accrued investment income – Given the short-term nature of these assets, their carrying amount approximates fair value. Since there is a lack of observable inputs related to instrument specific attributes, these are reported as Level 3. The preceding valuation methods may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the plan believes its valuation methods are appropriate and consistent with other market participants, of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. the use The following table presents the change in Level 3 assets measured at fair value. (In thousands) Balance at beginning of year Purchases, sales, issuance and settlements (net) Balance at end of year 2020 2019 $4,670 (753) $5,092 (422) $3,917 $4,670 There were no transfers in and/or out of Level 3 for financial instruments measured at fair value on a recurring basis during the years ended December 31, 2020 and 2019. There were no transfers in and/or out of Level 1 and Level 2 during the years ended December 31, 2020 and 2019. Information on the shares of common stock held by the pension plans is provided in the table that follows. (In thousands, except number of shares information) Shares of Popular, Inc. common stock Fair value of shares of Popular, Inc. common stock 2020 2019 162,936 156,444 $ 9,177 $ 9,191 Dividends paid on shares of Popular, Inc. common stock held by the plan $ 238 $ 177 POPULAR, INC. 2020 ANNUAL REPORT 153 The following table presents the components of net periodic benefit cost for the years ended December 31, 2020, 2019 and 2018. (In thousands) Personnel costs: Service cost Other operating expenses: Interest cost Expected return on plan assets Amortization of prior service cost (credit) Recognized net actuarial loss Net periodic benefit cost Termination benefit loss Total benefit cost Pension Plans 2019 2020 2018 2020 OPEB Plan 2019 2018 $ – $ – $ – $ 713 $ 759 $ 1,028 23,389 (38,104) – 20,880 $ 6,165 – $ 6,165 28,439 (32,388) – 23,508 $ 19,559 – $ 19,559 25,493 (40,240) – 20,260 $ 5,513 – $ 5,513 4,913 – – 567 $6,193 – $6,193 5,955 – – – $6,714 – $6,714 5,562 – (3,470) 1,282 $ 4,402 1,790 $ 6,192 During the year 2018, the termination benefit loss of $1.8 million related to the additional health care benefits provided to the eligible employees that accepted to participate in the “VRP” was recorded as “Personnel costs” in the Consolidated Statement of Operations. The following table sets forth the aggregate status of the plans and the amounts recognized in the consolidated financial statements at December 31, 2020 and 2019. (In thousands) Change in benefit obligation: Benefit obligation at beginning of year Service cost Interest cost Actuarial loss [1] Benefits paid Benefit obligation at end of year Change in fair value of plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Benefits paid Fair value of plan assets at end of year Funded status of the plan: Benefit obligation at end of year Fair value of plan assets at end of year Funded status at year end Pension Plans OPEB Plan 2020 2019 2020 2019 $ 852,551 – 23,389 83,277 (44,864) $ 914,353 $ 754,558 – 28,439 113,642 (44,088) $ 852,551 $ 168,681 713 4,913 11,247 (6,344) $ 179,210 $ 153,415 759 5,955 15,752 (7,200) $ 168,681 $ 799,935 123,484 230 (44,864) $ 878,785 $ 685,823 137,970 20,230 (44,088) $ 799,935 $ $ – – 6,344 (6,344) – $ $ – – 7,200 (7,200) – 878,785 $(914,353) $(852,551) $(179,210) $(168,681) – $ (35,568) $ (52,616) $(179,210) $(168,681) 799,935 – Amounts recognized in accumulated other comprehensive loss: Net loss Accumulated other comprehensive loss (AOCL) 265,899 $ 265,899 288,882 $ 288,882 32,152 $ 32,152 21,472 $ 21,472 Reconciliation of net (liabilities) assets: Net liabilities at beginning of year Amount recognized in AOCL at beginning of year, pre-tax Amount prepaid at beginning of year Net periodic benefit cost Contributions Amount prepaid at end of year Amount recognized in AOCL Net liabilities at end of year $ (52,616) $ (68,735) $(168,681) $(153,415) 5,720 288,882 (147,695) 236,266 (6,714) (6,165) 7,200 230 (147,209) 230,331 (265,899) (21,472) $ (35,568) $ (52,616) $(179,210) $(168,681) 21,472 (147,209) (6,193) 6,344 (147,058) (32,152) 304,330 235,595 (19,559) 20,230 236,266 (288,882) [1] For 2020, significant components of the Pension Plans actuarial loss that changed the benefit obligation were mainly related to a decrease in discount rates partially offset by a greater return on the fair value of plan assets. For OPEB Plans significant components of the actuarial loss that change the benefit obligation were mainly related to a decrease in discount rates partially offset by the per capita claim assumption at year-end which was lower than expected and the healthcare trend rate assumption which was updated at year-end. For 2019, significant components of the Pension Plans actuarial loss that changed the benefit obligation were mainly related to updates in discount and mortality rates. For OPEB Plans significant components of the actuarial loss that change the benefit obligation were mainly related to updates in discount and mortality rates partially offset by update in healthcare election rates and expected annual healthcare costs. 154 POPULAR, INC. 2020 ANNUAL REPORT The following table presents the change in accumulated other comprehensive loss (“AOCL”), pre-tax, for the years ended December 31, 2020 and 2019. (In thousands) Accumulated other comprehensive loss at beginning of year Increase (decrease) in AOCL: Recognized during the year: Amortization of actuarial losses Occurring during the year: Net actuarial (gains) losses Total (decrease) increase in AOCL Accumulated other comprehensive loss at end of year Pension Plans OPEB Plan 2020 2019 2020 2019 $288,882 $304,330 $21,472 $ 5,720 (20,880) (23,508) (567) – (2,103) 8,060 (22,983) (15,448) 11,247 10,680 15,752 15,752 $265,899 $288,882 $32,152 $21,472 The Corporation estimates the service and interest cost components utilizing a full yield curve approach in the estimation of these components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to their underlying projected cash flows. To determine benefit obligation at year end, the Corporation used a weighted average of annual spot rates applied to future expected cash flows for years ended December 31, 2020 and 2019. The following table presents the discount rate and assumed health care cost trend rates used to determine the benefit obligation and net periodic benefit cost for the plans: Pension Plans OPEB Plan Weighted average assumptions used to determine net periodic benefit cost for the years ended December 31: 2020 2019 2018 2020 Discount rate for benefit obligation Discount rate for service cost Discount rate for interest cost Expected return on plan assets Initial health care cost trend rate Ultimate health care cost trend rate Year that the ultimate trend rate is reached N/A 3.22 - 3.27% 4.20 - 4.23% 3.54 - 3.56% 3.38% 3.72% 2.81 - 2.83% 3.87 - 3.90% 3.16 - 3.20% 2.98% 5.00 - 5.80% 5.30 - 6.00% 5.50 - 6.00% N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 5.00% 5.00% 2020 2019 4.30% 4.49% 3.99% N/A 5.00% 5.00% 2019 2018 3.62% 3.74% 3.32% N/A 5.50% 5.00% 2019 Weighted average assumptions used to determine benefit obligation at December 31: Pension Plans 2020 2019 OPEB Plan 2019 2020 Discount rate for benefit obligation Initial health care cost trend rate Ultimate health care cost trend rate Year that the ultimate trend rate is reached 2.41 - 2.48% 3.22 - 3.27% 2.65% 3.38% 5.00% 5.00% N/A N/A 4.50% 5.00% N/A 2023 N/A N/A N/A 2019 The following table presents information for plans with a projected benefit obligation and accumulated benefit obligation in excess of plan assets for the years ended December 31, 2020 and 2019. (In thousands) Projected benefit obligation Accumulated benefit obligation Fair value of plan assets Pension Plans OPEB Plan 2020 2019 2020 2019 $914,353 914,353 878,785 $852,551 852,551 799,935 $179,210 179,210 – $168,681 168,681 – POPULAR, INC. 2020 ANNUAL REPORT 155 The Corporation expects to pay the following contributions to the plans during the year ended December 31, 2021. Benefit payments projected to be made from the plans during the next ten years are presented in the table below. (In thousands) Pension Plans OPEB Plan 2021 (In thousands) Pension Plans OPEB Plan $ 229 $6,333 2021 2022 2023 2024 2025 2026 - 2030 $ 47,553 45,392 45,542 45,732 45,841 227,986 $ 6,333 6,462 6,609 6,788 6,955 37,686 The table below presents a breakdown of the plans’ liabilities at December 31, 2020 and 2019. (In thousands) Current liabilities Non-current liabilities Pension Plans 2019 2020 OPEB Plan 2020 2019 $ 229 35,339 $ 227 52,389 $ 6,328 172,882 $ 6,456 162,225 Savings plans The