BPOP 10-Q Quarterly Report March 31, 2017

BPOP 10-Q Quarter ended March 31, 2017

POPULAR INC

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10-Q 1 d389076d10q.htm 10-Q 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended March 31, 2017

Commission File Number: 001-34084

POPULAR, INC.

(Exact name of registrant as specified in its charter)


Puerto Rico		66-0667416
(State or other jurisdiction of Incorporation or organization)		(IRS Employer Identification Number)

Popular Center Building 209 Muñoz Rivera Avenue Hato Rey, Puerto Rico		00918
(Address of principal executive offices)		(Zip code)

(787) 765-9800

(Registrant’s telephone number, including area code)

NOT APPLICABLE

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, $0.01 par value, 101,986,341 shares outstanding as of May 5, 2017.

POPULAR, INC.

INDEX


	Page
Part I – Financial Information

Item 1. Financial Statements

Unaudited Consolidated Statements of Financial Condition at March 31, 2017 and December 31, 2016		3

Unaudited Consolidated Statements of Operations for the quarters ended March 31, 2017 and 2016		4

Unaudited Consolidated Statements of Comprehensive Income for the quarters ended March 31, 2017 and 2016		5

Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the quarters ended March 31, 2017 and 2016		6

Unaudited Consolidated Statements of Cash Flows for the quarters ended March 31, 2017 and 2016		7

Notes to Unaudited Consolidated Financial Statements		8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		107

Item 3. Quantitative and Qualitative Disclosures about Market Risk		152

Item 4. Controls and Procedures		152

Part II – Other Information

Item 1. Legal Proceedings		152

Item 1A. Risk Factors		153

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		153

Item 3. Defaults upon Senior Securities		153

Item 4. Mine Safety Disclosures		153

Item 5. Other Information		153

Item 6. Exhibits		154

Signatures		155

Forward-Looking Information

The information included in this Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may relate to Popular, Inc.’s (the “Corporation,” “Popular,” “we,” “us,” “our”) financial condition, results of operations, plans, objectives, future performance and business, including, but not limited to, statements with respect to 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 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.

These statements are not guarantees of future performance and involve certain risks, uncertainties, estimates and assumptions by management that are difficult to predict.

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 in the economy and employment levels, as well as general business and economic conditions in the geographic areas we serve;

•

the impact of the current fiscal and economic crisis of the Commonwealth of Puerto Rico (the “Commonwealth” or “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 crisis on the value of our portfolio of Puerto Rico government securities and loans to governmental entities, and the possibility that these actions may result in credit losses that are higher than currently expected;

•

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

•

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

•

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

•

the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) on our businesses, business practices and cost of operations;

•

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

•

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

•

the performance of the stock and bond markets;

•

competition in the financial services industry;

•

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

•

possible legislative, tax or regulatory changes; and

•

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

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

•

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

•

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

•

liabilities resulting from litigation and regulatory investigations;

•

changes in accounting standards, rules and interpretations;

•

our ability to grow our core businesses;

•

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

•

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

Moreover, the outcome of legal proceedings, as discussed in “Part II, Item I. Legal Proceedings,” is inherently uncertain and depends on judicial interpretations of law and the findings of regulators, judges and juries. Investors should refer to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2016 as well as “Part II, Item 1A” of this Form 10-Q for a discussion of such factors and certain risks and uncertainties to which the Corporation is subject.

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(UNAUDITED)


	March 31,			December 31,
(In thousands, except share information)	2017			2016
Assets:
Cash and due from banks	$	340,225		$	362,394

Money market investments:
Securities purchased under agreements to resell		—			23,637
Time deposits with other banks		3,653,347			2,866,580

Total money market investments		3,653,347			2,890,217

Trading account securities, at fair value:
Pledged securities with creditors’ right to repledge		1,811			11,486
Other trading securities		49,174			48,319
Investment securities available-for-sale, at fair value:
Pledged securities with creditors’ right to repledge		452,568			491,843
Other investment securities available-for-sale		8,744,959			7,717,963
Investment securities held-to-maturity, at amortized cost (fair value 2017 - $73,628; 2016 - $75,576)		96,326			98,101
Other investment securities, at lower of cost or realizable value (realizable value 2017 - $169,617; 2016 - $170,890)		166,286			167,818
Loans held-for-sale, at lower of cost or fair value		85,309			88,821

Loans held-in-portfolio:
Loans not covered under loss-sharing agreements with the FDIC		22,858,556			22,895,172
Loans covered under loss-sharing agreements with the FDIC		551,980			572,878
Less – Unearned income		123,835			121,425
Allowance for loan losses		544,496			540,651

