2021 2021 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 11 Resumen Financiero Histórico (25 Años) 14 Gerencia y Junta de Directores 16 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 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/ Información Corporativa 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 Annual Stockholders’ Meeting of Popular, Inc. will be held on Thursday, May 12, 2022, at 9:00 a.m. AST by means of remote communication, in a virtual format only through www.virtualshareholdermeeting.com/BPOP2022. Reunión Anual La Reunión Anual de Accionistas de Popular, Inc. se celebrará el jueves 12 de mayo de 2022 a las 9:00 a.m. AST exclusivamente vía comunicación remota, mediante formato virtual a través de www.virtualshareholdermeeting.com/BPOP2022. 2 | Popular, Inc. Popular, Inc. Year In Review Dear Shareholders: 2021 was an outstanding year for Popular, driven by record earnings, solid credit quality, increased deposit levels, continued customer growth and the successful execution of capital actions. Our results reflect the continued recovery in economic activity in the markets in which we do business, our diversified sources of revenue and prudent risk management. Financial Results, Capital and Stock Performance Our net income for the year reached $935 million, $428 million or 84% higher than the previous year. The increase was largely driven by a lower expense in the provision for loan losses. In 2021, we reported a provision benefit of $193 million, compared to a provision expense of $293 million in 2020. The provision benefit was driven by the current economic recovery and positive outlook, coupled with solid credit quality metrics. Higher net interest income and fees also contributed to the positive results. Capital levels remained strong, closing the year with a Common Equity Tier 1 ratio of 17.4% and a tangible book value of $65.26, both higher than 2020. During the year, we executed important capital actions, including an increase in the quarterly common stock dividend from $0.40 to $0.45 per share, a $350 million common stock buyback and the redemption of $187 million of outstanding trust preferred securities. Early in 2022, we announced our capital plan for the year, which includes an increase in the quarterly common stock dividend from $0.45 to $0.55 per share and common stock repurchases of up to $500 million. Our capital actions underscore the strength of Popular’s financial performance and capital position, which allow us to deliver value for shareholders while continuing to invest in our franchise. Our shares performed well during 2021, closing the year at $82.04, 46% higher than 2020. This performance compares favorably against the KBW Nasdaq Regional Bank Index, which increased by 34%, and aligned with our U.S. peer banks which increased by 52%. 2021 2020 $507 MILLION $935 MILLION NET INCOME STOCK PRICE 46% HIGHER THAN YEAR-END 2020 $82.04 CLOSING PRICE FOR 2021 POPULAR, INC. SHARES (BPOP) 2021 was an outstanding year for Popular, driven by record earnings, improved credit quality, record deposit levels, continued customer growth and the successful execution of our capital actions. 2021 Annual Report | 3 Business Highlights Management and Board of Directors We continued to execute our business strategy, structured around four strategic pillars Sustainable and Profitable Growth • Increased deposits by approximately $10 billion. • Funded approximately $675 million in loans in the second round of the SBA Paycheck Protection Program (PPP), reaching a program total of $2.1 billion. • Grew total loans, excluding the PPP portfolio, by $810 million. The increase was driven by auto loans in Puerto Rico and our commercial niche businesses in the United States, including community association banking and health care lending. • Acquired the assets of K2 Capital Group, a national healthcare equipment leasing business, with $119 million in assets, which complements and expands our existing healthcare lending business in the mainland United States. Simplicity • Successfully completed the strategic realignment of our New York Metro branch network, and achieved positive momentum refocusing remaining branches towards small and medium businesses. in • Continued efforts to digitize and automate operational processes to increase efficiency and improve customer satisfaction. Customer Focus • Deployed a new customer experience management platform that provides businesses and delivery channels with more frequent and timelier customer feedback. • Launched various digital applications to streamline our commercial credit card and small business loan applications. Fit for the Future • Executed various initiatives related to compensation, including merit increases and market adjustments. • Announced increases in minimum base salaries in all our markets, beginning in 2022. • Launched the first Employee Resource Group for the LGBTQ+ community and its allies. • Continued strengthening our compliance and cybersecurity programs. During the past two years, our colleagues have demonstrated remarkable resilience and agility, adapting to rapidly evolving conditions. The way we work and how our customers interact with us changed abruptly and we are aware that the pace of change will keep accelerating. Late in 2021 we announced certain organizational changes designed to meet our customers’ evolving needs and allow us to compete more effectively. Javier D. Ferrer was appointed as the Corporation’s Executive Vice President, Chief Operating Officer and Head of Business Strategy, reporting directly to me. Javier joined Popular in 2015 as General Counsel and has also overseen our corporate strategic planning function since 2019. He has provided us with invaluable counsel through periods of significant change and challenges, earning the trust and respect of our leadership and key stakeholders. José R. Coleman was appointed Executive Vice President, Chief Legal Officer and General Counsel of Popular, succeeding Javier. José served as Popular’s Senior Vice President, Deputy General Counsel and Assistant Secretary since 2017, playing a vital role in transforming the Corporation’s Legal function and building a strong track record in delivering results. I am confident this new leadership structure strengthens Popular as we strive to serve our customers in today’s exciting and ever-changing environment. We were also fortunate to bring in two new Directors to our Board. Betty DeVita, who has extensive experience in the banking and payments industry, is currently the Chief Business Officer and a member of the board of directors of FinConecta, a global technology company focused on the digitalization of finance and open banking. Betty’s record of delivering strong growth and innovation in diverse financial services contexts is invaluable as we navigate our constantly evolving industry. José R. Rodríguez, an experienced certified public accountant, was an audit partner at KPMG LLP from 1995 until his retirement in April 2021. Over more than 25 years with KPMG, José held diverse leadership positions at national and global levels. José provides Popular with vital insights and judgment, drawn from his vast knowledge and expertise in the accounting, auditing, and financial sectors, as well as his many roles as a trusted advisor. 4 | Popular, Inc. Our Board of Directors is a group of highly talented and committed individuals, who provide invaluable counsel to me and the entire management team. We are grateful for their guidance and support. We are also fortunate to have a team of more than 8,500 dedicated colleagues. Once again, they showed their resilience, facing challenges with resolve and a positive attitude. They continue to be, without a doubt, our most valuable asset, and we are committed to their professional, financial and general wellbeing. Looking Ahead ESG Our business provides a powerful platform to make a difference in the lives of our customers, colleagues, communities, and shareholders, a privilege and responsibility we take very seriously. During 2021, we advanced our environmental, social and governance (ESG) strategy. An important milestone was publishing our first Corporate Sustainability Report aligned with external sustainability reporting standards, such as SASB and GRI. Equal access to banking services closely aligns with the core values of our organization and is one of the key focus areas of our ESG strategy. We are committed to improving access to financial services for members of our communities that have, for numerous reasons, remained outside of the traditional banking system. We are proud that Banco Popular de Puerto Rico and Popular Bank are now offering Bank On certified accounts. is granted by the national This certification nonprofit Cities for Financial Empowerment Fund to promote financial inclusion through standard account features that ensure low costs while offering robust transaction capabilities. We are also proud to be included, for the first time, in the Bloomberg Gender-Equality Index (GEI) as we continue to make important strides in gender parity at Popular. Our commitment to fostering a workplace that values inclusion, respect and accountability doesn’t just make us a better employer, it makes us a stronger organization. The year 2022 will bring its own set of challenges and opportunities. As we have seen in the first months, the pandemic will continue to require patience, flexibility and agility from all of us for some time. We have demonstrated our capacity to adapt to changing conditions and will continue to do so with energy and determination. We are optimistic about the economic outlook for Puerto Rico. In addition to the unprecedented level of federal stimulus received to counter the effects of the COVID-19 pandemic, Puerto Rico still has a significant amount of hurricane recovery funds that have yet to be disbursed. The recovery funds have now begun to flow at a faster pace. for Also, the recent court approval of the plan of adjustment the Commonwealth of Puerto Rico under Title III of the Puerto Rico Oversight, Management and Economic Stability Act is a key step in the process to end Puerto Rico’s public debt crisis and allows it to make necessary investments towards sustainable economic growth. A significant amount of time and effort has been invested to get to this point, and we look forward for these resources to be refocused on the island’s long-term economic development. The combined impact of these factors should generate considerable economic activity in Puerto Rico for the coming years and we are ideally positioned to benefit from such activity. We stand ready to build on our leadership position and leverage the momentum achieved to make 2022 another great year for your company, as we continue to serve our customers, care for our colleagues, support our communities and deliver value to our shareholders. IGNACIO ALVAREZ President and Chief Executive Officer Popular, Inc. 2021 Annual Report | 5 25-Year Historical Financial Summary (Dollars in millions, except per share data) 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 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 Popular Equipment Finance EVERTEC Subtotal Total Electronic Delivery System ATMs Owned Puerto Rico Virgin Islands United States Total $232.3 $257.6 $276.1 $304.5 $351.9 $470.9 $489.9 $540.7 $357.7 $(64.5) 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 44,411.4 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 29,911.0 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 28,334.4 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 3,581.9 $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 $2,968.3 1.14% 1.14% 1.08% 1.04% 1.09% 1.11% 1.36% 1.23% 1.17% 0.74% -0.14% 15.83% 15.41% 15.45% 15.00% 14.84% 16.29% 19.30% 17.60% 17.12% 9.73% -2.08% $7.51 7.51 2.00 51.83 $8.26 8.26 2.50 59.32 $9.19 9.19 3.00 57.54 123.75 170.00 139.69 74% 23% 3% 71% 25% 4% 71% 25% 4% $9.85 $10.87 $13.05 $17.36 $17.95 $19.78 $12.41 $(2.73) 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% (2.73) 6.40 121.24 106.00 59% 38% 3% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 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 8 142 341 196 8 147 351 158 134 52 15 11 32 12 2 1 1 1 7 51 12 24 32 13 2 1 1 1 9 351 689 292 633 280 631 583 61 181 825 605 65 192 862 615 69 187 871 Employees (full-time equivalent) 8,854 10,549 11,501 10,651 11,334 11,037 11,474 12,139 13,210 12,508 12,303 6 | Popular, Inc. 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 $(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 $934.9 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 75,097.9 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 29,299.7 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 67,005.1 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 5,969.4 $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 $6,551.0 -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% 1.31% -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% 16.22% $(45.51) $2.39 $(0.62) (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 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 1.02 1.00 49.51 35.49 76% 22% 2% $6.07 $6.89 $5.88 $11.49 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% 11.46 1.75 74.48 82.04 84% 15% 1% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 173 9 50 232 9 24 3 6 2 1 1 179 8 139 326 173 8 101 185 8 96 183 9 94 175 9 92 171 9 90 282 289 286 276 270 168 9 47 224 171 9 51 168 9 51 163 9 51 231 228 223 2 9 12 22 32 7 1 1 1 1 9 97 423 605 74 176 855 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 22 110 765 164 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 23 118 760 159 10 39 208 11 15 2 7 2 1 1 39 247 616 23 91 730 12 14 2 5 2 1 36 259 619 22 115 756 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 8,351 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. 2021 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 Executive Vice President & Chief Security Officer Corporate Security Group Popular, Inc. LUIS E. CESTERO Executive Vice President Retail Banking Group Banco Popular de Puerto Rico MANUEL CHINEA Executive Vice President Popular, Inc. Chief Operating Officer Popular Bank JOSÉ R. COLEMAN TIÓ Executive Vice President & Chief Legal Officer General Counsel & Corporate Matters Group Popular, Inc. JAVIER D. FERRER Executive Vice President, Chief Operating Officer, Head of Business Strategy & Corporate Secretary Popular, Inc. MARÍA CRISTINA (MC) GONZÁLEZ Executive Vice President Chief Communications and Public Affairs Officer Corporate Communications & Public Affairs Group 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 & Chief Administration Officer 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. 8 | Popular, Inc. 8 | Popular, Inc. Board of Directors RICHARD L. CARRIÓN Chairman of the Board of Directors Popular, Inc. IGNACIO ALVAREZ President & Chief Executive Officer Popular, Inc. JOAQUÍN E. BACARDÍ, III President and Chairman Edmundo B. Fernández, Inc. ALEJANDRO M. BALLESTER President Ballester Hermanos, Inc. ROBERT CARRADY President Caribbean Cinemas BETTY DEVITA Chief Business Officer FinConecta JOHN W. DIERCKSEN Principal Greycrest, LLC MARÍA LUISA FERRÉ RANGEL Chief Executive Officer FRG, LLC C. KIM GOODWIN Private Investor JOSÉ R. RODRÍGUEZ Chairman of the Board of Directors CareMax, Inc. MYRNA M. SOTO Chief Executive Officer & Founder Apogee Executive Advisors, LLC CARLOS A. UNANUE President Goya de Puerto Rico, Inc. 2021 Annual Report | 9 2021 Annual Report | 9 Popular, Inc. Resumen del año Estimados Accionistas: El 2021 fue un año excepcional para Popular, impulsado por ganancias récord, calidad crediticia sólida, aumento en los depósitos, crecimiento continuo de clientes y la ejecución exitosa de acciones de capital. Nuestros resultados reflejan la continua recuperación económica en los mercados en los que operamos, nuestras fuentes diversificadas de ingresos y una gestión prudente del riesgo. Resultados financieros, capital y desempeño de la acción Nuestro ingreso neto para el año alcanzó $935 millones, $428 millones o 84% más que el año anterior. El aumento fue impulsado en gran medida por un menor gasto de provisión para pérdidas de crédito. En 2021, reportamos un beneficio de provisión de $193 millones, en comparación con un gasto de provisión de $293 millones en 2020. El beneficio de la provisión fue impulsado por la recuperación económica actual y las perspectivas positivas, junto con métricas sólidas de calidad de crédito. El aumento en ingresos por intereses y comisiones también contribuyó a los resultados positivos. Los niveles de capital se mantuvieron sólidos, cerrando el año con una relación de capital “Tier 1 Common” de 17.4% y un valor tangible en libros de $65.26 dólares, ambos superiores a los del 2020. Durante el año, ejecutamos importantes acciones de capital, incluyendo un aumento en el dividendo trimestral de acciones comunes de $0.40 a $ 0.45 por acción, la recompra de $350 millones de acciones comunes en el mercado y la redención de $187 millones de acciones preferidas. A principios de 2022, anunciamos nuestro plan de capital para el año, que incluye un aumento en el dividendo trimestral de acciones comunes de $0.45 a $ 0.55 por acción y recompras de acciones comunes de hasta $500 millones. Nuestras acciones de capital reflejan la fortaleza del desempeño financiero y la posición de capital de Popular, que nos permiten ofrecer valor a los accionistas mientras continuamos invirtiendo en nuestra franquicia. Nuestras acciones tuvieron un buen desempeño durante 2021, cerrando el año en $82.04, un 46% más alto que en 2020. Este desempeño compara favorablemente con el Índice KBW Nasdaq Regional Banking, que aumentó 34%, y estuvo en línea con nuestros bancos pares en los Estados Unidos, que aumentaron 52%. 2021 2020 $507 MILLONES $935 MILLONES INGRESO NETO PRECIO DE LA ACCIÓN 46% MÁS ALTO QUE EL CIERRE DEL AÑO 2020 $82.04 PRECIO AL CIERRE DE 2021 ACCIONES DE POPULAR, INC. (BPOP) El 2021 fue un año excepcional para Popular, impulsado por ganancias récord, calidad crediticia sólida, aumento en los depósitos, crecimiento continuo de clientes y la ejecución exitosa de acciones de capital. Informe Anual 2021 | 11 Aspectos destacados del negocio Gerencia y Junta de Directores Continuamos ejecutando nuestra estrategia de negocio, estructurada en torno a cuatro pilares estratégicos. Crecimiento rentable y sostenible • Aumentamos los depósitos por aproximadamente $10 mil millones. • Procesamos aproximadamente $675 millones en préstamos en la segunda ronda del Programa de Protección de Nómina (PPP), de la Administración de Pequeños Negocios, alcanzando un total de $2.1 mil millones en el programa. • Aumentamos el total de préstamos por $810 millones, excluyendo la cartera de PPP. El aumento fue impulsado por los préstamos para automóviles en Puerto Rico y nuestros negocios especializados en los Estados Unidos, principalmente servicios a asociaciones de condominios y préstamos al sector de la salud. • Adquirimos los activos de K2 Capital Group, un negocio nacional de arrendamiento de equipos médicos, con $119 millones en activos, que complementa y expande nuestro negocio de préstamos al sector de salud en los Estados Unidos. Simplicidad • Completamos exitosamente la reorganización estratégica de nuestra red de sucursales del área metropolitana de Nueva York, y logramos un impulso positivo en el reenfoque de los recursos hacia las pequeñas y medianas empresas. • Continuamos los esfuerzos para digitalizar y automatizar procesos operacionales para aumentar la eficiencia y mejorar la satisfacción del cliente. Enfoque al cliente • Implementamos una nueva plataforma de manejo de la experiencia del cliente, la cual provee a los negocios el sentir de los clientes de manera más frecuente y oportuna. • Lanzamos varias aplicaciones digitales para agilizar las solicitudes de tarjetas de crédito comerciales y préstamos para pequeñas empresas. Preparados para el futuro • Ejecutamos diversas iniciativas relacionadas con la compensación, incluyendo aumentos de mérito y ajustes de mercado. • Anunciamos aumentos en los salarios base mínimos en todos nuestros mercados, a partir de 2022. • Lanzamos el primer Grupo de Recursos para Empleados para la comunidad LGBTQ+ y sus aliados. • Continuamos fortaleciendo nuestros programas de cumplimiento y ciberseguridad. 12 | Popular, Inc. a condiciones que Durante los últimos dos años, nuestros colegas han demostrado una notable resiliencia y agilidad, adaptándose evolucionan rápidamente. La forma en que trabajamos y cómo nuestros clientes interactúan con nosotros cambió abruptamente y sabemos que el ritmo del cambio seguirá acelerándose. A finales de 2021 anunciamos ciertos cambios organizacionales diseñados para satisfacer las necesidades cambiantes de nuestros clientes y permitirnos competir de manera más efectiva. Javier D. Ferrer fue nombrado vicepresidente ejecutivo, director de operaciones y jefe de estrategia de negocio de la Corporación, reportando directamente a mí. Javier se unió a Popular en 2015 como asesor general y también ha supervisado nuestra función corporativa de planificación estratégica desde 2019. Nos ha brindado un asesoramiento invaluable durante períodos de cambios y desafíos significativos, ganándose la confianza y el respeto de nuestro liderazgo y grupos claves. José R. Coleman fue nombrado vicepresidente ejecutivo, director jurídico y consejero general de Popular, como sucesor de Javier. José se desempeñó como primer vicepresidente, asesor general y secretario de Popular desde 2017, desempeñando un papel vital en la transformación de la función legal de la Corporación y alcanzando excelentes resultados en una gran variedad de proyectos. Estoy seguro de que esta nueva estructura de liderazgo fortalece a Popular a medida que nos esforzamos por servir a nuestros clientes en el entorno dinámico de hoy. Además, somos afortunados de contar con dos nuevos directores en nuestra Junta. Betty DeVita, que tiene una amplia experiencia en la industria bancaria y de pagos, es actualmente la directora de Negocios y miembro de la junta directiva de FinConecta, una compañía de tecnología global centrada en la digitalización de las finanzas y la banca abierta. El historial de Betty de propiciar crecimiento e innovación en diversos contextos de servicios financieros es invaluable mientras navegamos por una industria en constante evolución. José R. Rodríguez, un experimentado contador público certificado, fue socio auditor en KPMG LLP desde 1995 hasta su jubilación en abril de 2021. Durante más de 25 años con KPMG, José ocupó diversos puestos de liderazgo a nivel nacional y mundial. José proporciona a Popular ideas y consejos vitales, extraídos de su vasto conocimiento y experiencia en los sectores de contabilidad, auditoría y finanzas, así como de sus muchos roles como asesor. Nuestra Junta de Directores es un grupo de personas altamente talentosas y comprometidas, que nos brindan un asesoramiento invaluable a mí y a todo el equipo de gerencial. Estamos agradecidos por su orientación y apoyo. También, somos dichosos de tener un equipo de más de 8,500 compañeros dedicados. Una vez más, mostraron su resiliencia, enfrentando los desafíos con determinación y una actitud positiva. Ellos continúan siendo, sin duda, nuestro activo más valioso, y estamos comprometidos con su bienestar profesional, financiero y general. Mirando hacia el futuro ESG El año 2022 traerá su propio conjunto de desafíos y oportunidades. Como hemos visto en los primeros meses, la pandemia seguirá requiriendo paciencia, flexibilidad y agilidad de todos nosotros durante algún tiempo. Hemos demostrado nuestra capacidad las condiciones cambiantes y de adaptación a continuaremos haciéndolo con energía y determinación. Nos sentimos optimistas sobre las perspectivas económicas para Puerto Rico. Además del nivel sin precedentes de estímulo federal recibido para contrarrestar los efectos de la pandemia de COVID-19, Puerto Rico todavía cuenta con una cantidad significativa de fondos de recuperación de huracanes que aún no se han desembolsado. Estos fondos ahora han comenzado a fluir a un ritmo más acelerado. Además, la reciente aprobación judicial del plan de ajuste bajo el Título III de la Ley de Supervisión, Administración y Estabilidad Económica de Puerto Rico es un paso clave en el proceso para poner fin a la crisis de deuda pública del país y le permite realizar las inversiones necesarias para el crecimiento económico sostenible. Se ha invertido una cantidad significativa de tiempo y esfuerzo para llegar a este punto, y esperamos que estos recursos se vuelvan a enfocar en el desarrollo económico a largo plazo de la isla. El impacto combinado de estos factores debería generar un movimiento económico considerable en Puerto Rico durante los próximos años y estamos en una posición ideal para beneficiarnos de dicha actividad. Nos encontramos listos para construir sobre nuestra posición de liderazgo y aprovechar el impulso logrado para hacer de 2022 otro gran año para nuestra organización, a medida que continuamos sirviendo a nuestros clientes, cuidando a nuestros compañeros, apoyando a nuestras comunidades y aportando valor a nuestros accionistas. IGNACIO ÁLVAREZ Presidente y Principal Oficial Ejecutivo Popular, Inc. Nuestro negocio proporciona una plataforma poderosa para hacer una diferencia en la vida de nuestros clientes, compañeros, comunidades y accionistas, un privilegio y una responsabilidad que nos tomamos muy en serio. Durante 2021, avanzamos en nuestra estrategia ambiental, social y de gobernanza (ESG, por sus siglas en inglés). Un hito importante fue Informe la publicación de nuestro primer de alineado con los estándares externos de informes de sustentabilidad, como SASB y GRI. Sustentabilidad Corporativa El acceso a servicios bancarios se alinea estrechamente con los valores de nuestra organización y es una de las áreas de enfoque clave de nuestra estrategia ESG. Estamos comprometidos a mejorar el acceso a los servicios los miembros de nuestras financieros para comunidades que, por numerosas razones, han permanecido fuera del sistema bancario tradicional. Estamos orgullosos de que Banco Popular de Puerto Rico y Popular Bank ahora ofrecen cuentas certificadas de Bank On. Esta certificación la otorga la organización nacional sin fines de lucro Cities for Financial Empowerment Fund para promover la inclusión financiera a través cuentas con características que aseguran bajos costos, a la vez que ofrecen una capacidad transaccional robusta. importantes avances en También estamos orgullosos de ser incluidos, por primera vez, en el Índice de Igualdad de Género (GEI) de Bloomberg, a medida que continuamos haciendo la paridad de género en Popular. Nuestro compromiso de fomentar un lugar de trabajo que valore la inclusión, el respeto y la responsabilidad no solo nos convierte en un mejor patrono, sino que nos hace una organización más fuerte. Informe Anual 2021 | 13 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 Popular Equipment Finance EVERTEC Subtotal Total Sistema Electrónico de Distribución Cajeros Automáticos Propios y Administrados Puerto Rico Islas Vírgenes Estados Unidos Total Empleados (equivalente a tiempo completo) 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 $209.6 $232.3 $257.6 $276.1 $304.5 $351.9 $470.9 $489.9 $540.7 $357.7 $(64.5) 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 44,411.4 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 29,911.0 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 28,334.4 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 3,581.9 $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 $2,968.3 1.14% 1.14% 1.08% 1.04% 1.09% 1.11% 1.36% 1.23% 1.17% 0.74% -0.14% 15.83% 15.41% 15.45% 15.00% 14.84% 16.29% 19.30% 17.60% 17.12% 9.73% -2.08% $7.51 7.51 2.00 51.83 $8.26 8.26 2.50 59.32 $9.19 9.19 3.00 57.54 123.75 170.00 139.69 74% 23% 3% 71% 25% 4% 71% 25% 4% $9.85 $10.87 $13.05 $17.36 $17.95 $19.78 $12.41 $(2.73) 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 (2.73) 6.40 121.24 179.50 106.00 52% 45% 3% 59% 38% 3% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 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 5 351 689 583 61 181 825 191 8 142 341 158 52 15 11 32 12 2 1 1 1 7 292 633 605 65 192 862 196 8 147 351 134 51 12 24 32 13 2 1 1 1 9 280 631 615 69 187 871 8,854 10,549 11,501 10,651 11,334 11,037 11,474 12,139 13,210 12,508 12,303 14 | Popular, Inc. 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 $(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 $934.9 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 75,097.9 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 29,299.7 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 67,005.1 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 5,969.4 $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 $6,551.0 -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% 1.31% -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% 16.22% $(45.51) (45.51) 4.80 63.29 51.60 64% 33% 3% $2.39 $(0.62) 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 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 1.02 1.00 49.51 35.49 76% 22% 2% $6.07 $6.89 $5.88 $11.49 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% 11.46 1.75 74.48 82.04 84% 15% 1% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 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 51 168 9 51 163 9 51 231 228 223 179 8 139 326 2 9 12 22 32 7 1 1 1 1 9 97 423 605 74 176 855 10 33 6 1 1 1 9 61 343 571 77 136 784 173 9 50 232 9 24 3 6 2 1 1 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 22 110 765 164 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 23 118 760 159 10 39 208 11 15 2 7 2 1 1 39 247 616 23 91 730 12 14 2 5 2 1 36 259 619 22 115 756 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 8,351 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 2021 | 15 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 Vicepresidenta Ejecutiva y Principal Oficial de Seguridad Grupo de Seguridad Corporativa Popular, Inc. LUIS E. CESTERO Vicepresidente Ejecutivo Grupo de Banca Individual Banco Popular de Puerto Rico MANUEL CHINEA Vicepresidente Ejecutivo Popular, Inc. Principal Oficial de Operaciones Popular Bank JOSÉ R. COLEMAN TIÓ Vicepresidente Ejecutivo y Principal Oficial Legal Grupo del Asesor General y Asuntos Corporativos Popular, Inc. JAVIER D. FERRER Vicepresidente Ejecutivo Principal Oficial de Operaciones Principal Oficial de Estrategia y Secretario Corporativo Popular, Inc. MARÍA CRISTINA (MC) GONZÁLEZ Vicepresidenta Ejecutiva y Principal Oficial de Comunicaciones y Asuntos Públicos Grupo de Comunicaciones Corporativas y Asuntos Públicos 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 y Principal Oficial de Administración 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. 16 | 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 BETTY DEVITA Principal Oficial de Negocios FinConecta JOHN W. DIERCKSEN Principal Greycrest, LLC MARÍA LUISA FERRÉ RANGEL Principal Oficial Ejecutiva FRG, LLC C. KIM GOODWIN Inversionista Privada JOSÉ R. RODRÍGUEZ Presidente de la Junta de Directores CareMax, Inc. MYRNA M. SOTO Principal Oficial Ejecutiva y Fundadora Apogee Executive Advisors, LLC CARLOS A. UNANUE Presidente Goya de Puerto Rico, Inc. Informe Anual 2021 | 17 Informe Anual 2021 | 17 Financial Review and Supplementary Information Management’s Discussion and Analysis of Financial Condition and Results of Operations 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, 2021 and 2020 Consolidated Statements of Operations for the years ended December 31, 2021, 2020 and 2019 Consolidated Statements of Comprehensive Income for the years ended December 31, 2021, 2020 and 2019 Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2021, 2020 and 2019 Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019 Notes to Consolidated Financial Statements 2 46 49 50 53 54 55 56 57 58 POPULAR, INC. 2021 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 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 2 POPULAR, INC. 2021 ANNUAL REPORT 3 4 8 13 13 15 15 16 17 17 17 19 19 20 21 21 23 23 28 44 45 46 47 48 Inc.’s limitation, statements about Popular 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 condition, results of operations, plans, objectives and future performance. These statements are not guarantees of future performance, are based on management’s current expectations and, by their nature, involve risks, uncertainties, estimates and assumptions. Potential factors, some of which are beyond the Corporation’s control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. Risks and uncertainties include limitation the effect of competitive and economic without factors, and our reaction to those factors, the adequacy of the allowance for loan losses, delinquency trends, market risk and the impact of interest rate changes, capital markets conditions, capital adequacy and liquidity, and the effect of legal and regulatory proceedings and new accounting standards on the Corporation’s financial condition and results of operations. All statements contained herein that are not clearly historical in nature are forward-looking, and the words “anticipate,” “believe,” “continues,” “expect,” “estimate,” “intend,” “project” and similar expressions and future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions are generally intended to identify forward- looking statements. Various factors, some of which are beyond Popular’s control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. Factors that might cause such a difference include, but are not limited to, the rate of growth or decline in the economy and employment levels, as well as general business and economic conditions in the geographic areas we serve and, in particular, in the Commonwealth of Puerto Rico (the “Commonwealth” or “Puerto Rico”), where a significant portion of our business is concentrated; the impact of the current fiscal and economic challenges of Puerto Rico and the measures taken and to be taken by the Puerto Rico Government and the Federally- appointed oversight board on the economy, our customers and our business; the impact of the pending debt restructuring proceedings under Title III of the Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”) and of other actions taken or to be taken to address Puerto Rico’s fiscal challenges on the value of our portfolio of Puerto Rico government securities and loans to governmental entities and of our commercial, mortgage and consumer loan portfolios where private borrowers could be directly affected by governmental action; the 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 the Transaction and the connection with the COVID-19 pandemic and the rate of expenditure of such funds, as well as the timeline and implementation of the Plan of Adjustment for the Puerto Rico debt restructuring under Title III of PROMESA; risks related to Popular’s planned acquisition of certain information technology and related assets currently used by EVERTEC, Inc. to service certain of Banco Popular de Puerto Rico’s key channels, as well as the planned entry into amended and restated commercial agreements and the sale or conversion into non-voting of Popular’s ownership stake in Evertec (the “Transaction”), including: the length of time necessary to consummate the Transaction; the ability to satisfy the conditions to the closing thereof; the receipt of any regulatory approvals necessary to effect contemplated return to shareholders of net gains resulting from a sale of EVERTEC, Inc. shares; the ability to successfully transition and integrate the assets acquired as part of the Transaction, as well as related operations, employees and third party contractors; unexpected costs, including, without limitation, costs due to exposure to any unrecorded liabilities or issues not identified during due diligence investigation of the Transaction or that are not subject to indemnification or reimbursement by EVERTEC, Inc.; risks that Popular may be affected by operational and other risks arising from the acquisition of the acquired assets, including the transition and integration thereof, or by adverse effects on relationships with customers, employees and service providers; and business and other risks arising from the extension of Popular’s current commercial agreements with EVERTEC, Inc., as well as the sale or conversion of EVERTEC, Inc. shares owned by Popular; the scope and duration of the COVID-19 pandemic (including the appearance of new strains of the virus), actions taken by governmental authorities in response to the pandemic, and the direct and indirect 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 including federal bank regulatory and supervisory policies, 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 the emergence of disasters, acts of violence or war, or pandemics epidemics and other health-related crises, which could cause a disruption in our operations or other adverse consequences the relative strength or weakness of the consumer and commercial credit sectors and of the real estate markets in Puerto Rico and the other markets in for our business; assessments; impact of POPULAR, INC. 2021 ANNUAL REPORT 3 security which borrowers are located; the performance of the stock and bond markets; competition in the financial services industry; possible legislative, tax or regulatory changes; and a failure in or breach of our operational or systems or infrastructure or those of EVERTEC, Inc., our provider of core financial transaction processing and information technology services, or of other third parties providing services to us, including as a result of cyberattacks, e-fraud, denial-of-services and computer intrusion, that might result in loss or breach of customer data, disruption of services, reputational damage or additional costs to Popular. Other possible events or factors that could cause results or performance to differ materially from those expressed in these forward-looking statements include the following: negative economic conditions that adversely affect housing prices, the job market, consumer confidence and spending habits which may affect, among other things, the level of non-performing assets, charge-offs and provision expense; changes in market rates and prices which may adversely impact the value of financial assets and liabilities; potential judgments, claims, damages, penalties, fines, enforcement actions and reputational damage resulting from pending or future litigation and regulatory or government investigations or actions, including as 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. Moreover, and regulatory proceedings, as discussed in “Part I, Item 3. Legal Proceedings” of ended December 31, 2021, 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, 2021 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 legal 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 4 POPULAR, INC. 2021 ANNUAL REPORT (“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 37 to the Consolidated Financial Statements presents the Corporation’s information about business segments. The Corporation has several investments which it accounts for under the equity method. These include the 16.19% 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 ended December the Corporation recorded approximately $58.3 million in earnings from these investments on an aggregate basis. The carrying amounts of these investments as of December 31, 2021 were $299.0 million. Refer to Note 27 to the Consolidated Financial Statements for additional information. 31, 2021, equipment SIGNIFICANT EVENTS Acquisition of K2 Capital Group LLC On October 15, 2021, Popular Equipment Finance LLC (“PEF”), a newly-formed wholly-owned subsidiary of PB, completed the acquisition of certain assets and the assumption of certain liabilities of Minnesota-based K2 Capital Group LLC’s (the (“K2”) leasing “Acquired Business”). PEF made a payment to K2 of approximately $157 million in cash, representing a premium of $49 million over the book value of K2’s net assets, which has been recorded as goodwill. An additional approximate $29 million in earnout payments could be payable to K2 over the next three years, contingent upon the achievement of certain agreed-upon financial targets during such period. and financing business lease products, Specializing in the healthcare industry, the Acquired Business provides a variety of including operating and finance leases, and also offers private label vendor finance programs to equipment manufacturers and healthcare organizations. The acquisition provides PB with a national equipment leasing platform that complements its existing healthcare lending business. As part of the transaction, PEF acquired approximately $115 million in net assets that consisted mainly of commercial finance leases. The transaction was accounted for as a business combination. Refer to Note 4 to the Consolidated Financial Statements for additional information. Capital Actions 2021 Increase in Common Stock Dividend On May 6, 2021, the Corporation’s Board of Directors approved a quarterly cash dividend of $0.45 per share, an increase from the previous $0.40 per share quarterly dividend, on its outstanding ended December 31, 2021, the Corporation declared cash dividend of $1.75 per common share outstanding ($142.3 million in the aggregate). stock. During common year the Accelerated Share Repurchase On September 9, 2021, the Corporation completed its previously announced accelerated share repurchase program for the repurchase of an aggregate $350 million of Popular’s the accelerated share common stock. Under the terms of repurchase agreement (the “ASR Agreement”), on May 4, 2021, the Corporation made an initial payment of $350 million and received an initial delivery of 3,785,831 shares of Popular’s Common Stock (the “Initial Shares”). The transaction was accounted for as a treasury stock transaction. As a result of the receipt of the Initial Shares, the Corporation recognized in shareholders’ equity approximately $280 million in treasury stock and $70 million as a reduction in capital surplus. Upon the final settlement of the ASR Agreement, the Corporation received an additional 828,965 shares of Popular’s common stock and recognized $61 million as treasury stock with a corresponding increase in its capital surplus account. The Corporation repurchased a total of 4,614,796 shares at an average purchase price of $75.84 under the ASR Agreement. 6.70% Cumulative Monthly Redemption of Trust Preferred Securities the Corporation redeemed all On November 1, 2021, outstanding Income Trust Preferred Securities (the “Trust Preferred Securities”) issued by the Popular Capital Trust I (the “Trust”) (liquidation amount of $25 per security and amounting to $186,663,800 (or $181,063,250 after excluding the Corporation’s participation in the Trust of $5,600,550) in the aggregate). The redemption price for the Trust Preferred Securities was equal to $25 per security plus accrued and unpaid distributions up to and excluding the redemption date in the amount of $0.139583 per security, for a total payment per security in the amount of $25.139583. Upon redemption, Popular delisted the Trust Preferred Securities (NASDAQ: BPOPN) from the Nasdaq Global Select Market. 2022 Capital Plan On January 12, 2022 the Corporation announced the following capital actions: • an increase in the Corporation’s quarterly common stock dividend from $0.45 per share to $0.55 per share, commencing with the dividend payable in the second approval by the to the quarter of 2022, Corporation’s Board of Directors; and subject • common stock repurchases of up to $500 million during 2022. The Corporation’s planned common stock repurchases may be executed in the open market or in privately negotiated transactions. The timing and exact amount of such repurchases will be subject to various factors, including market conditions financial capital and performance. the Corporation’s position and Refer to Table 1 for selected financial data for the past three years. POPULAR, INC. 2021 ANNUAL REPORT 5 Table 1 - 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 (benefit) Non-interest income Operating expenses Income tax expense Net income Net income applicable to common stock PER COMMON SHARE DATA Net income per common share - basic Net income per common share - diluted 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 credit losses - loans portfolio Earning assets Total assets Deposits Borrowings Total stockholders’ equity SELECTED RATIOS 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. Years ended December 31, 2020 2019 2021 $ 2,122,637 165,047 $ 2,091,551 234,938 $ 2,260,793 369,099 1,957,590 1,856,613 1,891,694 (193,464) 642,128 1,549,275 309,018 934,889 933,477 11.49 11.46 1.75 74.48 82.04 $ $ $ 292,536 512,312 1,457,829 111,938 506,622 504,864 5.88 5.87 1.60 71.30 56.32 $ $ $ 165,779 569,883 1,477,482 147,181 671,135 667,412 6.89 6.88 1.20 62.42 58.75 $ $ $ 81,263,027 81,420,154 79,851,169 85,882,371 85,975,259 84,244,235 96,848,835 96,997,800 95,589,629 $29,074,036 68,088,675 71,168,650 63,102,916 1,255,495 5,777,652 $29,299,725 695,366 72,103,862 75,097,899 67,005,088 1,155,166 5,969,397 $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 2.88% 3.19 1.31 16.22 17.49 19.35 3.29% 3.62 0.85 9.36 16.33 18.81 4.03% 4.43 1.33 11.78 17.76 20.31 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 3 for the year ended December 31, 2021 as compared with the same period in 2020, 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 6 POPULAR, INC. 2021 ANNUAL REPORT 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 Financial highlights for the year ended December 31, 2021 The Corporation’s net income for the year ended December 31, 2021 amounted to $934.9 million, compared to a net income of $506.6 million for 2020. The discussion that follows provides highlights of for the Corporation’s ended December 31, 2021 compared to the results of operations of 2020. It also provides some highlights with respect to the Corporation’s financial condition, credit quality, capital and liquidity. Table 2 presents a three-year summary of the components of net income as a percentage of average total assets. results of operations the year Non-GAAP financial measures used by the Corporation may not be comparable to similarly named Non-GAAP financial measures used by other companies. Table 2 - Components of Net Income as a Percentage of Average Total Assets Net interest income Provision for credit losses (benefit) Mortgage banking activities Net gain and valuation adjustments on investment securities 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 2021 2020 2019 2.75% 3.12% 3.76% (0.49) 0.27 0.02 0.07 0.01 – 0.83 0.83 (0.33) 0.06 – 1.07 3.92 (2.18) 3.49 (2.45) 4.56 (2.94) 1.74 0.43 1.04 0.19 1.62 0.29 1.31% 0.85% 1.33% income from commercial Net interest income for the year ended December 31, 2021 was $2.0 billion, an increase of $101.0 million when compared to 2020. The increase in net interest income was mainly driven by higher interest loans due to income from loans under the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), and higher income from investment securities. In addition, lower interest expense on deposits, despite the higher volume, contributed to the higher net interest income. The net interest margin for the year ended December 31, 2021 was 2.88% compared to 3.29% for the same period in 2020 and was impacted by prolonged low interest rates as well as the change in the earning assets composition. On a taxable equivalent basis, net interest margin was 3.19% in 2021, compared to 3.62% in 2020. Refer to the Net Interest Income section of this MD&A for additional information. The Corporation’s total provision for credit losses reflected a benefit of $193.5 million for the year ended December 31, 2021, compared to a provision expense of $292.5 million for 2020. The benefit for the year 2021 was due to improvements in credit quality and the macroeconomic outlook. The Corporation continued to exhibit strong credit quality trends and low credit costs with low levels of net charge-offs and lower non-performing totaled loans. Non-performing $633 million at December 31, 2021, reflecting a decrease of $191 million when compared to December 31, 2020. 