Corporation also provides defined contribution savings plans pursuant the Puerto Rico to Section 1081.01(d) of Internal Revenue Code and Section 401(k) of the U.S. Internal Revenue Code, as applicable, for substantially all the employees of the Corporation. Investments in the plans are participant- directed, and employer matching contributions are determined based on the specific provisions of each plan. Employees are fully vested in the employer’s contribution after five years of service. The cost of providing these benefits in the year ended December 31, 2020 was $14.0 million (2019 - $15.1 million, 2018 - $12.7 million). The plans held 1,362,593 (2019 – 1,378,048) shares of common stock of the Corporation with a market value of approximately $77 million at December 31, 2020 (2019 - $81 million). Note 30 - Net income per common share The following table sets forth the computation of net income per common share (“EPS”), basic and diluted, for the years ended December 31, 2020, 2019 and 2018: (In thousands, except per share information) Net income Preferred stock dividends Net income applicable to common stock Average common shares outstanding Average potential dilutive common shares Average common shares outstanding - assuming dilution Basic EPS Diluted EPS 2020 2019 2018 506,622 (1,758) 504,864 $ $ 671,135 (3,723) 667,412 $ $ 618,158 (3,723) 614,435 85,882,371 92,888 96,848,835 148,965 101,142,258 166,385 85,975,259 96,997,800 101,308,643 5.88 5.87 $ $ 6.89 6.88 $ $ 6.07 6.06 $ $ $ $ As disclosed in Note 19, on May 27, 2020, the Corporation completed its $500 million accelerated share repurchase transaction (“ASR”) in 2020. Under the ASR, the Corporation received from the dealer counterparty an initial delivery of 7,055,919 shares of common stock on February 3, 2020. As part of the final settlement of the ASR, the Corporation received an additional 4,763,216 shares of common stock after the early termination date of March 19, 2020. The early termination resulted from the exercise by the dealer counterparty of its contractual right to terminate the transaction due to the trading price of the Corporation’s common stock falling below a specified level due to the effects of the COVID-19 pandemic on the global markets. The Corporation accounted for the ASR as a treasury stock transaction. Potential common shares consist of common stock issuable under the assumed exercise of stock options, restricted stock and performance shares awards using the treasury stock method. This method assumes that the potential common shares are issued and the proceeds from exercise, in addition to the amount of compensation cost attributed to future services, 156 POPULAR, INC. 2020 ANNUAL REPORT are used to purchase common stock at the exercise date. The difference between the number of potential shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Warrants, stock options, restricted stock and performance shares awards, if any, that result in lower the potential shares issued than shares purchased under treasury stock method are not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect in earnings per common share. Note 31 - Revenue from contracts with customers The following table presents the Corporation’s revenue streams from contracts with customers by reportable segment for the years ended December 31, 2020, 2019 and 2018. (In thousands) Service charges on deposit accounts Other service fees: Debit card fees Insurance fees, excluding reinsurance Credit card fees, excluding late fees and membership fees Sale and administration of investment products Trust fees 2020 Years ended December 31, 2019 2018 BPPR Popular U.S. BPPR Popular U.S. BPPR Popular U.S. $136,703 $11,120 $146,384 $14,549 $137,062 $13,615 38,685 35,799 88,091 21,755 21,700 967 2,484 831 – – 46,066 42,995 86,884 23,072 21,198 1,076 3,803 866 – – 45,139 33,951 74,609 21,895 20,351 1,035 3,667 921 – – Total revenue from contracts with customers [1] $342,733 $15,402 $366,599 $20,294 $333,007 $19,238 [1] The amounts include intersegment transactions of $4.3 million, $3.8 million and $3.2 million, respectively, for the years ended December 31, 2020, 2019 and 2018. Revenue from contracts with customers is recognized when, or as, the performance obligations are satisfied by the Corporation by transferring the promised services to the customers. A service is transferred to the customer when, or as, the customer obtains control of that service. A performance obligation may be satisfied over time or at a point in time. Revenue from a performance obligation satisfied over time is recognized based on the services that have been rendered to date. Revenue from a performance obligation satisfied at a point in time is recognized when the customer obtains control over the service. The transaction price, or the amount of revenue recognized, reflects the consideration the Corporation expects to be entitled to in exchange for those promised services. In determining the transaction price, the Corporation considers the effects of variable consideration. Variable consideration is is included in the transaction price only to the extent probable that a significant reversal in the amount of cumulative revenue recognized will not occur. The Corporation is the principal in a transaction if it obtains control of the specified goods or services before they are transferred to the customer. If the Corporation acts as principal, revenues are presented in the gross amount of consideration to which it expects to be entitled and are not netted with any related expenses. On the other hand, the Corporation is an agent if it does not control the specified goods or services before they are transferred to the customer. If the Corporation acts as an agent, revenues are presented in the amount of consideration to which it expects to be entitled, net of related expenses. it Following is a description of the nature and timing of revenue streams from contracts with customers: Service charges on deposit accounts Service charges on deposit accounts are earned on retail and commercial deposit activities and include, but are not limited to, nonsufficient fund fees, overdraft fees and checks stop payment fees. These transaction-based fees are recognized at a point in time, upon occurrence of an activity or event or upon the occurrence of a condition which triggers the fee assessment. The Corporation is acting as principal in these transactions. Debit card fees Debit card fees include, but are not limited to, interchange fees, surcharging income and foreign transaction fees. These transaction-based fees are recognized at a point in time, upon occurrence of an activity or event or upon the occurrence of a condition which triggers the fee assessment. Interchange fees are recognized upon settlement of the debit card payment transactions. The Corporation is acting as principal in these transactions. Insurance fees Insurance fees include, but are not limited to, commissions and contingent commissions. Commissions and fees are recognized when related policies are effective since the Corporation does not have an enforceable right to payment for services completed to date. An allowance is created for expected adjustments to POPULAR, INC. 2020 ANNUAL REPORT 157 commissions earned related to policy cancellations. Contingent commissions are recorded on an accrual basis when the amount to be received is notified by the insurance company. The Corporation is acting as an agent since it arranges for the sale of the policies and receives commissions if, and when, it achieves the sale. Credit card fees Credit card fees include, but are not limited to, interchange fees, additional card fees, cash advance fees, balance transfer foreign transaction fees, and returned payments fees. fees, Credit card fees are recognized at a point in time, upon the occurrence of an activity or an event. Interchange fees are recognized upon settlement of the credit card payment transactions. The Corporation is acting as principal in these transactions. Sale and administration of investment products Fees from the sale and administration of investment products include, but are not limited to, commission income from the sale fees, underwriting fees, and mutual fund fees. asset management investment products, of Commission income from investment products is recognized on the trade date since clearing, trade execution, and custody services are satisfied when the customer acquires or disposes of the rights to obtain the economic benefits of the investment products and brokerage contracts have no fixed duration and are terminable at will by either party. The Corporation is acting as principal in these transactions since it performs the service