Total loans held-in-portfolio, net		22,742,205			22,805,974

FDIC loss-share asset		58,793			69,334
Premises and equipment, net		548,995			543,981
Other real estate not covered under loss-sharing agreements with the FDIC		185,836			180,445
Other real estate covered under loss-sharing agreements with the FDIC		29,926			32,128
Accrued income receivable		128,018			138,042
Mortgage servicing assets, at fair value		193,698			196,889
Other assets		2,111,806			2,145,510
Goodwill		627,294			627,294
Other intangible assets		42,706			45,050

Total assets	$	40,259,282		$	38,661,609

Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	7,262,328		$	6,980,443
Interest bearing		24,950,251			23,515,781

Total deposits		32,212,579			30,496,224

Assets sold under agreements to repurchase		434,714			479,425
Other short-term borrowings		1,200			1,200
Notes payable		1,557,972			1,574,852
Other liabilities		862,604			911,951

Total liabilities		35,069,069			33,463,652

Commitments and contingencies (Refer to Note 21)
Stockholders’ equity:
Preferred stock, 30,000,000 shares authorized; 2,006,391shares issued and outstanding		50,160			50,160
Common stock, $0.01 par value; 170,000,000 shares authorized; 104,101,618 shares issued (2016 - 104,058,684) and 101,956,740 shares outstanding (2016 - 103,790,932)		1,041			1,040
Surplus		4,261,346			4,255,022
Retained earnings		1,286,706			1,220,307
Treasury stock - at cost, 2,144,878 shares (2016 - 267,752)		(89,128	)		(8,286	)
Accumulated other comprehensive loss, net of tax		(319,912	)		(320,286	)

Total stockholders’ equity		5,190,213			5,197,957

Total liabilities and stockholders’ equity	$	40,259,282		$	38,661,609

The accompanying notes are an integral part of these Consolidated Financial Statements.

POPULAR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Quarters ended March 31,
(In thousands, except per share information)	2017			2016
Interest income:
Loans	$	363,136		$	363,197
Money market investments		6,573			2,863
Investment securities		44,886			36,271
Trading account securities		1,400			1,689

Total interest income		415,995			404,020

Interest expense:
Deposits		33,757			29,874
Short-term borrowings		1,095			1,861
Long-term debt		19,045			19,873

Total interest expense		53,897			51,608

Net interest income		362,098			352,412
Provision for loan losses - non-covered loans		42,057			47,940
Provision (reversal) for loan losses - covered loans		(1,359	)		(3,105	)

Net interest income after provision for loan losses		321,400			307,577

Service charges on deposit accounts		39,536			39,862
Other service fees (Refer to Note 27)		56,175			53,382
Mortgage banking activities (Refer to Note 10)		11,369			10,551
Net gain on sale and valuation adjustments of investment securities		162			—
Trading account loss		(278	)		(162	)
Net loss on sale of loans, including valuation adjustments on loans held-for-sale		—			(304	)
Adjustments (expense) to indemnity reserves on loans sold		(1,966	)		(4,098	)
FDIC loss share expense (Refer to Note 28)		(8,257	)		(3,146	)
Other operating income		19,128			15,545

Total non-interest income		115,869			111,630

Operating expenses:
Personnel costs		125,607			127,091
Net occupancy expenses		20,776			20,430
Equipment expenses		15,970			14,548
Other taxes		10,969			10,195
Professional fees		69,250			75,459
Communications		5,949			6,320
Business promotion		11,576			11,110
FDIC deposit insurance		6,493			7,370
Other real estate owned (OREO) expenses		12,818			9,141
Other operating expenses		29,565			17,165
Amortization of intangibles		2,345			3,114

Total operating expenses		311,318			301,943

Income from continuing operations before income tax		125,951			117,264
Income tax expense		33,006			32,265

Net Income	$	92,945		$	84,999

Net Income Applicable to Common Stock	$	92,014		$	84,068

Net Income per Common Share – Basic	$	0.89		$	0.81

Net Income per Common Share – Diluted	$	0.89		$	0.81

Dividends Declared per Common Share	$	0.25		$	0.15

The accompanying notes are an integral part of these Consolidated Financial Statements.

POPULAR, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)


	Quarters ended March 31,
(In thousands)	2017			2016
Net income	$	92,945		$	84,999

Other comprehensive income before tax:
Foreign currency translation adjustment		139			(705	)
Amortization of net losses on pension and postretirement benefit plans		5,607			5,486
Amortization of prior service credit of pension and postretirement benefit plans		(950	)		(950	)
Unrealized holding (losses) gains on investments arising during the period		(2,907	)		76,236
Reclassification adjustment for gains included in net income		(162	)		—
Unrealized net losses on cash flow hedges		(637	)		(2,000	)
Reclassification adjustment for net losses included in net income		855			1,545

Other comprehensive income before tax		1,945			79,612
Income tax expense		(1,571	)		(4,476	)

Total other comprehensive income, net of tax		374			75,136

Comprehensive income, net of tax	$	93,319		$	160,135

Tax effect allocated to each component of other comprehensive income:
	Quarters ended March 31,
(In thousands)	2017			2016
Amortization of net losses on pension and postretirement benefit plans	$	(2,186	)	$	(2,140	)
Amortization of prior service credit of pension and postretirement benefit plans		370			370
Unrealized holding (losses) gains on investments arising during the period		298			(2,885	)
Reclassification adjustment for gains included in net income		32			—
Unrealized net losses on cash flow hedges		248			781
Reclassification adjustment for net losses included in net income		(333	)		(602	)

Income tax expense	$	(1,571	)	$	(4,476	)

The accompanying notes are an integral part of these Consolidated Financial Statements.