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, restructurings, net charge-offs and credit quality metrics. troubled debt assets Non-interest income for the year ended December 31, 2021 amounted to $642.1 million, an increase of $129.8 million, when compared with 2020, mostly due to: higher service fees and service charges on deposit accounts due to economic disruptions related to the pandemic, the waiver of service charges and late fees during 2020, higher income from mortgage banking activities and higher other operating income principally due to higher net earnings from the combined portfolio of investments under the equity method. Refer to the Non-Interest Income section of this MD&A for additional information on the major variances of the different categories of non-interest income. POPULAR, INC. 2021 ANNUAL REPORT 7 Total operating expenses amounted to $1.5 billion for the year 2021, reflecting an increase of $91.4 million, when compared to the same period in 2020, mainly due to higher personnel costs. Refer to the Operating Expenses section of this MD&A for additional information. Income tax expense amounted to $309.0 million for the year ended December 31, 2021, compared with an income tax expense of $111.9 million for the previous year. The increase in income tax expense for the year is mainly due to a higher pre-tax income. Refer to the Income Taxes section in this MD&A and Note 35 to the consolidated financial statements for additional information on income taxes. At December 31, 2021, the Corporation’s total assets were $75.1 billion, compared with $65.9 billion at December 31, 2020. The increase of $9.2 billion is mainly driven by higher money market investments and debt securities available-for-sale due to the additional funds available to invest resulting from the increase in deposits across various sectors, partially offset by paydowns of agency mortgage-backed securities. Refer to the Statement of Condition Analysis section of this MD&A for additional information. Deposits amounted to $67.0 billion at December 31, 2021, compared with $56.9 billion at December 31, 2020. Table 7 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 deposits accounts. The Corporation’s borrowings remained flat at $1.2 billion at December 31, 2021. Refer to Note 17 to the Consolidated Financial Statements for detailed information on the Corporation’s borrowings. Refer to Table 6 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. securities available-for-sale Stockholders’ equity remained flat at $6.0 billion at December 31, 2021, compared with December 31, 2020. The net activity for the year was mainly due to net income of $934.9 million for the year 2021 offset by unrealized losses on return debt transactions, repurchase transaction completed during 2021. The Corporation and its banking subsidiaries to be well-capitalized at December 31, 2021. The Common Equity Tier 1 Capital ratio at December 31, 2021 was 17.42%, compared to 16.26% at December 31, 2020. an accelerated share including continue and by capital For further discussion of operating results, financial 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 The accounting and reporting policies Corporation and its followed by the subsidiaries conform with generally 8 POPULAR, INC. 2021 ANNUAL REPORT 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 result lower of cost or fair value 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, 2021, 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. Loans and Allowance for Credit Losses Interest on loans is accrued and recorded as interest income based upon the principal amount outstanding. 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, 2021, 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 correlations based on the characteristics of the evaluated 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, 2021, 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 procedures pricing review of market methodology, assumption and level hierarchy changes, and evaluation of distressed transactions. changes, and Refer to Note 28 to the Consolidated Financial Statements for a description of the Corporation’s valuation methodologies used for the assets and liabilities measured at fair value. 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. 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 in accordance with Accounting One of the most critical and complex accounting estimates is associated with the determination of the allowance for credit losses (“ACL”). 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, Standards Codification (“ASC”) Topic 326. An ACL is recognized for all loans since including originated and purchased loans, inception, with a corresponding charge to the provision for credit losses, except for purchased credit deteriorated (“PCD”) loans a methodology to establish the ACL which includes a reasonable and supportable forecast period for estimating credit losses, considering 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, 2021, management applied probability weights to the outcome of the selected scenarios. explained below. The Corporation follows as 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 addition, refer to the Credit Risk section of this MD&A for detailed information on POPULAR, INC. 2021 ANNUAL REPORT 9 the Corporation’s collateral value estimation for other real estate. 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 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. 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 tax consequences are 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. 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 reversal of existing temporary differences, future taxable 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 35. 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. 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 Changes in the Corporation’s estimates can occur due to changes in tax rates, new business strategies, newly enacted issues with taxing authorities guidance, and resolution of regarding previously taken tax positions. Such changes could 10 POPULAR, INC. 2021 ANNUAL REPORT 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 greater than 50% likely of being realized upon ultimate 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 $5.5 million at effective December 31, 2021 and $10.2 million at December 31, 2020. Refer to Note 35 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 $1.4 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 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. The Corporation estimates the fair value of each reporting unit, consistent with the requirements of the fair value measurements accounting standard, generally using a 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 test as of July 31, 2021. For a detailed from the annual description of impairment evaluation performed by the Corporation during the third quarter of 2021, refer to Note 15. the annual goodwill impairment At December 31, 2021, goodwill amounted to $720 million. During the year ended December 31, 2021, the Corporation recognized an impairment loss of $5.4 million associated with a trademark. Note 15 to the Consolidated Financial Statements provides the assignment of goodwill by reportable segment. POPULAR, INC. 2021 ANNUAL REPORT 11 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 30 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 2021 was Plans’ $860.5 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 2022 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 as of January 1, 2022; for example, 8.5% for large cap stocks, 8.8% for small cap stocks, 8.9% for international stocks, 3.5% for long corporate bonds and 2.4% for long Treasury bonds. 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 2022 to 4.3% and 5.4% for the Pension Plans. Expected rates of return of 4.6% and 5.5% had been used for 2021 and 5.0% and 5.8% had been used for 2020 for the Pension Plans. Since the expected return assumption is on a long-term basis, it is not reviews, 12 POPULAR, INC. 2021 ANNUAL REPORT 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 a net benefit of $3.8 million in 2021. The total pension expense included a benefit of $38.7 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 2021 from 4.3% to 4.05% would increase the projected 2022 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 28. 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 pension asset of $17.8 million and a pension liability of $8.8 million at December 31, 2021. 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 2.79% to 2.83% for the Pension Plans and 2.94% for the OPEB Plan to determine the benefit obligations at December 31, 2021. A 50 basis point decrease to each of the rates in the December 31, 2021 Willis Towers Watson RATE: Link (10/90) Model would increase the projected 2022 expense for the Banco Popular de Puerto Rico Retirement Plan by approximately $2.6 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, 2021. The Corporation had recorded a liability for the underfunded postretirement benefit obligation of $160.0 million at December 31, 2021. interest STATEMENT OF OPERATIONS ANALYSIS Net Interest Income Net interest income is the interest earned from loans, debt securities and money market investments, including loan fees, minus the interest cost of deposits and borrowings. Various risk factors affect net income including the economic environment in which we operate, market driven events, the mix and size of the earning assets and related funding, changes in volumes, repricing characteristics, loans fees collected, moratoriums granted on loan payments and delay charges, loans, as well as strategic interest collected on nonaccrual decisions made by the Corporation’s management. Net interest income for the year ended December 31, 2021 was $2.0 billion or $101.0 million higher than in 2020. Net interest income, on a taxable equivalent basis, for the year ended December 31, 2021 was $2.2 billion compared to $2.0 billion in 2020. Due to the Corporation’s current asset sensitive position, an increase in interest rates should have a favorable impact on the Corporation’s 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 2021 and 2020 were as follows: Prime rate Fed funds rate 3-month LIBOR 3-month Treasury Bill 10-year Treasury FNMA 30-year 2021 2020 3.25% 3.53% 0.25 0.16 0.03 1.44 1.84 0.35 0.65 0.35 0.89 1.01 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, including the discount accretion on purchased credit deteriorated loans (“PCD”), are also included as part of the period ended the income of December impact $131.6 million, compared to $98.5 million for the same period in 2020. The year over year increase is related to higher amortized fees resulting mainly from the SBA forgiveness of PPP loans by $53.9 million, partially offset by $15.4 million lower amortization of the fair value discount of the auto and credit card portfolios acquired in previous years. a included related to those favorable items, Interest 2021 loan yield. 31, for Table 3 presents the the different Corporation’s net interest income, on a taxable equivalent basis, components of for the year ended December 31, 2021, as compared with the same period in 2020, segregated by major categories of interest earning assets and interest-bearing liabilities. Net interest margin was 2.88% in 2021 or 41 basis points lower than the 3.29% reported in 2020. The lower net interest margin for the year is driven by the increase of $11.5 billion in average deposits which were mostly redeployed in overnight Fed Funds and U.S. Treasury and agency debt securities. These assets, although accretive to net interest income, are low yielding assets and have the effect of compressing the net interest margin. Also impacting the net interest margin was a full year of low short-term rates as the Federal Reserve decreased by 150 basis points the Federal Funds Rate in the first quarter of 2020. On a taxable equivalent basis, net interest margin was 3.19% in 2021, compared to 3.62% in 2020. The main drivers for the increase in net interest income on a taxable equivalent basis were: Positive variances: • Higher interest income from money market and investment securities due to a higher volume by $11.0 billion, which resulted from an increase in deposits in most categories, partially offset by lower yield by 39 basis points driven by a lower interest rate environment. These larger balances resulted from an increase in deposits in most categories; • Higher interest income from commercial loans driven by higher interest and fees from PPP loans by $54.0 million when compared to 2020, partially offset the repricing of adjustable rates loans and origination in a low interest rate environment; • The auto and lease financing portfolios increased by $478 million or 12% driven by continued demand for automobiles in Puerto Rico after the COVID-19 related lockdown and higher household liquidity resulting from COVID-19 relief federal assistances; • Mortgage loans interest income increased 6% when compared to the year 2020, driven by the $807.6 million bulk loan repurchases from our GSE loan servicing portfolios that occurred at the end of September 2020, partially offset by lower yields also related to the lower rates of the repurchased portfolio; and • Lower interest expense on deposits due to the decrease in interest cost by 21 basis points resulting from the decrease in market rates in March 2020, increased liquidity in the financial industry as a result of retail and commercial federal support programs and the subsequent effect on these interest-bearing liabilities. The decrease in the cost of deposits was 51 basis points when compared to the year 2020 in the U.S. segment and 13 basis points in P.R. The impact from lower rates was partially offset by higher average balance of interest-bearing deposits by $8.4 billon when compared to the year 2020. POPULAR, INC. 2021 ANNUAL REPORT 13 Partially offset by: • Lower interest income from consumer loans due to lower average volume both on the installment loan and credit card portfolios, resulting also from a higher household liquidity in the market, as discussed above. Table 3 - Analysis of Levels & Yields on a Taxable Equivalent Basis from Continuing Operations (Non-GAAP) Average Volume Average Yields / Costs 2021 2020 Variance 2021 2020 Variance Year ended December 31, (In millions) $16,000 22,931 84 $ 8,598 $ 7,402 3,578 19,353 15 69 0.13% 0.23% (0.10)% Money market investments 2.22 5.16 Investment securities [1] Trading securities (0.20) (0.84) 2.42 6.00 Interest 2020 2021 Variance (In thousands) Variance Attributable to Rate Volume $ 21,147 $ 508,131 4,339 19,722 $ 467,994 4,165 1,425 40,137 174 $(10,745) $ 12,170 83,860 (43,723) 820 (646) 39,015 28,020 10,995 1.37 1.76 (0.39) trading securities 533,617 491,881 41,736 (55,114) 96,850 Total money market, investment and 13,455 849 1,289 7,696 2,463 3,322 13,245 913 1,112 7,255 2,839 3,021 210 5.39 (64) 5.41 177 6.00 5.09 441 (376) 11.17 8.47 301 5.23 5.74 6.05 5.23 11.34 8.97 29,074 28,385 689 6.19 6.29 0.16 (0.33) (0.05) (0.14) (0.17) (0.50) (0.10) Loans: Commercial Construction Leasing Mortgage Consumer Auto Total loans 723,765 45,821 77,356 392,047 275,078 280,722 692,372 52,438 67,247 379,794 322,009 271,162 31,393 (6,617) 10,109 12,253 (46,931) 9,560 20,297 (3,059) (522) (10,414) (5,612) (16,500) 11,096 (3,558) 10,631 22,667 (41,319) 26,060 1,794,789 1,785,022 9,767 (15,810) 25,577 $68,089 $56,405 $11,684 3.43% 4.04% (0.61)% Total earning assets $2,328,406 $2,276,903 $ 51,503 $(70,924) $122,427 $25,959 15,429 7,028 $19,678 $ 6,281 3,030 12,399 (943) 7,971 48,416 40,048 8,368 92 1,185 166 1,178 49,693 41,392 14,687 3,709 11,538 3,475 (74) 7 8,301 3,149 234 0.12% 0.28% (0.16)% 0.18 0.75 (0.12) (0.30) 0.30 1.05 Interest bearing deposits: NOW and money market [2] Savings Time deposits $ 31,911 $ 27,123 52,587 54,652 $ (22,741) $(37,171) $ 14,430 8,578 37,765 (10,096) 83,438 (10,642) (30,851) (19,220) (20,755) 0.23 0.35 4.49 0.33 0.44 1.48 4.81 0.57 (0.21) (1.13) (0.32) (0.24) Total interest bearing deposits 111,621 175,855 (64,234) (77,146) 12,912 Short-term borrowings Other medium and long-term debt 318 53,107 2,457 56,626 (2,139) (3,519) (1,411) (2,927) (728) (592) Total interest bearing liabilities 165,046 234,938 (69,892) (81,484) 11,592 Demand deposits Other sources of funds $68,089 $56,405 $11,684 0.24% 0.42% (0.18)% Total source of funds 165,046 234,938 (69,892) (81,484) 11,592 3.19% 3.62% (0.43)% Net interest margin/ income on a taxable equivalent basis (Non-GAAP) 3.10% 3.47% (0.37)% Net interest spread 2,163,360 2,041,965 121,395 $ 10,560 $110,835 Taxable equivalent adjustment 205,770 185,353 20,418 2.88% 3.29% (0.41)% non-taxable equivalent basis (GAAP) $1,957,590 $1,856,612 $100,977 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. 14 POPULAR, INC. 2021 ANNUAL REPORT Provision for Credit Losses - Loans Held-in-Portfolio and Unfunded Commitments For the year ended December 31, 2021, the Corporation recorded a release of $191.3 million for its reserve for credit related to loans held-in-portfolio and unfunded losses commitments, compared with a provision expense of $294.9 million for the year ended December 31, 2020. The reserve release related to the loans-held-in-portfolio for the year 2021 was $183.3 million, compared to a provision expense of $282.3 million for the year 2020. The decrease reflects the improvements in credit quality, changes in the macroeconomic outlook, and changes in qualitative reserves. The provision for unfunded commitments for the year 2021 reflected a benefit of $8.0 million, compared to a provision expense of $12.6 million for the same period of 2020. The reserve release related to loans held-in-portfolio for the BPPR segment was $129.0 million for the year ended December 31, 2021, compared to a provision expense of $205.9 million for the year ended December 31, 2020, a favorable variance of $334.9 million. The reserve release related to loans held-in-portfolio for the Popular U.S. segment was $54.3 million for the year 2021, a favorable variance of compared to a provision expense of $130.8 million, $76.5 million for the year 2020. At December 31, 2021, the total allowance for credit losses for loans held-in-portfolio amounted to $695.4 million, compared to $896.3 million as of December 31, 2020. The ratio of the allowance for credit losses to loans held-in-portfolio was 2.38% at December 31, 2021, compared to 3.05% at December 31, 2020. Refer to Note 9 to the Consolidated Financial Statements, information on the for additional Corporation’s methodology to estimate its allowance for credit losses (“ACL”). Refer to the Credit Risk section of this MD&A for a detailed analysis of net charge-offs, non-performing assets, the allowance for credit losses and selected loan losses statistics. As discussed in Note 9 to the Consolidated Financial Statements, within the process to estimate its allowance for the Corporation applies probability credit weights simulations using Moody’s Analytics’ Baseline, S3 (pessimistic) and S1 (optimistic) scenarios. to the outcomes of losses (“ACL”), Provision for Credit Losses - Investment Securities The Corporation’s provision for credit losses related to its investment securities held-to-maturity is related to the portfolio of obligations from the Government of Puerto Rico, states and political subdivisions. For the year ended December 31, 2021, the Corporation recorded a reserve release of $2.2 million, compared to a reserve release of $2.4 million for the year ended December 31, 2020. At December 31, 2021, the total allowance for credit losses for this portfolio amounted to $8.1 million, compared to $10.3 million as of December 31, 2020. Refer to Note 7 for additional information on the ACL for this portfolio. Non-Interest Income For the year ended December 31, 2021, non-interest income increased by $129.8 million, when compared with the previous year, primarily driven by: • higher on service deposit charges by $14.9 million principally due fees on transactional cash management services at BPPR in part due to the business disruptions and the waiver of fees related to the COVID-19 pandemic during 2020; to higher accounts • higher other service fees by $53.4 million, principally at the BPPR segment, due to higher credit and debit card fees by $43.4 million mainly in interchange income resulting from higher transactional volumes in part due to the business disruptions and the waiver of service charges and late fees related to the COVID-19 pandemic during 2020; higher insurance fees by $5.8 million, from which $3.0 million were insurance commissions recognized during the fourth quarter; and higher trust fees by $3.1 million; related to contingent • higher (“MSRs”) income from mortgage banking activities by $39.7 million mainly due to the impact of the bulk loan repurchases from the Corporation’s GNMA, FNMA and FHLMC loan servicing portfolio during 2020 which resulted in an unfavorable adjustment of $8.8 million and $10.5 million on the valuation of mortgage servicing losses, rights respectively, and an offsetting positive adjustment in servicing fees of $3.4 million; lower unfavorable fair value adjustments on MSRs by $23.0 million due to changes in assumptions; realized gains on closed derivatives positions by $11.9 million also contributed to the year over year income improvements; partially offset by lower gains from securitization transactions by $8.9 million; and and higher advances servicing and • higher other operating income by $26.7 million principally due to higher net earnings from the combined portfolio of investments under the equity method by $15.1 million, the gain of $7.0 million recognized in the third quarter of 2021 by BPPR as a result of the sale and partial leaseback of two corporate office buildings, and higher daily auto rental revenues by $3.9 million; partially offset by: • lower net gain on equity securities by $6.1 million mainly related to a $4.1 million gain on sale of certain equity securities at PB during the third quarter of 2020. POPULAR, INC. 2021 ANNUAL REPORT 15 Operating Expenses Table 4 provides a breakdown of operating expenses by major categories. Table 4 - 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 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 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, 2021 increased by $91.4 million, when compared with the previous year. The increase in operating expenses was driven primarily by: • Higher personnel cost by $67.6 million mainly due to higher incentives related to the profit-sharing plan by $29.1 million and higher commission and performance- based incentives by $34.5 million due to improved performance metrics and salary increases, higher fringe benefit by $8.0 million, partially offset by higher deferred salaries as a result of higher loan originations during 2021; expense, mainly medical insurance • Higher equipment expense by $3.2 million due to higher amortization of software costs; 16 POPULAR, INC. 2021 ANNUAL REPORT Years ended December 31, 2021 2020 2019 $ 371,644 113,095 52,077 94,986 $ 370,179 78,582 44,123 71,321 $ 351,788 97,764 41,804 99,269 631,802 102,226 92,097 56,783 13,199 272,386 10,712 114,568 410,865 25,234 72,981 25,579 (14,414) 45,088 38,391 53,509 564,205 119,345 88,932 54,454 12,588 253,565 10,611 117,358 394,122 23,496 57,608 23,868 (3,480) 45,108 26,331 57,443 590,625 96,339 84,215 51,653 16,300 247,332 12,877 107,902 384,411 23,450 75,372 18,179 4,298 38,059 21,414 80,097 136,988 128,882 139,570 9,134 6,397 9,370 $1,549,275 $1,457,829 $1,477,482 0.89% 2.18 8,351 8.52 $ 0.95% 2.45 8,522 6.99 $ 1.17% 2.93 8,560 5.88 $ • Higher professional fees by $16.7 million primarily due to higher processing service fees due to higher volume of transactions; • Higher business promotions by $15.4 million due to higher customer reward program expense in our credit card business and higher advertising expense; losses sundry $12.1 million, • Higher other operating expenses by $8.1 million mainly due higher including by $3.7 million related to the termination of a white label credit reserves; and higher card contract and higher impairment by properties $3.2 million; partially offset by lower pension plan cost by $10.0 million due in actuarial to annual assumptions and higher gain on sale of repossess auto units by $2.8 million; and undeveloped changes losses legal on • Higher amortization of intangibles by $2.7 million due to a write-down on impairment of a trademark. These variances were partially offset by: • Lower net occupancy expense by $17.1 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 recorded during 2020; and • Lower OREO expense by $10.9 million mainly due to higher gains on sale of mortgage properties. Income Taxes For the year ended December 31, 2021, the Corporation recorded an income tax expense of $309.0 million, compared to $111.9 million for the same period of 2020. The income tax expense for the year ended December 31, 2021 reflects the impact of higher pre-tax income, resulting primarily from a lower provision for credit losses partially offset by higher net exempt from U.S. income operations subject to a lower statutory tax rate. and higher interest income At December 31, 2021, the Corporation had a net deferred tax asset amounting to $0.7 billion, net of a valuation allowance of $0.5 billion. The net deferred tax asset related to the U.S. operations was $0.2 billion, net of a valuation allowance of $0.4 billion. Refer to Note 35 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 $206.1 million for the quarter ended December 31, 2021, compared with a net income of $176.3 million for the same quarter of 2020. Net interest income for the fourth quarter of 2021 amounted to $501.3 million, compared with $471.6 million for the fourth quarter of 2020, an increase of $29.7 million. The increase in net interest income was mainly due to increase in average balance of earning assets, mainly due to increase in deposits. The net interest margin declined by 26 basis points to 2.78% due to declines in market rates and the earning assets mix, which were concentrated in overnight Fed Funds, U.S. Treasuries and agency securities, which are all lower yielding assets. The provision for credit losses was a benefit of $33.1 million compared to a provision expense of $21.2 million for the fourth quarter of 2020. The benefit recorded in the fourth quarter of 2021 was reflective of improvements in the credit metrics and the macroeconomic outlook as well as releases in qualitative reserves. Non-interest income amounted to $164.7 million for the compared with 31, ended December 2020, quarter $144.8 million for the same quarter in 2020. The increase of $19.9 million was mainly due to other service fees, due to higher volume of income from mortgage banking activities. transactions, and higher Operating expenses totaled $417.4 million for the quarter ended December 31, 2021, compared with $375.9 million for in the previous year. The increase of the same quarter $41.5 million is mainly related to higher personnel costs due to higher salaries, incentives and commissions, higher business promotion expenses, and higher other operating expenses due to the reclassification during the fourth quarter in 2020 of $10.0 million in provision for unfunded commitments from the other expenses line to the provision for credit losses caption, partially offset by lower 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 recorded in the last quarter of 2020. Income tax expense amounted to $75.6 million for the quarter ended December 31, 2021, compared with income tax expense of $43.0 million for the same quarter of 2020. The increase is mainly due to higher pre-tax income during the quarter ended December 31, 2021, compared to the quarter ended December 31, 2020. 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 37 to the Consolidated Financial Statements. The Corporate group reported a net income of $13.4 million for the year ended December 31, 2021, compared to a net income of $8.5 million for the previous year. The increase in the net income was mainly attributed to lower net interest expense by $1.4 million, mainly due to lower interest expense the trust after the redemption on November 1, 2021 of preferred securities issued by the Popular Capital Trust I; higher non-interest income by $10.1 million mainly due to higher income from the portfolio of equity method investments, partially offset by higher operating expenses by $6.4 million mainly due to higher amortization of intangibles due to the impairment of a trademark. Highlights on the earnings results for the reportable segments are discussed below: Banco Popular de Puerto Rico The Banco Popular de Puerto Rico reportable segment’s net the year ended income amounted to $787.5 million for December 31, 2021, compared with $499.0 million for the year POPULAR, INC. 2021 ANNUAL REPORT 17 ended December 31, 2020. The results for 2021 included reserve for credit losses release of $136.4 million. The results for 2020 were impacted by the COVID-19 pandemic as well as the implementation of the CECL accounting pronouncement under which provision for credit losses of $211.0 million was recorded throughout factors that contributed to the variance in the financial results included the following: the year. The principal • Higher net interest income by $81.0 million due to higher income from investment securities by $35.2 million mainly due to higher average balances, higher income from loans by $15.3 million, mainly from interest and fees from commercial PPP loans and higher volume of mortgage loans and leases, partially offset by lower income from consumer loans, mainly credit cards; and lower interest expense from deposits by $29.2 million. The BPPR segment’s net interest margin was 2.86% for 2021 compared with 3.40% for the same period in 2020. The decrease was mainly due to the earning asset composition; • A reversal of $136.4 million of the reserve for credit losses, due to improved credit metrics and improved macroeconomic outlook, compared to a provision expense of $211.0 million in 2020, which reflected the implementation of CECL and the impact of the COVID-19 pandemic in the macroeconomic outlook; • Higher non-interest income by $119.4 million mainly due to: • Higher service charges on deposit accounts by $14.8 million due to the impact in 2020 of lower transactions and the temporary waiver of fees in response to the COVID-19 pandemic; • Higher other service fees by $51.7 million due to higher debit and credit card transactions and the fees in response to the temporary waiver of COVID-19 pandemic in 2020 and higher contingent insurance revenues in 2021; • Higher mortgage banking activities by $39.9 million due to lower unfavorable fair value adjustments on mortgage servicing rights, and the negative net impact that resulted from the from the bulk repurchase of loans from the Corporation’s GNMA, FNMA and FHLMC loan servicing portfolio in 2020; and • Higher other operating income by $10.7 million due to higher income from the portfolio of equity method investments, the gain from the sale of two corporate office buildings in 2021 and higher income from daily auto rental activities. 18 POPULAR, INC. 2021 ANNUAL REPORT • Higher operating expenses by $112.0 million, mainly due to: • Higher personnel costs by $43.6 million mainly incentives and profit- due to higher salaries, sharing plan expense; • Higher professional fees by $20.3 million mainly due to processing service fees due to higher volume of transactions; • Higher business promotions by $13.6 million mainly due to higher customer reward program expense in our credit card business and higher advertising expense; to losses, higher • Higher other operating expenses by $34.3 million including sundry due $3.7 million related to the termination of a white label credit card contract, impairment losses on long-lived assets of $5.3 million recorded in 2021, higher legal reserves and higher corporate expense allocations; Partially offset by: • Lower OREO expenses by $11.1 million mainly residential due to higher gains on sales of properties. • Higher income tax expense by $147.3 million mainly due to higher income before tax. Popular U.S. For the year ended December 31, 2021, the reportable segment income of $134.1 million, of Popular U.S. compared with a net loss of $0.7 million for the year ended December 31, 2020. The principal factors that contributed to the variance in the financial results included the following: reported net • Higher net interest income by $18.6 million mainly due to lower interest expense on deposits by $36.5 million, due to lower rates and lower average balance of certificates of deposits, partially offset by lower income from loans by $9.8 million mainly from consumer and construction loans, and lower income from investment securities by $10.2 million. The Popular U.S. reportable segment’s net interest margin was 3.39% for 2021 compared with 3.21% for the same period in 2020; to improvements • A release of $56.9 million of the reserve for credit losses, due the macroeconomic outlook, compared to a provision expense the of implementation of CECL and the effects of the pandemic; $81.5 million in 2020, mainly due credit metrics and to • Lower operating expenses by $26.7 million mainly due to: • Lower occupancy expenses by $22.7 million mainly due to the impact of the NY branch in that in resulted rationalization 2020 termination costs, $19.0 million in lease including the impairment of the right of use assets; and • Lower professional fees by $5.1 million mainly due intersegment allocated services; December 31, 2021. This was largely driven by the additional funds available to invest resulting from the increase in deposits across various sectors, partially offset by paydowns of agency mortgage-backed securities. Refer to Note 6 to the Consolidated Financial Statements for additional information with respect to the Corporation’s debt securities available-for-sale. Partially offset by: • Higher personnel costs by $6.9 million due to higher salaries, incentives and profit-sharing plan expenses. • Income taxes unfavorable variance of $49.1 million mainly due to higher income before tax. total assets were STATEMENT OF FINANCIAL CONDITION ANALYSIS Assets The Corporation’s billion at December 31, 2021, compared to $65.9 billion at December 31, 2020. Refer to the Corporation’s Consolidated Statements of Financial Condition at December 31, 2021 and 2020 included in this 2021 Annual Report on Form 10-K. Also, refer to the Statistical Summary 2021-2020 in this MD&A for Condensed Statements of Financial Condition. $75.1 Money market investments and debt securities available-for-sale Money market investments and debt securities available-for-sale increased by $5.9 billion and $3.4 billion, respectively, at Table 5 - Loans Ending Balances (In thousands) Loans held-in-portfolio: Commercial Construction Leasing Mortgage Auto Consumer Total loans held-in-portfolio Loans held-for-sale: Commercial Mortgage Total loans held-for-sale Total loans Loans Refer to Table 5 for a breakdown of the Corporation’s loan portfolio. Also, refer to Note 8 in the Consolidated Financial Statements for detailed information about the Corporation’s loan portfolio composition and loan purchases and sales. Loans held-in-portfolio decreased by $0.1 billion to $29.2 billion at December 31, 2021, mainly due to a decrease in commercial loans at BPPR of $0.6 billion principally related to the repayment of PPP loans, a decrease in mortgage loans at BPPR of $0.5 billion mainly due to paydowns and a decrease in construction loans of $0.2 billion, partially offset by an increase in commercial loans at PB of $0.7 billion principally in the healthcare industry from which $0.1 billion was related to the acquisition by PEF of K2’s lease financing business and growth in auto loans and leases at BPPR by $0.5 billion. The allowance for credit losses for the loan portfolio decreased by $0.2 billion due to improvements in credit quality, changes in the macroeconomic outlook, and changes in qualitative reserves. Refer to the Credit Quality section of the MD&A for additional information on the Allowance for credit losses for the loan portfolio. At December 31, 2020 2021 $13,732,701 716,220 1,381,319 7,427,196 3,412,187 2,570,934 $13,614,310 926,208 1,197,661 7,890,680 3,132,228 2,624,109 $29,240,557 $29,385,196 $ $ – 59,168 59,168 $ $ 2,738 96,717 99,455 $29,299,725 $29,484,651 POPULAR, INC. 2021 ANNUAL REPORT 19 Other assets Other assets amounted to $1.6 billion at December 31, 2021, a decrease of $0.1 billion when compared to December 31, 2020. Refer to Note 14 for a breakdown of the principal categories that comprise the caption of “Other Assets” in the Consolidated Statements of Financial Condition at December 31, 2021 and 2020. Liabilities The Corporation’s liabilities were $69.1 billion at December 31, 2021, an increase of $9.2 billion compared to total Table 6 - Financing to Total Assets $59.9 billion at December 31, 2020, 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, 2021 and 2020 is included in Table 6. (In millions) Non-interest bearing deposits Interest-bearing core deposits Other interest-bearing deposits Repurchase agreements Other short-term borrowings Notes payable Other liabilities Stockholders’ equity $67.0 billion totaled deposits Deposits The Corporation’s at December 31, 2021, compared to $56.9 billion at December 31, 2020.The deposits increase of $10.1 billion was mainly due to higher Puerto Rico public sector deposits by $5.2 billion and higher retail and commercial demand deposits by $3.9 billion at BPPR. Public sector deposit balances amounted to $20.3 billion at December 31, 2021. A significant portion of Puerto Rico public sector deposits are expected to be used by Puerto Rico pursuant to the Plan of Adjustment for Puerto Rico confirmed by the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”) Title III Court, which is expected to Table 7 - Deposits Ending Balances (In thousands) Demand deposits 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. Borrowings The Corporation’s borrowings amounted to $1.2 billion at December 31, 2021, compared to $1.3 billion at December 31, Consolidated 2020. Refer Note the 17 to to 20 POPULAR, INC. 2021 ANNUAL REPORT December 31, December 31, % increase (decrease) % of total assets 2020 from 2020 to 2021 2020 2021 2021 $15,684 47,954 3,367 92 75 989 968 5,969 $13,129 38,599 5,138 121 – 1,225 1,685 6,029 19.5% 24.2 (34.5) (24.0) N.M. (19.3) (42.6) (1.0) 20.9% 19.9% 63.9 4.5 0.1 0.1 1.3 1.3 7.9 58.5 7.8 0.2 – 1.9 2.6 9.1 become effective on or about March 15, 2022. However, the receipt by the P.R. Government of additional COVID-19 and hurricane recovery-related Federal assistance and seasonal tax collections could increase public deposit balances at BPPR in the near term. The rate at which public deposit balances will decline is uncertain and difficult to predict. The amount and timing of any such reduction is likely to be impacted by, for example, the implementation of the Plan of Adjustment under Title III of PROMESA and the speed at which the COVID-19 federal assistance is distributed. Refer to Table 7 for a breakdown of the Corporation’s deposits at December 31, 2021 and 2020. 2021 2020 $25,889,732 33,674,134 729,073 6,685,938 26,211 $22,532,729 26,390,565 635,198 7,130,749 177,099 $67,005,088 $56,866,340 for Statements Financial information on the Corporation’s borrowings. Also, refer to the Liquidity section in this MD&A for additional information on the Corporation’s funding sources. detailed Other liabilities The Corporation’s other liabilities amounted to $1.0 billion at December 31, 2021, a decrease of $0.7 billion when compared to December 31, 2020, mainly due to the settlement of purchases of debt securities. income Stockholders’ Equity Stockholders’ equity totaled $6.0 billion at December 31, 2021, a decrease of $59.3 million when compared to December 31, 2020, principally due to higher accumulated unrealized losses on debt securities available-for-sale by $557.0 million and the the $350.0 million accelerated share repurchase impact of transaction, offset by net ended December 31, 2021 of $934.9 million, less declared dividends of $142.3 million on common stock and $1.4 million in dividends on preferred stock and a reduction in the adjustment of pension and postretirement benefit plans of $36.1 million. 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 22 for a detail of accumulated other comprehensive loss (income), an integral component of stockholders’ equity. the year for 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 Table 8 - 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 specifies that Tier 1 capital consist of CET1 and “Additional Tier 1 Capital” instruments meeting specified requirements. Note 21 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 the Corporation’s ratios presented in Table 8 show that Corporation was “well capitalized” for regulatory purposes, the highest classification, under Basel III for years 2021 and 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, the shortfall. and compensation based on the amount of 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 8 presents the Corporation’s capital adequacy information for the years 2021 and 2020. At December 31, 2020 2021 $ 5,476,031 $ 4,992,096 22,143 22,143 $ 5,498,174 585,931 $ 5,014,239 759,680 $ 6,084,105 $ 5,773,919 $31,441,224 $30,702,091 $74,238,367 $64,305,022 17.42% 17.49 19.35 7.41 8.12 7.20 19.87 16.26% 16.33 18.81 7.80 9.10 8.02 19.09 POPULAR, INC. 2021 ANNUAL REPORT 21 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 increase in the CET1 capital ratio, Tier 1 capital ratio and, total capital ratio as of December 31, 2021, compared to December 31, 2020, was mostly due to the year earnings, partially offset by the accelerated share repurchase agreement to repurchase an aggregate of $350 million of Popular’s common stock and the slight increase in risk weighted assets. The decrease in leverage capital ratio was mainly due to the increase in average total assets, driven by investments in zero or low-risk weighted debt that therefore did not have a significant impact on the risk-weighted assets. securities and overnight Fed Funds 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. banking Specifically, 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 agencies have organizations including banking clarified that the to 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, 2021, the Corporation has $353 million in PPP loans and no loans were pledged as collateral for PPPL Facilities. Table 9 reconciles total stockholders’ equity to common equity Tier 1 capital. the Corporation’s common Table 9 - Reconciliation Common Equity Tier 1 Capital (In thousands) At December 31, 2020 2021 Common stockholders’ equity $6,116,756 $6,224,942 AOCI related adjustments due to opt-out election Goodwill, net of associated deferred 257,762 (261,245) tax liability (DTL) (591,703) (591,931) Intangible assets, net of associated DTLs Deferred tax assets and other deductions (16,219) (22,466) (290,565) (357,204) Common equity tier 1 capital $5,476,031 $4,992,096 Common equity tier 1 capital to risk- weighted assets 17.42% 16.26% 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 intangible assets, the 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 10 provides a reconciliation of total stockholders’ equity to tangible common equity and total assets to tangible assets at December 31, 2021 and 2020. 22 POPULAR, INC. 2021 ANNUAL REPORT Table 10 - Reconciliation of Tangible Common Equity and Tangible Assets (In thousands, except share or per share information) Total stockholders’ equity Less: Preferred stock Less: Goodwill Less: Other intangibles At December 31, 2021 2020 $ 5,969,397 (22,143) (720,293) (16,219) $ 6,028,687 (22,143) (671,122) (22,466) Total tangible common equity $ 5,210,742 $ 5,312,956 Total assets Less: Goodwill Less: Other intangibles Total tangible assets Tangible common equity to tangible assets Common shares outstanding at end of $75,097,899 (720,293) (16,219) $65,926,000 (671,122) (22,466) $74,361,387 $65,232,412 7.01% 8.14% period 79,851,169 84,244,235 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 $ 65.26 $ 63.07 Year-to-date average $ 5,777,652 (22,143) (679,959) (20,861) $ 5,419,938 (26,277) (671,121) (25,154) $ 5,054,689 $ 4,697,386 18.47% 10.75% [1] Average balances exclude unrealized gains or losses on debt securities available-for-sale. RISK MANAGEMENT Market / Interest Rate Risk The financial results and capital levels of the Corporation are constantly exposed to market, interest rate and liquidity risks. Market risk refers to the risk of a reduction in the Corporation’s capital due to changes in the market valuation of its assets and/or liabilities. Most of the assets subject to market valuation risk are debt securities classified as available-for-sale. Refer to Notes 6 and 7 for further information on the debt securities available-for-sale and held-to-maturity portfolios. Debt securities classified as available-for-sale amounted to $25.0 billion as of December 31, 2021. Other assets subject risk include loans held-for-sale, which amounted to $59 million, mortgage servicing rights (“MSRs”) which amounted to $122 million and to securities $30 million, as of December 31, 2021. “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 In managing interest curve and option risks. rate risk, management may alter the mix of floating and fixed rate assets and liabilities, change pricing schedules, adjust maturities through sales and purchases of investment securities, and enter into derivative contracts, among other alternatives. Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate rate risk position given line of business forecasts, management objectives, market and policy 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 rates, implied forwards, and parallel and non-parallel rate shocks. Management also performs analyses to isolate and measure basis and prepayment risk exposures. The asset and liability management group performs validation procedures on various assumptions used as part of the simulation analyses as well as validations of results on a monthly basis. In addition, the model and processes used to assess IRR are subject to independent validations according to the guidelines established in the Model Governance and Validation policy. in 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 simulations risk POPULAR, INC. 2021 ANNUAL REPORT 23 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, 2021 and December 31, 2020, assuming a static balance sheet and parallel changes over flat spot rates over a one-year time horizon: Table 11 - Net Interest Income Sensitivity (One Year Projection) December 31, 2021 December 31, 2020 Amount Change Percent Change Amount Change Percent Change $ 257,223 197,354 166,920 (78,408) (120,661) 13.21% 10.14 8.57 (4.03) (6.20) $167,474 81,690 39,361 (53,952) (71,517) 9.19% 4.49 2.16 (2.96) (3.93) continue to be close to their lower bound and Popular does not allow rates to turn negative in its IRR simulations. The Corporation’s loan and investment portfolios are subject to prepayment risk, which results from the ability of a third- party to repay debt obligations prior to maturity. Prepayment risk also could have a significant impact on the duration of collateralized mortgage mortgage-backed obligations lower prepayments could extend) the weighted average life of these portfolios. could shorten (or since prepayments securities and (Dollars in thousands) Change in interest rate +400 basis points +200 basis points +100 basis points -100 basis points -200 basis points simulations As of December 31, 2021, NII show the Corporation maintains an asset sensitive position and is expected to benefit from an overall rising rate environment. The increases in sensitivity for the period are primarily driven by the significant deposit increases seen in 2021, which have resulted in a higher level of short-term investments and cash reserves maintained at the Federal Reserve. These assets reprice immediately under the NII simulations, thus improving the NII benefit in rising rate scenarios. The declining rate scenarios show a smaller and asymmetric impact in sensitivity as rates 24 POPULAR, INC. 2021 ANNUAL REPORT Table 12 - Interest Rate Sensitivity (Dollars in thousands) 0-30 days After three months but within six months Within 31 - 90 days At December 31, 2021 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 $17,536,719 $ – $ – $ – $ – $ – $ – $ – $17,536,719 301,103 436,980 4,907,214 2,492,007 – – 664,755 1,412,901 – 678,066 1,359,602 – 712,179 3,936,869 17,980,634 1,307,655 4,272,336 13,548,010 – – – 548,736 25,259,322 – 29,299,725 3,002,133 3,002,133 22,745,036 2,928,987 2,077,656 2,037,668 2,019,834 8,209,205 31,528,644 3,550,869 75,097,899 23,065,038 1,940,456 809,349 496,482 1,137,611 642,437 1,053,198 647,957 976,622 357,661 3,260,426 14,306,213 1,655,856 971,300 31,550 30,295 20,102 9,656 – – – 75,000 1,000 – – – – – – – – – 100,000 – – – – – – – – – 2,148 – 341,103 – 544,312 – – – – – – – – – 15,684,482 15,684,482 968,248 5,969,397 968,248 5,969,397 – 44,608,457 6,712,149 – – – – 91,603 75,000 988,563 Total $25,113,044 $1,336,126 $1,900,150 $1,710,811 $1,336,431 $4,572,829 $16,506,381 $ 22,622,127 $75,097,899 Interest rate sensitive gap Cumulative interest rate (2,368,008) 1,592,861 177,506 326,857 683,403 3,636,376 15,022,263 (19,071,258) sensitive gap (2,368,008) (775,147) (597,641) (270,784) 412,619 4,048,995 19,071,258 Cumulative interest rate sensitive gap to earning assets (3.31)% (1.08)% (0.84)% (0.38)% 0.58% 5.66% 26.66% – – – – – POPULAR, INC. 2021 ANNUAL REPORT 25 Table 13, which presents the maturity distribution of earning assets, takes into consideration prepayment assumptions. Table 13 - Maturity Distribution of Earning Assets As of December 31, 2021 Maturities After one year through five years Fixed interest rates Variable interest rates After five years through fifteen years Variable Fixed interest interest rates rates After fifteen years Fixed interest rates Variable interest rates One year or less $17,536,719 $ – $ – $ – $ – $ – $ 2,714,995 14,688,701 14,430 7,164,229 4,952 482,039 5,067,977 497,519 408,552 1,640,359 787,698 4,223,468 32,857 959,267 3,292,532 2,623,120 2,631,141 149,412 – 268,033 121,010 910,162 4,693 13,500 182,496 3,381,618 735,828 31,739 – 527,827 26,056 Total $17,536,719 25,069,345 13,732,701 716,220 1,381,319 5,983,121 7,486,364 29,299,725 – – 84,054 – – – – 84,054 80,071 – – 71,873 546,863 698,807 (In thousands) Money market securities Investment and trading securities Loans: Commercial Construction Leasing Consumer Mortgage Subtotal loans 8,402,106 11,131,244 3,169,597 4,492,468 1,321,449 Total earning assets $28,653,820 $25,819,945 $3,184,027 $11,656,696 $1,326,401 $1,180,847 $84,054 $71,905,789 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, 2021, the Corporation held trading representing securities with a fair value of $30 million, assets, total approximately 0.04% of the Corporation’s compared with $37 million and 0.1%, at respectively, December 31, 2020. As shown in Table 14, the trading portfolio consists principally of mortgage-backed securities which at December 31, 2021 were investment grade securities. As of December 31, 2021 and December 31, 2020, the trading portfolio also included $0.1 million in Puerto Rico government obligations. Trading instruments are recognized at fair value, with changes resulting from fluctuations in market prices, interest rates or exchange rates reported in current period earnings. The Corporation recognized a net trading account loss of $389 thousand for the year ended December 31, 2021 and a net trading account gain of $1 million for the year ended December 31, 2020. 26 POPULAR, INC. 2021 ANNUAL REPORT Table 14 - Trading Portfolio (Dollars in thousands) Mortgage-backed securities U.S. Treasury securities Collateralized mortgage obligations Puerto Rico government obligations Interest-only strips 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 $0.3 million for the last week in December 31, and estimates 2021. There 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 interest rate volatility. Derivative instruments that the Corporation may use include, among others, interest indexed options, and forward contracts. The rate caps, Corporation does not use highly leveraged derivative instruments in its interest rate risk management strategy. Credit risk embedded in these transactions is reduced by requiring appropriate collateral from counterparties and entering into netting outstanding derivatives are recognized in the Corporation’s Consolidated Statements of Condition at their fair value. Refer to Note 26 for further in information on the Corporation’s derivative instruments and hedging activities. agreements whenever possible. All involvement 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 December 31, 2021 Weighted Average Yield [1] Amount December 31, 2020 Weighted Average Yield [1] Amount $22,559 6,530 257 85 280 $29,711 5.12% $24,338 11,506 0.03 346 5.61 103 0.47 381 12.00 4.06% $36,674 5.19% 0.04 5.65 0.48 12.00 3.64% 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, 2021 amounted to $ 88 million (2020 - $ 189 million). Refer to Note 26 for additional information on these derivative contracts. quantitative Fair Value Hedges The Corporation did not have any derivatives designated as fair value hedges during the years ended December 31, 2021 and 2020. 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 derivative free-standing 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. 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. In these certificates, the customer’s principal 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 this product gives customers the instrument. Accordingly, opportunity to invest in a product that protects the principal POPULAR, INC. 2021 ANNUAL REPORT 27 invested but allows the customer the potential to earn a return based on the performance of the indexes. The risk of issuing certificates of deposit with returns tied to the applicable indexes is 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, 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 effective cost of 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, 2021, the indexed options on deposits notional approximated $79 million (2020 - $69 million) with a fair value of $26 million (asset) (2020 - $21 million) while the embedded options had a notional value of $72 million (2020 - $63 million) with a fair value of $23 million (liability) (2020 - $18 million). amount of the Refer to Note 26 for a description of other non-hedging derivative activities utilized by the Corporation during 2021 and 2020. 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 $180.3 million at December 31, 2021. 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, 2021, the Corporation had approximately $67 million in an unfavorable foreign currency translation adjustment as part of accumulated other comprehensive income (loss), compared with an unfavorable adjustment of $71 million at December 31, 2020 and $57 million at December 31, 2019. 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 28 POPULAR, INC. 2021 ANNUAL REPORT 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 the Corporate Treasury Division coordinates basis. Also, 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 liquidity position and that of the banking subsidiaries. Additionally, contingency funding plans are used to model various stress events of different magnitudes and affecting different time horizons that assist management in evaluating the size of the liquidity buffers needed if those stress events occur. However, such models may not predict accurately how the market and customers might react to every event, and are dependent on many assumptions. Deposits, funds for the Corporation, including customer deposits, brokered deposits and public funds deposits, continue to be the most significant funding 89% of the source of Corporation’s total assets at December 31, 2021 and 86% at December 31, 2020. The ratio of total ending loans to deposits was 44% at December 31, 2021, compared to 52% at December 31, 2020. In addition to traditional deposits, the Corporation maintains arrangements, which borrowing amounted to approximately $1.2 billion in outstanding balances at December 31, 2021 (December 31, 2020 - $1.3 billion). A detailed description of the Corporation’s borrowings, including is included in Note 17 to the Consolidated their terms, Financial Statements. Also, the Consolidated Statements of Cash Flows in the accompanying Consolidated Financial Statements provide information on the Corporation’s cash inflows and outflows. On September 9, 2021, the Corporation completed an accelerated share repurchase program for the repurchase of an aggregate $350 million of Popular’s common stock, refer to Note 31 for additional information. On November 1, 2021, the Corporation redeemed all outstanding Income Trust Preferred Securities issued by the Popular Capital Trust I, refer to Note 17 for additional information. 6.70% Cumulative Monthly On January 12, 2022, Popular, Inc. announced the plan to increase its quarterly common stock dividend from $0.45 per share to $0.55 per share, commencing with the dividend payable in the second quarter of 2022, subject to the approval by its Board of Directors, and repurchase up to $500 million of its common stock during 2022. 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 17 to the Consolidated Financial Statements, the Corporation’s borrowing for additional facilities available through its banking subsidiaries. information of and repurchases, The principal uses of funds for the banking subsidiaries include loan originations, investment portfolio purchases, loan purchases outstanding obligations (including deposits), advances on certain serviced portfolios the banking subsidiaries assume liquidity risk related to collateral posting requirements for certain activities mainly in connection with servicing contractual recourse provisions, and operational expenses. Also, commitments, repayment of 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. recognized credit 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 the Corporation’s banking subsidiaries are federally all of insured (subject to FDIC limits) and this is expected to mitigate the potential effect of a downgrade in the credit ratings. agencies), rating Deposits are a key source of funding as they tend to be less volatile than institutional borrowings and their cost is less sensitive to changes in market rates. Refer to Table 7 for a breakdown of deposits by major types. Core deposits are generated from a large base of consumer, corporate and public sector customers. Core deposits include all non-interest bearing deposits, savings deposits and certificates of deposit under $250,000, excluding brokered deposits with denominations under $250,000. Core deposits have historically provided the Corporation with a sizable source of relatively stable and low-cost funds. Core deposits totaled $63.6 billion, or 95% of total deposits, compared with at December 31, 2021, $51.7 billion, or 91% of total deposits, at December 31, 2020. Core deposits financed 88% of the Corporation’s earning assets at December 31, 2021, compared with 82% at December 31, 2020. The distribution by maturity of certificates of deposits with denominations of $250,000 and over at December 31, 2021 is presented in the table that follows: Table 15 - Distribution by Maturity of Certificate of Deposits of $250,000 and Over (In thousands) 3 months or less Over 3 to 12 months Over 1 year to 3 years Over 3 years Total $1,772,700 500,200 219,395 133,795 $2,626,090 Average deposits, including brokered deposits, for the year ended December 31, 2021 represented 93% of average earning assets, compared with 91% for the year ended December 31, 2020. Table 16 summarizes average deposits for the past three years. POPULAR, INC. 2021 ANNUAL REPORT 29 Table 16 - Average Total Deposits (In thousands) Non-interest bearing demand deposits Savings accounts NOW, money market and other interest bearing demand accounts Certificates of deposit Total interest bearing deposits Total average deposits The Corporation had $0.8 billion in brokered deposits at December 31, 2021, which financed approximately 1% of its total assets (December 31, 2020 - $0.8 billion and 1%, respectively). In the event that any of the Corporation’s banking subsidiaries’ regulatory capital ratios fall below those required by a well-capitalized institution or are subject to capital restrictions by the regulators, that banking subsidiary faces the risk of not being able to raise or maintain brokered deposits and faces limitations on the rate paid on deposits, which may hinder the Corporation’s ability to effectively compete in its retail markets and could affect its deposit raising efforts. Deposits from the public sector represent an important source of funds for the Corporation. As of December 31, 2021, total public sector deposits were $20.3 billion, compared to $15.1 billion at December 31, 2020. Generally, these deposits require that the bank pledge high credit quality securities as collateral; therefore liquidity risks arising from public sector deposit outflows are lower given that the bank receives its collateral in return. This, now unpledged, collateral can either be financed via repurchase agreements or sold for cash. However, there are some timing differences between the time the deposit outflow occurs and when the bank receives its collateral. At December 31, 2021, management believes that the banking subsidiaries had sufficient current and projected liquidity sources to meet their anticipated cash flow obligations, as well as special needs and off-balance sheet commitments, in the ordinary course of business and have sufficient liquidity resources to address a stress event. Although the banking subsidiaries have historically been able to replace maturing deposits and advances, no assurance can be given that they would be able to replace those funds in the 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 to meet margin deposit cash or qualifying securities 30 POPULAR, INC. 2021 ANNUAL REPORT For the years ended December 31, 2021 2020 $14,687,093 $11,537,700 15,753,630 25,648,707 7,013,486 12,620,755 19,466,357 7,960,967 48,415,823 40,048,079 $63,102,916 $51,585,779 that 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. if management investment securities, dividends 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, 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 non-banking subsidiaries; however, the Corporation’s non-banking subsidiaries other than to repay indebtedness and interest are now minimal. These sources of funding are more costly due to the fact that two out of the three principal credit rating agencies rate the Corporation below “investment grade”, which affects the Corporation’s cost and ability to raise funds in the capital markets. The Corporation has an automatic shelf registration statement filed and effective with 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 $496 million at December 31, 2021 and $682 at December 31, 2020. The contractual maturities of the BHCs notes payable at December 31, 2021 are presented in Table 17. BPPR, $4 million from PIBI which main source of income is derived from its investment in BHD, $31 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. Table 17 - Distribution of BHC’s Notes Payable by Contractual Maturity Year 2023 Later years Total (In thousands) $297,842 198,292 $496,134 is at service the BHCs Annual debt approximately $32 million, and the Corporation’s latest quarterly dividend was $0.45 per share. On February 23, 2022, the Board of Directors of the Corporation declared a $0.55 cash dividend per common share, payable on April 1, 2022. The BHCs liquidity position continues to be adequate with sufficient cash on hand, investments and other sources of liquidity which are expected to be enough to meet all BHCs obligations during the foreseeable future. As of December 31, 2021, the BHCs had cash and money markets investments totaling $292 million, borrowing potential of $157 million from its secured facility with BPPR. In addition to these liquidity sources, the stake in EVERTEC had a market value of $583 million as of December 31, 2021 and it represents an additional source of contingent liquidity. sources of funding for Non-Banking Subsidiaries the non-banking The principal subsidiaries include internally generated cash flows from operations, loan sales, repurchase agreements, capital injections and borrowed funds from their direct parent companies or the the holding companies. The principal uses of 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. Popular, Inc. made capital contributions to its wholly owned subsidiary Popular Securities amounting to $9 million during the year 2021 and $10 million on February 24, 2022. funds for Dividends During the year ended December 31, 2021, the Corporation declared cash dividend of $1.75 per common share outstanding $ 142.3 million in the aggregate. The dividends for the Corporation’s to $1.4 million. During the year ended December 31, 2021, the BHC’s received dividends amounting to $761 million from Series A preferred amounted stock 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 Corporation’s to debt $3.0 billion at December 31, 2021 and $3.4 billion at December 31, 2020. 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. the financial needs of Off-Balance Sheet arrangements and other commitments In the ordinary course of business, the Corporation engages in financial transactions that are not recorded on the balance sheet or may be recorded on the balance sheet in amounts that are different than the full contract or notional amount of the transaction. As a provider of financial services, the Corporation routinely enters into commitments with off-balance sheet risk to meet 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 financial position. Refer to recognized in the statement of Note 24 to the Consolidated Financial Statements for information on the Corporation’s commitments to extent credit and other non-credit commitments. its the Other types of off-balance sheet arrangements that Corporation enters in the ordinary course of business include derivatives, operating leases and provision of guarantees, indemnifications, and representation and warranties. Refer to Note 33 for information on operating leases and to Note 23 for a detailed discussion related to the Corporation’s obligations POPULAR, INC. 2021 ANNUAL REPORT 31 under credit arrangements. recourse and representation and warranties The Corporation monitors its cash requirements, including its contractual obligations and debt commitments. As discussed above, liquidity is managed by the Corporation in order to meet its short- and long-term cash obligations. Note 17 to the Consolidated Financial Statements has information on the Corporation’s borrowings by maturity, which amounted to $1.2 billion at December 31, 2021. 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 PB, including PB’s wholly-owned subsidiaries Popular Equipment Finance, LLC, Popular Insurance Agency, U.S.A., and E-LOAN, Inc. PNA has issued junior subordinated debentures guaranteed by PIHC (together with PNA, the “obligor group”) purchased by statutory trusts established by the Corporation. These debentures were purchased by the statutory trust using the proceeds from trust preferred securities issued to the public (referred to as “capital securities”), together with the proceeds of the related issuances of common securities of the trusts. PIHC fully and unconditionally guarantees the junior subordinated debentures issued by PNA. PIHC’s obligation to make a guarantee payment may be satisfied by direct payment of the required amounts to the holders of the applicable capital securities or by causing the applicable trust to pay such amounts to such holders. Each guarantee does not apply to any payment of distributions by the applicable trust except to the extent such trust has funds available for such payments. If PIHC does not make interest payments on the debentures held by such trust, such trust will not pay distributions on the applicable capital securities and will not have funds available junior for 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 32 POPULAR, INC. 2021 ANNUAL REPORT received dividends from their The principal sources of funding for PIHC and PNA have and included 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, 2021 and December 31, 2020, and the results of their operations for the period ended December 31, 2021 and 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 18 - Summarized Statement of Condition December 31, 2021 December 31, 2020 $291,540 $ 190,830 25,691 17,634 29,349 114,955 42,251 27,630 16,338 31,162 88,272 46,547 $521,420 $ 400,779 (In thousands) Assets Cash and money market investments Investment securities Accounts receivables from non-obligor subsidiaries Other loans (net of allowance for credit losses of $96 (2020 - $311)) Investment in equity method investees Other assets Total assets Liabilities and Stockholders’ deficit Accounts payable to non-obligor subsidiaries $ 6,481 $ 3,946 Accounts payable to affiliates and related parties Notes payable Other liabilities Stockholders’ deficit 1,254 496,134 97,172 (79,621) 977 681,503 79,208 (364,855) Total liabilities and stockholders’ deficit $521,420 $ 400,779 Table 19 - Summarized Statement of Operations (In thousands) Income: Dividends from non-obligor subsidiaries Interest income from non-obligor subsidiaries and affiliates Earnings from investments in equity method investees Other operating income For the years ended December 31, 2021 December 31, 2020 $792,000 $586,000 848 29,387 3,136 2,383 17,912 4,340 Total income $825,371 $610,635 Expenses: Services provided by non-obligor subsidiaries and affiliates (net of reimbursement by subsidiaries for services provided by parent of $162,019 (2020 - $138,729)) Other operating expenses Total expenses Net income $ 13,594 33,524 $ 47,118 $778,253 $ 13,191 29,652 $ 42,843 $567,792 During the year ended December 31, 2021, the Obligor group recorded $3.0 million of distribution from its direct equity method investees (2020 - $2.3 million), of which $2.3 million are related to dividend distributions (2020 - $2.3 million). During the year ended December 31, 2020, the Obligor group received dividend distributions from a non-obligor subsidiary amounting $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 creditworthiness, regulatory requirements, among other factors. Derivatives, such as those embedded in long-term repurchase transactions or interest rate swaps, and off-balance sheet exposures, such as recourse, performance bonds or credit card arrangements, are subject to collateral the thereby reducing the collateral requirements may increase, 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 temporarily are fully funds 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 bank during the calendar year would exceed the total of its net income for that year, combined with its retained net income for the preceding two years, after considering those years’ dividend activity, less any required transfers to surplus or to a fund for the retirement of any preferred stock. During the year ended December 31, 2021, BPPR declared cash dividends of $761 million. At December 31, 2021, BPPR would have needed to obtain prior approval of the Federal Reserve Board before declaring a dividend due to its declared dividend activity and transfers to statutory reserves over the three year’s ended December 31, 2021. 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 be impacted by its financial performance, thus potentially limiting the amount of cash moving up to the BHCs from the banking subsidiaries. This could, in turn, affect the BHCs ability to declare dividends on its outstanding common and preferred stock, for example. POPULAR, INC. 2021 ANNUAL REPORT 33 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, 2021 that are subject to rating triggers. In addition, certain mortgage servicing and custodial agreements that BPPR has with third parties include rating covenants. In the event of a credit rating downgrade, the third parties have the right to require the institution to engage a substitute cash custodian for escrow deposits and/or increase levels securing the recourse obligations. Also, as collateral discussed in Note 23 to the Consolidated Financial Statements, the Corporation services residential mortgage loans subject to credit recourse provisions. Certain contractual agreements to secure such require the Corporation to post collateral recourse obligations if the institution’s required credit ratings are not maintained. Collateral pledged by the Corporation to secure amounted to approximately $32 million at December 31, 2021. The Corporation could be required to post additional collateral under the agreements. Management expects that it would be able to meet additional collateral requirements if and when needed. The requirements to post collateral under certain agreements or the loss of escrow deposits could reduce the Corporation’s liquidity resources and impact its operating results. recourse obligations 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 34 POPULAR, INC. 2021 ANNUAL REPORT 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 place, to shelter In Puerto Rico, former Governor Wanda Vázquez issued an executive order in March 2020 declaring a health emergency, ordering residents implementing a mandatory curfew, and requiring the closure of non-essential businesses. Although the most restrictive measures have been eased or lifted, allowing for the gradual reopening of the economy, certain measures remain in place and additional measures may be implemented in the future as a result of a resurgence in the spread of the virus or new strains of the virus. Since the beginning of the pandemic, most businesses have had to make significant adjustments to protect customers and employees, including transitioning to telework and suspending or modifying certain operations in compliance with health and safety guidelines. The Puerto Rico Legislative Assembly enacted legislation in April 2020 requiring financial institutions to offer moratoriums on consumer to clients impacted by the COVID-19 pandemic, which was effective through August 2020. The Federal Government has also approved several economic stimulus measures that seek to cushion the economic fallout of including providing direct subsidies, expanding eligibility for and increasing unemployment benefits and guaranteeing through the SBA PPP loans to small and medium businesses. financial products the pandemic, The COVID-19 pandemic and the restrictions imposed to curb the spread of the disease have had and may continue to have a material adverse effect on economic activity worldwide, including in Puerto Rico. The extent to which the COVID-19 pandemic will continue to adversely affect economic activity will depend on future developments, which are highly uncertain and difficult to predict, including the scope and duration of the pandemic (including the appearance of new strains of the virus), the restrictions imposed by governmental authorities and other third parties in response to the same, the pace of global vaccination efforts, and the amount of federal the and local assistance offered to offset pandemic. Pursuant to the 2022 Fiscal Plan (as defined below), economic stimulus measures have more than offset the estimated income loss due to reduced economic activity in Puerto Rico and are estimated to have caused a temporary increase in personal income on a net basis. However, there can be no assurance that these measures will be sufficient to offset the pandemic’s economic impact in the medium- and long- term. the impact of Economic Performance The Commonwealth’s economy entered a recession in the fourth quarter of fiscal year 2006 and its gross national product (“GNP”) contracted (in real terms) every fiscal year between 2007 and 2018, with the exception of fiscal year 2012. Pursuant to the latest Puerto Rico Planning Board (the “Planning Board”) estimates, dated March 2021, the Commonwealth’s real GNP increased by 1.8% in fiscal year 2019 due to the influx of federal funds and private insurance payments to repair damage caused by Hurricanes Irma and María. However, the Planning Board estimates that the Commonwealth’s real GNP decreased by approximately 3.2% in fiscal year 2020 due primarily to the adverse impact of the COVID-19 pandemic and the measures taken by the government in response to the same. The Planning Board projected that the negative effects of COVID-19 would continue through fiscal year 2021, resulting in a contraction in real GNP of approximately -2%, followed by 0.8% GNP growth in the current fiscal year. corporations Fiscal Crisis its The Commonwealth’s central government and many of instrumentalities, public and municipalities continue to face significant fiscal challenges, which have been primarily the result of economic contraction, persistent and significant budget deficits, a high debt burden, unfunded legacy obligations, and lack of access to the capital markets, among other factors. As a result, the Commonwealth and certain of its instrumentalities have been unable to make debt service payments on their outstanding bonds and notes since 2016. The escalating fiscal and economic crisis and imminent widespread defaults prompted the U.S. Congress to enact the Puerto Rico Oversight, Management, Stability Act and (“PROMESA”) in June 2016. As further discussed below under “Pending Title III Proceedings,” the Commonwealth and several of its instrumentalities are currently in the process of restructuring restructuring their debts mechanisms provided by PROMESA. through the debt Economic for and established two mechanisms PROMESA things, created a seven-member PROMESA, among other federally-appointed oversight board (the “Oversight Board”) with ample powers over the fiscal and economic affairs of the Commonwealth, its public corporations, instrumentalities and the municipalities 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 original voting members of the Oversight Board through the process established in PROMESA, which authorizes the President to select the members from several lists required to be submitted by congressional In 2020, when President Donald Trump reappointed three of the original members and appointed four new members to the Oversight Board. leaders. its public corporations In October 2016, the Oversight Board designated the and Commonwealth and all of 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. For additional discussion of risk factors related to the Puerto Rico fiscal challenges, see “Part I – Item 1A – Risk Factors” in this Form 10-K. 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 Oversight Board is dated January 27, 2022 (the “2022 Fiscal Plan”). and activity reduced economic Pursuant to the 2022 Fiscal Plan, while the COVID-19 pandemic and the measures taken in response to the same caused severely an unprecedented increase in unemployment in Puerto Rico, pandemic-related federal and local stimulus funding have more than offset the estimated income loss due to reduced economic activity and are estimated to have caused a temporary increase in personal income on a net basis. The 2022 Fiscal Plan’s economic projections incorporate adjustments for these short- term income effects for purposes of estimating tax receipts. For example, the 2022 Fiscal Plan estimates that, for fiscal years 2022 and 2023, real GNP will grow 2.6% and 0.9%, respectively, but projects that growth adjusted for income effects for such years will be approximately 5.2% and 0.6%, respectively. The 2022 Fiscal Plan incorporates the debt service costs of the Commonwealth’s restructured debt as contemplated by the Plan of Adjustment (as defined and further explained below). Therefore, it projects an unrestricted surplus after debt service average of $1 billion annually between fiscal years 2022 to 2031. This surplus declines over time as federal disaster relief funding slows, nominal GNP growth declines, revenues decline, rise. The 2022 Fiscal Plan and healthcare expenditures estimates fiscal measures could drive approximately $6.3 billion in savings and extra revenue over fiscal years 2022 through 2026 and that structural reforms could drive a cumulative 0.90% increase in growth by fiscal year 2051 (equal to approximately $33 billion). that POPULAR, INC. 2021 ANNUAL REPORT 35 by approximately the impact of The 2022 Fiscal Plan provides for the gradual reduction and the ultimate elimination of Commonwealth budgetary subsidies to municipalities, which constitute a material portion of the operating revenues of some municipalities. Since fiscal year 2017, Commonwealth appropriations to municipalities have decreased 64% (from approximately $370 million in fiscal year 2017 to approximately $132 million in fiscal year 2020). In response to the COVID-19 crisis, reductions in appropriations to municipalities were paused in fiscal year 2021. Municipalities have also received extraordinary appropriations and other funds from federally-funded programs during the current fiscal year, which has helped temporarily the reduced Commonwealth support. offset However, additional the 2022 Fiscal Plan contemplates reductions in appropriations to municipalities starting in fiscal year 2022, before eventually phasing out all appropriations in fiscal year 2025. Further, while the Commonwealth had enacted legislation in 2019 suspending the municipality’s obligations to contribute to the Commonwealth’s health plan and pay-as-you go retirement system, such legislation was challenged by the Oversight Board and eventually declared null by the Title III court in April 2020. As a result, municipalities are required to cover their own employees’ healthcare costs and retirement benefits and had to reimburse the Commonwealth for such costs corresponding to the period during which the law was in effect. Finally, the 2022 Fiscal Plan notes that towards municipalities have made little or no progress implementing fiscal discipline required to reduce reliance on Commonwealth appropriations and that fiscal management threatens the ability of municipalities to provide necessary services, such as health, sanitation, public safety, and emergency services to their residents, forcing them to prioritize expenditures. this lack of 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 (the “T&D System”), and calls for significant structural reforms at PREPA. The procurement process for the establishment of a public-private partnership with respect to the T&D System was completed in June 2020. The selected proponent, LUMA Energy LLC (“LUMA”), and PREPA entered into a 15-year agreement whereby, since June 1, 2021, LUMA is responsible for operating, maintaining and modernizing the T&D System. On April 23, 2021, the Oversight Board certified the latest version of the fiscal plan (the “CRIM Fiscal Plan”) for the Municipal Revenue Collection Center the government entity responsible for collecting property taxes and distributing them among the municipalities. The CRIM Fiscal (“CRIM”), 36 POPULAR, INC. 2021 ANNUAL REPORT enhancement of property tax collections, Plan outlines a series of measures centered around improving the competitiveness of Puerto Rico’s property tax regime and including the identifying as improvements and implementing operational and technological initiatives. and appraising new properties to existing properties, as well 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 PROMESA. The Oversight Board subsequently filed 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 to a plan of restructuring of COFINA’s debts pursuant adjustment confirmed by the U.S. District Court. III for Joint Plan of Adjustment On November 3, 2021, the Oversight Board filed the Eighth Amended Title the Commonwealth, et. al. (the “Plan of Adjustment”) in the pending debt restructuring proceedings under Title III of PROMESA. The Plan of Adjustment seeks to restructure approximately $35 billion of debt and other claims against the the Commonwealth, PBA and ERS. Commonwealth’s government enacted legislation establishing the framework for the issuance of new securities by the Commonwealth in connection with the Plan of Adjustment. On January 18, 2022, the U.S. District Court confirmed the Plan of Adjustment, which is expected to become effective on or about March 15, 2022 upon the satisfaction of certain conditions to effectiveness. In October 2021, 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 provided a process the Commonwealth’s fiscal crisis, the complexity and uncertainty of the Title III proceedings for the Commonwealth and various of its instrumentalities and the adjustment measures required by the fiscal plans still present significant economic risks. In addition, the COVID-19 outbreak has affected many of our individual customers and customers’ businesses. This, when added to Puerto Rico’s ongoing fiscal crisis and recession, could cause credit losses that adversely affect us and may negatively affect consumer confidence, result in reductions in consumer spending, and adversely impact our interest and non-interest to address 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 COVID-19 pandemic and the Commonwealth’s debt obligations while continuing to provide these adverse effects could continue or essential services, worsen in ways that we are not able to predict. consummating restructuring orderly an of the Rico Puerto all of to us. Of government’s instrumentalities resulting in losses At December 31, 2021, the Corporation’s direct exposure to the and municipalities totaled $367 million of which $349 million were outstanding, compared to $377 million at December 31, 2020 which was fully outstanding on such date. Further deterioration of the Commonwealth’s fiscal and economic situation could the value of our Puerto Rico government adversely affect obligations, amount outstanding, $319 million consists of loans and $30 million are securities ($342 million and $35 million, respectively, at amount Substantially December 31, 2020). outstanding at December 31, 2021 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 unlimited taxing power, or “special obligations” of a municipality, to which the applicable municipality has pledged other revenues. At December 31, 2021, 75% of the Corporation’s exposure to loans and securities was concentrated in the municipal municipalities of San Juan, Guaynabo, Carolina and Bayamón. On July 1, 2021, the Corporation received scheduled principal payments amounting to $32 million from various obligations from Puerto Rico municipalities. For additional discussion of to the Puerto Rico the Corporation’s direct government and its instrumentalities and municipalities, refer to Note 24 – Commitments and Contingencies. exposure the a is repayment ($317 million In addition, at December 31, 2021, the Corporation had $275 million in loans insured or securities issued by Puerto Rico governmental entities, but for which the principal source of at non-governmental December 31, 2020). These included $232 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, 2020 - $260 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, 2021, $43 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, 2020 - $46 million). In the event that insured by HFA and held by the the mortgage loans Corporation directly or those serving as collateral for the HFA bonds default and the collateral is insufficient to satisfy the outstanding balance of these loans, HFA’s ability to honor its insurance will depend, among other factors, on the financial condition of HFA at the time such obligations become due and payable. The Corporation does not consider the government guarantee when estimating the credit losses associated with this portfolio. Although the Governor is currently authorized by 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. 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 Commonwealth’s fiscal crisis and the ongoing Title III proceedings under PROMESA described above. Similarly, BPPR’s mortgage and consumer to government employees and retirees, which could also be negatively affected by fiscal measures such as employee layoffs or furloughs or reductions in pension benefits. loan portfolios include loans 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 24 of the Consolidated Financial Statements. information regarding additional United States Virgin Islands The Corporation has operations in the United States Virgin (the “USVI”) and has credit exposure to USVI Islands government entities. the effects of The USVI has been experiencing a number of fiscal and economic challenges, which have been and maybe be further the COVID-19 exacerbated as a result of 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. POPULAR, INC. 2021 ANNUAL REPORT 37 At December 31, 2021, the Corporation has operations in (the “USVI”) and has the United States Virgin Islands approximately $70 million in direct exposure to USVI government entities (December 31, 2020 - $105 million). The USVI has been experiencing a number of fiscal and economic challenges that could adversely affect the ability of its public corporations and instrumentalities to service their outstanding debt obligations. 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, at December 31, 2021 it has a loan portfolio amounting to approximately $221 million comprised of various retail and commercial clients, compared to a loan portfolio of $251 million at December 31, 2020, which included a $19 million loan with the BVI Government that was paid off during the second quarter of 2021. represented exposure U.S. Government As further detailed in Notes 6 and 7 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, $1.6 billion of residential mortgages, $353 million of SBA loans under the PPP and $67 million commercial loans were insured or guaranteed by the U.S. Government or its agencies at December 31, 2021 (compared to $1.8 billion, $1.3 billion and $60 million, respectively, at December 31, 2020). 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 20. During 2021, the Corporation continued to exhibit strong credit quality and low credit costs, with low level of NCOs and decreasing NPLs, outperforming pre-pandemic trends. These improvements have been aided by the significant government stimulus and the rebound of the economy, as well as payoffs related to troubled loan resolutions. We continue to closely monitor COVID-19 pandemic related risks on borrower performance and changes in the pace of economic recovery as new variants continue to emerge. However, management believes that the improvement over the last few years in the risk profile of the Corporation’s loan portfolios positions Popular to operate successfully under the current environment. 