of providing the customer with the ability to acquire or dispose of the rights to obtain the economic benefits of investment products. Asset management fees are satisfied over time and are recognized in arrears. At contract inception, the estimate of the asset management fee is constrained from the inclusion in the transaction price since the promised consideration is dependent on the market and thus is highly susceptible to factors outside the manager’s the broker-dealer influence. As subsidiary is acting as principal. advisor, Underwriting fees are recognized at a point in time, when the investment products are sold in the open market at a markup. When the broker-dealer subsidiary is lead underwriter, it is acting as an agent. In turn, when it is a participating underwriter, it is acting as principal. Mutual fund fees, such as distribution fees, are considered variable consideration and are recognized over time, as the uncertainty of the fees to be received is resolved as NAV is determined and investor activity occurs. The promise to provide distribution-related services is considered a single performance obligation as it requires the provision of a series of 158 POPULAR, INC. 2020 ANNUAL REPORT distinct services that are substantially the same and have the same pattern of transfer. When the broker-dealer subsidiary is acting as a distributor, it is acting as principal. In turn, when it acts as third-party dealer, it is acting as an agent. Trust fees Trust fees are recognized from retirement plan, mutual fund administration, investment management, trustee, escrow, and custody and safekeeping services. These asset management services are considered a single performance obligation as it requires the provision of a series of distinct services that are substantially the same and have the same pattern of transfer. The performance obligation is satisfied over time, except for optional services and certain other services that are satisfied at a point in time. Revenues are recognized in arrears, when, or as, the services are rendered. The Corporation is acting as principal since, as asset manager, it has the obligation to provide the specified service to the customer and has the ultimate discretion in establishing the fee paid by the customer for the specified services. Note 32 - Leases The Corporation enters in the ordinary course of business into operating and finance leases for land, buildings and equipment. These contracts generally do not include purchase options or residual value guarantees. The remaining lease terms of 0.1 to 33.0 years considers options to extend the leases for up to 20.0 years. The Corporation identifies leases when it has both the right to obtain substantially all of the economic benefits from the use of the asset and the right to direct the use of the asset. right-of-use assets The Corporation recognizes (“ROU assets”) and lease liabilities related to operating and finance leases in its Consolidated Statements of Financial Condition under liabilities, respectively. Refer to Note 13 and Note 18, respectively, for information on the balances of these lease assets and liabilities. the caption of other assets and other The Corporation uses the incremental borrowing rate for purposes of discounting lease payments for operating and finance leases, since it does not have enough information to determine the rates implicit in the leases. The discount rates are based on fixed-rate and fully amortizing borrowing facilities of its banking subsidiaries that are collateralized. For leases held by non-banking subsidiaries, a credit spread is added to this rate based on financing transactions with a similar credit risk profile. On October 27, 2020, PB authorized and approved a strategic realignment of its New York Metro branch network that will result in eleven branch closures, of which nine are leased properties. The branch closures were completed on January 29, 2021. The following table presents the undiscounted cash flows of operating and finance leases for each of the following periods: (In thousands) Operating Leases Finance Leases 2021 $34,322 3,897 2022 $25,062 3,402 2023 $22,900 3,492 2024 $21,778 3,589 2025 $18,870 3,701 Later Years $51,807 8,850 Total Lease Payments $174,739 26,931 December 31, 2020 Less: Imputed Interest $(22,151) $152,588 22,572 (4,359) Total The following table presents the lease cost recognized by the Corporation in the Consolidated Statements of Operations as follows: Years ended December 31, (Dollars in thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating Years ended December 31, 2020 2019 2020 2019 leases [1] $ 41,650 $ 30,073 (In thousands) Finance lease cost: Amortization of ROU assets Interest on lease liabilities Operating lease cost Short-term lease cost Variable lease cost Sublease income Net gain recognized from sale and leaseback transaction [1] Impairment of operating ROU assets [2] Impairment of finance ROU assets [2] $ 2,215 1,185 31,674 214 51 (113) (5,550) 14,805 1,115 $ 1,701 1,194 30,664 252 97 (113) – – – Total lease cost [3] $45,596 $33,795 [1] During the quarter ended June 30, 2020, the Corporation recognized the transfer of the Caparra Center as a sale. Since the sale and partial leaseback was considered to be at fair value, no portion of the gain on sale was deferred. Impairment loss recognized during the fourth quarter of 2020 in connection with the closure of nine branches as a result of the strategic realignment of PB’s New York Metro branch network. [2] [3] Total lease cost is recognized as part of net occupancy expense, except for the net gain recognized from the sale and leaseback transaction which was included as part of other operating income. Total rental expense for all operating leases, except those with terms of a month or less that were not renewed, for the year ended December 31, 2018 was $31.2 million, which is included in net occupancy, equipment and communication expenses, according to their nature. Total amortization and interest expense for capital leases for the year ended December 31, 2018 was $1.5 million and $1.2 million, respectively. The following table presents supplemental cash flow information and other related information related to operating and finance leases. Operating cash flows from finance leases Financing cash flows from finance leases [1] ROU assets obtained in exchange for new lease obligations: Operating leases [2] Finance leases Weighted-average remaining lease term: Operating leases Finance leases Weighted-average discount rate: Operating leases Finance leases 1,185 1,200 3,145 1,726 $ 14,975 4,510 $ 28,430 661 8.0 years 8.9 years 8.7 years 7.3 years 3.0% 5.0% 3.4% 5.9% [1] During the quarter ended December 31, 2020, the Corporation made base lease termination payments amounting to $10.2 million in connection with the closure of nine branches as a result of the strategic realignment of PB’s New York Metro branch network. [2] During the quarter ended June 30, 2020, the Corporation recognized a lease liability of $11.1 million and a corresponding ROU asset for the same amount as a result of the partial leaseback of the Caparra Center. As of December 31, 2020, the Corporation has additional operating leases contracts that have not yet commenced with an undiscounted contract amount of $3.6 million, which will have lease terms ranging from 10 to 20 years. Note 33 - Stock-based compensation the shareholders of Incentive Plan On May 12, 2020, the Corporation approved the Popular, Inc. 2020 Omnibus Incentive Plan, which permits the Corporation to issue several types of stock- based compensation to employees and directors of the Corporation and/or any of its subsidiaries (the “2020 Incentive POPULAR, INC. 2020 ANNUAL REPORT 159 Plan”). The 2020 Incentive Plan replaced the Popular, Inc. 2004 Omnibus Incentive Plan, which was in effect prior to the adoption of the 2020 Incentive Plan (the “2004 Incentive Plan” and, together with the 2020 Incentive Plan, the “Incentive Plan”). Participants under the Incentive Plan are designated by the Compensation Committee of the Board of Directors (or its delegate, as determined by the Board). Under the Incentive Plan, issued restricted stock and performance shares for its employees and restricted stock and restricted stock units (“RSU”) to its directors. the Corporation has The restricted stock granted under the Incentive Plan to employees becomes vested based on the employees’ continued service with Popular. Unless otherwise stated in an agreement, the compensation cost associated with the shares of restricted stock is determined based on a two-prong vesting schedule. The first part is vested ratably over five years commencing at the date of grant (the “graduated vesting portion”) and the second part is vested at termination of employment after attaining 55 years of age and 10 years of service (the “retirement vesting portion”). The graduated vesting portion is accelerated at termination of employment after attaining 55 years of age and 10 years of service. The vesting schedule for restricted shares granted on or after 2014 is as follows, the graduated vesting portion is vested ratably over four years commencing at the date of the grant and the retirement vesting portion is vested at termination of employment after attaining the earlier of 55 years of age and 10 years of service or 60 years of age and 5 years of service. The graduated vesting portion is accelerated at termination of employment after attaining the earlier of 55 years of age and 10 years of service or 60 years of age and 5 years of service. The performance share award granted under the Incentive Plan consist of the opportunity to receive shares of Popular, Inc.’s common stock provided that the Corporation achieves certain goals during a three-year performance cycle. The goals will be based on two metrics weighted equally: the Relative Total Shareholder Return (“TSR”) and the Absolute Earnings per Share (“EPS”) goals. For grants issued on 2020, the EPS goal is substituted by the Absolute Return on Average Assets (“ROA”) goal. The TSR metric is considered to be a market condition under ASC 718. For equity settled awards based on a market condition, the fair value is determined as of the grant date and is not subsequently revised based on actual performance. The EPS and ROA metrics are considered to be a performance condition under ASC 718. The fair value is determined based on the probability of achieving the EPS or ROA goal as of each reporting period. The TSR and EPS or ROA metrics are equally weighted and work independently. The number of shares that will ultimately vest ranges from 50% to a 150% of target based on both market (TSR) and performance (EPS and ROA) conditions. The performance shares vest at the If a participant end of the three-year performance cycle. 160 POPULAR, INC. 2020 ANNUAL REPORT terminate employment after attaining the earlier of 55 years of age and 10 years of service or 60 years of age and 5 years of service, the performance shares shall continue outstanding and vest at the end of the performance cycle. The following table summarizes the restricted stock and performance shares activity under the Incentive Plan for members of management. (Not in thousands) Non-vested at January 1, 2018 Granted Performance Shares Quantity Adjustment Vested Forfeited Non-vested at December 31, 2018 Granted Performance Shares Quantity Adjustment Vested Non-vested at December 31, 2019 Granted Performance Shares Quantity Adjustment Vested Forfeited Shares 295,340 239,062 234,076 (372,271) (14,021) 382,186 218,169 15,061 (270,051) 345,365 253,943 (7) (234,421) (6,368) Non-vested at December 31, 2020 358,512 Weighted-average grant date fair value $30.75 45.81 33.09 35.83 37.35 $36.41 55.55 55.72 44.73 $41.68 42.49 48.79 42.64 44.26 $41.23 During the year ended December 31, 2020, 213,511 shares of restricted stock (2019 - 152,773; 2018 - 166,648) and 40,432 performance shares (2019 - 65,396; 2018 - 72,414) were awarded to management under the Incentive Plan. During the year ended December 31, 2020, the Corporation recognized $7.6 million of restricted stock expense related to management incentive awards, with a tax benefit of $1.3 million (2019 - $7.7 million, with a tax benefit of $1.2 million; 2018 - $6.9 million, with a tax benefit of $1.1 million). During the year ended December 31, 2020, the fair market value of the restricted stock vested was $9.8 million at grant date and $11.2 million at vesting date. This triggers a windfall of $0.5 million that was recorded as a reduction on income tax expense. During the year ended December 31, 2020 the Corporation recognized $2.3 million of performance shares expense, with a tax benefit of $0.2 million (2019 - $4.6 million, with a tax benefit of $0.3 million; 2018 - $5.6 million, with a tax benefit of $0.4 million). The total unrecognized compensation cost related to non-vested restricted stock awards to members of management at December 31, 2020 was $9.5 million and is expected to be recognized over a weighted-average period of 2.3 years. The following table summarizes the restricted stock and RSU activity under the Incentive Plan for members of the Board of Directors: (Not in thousands) Non-vested at January 1, 2018 Granted Vested Forfeited Non-vested at December 31, 2018 Granted Vested Forfeited Non-vested at December 31, 2019 Granted Vested Forfeited Non-vested at December 31, 2020 Restricted stock Weighted-average grant date fair value RSU Weighted-average grant date fair value – 25,159 (25,159) – – 1,052 (1,052) – – – – – – – $46.71 46.71 – – $49.25 49.25 – $ – – – – – – – – – – 27,449 (27,449) – – 43,866 (43,866) – – $ – – – – – $57.64 57.64 – – $35.47 35.47 – – The equity awards granted to members of the Board of Directors of Popular, Inc. (the Directors) will vest and become non-forfeitable on the grant date of such award. Effective on May 2019 all equity awards granted to the Directors may be paid in either restricted stocks or RSU, at the Directors’ election. If RSU are elected the Directors may defer the delivery of the shares of common stocks underlying the RSU award after their retirement. To the extent that cash dividends are paid on the Corporation’s outstanding common stocks, the Directors will receive an additional number of RSU that reflect reinvested dividend equivalent. For 2020 and 2019, all Directors elected RSU. Accordingly, during the year ended December 31, 2020, no shares of restricted stock were granted to members of the Board of Directors of Popular, Inc. (2019 - 1,052; 2018 - 25,159) and the Corporation recognized no expense related to these restricted stock shares (2019 - $52 thousand, with a tax benefit of $6 thousand; 2018 - $1.6 million, with a tax benefit of $0.2 million). For the year ended December 31, 2020, 43,866 RSUs were granted to the Directors (2019 - 27,449). For the year ended December 31, 2020, $1.6 million of restricted stock expense related to these RSU was recognized, with a tax benefit of $0.3 million (2019 - $1.6 million with a tax benefit of $0.2 million). The fair value at vesting date of the RSU vested during the year ended December 31, 2020 for directors was $1.6 million. Note 34 - Income taxes The components of income tax expense for the years ended December 31, are summarized in the following table. (In thousands) Current income tax (benefit) expense: Puerto Rico Federal and States Subtotal Deferred income tax expense (benefit): Puerto Rico Federal and States Adjustment for enacted changes in income tax laws Subtotal Total income tax expense 2020 2019 2018 $ 33,281 3,613 $ 2,251 3,598 $126,700 6,841 36,894 5,849 133,541 69,300 5,744 – 75,044 123,337 17,995 – 141,332 (62,601) 20,953 27,686 (13,962) $111,938 $147,181 $119,579 POPULAR, INC. 2020 ANNUAL REPORT 161 The reasons for the difference between the income tax expense applicable to income before provision for income taxes and the amount computed by applying the statutory tax rate in Puerto Rico were as follows: (In thousands) Computed income tax at statutory rates Benefit of net tax exempt interest income Effect of income subject to preferential tax rate [1] Deferred tax asset valuation allowance Difference in tax rates due to multiple jurisdictions Adjustment in net deferred tax due to change in the applicable tax rate Unrecognized tax benefits State and local taxes Others Income tax expense 2020 2019 2018 Amount $ 231,960 (126,232) (10,141) 15,276 (1,903) – (2,163) 4,350 791 % of pre-tax income 38% (20) (2) 2 – – – – – Amount $ 306,869 (145,597) (9,562) 16,992 (12,888) (6,559) – 4,749 (6,823) % of pre-tax income 38% (18) (1) 2 (2) (1) – 1 (1) Amount $ 287,717 (97,199) (111,738) 27,336 (16,324) 27,686 (1,621) 8,772 (5,050) % of pre-tax income 39% (13) (15) 4 (3) 4 – 1 (1) $ 111,938 18% $ 147,181 18% $ 119,579 16% [1] For the year ended December 31, 2018, includes the impact of the Tax Closing Agreement entered into in connection with the Westernbank FDIC-assisted Transaction. For the year ended December 31, 2020, the Corporation recorded income tax expense of $111.9 million, compared to $147.2 million for the previous year. The reduction in income tax expense was mainly due to lower pre-tax income during the year 2020 as compared to year 2019 resulting primarily from a higher provision for credit losses and the impact of the Covid- 19 pandemic net of lower tax benefit related to net exempt interest income in year 