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)


														Accumulated
														other
	Common		Preferred					Retained			Treasury			comprehensive
(In thousands)	stock		stock		Surplus			earnings			stock			loss			Total
Balance at December 31, 2015	$	1,038	$	50,160	$	4,229,156		$	1,087,957		$	(6,101	)	$	(256,886	)	$	5,105,324
Net income									84,999									84,999
Issuance of stock		1				2,108												2,109
Tax windfall benefit on vesting of restricted stock						(31	)											(31	)
Dividends declared:
Common stock									(15,549	)								(15,549	)
Preferred stock									(931	)								(931	)
Common stock purchases												(764	)					(764	)
Common stock reissuance												7						7
Other comprehensive income, net of tax															75,136			75,136

Balance at March 31, 2016	$	1,039	$	50,160	$	4,231,233		$	1,156,476		$	(6,858	)	$	(181,750	)	$	5,250,300

Balance at December 31, 2016	$	1,040	$	50,160	$	4,255,022		$	1,220,307		$	(8,286	)	$	(320,286	)	$	5,197,957
Net income									92,945									92,945
Issuance of stock		1				1,806												1,807
Dividends declared:
Common stock									(25,615	)								(25,615	)
Preferred stock									(931	)								(931	)
Common stock purchases						4,518						(80,842	)					(76,324	)
Other comprehensive income, net of tax															374			374

Balance at March 31, 2017	$	1,041	$	50,160	$	4,261,346		$	1,286,706		$	(89,128	)	$	(319,912	)	$	5,190,213


														March 31,			March 31,
Disclosure of changes in number of shares:														2017			2016
Preferred Stock:
Balance at beginning and end of period															2,006,391			2,006,391

Common Stock – Issued:
Balance at beginning of period															104,058,684			103,816,185
Issuance of stock															42,934			79,457

Balance at end of the period															104,101,618			103,895,642
Treasury stock															(2,144,878	)		(225,637	)

Common Stock – Outstanding															101,956,740			103,670,005

The accompanying notes are an integral part of these Consolidated Financial Statements.

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Quarter ended March 31,
(In thousands)	2017			2016
Cash flows from operating activities:
Net income	$	92,945		$	84,999

Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		40,698			44,835
Amortization of intangibles		2,345			3,114
Depreciation and amortization of premises and equipment		11,799			11,707
Net accretion of discounts and amortization of premiums and deferred fees		(6,463	)		(11,158	)
Fair value adjustments on mortgage servicing rights		5,954			8,477
FDIC loss share expense		8,257			3,146
Adjustments (expense) to indemnify reserves on loans sold		1,966			4,098
Earnings from investments under the equity method		(10,879	)		(7,089	)
Deferred income tax expense		25,060			23,218
Loss (gain) on:
Disposition of premises and equipment and other productive assets		6,466			(1,946	)
Sale and valuation adjustments of investment securities		(162	)		—
Sale of loans, including valuation adjustments on loans held-for-sale and mortgage banking activities		(5,381	)		(7,101	)
Sale of foreclosed assets, including write-downs		4,512			2,802
Acquisitions of loans held-for-sale		(73,043	)		(66,451	)
Proceeds from sale of loans held-for-sale		29,364			22,253
Net originations on loans held-for-sale		(123,336	)		(110,528	)
Net decrease (increase) in:
Trading securities		177,153			176,598
Accrued income receivable		10,024			3,926
Other assets		13,161			20,996
Net (decrease) increase in:
Interest payable		(11,281	)		(12,261	)
Pension and other postretirement benefits obligation		331			1,536
Other liabilities		(13,654	)		(17,010	)

Total adjustments		92,891			93,162

Net cash provided by operating activities		185,836			178,161

Cash flows from investing activities:
Net (increase) decrease in money market investments		(763,130	)		262,632
Purchases of investment securities:
Available-for-sale		(1,216,880	)		(742,859	)
Other		(225	)		(59,786	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale		222,677			239,399
Held-to-maturity		2,184			2,108
Other		—			41,664
Proceeds from sale of investment securities:
Available-for-sale		381			—
Other		1,757			26,346
Net repayments on loans		99,306			13,335
Proceeds from sale of loans		—			1,128
Acquisition of loan portfolios		(109,098	)		(212,798	)
Net payments (to) from FDIC under loss sharing agreements		(23,574	)		88,588
Return of capital from equity method investments		3,862			206
Acquisition of premises and equipment		(18,646	)		(38,819	)
Proceeds from sale of:
Premises and equipment and other productive assets		3,011			5,092
Foreclosed assets		27,547			14,513