38 POPULAR, INC. 2021 ANNUAL REPORT by 31, lower 2020. driven non-performing Total NPAs decreased by $191 million when compared with loans Total December held-in-portfolio (“NPLs”) decreased by $190 million from December 31, 2020. BPPR’s NPLs decreased by $186 million, and mainly commercial, mortgage, construction NPLs by $84 million, $80 million, and $21 million, respectively. The commercial and construction NPLs decrease reflects payoffs related to troubled loan resolutions, and loans that were returned to accrual status during the period. The mortgage NPLs decrease was mainly due increased to the combined effects of collection efforts, foreclosure activity and the on-going low levels of early delinquency compared with pre-pandemic trends. Popular U.S. NPLs decreased by $4 million from December 31, 2020, mostly related to a $7 million construction loan sold and lower consumer NPLs by $3 million, in part offset by mortgage NPLs increase by $7 million, mostly driven by loans that did not resume payment at the end of the COVID-related deferral period. At December 31, 2021, the ratio of NPLs to total loans held-in-portfolio was 1.9% compared to 2.5% in the fourth quarter of 2020. Other real estate owned loans (“OREOs”) increased by $2 million, mostly related to end of the foreclosure moratorium period. At December 31, 2021, NPLs secured by real estate amounted to $428 million in the Puerto Rico operations and $31 million in Popular U.S. These figures were $630 million and $34 million, respectively, at December 31, 2020. The Corporation’s commercial loan portfolio secured by real estate (“CRE”) amounted to $8.4 billion at December 31, 2021, of which $1.8 billion was secured with owner occupied properties, compared with $7.8 billion and $1.9 billion, respectively, at December 31, 2020. CRE NPLs amounted to $77 million at December 31, 2021, compared with $173 million at December 31, 2020. The CRE NPL ratios for the BPPR and Popular U.S. segments were 1.95% and 0.04%, respectively, at December 31, 2021, compared with 4.51% and 0.07%, respectively, at December 31, 2020. In addition to the NPLs included in Table 20, at December 31, 2021, there were $214 million of performing loans, which in management’s loans, mostly commercial opinion, are currently subject to potential future classification as non-performing (December 31, 2020 - $228 million). For the year ended December 31, 2021, total inflows of NPLs held-in-portfolio, excluding consumer loans, decreased by approximately $132 million, when compared to the inflows for the same period in 2020. Inflows of NPLs held-in-portfolio at the BPPR segment decreased by $129 million compared to the same period in 2020, driven by lower mortgage inflows by $114 million. Inflows of NPLs held-in-portfolio at the Popular U.S. segment decreased by $3 million from the same period in 2020. Table 20 - Non-Performing Assets (Dollars in thousands) Non-accrual loans: Commercial Construction Leasing Mortgage Auto Consumer Total non-performing loans held-in-portfolio Non-performing loans held-for-sale [1] Other real estate owned (“OREO”) Total non-performing assets December 31, 2021 Popular U.S. Popular, Inc. BPPR December 31, 2020 Popular U.S. Popular, Inc. BPPR $120,047 485 3,102 333,887 23,085 33,683 514,289 – 83,618 $ 5,532 – – 21,969 – 6,087 33,588 – 1,459 $125,579 485 3,102 355,856 23,085 39,770 547,877 – 85,077 $ 204,092 21,497 3,441 414,343 15,736 41,268 700,377 – 81,512 $ 5,988 7,560 – 14,864 – 8,985 37,397 2,738 1,634 $ 210,080 29,057 3,441 429,207 15,736 50,253 737,774 2,738 83,146 $597,907 $35,047 $632,954 $ 781,889 $41,769 $ 823,658 Accruing loans past-due 90 days or more [2] $480,649 $ 118 $480,767 $1,028,061 $ 3 $1,028,064 Non-performing loans to loans held-in-portfolio Interest lost 1.87% $ 38,123 2.51% $ 45,040 [1] There were no non-performing loans held-for-sale as of December 31, 2021 (December 31, 2020 - $3 million in commercial loans). [2] It is the Corporation’s policy to report delinquent residential mortgage loans insured by FHA or guaranteed by 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 $13 million at December 31, 2021 related to the rebooking of loans previously pooled into GNMA securities, in which the Corporation had a buy-back option as further described below (December 31, 2020 - $57 million). Under the GNMA program, issuers such as BPPR have the option but not the obligation to repurchase loans that are 90 days or more past due. For accounting purposes, these loans subject to the repurchase option are required to be reflected (rebooked) on the financial statements of BPPR with an offsetting liability. These balances include $304 million of residential mortgage loans insured by FHA or guaranteed by the VA that are no longer accruing interest as of December 31, 2021 (December 31, 2020 - $329 million). Furthermore, the Corporation has approximately $50 million in reverse mortgage loans which are guaranteed by FHA, but which are currently not accruing interest. Due to the guaranteed nature of the loans, it is the Corporation’s policy to exclude these balances from non-performing assets (December 31, 2020 - $60 million). Table 21 - 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 Loans transferred to held-for-sale Ending balance NPLs For the year ended December 31, 2021 Popular U.S. Popular, Inc. BPPR $ 639,932 $ 28,412 $ 668,344 234,258 – (34,419) (35,963) (349,389) – 51,494 84 – (1,592) (42,124) (8,773) 285,752 84 (34,419) (37,555) (391,513) (8,773) $ 454,419 $ 27,501 $ 481,920 POPULAR, INC. 2021 ANNUAL REPORT 39 Table 22 - Activity in Non-Performing Loans Held-in-Portfolio (Excluding Consumer Loans) 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 – (11,762) (44,675) (343,202) – 54,092 825 – (3,204) (47,790) (10,679) 416,878 825 (11,762) (47,879) (390,992) (10,679) $ 639,932 $ 28,412 $ 668,344 For the year ended December 31, 2021 Popular U.S. Popular, Inc. BPPR $ 204,092 $ 5,988 $ 210,080 57,132 – (9,261) (14,935) (116,981) – 13,510 52 – (1,042) (11,203) (1,773) 70,642 52 (9,261) (15,977) (128,184) (1,773) $ 120,047 $ 5,532 $ 125,579 For the year ended December 31, 2020 Popular U.S. Popular, Inc. BPPR $147,255 112,517 50,834 – (2,304) (23,755) (80,455) – 5,504 18,547 15,496 633 – (1,646) (21,867) (10,679) $ 152,759 131,064 66,330 633 (2,304) (25,401) (102,322) (10,679) $204,092 $ 5,988 $ 210,080 (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 Table 23 - 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 Loans transferred to held-for-sale Ending balance - NPLs Table 24 - 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 40 POPULAR, INC. 2021 ANNUAL REPORT Table 25 - 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 Loans in accrual status transfer to held-for-sale Ending balance - NPLs Table 26 - 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 27 - 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 Table 28 - 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, 2021 Popular U.S. Popular, Inc. BPPR $ 21,497 $ 7,560 $ 29,057 481 12,141 12,622 (6,620) (14,873) – (523) (12,178) (7,000) (7,143) (27,051) (7,000) $ 485 $ – $ 485 For the year ended December 31, 2020 Popular U.S. Popular, Inc. BPPR $ 119 $ 26 $ 145 21,514 9,069 30,583 – (136) (1,509) (26) (1,509) (162) $21,497 $ 7,560 $29,057 For the year ended December 31, 2021 Popular U.S. Popular, Inc. BPPR $ 414,343 $ 14,864 $ 429,207 176,645 – (25,158) (14,408) (217,535) 25,843 32 – (27) (18,743) 202,488 32 (25,158) (14,435) (236,278) $ 333,887 $ 21,969 $ 355,856 For the year ended December 31, 2020 BPPR Popular U.S. Popular, Inc. $ 283,708 133,186 $ 11,091 – $ 294,799 133,186 290,438 – (9,458) (20,920) (262,611) 29,527 192 – (49) (25,897) 319,965 192 (9,458) (20,969) (288,508) $ 414,343 $ 14,864 $ 429,207 POPULAR, INC. 2021 ANNUAL REPORT 41 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, 2021 and 2020, are presented below. Table 29 - Loan Delinquencies (Dollars in thousands) 2021 Commercial Construction Leasing Mortgage [1] Consumer Loans held-for-sale Total Loans delinquent 30 days or more $ 161,251 485 14,379 1,141,082 173,896 – $1,491,093 Total loans $13,732,701 716,220 1,381,319 7,427,196 5,983,121 59,168 $29,299,725 Total delinquencies as a percentage of total loans Loans delinquent 30 days or more 1.17% 0.07 1.04 15.36 2.91 – 5.09% $ 249,484 50,369 14,009 1,775,902 179,789 3,108 $2,272,661 2020 Total loans $13,614,310 926,208 1,197,661 7,890,680 5,756,337 99,455 $29,484,651 Total delinquencies as a percentage of total loans 1.83% 5.44 1.17 22.51 3.12 3.13 7.71% [1] Loans delinquent 30 days or more includes $0.6 billion of residential mortgage loans insured by FHA or guaranteed by the VA as of December 31, 2021 (December 31, 2020 - $1.1 billion). Refer to Note 8 to the Consolidated Financial Statements for additional information of guaranteed loans. 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 lifetime 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 in used to calculate 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 credit losses. Consequently, the business financial condition, liquidity, capital, and results of operations could also be affected. individual borrowers, expected losses, changes At December 31, 2021, the allowance for credit losses amounted to $695 million, a decrease of $201 million, when compared with December 31, 2020, mainly prompted by improvements in credit quality and the macroeconomic outlook. Since the December 31, 2020, scenarios, updated economic assumptions have included a more optimistic view of the economy, prompting substantial reductions in reserves across different portfolios, also contributing to lower qualitative reserves. Given that any one economic outlook is inherently uncertain, the Corporation leverages multiple scenarios to estimate its ACL. The baseline scenario continues to be assigned the highest probability, followed by the pessimistic scenario. During the fourth quarter of 2021, in response to recent events that impacted both epidemiological and fiscal assumptions, the weight assigned to the pessimistic scenario was increased, contributing to an increase of approximately $13 million in reserves. The ACL for BPPR decreased by $146 million to $594 million, when compared to December 31, 2020. The ACL for Popular U.S. decreased by $55 million to $101 million, when compared to December 31, 2020. The decrease in ACL was mainly driven by continued borrower performance and improvements in the macroeconomic outlook, coupled with releases of qualitative reserves. The current baseline forecast continues to show a favorable economic scenario. The 2022 expected GDP growth rate for Puerto Rico is approximately 4%, with the unemployment rate expected to average around 7.4% for the year. In the case of the United States, the baseline scenario expects GDP growth for 2022 of approximately 4.6%, with unemployment rate expected to average around 3.7%. For 2023 both regions expect GDP growth with average unemployment rate levels remaining stable in comparison to 2022. 42 POPULAR, INC. 2021 ANNUAL REPORT for losses The provision for credit the year ended December 31, 2021, amounted to a benefit of $183.3 million, a favorable variance of $465.7 million from the same period in the prior year, mainly driven by the abovementioned improvements in credit quality and the macroeconomic outlook, and lower NCOs. Refer to Note 9 – Allowance for credit losses – loans held-in-portfolio, and to the Provision for Credit Losses section of this MD&A for additional information. The following table presents net charge-offs to average loans held-in-portfolio (“HIP”) ratios by loan category for the years ended December 31, 2021 and 2020: Table 30 - Net Charge-Offs (Recoveries) to Average Loans HIP Commercial Construction Mortgage Leasing Consumer Total December 31, 2021 Popular U.S. Popular Inc. BPPR December 31, 2020 Popular U.S. Popular Inc. BPPR (0.24)% (0.02)% (0.15)% 0.21% (0.04)% 0.11% 1.27 0.04 0.11 0.58 (0.07) 0.27 0.66 2.48 (0.57) 0.32 0.66 2.44 (0.02) – – 0.99 0.04 – – 3.07 0.19 0.04 0.11 0.60 0.09% 0.01% 0.07% 0.85% 0.13% 0.66% NCOs for the year ended December 31, 2021 amounted to $20.7 million, decreasing by $165.7 million when compared to the same period in 2020. The BPPR segment decreased by $156.9 million mainly driven by lower consumer, commercial, and mortgage NCOs by $101.5 million, $35.2 million and $16.9 million, respectively. The PB segment decreased by 8.8 million, mainly driven by lower consumer NCOs by $9.4 million. The decrease in NCOs was due to the effect of a favorable economic environment and continued borrower reflected in the ongoing low level of performance, as delinquencies and NPLs when compared to pre-pandemic trends. Table 31 - Allowance for Credit Losses - Loan Portfolios (Dollars in thousands) Commercial Construction Mortgage Leasing Consumer Total December 31, 2021 Total ACL Total loans held-in-portfolio ACL to loans held-in-portfolio Total Non-performing loans held-in-portfolio ACL to non-performing loans held-in-portfolio N.M. - Not meaningful. $ 215,805 $13,732,701 $ 6,363 $716,220 $ 154,478 $7,427,196 $ 17,578 $1,381,319 $ 301,142 $5,983,121 $ 695,366 $29,240,557 $ 1.57% 125,579 171.85% $ 0.89% 485 N.M. 2.08% $ 355,856 $ 43.41% 1.27% 3,102 566.67% $ 5.03% $ 62,855 479.11% 2.38% 547,877 126.92% Table 32 - Allowance for Credit Losses - Loan Portfolios December 31, 2020 (Dollars in thousands) Commercial Construction Mortgage Leasing Consumer Total Total ACL Total loans held-in-portfolio ACL to loans held-in-portfolio Total Non-performing loans held-in-portfolio ACL to non-performing loans held-in-portfolio $ 333,380 $13,614,310 $ 14,237 $926,208 $ 215,716 $7,890,680 $ 16,863 $1,197,661 $ 316,054 $5,756,337 $ 896,250 $29,385,196 $ 2.45% 210,080 158.69% 1.54% 2.73% $ 29,057 $ 429,207 $ 49.00% 50.26% 1.41% 3,441 490.06% $ 5.49% $ 65,989 478.95% 3.05% 737,774 121.48% POPULAR, INC. 2021 ANNUAL REPORT 43 Table 33 details the breakdown of the allowance for credit 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 33 - Allocation of the Allowance for Credit Losses - Loans At December 31, (Dollars in millions) Commercial Construction Mortgage Leasing Consumer Total [1] [1] Note: For purposes of this table the term loans refers to loans held-in-portfolio excluding loans held-for-sale. 2021 2020 % of loans in each category to total loans ACL 47.0% $333.4 14.3 2.4 215.7 25.4 16.9 4.7 316.0 20.5 % of loans in each category to total loans 46.3% 3.2 26.8 4.1 19.6 100.0% $896.3 100.0% ACL $215.8 6.4 154.5 17.6 301.1 $695.4 Troubled debt restructurings The Corporation’s troubled debt restructurings (“TDRs”) loans amounted to $1.7 billion at December 31, 2021, decreasing by $12 million, from December 31, 2020. A total of $716 million of these TDRs are related to guaranteed loans, which are in accruing status. TDRs in the BPPR segment amounted to $1.6 billion, a decrease of $9 million, mostly related to a combined decrease of $58 million in the commercial and construction TDRs and lower consumer TDRs by $11 million, in part offset by higher mortgage TDRs by $61 million, of which $61 million were related to government guaranteed loans. The Popular U.S. segment TDRs have remained essentially flat since December 31, 2020. TDRs in accruing status increased by $74 million from December 31, 2020, mostly related to an increase of $83 million in BPPR’s mortgage TDRs, in part offset by a decrease of $10 million in BPPR’s consumer TDRs, while non-accruing TDRs decreased by $86 million, of which $60 million were related to commercial and construction TDRs. Refer to Note 9 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. 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 44 POPULAR, INC. 2021 ANNUAL REPORT activities, components of with business the Risk (b) 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. (“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 Management review key risk (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 & ERM 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 monitors the following principal risks: credit, interest rate, market, liquidity, operational, cyber and information security, legal, regulatory affairs, regulatory and financial compliance, BSA/ AML & sanctions, strategic and reputational. The Market Risk & ERM 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 transactions. and Acquisitions Division for acquisition 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 underlie Popular’s identifying, assessing, measuring, monitoring, testing, mitigating, and reporting compliance risks. They also supervise Popular’s reporting obligations under the compliance program so as to ensure the adequacy, consistency and timeliness of the 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. functions, representatives and The Credit Strategy Committee, composed of senior level from the business lines and management corporate the Corporate Credit Risk Management Division, are responsible for managing the Corporation’s overall credit exposure by establishing policies, standards and guidelines that define, quantify and monitor credit risk and assessing the adequacy of the allowance for credit losses. 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 The Corporation has also established an Environmental, Social and Governance (“ESG”) Committee whose purpose and responsibility is to oversee the Corporation’s ESG strategies and support the development and consistent application of policies, processes and procedures that measure, limit and manage ESG matters and risks. The processes of strategic risk planning and the evaluation of reputational risk are on-going processes 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 and implementation of action plans with respect to reputational risk issues. the monitoring, management for 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. POPULAR, INC. 2021 ANNUAL REPORT 45 Statistical Summary 2020-2021 Statements of Financial Condition (In thousands) 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 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 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 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 (loss) income, net of tax Total stockholders’ equity Total liabilities and stockholders’ equity 46 POPULAR, INC. 2021 ANNUAL REPORT At December 31, 2020 2021 $ 428,433 $ 491,065 17,536,719 11,640,880 17,536,719 11,640,880 29,711 24,968,269 79,461 8,096 71,365 189,977 59,168 36,674 21,561,152 92,621 10,261 82,360 173,737 99,455 29,506,225 265,668 695,366 29,588,430 203,234 896,250 28,545,191 28,488,946 494,240 85,077 203,096 121,570 1,628,571 720,293 16,219 510,241 83,146 209,320 118,395 1,737,041 671,122 22,466 $75,097,899 $65,926,000 $15,684,482 51,320,606 $13,128,699 43,737,641 67,005,088 56,866,340 91,603 75,000 988,563 968,248 121,303 – 1,224,981 1,684,689 69,128,502 59,897,313 22,143 1,046 4,650,182 2,973,745 (1,352,650) (325,069) 22,143 1,045 4,571,534 2,260,928 (1,016,954) 189,991 5,969,397 6,028,687 $75,097,899 $65,926,000 Statistical Summary 2019-2021 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 (benefit) Net interest income after provision for credit losses (benefit) Mortgage banking activities Net gain (loss) on sale of debt securities Net gain, including impairment on equity securities Net (loss) profit on trading account debt securities Net (loss) gain on sale of loans, including valuation adjustments on loans held-for-sale Adjustment (expense) to indemnity reserves on loans sold Other non-interest income Total non-interest income Operating expenses: Personnel costs All other operating expenses Total operating expenses Income before income tax Income tax expense Net Income Net Income Applicable to Common Stock For the years ended December 31, 2019 2020 2021 $1,747,827 21,147 353,663 $1,742,390 19,721 329,440 $1,802,968 89,823 368,002 2,122,637 165,047 1,957,590 (193,464) 2,091,551 234,938 1,856,613 292,536 2,260,793 369,099 1,891,694 165,779 2,151,054 1,564,077 1,725,915 50,133 23 131 (389) (73) 4,406 587,897 642,128 10,401 41 6,279 1,033 1,234 390 492,934 512,312 32,093 (20) 2,506 994 – (343) 534,653 569,883 631,802 917,473 564,205 893,624 590,625 886,857 1,549,275 1,457,829 1,477,482 1,243,907 309,018 618,560 111,938 818,316 147,181 $ 934,889 $ 506,622 $ 671,135 $ 933,477 $ 504,864 $ 667,412 POPULAR, INC. 2021 ANNUAL REPORT 47 (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 Liabilities and Stockholders’ Equity Interest bearing liabilities: Savings, NOW, money market and other interest bearing demand accounts Time deposits Federal funds purchased Securities purchased under agreement to resell Other short-term borrowings Notes payable Total interest bearing liabilities/ Interest expense Total non-interest bearing liabilities Total liabilities Stockholders’ equity Statistical Summary 2019-2021 Average Balance Sheet and Summary of Net Interest Income On a Taxable Equivalent Basis* 2021 2020 2019 Average Balance Interest Average Rate Average Balance Interest Average Rate Average Balance Interest Average Rate $15,999,741 $ 12,396,773 21,147 266,670 0.13% $ 8,597,652 $ 2.16 12,107,819 19,723 0.23% $ 4,166,293 $ 257,308 2.13 9,823,518 89,824 2.16% 302,025 3.07 7,972 120 1.50 70,424 2,818 4.00 234,553 5,911 2.52 75,607 7,608 10.06 82,051 5,705 6.95 93,313 6,394 6.85 10,255,525 194,640 22,930,517 84,380 224,706 9,027 508,131 4,339 29,074,045 1,794,789 2.19 4.64 2.22 5.16 6.19 6,913,416 178,818 19,352,528 69,446 194,794 2.82 7,369 4.12 467,994 2.42 4,165 6.00 28,384,981 1,785,022 6.29 5,582,051 171,223 15,904,658 67,596 178,964 3.21 8,487 4.96 501,781 3.15 5,103 7.55 26,806,368 1,850,894 6.90 $68,088,683 $2,328,406 3.43% $56,404,607 $2,276,904 4.04% $46,944,915 $2,447,602 5.21% 3,079,942 $71,168,625 3,178,848 $59,583,455 3,396,912 $50,341,827 $41,387,504 $ 7,028,334 1 91,394 343 1,184,737 49,692,313 15,698,660 65,390,973 5,777,652 59,034 52,587 – 317 1 53,107 0.15% $32,077,578 $ 0.75 0.25 7,970,474 342 92,417 0.29% $25,575,455 $ 192,200 0.75% 7,770,430 83,438 1.05 – 1 0.25 112,658 1.45 – 2.63 0.35 0.35 4.49 143,718 21,557 1,178,169 2,336 1.63 120 0.56 56,626 4.81 222,565 8,703 1,194,119 5,882 2.64 217 2.50 58,142 4.77 165,046 0.33 234,938 0.57 41,391,838 12,771,679 54,163,517 5,419,938 $59,583,455 369,099 1.06 34,771,272 9,857,038 44,628,310 5,713,517 $50,341,827 $2,163,360 $2,041,966 $2,078,503 0.24% 3.19% 0.42% 3.62% 0.78% 4.43% 205,770 $1,957,590 185,353 $1,856,613 186,809 $1,891,694 Total liabilities and stockholders’ equity $71,168,625 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 * 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. 48 POPULAR, INC. 2021 ANNUAL REPORT 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, 2021. 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). On October 15, 2021, Popular Equipment Finance, LLC (“PEF”), a newly formed wholly-owned subsidiary of Popular Bank (“PB”), completed the acquisition of certain assets and the assumption of certain liabilities of K2 Capital Group LLC’s (“K2”) equipment leasing and financing business based in Minnesota (the “Acquired Business”). The Acquired Business’ total assets and total revenues represented approximately 0.2% and 0.2%, respectively, of the related consolidated financial statements as of and for the period ended December 31, 2021. The Corporation has excluded the Acquired Business from its assessment of the design and operating effectiveness of internal controls over financial reporting for the fiscal year 2021. The Corporation made this determination in accordance with SEC’s guidance which permits the exclusion of a recently acquired business from the scope of this assessment in the year of acquisition. Based on our assessment, management concluded that the Corporation maintained effective internal control over financial reporting as of December 31, 2021 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, 2021, as stated in their report dated March 1, 2022 which appears herein. Ignacio Alvarez President and Chief Executive Officer Carlos J. Vázquez Executive Vice President and Chief Financial Officer POPULAR, INC. 2021 ANNUAL REPORT 49 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, 2021 and 2020, 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, 2021, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 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, 2021, 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. As described in the Report of Management on Internal Control Over Financial Reporting, management has excluded the business acquired from K2 Capital Group LLC (the “acquired business”) from its assessment of internal control over financial reporting as of December 31, 2021 because it was acquired by the Corporation in a purchase business combination during 2021. We have also 50 POPULAR, INC. 2021 ANNUAL REPORT excluded the acquired business from our audit of internal control over financial reporting. The acquired business’ total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent .2% and .2%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2021. 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 9 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, 2021, the allowance for credit losses was $695 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 loan level modeling techniques to estimate loss severity. As part of this methodology, management evaluates various 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 POPULAR, INC. 2021 ANNUAL REPORT 51 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 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 15 to the consolidated financial statements, the Corporation’s consolidated goodwill balance was $720 million as of December 31, 2021, 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) a selection of comparable acquisitions, (iii) calculation of average price multiples of relevant value drivers from a group of selected comparable companies and acquisitions; (iv) the discount rate applied to future earnings, based on an estimate of the cost of equity; (v) the potential future earnings of the reporting units; and (vi) 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 in turn 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 and acquisitions; 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 guideline public companies methodologies 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 acquisitions; 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, 2022 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 E452193 of the P.R. Society of Certified Public Accountants has been affixed to the file copy of this report 52 POPULAR, INC. 2021 ANNUAL REPORT POPULAR, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, 2021 (In thousands, except share information) December 31, 2020 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 2021 - $83,368; 2020 - $94,891) Less – Allowance for credit losses Debt securities held-to-maturity, net Equity securities (realizable value 2021 - $192,345; 2020 - $173,929) 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 Other short-term borrowings Notes payable Other liabilities Total liabilities Commitments and contingencies (Refer to Note 24) Stockholders’ equity: Preferred stock, 30,000,000 shares authorized; 885,726 shares issued and outstanding (2020 - 885,726) Common stock, $0.01 par value; 170,000,000 shares authorized; 104,579,334 shares issued (2020 - 104,508,290) and 79,851,169 shares outstanding (2020 - 84,244,235) Surplus Retained earnings Treasury stock - at cost, 24,728,165 shares (2020 - 20,264,055) Accumulated other comprehensive (loss) income, net of tax Total stockholders’ equity Total liabilities and stockholders’ equity The accompanying notes are an integral part of these Consolidated Financial Statements. $ 428,433 $ 491,065 17,536,719 11,640,880 17,536,719 11,640,880 – 29,711 241 36,433 93,330 24,874,939 125,819 21,435,333 79,461 8,096 71,365 189,977 59,168 92,621 10,261 82,360 173,737 99,455 29,506,225 265,668 695,366 29,588,430 203,234 896,250 28,545,191 28,488,946 494,240 85,077 203,096 121,570 1,628,571 720,293 16,219 510,241 83,146 209,320 118,395 1,737,041 671,122 22,466 $75,097,899 $65,926,000 $15,684,482 51,320,606 $13,128,699 43,737,641 67,005,088 56,866,340 91,603 75,000 988,563 968,248 121,303 – 1,224,981 1,684,689 69,128,502 59,897,313 22,143 22,143 1,046 4,650,182 2,973,745 (1,352,650) (325,069) 1,045 4,571,534 2,260,928 (1,016,954) 189,991 5,969,397 6,028,687 $75,097,899 $65,926,000 POPULAR, INC. 2021 ANNUAL REPORT 53 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 (benefit) Net interest income after provision for credit losses (benefit) Service charges on deposit accounts Other service fees Mortgage banking activities (Refer to Note 10) Net gain (loss) on sale of debt securities Net gain, including impairment on equity securities Net (loss) profit on trading account debt securities Net (loss) gain on sale of loans, including valuation adjustments on loans held-for-sale Adjustments (expense) to indemnity reserves on loans sold 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 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. 54 POPULAR, INC. 2021 ANNUAL REPORT Years ended December 31, 2020 2019 2021 $1,747,827 21,147 353,663 $1,742,390 19,721 329,440 $1,802,968 89,823 368,002 2,122,637 2,091,551 2,260,793 111,621 319 53,107 165,047 175,855 2,457 56,626 234,938 304,858 6,100 58,141 369,099 1,957,590 (193,464) 1,856,613 292,536 1,891,694 165,779 2,151,054 1,564,077 1,725,915 162,698 311,248 50,133 23 131 (389) (73) 4,406 113,951 642,128 631,802 102,226 92,097 56,783 410,865 25,234 72,981 25,579 (14,414) 136,988 9,134 147,823 257,892 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 1,549,275 1,457,829 1,477,482 1,243,907 309,018 618,560 111,938 818,316 147,181 $ 934,889 $ 506,622 $ 671,135 $ 933,477 $ 504,864 $ 667,412 $ $ 11.49 11.46 $ $ 5.88 5.87 $ $ 6.89 6.88 POPULAR, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (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 Unrealized net holding (losses) gains on debt securities arising during the period Reclassification adjustment for (gains) losses included in net income Unrealized net gains (losses) on cash flow hedges Reclassification adjustment for net losses included in net income Other comprehensive (loss) income before tax Income tax benefit (expense) Total other comprehensive (loss) income, net of tax Comprehensive income, net of tax Tax effect allocated to each component of other comprehensive (loss) income: (In thousands) Adjustment of pension and postretirement benefit plans Amortization of net losses Unrealized net holding (losses) gains on debt securities arising during the period Reclassification adjustment for (gains) losses included in net income Unrealized net gains (losses) on cash flow hedges Reclassification adjustment for net losses included in net income Income tax benefit (expense) The accompanying notes are an integral part of these consolidated financial statements. Years ended December 31, 2020 2021 2019 $ 934,889 $ 506,622 $ 671,135 – – (50) 3,947 36,950 20,749 (619,470) (23) 539 1,847 (555,461) 40,401 (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) (515,060) 359,929 258,036 $ 419,829 $ 866,551 $ 929,171 Years ended December 31, 2019 2020 2021 $(13,856) $ 3,387 (8,042) (51,213) 6 2,472 (2,084) (7,781) 62,468 5 (172) (263) $ 8,203 (8,817) (20,113) (4) 1,302 (1,496) $ 40,401 $(55,474) $(20,925) POPULAR, INC. 2021 ANNUAL REPORT 55 POPULAR, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (In thousands) 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 [2] 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[3] Common stock reissuance Preferred Stock, Redemption Amount[4] Stock based compensation Other comprehensive income, net of tax Transfer to statutory reserve Balance at December 31, 2020 Net income Issuance of stock Dividends declared: Common stock[1] Preferred stock Common stock purchases[5] Stock based compensation Other comprehensive loss, net of tax Transfer to statutory reserve Balance at December 31, 2021 Accumulated other comprehensive (loss) income Total 5,435,057 4,905 671,135 3,497 $(427,974) Common stock $1,043 Preferred stock $ 50,160 Retained earnings Surplus $4,365,606 $1,651,731 $ (205,509) Treasury stock 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 (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 4,673 934,889 (142,290) (1,412) (8,557) 4,162 (347,093) 11,397 78,370 (78,370) (515,060) 934,889 4,674 (142,290) (1,412) (355,650) 15,559 (515,060) – $1,046 $ 22,143 $4,650,182 $2,973,745 $(1,352,650) $(325,069) 5,969,397 [1] Dividends declared per common share during the year ended December 31, 2021 - $1.75 (2020 - $1.60; 2019 - $1.20). [2] 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 20 for additional information. [3] 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 20 for additional information. [4] On February 24, 2020, the Corporation redeemed all the outstanding shares of 2008 Series B Preferred Stock. Refer to Note 20 for additional information. [5] During the year ended December 31, 2021, the Corporation completed a $350 million accelerated share repurchase transaction with respect to its common stock, which was accounted for as a treasury stock transaction. Refer to Note 20 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. 56 POPULAR, INC. 2021 ANNUAL REPORT Years ended December 31, 2019 2020 2021 885,726 – 885,726 2,006,391 (1,120,665) 2,006,391 – 885,726 2,006,391 104,508,290 71,044 104,392,222 116,068 104,320,303 71,919 104,579,334 (24,728,165) 104,508,290 (20,264,055) 104,392,222 (8,802,593) 79,851,169 84,244,235 95,589,629 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 (benefit) 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 or loss mitigation alternatives Share-based compensation Impairment losses on right-of-use and long-lived assets Fair value adjustments on mortgage servicing rights Adjustments (expense) to indemnity reserves on loans sold Earnings from investments under the equity method, net of dividends or distributions Deferred income tax expense (Gain) loss on: Disposition of premises and equipment and other productive assets Proceeds from insurance claims 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 repayments (disbursements) on loans Proceeds from sale of loans Acquisition of loan portfolios Payments to acquire other intangible 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 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 (decrease) increase 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. Years ended December 31, 2021 2020 2019 $ 934,889 $ 506,622 $ 671,135 (193,464) 9,134 55,104 (21,962) (15,567) 17,774 5,320 10,206 (4,406) (50,942) 229,371 (18,393) – (23) (21,611) (30,098) (251,336) 95,100 (527,585) 741,465 (2,336) 6,193 25,022 (5,395) (4,104) 22,802 70,269 1,005,158 292,536 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 (5,895,789) (8,378,577) 905,558 (14,672,856) (16,196) (21,033,807) (30,794) (18,733,295) (16,300) 9,602,430 15,700 18,224,362 6,733 14,650,440 5,913 235,992 2,904 469,268 203,179 (348,179) (905) (155,828) 6,362 (375) (72,781) – 21,482 86,942 5,103 25,206 (875,941) 84,385 (1,138,276) (83) – 959 (1,778) (60,073) 366 26,548 77,521 99,445 20,030 (641,029) 110,534 (619,737) (10,382) – 6,942 – (75,665) 1,205 18,608 107,881 (10,518,650) (13,068,146) (4,169,852) 10,138,617 (29,700) 75,000 (237,713) (2,852) – 4,674 – (141,466) (350,535) (5,115) 13,102,028 (72,076) – (139,920) (3,145) 261,999 9,093 (28,017) (133,645) (500,479) (3,693) 9,450,910 12,492,145 (62,582) 497,094 102,771 394,323 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 $ 434,512 $ 497,094 $ 394,323 POPULAR, INC. 2021 ANNUAL REPORT 57 Note 1 - Nature of Operations Note 2 - Summary of Significant Accounting Policies Note 3 - New Accounting Pronouncements Note 4 - Business Combination Note 5 - Restrictions on Cash and Due from Banks and Certain Securities Note 6 - Debt Securities Available-For-Sale Note 7 - Debt Securities Held-to-Maturity Note 8 - Loans Note 9 - Allowance for Credit Losses – Loans Held-In-Portfolio Note 10 - Mortgage Banking Activities Note 11 - Transfers of Financial Assets and Mortgage Servicing Assets Note 12 - Premises and Equipment Note 13 - Other Real Estate Owned Note 14 - Other Assets Note 15 - Goodwill and Other Intangible Assets Note 16 - Deposits Note 17 - Borrowings Note 18 - Trust Preferred Securities Note 19 - Other Liabilities Note 20 - Stockholders’ Equity Note 21 - Regulatory Capital Requirements Note 22 - Other Comprehensive (Loss) Income Note 23 - Guarantees Note 24 - Commitments and Contingencies Note 25 - Non-consolidated Variable Interest Entities Note 26 - Derivative Instruments and Hedging Activities Note 27 - Related Party Transactions Note 28 - Fair Value Measurement Note 29 - Fair Value of Financial Instruments Note 30 - Employee Benefits Note 31 - Net Income per Common Share Note 32 - Revenue from Contracts with Customers Note 33 - Leases Note 34 - Stock-Based Compensation Note 35 - Income Taxes Note 36 - Supplemental Disclosure on the Consolidated Statements of Cash Flows Note 37 - Segment Reporting Note 38 - Popular, Inc. (Holding company only) Financial Information Note 39 - Subsequent Events 59 59 69 72 73 73 76 78 85 107 107 110 110 111 111 114 114 116 118 118 119 122 123 125 130 131 134 136 143 145 151 152 153 155 156 160 160 163 167 Notes to Consolidated Financial Statements 58 POPULAR, INC. 2021 ANNUAL REPORT 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, and equipment leasing and financing services through Popular Equipment Finance (“PEF”), a newly formed wholly- owned subsidiary of PB based in Minnesota. Note 2 - Summary of significant accounting policies The accounting and financial reporting policies of Popular, Inc. conform with and its 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. in the acquiree at Business combinations Business combinations are accounted for under the acquisition method. Under this method, assets acquired, liabilities assumed and any noncontrolling interest the acquisition date are measured at their fair values as of the acquisition date. The acquisition date is the date the acquirer obtains control. Transaction costs are expensed as incurred. Contingent consideration classified as an asset or a liability is remeasured to fair value at each reporting date until the contingency is resolved. The changes in fair value of the contingent consideration are recognized in earnings unless the arrangement is a hedging instrument for which changes are initially recognized in other comprehensive income. On October 15, 2021, Popular Equipment Finance, LLC (“PEF”), a newly formed wholly-owned subsidiary of Popular Bank (“PB”), completed the acquisition of certain assets and the assumption of certain liabilities of K2 Capital Group LLC’s leasing and financing business based in (“K2”) equipment “Acquired Business”). The Corporation Minnesota (the acquisition constituted a business this determined that combination as defined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805 “Business Combinations”. Refer to Note 4, Business combination, for further details on the K2 Transaction. 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 active markets, for liabilities identical assets or in POPULAR, INC. 2021 ANNUAL REPORT 59 (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. 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 circumstances. If sufficient information is not available to 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: on the uncollectible, • 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. An ACL is established for the expected credit losses over the 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 information based deemed 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 60 POPULAR, INC. 2021 ANNUAL REPORT • Debt securities classified as trading securities are reported at fair value, with unrealized and realized gains and losses included in non-interest income. losses relating earnings. losses over • 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 to Credit 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 the the expected credit established for security. The Corporation’s remaining term of debt 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 these zero-credit securities has been established. The Corporation monitors its credit performance on a quarterly basis to determine if any securities allowance 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 assumption and no ACL for (loss) gain on sale of debt considered necessary. Debt composition securities securities portfolio and is • 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 resulting from impairment, plus or minus changes 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 subsequently other 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 includes documents relationship and strategy for undertaking Prior to entering a hedge transaction, the Corporation formally between hedging instruments and hedged items, as well as the risk management various hedge objective transactions. This process linking all derivative instruments to specific assets and liabilities on the Statements 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 held-in-portfolio when Loans 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 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. POPULAR, INC. 2021 ANNUAL REPORT 61 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. repayment the of is interest deemed generally 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 other factors indicate that the collection of principal and 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 the U.S. Department of Veterans Affairs (“VA”) when 15-months delinquent as to principal or interest. The principal 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 62 POPULAR, INC. 2021 ANNUAL REPORT 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. Refer to Note 8 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, 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 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 factors as well as the economic outlook. As part of this methodology, management evaluates various macroeconomic scenarios provided by third parties. At December 31, 2021, management applied probability weights to the outcome of the selected scenarios. This evaluation includes benchmarking the underlying procedures as well as careful analysis of 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. channels, 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, and lending amongst others. The modeling framework includes competing risk models to generate lifetime 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 evaluates model limitations as well as the different risks covered by the variables used in each quantitative model. The Corporation considers additional macroeconomic scenarios to address these risks. This assessment takes into consideration factors listed as part of ASC 326-20-55-4. To complement the analysis, management also evaluates whether there are sectors that have low levels of historical defaults, but current conditions show the potential for future losses. This type of qualitative adjustment is more prevalent in the 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 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. 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 behaviors were further POPULAR, INC. 2021 ANNUAL REPORT 63 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 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 collect all amounts due, including interest accrued at the 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 the change in the fair value of the underlying collateral that may be used to repay the loan. Classification of loan modifications as TDRs involves a degree of 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 would be in payment default on any of its debt in the foreseeable future without the modification; (ii) the in the process of declaring borrower has declared or 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 and projections that only encompass 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 terms of the existing agreement through maturity; and (vi) absent the current modification, the borrower cannot obtain funds from sources other than the existing creditors at an effective interest rate equal to the current market interest rate for similar debt for a non-troubled debtor. The identification of TDRs is critical in the determination of the adequacy of the ACL. is 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 loan that may be considered uncollectible and original charged-off, but the obligation is not forgiven to the borrower. 64 POPULAR, INC. 2021 ANNUAL REPORT 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 9 to the Consolidated Financial Statements for the on TDRs qualitative and additional Corporation’s determination of the ACL. information for reserve establishes Reserve for unfunded commitments The Corporation unfunded a commitments, based on the estimated losses over the remaining the facility. An allowance is not established for term of commitments that are unconditionally cancellable by the Corporation. Accordingly, no reserve established for 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 Consolidated Statements of Operations as provision for credit losses for the years ended December 31, 2021 and 2020. liabilities is 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 the factors concerning the nature and extent of 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 balance of the 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 Corporation has loan. Once the 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 to service the 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 the improvements, whichever is shorter. Costs of lives 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 interest cost 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, 2021, 2020 and 2019 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 to Note 33 to the fair value. Refer transaction was at 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 and records POPULAR, INC. 2021 ANNUAL REPORT 65 a write down for the difference between the carrying amount and the fair value less costs to sell. 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 indicate possible frequently 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. 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 inflows competitive, economic and other factors, which could limit the intangible asset’s useful life. contractual, and legal, regulatory, 66 POPULAR, INC. 2021 ANNUAL REPORT 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. 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, at the input 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 within other liabilities in the Consolidated Statements of Financial Condition. Refer to Note 23 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 32 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 22. 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 and liabilities tax assets 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. 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 POPULAR, INC. 2021 ANNUAL REPORT 67 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 income adjusted for preferred stock dividends, including 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 shares and restricted stock, performance stock options, 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. or laws rates, tax and (d) tax-deductible dividends paid to shareholders, subject to certain exceptions. changes in tax status, (c) 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. 