2020, primarily as a result of an income tax benefit of approximately $26 million recognized in year 2019 related to a revision of the amount of exempt income earned in prior years and certain adjustments pertaining to tax periods for which the statute of limitations had expired. Income tax expense of $119.6 million for the year ended December 31, 2018 reflects the impact of the Termination Agreement with the FDIC. In June 2012, the Puerto Rico Department of the Treasury and the Corporation entered into a Tax Closing Agreement (the “Tax Closing Agreement”) to clarify the tax treatment related to the loans acquired in the FDIC Transaction in accordance with the provisions of the Puerto Rico Tax Code. The Tax Closing Agreement provides that these loans are capital assets and any principal amount collected in excess of the amount paid for such loans will be taxed as a capital gain. The Tax Closing Agreement further tax liability upon the provides the Corporation’s that termination of the Shared-Loss Agreements be calculated based on the “deemed sale” of the underlying loans. As a result, in connection with the Termination Agreement with the FDIC, the Corporation recognized an additional income tax expense of $49.8 million associated with the “deemed sale” incremental tax liability at the capital gains rate per the Tax Closing Agreement. In addition, the Corporation recognized an income tax benefit of $158.7 million related to the increase in deferred tax assets due to increase in the tax basis of the loans as a result of the “deemed sale” for a net tax benefit of $108.9 million. Also, the Corporation recorded an income tax expense of $45.0 million related to the gain resulting from the Termination Agreement, mainly related to the reversal of net deferred tax liability of the true-up payment obligation and the FDIC Loss Share Asset. On December 10, 2018, the Governor of Puerto Rico signed into law Act No. 257 of 2018, which amended the Puerto Rico Internal Revenue Code to, among other things, reduce the Puerto Rico corporate income tax rate from 39% to 37.5%. The Corporation recognized, during the year 2018, $27.7 million of income tax expense as a result of a reduction in the Corporation’s net deferred tax asset related to its Puerto Rico operations, due to aforementioned reduction in tax rate at which it expects to realize the benefit of the deferred tax asset. 162 POPULAR, INC. 2020 ANNUAL REPORT Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Significant components of the Corporation’s deferred tax assets and liabilities at December 31 were as follows: (In thousands) Deferred tax assets: Tax credits available for carryforward Net operating loss and other carryforward available Postretirement and pension benefits Deferred loan origination fees Allowance for credit losses Accelerated depreciation FDIC-assisted transaction Intercompany deferred gains Lease liability Difference in outside basis from pass-through entities Other temporary differences Total gross deferred tax assets Deferred tax liabilities: Indefinite-lived intangibles Unrealized net gain (loss) on trading and available-for-sale securities Right of use assets Other temporary differences Total gross deferred tax liabilities Valuation allowance Net deferred tax asset (In thousands) Deferred tax assets: Tax credits available for carryforward Net operating loss and other carryforward available Postretirement and pension benefits Deferred loan origination fees Allowance for loan losses Accelerated depreciation FDIC-assisted transaction [1] Intercompany deferred gains Lease liability Difference in outside basis from pass-through entities Other temporary differences Total gross deferred tax assets Deferred tax liabilities: Indefinite-lived intangibles Unrealized net gain (loss) on trading and available-for-sale securities Right of use assets Other temporary differences Total gross deferred tax liabilities Valuation allowance Net deferred tax asset December 31, 2020 US Total PR $ 3,003 124,355 80,179 12,079 373,010 3,439 152,665 1,728 22,790 61,222 38,954 $ 5,269 698,842 – (2,652) 38,606 5,390 – – 18,850 – 7,344 $ 8,272 823,197 80,179 9,427 411,616 8,829 152,665 1,728 41,640 61,222 46,298 873,424 771,649 1,645,073 73,305 67,003 20,708 50,247 211,263 37,745 8,595 15,510 1,169 63,019 112,871 407,225 111,050 75,598 36,218 51,416 274,282 520,096 $549,290 $301,405 $ 850,695 December 31, 2019 US Total PR $ 2,368 112,803 82,623 2,519 405,475 3,439 152,665 1,604 22,694 21,670 26,554 $ 5,269 716,796 – (2,759) 10,981 4,914 – – 23,387 – 7,460 $ 7,637 829,599 82,623 (240) 416,456 8,353 152,665 1,604 46,081 21,670 34,014 834,414 766,048 1,600,462 69,976 15,635 20,598 50,194 156,403 36,058 432 21,430 1,179 59,099 100,175 399,800 106,034 16,067 42,028 51,373 215,502 499,975 $577,836 $307,149 $ 884,985 [1] For the year ended December 31, 2019, the amounts included within the indefinite-lived intangibles and other liabilities include $32.6 million and $37.4 million, respectively which were previously included within the FDIC- assisted transaction line for the Puerto Rico operations. The Corporation determined to separately present these lines to better reflect the nature of the assets and liabilities within the respective lines, after the termination of the FDIC loss sharing agreement. POPULAR, INC. 2020 ANNUAL REPORT 163 The net deferred tax asset shown in the table above at December 31, 2020 is reflected in the consolidated statements of financial condition as $0.9 billion in net deferred tax assets (in the “other assets” caption) (2019 - $0.9 billion in deferred tax asset in the “other assets” caption) and $897 thousands in deferred tax liabilities (in the “other liabilities” caption) (2019 - $1.4 million in deferred tax liabilities in the “other liabilities” reflecting the aggregate deferred tax assets or caption), liabilities the of Corporation. subsidiaries tax-paying individual of Included as part of the other carryforwards available are $29 million related to contributions to BPPR’s qualified pension plan that have no expiration date. Additionally, the deferred tax asset related to the NOLs outstanding at December 31, 2020 expires as follows: (In thousands) 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 $ 16 396 1,362 9,181 13,516 13,402 16,430 311,838 111,343 115,550 96,273 16,951 2,990 84,923 $794,171 be those challenges such as NPL inflows in our U.S. operations has been stable. On raised by the the other hand, besides pandemic, the financial results of the U.S. operations were positive. This objectively verifiable positive evidence together with the positive evidence of recent historical operating performance such as sustained loan growth, the early success of new business initiatives, the branch optimization strategy, and stable credit metrics, in combination with the length of the expiration of the NOLs are enough to overcome the additional negative evidence related to the COVID-19 pandemic. As of December 31, 2020, after weighting all positive and negative evidence, the Corporation concluded that it is more likely than not that approximately $301 million of the deferred tax asset from the U.S. operations, comprised mainly of net operating realized. The Corporation based this losses, will determination on its estimated earnings available to realize the deferred tax asset for the remaining carryforward period, together with the historical level of book income adjusted by permanent differences. Management will continue to monitor and review the U.S. operation’s results and the pre-tax earnings forecast on a quarterly basis to assess the future realization of the DTA. Management will closely monitor factors like, net interest income versus forecast, income margin, allowance for credit losses, charge offs, NPLs inflows and NPA balances. If such factors worsen during future periods, they could constitute sufficient objectively verifiable that negative evidence to overcome the positive evidence, currently exists, and could require additional amounts of valuation allowance to be registered on the DTA. Any increases to the valuation allowance would be reflected as an income tax expense, reducing the Corporation’s earnings. targeted loan growth, net A deferred tax asset should be reduced by a valuation allowance if based on the weight of all available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or the entire deferred tax asset will not be realized. The valuation allowance should be sufficient to reduce the deferred tax asset to the amount that is more likely than not to be realized. At December 31, 2020 the net deferred tax asset of the U.S. operations amounted to $708 million with a valuation allowance of approximately $407 