Net cash used in by investing activities		(1,770,828	)		(359,251	)

Cash flows from financing activities:
Net increase (decrease) in:
Deposits		1,715,958			318,550
Federal funds purchased and assets sold under agreements to repurchase		(44,711	)		(1,991	)
Other short-term borrowings		—			5,170
Payments of notes payable		(17,408	)		(108,452	)
Proceeds from issuance of notes payable		—			28,883
Proceeds from issuance of common stock		1,806			2,109
Dividends paid		(16,499	)		(16,473	)
Net payments for repurchase of common stock		(75,604	)		(77	)
Payments related to tax withholding for shared-based compensation		(719	)		(680	)

Net cash provided by financing activities		1,562,823			227,039

Net (decrease) increase in cash and due from banks		(22,169	)		45,949
Cash and due from banks at beginning of period		362,394			363,674

Cash and due from banks at the end of the period	$	340,225		$	409,623

The accompanying notes are an integral part of these Consolidated Financial Statements.

Notes to Consolidated Financial

Statements (Unaudited)


Note 1	-	Nature of operations	9
Note 2	-	Basis of presentation and summary of significant accounting policies	10
Note 3	-	New accounting pronouncements	11
Note 4	-	Restrictions on cash and due from banks and certain securities	13
Note 5	-	Investment securities available-for-sale	14
Note 6	-	Investment securities held-to-maturity	18
Note 7	-	Loans	20
Note 8	-	Allowance for loan losses	28
Note 9	-	FDIC loss share asset and true-up payment obligation	42
Note 10	-	Mortgage banking activities	44
Note 11	-	Transfers of financial assets and mortgage servicing assets	45
Note 12	-	Other real estate owned	48
Note 13	-	Other assets	49
Note 14	-	Goodwill and other intangible assets	50
Note 15	-	Deposits	52
Note 16	-	Borrowings	53
Note 17	-	Offsetting of financial assets and liabilities	55
Note 18	-	Stockholders’ equity	57
Note 19	-	Other comprehensive loss	58
Note 20	-	Guarantees	60
Note 21	-	Commitments and contingencies	62
Note 22	-	Non-consolidated variable interest entities	70
Note 23	-	Related party transactions	73
Note 24	-	Fair value measurement	76
Note 25	-	Fair value of financial instruments	82
Note 26	-	Net income per common share	86
Note 27	-	Other service fees	87
Note 28	-	FDIC loss share (expense) income	88
Note 29	-	Pension and postretirement benefits	89
Note 30	-	Stock-based compensation	90
Note 31	-	Income taxes	92
Note 32	-	Supplemental disclosure on the consolidated statements of cash flows	95
Note 33	-	Segment reporting	96
Note 34	-	Condensed consolidating financial information of guarantor and issuers of registered guaranteed securities	100

Note 1 – Nature of operations

Popular, Inc. (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 and the Caribbean. 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 operates Banco Popular North America (“BPNA”). BPNA focuses efforts and resources on the core community banking business. BPNA operates branches in New York, New Jersey and South Florida under the name of Popular Community Bank.

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

Principles of Consolidation and Basis of Presentation

The consolidated interim financial statements have been prepared without audit. The consolidated statement of financial condition data at December 31, 2016 was derived from audited financial statements. The unaudited interim financial statements are, in the opinion of management, a fair statement of the results for the periods reported and include all necessary adjustments, all of a normal recurring nature, for a fair statement of such results.

Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from the unaudited financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these financial statements should be read in conjunction with the audited Consolidated Financial Statements of the Corporation for the year ended December 31, 2016, included in the Corporation’s 2016 Form 10-K. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

Use of Estimates in the Preparation of Financial Statements

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

Note 3 – New accounting pronouncements

Recently Adopted Accounting Standards Updates

FASB Accounting Standards Update (“ASU”) 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting

The FASB issued ASU 2016-09 in March 2016, which simplifies multiple aspects of the accounting for share-based payment transactions, including the recognition of excess tax benefits and deficiencies as an income tax benefit or expense in the income statement and classification in the statement of cash flows as an operating activity, allowing entities to elect as an accounting policy to account for forfeitures when they occur, permitting entities to withhold up to the maximum individual statutory rate without classifying the awards as a liability, and requiring that the cash paid to satisfy the statutory income tax withholding obligation be classified as a financing activity.

The amendments to this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. As a result of the adoption of this accounting pronouncement during the first quarter of 2017, the Corporation recognized excess tax benefits and shortfalls as income tax benefit or expense in the income statement and revised the presentation of its statements of cash flows, all of which had an immaterial impact to the financial statements taken as a whole.