68 POPULAR, INC. 2021 ANNUAL REPORT Note 3 - New accounting pronouncements Recently Adopted Accounting Standards Updates Standard FASB ASU 2021-06, Presentation of Financial Statements (Topic 205), Financial Services – Depository and Lending (Topic 942), and Financial Services – Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Financial Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants FASB ASU 2020-10, Codification Improvements FASB ASU 2020-08, Codification Improvements to Subtopic 310-20 – Receivables – Nonrefundable Fees and Other Costs FASB ASU 2020-04, Reference Rate Reform (Topic 848) Description The FASB issued ASU 2021-06 in August 2021, which amends certain paragraphs from the ASC in response to the issuance of SEC Final Rules Nos. 33-10786 and 33-10835. Date of adoption August 9, 2021 Effect on the financial statements The adoption of ASU 2021-06 during 2021 resulted in simplified MD&A disclosures. The FASB issued ASU 2020-10 in October 2020 which moves all disclosures guidance to the appropriate codification section and makes other improvements and technical corrections. December 31, 2021 The Corporation was not impacted by the adoption of ASU 2020-10 during the fourth quarter of 2021. The FASB issued ASU 2020-08 in October 2020 which clarifies that a reporting entity should assess whether a callable debt 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 FASB issued ASU 2020-04 in March 2020, which provides accounting relief from the impact of the cessation of LIBOR by, among other things, providing optional expedients to treat contract modifications resulting from such reference rate reform as a continuation of the existing contract and for hedging to not be relationships de-designated resulting from such changes provided certain criteria are met. January 1, 2021 The Corporation was not impacted by the adoption of ASU 2020-08 during the first quarter of 2021 since it does not currently hold purchased callable debt securities at a premium. December 31, 2021 The Corporation identified all LIBOR-based contracts that will be impacted by the cessation of LIBOR. It has incorporated fallback language in new contracts and is in the process of completing the modification of existing contracts to include adequate fallback language. The Company has no outstanding tied to hedge liabilities. LIBOR-based Furthermore, stopped in originating December 2021 so no new exposures will be added prospectively. The election to apply the optional expedients did not have a material impact the Consolidated Financial on Statements. LIBOR-based relationships accounting Company contracts assets the or POPULAR, INC. 2021 ANNUAL REPORT 69 Standard 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 2020-01 in January 2020, which clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of alternative in applying the measurement accordance with Topic 321 and includes scope considerations for entities that hold non-derivative and forward purchased options to acquire equity securities that, upon settlement of the forward contract or exercise of the purchase option, would be accounted for under the equity method of accounting. contracts the The FASB issued ASU 2019-12 in December 2019, which simplifies the accounting for income taxes by removing certain exceptions such as approach for incremental intraperiod tax allocation and interim period income tax accounting for year-to-date losses that exceed anticipated losses. In addition, the ASU simplifies GAAP in a number of financial areas statements of legal entities are not subject to tax and enacted changes in tax laws in interim periods. such as when separate January 1, 2021 January 1, 2021 contracts The Corporation was not impacted by the adoption of ASU 2020-01 during the first quarter of 2021 since it does not hold non-derivative and forward purchased options to acquire equity securities the forward or that, upon settlement of exercise of the purchase option, would be accounted for under the equity method of accounting. Notwithstanding, it will consider this guidance for the purposes of applying the measurement alternative in ASC Topic 321 immediately before applying or discontinuing the equity method of accounting. The Corporation adopted ASU 2019-12 during the first quarter of 2021 but was not materially impacted by the amendments of this ASU. It will consider this guidance for enacted changes in tax laws, subsequent step-ups in the tax basis of goodwill, or ownership changes in investments. FASB ASUs Financial Instruments – Credit Losses (Topic 326) The CECL model applies to financial assets measured at amortized cost that are subject to credit losses and certain off-balance sheet exposures. CECL 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. Under the revised methodology, credit losses are measured based on past events, current conditions and reasonable and supportable forecasts that affect the collectability of financial assets. CECL also revises the approach to recognizing credit losses for 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 initial allowance for credit losses 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 standards also expand credit quality disclosures. effective on These accounting the January 1, 2020. Prior Corporation followed a systematic methodology to establish and evaluate the adequacy of the allowance for credit losses to provide for probable losses in the loan portfolio. to the adoption of CECL, standards updates were 70 POPULAR, INC. 2021 ANNUAL REPORT recognized under recourse guarantees which is 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 recorded in Other credit Liabilities. The Corporation also recognized an allowance for credit losses of approximately $13 million related to its held-to-maturity debt securities portfolio. The adoption of the modified retrospective CECL was approach. Therefore, the adjustments to record the increase in the allowance for credit losses was recorded as a decrease to the opening balance of year of implementation, net of income taxes, except for approximately $17 million related to 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. The total impact to retained earnings, net of tax, related to the adoption of CECL was of $205.8 million. As part of the adoption of CECL, the Corporation made the election to break the existing pools of purchased credit impaired (“PCI”) loans these loans are no longer excluded from and, as such, non-performing status. retained earnings of the Accounting Standards Updates Not Yet Adopted Standard FASB ASU 2021-08, Business Combinations (Topic 805) – Accounting for Contract Assets and Contract Liabilities from Contracts with Customers FASB ASU 2021-05, Leases (Topic 842), Lessors – Certain Leases with Variable Lease Payments FASB ASU 2021-04, Earnings per Share (Topic 260), Debt – Modifications and Extinguishments (Subtopic 470-50), Compensation – Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity- Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force) 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 Description The FASB issued ASU 2021-08 in October 2021, which amends ASC Topic 805 by requiring contract liabilities arising from revenue contracts with customers to be recognized in accordance with ASC Topic 606 on the acquisition date instead of fair value. contract assets and The FASB issued ASU 2021-05 in July 2021, which amends ASC Topic 842 so that lessors can classify as operating leases those leases with variable lease payments that, prior to these been classified as a sales-type or direct financing lease and at inception a loss would have been recognized. amendments, would have for the clarifies accounting The FASB issued ASU 2021-04 in May 2021, which a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after a modification or exchange and the related EPS effects of such an if adjustment to equity. transaction recognized as Date of adoption January 1, 2023 Effect on the financial statements Upon adoption of this ASU, the Corporation will consider revenue contracts with customers recognized as part of business combinations entered into on or after the effective date. this guidance for January 1, 2022 The Corporation does not expect to be impacted by the adoption of this ASU since it does not hold direct financing leases with variable lease payments. January 1, 2022 Upon adoption of this ASU, the Corporation will consider this guidance for modifications or exchanges of freestanding equity-classified written call options. 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 Corporation will consider these amendments in its evaluation of contracts in its own equity, including accelerated share repurchase transactions. POPULAR, INC. 2021 ANNUAL REPORT 71 Note 4 - Business combination On October 15, 2021, Popular Equipment Finance, LLC (“PEF”), a newly formed wholly-owned subsidiary of Popular Bank (“PB”), completed the acquisition of certain assets and the assumption of certain liabilities of K2 Capital Group LLC’s leasing and financing business based in (“K2”) equipment loans (the Minnesota this transaction consisted of acquired by PEF as part of $105 million in commercial direct financing leases and $14 million in working capital lines. Refer to Note 2, Summary of significant accounting policies, for further details. “Acquired Business”). Commercial (In thousands) Cash consideration Contingent consideration Total consideration Assets: Cash and due from banks Commercial loans Premises and equipment Accrued income receivable Other assets Other intangible assets Total assets Liabilities: Other liabilities Total liabilities Net assets acquired Goodwill on acquisition lease products, Specializing in the healthcare industry, the Acquired including Business provides a variety of operating and finance leases, and also offers private label vendor finance programs to equipment manufacturers and healthcare organizations. The acquisition provides PB with a national equipment leasing platform that complements its existing health care lending business. The following table presents the consideration and major classes of identifiable assets acquired and liabilities assumed by PEF as of October 15, 2021. the fair values of Book value prior to purchase accounting adjustments Fair value adjustments As recorded by Popular, Inc. $156,628 – $156,628 $ 800 118,907 6,987 57 2,822 – $129,573 14,439 $ 14,439 $115,134 $ – 9,241 $ 9,241 $ – (3,332) 2,009 – – 2,887 $ 1,564 – – $ $ 1,564 $156,628 9,241 $165,869 $ 800 115,575 8,996 57 2,822 2,887 $131,137 14,439 $ 14,439 $116,698 $ 49,171 The fair values initially assigned to the assets acquired and liabilities assumed are preliminary and are subject to refinement for up to one year after the closing date of the acquisition as new information relative to closing date fair values becomes available. As the Corporation finalizes its analyses, there may continue to be adjustments to the recorded carrying values, and thus the recognized goodwill may increase or decrease. Following is a description of the methods used to determine the fair values of significant assets acquired and liabilities assumed on the K2 Transaction: Commercial Loans In determining the fair value of commercial direct financing leases, the specific terms and conditions of each lease agreement were considered. The fair values for commercial direct financing leases were calculated based on the fair value of the underlying collateral, or from the cash flows expected to be collected discounted at a market rate commensurate with the credit risk profile of the lessee at origination in instances where there was a purchase option at the end of the lease term with a stated guaranteed residual value. Fair values for commercial working capital lines were calculated based on the present value of remaining contractual payments discounted at a market rate commensurate with the credit risk profile of the borrower at origination. These commercial loans were accounted for under ASC Subtopic 310-20. As of October 15, 2021, the gross loans amounted to receivable for commercial contractual $125 million. An allowance for credit losses of $1 million was recognized as of October 15, 2021 with an offset to provision for credit losses, which represents the estimate of contractual cash flows not expected to be collected. Goodwill The amount of goodwill is the residual difference between the consideration transferred to K2 and the fair value of the assets acquired, net of the liabilities assumed. The entire amount of goodwill is deductible for income tax purposes pursuant to U.S. Internal Revenue Code (“IRC”) section 197 over a 15-year period. 72 POPULAR, INC. 2021 ANNUAL REPORT Contingent consideration The fair value of the contingent consideration, which relates to approximately $29 million in earnout payments that could be payable to K2 over a three-year period, was calculated based on a Montecarlo Simulation model. The Corporation believes that given the amount of assets and liabilities assumed and the size of the operations acquired in relation to Popular’s operations, the historical results of K2 are not significant to Popular’s results, and thus no pro forma information is presented. Note 5 - Restrictions on cash and due from banks and certain securities BPPR is required by 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 $2.7 billion at December 31, 2021 (December 31, 2020 - $2.3 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, 2021, the Corporation held $50 million in funds deposited in money restricted assets in the form of market accounts, debt securities available for sale and equity securities (December 31, 2020 - $39 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 6 - Debt securities available-for-sale The following tables present the amortized cost, gross unrealized gains and losses, approximate fair value, weighted average yield and contractual maturities of debt securities available-for-sale at December 31, 2021 and December 31, 2020. (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 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, 2021 Gross unrealized losses Gross unrealized gains Fair value Weighted average yield Amortized cost $ 1,225,558 10,059,163 4,563,265 $ 13,556 98,808 739 $ 69 65,186 36,804 $ 1,239,045 10,092,785 4,527,200 2.33% 1.18 1.22 15,847,986 113,103 102,059 15,859,030 1.27 70 70 2,433 43,241 172,176 217,850 11 65,749 665,600 8,263,835 8,995,195 123 123 – – 42 295 3,441 3,778 1 2,380 17,998 68,128 88,507 5 5 – – – 6 357 363 – 11 5 195,910 195,926 70 70 2,475 43,530 175,260 221,265 12 68,118 683,593 8,136,053 8,887,776 – – 128 128 5.63 5.63 2.16 1.54 2.13 2.01 4.79 2.23 1.97 1.67 1.69 3.62 3.62 Total debt securities available-for-sale [1] $25,061,224 $205,393 $298,348 $24,968,269 1.42% [1] Includes $22.0 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 $20.9 billion serve as collateral for public funds. POPULAR, INC. 2021 ANNUAL REPORT 73 (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. 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, 2021 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 $ 1,225,639 10,127,468 5,272,106 8,436,011 $ 1,239,127 10,163,506 5,254,323 8,311,313 $25,061,224 $24,968,269 74 POPULAR, INC. 2021 ANNUAL REPORT During the years ended December 31, 2021 and 2020, the Corporation sold U.S. Treasury Notes. The proceeds from these sales were $236 million and $5 million, respectively. Gross realized gains and losses on the sale of debt securities available-for-sale for the years ended December 31, 2021, 2020 and 2019 were as follows: (In thousands) Gross realized gains Gross realized losses 2021 $ 695 (672) 2020 $41 – 2019 $ – (20) Net realized gains (losses) on sale of debt securities available-for-sale $ 23 $41 $(20) 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, 2021 and 2020. (In thousands) Less than 12 months Gross unrealized losses Fair value At December 31, 2021 12 months or more Gross unrealized losses Fair value Fair value Total U.S. Treasury securities Collateralized mortgage obligations - federal agencies Mortgage-backed securities $ 9,590,448 35,533 5,767,556 $102,059 334 170,614 $ – 1,084 595,051 $ – 29 25,312 $ 9,590,448 36,617 6,362,607 Gross unrealized losses $102,059 363 195,926 Total debt securities available-for-sale in an unrealized loss position $15,393,537 $273,007 $596,135 $25,341 $15,989,672 $298,348 (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 As of December 31, 2021, the portfolio of available-for-sale debt securities reflects gross unrealized losses of approximately $298 million, driven mainly by U.S. Treasury Securities and mortgage-backed securities, which were impacted by increases in the interest rate environment. and credit of the U.S. Government. Investments in obligations 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. 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 securities equity. This information excludes debt securities backed by the full faith stockholders’ 10% of exceeds 2021 2020 (In thousands) FNMA Freddie Mac Amortized cost $1,533,637 3,228,543 Fair value $1,587,127 3,176,197 Amortized cost $2,242,121 3,616,238 Fair value $2,338,897 3,675,679 POPULAR, INC. 2021 ANNUAL REPORT 75 Note 7 - Debt securities held-to-maturity The following tables present the amortized cost, allowance for credit losses, gross unrealized gains and losses, approximate fair value, weighted average yield and contractual maturities of debt securities held-to-maturity at December 31, 2021 and 2020. (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 At December 31, 2021 Amortized cost Allowance for Credit Losses Net of Allowance Gross unrealized gains Gross unrealized losses Fair value Weighted average yield $ 4,240 14,395 11,280 43,561 $ 7 148 122 7,819 $ 4,233 14,247 11,158 35,742 $ 4 149 104 11,746 73,476 8,096 65,380 12,003 25 25 5,960 5,960 – – – – 25 25 5,960 5,960 – – – – $– – – – – – – – – $ 4,237 14,396 11,262 47,488 6.07% 6.23 2.18 1.50 77,383 2.79 25 25 6.44 6.44 5,960 6.33 5,960 6.33 Total debt securities held-to-maturity $79,461 $8,096 $71,365 $12,003 $– $83,368 3.06% (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% 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. 76 POPULAR, INC. 2021 ANNUAL REPORT The following table presents the aggregate amortized cost and fair value of debt securities held-to-maturity at December 31, 2021 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 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 At December 31, 2021 and December 31, 2020, “Obligations of Puerto Rico, States and political subdivisions” classified as held-to-maturity, includes securities issued by municipalities of Puerto Rico that are generally not rated by a credit rating agency. This includes $30 million of general and special obligation bonds issued by three municipalities of Puerto Rico, that are payable primarily from certain property taxes imposed by the issuing municipality (December 31, 2020 - $35 million). 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 9. 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: (In thousands) At December 31, 2021 At December 31, 2020 Securities issued by Puerto Rico municipalities Watch Pass Total $16,345 13,800 $30,145 $35,315 – $35,315 Amortized cost Fair value $ 4,240 14,420 11,280 49,521 $79,461 $ 4,237 14,421 11,262 53,448 $83,368 (not in Puerto Rico residential properties At December 31, 2021, the portfolio of “Obligations of Puerto Rico, States and political subdivisions” also includes $43 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 the government), but for which HFA, provides a guarantee in the event of default and upon the satisfaction of certain other conditions (December 31, 2020 - $46 million). 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 the the underlying borrowers. At December 31, 2021, of average refreshed FICO score for the representative sample, comprised of 64% of the nominal value of the securities, used for the loss estimate was of 704 (compared to 66% and 697, respectively, at December 31, 2020). 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 24 for additional information on the Corporation’s exposure to the Puerto Rico Government. Delinquency status At December 31, 2021 and December 31, 2020, there were no securities held-to-maturity in past due or non-performing status. POPULAR, INC. 2021 ANNUAL REPORT 77 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 at December 31, 2021 and December 31, 2020: For the year ended December 31, 2021 2020 Obligations of Puerto Rico, States and political subdivisions $10,261 – (2,165) – – $ – 12,654 (2,393) – – $ 8,096 $10,261 (In thousands) Allowance for credit losses: Beginning balance Impact of adopting CECL Provision for credit losses (benefit) Securities charged-off Recoveries Ending balance The allowance for credit losses for the Obligations of Puerto Rico, States and political subdivisions includes $0.3 million for securities issued by municipalities of Puerto Rico, and $7.8 million for bonds issued by the Puerto Rico HFA, which are secured by second mortgage loans on Puerto Rico residential $1.4 million and (compared $8.9 million, respectively, at December 31, 2020). properties to Note 8 - 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, 2021, the Corporation recorded purchases (including repurchases) of mortgage loans amounting to $393 million including $14 million in Purchased loans of Credit Deteriorated (“PCD”) $61 million and commercial loans of $139 million; compared to purchases (including repurchases) of mortgage loans of $1.3 billion including $160 million in PCD loans, consumer loans of $56 million and commercial loans of $26 million, during the year ended December 31, 2020. During 2020, these included a bulk repurchase mortgage loan repurchases consumer loans, transaction of $688 million in GNMA loans, of which $684 million were 90 days past due at that time, including $324 million which were already included in 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 is required to recognize (rebook) these loans in accordance with U.S. GAAP. The bulk repurchase 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 $145 million of residential mortgage loans and $131 million of commercial and construction loans during the year ended December 31, 2021 (December 31, 2020 - $150 million of residential mortgage loans and $32 million of commercial loans). Also, during the year ended December 31, 2021, the Corporation securitized approximately $380 million into Government National Mortgage of mortgage securities Association $330 million of mortgage loans into Federal National Mortgage Association (“FNMA”) mortgage-backed securities, compared to $332 million and $176 million, respectively, during the year ended December 31, 2020. Also, the Corporation securitized approximately $23 million of mortgage loans into Federal Home Loan Mortgage Corporation (“FHLMC”) mortgage- backed securities during the year ended December 31, 2021. loans (“GNMA”) mortgage-backed As previously disclosed in Note 4, on October 15, 2021 Popular Equipment Finance LLC acquired $105 million in commercial finance leases and $14 million in working capital lines as a result of the acquisition of certain assets and the assumption of certain liabilities from the K2 Capital Group leases and loans from the acquired LLC. The portfolio of business is included in the information presented in this note. Delinquency status The following tables present the amortized cost basis of loans held-in-portfolio (“HIP”), net of unearned income, by past due status, and by loan class including those that are in non-performing status or that are accruing interest but are past due 90 days or more at December 31, 2021 and 2020. 78 POPULAR, INC. 2021 ANNUAL REPORT December 31, 2021 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 loans $ 314 $ – $ 272 $ 586 $ 154,183 $ 154,769 $ 272 $ – 2,399 3,329 3,438 – 217,830 9,240 5,768 46 10,027 59,128 432 136 278 1,727 – 81,754 2,037 3,520 – 6,072 15,019 714 20,716 54,335 45,242 485 805,245 3,102 8,577 23 21,235 23,085 12,621 23,251 57,942 50,407 485 1,104,829 14,379 17,865 69 37,334 97,232 13,767 2,266,672 1,365,787 3,478,041 86,626 5,147,037 1,366,940 901,986 3,502 1,250,726 3,314,955 110,781 2,289,923 1,423,729 3,528,448 87,111 6,251,866 1,381,319 919,851 3,571 1,288,060 3,412,187 124,548 20,716 54,335 44,724 485 333,887 3,102 – – 21,235 23,085 12,448 – – 518 – 471,358 – 8,577 23 – – 173 (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 $311,951 $111,257 $994,938 $1,418,146 $19,447,236 $20,865,382 $514,289 $480,649 (In thousands) Commercial multi-family Commercial real estate: Non-owner occupied Owner occupied Commercial and industrial Construction Mortgage Consumer: Credit cards Home equity lines of credit Personal Other December 31, 2021 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 $ 3,826 $ – $ – $ 3,826 $1,804,035 $1,807,861 $ – $ – 5,721 1,095 9,410 – 11,711 – 71 863 – 683 – 2,680 – 2,573 – 34 574 – 622 1,013 4,015 – 21,969 – 5,406 681 – 7,026 2,108 16,105 – 36,253 – 5,511 2,118 – 2,316,441 392,265 1,794,026 629,109 1,139,077 10 69,780 152,827 4,658 2,323,467 394,373 1,810,131 629,109 1,175,330 10 75,291 154,945 4,658 622 1,013 3,897 – 21,969 – 5,406 681 – – – 118 – – – – – – Total $32,697 $6,544 $33,706 $72,947 $8,302,228 $8,375,175 $33,588 $118 POPULAR, INC. 2021 ANNUAL REPORT 79 December 31, 2021 Popular, Inc. Past due 30-59 days 60-89 days 90 days or more Total past due Current Loans HIP [2] [3] Past due 90 days or more Accruing Non-accrual loans loans $ 4,140 $ – $ 272 $ 4,412 $ 1,958,218 $ 1,962,630 $ 272 $ – 8,120 4,424 12,848 – 229,541 9,240 5,768 117 10,890 59,128 432 819 278 4,407 – 84,327 2,037 3,520 34 6,646 15,019 714 21,338 55,348 49,257 485 827,214 3,102 8,577 5,429 21,916 23,085 12,621 30,277 60,050 66,512 485 1,141,082 14,379 17,865 5,580 39,452 97,232 13,767 4,583,113 1,758,052 5,272,067 715,735 6,286,114 1,366,940 901,996 73,282 1,403,553 3,314,955 115,439 4,613,390 1,818,102 5,338,579 716,220 7,427,196 1,381,319 919,861 78,862 1,443,005 3,412,187 129,206 21,338 55,348 48,621 485 355,856 3,102 – 5,406 21,916 23,085 12,448 – – 636 – 471,358 – 8,577 23 – – 173 (In thousands) Commercial multi-family Commercial real estate: Non-owner occupied Owner occupied Commercial and industrial Construction Mortgage [1] Leasing Consumer: Credit cards Home equity lines of credit Personal Auto Other Total $344,648 $117,801 $1,028,644 $1,491,093 $27,749,464 $29,240,557 $547,877 $480,767 [1] [2] [3] It is the Corporation’s policy to report delinquent residential mortgage loans insured by Federal Housing Administration (“FHA”) or guaranteed by the U.S. Department of Veterans Affairs (“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 $13 million at December 31, 2021 related to the rebooking of loans previously pooled into GNMA securities, in which the Corporation had a buy-back option as further described below. Under the GNMA program, issuers such as BPPR have the option but not the obligation to repurchase loans that are 90 days or more past due. For accounting purposes, these loans subject to repurchases option are required to be reflected (rebooked) on the financial statements of BPPR with an offsetting liability. These balances include $304 million of residential mortgage loans insured by FHA or guaranteed by the VA that are no longer accruing interest as of December 31, 2021. Furthermore, the Corporation has approximately $50 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. Loans held-in-portfolio are net of $266 million in unearned income and exclude $59 million in loans held-for-sale. Includes $6.6 billion pledged to secure credit facilities and public funds that the secured parties are not permitted to sell or repledge the collateral, of which $3.2 billion were pledged at the Federal Home Loan Bank (“FHLB”) as collateral for borrowings and $1.7 billion at the Federal Reserve Bank (“FRB”) for discount window borrowings and $1.7 billion serve as collateral for public funds. 80 POPULAR, INC. 2021 ANNUAL REPORT December 31, 2020 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 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 82,829 101,489 46,010 21,497 1,712,152 14,009 12,798 48 26,387 15,736 15,052 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 – 12,798 48 – – 171 (In thousands) Commercial multi-family Commercial real estate: Non-owner occupied Owner occupied Commercial and industrial Construction Mortgage [1] 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] 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 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 1,117 21,312 33,422 – 236 1,486 – 3,640 650 72 – 15,464 – 342 1,342 – 669 334 3,091 7,560 14,864 3 7,491 1,474 20 5,233 1,175 4,280 28,872 63,750 3 8,069 4,302 20 1,988,577 343,205 1,540,513 740,230 1,056,787 28 86,502 194,936 1,723 1,993,810 344,380 1,544,793 769,102 1,120,537 31 94,571 199,238 1,743 669 334 3,091 7,560 14,864 – 7,491 1,474 20 – – – – – 3 – – – Total $63,961 $21,510 $37,400 $122,871 $7,689,045 $7,811,916 $37,397 $3 POPULAR, INC. 2021 ANNUAL REPORT 81 December 31, 2020 Popular, Inc. Past due 30-59 days 60-89 days 90 days or more Total past due Current Loans HIP [2] [3] 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 11,340 21,312 229,024 9,141 6,550 420 12,741 53,186 304 7,143 1,868 847 – 103,190 1,427 4,619 342 9,439 12,696 483 77,806 92,335 38,103 29,057 1,443,688 3,441 88,062 102,664 50,290 50,369 1,775,902 14,009 12,801 7,539 27,861 15,736 15,072 23,970 8,301 50,041 81,618 15,859 3,913,081 1,840,611 5,723,611 875,839 6,114,778 1,183,652 895,996 90,449 1,426,944 3,050,610 112,549 4,001,143 1,943,275 5,773,901 926,208 7,890,680 1,197,661 919,966 98,750 1,476,985 3,132,228 128,408 77,806 92,335 37,540 29,057 429,207 3,441 – 7,491 27,861 15,736 14,901 – – 563 – 1,014,481 – 12,801 48 – – 171 (In thousands) Commercial multi-family Commercial real estate: Non-owner occupied Owner occupied Commercial and industrial Construction Mortgage[1] Leasing 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] [2] [3] 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. Under the GNMA program, issuers such as BPPR have the option but not the obligation to repurchase loans that are 90 days or more past due. For accounting purposes, these loans subject to repurchases option are required to be reflected (rebooked) on the financial statements of BPPR with an offsetting liability. These balances include $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. 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. 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 FHLB as collateral for borrowings and $2.4 billion at the FRB for discount window borrowings. 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 FHA or guaranteed by VA when 15 months delinquent as to principal or interest, since the principal repayment on these loans is insured. At December 31, 2021, mortgage loans held-in-portfolio include $1.9 billion (December 31, 2020 - $2.1 billion) of loans insured by the FHA, or guaranteed VA of which $0.5 billion (December 31, 2020 - $1.0 billion) are 90 days or more past due. These balances include $716 million in loans modified under a TDR (December 31, 2020 - $655 million), that are presented as accruing loans. The portfolio of guaranteed loans includes $304 million of residential mortgage loans in Puerto Rico that are no longer accruing interest as of December 31, 2021 (December 31, 2020 - $329 million). The Corporation has approximately $50 million in reverse mortgage loans in Puerto Rico which are guaranteed by FHA, but which are currently not accruing interest at December 31, 2021 (December 31, 2020 - $60 million). Loans with a delinquency status of 90 days past due as of December 31, 2021 include $13 million in loans previously pooled into GNMA securities (December 31, 2020 - $57 82 POPULAR, INC. 2021 ANNUAL REPORT 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 finance leases within the C&I December 31, 2021 and 2020 were as follows: financing leases, category, including at receivable (In thousands) Total minimum lease payments Estimated residual value of leased property 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 2021 2020 $1,190,545 $ 957,367 518,670 21,474 257,738 419,024 18,141 196,788 1,472,951 18,581 1,197,744 16,863 allowance for credit losses $1,454,370 $1,180,881 At December 31, 2021, future minimum lease payments are expected to be received as follows: (In thousands) 2022 2023 2024 2025 2026 2027 and thereafter Total $ 106,927 123,654 181,405 216,577 369,592 192,390 $1,190,545 The following tables present the amortized cost basis of non-accrual loans as of December 31, 2021 and 2020 by class of loans: (In thousands) Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Construction Mortgage Leasing Consumer: HELOCs Personal Auto Other Total (In thousands) Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Construction Mortgage Leasing Consumer: HELOCs Personal Auto Other Total December 31, 2021 Puerto Rico Popular U.S. Popular, Inc. Non-accrual with no allowance Non-accrual with allowance Non-accrual with no allowance Non-accrual with allowance Non-accrual with no allowance Non-accrual with allowance $ – 15,819 13,491 30,177 – 169,827 276 – 6,279 879 – $ 272 4,897 40,844 14,547 485 164,060 2,826 – 14,956 22,206 12,448 $ – – – – – 29 – – 81 – – $ – 622 1,013 3,897 – 21,940 – 5,406 600 – – $ – 15,819 13,491 30,177 – 169,856 276 – 6,360 879 – $ 272 5,519 41,857 18,444 485 186,000 2,826 5,406 15,556 22,206 12,448 $236,748 $277,541 $110 $33,478 $236,858 $311,019 December 31, 2020 Puerto Rico Popular U.S. Popular, Inc. Non-accrual with no allowance Non-accrual with allowance Non-accrual with no allowance Non-accrual with allowance Non-accrual with no allowance Non-accrual with allowance $ – 35,968 14,825 1,148 – 141,737 – – 9,265 – – $ 505 41,169 77,176 33,301 21,497 272,606 3,441 – 17,122 15,736 14,881 $ – – – – – 517 – – – – – $ 1,894 669 334 3,091 7,560 14,347 – 7,491 1,474 – 20 $ – 35,968 14,825 1,148 – 142,254 – – 9,265 – – $ 2,399 41,838 77,510 36,392 29,057 286,953 3,441 7,491 18,596 15,736 14,901 $202,943 $497,434 $517 $36,880 $203,460 $534,314 POPULAR, INC. 2021 ANNUAL REPORT 83 Loans in non-accrual status with no allowance at December 31, loans 2021 include $237 million in collateral dependent (December 31, 2020 - $203 million). The Corporation recognized $3 million in interest income on non-accrual loans during the year ended December 31, 2021 (December 31, 2020 - $4 million). The Corporation has designated loans classified as collateral dependent for which the ACL is measured based on the fair value of the collateral less cost to sell, when foreclosure is probable or 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 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 tables present the amortized cost basis of collateral-dependent loans, for which the ACL was measured based on the fair value of the collateral less cost to sell, by class of loans and type of collateral as of December 31, 2021 and 2020: December 31, 2021 Real Estate Auto Equipment Accounts Receivables Other Total $ 1,374 $ – $ – $ – $ – $ 1,374 211,026 47,268 2,650 179,774 – – – – – 574 6,165 – – 8,983 – – 680 – – – – – – 10,675 – – – – – – 27,893 – – 211,026 47,268 41,898 179,774 574 – – 6,165 8,983 $448,257 $9,557 $680 $10,675 $27,893 $497,062 926 926 $ $ 1,374 211,026 47,268 2,650 180,700 – $ $ – – – – – – – 574 6,165 – – 8,983 – $ – $ – – – 680 – – – – – – – $ $ – – – 926 926 $ $ 1,374 $ $ – – 10,675 – – – – – – 27,893 – – 211,026 47,268 41,898 180,700 574 – – 6,165 8,983 $449,183 $9,557 $680 $10,675 $27,893 $497,988 (In thousands) Puerto Rico Commercial multi-family Commercial real estate: Non-owner occupied Owner occupied Commercial and industrial Mortgage Leasing Consumer: Personal Auto Total Puerto Rico Popular U.S. Mortgage Total Popular U.S. Popular, Inc. Commercial multi-family Commercial real estate: Non-owner occupied Owner occupied Commercial and industrial Mortgage Leasing Consumer: Personal Auto Total Popular, Inc. 84 POPULAR, INC. 2021 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 (PCD) Loans 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, 2021 December 31, 2020 Purchase price of loans at acquisition Allowance for credit losses at acquisition Non-credit discount / (premium) at acquisition Par value of acquired loans at acquisition $10,995 $152,667 3,142 446 7,512 (6,542) $14,583 $153,637 Note 9 - 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 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 recorded in current operations is based on this methodology. Loan losses are charged and recoveries are credited to the ACL. At December 31, 2021, the Corporation estimated the ACL by weighting the outputs of optimistic, baseline, and pessimistic scenarios. Among the three scenarios used to estimate the ACL, the baseline is assigned the highest probability, followed by the pessimistic scenario given the uncertainties in the economic outlook and downside risk. The weights applied are subject to evaluation on a quarterly basis as part of the ACL’s governance process. The current baseline forecast continues to show a favorable economic scenario. The 2022 expected GDP growth approximately 4%, with the rate for Puerto Rico is POPULAR, INC. 2021 ANNUAL REPORT 85 unemployment rate expected to average around 7.4% for the year. In the case of the United States, the baseline scenario expects GDP growth for 2022 of approximately 4.6%, with unemployment rate expected to average around 3.7%. For 2023 both regions expect GDP growth with average unemployment rate levels remaining stable in comparison to 2022. The following tables present the changes in the ACL of loans held-in-portfolio and unfunded commitments for the years ended December 31, 2021 and 2020. For the year ended December 31, 2021 Puerto Rico Commercial Construction Mortgage Leasing Consumer Total (In thousands) Allowance for credit losses - loans: Beginning balance Provision for credit losses (benefit) Initial allowance for credit losses - PCD Loans Charge-offs Recoveries Ending balance - loans Allowance for credit losses - unfunded commitments: Beginning balance Provision for credit losses (benefit) Ending balance - unfunded commitments [1] $225,323 (91,695) – (17,180) 35,480 $151,928 $ 4,913 (3,162) $ 1,751 $ 4,871 (1,533) – (6,620) 4,923 $ 1,641 $ 4,610 (2,222) $ 2,388 $195,557 (57,684) 3,142 (17,656) 14,927 $16,863 2,094 – (4,637) 3,258 $297,136 19,800 – (78,047) 45,840 $ 739,750 (129,018) 3,142 (124,140) 104,428 $138,286 $17,578 $284,729 $ 594,162 $ $ – – – $ $ – – – $ $ – – – $ $ 9,523 (5,384) 4,139 [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, 2021 Popular U.S. (In thousands) Allowance for credit losses - loans: Beginning balance Provision for credit losses (benefit) Charge-offs Recoveries Ending balance - loans Allowance for credit losses - unfunded commitments: Beginning balance Provision for credit losses (benefit) Ending balance - unfunded commitments [1] Commercial Construction Mortgage Consumer Total $108,057 (45,427) (1,177) 2,424 $ 63,877 $ 1,753 (369) $ 1,384 $ 9,366 (4,764) (523) 643 $ 4,722 $ 4,469 (2,132) $ 2,337 $20,159 (3,949) (605) 587 $18,918 (187) (8,732) 6,414 $156,500 (54,327) (11,037) 10,068 $16,192 $16,413 $101,204 $ $ – – – $ $ 106 (69) $ 6,328 (2,570) 37 $ 3,758 [1] Allowance for credit losses of unfunded commitments is presented as part of Other Liabilities in the Consolidated Statements of Financial Condition. 86 POPULAR, INC. 2021 ANNUAL REPORT For the year ended December 31, 2021 Popular, Inc. Commercial Construction Mortgage Leasing Consumer Total (In thousands) Allowance for credit losses - loans: Beginning balance Provision for credit losses (benefit) Initial allowance for credit losses - PCD Loans Charge-offs Recoveries Ending balance - loans Allowance for credit losses - unfunded commitments: Beginning balance Provision for credit losses (benefit) Ending balance - unfunded commitments [1] $ 333,380 (137,122) – (18,357) 37,904 $ 215,805 $ $ 6,666 (3,531) 3,135 $14,237 (6,297) – (7,143) 5,566 $ 6,363 $ 9,079 (4,354) $ 4,725 $215,716 (61,633) 3,142 (18,261) 15,514 $16,863 2,094 – (4,637) 3,258 $316,054 19,613 – (86,779) 52,254 $ 896,250 (183,345) 3,142 (135,177) 114,496 $154,478 $17,578 $301,142 $ 695,366 $ $ – – – $ $ – – – $ $ 106 (69) $ 15,851 (7,954) 37 $ 7,897 [1] Allowance for credit losses of unfunded commitments is presented as part of Other Liabilities in the Consolidated Statements of Financial Condition. (In thousands) Allowance for credit losses - loans: Beginning balance Impact of adopting CECL Provision for credit losses 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 for credit losses 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. (In thousands) Allowance for credit losses - loans: Beginning balance Impact of adopting CECL Provision for credit losses Charge-offs Recoveries Ending balance - loans Allowance for credit losses - unfunded commitments: Beginning balance Impact of adopting CECL Provision for credit losses Ending balance - unfunded commitments [1] Commercial Construction Mortgage Consumer Total $ 16,557 29,537 59,748 (2,078) 4,293 $108,057 $ 152 453 1,148 $ 1,753 $ 4,266 (3,038) 8,427 (1,509) 1,220 $ 9,366 $ 125 582 3,762 $ 4,469 $ 4,827 10,431 4,891 (59) 69 $ 19,407 7,809 3,405 (17,404) 5,701 $ 45,057 44,739 76,471 (21,050) 11,283 $20,159 $ 18,918 $156,500 $ $ – – – – $ $ 1 (1) 106 106 $ 278 1,034 5,016 $ 6,328 [1] Allowance for credit losses of unfunded commitments is presented as part of Other Liabilities in the Consolidated Statements of Financial Condition. POPULAR, INC. 2021 ANNUAL REPORT 87 (In thousands) Allowance for credit losses - loans: Beginning balance Impact of adopting CECL Provision for credit losses 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 for credit losses Ending balance - unfunded commitments [1] For the year ended December 31, 2020 Popular, Inc. Commercial Construction Mortgage Leasing Consumer Total $147,620 91,930 108,504 – (29,809) 15,135 $333,380 $ 830 1,611 4,225 $ 6,666 $ 4,840 (2,923) 11,655 – (1,509) 2,174 $14,237 $121,108 96,512 10,209 7,512 (30,139) 10,514 $ 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 $ 16,863 $ 316,054 $ 896,250 $ 419 397 8,263 $ 9,079 $ $ – – – – $ $ – – – – $ $ 7,468 (7,468) 106 $ 8,717 (5,460) 12,594 106 $ 15,851 [1] Allowance for credit losses of unfunded commitments is presented as part of Other Liabilities in the Consolidated Statements of Financial Condition. 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, 2021 (December 31, 2020 - $1.7 billion). The amount of outstanding commitments to lend additional funds to debtors owing receivables whose terms have been modified in TDRs amounted to $9 million related to the commercial loan portfolio at December 31, 2021 (December 31, 2020 - $14 million). The following table presents the outstanding balance of loans classified as TDRs according to their accruing status and the related allowance at December 31, 2021 and 2020. (In thousands) Loans held-in-portfolio: Commercial Construction Mortgage [1] Leasing Consumer December 31, 2021 December 31, 2020 Accruing Non-Accruing Total Allowance Accruing Non-Accruing Total Related Related Allowance $ 261,344 – 1,143,204 325 64,093 $ 64,744 – 112,509 47 10,556 $ 326,088 $ 24,736 $ 259,246 – 1,060,193 392 74,707 – 1,255,713 372 74,649 – 61,888 42 16,124 $103,551 21,497 135,772 218 12,792 $ 362,797 $ 15,236 4,397 71,018 150 22,508 21,497 1,195,965 610 87,499 Loans held-in-portfolio $1,468,966 $187,856 $1,656,822 $102,790 $1,394,538 $273,830 $1,668,368 $113,309 [1] At December 31, 2021, accruing mortgage loan TDRs include $716 million guaranteed by U.S. sponsored entities at BPPR, compared to $655 million at December 31, 2020. 88 POPULAR, INC. 2021 ANNUAL REPORT The following tables present the loan count by type of modification for those loans modified in a TDR during the years ended December 31, 2021 and 2020. Loans modified as TDRs for the U.S. operations are considered insignificant to the Corporation. For the year ended December 31, 2021 Reduction in interest rate Extension of maturity date Combination of reduction in interest rate and extension of maturity date Other 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 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 – – 4 5 39 – 134 – 183 – 7 372 1 11 23 13 140 – – 1 117 7 – 313 1 1 4 – 1,590 2 1 1 1 3 – 1,604 – – 12 21 5 – 43 – 2 – 1 84 For the year ended December 31, 2020 Reduction in interest rate Extension of maturity date Combination of reduction in interest rate and extension of maturity date Other – 2 – 3 – 3 – 659 – 355 – 3 2 10 37 50 1 68 – – 2 5 2 – 1,025 177 – – – – – 331 5 – 1 1 2 – 340 – 1 – – – 411 17 93 – 1 38 – 561 POPULAR, INC. 2021 ANNUAL REPORT 89 The following tables present, by class, quantitative information related to loans modified as TDRs during the years ended December 31, 2021 and 2020. (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, 2021 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 2 12 43 39 1,774 2 178 2 303 10 8 $ 246 3,612 95,354 6,573 213,661 40 2,223 176 4,222 199 305 $ 211 3,604 90,096 5,719 214,367 38 2,136 228 4,217 206 303 $ 26 177 1,577 745 6,632 5 42 54 899 65 124 2,373 $326,611 $321,125 $10,346 Popular, Inc. For the year ended December 31, 2020 (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 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 During the year ended December 31, 2021, five loans with an aggregate unpaid principal balance of $ 10.2 million were restructured into multiple notes (“Note A / B split”), compared to ten loans with an aggregate unpaid principal balance of $35.1 million during the year ended December 31, 2020, of which a discounted payoff for one loan with an aggregate unpaid principal balance of $1.7 million was completed after the restructuring. The Corporation recorded $0.3 million in charge-offs as part of Note A / B splits during 2020. The recorded investment on these commercial TDRs amounted to approximately $10.2 million at December 31, 2021, compared to $32.9 million at December 31, 2020. These loans were restructured after analyzing the borrowers’ capacity to repay the debt, collateral and ability to perform under the modified terms. 90 POPULAR, INC. 2021 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. Defaulted during the year ended December 31, 2021 Loan count Recorded investment as of first default date 4 4 5 104 81 27 225 $ 8,421 4,500 317 10,543 979 723 $25,483 Defaulted during the year ended December 31, 2020 Loan count Recorded investment as of first default date (Dollars in thousands) Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Mortgage Consumer: Credit cards Personal Total (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 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. 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 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 1 6 4 1 249 317 99 2 679 $ 1,700 933 141 21,497 26,925 2,560 1,660 1 $55,417 reflects the risk of payment default of a borrower in the ordinary course of business. 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 levels of average supervision and attention from Loan Officers. requires average above risk, Special Mention (Scale 10) - Loans classified as special mention have potential weaknesses that deserve left uncorrected, management’s close attention. 