million, for a net deferred tax asset after valuation allowance of approximately $301 million. The Corporation evaluates the realization of the deferred tax asset by taxing jurisdiction. The U.S. operations are evaluated, as a whole, since a consolidated income tax return is filed. During the year ended December 31, 2020, two additional pieces of negative evidence arose: further reduction in interest rates combined with a lower expectation of rate increases in the near future and the economic uncertainty around COVID-19 pandemic. This economic disruption was the principal driver of the significant increase in the provision for credit losses during this year, although net charge-offs and early credit indicators 164 POPULAR, INC. 2020 ANNUAL REPORT At December 31, 2020, the Corporation’s net deferred tax assets related to its Puerto Rico operations amounted to $549 million. The Corporation’s Puerto Rico Banking operation is not in a cumulative loss position and has sustained profitability for the three year period ended December 31, 2020. This is considered a strong piece of objectively verifiable positive evidence that out weights any negative evidence considered by management in the evaluation of the realization of the deferred tax asset. Based on this evidence and management’s estimate of future taxable income, the Corporation has concluded that it is more likely than not that such net deferred tax asset of the Puerto Rico Banking operations will be realized. taking into account The Holding Company operation is in a cumulative loss taxable income exclusive of position, reversing temporary differences, for the three years period ending December 31, 2020. Management expect these losses will be a trend in future years. This objectively verifiable negative evidence is considered by management a strong negative evidence that will suggest that income in future years will be insufficient to support the realization of all deferred tax asset. After weighting of all positive and negative evidence management concluded, as of the reporting date, that it is more likely than not that the Holding Company will not be able to realize any portion of the deferred tax assets, considering the criteria of ASC Topic 740. Accordingly, the Corporation has maintained a valuation allowance on the deferred tax asset of $113 million as of December 2020. Under the Puerto Rico Internal Revenue Code, the Corporation and its subsidiaries are treated as separate taxable entities and are not entitled to file consolidated tax returns. However, certain subsidiaries that are organized as limited liability companies with a partnership election are treated as pass-through entities for Puerto Rico tax purposes. The Code provides a dividends-received deduction of 100% on dividends received from “controlled” subsidiaries subject to taxation in Puerto Rico and 85% on dividends received from other taxable domestic corporations. The Corporation’s subsidiaries in the United States file a consolidated federal income tax return. The intercompany settlement of taxes paid is based on tax sharing agreements which generally allocate taxes to each entity based on a separate return basis. The reconciliation following presents of a table unrecognized tax benefits. approximated $4.8 million (2019 - $3.5 million). The total interest expense recognized during 2020 was $2.0 million net of a reduction of $645 thousands due to the expiration of the statute of limitation (2019 - $664 thousand). Management determined that, as of December 31, 2020 and 2019, there was the payment of penalties. The no need to accrue for to interest to is Corporation’s unrecognized tax benefits in income tax expense, while the penalties, if any, are reported in other operating expenses in the consolidated statements of operations. related report policy After consideration of the effect on U.S. federal tax of unrecognized U.S. state tax benefits, the total amount of unrecognized tax benefits, including U.S. and Puerto Rico that, if recognized through earnings, would affect the Corporation’s approximately $10.2 million at effective December 31, 2020 (2019 - $10.5 million). tax rate, was The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current tax year positions, expiration of open income tax returns due to the statute of limitations, changes in management’s judgment about the level of uncertainty, status of examinations, and the addition or elimination of uncertain tax positions. litigation and legislative activity, (In millions) Balance at January 1, 2019 Additions for tax positions taken in prior years [1] Balance at December 31, 2019 Reduction as a result of lapse of statute of limitations Balance at December 31, 2020 $ 7.2 9.1 $16.3 (1.5) $14.8 [1] The Corporation recorded a deferred tax asset of $8.7 million associated with the unrecognized tax benefit since the uncertainty of the tax position is related to the timing of the tax benefit. The Corporation and its subsidiaries file income tax returns in Puerto Rico, the U.S. federal jurisdiction, various U.S. states and political subdivisions, and foreign jurisdictions. As of December 31, 2020, the following years remain subject to examination in the U.S. Federal jurisdiction – 2017 and thereafter and in the Puerto Rico jurisdiction – 2014, 2016 and thereafter. The Corporation anticipates a reduction in the total amount of unrecognized tax benefits within the next 12 months, which could amount to approximately $13.6 million, including interest. At December 31, 2020, the total amount of recognized in the statement of financial interest condition POPULAR, INC. 2020 ANNUAL REPORT 165 Note 35 - Supplemental disclosure on the consolidated statements of cash flows Additional disclosures on cash flow information and non-cash activities for the years ended December 31, 2020, 2019 and 2018 are listed in the following table: (In thousands) Income taxes paid Interest paid Non-cash activities: Loans transferred to other real estate Loans transferred to other property Total loans transferred to foreclosed assets Loans transferred to other assets Financed sales of other real estate assets Financed sales of other foreclosed assets Total financed sales of foreclosed assets Financed sale of premises and equipment Transfers from loans held-in-portfolio to loans held-for-sale Transfers from loans held-for-sale to loans held-in-portfolio Loans securitized into investment securities [1] Trades receivables from brokers and counterparties Trades payable to brokers and counterparties Receivables from investments securities Recognition of mortgage servicing rights on securitizations or asset transfers Loans booked under the GNMA buy-back option Capitalization of Right of Use Assets Gain from the FDIC Termination Agreement [1] Includes loans securitized into trading securities and subsequently sold before year end. 2020 2019 2018 $ 13,045 240,342 $ 14,461 369,383 $ 4,116 296,757 14,464 48,614 63,078 7,117 15,606 34,492 50,098 31,350 82,299 20,153 508,071 64,092 720,212 – 9,544 24,244 29,692 – 67,056 53,286 120,342 16,503 15,907 30,840 46,747 – – 7,829 458,758 39,364 4,084 – 9,143 72,480 189,097 – 47,965 43,645 91,610 16,843 16,779 17,867 34,646 – – 20,938 506,685 40,088 64 70,000 10,223 384,371 – 102,752 The following table provides a reconciliation of cash and due from banks, and restricted cash reported within the Consolidated Statement of Financial Condition that sum to the total of the same such amounts shown in the Consolidated Statement of Cash Flows. (In thousands) Cash and due from banks Restricted cash and due from banks Restricted cash in money market investments Total cash and due from banks, and restricted cash [2] December 31, 2020 December 31, 2019 December 31, 2018 $484,859 6,206 6,029 $497,094 $361,705 26,606 6,012 $394,323 $353,936 40,099 9,216 $403,251 [2] Refer to Note 4 - Restrictions on cash and due from banks and certain securities for nature of restrictions. structure corporate consists of Note 36 - Segment reporting two The Corporation’s reportable segments – Banco Popular de Puerto Rico and Popular U.S. Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. The segments were determined based on the organizational structure, which focuses primarily on the markets the segments serve, as well as on the products and services offered by the segments. Banco Popular de Puerto Rico: Given that Banco Popular de Puerto Rico constitutes a significant portion of the Corporation’s results of operations and total assets at December 31, 2020, additional disclosures 166 POPULAR, INC. 2020 ANNUAL REPORT are provided for the business areas included in this reportable segment, as described below: • Commercial It banking represents includes aspects of the Corporation’s banking operations conducted at BPPR, which are targeted mainly to corporate, small and middle size the lending and businesses. depository businesses, as well as other finance and advisory services. BPPR allocates funds across business areas based on duration matched transfer pricing at market rates. This area also incorporates income related with the investment of excess funds, as well as a proportionate share of the investment function of BPPR. • Consumer and retail banking represents the branch banking operations of BPPR which focus on retail clients. It includes the consumer lending business operations of BPPR, as well as the lending operations of Popular Auto and Popular Mortgage. Popular Auto focuses on auto and lease focuses principally on residential mortgage loan originations. The consumer and retail banking area also incorporates income related with the investment of excess funds from the branch network, as well as a proportionate share of the investment function of BPPR. Popular Mortgage financing, while • Other financial services include the trust and asset management service units of BPPR, the brokerage and investment banking operations of Popular Securities, and the insurance agency and reinsurance businesses of Popular Insurance, Popular Risk Services, and Popular Life Re. Most of the services that are provided by these subsidiaries generate profits based on fee income. reportable segment consists of Popular U.S.: the banking Popular U.S. operations of Popular Bank (PB) and Popular Insurance Agency, U.S.A. PB operates through a retail branch network in the U.S. mainland under the name of Popular. Popular Insurance Agency, U.S.A. offers investment and insurance services across the PB branch network. The Corporate group consists primarily of the holding companies Popular, Inc., Popular North America, Popular International Bank and certain of the Corporation’s investments accounted for under the equity method, including EVERTEC and Centro Financiero BHD, León. accounting policies of The segments the Transactions between reportable conducted at market eliminated for reporting consolidated results of operations. individual operating the Corporation. are primarily that are segments resulting in profits the those of rates, same are as The tables that follow present the results of operations and total assets by reportable segments: (In thousands) Net interest income (expense) Provision for credit losses Non-interest income Amortization of intangibles Depreciation expense Other operating expenses Income tax expense (benefit) Net income December 31, 2020 Reportable Segments Corporate Eliminations Total Popular, Inc. $ 1,896,127 $ (39,514) $ 292,441 469,625 95 46,442 6,299 57,448 1,397,678 98 1,004 (1,212) – – (3,755) – – (3,486) $ 1,856,613 292,536 512,312 6,397 58,452 1,392,980 113,622 (1,560) $ 498,264 $ 8,503 $ (124) (145) 111,938 $ 506,622 Segment assets $65,575,645 $5,214,439 $(4,864,084) $65,926,000 (In thousands) Net interest income Provision for credit losses Non-interest income Amortization of intangibles Depreciation expense Other operating expenses Income tax expense Net income Segment assets December 31, 2019 Banco Popular de Puerto Rico $ 1,633,950 135,495 506,739 8,610 49,058 1,208,458 129,145 Popular U.S. Intersegment Eliminations $ $ 295,470 30,028 23,160 664 8,263 205,219 19,164 (51) – (561) – – (547) – (65) $ 609,923 $ 55,292 $ $41,756,864 $10,056,316 $(18,576) December 31, 2019 Reportable Segments Corporate Eliminations Total Popular, Inc. $ 1,929,369 $ (37,675) $ 165,523 256 – – $ 1,891,694 165,779 529,338 43,901 (3,356) 569,883 9,274 57,321 1,413,130 96 746 55 – – 9,370 58,067 (3,140) 1,410,045 (In thousands) Net interest income (expense) Provision for credit losses Non-interest income Amortization of intangibles Depreciation expense Other operating expenses Income tax expense (benefit) Net income $ 665,150 $ 6,114 $ 148,309 (1,041) (87) (129) 147,181 $ 671,135 December 31, 2020 Segment assets $51,794,604 $5,228,276 $(4,907,556) $52,115,324 (In thousands) Net interest income Provision for credit losses Non-interest income Amortization of intangibles Depreciation expense Other operating expenses Income tax expense Net income (loss) Segment assets Banco Popular de Puerto Rico $ 1,593,599 210,955 445,893 5,634 47,890 1,169,816 106,211 Popular U.S. Intersegment Eliminations $ 302,517 81,486 24,285 665 9,558 228,406 7,411 $ 11 – (553) – – (544) – $ 498,986 $ (724) $ 2 $55,353,626 $10,255,954 $(33,935) (In thousands) Net interest income Provision for credit losses Non-interest income Amortization of intangibles Depreciation expense Other operating expenses Income tax expense Net income Segment assets December 31, 2018 Banco Popular de Puerto Rico $ 1,482,178 198,442 592,938 8,620 43,504 1,073,012 121,195 Popular U.S. $ 304,576 29,881 19,988 665 9,053 182,154 25,294 Intersegment Eliminations $ (2) – (560) – – (546) – (16) $ 630,343 $ 77,517 $ $38,037,696 $9,381,636 $(114,923) POPULAR, INC. 2020 ANNUAL REPORT 167 December 31, 2018 Reportable Segments Corporate Eliminations Total Popular, Inc. $ 1,786,752 $ (51,875) $ – $ 1,734,877 228,323 612,366 (251) 42,914 – (2,786) 9,285 52,557 41 743 – – 228,072 652,494 9,326 53,300 – 1,254,620 12,522 94,640 – (2,846) 12,522 1,346,414 (In thousands) Net interest income (expense) Provision (reversal) for credit losses Non-interest income Amortization of intangibles Depreciation expense Loss on early extinguishment of debt Other operating expenses Income tax expense (benefit) 146,489 (26,947) Net income (loss) $ 707,844 $ (89,709) $ 37 23 119,579 $ 618,158 Segment assets $47,304,409 $5,099,491 $(4,799,323) $47,604,577 December 31, 2018 Banco Popular de Puerto Rico Commercial Banking Consumer and Retail Banking Other Financial Services Eliminations and Other Adjustments [1] Total Banco Popular de Puerto Rico $ 584,293 $ 892,735 $ 5,201 $ (51) $ 1,482,178 Net interest income Provision for credit losses 105,604 92,838 – – 198,442 Non-interest income Amortization of intangibles Depreciation expense Other operating expenses Income tax expense 84,762 311,775 95,199 101,202 592,938 208 4,275 4,137 17,668 25,222 614 – – 8,620 43,504 276,158 718,990 71,344 6,520 1,073,012 76,255 100,925 7,903 (63,888) 121,195 Net income $ 193,162 $ 262,260 $ 16,402 $ 158,519 $ 630,343 Additional disclosures with respect to the Banco Popular de Puerto Rico Segment assets $27,712,852 $22,712,950 $376,992 $(12,765,098) $38,037,696 reportable segment are as follows: December 31, 2020 Banco Popular de Puerto Rico Commercial Banking Consumer and Retail Banking Other Financial Services Eliminations Total Banco Popular de Puerto Rico $ 653,091 $ 927,165 $ 13,343 $ – $ 1,593,599 47,905 163,050 – – 210,955 100,329 249,464 97,443 (1,343) 445,893 197 3,609 1,828 20,488 26,746 656 – – 5,634 47,890 303,534 782,521 85,122 (1,361) 1,169,816 104,617 (5,934) 7,528 – 106,211 (In thousands) Net interest income Provision for credit losses Non-interest income Amortization of intangibles Depreciation expense Other operating expenses Income tax expense (benefit) Net income $ 276,679 $ 206,637 $ 15,652 $ 18 $ 498,986 Segment assets $49,806,766 $29,000,270 $2,218,444 $(25,671,854)$55,353,626 December 31, 2019 Banco Popular de Puerto Rico (In thousands) Commercial Banking Consumer and Retail Banking Other Financial Services Eliminations Total Banco Popular de Puerto Rico 619,926 $ 1,009,196 $ 4,828 $ – $ 1,633,950 (46,099) 181,594 – – 135,495 [1] Includes the impact of the Termination Agreement with the FDIC and the Tax Closing Agreement entered into in connection with the FDIC transaction. These transactions resulted in a gain of $102.8 million reported in the non-interest income line, other operating expenses of $8.1 million and a net tax benefit of $63.9 million. Refer to Note 34 to the Consolidated Financial Statements for additional information. selected presents information Geographic Information financial following The information based on the geographic location where the Corporation conducts its business. The banking operations of BPPR are primarily based in Puerto Rico, where it has the largest retail banking franchise. BPPR also conducts banking operations in the U.S. Virgin Islands, the British Virgin Islands and New York. BPPR’s banking operations in the United States include E-loan, an online platform used to offer personal loans, co-branded credit cards offerings and an online deposit gathering platform. In the Virgin Islands, the BPPR segment offers banking products, including loans and deposits. During the year ended December 31, 2020, the BPPR segment generated approximately $55.3 million (2019 - $55.7 million, 2018 - $37.6 million) in revenues from its operations in the United States, including net interest income, service charges on deposit accounts and other service fees. In addition, the BPPR segment generated $44.2 million in revenues (2019 - $47.6 million, 2018 - $48.8 million) from its operations in the U.S. and British Virgin Islands. At December 31, 2020, total assets for the BPPR segment related to its operations in the United States amounted to $627 million (2019 - $635 million). 