Additionally, adoption of the following standards effective during the first quarter of 2017 did not have a significant impact on its Consolidated Financial Statements:

•

FASB Accounting Standards Update (“ASU”) 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control

•

FASB Accounting Standards Update (“ASU”) 2016-07, Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting

•

FASB Accounting Standards Update (“ASU”) 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments

•

FASB Accounting Standards Update (“ASU”) 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships

Recently Issued Accounting Standards Updates

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

The FASB issued ASU 2017-08 in March 2017, which amends the amortization period for certain callable debt securities held at a premium by shortening such period to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.

The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The amendments in this Update should be applied on a modified retrospective basis with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption.

The Corporation does not anticipate that the adoption of this accounting pronouncement will have a material effect on its consolidated statements of financial condition and results of operations since the premium of purchased callable debt securities is not significant.

FASB Accounting Standards Update (“ASU”) 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

The FASB issued ASU 2017-07 in March 2017, which requires that an employer disaggregate the service cost component from the other components of net benefit cost. The amendments also provide guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization.

The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The amendments in this Update should be applied retrospectively for the presentation of the service cost component and other components of net benefit cost and prospectively for the capitalization of the service cost component.

The Corporation is currently evaluating the impact that the adoption of this guidance will have on its consolidated statements of financial condition and results of operations.

For recently issued Accounting Standards Updates not yet effective, refer to Note 3 to the Consolidated Financial Statements included in the 2016 Form 10-K.

Note 4 - Restrictions on cash and due from banks and certain securities

The Corporation’s banking subsidiaries, BPPR and BPNA, are required by federal and state regulatory agencies to maintain average reserve balances with the Federal Reserve Bank of New York (the “Fed”) or other banks. Those required average reserve balances amounted to $ 1.2 billion at March 31, 2017 (December 31, 2016 - $ 1.2 billion). Cash and due from banks, as well as other highly liquid securities, are used to cover the required average reserve balances.

At March 31, 2017, the Corporation held $45 million in restricted assets in the form of funds deposited in money market accounts, trading account securities and investment securities available for sale (December 31, 2016 - $31 million). The amounts held in trading account securities and investment securities available for sale consist primarily of restricted assets held for the Corporation’s non-qualified retirement plans and fund deposits guaranteeing possible liens or encumbrances over the title of insured properties.

Note 5 – Investment 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 investment securities available-for-sale at March 31, 2017 and December 31, 2016.


	At March 31, 2017
(In thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value		Weighted average yield
U.S. Treasury securities
Within 1 year	$	944,180	$	408	$	242	$	944,346		0.98	%
After 1 to 5 years		2,007,013		1,039		9,278		1,998,774		1.24

Total U.S. Treasury securities		2,951,193		1,447		9,520		2,943,120		1.16

Obligations of U.S. Government sponsored entities
Within 1 year		125,028		39		46		125,021		0.97
After 1 to 5 years		588,119		724		1,785		587,058		1.40
After 5 to 10 years		200		3		—		203		5.64

Total obligations of U.S. Government sponsored entities		713,347		766		1,831		712,282		1.32

Obligations of Puerto Rico, States and political subdivisions
After 1 to 5 years		6,480		—		127		6,353		2.78
After 5 to 10 years		5,000		—		1,967		3,033		3.80
After 10 years		17,625		—		6,102		11,523		7.09

Total obligations of Puerto Rico, States and political subdivisions		29,105		—		8,196		20,909		5.56

Collateralized mortgage obligations - federal agencies
Within 1 year		48		—		—		48		4.00
After 1 to 5 years		18,086		349		50		18,385		2.87
After 5 to 10 years		35,328		354		59		35,623		2.67
After 10 years		1,111,730		5,130		24,030		1,092,830		1.99

Total collateralized mortgage obligations - federal agencies		1,165,192		5,833		24,139		1,146,886		2.02

Mortgage-backed securities
Within 1 year		49		—		—		49		4.73
After 1 to 5 years		18,205		441		77		18,569		3.80
After 5 to 10 years		333,619		3,071		2,324		334,366		2.23
After 10 years		4,049,014		27,557		66,499		4,010,072		2.48

Total mortgage-backed securities		4,400,887		31,069		68,900		4,363,056		2.46

Equity securities (without contractual maturity)		1,026		833		—		1,859		8.13

Other
Within 1 year		8,445		9		—		8,454		1.86
After 5 to 10 years		935		26		—		961		3.62

Total other		9,380		35		—		9,415		2.04

Total investment securities available-for-sale ^[1]	$	9,270,130	$	39,983	$	112,586	$	9,197,527		1.91	%

[1]	Includes $4.9 billion pledged to secure public and trust deposits, assets sold under agreements to repurchase, credit facilities and loan servicing agreements that the secured parties are not permitted to sell or repledge the collateral, of which $4.2 billion serve as collateral for public funds.