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 POPULAR, INC. 2021 ANNUAL REPORT 91 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 characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. the weaknesses inherent Doubtful (Scale 13) - Loans classified as doubtful have all in those classified as 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 tables present 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, 2021 and 2020 by vintage year. 92 POPULAR, INC. 2021 ANNUAL REPORT December 31, 2021 Term Loans Amortized Cost Basis by Origination Year 2021 2020 2019 2018 2017 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 $ – $ – – 24,936 – $ – – 21,288 – $ – 982 34,840 – $ – – 25,311 – $ – – 2,066 4,485 $ 3,025 6,257 31,468 – – 100 11 111 Total commercial multi-family $ 24,936 $ 21,288 $ 35,822 $ 25,311 $ 2,066 $ 45,235 $ Commercial real estate non-owner occupied Watch Special Mention Substandard Pass Total commercial real estate non-owner occupied $ 100,465 $228,852 $ 25,443 $137,044 $ 2,406 $ 205,304 $ 3,237 – – 9,712 24,056 72,407 557,052 18,509 30,155 513,087 7,271 24,200 88,353 – 25,456 37,999 12,563 27,790 88,662 4,608 2,770 42,522 $ 662,216 $357,867 $145,267 $200,499 $ 52,306 $ 858,819 $ 12,949 Commercial real estate owner occupied $ Watch Special Mention Substandard Doubtful Pass Total commercial real estate 8,393 $ 8,612 $ 8,972 $ 6,958 $ 3,039 $ 121,716 $ 5,573 6,960 – 238,533 103,472 113,288 612 429,651 857 1,028 – 198,442 1,427 35,529 – 23,112 7,598 1,646 – 44,943 2,449 1,869 76 32,585 – – – – 16,389 owner occupied $ 259,459 $208,939 $ 63,159 $ 67,026 $ 40,018 $ 768,739 $ 16,389 Commercial and industrial Watch Special Mention Substandard Doubtful Pass Total commercial and industrial Construction Substandard Pass Total construction Mortgage Substandard Pass Total mortgage Leasing Substandard Loss Pass Total leasing $ 186,529 $ 12,542 $ 21,536 $103,835 $ 14,577 $ 14,856 3,041 – 275,357 9,936 1,091 – 335,369 7,380 2,190 – 843,661 28,473 35,826 – 84,084 1,012 66,771 – 72,580 90,776 $108,183 60,397 28,448 38,003 45,168 – 62 702,896 333,869 $1,039,760 $358,938 $314,790 $252,218 $154,940 $ 498,323 $909,479 – $ – $ 485 $ 21,596 41,622 1,148 21,596 $ 41,622 $ 1,633 $ – $ – – $ – $ – – $ – $ – – 22,260 – $ 22,260 – $ 954 $ 5,212 $ 5,613 $ 4,310 $ 122,690 $ 463,742 304,780 223,464 265,239 194,982 4,660,880 $ 463,742 $305,734 $228,676 $270,852 $199,292 $4,783,570 $ $ 124 $ – 613,452 618 $ – 328,085 880 $ – 222,770 613 $ 1 133,112 613 $ 16 62,881 235 $ 2 17,917 $ 613,576 $328,703 $223,650 $133,726 $ 63,510 $ 18,154 $ – – – – – – – $ $ $ $– – – – $– $– – – – $– $– – – – – $– $– – – – – $– $– – $– $– – $– $– – – $– Total $ 4,485 3,025 7,339 139,920 $ 154,769 $ 702,751 67,007 182,778 1,337,387 $2,289,923 $ 157,690 121,376 160,320 688 983,655 $1,423,729 $ 537,978 150,502 192,090 62 2,647,816 $3,528,448 $ $ 485 86,626 87,111 $ 138,779 6,113,087 $6,251,866 $ 3,083 19 1,378,217 $1,381,319 POPULAR, INC. 2021 ANNUAL REPORT 93 Total $ $ $ $ $ 8,577 911,274 919,851 23 3,548 3,571 22,008 38 1,266,014 $ 1,288,060 $ 28,469 53 3,383,665 $ 3,412,187 $ 12,007 613 111,928 $ 124,548 December 31, 2021 Term Loans Amortized Cost Basis by Origination Year 2021 2020 2019 2018 2017 Revolving Loans Amortized Cost Basis Prior Years Revolving Loans Converted to Term Loans Amortized Cost Basis – $ – – $ – $ – – $ – $ – – $ – $ – – $ – $ – – $ – $ – – $ – $ – – $ – $ – – $ – $ – – $ – $ – – $ – $ – 8,577 911,274 – $ 919,851 – $ – – $ 23 3,548 3,571 $ $ $ $ – – – – – – (In thousands) Puerto Rico Consumer: Credit cards Substandard Pass Total credit cards HELOCs Substandard Pass Total HELOCs Personal Substandard Loss Pass $ $ $ $ $ 426 $ 30 539,604 610 $ 2 197,652 2,105 $ 3 227,328 866 $ – 91,341 936 $ – 53,630 15,680 $ 3 120,065 Total Personal $ 540,060 $ 198,264 $ 229,436 $ 92,207 $ 54,566 $ 135,748 $ Auto Substandard Loss Pass $ 3,080 $ 42 1,259,800 7,520 $ 11 808,339 9,498 $ – 637,300 4,739 $ 2,210 $ – 420,293 – 177,104 1,422 $ – 80,829 Total Auto $1,262,922 $ 815,870 $ 646,798 $ 425,032 $179,314 $ 82,251 $ Other consumer Substandard Loss Pass $ – $ – 24,845 114 $ – 9,781 21 $ – 9,348 487 $ 579 5,610 – $ – 3,914 135 $ 34 947 11,250 – 57,483 Total Other consumer $ 24,845 $ 9,895 $ 9,369 $ 6,676 $ 3,914 $ 1,116 $ 68,733 – – – – – – – – $ 1,385 – 36,394 $37,779 $ $ $ $ – – – – – – – – Total Puerto Rico $4,913,112 $2,647,120 $1,898,600 $1,473,547 $749,926 $7,191,955 $1,953,343 $37,779 $20,865,382 94 POPULAR, INC. 2021 ANNUAL REPORT December 31, 2021 Term Loans Amortized Cost Basis by Origination Year 2021 2020 2019 2018 2017 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 $ 8,600 $ 41,348 $ 56,229 $ 20,682 $ 37,343 $ 48,753 28,297 18,644 352,724 3,752 – 241,805 9,013 67,149 201,298 30,244 12,748 144,534 – – 422,613 11,071 – 46,809 $ – – – 4,205 Total commercial multi-family $431,213 $286,905 $333,689 $208,208 $ 95,223 $448,418 $ 4,205 Commercial real estate non-owner occupied Watch Special Mention Substandard Pass Total commercial real estate non-owner occupied $ 12,716 $ 22,109 $ 42,067 $ 56,576 $ 28,604 $154,289 15,569 60,323 346,606 7,025 14,544 211,432 – 756 356,071 10,573 11,384 250,516 3,205 6,405 156,925 2,939 – 543,667 $ 780 – – 8,386 $559,322 $378,936 $208,602 $289,577 $301,077 $576,787 $ 9,166 Commercial real estate owner occupied Watch Special Mention Substandard Pass Total commercial real estate $ – $ – – 129,898 239 $ 7,825 $ 8,150 $ 1,676 $ 17,132 1,800 – 20,841 2,878 63,463 23,845 – 1,148 34,355 – – 26,236 – – 46,737 $ 4,222 – – 3,928 owner occupied $129,898 $ 46,976 $ 43,328 $ 34,873 $ 27,912 $103,236 $ 8,150 Commercial and industrial Watch Special Mention Substandard Loss Pass $ 3,747 $ 4,667 $ 4,292 $ 9,273 $ 2,504 537 262 273,254 7,203 97 58 339,564 670 4,559 108 211,695 481 495 17 191,086 5 $ 1,530 215 59 1,890 168 191 51 339,336 115,146 $ 3,925 8,177 159 – 284,710 Total commercial and industrial $280,304 $351,589 $221,324 $201,352 $115,429 $343,162 $296,971 Construction Watch Special Mention Substandard Pass $ – $ 14,300 $ 23,547 $ 28,757 $ 34,205 $ – – 130,587 – – 136,045 – – 165,105 – 15,438 13,634 – 10,231 36,500 – 13,622 – 7,138 Total construction $130,587 $150,345 $188,652 $ 57,829 $ 80,936 $ 20,760 Mortgage Substandard Pass Total mortgage $ – $ 4,338 $ 3,894 $ 967 $ 326,641 266,212 215,071 61,986 217 $ 12,680 276,948 6,376 $326,641 $270,550 $218,965 $ 62,953 $ 6,593 $289,628 $ $ $ $ – – – – – – – – Total $ 212,955 82,377 98,541 1,413,988 $1,807,861 $ 317,141 39,311 93,412 1,873,603 $2,323,467 $ 39,244 1,800 24,867 328,462 $ 394,373 $ 27,439 19,309 7,905 687 1,754,791 $1,810,131 $ 100,809 13,622 25,669 489,009 $ 629,109 $ 22,096 1,153,234 $1,175,330 $– – – – $– $– – – – $– $– – – – $– $– – – – – $– $– – – – $– $– – $– POPULAR, INC. 2021 ANNUAL REPORT 95 December 31, 2021 Term Loans Amortized Cost Basis by Origination Year 2021 2020 2019 2018 2017 Revolving Loans Amortized Cost Basis Prior Years Revolving Loans Converted to Term Loans Amortized Cost Basis – $ – $ – $ – – – $ – $ – $ – $ – – – $ – $ – $ – $ – – – $ – $ – $ – $ – – – $ – $ – $ – $ – – – $ – $ – $ 10 10 3,006 $ 207 11,423 – – 38,267 $ $ $ – – 935 1,258 20,195 14,636 $ 38,267 $22,388 72 $ – 75,538 81 $ – 19,411 250 $ 4 43,346 73 $ – 7,418 17 $ – 2,802 163 $ 19 5,625 75,610 $ 19,492 $ 43,600 $ 7,491 $ 2,819 $ 5,807 $ 2 – 124 126 – $ – $ – $ – $ – $ – $ – $ – $ – $ – $ – $ 4,658 – $ 4,658 $ $ $ $ – – – – – – Total $ $ $ $ $ 10 10 3,941 1,465 69,885 75,291 658 23 154,264 $ 154,945 $ $ 4,658 4,658 (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 Pass Total Other consumer $ $ $ $ $ $ $ $ Total Popular U.S. $1,933,575 $1,504,793 $1,258,160 $862,283 $629,989 $1,802,434 $361,553 $22,388 $8,375,175 96 POPULAR, INC. 2021 ANNUAL REPORT December 31, 2021 Term Loans Amortized Cost Basis by Origination Year 2021 2020 2019 2018 2017 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 4,216 4,316 4,017 – – 18,098 8,600 $ 41,348 $ 56,229 $ 20,682 $ 37,343 $ 9,013 68,131 236,138 30,244 12,748 169,845 3,752 – 263,093 11,071 – 48,875 – – 447,549 53,238 $ 31,322 24,901 384,192 Total commercial multi-family $ 456,149 $308,193 $369,511 $233,519 $ 97,289 $ 493,653 $ Commercial real estate non-owner occupied Watch Special Mention Substandard Pass $ 113,181 $250,961 $ 67,510 $193,620 $ 31,010 $ 359,593 $ 21,448 30,155 1,056,754 12,563 28,546 444,733 10,476 30,605 245,278 7,025 40,000 249,431 15,181 14,154 293,038 39,625 132,730 903,658 Total commercial real estate non-owner occupied $1,221,538 $736,803 $353,869 $490,076 $353,383 $1,435,606 $ 22,115 Commercial real estate owner occupied $ Watch Special Mention Substandard Doubtful Pass Total commercial real estate 8,393 $ 8,851 $ 16,797 $ 15,108 $ 4,715 $ 138,848 $ 5,573 6,960 – 368,431 105,272 134,129 612 493,114 857 1,028 – 245,179 1,427 38,407 – 46,957 2,449 1,869 76 58,821 7,598 2,794 – 79,298 4,222 – – – 20,317 owner occupied $ 389,357 $255,915 $106,487 $101,899 $ 67,930 $ 871,975 $ 24,539 Commercial and industrial Watch Special Mention Substandard Doubtful Loss Pass Total commercial and industrial $ 190,276 $ 17,209 $ 25,828 $113,108 $ 14,582 $ 15,526 7,600 – 108 487,052 9,884 2,727 – 262 1,116,915 28,954 36,321 – 17 275,170 17,139 1,188 – 58 674,933 1,071 66,939 – 51 187,726 92,306 $ 112,108 68,574 28,663 38,162 47,058 – 62 – 191 987,606 673,205 $1,320,064 $710,527 $536,114 $453,570 $270,369 $ 841,485 $1,206,450 $– – – – $– $– – – – $– $– – – – – $– $– – – – – – $– Total $ 217,440 85,402 105,880 1,553,908 $1,962,630 $1,019,892 106,318 276,190 3,210,990 $4,613,390 $ 196,934 123,176 185,187 688 1,312,117 $1,818,102 $ 565,417 169,811 199,995 62 687 4,402,607 $5,338,579 POPULAR, INC. 2021 ANNUAL REPORT 97 Total $ 100,809 13,622 26,154 575,635 $ 716,220 $ 160,875 7,266,321 $7,427,196 $ 3,083 19 1,378,217 $1,381,319 $– – – – $– $– – $– $– – – $– December 31, 2021 Term Loans Amortized Cost Basis by Origination Year 2021 2020 2019 2018 2017 Revolving Loans Amortized Cost Basis Prior Years Revolving Loans Converted to Term Loans Amortized Cost Basis (In thousands) Popular, Inc. Construction Watch Special Mention Substandard Pass $ – $ 14,300 $ 23,547 $ 28,757 $ 34,205 $ – – 152,183 – 485 166,253 – – 177,667 – 15,438 13,634 – 10,231 36,500 – 13,622 – 7,138 $ – – – 22,260 Total construction $152,183 $191,967 $190,285 $ 57,829 $ 80,936 $ 20,760 $22,260 $ – $ 5,292 $ 9,106 $ 6,580 $ 4,527 $ 135,370 4,937,828 327,225 438,535 570,992 201,358 790,383 $790,383 $576,284 $447,641 $333,805 $205,885 $5,073,198 $ 124 $ – 613,452 618 $ – 328,085 880 $ – 222,770 613 $ 1 133,112 613 $ 16 62,881 235 2 17,917 $ $ $ $613,576 $328,703 $223,650 $133,726 $ 63,510 $ 18,154 $ – – – – – – – Mortgage Substandard Pass Total mortgage Leasing Substandard Loss Pass Total leasing 98 POPULAR, INC. 2021 ANNUAL REPORT December 31, 2021 Term Loans Amortized Cost Basis by Origination Year 2021 2020 2019 2018 2017 Revolving Loans Amortized Cost Basis Prior Years Revolving Loans Converted to Term Loans Amortized Cost Basis – $ – – $ – $ – – – $ – $ – – $ – $ – – – $ – $ – – $ – $ – – – $ – $ – – $ – $ – – – $ – $ – – $ – $ – – – $ – $ – 8,577 911,284 – $ 919,861 3,006 $ 207 11,423 23 – 41,815 $ $ $ – – – 935 1,258 20,195 14,636 $ 41,838 $22,388 498 $ 30 615,142 691 $ 2 217,063 2,355 $ 7 270,674 939 $ – 98,759 953 $ – 56,432 15,843 $ 22 125,690 $ 1,385 – 36,394 Total $ $ $ $ $ 8,577 911,284 919,861 3,964 1,465 73,433 78,862 22,666 61 1,420,278 (In thousands) Popular, Inc. Consumer: Credit cards Substandard Pass Total credit cards HELOCs Substandard Loss Pass Total HELOCs Personal Substandard Loss Pass $ $ $ $ $ Total Personal $ 615,670 $ 217,756 $ 273,036 $ 99,698 $ 57,385 $ 141,555 $ Auto Substandard Loss Pass $ 3,080 $ 42 1,259,800 7,520 $ 11 808,339 9,498 $ – 637,300 4,739 $ – 420,293 2,210 $ – 177,104 1,422 $ – 80,829 Total Auto $1,262,922 $ 815,870 $ 646,798 $ 425,032 $ 179,314 $ 82,251 $ Other consumer Substandard Loss Pass $ – $ – 24,845 114 $ – 9,781 21 $ – 9,348 487 $ 579 5,610 – $ – 3,914 135 $ 34 947 11,250 – 62,141 Total Other consumer $ 24,845 $ 9,895 $ 9,369 $ 6,676 $ 3,914 $ 1,116 $ 73,391 $37,779 $ 1,443,005 $ $ $ $ – – – – – – – – $ 28,469 53 3,383,665 $ 3,412,187 $ 12,007 613 116,586 $ 129,206 Total Popular Inc. $6,846,687 $4,151,913 $3,156,760 $2,335,830 $1,379,915 $8,994,389 $2,314,896 $60,167 $29,240,557 POPULAR, INC. 2021 ANNUAL REPORT 99 2 – 124 126 – – – – 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 $ 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 19,220 26,921 – – 119,709 28,507 55,220 54 – 218,716 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 $ – – – – – – 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 100 POPULAR, INC. 2021 ANNUAL REPORT $ $ $ 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 $– – – – $– $– – – – $– $– – – – – $– $– – – – – – $– $– – – $– $– – $– $– – $– 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 Total Other consumer $ $ – $ 16 $ 16,912 15,698 1,376 $ 13,158 240 $ 174 $ 4,966 2,828 13,075 $ 3,785 – 54,437 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 POPULAR, INC. 2021 ANNUAL REPORT 101 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 70,224 40,528 142,432 4,760 18,642 231,904 15,304 36,495 224,256 20,028 28,984 214,495 – 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 – 1,152 47,484 192 2,361 47,451 – 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 2,029 410,349 – 6,568 196,958 30 $ 3,621 $ 1,196 $ 8,488 $ 3,972 1,637 – 2,394 – 102,369 198,249 4,807 – 123,762 1,634 – 132,993 4,756 5,980 300,846 Total commercial and industrial $442,560 $205,499 $198,279 $138,248 $129,765 $320,070 $110,372 Construction Watch Special Mention Substandard Pass $ 8,451 $ – – 79,489 – $ – – 288,865 – $ 37,015 $ – 20,655 168,411 3,089 9,372 99,814 – $ 2,065 $ 30,083 – 7,560 – 5,841 8,392 Total construction $ 87,940 $288,865 $189,066 $149,290 $ 15,952 $ 37,989 $ Mortgage Substandard Pass Total mortgage $ 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 $ – – – – – – – – 102 POPULAR, INC. 2021 ANNUAL REPORT 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 $ 35,406 26,890 16,971 1,465,526 $1,544,793 $ 47,531 33,172 37,587 650,812 $ 769,102 $ 14,865 1,105,672 $1,120,537 $– – – – $– $– – – – $– $– – – – $– $– – – – $– $– – – – $– $– – $– 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 POPULAR, INC. 2021 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 $ 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 $1,043,036 246,258 211,862 123 13 4,272,609 $5,773,901 $– – – – $– $– – – – $– $– – – – – $– $– – – – – – $– (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 $ 147,682 $ 79,794 $182,806 $ 43,939 $ 65,164 $ 276,344 $ 247,307 87,900 47,495 51,430 26,769 1 1 – 13 623,234 301,167 42,366 34,970 – – 1,591,748 19,220 26,921 – – 317,958 33,263 61,200 54 – 519,562 10,297 8,748 67 – 689,736 5,717 1,824 – – 229,204 $1,816,766 $788,642 $546,905 $419,371 $301,909 $ 890,423 $1,009,885 Commercial and industrial Watch Special Mention Substandard Doubtful Loss Pass Total commercial and industrial 104 POPULAR, INC. 2021 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. Construction Watch Special Mention Substandard Pass $ 8,451 – – 95,212 $ 105 – – 311,273 $ 4,895 – 20,655 171,834 $ 37,015 3,089 30,869 163,396 $ – – 7,560 8,392 $ 2,065 30,083 – 5,841 $ 960 – – 24,513 Total construction $103,663 $311,378 $197,384 $234,369 $ 15,952 $ 37,989 $25,473 Mortgage Substandard Pass $ 783 620,312 $ 903 499,679 $ 2,393 280,697 $ 3,129 221,987 $ 4,702 235,354 $ 172,646 5,848,095 Total mortgage $621,095 $500,582 $283,090 $225,116 $240,056 $6,020,741 Leasing Substandard Pass $ 200 480,964 $ 822 315,022 $ 748 209,340 $ 913 109,708 $ 617 63,955 Total leasing $481,164 $315,844 $210,088 $110,621 $ 64,572 $ $ 136 15,236 15,372 $ $ $ $ – – – – – – $– – – – $– $– – $– $– – $– Total $ 53,491 33,172 59,084 780,461 $ 926,208 $ 184,556 7,706,124 $7,890,680 $ 3,436 1,194,225 $1,197,661 POPULAR, INC. 2021 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 – $ – – $ – $ – – – $ – $ – – $ – $ – – – $ – $ – – $ – $ – – – $ – $ – – $ – $ – – – $ – $ – – $ – $ – – – $ – $ – 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 $29,385,196 106 POPULAR, INC. 2021 ANNUAL REPORT 152 2 2,336 2,490 – – – Note 10 - 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, repurchased loans, including interest advances, and trading 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 profit (loss): Realized gains (losses) on closed derivative positions Total trading account profit (loss) Losses on repurchased loans, including interest advances [1] Total mortgage banking activities Years ended December 31, 2019 2020 2021 $ 38,105 (10,206) $ 43,234 (42,055) $ 46,952 (27,430) 27,899 21,684 1,179 31,215 19,522 18,817 1,323 1,323 (10,586) (10,586) (6,246) (6,246) (773) (11,407) – $ 50,133 $ 10,401 $ 32,093 [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. Note 11 - Transfers of financial assets and mortgage servicing assets The Corporation typically transfers conforming residential mortgage loans in conjunction with GNMA, FNMA and FHLMC securitization transactions whereby the loans are exchanged for cash or securities and servicing rights. As seller, the Corporation has made 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 23 certain representations to the Consolidated Financial Statements for a description of such arrangements. a result of incurred as No liabilities were these securitizations during the years ended December 31, 2021 and 2020 because they did not contain any credit recourse arrangements. The Corporation recorded a net gain of $18.4 million and $27.3 million, respectively, during the years ended December 31, 2021 and 2020 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, 2021 and 2020: (In thousands) Assets Trading account debt securities: Mortgage-backed securities - GNMA Mortgage-backed securities - FNMA Mortgage-backed securities - FHLMC Total trading account debt securities Mortgage servicing rights Total Proceeds Obtained During the Year Ended December 31, 2021 Level 1 Level 2 Level 3 Initial fair value $– – – $– $– $– $380,228 329,617 22,688 $732,533 $ – $732,533 $ $ – – – – $11,314 $11,314 $380,228 329,617 22,688 $732,533 $ 11,314 $743,847 POPULAR, INC. 2021 ANNUAL REPORT 107 (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, 2021, the Corporation retained servicing rights on whole loan sales involving approximately $144 million in principal balance outstanding (2020 - $147 million), with net realized gains of approximately $3.2 million (2020 - $3.9 million). All loan sales performed during the years ended December 31, 2021 and 2020 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 (“MSRs”) are measured at fair value. 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 including use in estimating future net servicing income, estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, prepayment considerations. Prepayment speeds are adjusted for the loans’ characteristics and portfolio behavior. among other and late fees, 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 Residential mortgage loans serviced for others were $12.1 billion at December 31, 2021 (2020 - $12.9 billion). activities Statements 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 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, 2021, those weighted average mortgage servicing fees were 0.30% (2020 - 0.31%). Under these servicing agreements, the banking subsidiaries do not generally earn significant prepayment penalty fees on the underlying loans serviced. 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, 2021 and 2020 were as follows: Years ended December 31, 2021 December 31, 2020 BPPR PB BPPR PB 6.8% 19.0% 7.6% 21.9% 8.3 10.5% 10.7% 10.9% 10.5% 20.9 8.7 3.6 Prepayment speed Weighted average life (in years) Discount rate (annual rate) The following table presents the changes in MSRs measured using the fair value method for the years ended December 31, 2021 and 2020. 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 December 31, 2021 December 31, 2020 $118,395 13,391 $150,906 9,544 (15,383) (1,233) (11,692) (11,060) 6,410 (10) (19,327) 24 Fair value at end of period [2] $121,570 $118,395 [1] Represents changes due to collection / realization of expected cash flows over time. [2] At December 31, 2021, PB had MSRs amounting to $1.6 million (December 31, 2020 - $0.7 million). 108 POPULAR, INC. 2021 ANNUAL REPORT 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 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, 2021, the Corporation serviced $0.7 billion (2020 - $0.9 billion) in residential mortgage loans with credit recourse to the Corporation, from which $26 million was 60 days or more past due (2020 - $52 million). Also refer to Note 23 for information on changes in the Corporation’s liability of estimated losses related to loans serviced with credit recourse. Under 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 individual Originated MSRs Purchased MSRs December 31, December 31, December 31, December 31, 2021 $40,058 7.1 7.7% $ (1,500) $ (2,359) 11.2% $ (2,079) $ (3,452) 2020 $44,129 6.2 6.6% $ (1,115) $ (2,194) 11.3% $ (1,640) $ (3,175) 2021 $81,512 7.5 7.6% $ (1,486) $ (3,495) 11.0% $ (2,731) $ (5,832) 2020 $74,266 5.9 7.1% $ (2,206) $ (4,312) 11.1% $ (2,740) $ (5,301) Corporation was the pool issuer. At December 31, 2021, the Corporation had recorded $13 million in mortgage loans on its Consolidated Statements of Financial Condition related to this buy-back option program (2020 - $57 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 mortgage-backed security, the MSR is recognized by the Corporation. During the year ended December 31, 2021, the Corporation repurchased approximately $94 million of mortgage loans from its GNMA servicing portfolio (2020 - $862 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 United States Department of Agriculture (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 POPULAR, INC. 2021 ANNUAL REPORT 109 Note 12 - 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 - Depreciation and amortization of premises and equipment for the year 2021 was $55.1 million (2020 -$58.4 million; 2019 $25.2 million (2020 - $27.2 million; 2019 - $27.3 million) was charged to occupancy expense and $29.8 million (2020 - $31.2 million; equipment, 2019 $30.8 million) was $58.1 million), of which charged to - Useful life in years 2021 2020 10-50 2-10 3-10 $ 94,246 $109,780 468,293 374,192 87,406 929,891 559,234 370,657 29,337 512,131 350,014 87,289 949,434 574,835 374,599 25,862 $494,240 $510,241 communications and other operating expenses. Occupancy expense of premises and equipment is net of rental income of $13.4 million (2020 - $15.5 million; 2019 - $19.3 million). For finance information related to the amortization expense of leases, refer to Note 33 -Leases. Note 13 - Other real estate owned The following tables present the activity related to Other Real Estate Owned (“OREO”), for the years ended December 31, 2021, 2020 and 2019. For the year ended December 31, 2021 OREO Commercial/Construction OREO Mortgage (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 Ending balance (In thousands) Balance at beginning of period Write-downs in value Additions Sales Other adjustments Ending balance 110 POPULAR, INC. 2021 ANNUAL REPORT For the year ended December 31, 2020 OREO Commercial/Construction OREO Mortgage $13,214 (1,058) 9,746 (7,282) 397 $15,017 $16,959 (1,564) 2,223 (4,359) (45) $13,214 $21,794 (1,584) 6,801 (9,892) (160) $16,959 $ 69,932 (2,161) 55,898 (52,666) (943) Total $ 83,146 (3,219) 65,644 (59,948) (546) $ 70,060 $ 85,077 $105,113 (3,060) 17,785 (49,797) (109) Total $122,072 (4,624) 20,008 (54,156) (154) $ 69,932 $ 83,146 $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, 2019 OREO Commercial/Construction OREO Mortgage Note 14 - 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 33) Finance ROU assets (Note 33) Others December 31, 2021 December 31, 2020 $ 657,597 $ 851,592 298,988 37,924 79,845 26,093 65,460 53,942 98,001 141,748 13,459 155,514 250,467 32,615 74,572 20,785 65,429 65,671 80,477 131,921 15,464 148,048 Total other assets $1,628,571 $1,737,041 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, 2021, the total capitalized implementation costs amounted to $18.4 million with an accumulated amortization of $8.8 million for a net value of $9.6 million, compared to total capitalized implementation costs amounting to $17.4 million with an accumulated amortization of $4.9 million for a net value of $12.5 million as of December 31, 2020. Total amortization expense for all capitalized implementation costs of hosting arrangements that are service contracts for the year ended December 31, 2021 was $3.9 million (December 31, 2020 - $2.2 million). Note 15 - Goodwill and other intangible assets The changes in the carrying amount of goodwill for the year ended December 31, 2021, allocated by reportable segments, were as follows (refer to Note 37 for the definition of the Corporation’s reportable segments): (In thousands) Banco Popular de Puerto Rico Popular U.S. Total Popular, Inc. 2021 Balance at January 1, 2021 Goodwill on acquisition Balance at December 31,2021 $320,248 350,874 $671,122 $ – 49,171 $49,171 $320,248 400,045 $720,293 The goodwill recognized during the year ended December 31, 2021 in the reportable segment of Popular U.S. of $49 million was related to the K2 Transaction. Refer to Note 4, Business combination, for additional information related to the K2 Transaction, including the goodwill and other intangible assets recognized. There were no changes in the carrying amount of goodwill for the year ended December 31, 2020. At December 31, 2021, the Corporation had $0.7 million of identifiable intangible assets with indefinite useful lives, compared to $6.1 million at December 31, 2020, due to the recognition of an impairment loss of $5.4 million associated with a trademark. The following table reflects the components of other intangible assets subject to amortization: (In thousands) December 31, 2021 Core deposits Other customer relationships Total other intangible assets December 31, 2020 Core deposits Other customer relationships Trademark Total other intangible assets Gross Carrying Amount $12,810 14,286 $27,096 $12,810 26,397 488 $39,695 Accumulated Amortization $ 8,754 2,883 $11,637 $ 7,473 15,684 236 $23,393 Net Carrying Value $ 4,056 11,403 $15,459 $ 5,337 10,713 252 $16,302 POPULAR, INC. 2021 ANNUAL REPORT 111 During the year ended December 31, 2021, $15.0 million in other customer relationships became fully amortized and thus were removed from the Corporation’s intangibles assets, from which $14.2 million were recognized as part of the purchase of the American Airlines co-branded credit card portfolio during 2011. During the year ended December 31, 2021, the Corporation recognized $ 9.1 million in amortization expense related to other intangible assets with definite useful lives, which includes the previously mentioned $5.4 million impairment loss (2020 - $ 6.4 million; 2019 - $9.4 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 2022 Year 2023 Year 2024 Year 2025 Year 2026 Later years $3,299 3,179 2,938 1,750 1,416 2,877 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. 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 2021 using July 31, 2021 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 well 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 as discounted cash flow analysis. transactions, Management evaluates the particular circumstances of each reporting unit in order to determine the most appropriate valuation methodology and the weights applied to each applicable. The Corporation valuation methodology, valuation results the evaluates as obtained under each 112 POPULAR, INC. 2021 ANNUAL REPORT 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 value drivers. For purposes of comparable 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. the market approach, For purposes of the discounted cash flows financial projections presented to (“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 valuation date) the / 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 (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 11.34% to 15.13% for the 2021 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, 2021. The results of the BPPR annual goodwill impairment test as of July 31, 2021 indicated that the average estimated fair value using all valuation methodologies exceeded BPPR’s equity value by approximately $1.5 billion or 50% compared to $282 million or 9%, for the annual goodwill impairment test completed as of July 31, 2020. PB’s annual goodwill impairment test results as of such dates indicated that the valuation methodologies exceeded PB’s equity value by approximately $412 million or 24%, compared to $215 million or 13%, for the annual goodwill impairment test completed as of July 31, 2020. 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, 2021 valuation date. value using estimated average fair all 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, 2021 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 related to global 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 response thereto. A decline in the Corporation’s stock regional macroeconomic price and/or in the Puerto Rico conditions, earnings economy 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 impairment would not impact regulatory capital calculations. the continued weakness reduced future and fiscal situation, 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, 2021 December 31, 2020 Balance at December 31, 2021 (gross amounts) $324,049 564,456 $888,505 Accumulated impairment losses $ 3,801 164,411 $168,212 Balance at December 31, 2021 (net amounts) $320,248 400,045 $720,293 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 POPULAR, INC. 2021 ANNUAL REPORT 113 At December 31, 2021, public sector deposits amounted to $20.3 billion. A significant portion of Puerto Rico public sector deposits are expected to be used by Puerto Rico pursuant to the Plan of Adjustment for Puerto Rico confirmed by the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) Title III Court, which is expected to become effective on or about March 15, 2022. However, the receipt by the P.R. Government of additional COVID-19 and hurricane recovery tax collections, could increase public deposit balances at BPPR in the near term. The rate at which public deposit balances will decline is uncertain and difficult to predict. The amount and timing of any such reduction is likely to be impacted by, for example, the implementation of PROMESA and the speed at which COVID-19 federal assistance is distributed. related Federal assistance, seasonal and Note 17 - Borrowings Assets sold under agreements to repurchase Assets sold under agreements to repurchase amounted to $92 million at December 31, 2021 and $121 million December 31, 2020. 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 Note 16 - Deposits Total interest bearing deposits as of the end of the periods presented consisted of: (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 $250,000 $250,000 and over Total certificates of deposit December 31, 2021 December 31, 2020 $15,871,998 $14,031,736 28,736,459 22,398,057 44,608,457 36,429,793 4,086,059 2,626,090 6,712,149 4,524,794 2,783,054 7,307,848 Total interest bearing deposits $51,320,606 $43,737,641 A summary of December 31, 2021 follows: certificates of deposits by maturity at (In thousands) 2022 2023 2024 2025 2026 2027 and thereafter Total certificates of deposit $4,043,357 864,315 681,201 511,710 534,030 77,536 $6,712,149 At December 31, 2021, the Corporation had brokered deposits amounting to $0.8 billion (December 31, 2020 - $0.8 billion). The aggregate amount of overdrafts in demand deposit accounts that were reclassified to loans was $6 million at December 31, 2021 (December 31, 2020 - $3 million) 114 POPULAR, INC. 2021 ANNUAL REPORT 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 - After 90 days Total mortgage-backed securities Collateralized mortgage obligations Within 30 days Total collateralized mortgage obligations Total 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 (Dollars in thousands) Maximum aggregate balance outstanding at 2021 2020 any month-end $92,101 $195,498 Average monthly aggregate balance outstanding Weighted average interest rate: For the year At December 31 December 31, 2021 December 31, 2020 Repurchase liability Repurchase liability weighted average interest rate Repurchase liability Repurchase liability weighted average interest rate $19,538 30,295 29,036 78,869 11,733 – 722 12,455 279 279 $91,603 0.30% 0.21 0.29 0.26 0.26 – 0.16 0.26 0.25 0.25 0.26% $ 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% Other short-term borrowings At December 31, 2021, other short-term borrowings consisted of $75 million in FHLB Advances. There were no other short-term borrowings outstanding at December 31, 2020. The following table presents additional information related to the Corporation’s other short-term borrowings for the years ended December 31, 2021 and December 31, 2020. (Dollars in thousands) Maximum aggregate balance outstanding at 2021 2020 any month-end $75,000 $100,000 $91,394 $143,718 Average monthly aggregate balance 0.35% 0.26% 1.63% 1.11% outstanding Weighted average interest rate: For the year At December 31 $ 343 $ 21,557 0.35% 0.35% 0.56% 0.73% POPULAR, INC. 2021 ANNUAL REPORT 115 Notes payable included junior subordinated debentures issued by the Corporation that were associated to capital issued by the Popular Capital Trust I. On November 1, 2021, the Corporation redeemed all outstanding 6.70% Cumulative Monthly Income Trust Preferred Securities (the “Capital Securities”) issued by the Popular Capital Trust I (liquidation amount of $25 per security and amounting to approximately $187 million (or approximately $181 million after excluding Popular’s participation in the Trust of approximately $6 million) in the aggregate). The redemption price for the Capital Securities was equal to $25 per security plus accrued and unpaid distributions up to and excluding the redemption date in the amount of $0.139583 per security, for a total payment per security in the amount of $25.139583. Upon redemption, Popular delisted the Capital Securities of Popular Capital Trust I (NASDAQ: BPOPN) from the Nasdaq Global Select Market. Notes Payable The following table presents the composition of notes payable at December 31, 2021 and December 31, 2020. (In thousands) Advances with the FHLB with maturities ranging from 2022 through 2029 paying interest at monthly fixed rates ranging from 0.39% to 3.18% (2020 - 0.39% to 4.19%) Advances with the FRB maturing on 2022 paying interest at annual fixed rate of 0.35% [1] Unsecured senior debt securities maturing on 2023 paying interest semiannually at a fixed rate of 6.125%, net of debt issuance costs of $2,158 (2020 - $3,426) Junior subordinated deferrable interest debentures (related to trust preferred securities) maturing on 2034 with fixed interest rates ranging from 6.125% to 6.564% (2020 - 6.125% to 6.70%), net of debt issuance costs of $342 (2020 - $369) Total notes payable December 31, 2021 December 31, 2020 $492,429 $ 542,469 – 1,009 297,842 296,574 198,292 384,929 $988,563 $1,224,981 [1] During the second quarter of 2021, the Paycheck Protection Program Liquidity Facility advance was prepaid. A breakdown of borrowings by contractual maturities at December 31, 2021 is included in the table below. (In thousands) 2022 2023 2024 2025 2026 Later years Total borrowings Assets sold under agreements to repurchase Short-term borrowings Notes payable $91,603 – – – – – $91,603 75,000 – – – – – 75,000 Total $ 269,751 341,103 91,943 139,920 74,500 237,949 $103,148 341,103 91,943 139,920 74,500 237,949 $988,563 $1,155,166 At December 31, 2021 and 2020, the Corporation had FHLB borrowing facilities whereby the Corporation could borrow up to $3.0 billion, of which $0.6 billion and $0.5 billion, respectively, were used. In addition, at December 31, 2021 and 2020, the Corporation had placed $1.2 billion and $0.9 billion, respectively, of the available FHLB credit facility as collateral for municipal letters of credit to secure deposits. The FHLB borrowing loans held-in-portfolio, and do not have restrictive covenants or callable features. collateralized facilities with are Also, at December 31, 2021, the Corporation has a borrowing facility at the Federal Reserve Bank of New York amounting to $1.3 billion (2020 - $1.4 billion), which remained unused at December 31, 2021 and December 31, 2020. the discount window of Note 18 - Trust preferred securities Statutory trusts established by the Corporation (Popular Capital Trust I, Popular North America Capital Trust I and Popular II) had issued trust preferred securities Capital Trust 116 POPULAR, INC. 2021 ANNUAL REPORT (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 interest debentures (the “junior subordinated debentures”) issued by the Corporation. 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. 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 As disclosed in Note 17, on November 1, 2021, Corporation redeemed all outstanding trust preferred securities amounting to issued by the Popular Capital Trust approximately $187 million (or approximately $181 million after excluding the Corporation’s participation in the Trust of approximately $6 million) in the aggregate. I The junior subordinated debentures are included by the Corporation as notes payable in the Consolidated Statements of The following tables presents financial data pertaining to the different trusts at December 31, 2021 and 2020. (Dollars in thousands) Issuer Capital securities Distribution rate Common securities Junior subordinated debentures aggregate liquidation amount Stated maturity date Reference notes December 31, 2021 Popular North America Capital Trust I Popular Capital Trust Il $ $ $ 91,651 6.564% 2,835 94,486 September 2034 [1],[3],[5] $ $ $ 101,023 6.125% 3,125 104,148 December 2034 [2],[4],[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 obligation of PNA under the junior subordinated debenture and its guarantees of the capital securities under the trust is fully and unconditionally guaranteed on a subordinated basis by the Corporation to the extent set forth in the 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 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. (Dollars in thousands) Issuer Capital securities Distribution rate Common securities Junior subordinated debentures aggregate liquidation amount Stated maturity date Reference notes December 31, 2020 Popular North America Capital Trust I Popular Capital Trust I Popular Capital Trust Il $ $ $ 181,063 6.700% 5,601 186,664 November 2033 [2],[4],[5] $ $ $ 91,651 6.564% 2,835 94,486 September 2034 [1],[3],[5] $ $ $ 101,023 6.125% 3,125 104,148 December 2034 [2],[4],[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 obligation of PNA under the junior subordinated debenture and its guarantees of the capital securities under the trust is fully and unconditionally guaranteed on a subordinated basis by the Corporation to the extent set forth in the 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. 2021 ANNUAL REPORT 117 At December 31, 2021, the Corporation’s $193 million in trust preferred securities outstanding do not qualify for Tier 1 capital instead qualify for Tier 2 capital treatment compared to $374 million at December 31, 2020. treatment, but Note 19 - 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 33) Finance lease liabilities (Note 33) Pension benefit obligation Postretirement benefit obligation Others December 31, 2021 December 31, 2020 $308,594 33,227 91,804 35,937 13,789 12,806 12,639 43,886 154,114 19,719 8,778 161,988 70,967 $ 235,449 38,622 69,784 33,701 720,212 57,189 24,781 41,452 152,588 22,572 35,568 179,211 73,560 Total other liabilities $968,248 $1,684,689 Note 20 - 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 preferred stock 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 the Corporation’s Board of Directors. factors deemed relevant by and other 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, 2021 consisted of: 118 POPULAR, INC. 2021 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, 2021, 2020 and 2019. Outstanding shares of 2003 Series A Preferred Stock amounted to 885,726 at December 31, 2021, 2020 and 2019. 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 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 Corporation with the consent of the Board 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 year ended December 31, 2019. Common stocks Dividends During the year 2021, cash dividends of $1.75 (2020 - $1.60; 2019 - $1.20) per common share outstanding were declared amounting to $142.3 million (2020 - $136.6 million; 2019 - $116.0 million) of which $35.9 million were payable to shareholders of common stock at December 31, 2021 (2020 - $33.7 million; 2019 -$29.0 million). The quarterly dividend of $0.45 per share declared to shareholders of record as of the close of business on December 7, 2021, was paid on January 3, 2022. On January 12, 2022, the Corporation announced as part of its capital plan for 2022, an increase in its quarterly common stock dividend from $0.45 to $0.55 per share, beginning in the second quarter of 2022, subject to approval by its Board of Directors. On February 23, 2022, the Corporation’s Board of Directors approved a quarterly cash dividend of $0.55 per share on its outstanding common stock, payable on April 1, 2022 to shareholders of record at the close of business on March 15, 2022. the initial 3,785,831 shares, Accelerated share repurchase transaction (“ASR”) On May 3, 2021, the Corporation entered into a $350 million ASR transaction with respect to its common stock, which was accounted for as a treasury stock transaction. As a result of the receipt of the Corporation recognized in stockholders’ equity approximately $280 million in treasury stock and $70 million as a reduction in capital surplus. The Corporation completed the transaction on September 9, 2021 and received 828,965 additional shares of common stock and recognized $61 million in treasury stock with a corresponding increase in capital surplus. In total, the Corporation repurchased a total of 4,614,796 shares at an average price of $75.8430 under the ASR Agreement. the receipt of On January 30, 2020, the initial 7,055,919 shares, 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. 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 fund amounted to $786 million at December 31, 2021 (2020 - $708 million; 2019 - $659 million). During 2021, $78 million was transferred to the statutory reserve account (2020 - $49 million, 2019 - $60 million). BPPR was in compliance with the statutory reserve requirement in 2021, 2020 and 2019. statutory reserve Note 21 - 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 capitalized requirements, regulatory capital ratios and compliance with the standardized approach for determining risk-weighted assets. including minimum and well 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, 2021 and 2020, the Corporation exceeded all capital adequacy requirements to which it is subject. POPULAR, INC. 2021 ANNUAL REPORT 119 The following tables present the Corporation’s risk-based capital and leverage ratios at December 31, 2021 and 2020 under the Basel III regulatory guidance. Capital adequacy minimum requirement (including conservation capital buffer) [1] Actual (Dollars in thousands) Amount Ratio Amount Ratio 2021 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 $6,084,105 19.35% $3,301,329 2,376,184 4,281,930 18.92 852,032 1,361,911 16.78 10.500% 10.500 10.500 $5,476,031 17.42% $2,200,886 1,584,123 3,998,102 17.67 568,021 1,309,398 16.14 $5,498,174 17.49% $2,672,504 1,923,577 3,998,102 17.67 689,740 1,309,398 16.14 7.41% $2,969,535 $5,498,174 2,561,003 6.24 3,998,102 389,736 1,309,398 13.44 7.000% 7.000 7.000 8.500% 8.500 8.500 4% 4 4 [1] The conservation capital buffer included for these ratios is 2.5%, except for the Tier I to Average Asset ratio for which the buffer is not applicable and therefore the capital adequacy minimum of 4% is presented. 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 interim transition period option as permitted in the final 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. to to the that clarified banking including organizations agencies have 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 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, 2021, the Corporation has $353 million in PPP loans and no loans were pledged as collateral for PPPL Facilities. At December 31, 2021 and 2020, BPPR and PB were well- regulatory framework for prompt the capitalized under corrective action. 120 POPULAR, INC. 2021 ANNUAL REPORT Capital adequacy minimum requirement (including conservation capital buffer) Actual 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 2021 2020 2020 (Dollars in thousands) Amount Ratio Amount Ratio 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 7.80% $2,572,201 $5,014,239 2,169,835 7.26 3,940,385 385,685 1,190,758 12.35 4% 4 4 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 $2,263,032 811,459 10% $2,274,660 739,976 10 10% 10 $1,470,971 527,448 6.5% $1,478,529 480,985 6.5 6.5% 6.5 $1,810,426 649,167 8% $1,819,728 591,981 8 $3,201,254 487,171 5% $2,712,294 482,106 5 8% 8 5% 5 POPULAR, INC. 2021 ANNUAL REPORT 121 Note 22 - Other comprehensive (loss) income The following table presents changes in accumulated other comprehensive (loss) income by component for the years ended December 31, 2021, 2020 and 2019. Changes in Accumulated Other Comprehensive (Loss) Income by Component [1] Years ended December 31, 2020 2019 2021 $ (71,254) $ (56,783) $ (49,936) 3,947 3,947 (14,471) (14,471) (6,847) (6,847) $ (67,307) $ (71,254) $ (56,783) $(195,056) $(202,816) $(203,836) 23,094 (5,645) (13,671) 12,968 36,062 13,405 7,760 14,691 1,020 $(158,994) $(195,056) $(202,816) $ 460,900 $ 92,155 $(173,811) (557,002) 368,780 265,950 (18) (35) 16 (557,020) 368,745 265,966 $ (96,120) $ 460,900 $ 92,155 $ (4,599) $ (2,494) $ (391) – 367 1,584 1,951 – (6,400) 4,295 (2,105) (50) (4,439) 2,386 (2,103) $ (2,648) $ (4,599) $ (2,494) $(325,069) $ 189,991 $(169,938) (In thousands) Foreign currency translation Beginning Balance Other comprehensive income (loss) Net change Ending balance Adjustment of pension and postretirement benefit plans Beginning Balance Other comprehensive income (loss) before reclassifications Amounts reclassified from accumulated other comprehensive loss for amortization of net losses Net change Unrealized net holding (losses) gains on debt securities Beginning Balance Ending balance Other comprehensive (loss) income before reclassifications Amounts reclassified from accumulated other comprehensive income (loss) for (gains) losses on securities 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 income (loss) before reclassifications Amounts reclassified from accumulated other comprehensive loss Net change Ending balance Total [1] All amounts presented are net of tax. 122 POPULAR, INC. 2021 ANNUAL REPORT The following table presents the amounts reclassified out of each component of accumulated other comprehensive (loss) income for the years ended December 31, 2021, 2020, and 2019. (In thousands) Reclassifications Out of Accumulated Other Comprehensive (Loss) Income Years ended December 31, 2019 2020 2021 Affected Line Item in the Consolidated Statements of Operations Adjustment of pension and postretirement benefit plans Amortization of net losses Other operating expenses Total before tax Income tax benefit Total net of tax Unrealized net holding (losses) gains 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 Total net of tax $(20,749) $(21,447) $(23,508) (20,749) (21,447) (23,508) 7,781 8,042 8,817 $(12,968) $(13,405) $(14,691) $ $ $ $ 23 23 (5) $ 41 41 (6) (20) (20) 4 18 $ 35 $ (16) (704) $ (5,559) $ (3,992) (1,143) (1,847) (820) 110 (6,379) (3,882) 263 2,084 1,496 $ (1,584) $ (4,295) $ (2,386) Total reclassification adjustments, net of tax $(14,534) $(17,665) $(17,093) Note 23 - 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, 2021, the Corporation recorded a liability of $0.2 million (December 31, 2020 - $0.2 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, 2021 and 2020, shown in Note 24, represent the maximum potential amount of the Corporation could be required to make under the guarantees in the event of nonperformance by the customers. These standby future payments that in standby outstanding letters of 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, to the underlying collateral the Corporation has 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”) to credit recourse or to certain commercial representations and warranties from the Corporation to the purchaser. These representations and warranties may relate, for example, to borrower creditworthiness, loan documentation, and early payment defaults. The collateral, prepayment Corporation may be required to repurchase the loans under the credit recourse agreements or representation and warranties. loans subject At December 31, 2021, the Corporation serviced $0.7 billion (December 31, 2020 - $0.9 billion) in residential mortgage loans subject to credit recourse provisions, principally loans POPULAR, INC. 2021 ANNUAL REPORT 123 the recourse arrangements 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 in the event of make under nonperformance by the borrowers is equivalent to the total outstanding balance of the residential mortgage loans serviced with recourse and interest, if applicable. During 2021, the Corporation repurchased approximately $19 million of unpaid principal balance in mortgage loans subject to the credit recourse provisions (2020 - $161 million, which 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 recourse). 