99,758 303,268 106,218 (2,505) 506,739 195 4,294 4,121 20,024 28,411 623 – – 8,610 49,058 (In thousands) Revenues: [1] Puerto Rico United States Other 2020 2019 2018 $1,921,207 376,529 71,189 $2,368,925 $2,016,089 371,368 74,120 $2,461,577 $1,953,671 357,680 76,020 $2,387,371 Total consolidated revenues [1] Total revenues include net interest income, service charges on deposit accounts, other service fees, mortgage banking activities, net gain (loss) on sale of debt securities, net gain (loss), including impairment on equity securities, net profit (loss) on trading account debt securities, net gain on sale of including valuation adjustments on loans held-for-sale, adjustments (expense) to indemnity reserves on loans sold, FDIC loss-share income and other operating income. loans, 309,762 104,636 835,582 11,999 65,631 12,510 (2,517) – 1,208,458 129,145 Net income $ 331,166 $ 250,584 $ 28,161 $ 12 $ 609,923 Segment assets $34,340,842 $23,976,004 $380,557 $(16,940,539)$41,756,864 168 POPULAR, INC. 2020 ANNUAL REPORT Net interest income $ Provision (reversal) for credit losses Non-interest income Amortization of intangibles Depreciation expense Other operating expenses Income tax expense Selected Balance Sheet Information (In thousands) Puerto Rico Total assets Loans Deposits United States Total assets Loans Deposits Other Total assets Loans Deposits [1] 2020 2019 2018 $54,143,954 20,413,112 47,586,880 $40,544,255 18,989,286 34,664,243 $36,863,930 18,837,742 31,237,529 $10,878,030 8,396,983 7,672,549 $10,693,536 7,819,187 7,664,792 $9,847,944 7,034,075 6,878,599 $904,016 674,556 1,606,911 $877,533 657,603 1,429,571 $892,703 687,494 1,593,911 [1] Represents deposits from BPPR operations located in the U.S. and British Virgin Islands. Note 37 - Popular, Inc. (holding company only) financial information The following condensed financial information presents the financial position of Popular, Inc. Holding Company only at December 31, 2020 and 2019, and the results of its operations and cash flows for the years ended December 31, 2020, 2019 and 2018. POPULAR, INC. 2020 ANNUAL REPORT 169 Condensed Statements of Condition (In thousands) ASSETS Cash and due from banks (includes $69,299 due from bank subsidiary (2019 – $56,008)) Money market investments Debt securities held-to-maturity, at amortized cost (includes $8,726 in common securities from statutory trusts (2019 - $8,726)) [1] Equity securities, at lower of cost or realizable value Investment in BPPR and subsidiaries, at equity Investment in Popular North America and subsidiaries, at equity Investment in other non-bank subsidiaries, at equity Other loans Less - Allowance for credit losses Premises and equipment Investment in equity method investees Other assets (includes $5,518 due from subsidiaries and affiliate (2019 - $4,353)) Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Notes payable Other liabilities (includes $3,779 due to subsidiaries and affiliate (2019 - $2,109)) Stockholders’ equity Total liabilities and stockholders’ equity [1] Refer to Note 17 to the consolidated financial statements for information on the statutory trusts. December 31, 2020 2019 $ 69,299 111,596 $ 55,956 221,598 8,726 16,049 4,327,188 1,733,411 271,129 31,473 311 5,322 88,272 35,002 8,726 10,744 4,233,046 1,749,518 260,501 32,027 410 3,893 75,739 25,087 $6,697,156 $6,676,425 $ 587,386 81,148 6,028,622 $ 586,119 73,596 6,016,710 $6,697,156 $6,676,425 170 POPULAR, INC. 2020 ANNUAL REPORT Condensed Statements of Operations (In thousands) Income: Dividends from subsidiaries Interest income (includes $2,290 due from subsidiaries and affiliates (2019 – $4,237; 2018 – $6,121)) Earnings from investments in equity method investees Other operating income Net gain (loss), including impairment, on equity securities Total income Expenses: Interest expense Provision (reversal) for credit losses Loss on early extinguishment of debt Operating (income) expenses (includes expenses for services provided by subsidiaries and affiliate of $13,140 (2019 – $14,400 ; 2018 – $10,511)), net of reimbursement by subsidiaries for services provided by parent of $138,729 (2019 – $106,725 ; 2018 – $90,807) Total expenses Income before income taxes and equity in undistributed (losses) earnings of subsidiaries Income tax expense Income before equity in undistributed (losses) earnings of subsidiaries Equity in undistributed (losses) earnings of subsidiaries Net income Comprehensive income, net of tax Years ended December 31, 2018 2019 2020 $586,000 4,949 17,841 1 1,494 $408,000 6,669 17,279 1 988 $453,200 8,366 15,498 253 (777) 610,285 432,937 476,540 38,528 95 – 38,528 256 – 51,218 (251) 12,522 (921) 80 37,702 38,864 572,583 17 572,566 (65,944) 394,073 – 394,073 277,062 3,656 67,145 409,395 – 409,395 208,763 $506,622 $671,135 $618,158 $866,551 $929,171 $540,836 POPULAR, INC. 2020 ANNUAL REPORT 171 Condensed Statements of Cash Flows (In thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Equity in losses (earnings) of subsidiaries, net of dividends or distributions Provision (reversal) for credit losses Amortization of intangibles Net accretion of discounts and amortization of premiums and deferred fees Share-based compensation Earnings from investments under the equity method, net of dividends or distributions Loss on early extinguishment of debt Net (increase) decrease in: Equity securities Other assets Net (decrease) increase in: Interest payable Other liabilities Total adjustments Net cash provided by operating activities Cash flows from investing activities: Net decrease (increase) in money market investments Net repayments on other loans Capital contribution to subsidiaries Return of capital from wholly owned subsidiaries Return of capital from equity method investments Acquisition of premises and equipment Proceeds from sale of premises and equipment Net cash provided by (used in) investing activities Cash flows from financing activities: Payments of notes payable Payments of debt extinguishment Proceeds from issuance of notes payable Proceeds from issuance of common stock Payments for repurchase of reedemable preferred stock Dividends paid Net payments for repurchase of common stock Payments related to tax withholding for share-based compensation Net cash used in financing activities Net increase (decrease) in cash and due from banks, and restricted cash Cash and due from banks, and restricted cash at beginning of period Cash and due from banks, and restricted cash at end of period Years ended December 31, 2019 2018 2020 $ 506,622 $ 671,135 $ 618,158 65,944 95 98 1,233 5,770 (15,510) – (277,062) 256 96 1,240 7,927 (14,948) – (208,763) (251) 41 2,022 7,441 (14,333) 12,522 (5,305) (8,327) (4,051) 1,134 (1,583) 344 – 2,470 – 2,508 (10,288) 8,059 46,468 (282,900) (204,789) 553,090 388,235 413,369 110,000 587 (10,000) 12,500 131 (2,667) 285 110,836 – – – 15,175 (28,017) (133,645) (500,705) (3,394) (45,000) 677 (9,000) 13,000 – (1,289) 3 (41,609) – – – 13,451 – (115,810) (250,571) (5,420) 70,000 536 (87,000) 13,000 – (1,099) 293 (4,270) (448,518) (12,522) 293,819 11,653 – (105,441) (125,731) (2,201) (650,586) (358,350) (388,941) 13,340 56,554 (11,724) 68,278 20,158 48,120 $ 69,894 $ 56,554 $ 68,278 Popular, Inc. (parent company only) received dividend distributions from its direct equity method investees amounting to $2.3 million for the year ended December 31, 2020 (2019 - $2.3 million; 2018 - $1.2 million). Also, received dividend distributions from PIBI amounting to $12.5 million (2019 - $13.0 million; 2018 - $13.0 million) which main source of income is derived from its investment in BHD and was recorded as a reduction to the investment. 172 POPULAR, INC. 2020 ANNUAL REPORT Notes payable include junior subordinated debentures issued by the Corporation that are associated to capital securities issued by the Popular Capital Trust I and Popular Capital Trust II and medium-term notes. Refer to Note 17 for a description of significant provisions related to these junior subordinated debentures. The following table presents the aggregate amounts by contractual maturities of notes payable at December 31, 2020: Year 2021 2022 2023 2024 2025 Later years Total (In thousands) $ – – 296,574 – – 290,812 $587,386 POPULAR, INC. 2020 ANNUAL REPORT 173