	At December 31, 2016
(In thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value		Weighted average yield
U.S. Treasury securities
Within 1 year	$	844,002	$	1,254	$	28	$	845,228		1.00	%
After 1 to 5 years		1,300,729		214		9,551		1,291,392		1.11

Total U.S. Treasury securities		2,144,731		1,468		9,579		2,136,620		1.06

Obligations of U.S. Government sponsored entities
Within 1 year		100,050		102		—		100,152		0.98
After 1 to 5 years		613,293		710		2,505		611,498		1.38
After 5 to 10 years		200		—		—		200		5.64

Total obligations of U.S. Government sponsored entities		713,543		812		2,505		711,850		1.32

Obligations of Puerto Rico, States and political subdivisions
After 1 to 5 years		6,419		—		161		6,258		2.89
After 5 to 10 years		5,000		—		1,550		3,450		3.80
After 10 years		17,605		—		4,542		13,063		7.09

Total obligations of Puerto Rico, States and political subdivisions		29,024		—		6,253		22,771		5.60

Collateralized mortgage obligations - federal agencies
Within 1 year		13		—		—		13		1.23
After 1 to 5 years		18,524		429		28		18,925		2.89
After 5 to 10 years		39,178		428		61		39,545		2.68
After 10 years		1,180,686		6,313		23,956		1,163,043		1.99

Total collateralized mortgage obligations - federal agencies		1,238,401		7,170		24,045		1,221,526		2.02

Mortgage-backed securities
Within 1 year		55		1		—		56		4.76
After 1 to 5 years		19,960		537		43		20,454		3.86
After 5 to 10 years		317,185		3,701		1,721		319,165		2.29
After 10 years		3,805,675		28,772		68,790		3,765,657		2.47

Total mortgage-backed securities		4,142,875		33,011		70,554		4,105,332		2.46

Equity securities (without contractual maturity)		1,246		876		—		2,122		7.94

Other
Within 1 year		8,539		11		—		8,550		1.78
After 5 to 10 years		1,004		31		—		1,035		3.62

Total other		9,543		42		—		9,585		1.97

Total investment securities available-for-sale ^[1]	$	8,279,363	$	43,379	$	112,936	$	8,209,806		1.94	%

[1]	Includes $4.1 billion pledged to secure public and trust deposits, assets sold under agreements to repurchase, credit facilities and loan servicing agreements that the secured parties are not permitted to sell or repledge the collateral, of which $3.4 billion serve as collateral for public funds.

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

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.

During the quarter ended March 31, 2017, the Corporation sold equity securities with a realized gain of $162 thousand. The proceeds from these sales were $381 thousand. There were no securities sold during the quarter ended March 31, 2016.

The following tables present the Corporation’s fair value and gross unrealized losses of investment securities available-for-sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2017 and December 31, 2016.


	At March 31, 2017
	Less than 12 months				12 months or more				Total
(In thousands)	Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Fair value		Gross unrealized losses
U.S. Treasury securities	$	1,711,899	$	9,520	$	—	$	—	$	1,711,899	$	9,520
Obligations of U.S. Government sponsored entities		405,934		1,797		2,945		34		408,879		1,831
Obligations of Puerto Rico, States and political subdivisions		6,353		127		14,556		8,069		20,909		8,196
Collateralized mortgage obligations - federal agencies		471,245		8,778		325,069		15,361		796,314		24,139
Mortgage-backed securities		3,601,972		68,519		14,453		381		3,616,425		68,900

Total investment securities available-for-sale in an unrealized loss position	$	6,197,403	$	88,741	$	357,023	$	23,845	$	6,554,426	$	112,586


	At December 31, 2016
	Less than 12 months				12 months or more				Total
(In thousands)	Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Fair value		Gross unrealized losses
U.S. Treasury securities	$	1,162,110	$	9,579	$	—	$	—	$	1,162,110	$	9,579
Obligations of U.S. Government sponsored entities		430,273		2,426		3,126		79		433,399		2,505
Obligations of Puerto Rico, States and political subdivisions		6,258		161		16,512		6,092		22,770		6,253
Collateralized mortgage obligations - federal agencies		505,503		8,112		339,236		15,933		844,739		24,045
Mortgage-backed securities		3,537,606		70,173		15,113		381		3,552,719		70,554

Total investment securities available-for-sale in an unrealized loss position	$	5,641,750	$	90,451	$	373,987	$	22,485	$	6,015,737	$	112,936

As of March 31, 2017, the available-for-sale investment portfolio reflects gross unrealized losses of approximately $113 million, driven by Mortgage backed securities and Collateralized mortgage obligations.