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, 2021, the Corporation’s liability established to cover the estimated credit loss exposure related to loans sold or serviced with credit recourse amounted to $12 million (December 31, 2020 - $22 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, 2021 and 2020. the Corporation has rights (In thousands) Balance as of beginning of period Impact of adopting CECL Provision (benefit) for recourse liability Net charge-offs Balance as of end of period Years ended December 31, 2020 2021 $22,484 – (2,948) (7,736) $34,862 (3,831) (104) (8,443) $11,800 $22,484 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 necessary, when additional information becomes available. The methodology used to estimate the recourse liability is a function of the recourse arrangements given and considers a variety of factors, which include actual defaults and loss experience, foreclosure rate, estimated future historical relevant in the sold” 124 POPULAR, INC. 2021 ANNUAL REPORT 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 delinquent within the twelve-month period. following 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 in Puerto Rico group Corporation’s mortgage operations 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, 2021 and reinstate to 2020. A substantial amount of performing status or have mortgage insurance, and thus the ultimate losses on the loans are not deemed significant. these loans The table presents following 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, 2021 and 2020. changes the (In thousands) Balance as of beginning of period Provision (benefit) for representation and warranties Balance as of end of period Years ended December 31, 2020 2021 $ 2,297 $3,212 (1,458) (915) $ 839 $2,297 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, 2021, the Corporation serviced $12.1 billion in mortgage loans for third-parties, including the loans serviced with credit recourse (December 31, 2020 - $12.9 billion). The Corporation generally recovers funds advanced pursuant to in the meantime, 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, 2021, the outstanding balance of funds advanced by the Corporation under such mortgage loan servicing agreements was approximately $54 million (December 31, the mortgage loans 2020 - $66 million). To the extent underlying the Corporation’s servicing portfolio experience 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. guarantees Inc. Holding Company (“PIHC”) fully and Popular, unconditionally certain borrowing obligations issued by certain of its 100% owned consolidated subsidiaries amounting to $94 million at both December 31, 2021 and December 31, 2020, at both respectively. December 31, 2021 and December 31, 2020, PIHC fully and basis unconditionally $193 million and $374 million, respectively, 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 18 to the consolidated financial statements for further information on the trust preferred securities. In addition, subordinated guaranteed on a Note 24 - Commitments and contingencies Off-balance sheet risk the financial needs of The Corporation is a party to financial instruments with off-balance sheet credit risk in the normal course of business to meet its customers. These financial 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. 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, 2021 December 31, 2020 $5,382,089 $5,226,660 lines of credit 3,830,601 3,805,459 Other consumer unused credit commitments Commercial letters of credit Standby letters of credit Commitments to originate or fund 250,229 3,260 27,848 257,312 1,864 22,266 mortgage loans 95,372 96,786 the At December 31, 2021 and December 31, 2020, Corporation maintained a reserve of approximately $7.9 million and $15.9 million, respectively, for potential losses associated with unfunded loan commitments related to commercial, construction and consumer lines of credit. Other commitments At December 31, 2021, the Corporation also maintained other non-credit commitments for approximately $1.0 million and $1.4 million, respectively, primarily for the acquisition of other investments. and December 31, 2020, the and, residential Puerto Rico has faced significant 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 37 to the Consolidated Financial Statements. fiscal and economic challenges for over a decade. In response to such challenges, 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 the restructuring of the debts of the Commonwealth, its instrumentalities and municipalities. The Commonwealth and several of instrumentalities have commenced debt restructuring proceedings under PROMESA. As of the date of this report, while municipalities have been designated no entities municipality has commenced, or has been authorized by the Oversight Board to commence, any such debt restructuring proceeding under PROMESA. PROMESA, covered under its as POPULAR, INC. 2021 ANNUAL REPORT 125 At December 31, 2021, the Corporation’s direct exposure to the Puerto Rico government and its instrumentalities and municipalities totaled $367 million, of which $349 million were outstanding, compared to $377 million, which were fully outstanding at December 31, 2020. Of the amount outstanding, $319 million consists of loans and $30 million are securities ($342 million and $35 million at December 31, 2020). Substantially all of the amount outstanding at December 31, 2021 and 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 unlimited taxing power, or “special obligations” of a municipality, to which the applicable municipality has pledged other revenues. At December 31, 2021, 75% 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, 2021, the Corporation received scheduled principal payments amounting to $32 million 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, 2021: 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, 2021, the Corporation had $275 million in loans insured or securities issued by Puerto Rico governmental entities but for which the principal source of repayment is non-governmental ($317 million at December 31, 2020). These included $232 million in residential mortgage loans insured by the Puerto Rico Housing Finance Authority instrumentality that has been (“HFA”), designated as a covered entity under PROMESA (December 31, 2020 - $260 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, 2021, $43 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, 2020 - $46 million). In the event that the mortgage loans insured by HFA and held by the Corporation directly or those serving as collateral for the HFA bonds default and the collateral is insufficient to satisfy the outstanding balance of 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 satisfaction of certain other 126 POPULAR, INC. 2021 ANNUAL REPORT $ 14 1 38 53 4,240 14,395 11,280 230 30,145 $ – – – – 68,650 70,962 123,521 55,257 318,390 $ 14 1 38 53 72,890 85,357 134,801 55,487 348,535 $ 14 1 38 53 72,890 103,546 134,801 55,487 366,724 $30,198 $318,390 $348,588 $366,777 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. 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 Commonwealth’s fiscal crisis and the ongoing Title III proceedings under PROMESA. loan portfolios Similarly, BPPR’s mortgage and consumer include loans to government employees and retirees, which could also be negatively affected by fiscal measures such as employee layoffs or furloughs or reductions in pension benefits. residential mortgages, billion of $353 million of Small Business Administration (“SBA”) loans under and the Paycheck Protection Program (“PPP”) $67 million commercial loans were insured or guaranteed by the U.S. Government or its agencies at December 31, 2021 (compared to $1.8 billion, $1.3 billion and $60 million, respectively, at December 31, 2020). In addition, $1.6 At December 31, 2021, the Corporation has operations in (the “USVI”) and has the United States Virgin Islands approximately $70 million in direct exposure to USVI government entities (December 31, 2020 - $105 million). The USVI has been experiencing a number of fiscal and economic challenges that could adversely affect the ability of its public corporations and instrumentalities to service their outstanding debt obligations. At December 31, 2021, 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 $221 million comprised of various retail and commercial clients, compared to a loan portfolio of $251 million at December 31, 2020, which included a $19 million loan with the BVI Government that was paid off during the second quarter of 2021. 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. 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 in the event of consolidated financial position. However, 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 stockholders 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 Corporation establishes loss. Once 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 the loss cannot be reasonably estimated, no accrual is established. an accrual the for 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, 2021. 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 in several of in many of 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 originally sought damages and preliminary and permanent injunctive relief on behalf of the class against the Popular Insurance Company and Defendants, as well as Antilles “Defendant MAPFRE-PRAICO Insurance Company (the 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 their hazard insurance policies. They demand the reimbursement to the purported “class” of an estimated $400 million plus legal interest, for the the “good experience” Defendant time period, as well as injunctive relief seeking to enjoin the Defendant Insurance 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 allegedly paid by Insurance Companies during the relevant commissions POPULAR, INC. 2021 ANNUAL REPORT 127 filed voluntary dismissal petitions against MAPFRE-PRAICO Insurance Company, and Antilles Insurance Company respectively, the sole remaining defendants in the action. leaving the Popular Defendants as 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 policies with Antilles Insurance or MAPFRE 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 in September 2020 the notice to the class, which is yet to be published. from receiving On May 7, 2021, the Popular Defendants filed a motion for summary judgment with respect to plaintiffs’ unjust enrichment theory of liability, reserving the right to file an additional motion for summary judgment regarding damages should the court deny the Popular Defendant’s pending motion to exclude an economic expert recently designated by Plaintiffs. On May 7, 2021, Popular, Inc. and BPPR also filed a separate motion for summary judgment alleging that, even taking as true and correct Plaintiffs’ theory of liability, Popular, Inc. and BPPR are not liable to Plaintiffs since they do not receive - and are legally commissions. On prohibited September 27, 2021, the Court held an oral hearing to discuss the pending motions for summary judgment. At such hearing, Plaintiffs notified they did not object the dismissal of the action with prejudice as to Popular, Inc. and BPPR, leaving Popular Insurance, LLC as the sole remaining defendant in the case. On November 1, 2021, the Court issued a resolution denying Popular Insurance, LLC’s motion for summary judgment. On December 29, 2021, Popular Insurance filed a petition of certiorari to the Puerto Rico Court of Appeals, seeking review from the denial of the motion for summary judgment. This petition of is now fully briefed and pending resolution. insurance certiorari foreclosures and/or through their mortgage Mortgage-Related Litigation BPPR was named a defendant in a putative class action captioned Yiries Josef Saad Maura v. Banco Popular, et al. on behalf of residential customers of the defendant banks who have allegedly been subject loan to illegal modifications servicers. 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 the Truth In Lending Act (“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 128 POPULAR, INC. 2021 ANNUAL REPORT the complaint (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. In September 2019, the Court 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. In January 2020, plaintiffs filed a Notice of Appeal to the U.S. Court of Appeals for the First Circuit. Plaintiffs filed their appeal brief in July 2020, Appellees filed their brief in September 2020, and Appellants filed their reply brief in January 2021. The appeal is now fully briefed and pending resolution. 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 Rico, filed before the United States District Court for the District of Puerto Rico. The complaint alleges breach of contract, breach of the covenant of good faith and fair dealing and unjust enrichment 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 the case. On April 21, 2021, the Court issued an order granting in part and denying in part BPPR’s motion to dismiss; the unjust enrichment claim was dismissed, whereas the breach of contract and covenant of good faith and fair dealing claims survived the motion. Discovery is ongoing. seeking damages, 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 restitution and District of New York, 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 charging OD Fees on Popular’s purported practice of 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” (“APPSN”) transactions and alleges 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. In October 2020, Plaintiffs filed a Notice of Voluntary funds are held for settlement. Dismissal before the U.S. District Court for the Southern District of New York and, simultaneously, filed an identical complaint in the U.S. District Court for the District of the Virgin Islands against Popular, Inc., Popular Bank and BPPR. In November 2020, Plaintiffs filed a Notice of Voluntary Dismissal against Popular, Inc. and Popular Bank following a Motion to Dismiss filed on behalf of such entities which argued failure to state a claim and lack of minimum contacts of such parties with the U.S.V.I. district court jurisdiction. BPPR, the only defendant remaining in the case, was served with process in November 2020 and filed a Motion to Dismiss in January 2021. On October 4, 2021, the District Court, notwithstanding that BPPR’s Motion to Dismiss remains pending resolution, held an initial scheduling conference and, thereafter, issued a trial management order where it scheduled the deadline for all discovery for November 1, 2022, the deadline for the filing of a joint pre-trial brief for June 1, 2023, and the trial for June 20 to June 30, 2023. On January 31, 2022, Popular was also named as a defendant on a putative class action complaint captioned Lipsett v. Popular, Inc. d/b/a Banco Popular, filed before the U.S. District Court for the Southern District of New York, seeking damages, restitution and injunctive relief. Similar to the claims set forth in the aforementioned Golden complaint, Plaintiff alleges breach of contract, including violations of the covenant of good faith and fair dealing, as a result of Popular’s for APPSN purported practice transactions. The complaint that Popular assesses OD Fees over authorized transactions for which sufficient funds are held for settlement. Popular waived service of process and expects to file a responsive allegation by April 4, 2022. charging OD Fees further alleges of 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 and state local 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. the Court In June 2021, in the AB Action entered a judgment dismissing all claims except those regarding the principal plaintiff Aileen Betances against PB for retaliation, and Betances’ claim against three (3) other AB Defendants for aiding/abetting the alleged retaliation. Also, in July 2021, the Court in the DR action entered a partial judgment dismissing the individual DR Defendants, with all all claims against surviving claims being against PB and limited to local retaliation claims and local and state discrimination claims. Plaintiffs in both the AB Action and the DR Action have filed notices of appeal of both judgments. On August 11, 2021, PB and the remaining AB Defendants in the AB Action, as well as PB in the DR Action, answered the respective complaints as to the surviving claims. Discovery is ongoing. 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, 2021, was named as a respondent (among other broker-dealers) in 65 pending arbitration proceedings with initial claimed amounts of approximately $62 million in the aggregate. While Popular Securities believes it has meritorious defenses to the claims asserted in these proceedings, it has often determined that it is in its best interest to settle certain claims 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 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 in the primarily in Puerto Rico bonds. An adverse result arbitration proceedings described above, or a significant “Oversight decision Board”) (the to POPULAR, INC. 2021 ANNUAL REPORT 129 increase in customer complaints, could have a material adverse effect on Popular. from trading On October 28, 2021, a panel in an arbitration proceeding with claimed damages losses of arising approximately $30 million ordered Popular Securities to pay claimants approximately $6.9 million in compensatory damages and expenses. On November 4, 2021, the claimants in such arbitration proceeding filed a complaint captioned Trinidad García v. Popular, Inc. et. al. before the United States District Court for the District of Puerto Rico against Popular, Inc., BPPR and Popular Securities (the “Popular Defendants”) alleging, inter alia, that they sustained monetary losses as a result of the Popular Defendants’ anticompetitive, unfair, and predatory practices, including tying arrangements prohibited by the Bank the Popular Holding Company Act. Plaintiffs claim that Defendants caused them to enter a tying arrangement scheme whereby BPPR allegedly would extend secured credit lines to the Plaintiffs on the conditions that they transfer their portfolios to Popular Securities to be used as pledged collateral and obtain additional investment services and products solely from Popular Securities, not from any of its competitors. Plaintiffs also invoke federal court’s supplemental jurisdiction to allege several state law claims against the Popular Defendants, including contractual fault, fault in causing losses in value of the pledge collateral, breach of contract, request for specific compliance thereof, fault in pre-contractual negotiations, emotional distress, and punitive damages. On January 27, 2022, Plaintiffs filed an Amended Complaint and the Popular Defendants were served with summons on that same date. Plaintiffs demand no less than $390 million in damages, plus an award for costs and attorney’s fees. The Popular Defendants expect to file their response by March 21, 2022. 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 the Puerto Rico financial crisis. Popular, Inc., BPPR and Popular Securities (collectively, the “Popular Companies”) were the Oversight Board in served by, and cooperated with, 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. 130 POPULAR, INC. 2021 ANNUAL REPORT 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 Committee (“UCC”), including third parties, transfer and other claims against government vendors and financial institutions and other professionals involved in bond issuances then being challenged as invalid by the SCC and the UCC. The Popular Companies, the SCC and the UCC 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 aforementioned challenged bond issuances. On of January 12, 2022, the UCC and the Popular Companies executed a settlement agreement as to potential claims related to the avoidance and recovery of payments and/ or transfers made to the Popular Companies. The tolling agreement as to potential claims the SCC and the UCC may assert against the Popular Companies as a result of any role of the Popular Companies in the offering of certain challenged bond issuances remains in effect. the SCC, the Note 25 - 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 interest in the trusts, and therefore, cannot be the trusts’ primary beneficiary. Furthermore, the Corporation concluded that it did not hold a controlling financial interest in these the trusts are predetermined trusts since the decisions of 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 in these guaranteed loan securitizations includes owning certain beneficial interests in the form of securities as well as the servicing rights retained. The Corporation is not required to financial support to any of the variable provide additional 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 28 to the Consolidated Financial Statements for additional information on the debt securities outstanding at December 31, 2021 and 2020, 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 in those government-sponsored special transferred loans 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. 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, 2021 and 2020. (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, 2021 December 31, 2020 $ 94,464 $ 94,464 $ 7,968 $ 7,968 $102,432 $102,432 $90,273 $90,273 $ 8,769 $ 8,769 $99,042 $99,042 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 assessment the 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, 2021. Note 26 - Derivative instruments and hedging activities the incorporated as part of is The use of derivatives 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 is to manage interest rate sensitivity by Corporation’s goal 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 this appreciate or depreciate in fair value. The effect of 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. to the risk The credit attributed counterparty’s nonperformance risk is incorporated in the fair value of the derivatives. Additionally, 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, 2021, inclusion of the credit risk in the fair value of the derivatives resulted in a loss of $0.3 million from the Corporation’s credit standing adjustment and a loss of $0.1 million from the counterparty’s nonperformance risk. During the years ended December 31, 2020 and 2019, the Corporation recognized a gain of $0.7 million and $0.2 million, respectively, from the Corporation’s credit standing adjustment. 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 $8.3 billion at December 31, 2021 (December 31, 2020 - $8.7 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, 2021 and 2020 will not 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 POPULAR, INC. 2021 ANNUAL REPORT 131 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, 2021 and 2020 were as follows: Notional amount Derivative assets Derivative liabilities At December 31, 2020 2021 Statement of condition classification Fair value at December 31, 2020 2021 Statement of condition classification Fair value at December 31, 2020 2021 (In thousands) Derivatives designated as hedging instruments: Forward contracts $ 87,900 $188,800 Other assets Total derivatives designated as hedging instruments $ 87,900 $188,800 Derivatives not designated as hedging instruments: Interest rate caps Indexed options on deposits $ 27,866 79,114 $ 29,248 Other assets 69,054 Other assets $ – 26,075 Bifurcated embedded options 72,352 63,121 – – $ $ 18 18 $ $ $ – Other liabilities – 20,785 – Other liabilities – Interest bearing deposits – Total derivatives not designated as hedging instruments $179,332 $161,423 Total derivative assets and liabilities $267,232 $350,223 $26,075 $20,785 $26,093 $20,785 $ $ $ 125 $ 1,267 125 $ 1,267 $ – – – – 22,753 17,658 $22,753 $17,658 $22,878 $18,925 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 (loss) income. The amount included in accumulated other comprehensive (loss) income 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 76 days at December 31, 2021. For cash flow hedges, net gains (losses) on derivative contracts that are reclassified from accumulated other comprehensive (loss) income 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, 2021 Amount of net gain (loss) recognized in OCI on derivatives (effective portion) $456 $456 (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) $(704) $(704) $– $– 132 POPULAR, INC. 2021 ANNUAL REPORT 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) (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) $(3,992) $(3,992) $– $– Fair Value Hedges At December 31, 2021 and 2020, there were no derivatives designated as fair value hedges. Non-Hedging Activities For the year ended December 31, 2021, the Corporation recognized a gain of $2.3 million (2020 - loss of $3.0 million; 2019 - loss of $ 1.2 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, 2021 Year ended December 31, 2020 Year ended December 31, 2019 Mortgage banking activities Other operating income Interest expense Interest expense $ 2,027 – 6,824 (6,538) $ 2,313 $(5,027) – 5,462 (3,417) $(2,982) $(2,254) (5) 7,898 (6,883) $(1,244) 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 an The Corporation enters 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. POPULAR, INC. 2021 ANNUAL REPORT 133 Note 27 - 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, 2019 New loans Payments Other changes, including existing loans to new related parties Balance at December 31, 2020 New loans Payments Other changes, including existing loans to new related parties Balance at December 31, 2021 $133,054 8,360 (16,839) 316 $124,891 3,182 (28,208) 2,714 $102,579 New loans and payments include disbursements and collections from existing lines of credit. The Corporation has had loan transactions with the including certain Corporation’s directors, executive officers, 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. by the and personally guaranteed In 2010, as part of the Westernbank FDIC assisted loans made to transaction, BPPR acquired five commercial entities that were wholly owned by one brother-in-law of a director of the Corporation. The loans were secured by real estate 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, 134 POPULAR, INC. 2021 ANNUAL REPORT 2016 and, thereafter, various interim renewals were approved to allow for the re-negotiation of a longer-term extension. The most recent of 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%. the Audit Committee also authorized two During 2020, 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 in accordance with the Related Party September 2020, 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, 2021 was approximately approximately $17.1 million corresponded to Notes A and $13.5 million to Notes B. the maturity date of $30.6 million, of which the credit 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, 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. In December 2021, the Corporation refinanced the then-current $36.0 million principal balance of the loan at an interest rate of 4.50%, a maturity date of December 2026 and a 20-year amortization schedule. As of December 31, 2021, the unpaid principal balance amounted to $34.8 million. amounting payments interest to 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 the borrowers 5.875%. From March to August 2020, 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 to additional 3-month loan payment moratorium pursuant 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, 2021 was approximately $0.2 million. BPPR is evaluating borrowers’ application in connection with this loan under BPPR’s loss mitigation program. At December the Corporation’s banking subsidiaries held deposits from related parties, excluding EVERTEC, Inc. (“EVERTEC”) amounting to approximately $700 million (2020 - $851 million). 31, 2021, currently From time to time, the Corporation, in the ordinary course of business, obtains services from related parties that have some association with the Corporation. Management believes the (In thousands) Equity investment in EVERTEC terms of such arrangements are consistent with arrangements entered into with independent third parties. For the year ended December 31, 2021, the Corporation made contributions of approximately $4.5 million to Fundación Banco Popular and Popular Bank Foundation, which are not-for-profit corporations dedicated to philanthropic work (2020 - $1.6 million). The Corporation also provided human and operational resources to support the Fundación Banco Popular which in 2021 amounted to approximately $1.3 million (2020- $1.4 million). the activities of Related party transactions with EVERTEC, as an affiliate various processing The Corporation has an investment in EVERTEC, Inc. (“EVERTEC”), which provides and 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, 2021, the Corporation’s stake in EVERTEC was 16.19%. The Corporation influence over EVERTEC. continues 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 recorded $2.3 million in dividend distributions during the year ended December 31, 2021 from its investments in EVERTEC’s holding company (December 31, 2020 - $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. December 31, 2021 December 31, 2020 $110,299 $86,158 The Corporation had the following financial condition balances outstanding with EVERTEC at December 31, 2021 and December 31, 2020. 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, 2021 December 31, 2020 $ 5,668 (150,737) (3,431) $(148,500) $ 5,678 (125,361) (2,395) $(122,078) 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, 2021, 2020 and 2019. (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, 2019 2020 2021 $26,096 53 $16,936 865 $16,749 516 $26,149 $17,801 $17,265 POPULAR, INC. 2021 ANNUAL REPORT 135 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, 2021, 2020 and 2019. Items that represent expenses to the Corporation are presented with parenthesis. (In thousands) Years ended December 31, 2020 2019 2021 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 $ (388) $ (315) $ 27,384 6,593 (245,945) 740 22,406 7,305 (223,069) 1,002 (106) 29,224 7,418 (219,992) Interest expense Other service fees Net occupancy Professional fees 1,118 Other operating expenses Total $(211,616) $(192,671) $(182,338) Centro Financiero BHD León At December 31, 2021, 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, 2021, the Corporation recorded $27.7 million in earnings from its investment in BHD León (December 31, 2020 - $27.0 million), which had a carrying amount of $180.3 million at December 31, 2021 (December 31, 2020 - $153.1 million). The Corporation received $4.3 million in dividends distributions during the year ended December 31, 2021, from its investment in BHD León (December 31, 2020 - $13.2 million). through its Investment Companies The Corporation, subsidiary Popular Asset Management LLC (“PAM”), provides advisory services to several investment companies registered under the Investment Company Act of 1940 in exchange for a fee. The Corporation, through its subsidiary BPPR, 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. to these amounted companies investment For the year ended December 31, 2021 administrative fees charged to $4.1 million (December 31, 2020 - $6.3 million) and waived fees amounted to $1.5 million (December 31, 2020 - $2.8 million), for a net fee of $2.6 million (December 31, 2020 - $3.5 million). The Corporation, through its subsidiary BPPR, had also entered into certain uncommitted credit facilities with those investment companies. The available lines of credit facilities amounted to $275 million at December 31, 2020. The aggregate sum of all outstanding balances under all credit facilities that could be made available by BPPR, from time to time, to those investment companies for which PAM acted as investment advisor or co-investment advisor, could have never exceed the lesser of $200 million or 10% of BPPR’s capital. During the year ended December 31, 2021, these credit facilities expired and the investment companies entered into credit facilities with a third party. 820-10 “Fair Value Measurements Note 28 - 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 reflect the Corporation’s own judgements about assumptions that market participants would use in pricing the asset or liability. 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 136 POPULAR, INC. 2021 ANNUAL REPORT 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, 2021 and 2020: At December 31, 2021 (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 Contingent consideration Total liabilities measured at fair value on a recurring basis Level 1 Level 2 Level 3 Measured at NAV Total $ $ – – – – – – $15,859,030 70 221,265 8,886,950 128 $24,967,443 $ $ – – – 826 – 826 $6,530 – – – – $6,530 – $ – – $6,530 $ – 85 59 22,559 – 22,703 32,429 – 26,093 $25,048,668 $ $ $ – – 198 – 280 478 – 121,570 – $122,874 $ $ $ $ – – – $ $ (22,878) $ – – (9,241) (22,878) $ (9,241) $ – – – – – $ – $ – – – – – $ – $77 – – $77 $ – – $ – $15,859,030 70 221,265 8,887,776 128 $24,968,269 $ 6,530 85 257 22,559 280 29,711 32,506 121,570 26,093 $25,178,149 $ $ $ $ (22,878) (9,241) (32,119) POPULAR, INC. 2021 ANNUAL REPORT 137 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) 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, 2021, 2020 and 2019 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, 2021 Assets Loans [1] Other real estate owned [2] Other foreclosed assets [2] Long-lived assets held-for-sale [3] Trademark [4] Total assets measured at fair value on a nonrecurring basis Write-downs $– – – – – $– $ $21,167 7,727 68 9,007 156 $21,167 7,727 68 9,007 156 (3,721) (1,579) (33) (5,320) (5,404) $38,125 $38,125 $ (16,057) $– – – – – $– [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. [4] Represents the fair value of a trademark due to a write-down on impairment. 138 POPULAR, INC. 2021 ANNUAL REPORT (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 Metro Branch network. (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. 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, 2021, 2020, and 2019. Year ended December 31, 2021 (In thousands) Balance at January 1, 2021 Gains (losses) included in earnings Gains (losses) included in OCI Additions Settlements Balance at December 31, 2021 Changes in unrealized gains (losses) included in earnings relating to assets still held at December 31, 2021 MBS classified as debt securities available- for-sale $1,014 – (13) – (175) $ 826 CMOs classified as trading account debt securities Other securities classified as trading account debt securities Mortgage servicing rights Total assets Contingent Consideration Total liabilities $ 278 (1) – 29 (107) $ 198 $ 381 (101) – – – $ 280 (10,216) $118,395 $120,068 (10,318) (13) 13,419 (282) – 13,391 – $ – – – 9,241 – $121,570 $122,874 $9,241 $ – – – 9,241 – $9,241 $ – $ (1) $ (45) $ 6,410 $ 6,364 $ – – POPULAR, INC. 2021 ANNUAL REPORT 139 (In thousands) Balance at January 1, 2020 Gains (losses) included in earnings Gains (losses) included in OCI Additions Settlements Balance at December 31, 2020 Year ended 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) Year ended December 31, 2019 CMOs classified as trading account debt securities MBS classified as trading account debt securities Other securities classified as trading account debt securities (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 MBS classified as debt securities available- for-sale $1,233 – (1) – (50) – $1,182 Changes in unrealized gains (losses) included in earnings relating to assets still held at December 31, 2019 $ – $ 1 $ 611 (1) – 71 (151) – $ 530 $ 43 (1) – 25 (41) (26) $ – $ – 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 $485 (45) – – – – $440 $ 20 $ (14,190) $ (14,169) 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, 2021, 2020, and 2019 for Level 3 assets and liabilities included in the previous tables are reported in the consolidated statement of operations as follows: 2021 2020 2019 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 $(10,216) $6,410 $(42,055) $(19,327) $(27,516) $(14,190) (102) $(10,318) (46) $6,364 (60) 27 (47) 21 $(42,115) $(19,300) $(27,563) $(14,169) (In thousands) Mortgage banking activities Trading account (loss) profit Total 140 POPULAR, INC. 2021 ANNUAL REPORT 0.8 years (0.04 - 1.0 years) 3.6% (3.6% - 4.1%) 11.4% (10.1% - 17.2%) 2.9 years 12.0% 10.8% 5.0% 22.3% (5.0% - 35.0%) 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, 2021 and 2020. (In thousands) CMO’s - trading Fair value at December 31, 2021 Valuation technique Unobservable inputs Weighted average (range) [1] $ 198 Discounted cash flow model Weighted average life Yield Prepayment speed Other - trading $ 280 Discounted cash flow model Weighted average life Loans held-in-portfolio $20,041 [2] External appraisal Other real estate owned $ 3,631 [3] External appraisal Yield Prepayment speed Haircut applied on external appraisals Haircut applied on external appraisals [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, 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 (0.3 - 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. Effective the fourth quarter 2021, the mortgage servicing rights fair value was provided by a third-party valuation specialist. Refer to Note 11 for additional information on MSRs. The significant unobservable inputs used in the fair value measurement of the Corporation’s collateralized mortgage 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 the constant prepayment 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 POPULAR, INC. 2021 ANNUAL REPORT 141 value. The disclosure requirements exclude certain financial instruments and all non-financial instruments. Accordingly, the instruments aggregate fair value amounts of disclosed do not represent management’s estimate of the 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 Obligations of U.S. Government sponsored entities 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, 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 142 POPULAR, INC. 2021 ANNUAL REPORT 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- ended and open-ended mutual funds and other equity 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, except for one equity security that do not have readily determinable fair value and is under an investment company is measured at NAV. discounted cash flow model Mortgage servicing rights Mortgage servicing rights (“MSRs”) do not trade in an active market with readily observable prices. MSRs are priced using a discounted cash flow model valuation performed by a third incorporates party. The assumptions that market participants would use in estimating future net servicing income, including portfolio characteristics, prepayments 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 loans’ characteristics and portfolio behavior. Due to the unobservable nature of certain valuation inputs, the MSRs are classified as Level 3. rate caps and indexed options Derivatives Interest 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” are (“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. Contingent consideration liability The fair value of the contingent consideration, which relates to earnout payments that could be payable to K2 over a three-year period, was calculated based on a discounted cash flow technique using the probability-weighted average from likely scenarios. This contingent consideration is classified as Level 3. Loans held-in-portfolio that are collateral dependent The impairment is measured based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar to assets in similar locations and which could be subject 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 the branches that were subject realignment of PB’s New York Metro Branch network. These ROU assets and leasehold improvements are classified as Level 3. Long-lived assets held-for-sale The Corporation evaluates for impairment its long-lived assets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and records a write down for the difference between the carrying amount and the fair value less cost to sell. These long-lived assets held-for-sale are classified as Level 3. Trademark The write-down on impairment of a trademark was based on the discontinuance of origination thru e-loan platform. This trademark is classified as Level 3. Note 29 - 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 as management’s best to current 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, 2021 and December 31, 2020, 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 the Corporation’s fee generating businesses and value of anticipated future business activities, they do not represent the Corporation’s value as a going concern. There have been no changes in the Corporation’s valuation methodologies and inputs used to estimate the fair values for each class of financial assets and liabilities not measured at fair value. instruments. that is, POPULAR, INC. 2021 ANNUAL REPORT 143 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 $ 65,380 $ 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 Other short-term borrowings[2] Notes payable: FHLB advances Unsecured senior debt securities Junior subordinated deferrable interest debentures (related to trust preferred securities) Total notes payable Derivatives Contingent consideration $ $ $ $ 25 5,960 71,365 59,918 96,217 33,842 189,977 59,168 28,545,191 121,570 26,093 Carrying amount $60,292,939 6,712,149 $67,005,088 91,603 $ 75,000 $ $ $ $ $ 492,429 297,842 198,292 988,563 22,878 9,241 $ $ $ $ $ $ $ $ $ $ $ $ Carrying amount Level 1 Level 2 Level 3 Measured at NAV December 31, 2021 $ 428,433 17,536,719 $ 428,433 17,530,640 $ $ – 6,079 29,711 24,968,269 6,530 – 22,703 24,967,443 – – 478 826 Fair value $ 428,433 17,536,719 29,711 24,968,269 $ 77,383 25 5,960 83,368 59,918 96,217 36,210 192,345 59,885 27,489,583 121,570 26,093 $ $ $ $ $ – – – – $ – – – $ – $ – – 77 $77 $ – – – – $ $ $ $ $ – – – – – – – – – – – – – – 5,960 5,960 59,918 96,217 32,429 188,564 – – – 26,093 $ 77,383 25 – 77,408 – – 3,704 3,704 59,885 27,489,583 121,570 – $ $ $ $ December 31, 2021 Level 1 Level 2 Level 3 Measured at NAV Fair value – - – – – – – – – – – $60,292,939 6,647,301 $66,940,240 91,602 $ 75,000 $ $ 496,091 319,296 201,879 $ 1,017,266 22,878 $ – $ $ $ $ $ $ $ $ $ – - – – – – – – – – 9,241 $ – – $ – $ – $ – $ – – – $ – $ – $ – $60,292,939 6,647,301 $66,940,240 91,602 $ 75,000 $ $ 496,091 319,296 201,879 $ 1,017,266 22,878 $ 9,241 $ [1] Refer to Note 28 to the Consolidated Financial Statements for the fair value by class of financial asset and its hierarchy level. [2] Refer to Note 17 to the Consolidated Financial Statements for the composition of other short-term borrowings. 144 POPULAR, INC. 2021 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 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 $ $ $ $ $ 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 $ $ $ $ $ $ $ $ $ $ $ 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 83,298 32 – 83,330 – – 1,495 1,495 102,189 27,098,297 118,395 – $491,065 11,640,880 36,674 21,561,152 $ $ $ $ $ 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 [1] Refer to Note 28 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, 2021 and December 31, 2020 is $ 9.5 billion and $9.3 billion, respectively, and represents the unused portion of credit facilities granted to customers. The notional amount of letters of credit at December 31, 2021 and December 31, 2020 is $ 31 million and $ 24 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 30 - Employee benefits by three Certain covered of employees the Banco non-contributory defined benefit pension plans, Popular de Puerto Rico Retirement Plan and two Restoration Plans (the “Pension Plans”). Pension benefits are based on age, years of credited service, and final average compensation. BPPR are 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. 2021 ANNUAL REPORT 145 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, 2021 and 2020 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 Maximum allotment 0% 0% 0% 0% 70% 100% 5% 100% 2021 2020 30% 38% 67% 60% 1% 2% 1% 1% 146 POPULAR, INC. 2021 ANNUAL REPORT The following table sets forth by level, within the fair value hierarchy, the Pension Plans’ assets at fair value at December 31, 2021 and 2020. 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. During the year ended December 31, 2021 investments in certain government obligations classified as Level 2 were substituted by proprietary funds of a money manager that invest in government obligations that are measured at NAV. (In thousands) Level 1 Level 2 Level 3 Measured at NAV Total Level 1 Level 2 Level 3 Measured at NAV Total 2021 2020 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 Private equity investments Cash and cash equivalents Accrued investment income $ – $ 9,259 $ 375,875 – – 41,414 25,446 111,365 – – 5,262 – – – – 7,523 – – – $188,377 $197,636 $ – – – – – 56 – 4,510 384,360 41,414 136,811 82,912 5,262 56 7,523 4,510 8,485 – – 82,912 – – – – – $187,065 $ 326,344 – – 101,081 38,229 94,009 – – 4,526 – – – – 9,626 – – – $ 7,377 $194,442 334,524 – 101,081 – 132,238 – 98,431 – 4,526 – 70 70 9,626 – 3,847 3,847 8,180 – – 98,431 – – – – Total assets $160,302 $415,842 $4,566 $279,774 $860,484 $204,716 $556,164 $3,917 $113,988 $878,785 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: • 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 these trade. Certain agency 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 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. • 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. POPULAR, INC. 2021 ANNUAL REPORT 147 • 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 of different with other market participants, 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 2021 2020 $3,917 649 $4,670 (753) $4,566 $3,917 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, 2021 and 2020. There were no transfers in and/or out of Level 1 and Level 2 during the years ended December 31, 2021 and 2020. 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 2021 2020 167,182 162,936 $ 13,716 $ 9,177 Dividends paid on shares of Popular, Inc. common stock held by the plan $ 280 $ 238 The following table presents the components of net periodic benefit cost for the years ended December 31, 2021, 2020 and 2019. (In thousands) Personnel costs: Service cost Other operating expenses: Interest cost Expected return on plan assets Recognized net actuarial loss Net periodic benefit cost Total benefit cost Pension Plans 2020 2021 2019 2021 OPEB Plan 2020 2019 $ – $ – $ – $ 642 $ 713 $ 759 15,993 (38,679) 18,876 23,389 (38,104) 20,880 28,439 (32,388) 23,508 $ (3,810) $ 6,165 $ 19,559 $ (3,810) $ 6,165 $ 19,559 3,573 – 1,873 $6,088 $6,088 4,913 – 567 $6,193 $6,193 5,955 – – $6,714 $6,714 148 POPULAR, INC. 2021 ANNUAL REPORT The following table sets forth the aggregate status of the plans and the amounts recognized in the consolidated financial statements at December 31, 2021 and 2020. (In thousands) Change in benefit obligation: Benefit obligation at beginning of year Service cost Interest cost Actuarial (gain)/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 Amounts recognized in accumulated other comprehensive loss: Net loss Accumulated other comprehensive loss (AOCL) 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 asset/(liabilities) at end of year Pension Plans OPEB Plan 2021 2020 2021 2020 $ 914,353 – 15,993 (34,297) (44,578) $ 852,551 – 23,389 83,277 (44,864) $ 179,210 642 3,573 (17,286) (6,181) $ 168,681 713 4,913 11,247 (6,344) $ 851,471 $ 914,353 $ 159,958 $ 179,210 $ $ 878,785 26,049 228 (44,578) $ 799,935 123,484 230 (44,864) – – 6,181 (6,181) $ – – 6,344 (6,344) $ 860,484 $ 878,785 $ – $ – $(851,471) $(914,353) $(159,958) $(179,210) – 878,785 860,484 – $ 9,013 $ (35,568) $(159,958) $(179,210) 225,356 265,899 12,993 32,152 $ 225,356 $ 265,899 $ 12,993 $ 32,152 $ (35,568) $ (52,616) $(179,210) $(168,681) 21,472 265,899 288,882 32,152 230,331 3,810 228 236,266 (6,165) 230 234,369 (225,356) 230,331 (265,899) (147,058) (6,088) 6,181 (146,965) (12,993) (147,209) (6,193) 6,344 (147,058) (32,152) $ 9,013 $ (35,568) $(159,958) $(179,210) [1] For 2021, significant components of the Pension Plans actuarial gain that changed the benefit obligation were mainly related to an increase in the single weighted- average discount rates partially offset by a lower return on the fair value of plan assets. For OPEB Plans significant components of the actuarial gain that change the benefit obligation were mainly related to an increase in discount rates and the per capita claim assumption at year-end which was lower than expected. The per capita claim methodology for the fully insured Medicare Advantage plans changed from age-based per capita cost to cost that do not vary by age. 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. POPULAR, INC. 2021 ANNUAL REPORT 149 The following table presents the change in accumulated other comprehensive loss (“AOCL”), pre-tax, for the years ended December 31, 2021 and 2020. (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 2021 2020 2021 2020 $265,899 $288,882 $ 32,152 $21,472 (18,876) (20,880) (1,873) (567) (21,667) (2,103) (17,286) (40,543) (22,983) (19,159) 11,247 10,680 $225,356 $265,899 $ 12,993 $32,152 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, 2021 and 2020. 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: Weighted average assumptions used to determine net periodic benefit cost for the years ended December 31: 2021 2020 2019 2021 2020 2019 Pension Plans OPEB Plan 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 2.41 - 2.48% 3.22 - 3.27% 4.20 - 4.23% 2.65% 3.38% 4.30% 3.09% 3.72% 4.49% 1.76 - 1.80% 2.81 - 2.83% 3.87 - 3.90% 2.03% 2.98% 3.99% 4.60 - 5.50% 5.00 - 5.80% 5.30 - 6.00% 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% 5.00% 4.50% 5.00% 5.00% N/A N/A N/A 2023 2020 2019 Weighted average assumptions used to determine benefit obligation at December 31: Pension Plans 2021 2020 OPEB Plan 2020 2021 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 2.79-2.83% 2.41-2.48% 2.94% 2.65% 4.75% 5.00% N/A N/A 4.50% 4.50% N/A 2023 N/A N/A N/A 2023 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, 2021 and 2020. (In thousands) Projected benefit obligation Accumulated benefit obligation Fair value of plan assets 150 POPULAR, INC. 2021 ANNUAL REPORT Pension Plans OPEB Plan 2021 2020 2021 2020 $851,471 851,471 860,484 $914,353 914,353 878,785 $159,958 159,958 – $179,210 179,210 – The Corporation expects to pay the following contributions to the plans during the year ended December 31, 2022. 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 2022 (In thousands) Pension Plans OPEB Plan $ 227 $5,971 2022 2023 2024 2025 2026 2027 - 2031 $ 48,339 45,409 45,598 45,742 45,824 226,642 $ 5,971 6,117 6,293 6,458 6,667 35,807 The table below presents a breakdown of the plans’ assets and liabilities at December 31, 2021 and 2020. (In thousands) Non-current assets Current liabilities Non-current liabilities Pension Plans 2020 2021 OPEB Plan 2021 2020 $17,792 227 8,552 $ – 229 35,339 $ – 5,959 153,999 $ – 6,328 172,882 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, 2021 was $13.3 million (2020 - $14.0 million, 2019 - $15.1 million). The plans held 1,279,982 (2020 – 1,362,593) shares of common stock of the Corporation with a market value of approximately $105 million at December 31, 2021 (2020 - $77 million). Note 31 - 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, 2021, 2020 and 2019: (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 2021 2020 2019 934,889 (1,412) 933,477 $ $ 506,622 (1,758) 504,864 $ $ 671,135 (3,723) 667,412 81,263,027 157,127 85,882,371 92,888 96,848,835 148,965 81,420,154 85,975,259 96,997,800 11.49 11.46 $ $ 5.88 5.87 $ $ 6.89 6.88 $ $ $ $ As disclosed in Note 20, as of September 30, 2021, the Corporation completed its $350 million accelerated share repurchase transaction (“ASR”) and, in connection therewith, received an initial delivery of 3,785,831 shares of common stock during the second quarter of 2021 and 828,965 additional shares of common stock during the third quarter of 2021. The final number of shares delivered was based in the average daily volume weighted average price (“VWAP”) of its common stock, net of discount, during the term of the ASR, which amounted to $75.84. Potential common shares consist of shares of common stock issuable under the assumed exercise of stock options, restricted stock and performance share 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, are used to purchase shares of common stock at the exercise date. The difference between the number of potential common shares issued and the shares of common stock purchased is added as incremental shares to the actual number of shares POPULAR, INC. 2021 ANNUAL REPORT 151 outstanding to compute diluted earnings per share. Warrants, stock options, restricted stock and performance share awards, if any, that result in lower potential common shares issued than shares of common stock purchased under the treasury stock method are not earnings per share since their antidilutive effect in earnings per common share. included in the computation of dilutive inclusion would have an Note 32 - 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, 2021, 2020 and 2019. (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 2021 Years ended December 31, 2020 2019 BPPR Popular U.S. BPPR Popular U.S. BPPR Popular U.S. $151,453 $11,245 $136,703 $11,120 $146,384 $14,549 47,681 40,929 117,418 23,634 24,855 956 3,798 1,052 – – 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 – – Total revenue from contracts with customers [1] $405,970 $17,051 $342,733 $15,402 $366,599 $20,294 [1] The amounts include intersegment transactions of $4.1 million, $4.3 million and $3.8 million, respectively, for the years ended December 31, 2021, 2020 and 2019. Revenue from contracts with customers is recognized when, the performance obligations are satisfied by the or as, 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 included in the transaction price only to the extent is 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 152 POPULAR, INC. 2021 ANNUAL REPORT 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 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 33 - 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 32.0 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 liabilities, under respectively. Refer to Note 14 and Note 19, 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. the Corporation, On October 27, 2020, PB, the United States mainland banking subsidiary of authorized and approved a strategic realignment of its New York Metro branch network that resulted in eleven branch closures, of which nine were leased properties. The branch closures were completed on January 29, 2021. An impairment loss of ROU assets amounting to $15.9 million was recognized in connection with this transaction during the fourth quarter of 2020. POPULAR, INC. 2021 ANNUAL REPORT 153 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 December 31, 2021 2022 2023 2024 2025 2026 Later Years $30,044 3,402 $27,956 3,491 $26,550 3,589 $23,619 3,701 $15,187 3,350 $50,912 5,501 Total Lease Payments $174,268 23,034 Less: Imputed Interest Total $(20,154) $154,114 19,719 (3,315) Years ended December 31, 2019 2020 2021 The following table presents the lease cost recognized by the Corporation in the Consolidated Statements of Operations as follows: (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] Total lease cost [3] Years ended December 31, 2019 2020 2021 $ 2,006 1,044 29,970 647 93 (70) $ 2,215 1,185 31,674 214 51 (113) $ 1,701 1,194 30,664 252 97 (113) (7,007) (5,550) – – 14,805 1,115 – – – (Dollars in thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases [1] $ 38,288 $ 41,650 $ 30,073 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 1,044 1,185 1,200 2,852 3,145 1,726 $ 24,136 $ 14,975 $ 28,430 661 4,510 – 7.9 years 8.3 years 8.0 years 8.9 years 8.7 years 7.3 years $26,683 $45,596 $33,795 Weighted-average discount rate: [1] During the quarter ended September 30, 2021, the Corporation recognized the transfer of two corporate office buildings as a sale. During the quarter ended June 30, 2020, the Corporation recognized the transfer of the Caparra Center as a sale. Since these sale and partial leaseback transactions were 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 sale and leaseback transactions which was included as part of other operating income. Operating leases Finance leases 2.7% 5.0% 3.0% 5.0% 3.4% 5.9% [1] During the quarter ended March 31, 2021, the Corporation made base lease termination payments amounting to $7.8 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 September 30, 2021, the Corporation recognized a lease liability of $16.8 million and a corresponding ROU asset for the same amount as a result of the partial leaseback of two corporate office buildings. following table presents The cash flow information and other related information related to operating and finance leases. supplemental As of December 31, 2021, the Corporation has an additional operating lease contract that has not yet commenced with an undiscounted contract amount of $2.3 million, which will have a lease term of 20 years. 154 POPULAR, INC. 2021 ANNUAL REPORT Note 34 - 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- the based compensation to employees and directors of Corporation and/or any of its subsidiaries (the “2020 Incentive 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 (“RSUs”) 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 and prior to 2021 was modified as follows: the graduated vesting portion is vested ratably over the grant and the four years commencing at 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. Restricted stock granted on or after 2021 will vest ratably in equal annual installments over a period of 4 years or 3 years, depending in the classification of the employee. the date of 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 and 2021, the EPS goal is substituted by the Absolute Return on Average Assets (“ROA”) goal and the Absolute Return on Average Tangible Common Equity (“ROATCE”) respectively. 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, ROA and ROATCE metrics are considered to be a performance condition under ASC 718. The fair value is determined based on the probability of achieving the EPS, ROA goal as of each reporting period. The TSR and EPS, ROA or ROATCE 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, ROA and ROATCE) conditions. The performance shares vest at the end of the three-year performance cycle. If a participant terminates 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, 2019 Granted Performance Shares Quantity Adjustment Vested Non-vested at December 31, 2019 Granted Performance Shares Quantity Adjustment Vested Forfeited Non-vested at December 31, 2020 Granted Performance Shares Quantity Adjustment Vested Forfeited Shares 382,186 218,169 15,061 (270,051) 345,365 253,943 (7) (234,421) (6,368) 358,512 191,479 54,306 (273,974) (8,440) Non-vested at December 31, 2021 321,883 Weighted-average grant date fair value $36.41 55.55 55.72 44.73 $41.68 42.49 48.79 42.64 44.26 $41.23 69.38 54.21 55.11 43.48 $47.98 During the year ended December 31, 2021, 120,105 shares of restricted stock (2020 - 213,511; 2019 - 152,773) and 71,374 performance shares (2020 - 40,432; 2019 - 65,396) were awarded to management under the Incentive Plan. incentive During the year ended December 31, 2021, the Corporation recognized $8.6 million of restricted stock expense related to tax benefit of management $1.6 million (2020 - $7.6 million, with a tax benefit of $1.3 million; 2019 - $7.7 million, with a tax benefit of $1.2 million). During the year ended December 31, 2021, the fair market value of the restricted stock vested was $11.6 million at awards, with a POPULAR, INC. 2021 ANNUAL REPORT 155 grant date and $18.6 million at vesting date. This triggers a windfall of $2.5 million that was recorded as a reduction on income tax expense. During the year ended December 31, 2021 the Corporation recognized $5.8 million of performance shares expense, with a tax benefit of $0.5 million (2020 - $2.3 million, with a tax benefit of $0.2 million; 2019 - $4.6 million, with a tax benefit of $0.3 million). The total unrecognized compensation cost related to non-vested restricted stock awards to members of management at December 31, 2021 was $8.9 million and is expected to be recognized over a weighted- average period of 2.1 years. The following table summarizes the restricted stock activity under the Incentive Plan for members of the Board of Directors: (Not in thousands) Non-vested at January 1, 2019 Granted Vested Forfeited Non-vested at December 31, 2019 Granted Vested Forfeited Non-vested at December 31, 2020 Granted Vested Forfeited Non-vested at December 31, 2021 The equity awards granted to members of the Board of Inc. (the “Directors”) will vest and Directors of Popular, become non-forfeitable on the grant date of such award. Effective in May 2019, all equity awards granted to the Directors may be paid in either restricted stock or RSUs at each Directors election. If RSUs are elected, the Directors may defer the delivery of the shares of common stock underlying the RSU award until their retirement. To the extent that cash dividends are paid on the Corporation’s outstanding common stock, the Directors holding RSUs will receive an additional number of RSUs that reflect a reinvested dividend equivalent. For 2019, Directors elected shares of restricted stock and RSUs and for 2020 and 2021, all Directors elected RSUs. For Restricted stock Weighted-average grant date fair value – 1,052 (1,052) – – – – – – – – – – – $49.25 49.25 – $ $ – – – – – – – – – RSU – 27,449 (27,449) – – 43,866 (43,866) – – 20,638 (20,638) – – Weighted-average grant date fair value – $57.64 57.64 – – $35.47 35.47 – – $78.20 78.20 – – the year ended December 31, 2021, 20,638 RSUs were granted to the Directors (2020 - 43,866; 2019 - 1,052; shares of restricted stock and 27,449 RSUs). For the year ended December 31, 2021, $1.9 million of restricted stock expense related to these RSUs was recognized, with a tax benefit of $0.4 million (2020 - $1.6 million with a tax benefit of $0.3 million; 2019 - $52 thousand with a tax benefit of $6 thousand for shares of restricted stock and $1.6 million with a tax benefit of $0.2 million for RSUs). The fair value at vesting date of the RSUs vested during the year ended December 31, 2021 for the Directors was $1.6 million. Note 35 - 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 Subtotal Total income tax expense 156 POPULAR, INC. 2021 ANNUAL REPORT 2021 2020 2019 $ 69,415 10,232 $ 33,281 3,613 $ 2,251 3,598 79,647 36,894 5,849 179,688 49,683 229,371 69,300 5,744 75,044 123,337 17,995 141,332 $309,018 $111,938 $147,181 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 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 2021 2020 2019 Amount $ 466,465 (139,426) (11,981) 20,932 (30,719) – (5,484) 14,629 (5,398) % of pre-tax income 38% (12) (1) 2 (3) – – 1 – 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) $ 309,018 25% $ 111,938 18% $ 147,181 18% For the year ended December 31, 2021, the Corporation recorded income tax expense of $309.0 million, compared to $111.9 million for the previous year. The increase in income tax expense was mainly due to higher pre-tax income during the year 2021 as compared to year 2020 resulting primarily from a lower provision for credit losses partially offset by higher net exempt interest income and higher income from the U.S. operations subject to lower statutory tax rate. The results for the year 2019 include an additional income tax benefit of $26 million related to the revision of the amount of exempt income earned in prior years, that resulted in the amendment of income tax returns for Banco Popular de Puerto Rico for the years 2015 to 2017 and certain adjustments pertaining to tax periods for which the statute of limitations had expired. 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/cost Allowance for credit losses Deferred gains Accelerated depreciation FDIC-assisted transaction 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 Deferred loan origination fees/cost Other temporary differences Total gross deferred tax liabilities Valuation allowance Net deferred tax asset December 31, 2021 US Total PR $ 261 112,331 57,002 2,788 233,500 1,642 5,246 152,665 31,211 54,781 38,512 689,939 76,635 4,329 29,025 – 43,856 153,845 128,557 $407,537 $ 2,781 665,164 – – 31,872 – 7,422 – 23,894 – 8,418 739,551 51,150 2,817 20,282 3,567 1,530 79,346 410,970 $249,235 $ 3,042 777,495 57,002 2,788 265,372 1,642 12,668 152,665 55,105 54,781 46,930 1,429,490 127,785 7,146 49,307 3,567 45,386 233,191 539,527 $ 656,772 POPULAR, INC. 2021 ANNUAL REPORT 157 (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 The net deferred tax asset shown in the table above at December 31, 2021 is reflected in the consolidated statements of financial condition as $0.7 billion in net deferred tax assets (in the “other assets” caption) (2020 - $0.9 billion in deferred tax asset in the “other assets” caption) and $825 thousand in deferred tax liabilities (in the “other liabilities” caption) (2020 - $897 thousand 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 The deferred tax asset related to the NOLs outstanding at December 31, 2021 expires as follows: (In thousands) 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 158 POPULAR, INC. 2021 ANNUAL REPORT $ 396 1,363 9,310 13,516 13,367 15,202 288,395 119,297 120,255 117,210 22,758 10,749 44,473 1,079 125 $777,495 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 three-year At December 31, 2021 the net deferred tax asset of the U.S. operations amounted to $660 million with a valuation allowance of approximately $411 million, for a net deferred tax asset after valuation allowance of approximately $249 million. The Corporation evaluates the realization of the deferred tax asset by taxing jurisdiction. The U.S. operation is not in a cumulative loss position and had sustained profitability for the three-year period ended December 31, 2021. Years 2020 and 2021 have been impacted by the COVID-19 pandemic and other events. Year 2020 was unfavorably impacted by the ACL reserve build-ups and the impairment of expenses on the branch closures in the New York region. Year 2021 has been favorably impacted by a strong economic recovery that resulted in ACL reserve releases, reversing the year 2020 build-up. The financial results for year 2021 is objectively verifiable positive evidence, evaluated together with the positive evidence of stable credit metrics, in combination with the length of the expiration of the NOLs. On the other hand, the Corporation evaluated the negative evidence accumulated over the years, including financial results lower than expectations and the uncertainty created by new variants of COVID-19. As of December 31, 2021, after weighting all positive and negative evidence, the Corporation concluded that it is more likely than not that approximately $249 million of the deferred tax asset from the U.S. operations, comprised mainly of net operating losses, will be realized. The Corporation based this 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 deferred tax asset. Management will closely monitor factors, including, net income versus forecast, targeted loan growth, net interest income margin, allowance for credit losses, charge offs, NPLs inflows and NPA balances. Strong financial results during year 2022 together with the additional income expected from the recent acquisition of K2 assets, along with new tax initiatives could be considered additional positive evidence that, in the future, could overcome totally or partially the negative evidence evaluated as of December 31, 2021, that could result in future adjustments to the valuation allowance. At December 31, 2021, the Corporation’s net deferred tax assets related to its Puerto Rico operations amounted to $408 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, 2021. 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, 2021. Management expects 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 full valuation allowance on the deferred tax asset of $129 million as of December 2021. 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 income tax return. The intercompany consolidated federal 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 presents of a table unrecognized tax benefits. following (In millions) Balance at January 1, 2020 Reduction as a result of lapse of statute of limitations Balance at December 31, 2020 Reduction as a result of lapse of statute of limitations Balance at December 31, 2021 $ 16.3 (1.5) $ 14.8 (11.3) $ 3.5 of in the financial statement the total amount of At December 31, 2021, interest recognized condition approximated $2.8 million (2020 - $4.8 million). The total interest expense recognized during 2021 was $892 thousand net of a reduction of $2.9 million due to the expiration of the statute of limitation (2020 - $2.0 million net of a reduction of $645 of December 31, 2021 and 2020, there was no need to accrue for the payment of penalties. The Corporation’s policy is to report interest related to unrecognized tax benefits in income tax if any, are reported in other expense, while the penalties, of in the expenses operating operations. thousand). Management consolidated statements determined that, as 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 effective approximately $5.5 million at December 31, 2021 (2020 - $10.2 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, 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, 2021, the following years remain subject to examination in the U.S. Federal jurisdiction – 2018 and thereafter and in the Puerto Rico jurisdiction – 2017 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 $1.4 million, including interest. POPULAR, INC. 2021 ANNUAL REPORT 159 Note 36 - 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, 2021, 2020 and 2019 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 premises and equipment to long-lived assets held-for-sale 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 Recognition of mortgage servicing rights on securitizations or asset transfers Loans booked under the GNMA buy-back option Capitalization of Right of Use Assets [1] Includes loans securitized into trading securities and subsequently sold before year end. 2021 2020 2019 $ 64,997 170,442 $ 13,045 240,342 $ 14,461 369,383 57,638 45,144 102,782 7,219 13,014 43,060 56,074 31,085 32,103 69,890 9,762 732,533 64,824 13,789 13,391 19,798 35,683 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 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, 2021 December 31, 2020 December 31, 2019 $411,346 17,087 6,079 $434,512 $484,859 6,206 6,029 $497,094 $361,705 26,606 6,012 $394,323 [2] Refer to Note 5 - Restrictions on cash and due from banks and certain securities for nature of restrictions. structure corporate consists of Note 37 - Segment reporting The Corporation’s two 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 structure, which determined based on the organizational 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, 2021, additional disclosures 160 POPULAR, INC. 2021 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 service units of services of Popular Asset BPPR, asset management the brokerage and investment banking Management, 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. Popular U.S.: Popular U.S. the banking reportable segment consists of operations of Popular Bank (PB), Popular Insurance Agency, U.S.A., and Popular Equipment Finance (PEF). PB operates through a retail branch network in the U.S. mainland under the name of Popular, and equipment leasing and financing services Insurance Agency, U.S.A. offers through PEF. Popular investment and insurance services across the PB branch network. The Corporate group consists primarily of the holding Inc., Popular North America, Popular companies 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: December 31, 2021 (In thousands) Net interest income Provision for credit losses (benefit) Non-interest income Amortization of intangibles Depreciation expense Other operating expenses Income tax expense Net income Segment assets Banco Popular de Puerto Rico $ 1,674,589 (136,352) 565,310 2,813 46,539 1,285,959 253,479 Popular U.S. Intersegment Eliminations $ 321,154 (56,897) 24,518 665 7,415 203,892 56,538 $ 6 – (548) – – (544) – $ 787,461 $ 134,059 $ 2 $64,336,681 $10,399,066 $(31,528) (In thousands) Net interest income (expense) Provision for credit losses (benefit) Non-interest income Amortization of intangibles Depreciation expense Other operating expenses Income tax expense (benefit) Net income December 31, 2021 Reportable Segments Corporate Eliminations Total Popular, Inc. $ 1,995,749 $ (38,159) $ – $ 1,957,590 (193,249) 589,280 (215) 56,535 3,478 53,954 1,489,307 5,656 1,150 (545) – (3,687) – – (3,725) (193,464) 642,128 9,134 55,104 1,485,037 310,017 (1,085) 86 309,018 $ 921,522 $ 13,415 $ (48) $ 934,889 Segment assets $74,704,219 $5,458,718 $(5,065,038) $75,097,899 (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 December 31, 2020 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 (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 Popular U.S. Intersegment Eliminations $ $ 1,633,950 135,495 506,739 8,610 49,058 1,208,458 129,145 $ 295,470 30,028 23,160 664 8,263 205,219 19,164 $ 609,923 $ 55,292 $ (51) – (561) – – (547) – (65) $41,756,864 $10,056,316 $(18,576) POPULAR, INC. 2021 ANNUAL REPORT 161 (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, 2019 Reportable Segments Corporate Eliminations Total Popular, Inc. $ 1,929,369 $ (37,675) $ 165,523 529,338 256 43,901 9,274 57,321 1,413,130 96 746 55 – – (3,356) – – (3,140) $ 1,891,694 165,779 569,883 9,370 58,067 1,410,045 148,309 (1,041) (87) 147,181 $ 665,150 $ 6,114 $ (129) $ 671,135 Segment assets $51,794,604 $5,228,276 $(4,907,556) $52,115,324 Additional disclosures with respect to the Banco Popular de Puerto Rico reportable segment are as follows: December 31, 2021 Banco Popular de Puerto Rico Commercial Banking Consumer and Retail Banking Other Financial Services Eliminations Total Banco Popular de Puerto Rico $ 734,501 $ 934,611 $ 5,477 $ – $ 1,674,589 (85,990) (50,362) – – (136,352) 118,126 343,125 109,018 (4,959) 565,310 290 2,110 20,512 25,386 609 641 (196) 2,813 – 46,539 377,563 818,503 91,652 (1,759) 1,285,959 180,874 66,616 5,989 – 253,479 (In thousands) Net interest income Provision for credit losses (benefit) Non-interest income Amortization of intangibles Depreciation expense Other operating expenses Income tax expense Net income $ 359,378 $ 415,483 $ 15,604 $ (3,004) $ 787,461 Segment assets $64,994,081 $31,313,708 $2,038,402 $(34,009,510)$64,336,681 December 31, 2020 Banco Popular de Puerto Rico Commercial Banking Consumer and Retail Banking Other Financial Services Eliminations Total Banco Popular de Puerto Rico December 31, 2019 Banco Popular de Puerto Rico (In thousands) Commercial Banking Consumer and Retail Banking Other Financial Services Eliminations and Other Adjustments Total Banco Popular de Puerto Rico Net interest income $ Provision for credit losses (benefit) Non-interest income Amortization of intangibles Depreciation expense Other operating expenses Income tax expense 619,926 $ 1,009,196 $ 4,828 $ – $ 1,633,950 (46,099) 181,594 – – 135,495 99,758 303,268 106,218 (2,505) 506,739 195 4,294 4,121 20,024 28,411 623 – – 8,610 49,058 309,762 104,636 835,582 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 selected presents information Geographic Information The financial following 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, 2021, the BPPR segment generated approximately $50.6 million (2020 - $55.3 million, 2019 - $55.7 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 $45.4 million in revenues (2020 - $44.2 million, 2019 - $47.6 million) from its operations in the U.S. and British Virgin Islands. At December 31, 2021, total assets for the BPPR segment related to its operations in the United States amounted to $589 million (2020 - $627 million). (In thousands) Net interest income Provision for credit losses Non-interest income Amortization of intangibles Depreciation expense Other operating expenses Income tax expense (benefit) $ 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 (In thousands) Revenues: [1] Puerto Rico United States Other 197 3,609 1,828 20,488 26,746 656 – – 47,890 5,634 Total consolidated revenues 2021 2020 2019 $2,136,481 390,201 73,036 $1,921,207 376,529 71,189 $2,016,089 371,368 74,120 $2,599,718 $2,368,925 $2,461,577 [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, including impairment on equity securities, net (loss) profit on trading account debt securities, net (loss) gain on sale of loans, including valuation adjustments on loans held-for-sale, adjustments (expense) to indemnity reserves on loans sold, and other operating income. 303,534 782,521 85,122 (1,361) 1,169,816 104,617 (5,934) 7,528 – 106,211 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)$55,353,626 162 POPULAR, INC. 2021 ANNUAL REPORT Selected Balance Sheet Information (In thousands) Puerto Rico Total assets Loans Deposits United States Total assets Loans Deposits Other Total assets Loans Deposits [1] 2021 2020 2019 $63,221,282 19,770,118 57,211,608 $54,143,954 20,413,112 47,586,880 $40,544,255 18,989,286 34,664,243 $10,986,055 8,903,493 7,777,232 $10,878,030 8,396,983 7,672,549 $10,693,536 7,819,187 7,664,792 $890,562 626,115 2,016,248 $904,016 674,556 1,606,911 $877,533 657,603 1,429,571 [1] Represents deposits from BPPR operations located in the U.S. and British Virgin Islands. Note 38 - 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, 2021 and 2020, and the results of its operations and cash flows for the years ended December 31, 2021, 2020 and 2019. POPULAR, INC. 2021 ANNUAL REPORT 163 Condensed Statements of Condition (In thousands) ASSETS Cash and due from banks (includes $79,660 due from bank subsidiary (2020 – $69,299)) Money market investments Debt securities held-to-maturity, at amortized cost (includes $3,125 in common securities from statutory trusts (2020 – $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 $6,802 due from subsidiaries and affiliate (2020 – $5,518)) Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Notes payable Other liabilities (includes $6,591 due to subsidiaries and affiliate (2020 – $3,779)) Stockholders’ equity Total liabilities and stockholders’ equity [1] Refer to Note 18 to the consolidated financial statements for information on the statutory trusts. December 31, 2021 2020 $ 79,660 205,646 $ 69,299 111,596 3,125 19,711 3,858,701 1,834,931 288,736 29,445 96 5,684 114,955 32,810 8,726 16,049 4,327,188 1,733,411 271,129 31,473 311 5,322 88,272 35,002 $6,473,308 $6,697,156 $ 401,990 101,923 5,969,395 $ 587,386 81,148 6,028,622 $6,473,308 $6,697,156 164 POPULAR, INC. 2021 ANNUAL REPORT Condensed Statements of Operations (In thousands) Income: Dividends from subsidiaries Interest income (includes $828 due from subsidiaries and affiliates (2020 – $2,290; 2019 – $4,237)) Earnings from investments in equity method investees Other operating income Net (loss) gain, including impairment, on equity securities Total income Expenses: Interest expense Provision for credit losses (benefit) Operating expense (income) (includes expenses for services provided by subsidiaries and affiliate of $13,546 (2020 – $13,140 ; 2019 – $14,400)), net of reimbursement by subsidiaries for services provided by parent of $162,019 (2020 – $138,729 ; 2019 – $106,725) Total expenses Income before income taxes and equity in undistributed earnings (losses) of subsidiaries Income tax expense Income before equity in undistributed earnings (losses) of subsidiaries Equity in undistributed earnings (losses) of subsidiaries Net income Comprehensive income, net of tax Years ended December 31, 2019 2020 2021 $792,000 4,303 29,387 – (525) $586,000 4,949 17,841 1 1,494 $408,000 6,669 17,279 1 988 825,165 610,285 432,937 36,444 (215) 38,528 95 38,528 256 5,432 41,661 783,504 352 783,152 151,737 (921) 80 37,702 38,864 572,583 17 572,566 (65,944) 394,073 – 394,073 277,062 $934,889 $506,622 $671,135 $419,829 $866,551 $929,171 POPULAR, INC. 2021 ANNUAL REPORT 165 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 (earnings) losses of subsidiaries, net of dividends or distributions Provision for credit losses (benefit) 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 Sale of foreclosed assets, including write-downs 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 (increase) decrease in money market investments Proceeds from calls, paydowns, maturities and redemptions of investment securities held-to-maturity 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 Proceeds from sale of foreclosed assets Net cash (used in) provided by investing activities Cash flows from financing activities: Payments 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 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, 2020 2019 2021 $ 934,889 $ 506,622 $ 671,135 (151,737) (215) 5,656 1,241 8,895 (26,360) 59 (3,662) (1,970) (1,042) 19,095 65,944 95 98 1,233 5,770 (15,510) – (277,062) 256 96 1,240 7,927 (14,948) – (5,305) (8,327) (4,051) 1,134 – 2,470 – 2,508 (150,040) 46,468 (282,900) 784,849 553,090 388,235 (94,000) 5,601 1,879 (12,900) – – (1,788) 83 87 110,000 – 587 (10,000) 12,500 131 (2,667) 285 – (101,038) 110,836 (45,000) – 677 (9,000) 13,000 – (1,289) 3 – (41,609) (186,664) 10,493 – (141,466) (350,656) (5,107) – 15,175 (28,017) (133,645) (500,705) (3,394) – 13,451 – (115,810) (250,571) (5,420) (673,400) (650,586) (358,350) 10,411 69,894 13,340 56,554 (11,724) 68,278 $ 80,305 $ 69,894 $ 56,554 Popular, Inc. (parent company only) received distributions from its direct equity method investees amounting to $3.0 million for the year ended December 31, 2021 (2020 - $2.3 million; 2019 - $2.3 million), of which $2.3 million are related to dividend distributions (2020 - $2.3 million; 2019 - $2.3 million). There were no dividend distributions from PIBI for the year ended Dec 31, 2021 (2020 - $12.5 million; 2019 - $13.0 million). PIBI main source of income is derived from its investment in BHD. 166 POPULAR, INC. 2021 ANNUAL REPORT Notes payable include junior subordinated debentures issued by the Corporation that are associated to capital securities issued by the Popular Capital Trust II and medium- term notes. Refer to Note 18 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, 2021: Year 2022 2023 2024 2025 2026 Later years Total (In thousands) $ – 297,842 – – – 104,148 $401,990 Note 39 - Subsequent events Accelerated Share Repurchase Transaction On February 28, 2022, the Corporation entered into an accelerated share repurchase transaction of $400 million with respect to its common stock, which will be accounted for as a the treasury stock transaction. Accordingly, as a result of receipt of the initial shares, the Corporation will recognize in shareholders’ equity approximately $320 million in treasury stock and $80 million as a reduction of capital surplus. The Corporation expects to further adjust its treasury stock and capital surplus accounts to reflect the delivery or receipt of cash or shares upon the termination of the ASR agreement, which will depend on the average price of the Corporation’s shares during the term of the ASR, less a discount. The final settlement of the ASR is expected to occur no later than the third quarter of 2022. Entry into Asset Purchase Agreement with Evertec; Renegotiation and Extension of Commercial Agreements On February 24, 2022, the Corporation and BPPR, entered into an Asset Purchase Agreement (the “Purchase Agreement”), dated as of February 24, 2022, with EVERTEC and Evertec Group, LLC, a wholly owned subsidiary of EVERTEC (“EVERTEC Group”), pursuant to which BPPR will purchase from EVERTEC Group certain information technology and related assets currently used by EVERTEC to service certain of BPPR’s key channels the Amended and Restated Master Service Agreement (the “MSA”), dated September 30, 2010, among Popular, BPPR and EVERTEC. In connection with the purchase of the Acquired Assets, BPPR will assume certain liabilities relating to the Acquired Assets (together with the purchase of the Acquired Assets, the “Transaction”). The Transaction is expected to close on or about June 30, 2022, subject to the satisfaction of certain closing conditions. (the “Acquired Assets”) under the Transaction, In connection with the consummation of the Transaction (the “Closing”), Popular or BPPR will transfer to EVERTEC Group, as consideration for shares of EVERTEC’s common stock (“EVERTEC Common Stock”) having an aggregate value equal to $197 million, subject to certain purchase price adjustments, calculated on the basis that each share of EVERTEC Common Stock is valued at $42.84 per share. As a result of this transfer, Popular expects that its percentage ownership of the outstanding shares of EVERTEC Common Stock will be reduced from its current level, which is to approximately 10.5% immediately approximately 16.2%, following the Closing. other among In connection with the Closing, Popular and BPPR will also enter with EVERTEC into, commercial agreements, a Second Amended and Restated Master Services Agreement (the “Second A&R MSA”), pursuant to which EVERTEC Group will continue to provide various key information technology and various transaction processing services to Popular, BPPR and their respective subsidiaries, which services are provided under the currently effective MSA. Under the Second A&R MSA, Popular and BPPR would no longer be subject to exclusivity provisions under the currently effective MSA that require Popular and BPPR to obtain certain services from EVERTEC Group, nor will they be subject to rights of first refusal that EVERTEC Group currently has under the currently effective MSA with respect to certain technology projects. In connection with the elimination of exclusivity provisions under the currently effective MSA, EVERTEC Group will be entitled to receive monthly payments from Popular and BPPR to the extent that EVERTEC Group’s revenues under the Second A&R MSA fall below certain agreed minimum amounts on an annualized basis (each, an “Annual Minimum”). The Annual Minimum will equal (i) $170 million for each one-year period from the effective date of the Second A&R MSA through September 30, 2025; (ii) $165 million for each one-year period from October 1, 2025 through September 30, 2026; and (iii) $160 million for each one-year period from October 1, 2026 through September 30, 2028 (in each case, pro-rated for any partial one-year period). Under the currently effective MSA, EVERTEC Group is entitled to increase annually the fees charged under the MSA based on the annual increases in the Consumer Price Index (the “Annual MSA CPI Escalation”), subject to an annual cap of 5%. At the Closing, the Annual MSA CPI Escalation that became effective as of October 1, 2021 will be retroactively eliminated, and BPPR will receive a credit against fees payable under the Second A&R MSA equal to the amount by which the fees paid by BPPR for the period from October 1, 2021 through the Closing were increased as a result of the most recent Annual MSA CPI Escalation. Additionally, the cap on the Annual MSA CPI Escalation will be reduced relative to the currently effective MSA and will be capped (i) at 1.5% for each one-year period POPULAR, INC. 2021 ANNUAL REPORT 167 beginning on the effective date of the Second A&R MSA through September 30, 2025, and (ii) at 2% for each one-year period from October 1, 2025 through September 30, 2028 (or if lower, at the percentage by which the CPI increase during the prior one-year period exceeded 2%). In addition, beginning in October 2025, BPPR will receive a 10% fee discount for services provided under the Second A&R MSA. and Rights Sell-Down Agreement At the Closing, EVERTEC and Popular will also enter into a Registration (the “Registration Rights Agreement”) pursuant to which Popular may sell to third parties during the 90-day period following the Closing (the “Sell-Down Period”) a sufficient number of its shares of EVERTEC Common Stock so as to reduce Popular’s ownership of shares of EVERTEC Common Stock to no more the total number of shares of EVERTEC than 4.99% of Common Stock issued and outstanding. At the end of the Sell- Down Period, if there are any shares of EVERTEC Common Stock beneficially owned, owned of record or controlled by Popular in excess of 4.5% of the total number of shares of EVERTEC Common Stock issued and outstanding (“Excess Common Stock”), EVERTEC shall cause all the shares of Excess Common Stock to be exchanged for shares of EVERTEC non-voting preferred stock (the “Non-Voting Preferred Stock”, and such conversion, the “Share Conversion”). Following the Share Conversion, if Popular at any point would beneficially own, own of record or control shares of Excess Common Stock, EVERTEC shall cause all such Excess Common Stock to be exchanged for Non-Voting Preferred Stock. The Non-Voting Preferred Stock will have identical rights and privileges as EVERTEC Common Stock, except the Non-Voting Preferred Stock will be non-voting other than limited protective voting rights and will automatically convert into shares of EVERTEC Common Stock in the hands of a transferee after a transfer to EVERTEC, (iii) in which no transferee (or group of associated transferees) would receive 2% or more of the outstanding securities of any class of voting securities of EVERTEC or (iv) to a transferee that would control more than 50% of every class of voting securities of EVERTEC without any such transfer. in a widespread public distribution, that (ii) (i) The Registration Rights Agreement contains customary registration rights with respect to the shares of EVERTEC Common Stock and Non-Voting Preferred Stock held by Popular, including customary indemnification provisions, similar to the registration rights provided for in the Stockholder Agreement (the “Stockholder Agreement”), dated April 17, 2012, among Carib Latam Holdings, Inc., and each of the holders of Carib Latam Holdings, Inc., as amended on March 27, 2013, June 30, 2013 and November 13, 2013. Under the Stockholder Agreement, which will be terminated at Closing, Popular is currently entitled to, among other things, (1) nominate two directors for election to EVERTEC’s board of directors, (2) limited pre-emptive rights and (3) various registration rights with respect to EVERTEC Common Stock. business acquiring At the Closing, certain other commercial agreements will be entered into by and between Popular or BPPR (or both) and EVERTEC or EVERTEC Group, Inc., including (i) a Second Amended and Restated Independent Sales Organization Sponsorship and Services Agreement, pursuant to which BPPR will continue to sponsor EVERTEC Group as an independent sales organization with various credit card associations and will receive revenue sharing on a percentage of the net revenues of and EVERTEC Group’s merchant person-to-business merchant services business, for an initial term commencing on the date of the Closing and ending on December 31, 2035 (a ten-year extension of the term of the currently effective agreement), and (ii) a Second Amended and Restated ATH Network Participation Agreement, pursuant to which BPPR will continue to be required to issue ATH-branded debit cards and may issue dual-branded debit cards having certain enhanced functionalities and will continue to have the ability to access the ATH Network and BPPR’s customers will continue to be able to access EVERTEC Group’s ATH Movil person-to-person and person-to-business services, for an initial term commencing on the date of the Closing and ending on September 30, 2030 (a five-year extension of the term of the currently effective agreement). 168 POPULAR, INC. 2021 ANNUAL REPORT P.O. Box 362708 | San Juan, Puerto Rico 00936-2708