Management evaluates investment securities for other-than-temporary (“OTTI”) declines in fair value on a quarterly basis. Once a decline in value is determined to be other-than-temporary, the value of a debt security is reduced and a corresponding charge to earnings is recognized for anticipated credit losses. Also, for equity securities that are considered other-than-temporarily impaired, the excess of the security’s carrying value over its fair value at the evaluation date is accounted for as a loss in the results of operations. The OTTI analysis requires management to consider various factors, which include, but are not limited to: (1) the length of time and the extent to which fair value has been less than the amortized cost basis, (2) the financial condition of the issuer or issuers, (3) actual collateral attributes, (4) the payment structure of the debt security and the likelihood of the issuer being able to make payments, (5) any rating changes by a rating agency, (6) adverse conditions specifically related to the security, industry, or a geographic area, and (7) management’s intent to sell the debt security or whether it is more likely than not that the Corporation would be required to sell the debt security before a forecasted recovery occurs.

The portfolio of “Obligations of Puerto Rico, States and Political subdivisions” include senior obligations from the Puerto Rico Sales Tax Financing Corporation (“COFINA”) with a fair value of $15 million (December 31, 2016 - $17 million) that had an unrealized loss of $8 million, included in accumulated other comprehensive income, at March 31, 2017 (December 31, 2016 - $6 million). As further discussed in Note 21, on May 3, 2017, the Oversight Board established pursuant to the Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”) filed a petition in the Federal Court for the District of Puerto Rico to utilize the restructuring authority provided by Title III of PROMESA for the Commonwealth; on May 5, 2017, the Oversight Board sought relief under Title III with respect to COFINA. Act No. 26-2017 of 2017, signed on April 29, 2017, also allows the Commonwealth to use COFINA revenues for operational expenses, subject to certain conditions and restrictions. Although to date, COFINA has made all debt service payments and has certain moneys in reserve to make certain additional debt service payments in the ordinary course, the Corporation, in light of these developments, will re-evaluate during the second quarter of 2017 whether the decline in value of these investments is other-than-temporary, which would result in the recognition of a charge to earnings related to credit losses with respect to such COFINA senior obligations. Further negative evidence impacting the liquidity and sources of repayment of the obligations of Puerto Rico and its political subdivisions, or any further actions taken by the Commonwealth or the Oversight Board that affect our holdings of obligations of the Commonwealth or its instrumentalities, could result in additional charges to earnings to recognize estimated credit losses determined to be other-than-temporary.

At March 31, 2017, the Corporation did not have the intent to sell debt securities in an unrealized loss position and it was not more likely than not that the Corporation would have to sell the investments securities prior to recovery of their amortized cost basis.

The following table states the name of issuers, and the aggregate amortized cost and fair value of the securities of such issuer (includes available-for-sale and held-to-maturity securities), in which the aggregate amortized cost of such securities exceeds 10% of stockholders’ equity. This information excludes securities backed by the full faith 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.


	March 31, 2017				December 31, 2016
(In thousands)	Amortized cost		Fair value		Amortized cost		Fair value
FNMA	$	3,435,528	$	3,392,789	$	3,255,844	$	3,211,443
Freddie Mac		1,391,110		1,371,949		1,381,197		1,361,933

N ote 6 – Investment securities held-to-maturity

The following tables present the amortized cost, gross unrealized gains and losses, approximate fair value, weighted average yield and contractual maturities of investment securities held-to-maturity at March 31, 2017 and December 31, 2016.


	At March 31, 2017
(In thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value		Weighted average yield
Obligations of Puerto Rico, States and political subdivisions
Within 1 year	$	3,235	$	—	$	1,375	$	1,860		5.95	%
After 1 to 5 years		15,200		—		6,627		8,573		6.03
After 5 to 10 years		17,485		—		7,689		9,796		6.24
After 10 years		58,333		1,387		8,360		51,360		1.80

Total obligations of Puerto Rico, States and political subdivisions		94,253		1,387		24,051		71,589		3.45

Collateralized mortgage obligations - federal agencies
After 5 to 10 years		73		4		—		77		5.45

Total collateralized mortgage obligations - federal agencies		73		4		—		77		5.45

Other
Within 1 year		1,250		—		25		1,225		1.62
After 1 to 5 years		750		—		13		737		2.75

Total other		2,000		—		38		1,962		2.04

Total investment securities held-to-maturity ^[1]	$	96,326	$	1,391	$	24,089	$	73,628		3.42	%

[1]	Includes $94.3 million pledged to secure public and trust deposits that the secured parties are not permitted to sell or repledge the collateral.


	At December 31, 2016
			Gross		Gross				Weighted
(In thousands)	Amortized cost		unrealized gains		unrealized losses		Fair value		average yield
Obligations of Puerto Rico, States and political subdivisions
Within 1 year	$	3,105	$	—	$	1,240	$	1,865		5.90	%
After 1 to 5 years		14,540		—		5,957		8,583		6.02
After 5 to 10 years		18,635		—		7,766		10,869		6.20
After 10 years		59,747		1,368		8,892		52,223		1.91

Total obligations of Puerto Rico, States and political subdivisions		96,027		1,368		23,855		73,540		3.49

Collateralized mortgage obligations - federal agencies
After 5 to 10 years		74		4		—		78		5.45

Total collateralized mortgage obligations - federal agencies		74		4		—		78		5.45

Other
Within 1 year		1,000		—		3		997		1.65
After 1 to 5 years		1,000		—		39		961		2.44

Total other		2,000		—		42		1,958		2.05

Total investment securities held-to-maturity ^[1]	$	98,101	$	1,372	$	23,897	$	75,576		3.46	%

[1]	Includes $53.1 million pledged to secure public and trust deposits that the secured parties are not permitted to sell or repledge the collateral.

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.

The following tables present the Corporation’s fair value and gross unrealized losses of investment securities held-to-maturity, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2017 and December 31, 2016.


	At March 31, 2017
	Less than 12 months				12 months or more				Total
(In thousands)	Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Fair value		Gross unrealized losses
Obligations of Puerto Rico, States and political subdivisions	$	31,526	$	1,764	$	28,703	$	22,287	$	60,229	$	24,051
Other		737		13		1,225		25		1,962		38

Total investment securities held-to-maturity in an unrealized loss position	$	32,263	$	1,777	$	29,928	$	22,312	$	62,191	$	24,089


	At December 31, 2016
	Less than 12 months				12 months or more				Total
(In thousands)	Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Fair value		Gross unrealized losses
Obligations of Puerto Rico, States and political subdivisions	$	31,294	$	1,702	$	30,947	$	22,153	$	62,241	$	23,855
Other		491		9		1,217		33		1,708		42

Total investment securities held-to-maturity in an unrealized loss position	$	31,785	$	1,711	$	32,164	$	22,186	$	63,949	$	23,897

As indicated in Note 5 to these Consolidated Financial Statements, management evaluates investment securities for OTTI declines in fair value on a quarterly basis.

The “Obligations of Puerto Rico, States and political subdivisions” classified as held-to-maturity at March 31, 2017 are primarily associated with securities issued by municipalities of Puerto Rico and are generally not rated by a credit rating agency. This includes $51 million of general and special obligation bonds issued by three municipalities of Puerto Rico, which are payable primarily from, and have a lien on, certain property taxes imposed by the issuing municipality. In the case of general obligations, they also benefit from a pledge of the full faith, credit and unlimited taxing power of the issuing municipality and issuing municipalities are required by law to levy property taxes in an amount sufficient for the payment of debt service on such general obligations bonds.

The portfolio also includes approximately $43 million in securities for which the underlying source of payment is not the central government, but in which a government instrumentality provides a guarantee in the event of default.

The Corporation performs periodic credit quality reviews on these issuers. Based on the quarterly analysis performed, management concluded that no individual debt security was other-than-temporarily impaired at March 31, 2017. Further deterioration of the fiscal crisis of the Government of Puerto Rico could further affect the value of these securities, resulting in losses to the Corporation. The Corporation does not have the intent to sell securities held-to-maturity and it is more likely than not that the Corporation will not have to sell these investment securities prior to recovery of their amortized cost basis.

Refer to Note 21 for additional information on the Corporation’s exposure to the Puerto Rico Government.

Note 7 – Loans

Loans acquired in the Westernbank FDIC-assisted transaction, except for lines of credit with revolving privileges, are accounted for by the Corporation in accordance with ASC Subtopic 310-30. Under ASC Subtopic 310-30, the acquired loans were aggregated into pools based on similar characteristics. Each loan pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. The loans which are accounted for under ASC Subtopic 310-30 by the Corporation are not considered non-performing and will continue to have an accretable yield as long as there is a reasonable expectation about the timing and amount of cash flows expected to be collected. The Corporation measures additional losses for this portfolio when it is probable the Corporation will be unable to collect all cash flows expected at acquisition plus additional cash flows expected to be collected arising from changes in estimates after acquisition. Lines of credit with revolving privileges that were acquired as part of the Westernbank FDIC-assisted transaction are accounted for under the guidance of ASC Subtopic 310-20, which requires that any differences between the contractually required loan payment receivable in excess of the Corporation’s initial investment in the loans be accreted into interest income. Loans accounted for under ASC Subtopic 310-20 are placed in non-accrual status when past due in accordance with the Corporation’s non-accruing policy and any accretion of discount is discontinued.

The risks on loans acquired in the FDIC-assisted transaction are significantly different from the risks on loans not covered under the FDIC loss sharing agreements because of the loss protection provided by the FDIC. Accordingly, the Corporation presents loans subject to the loss sharing agreements as “covered loans” in the information below and loans that are not subject to the FDIC loss sharing agreements as “non-covered loans.” The FDIC loss sharing agreements expired on June 30, 2015 for commercial (including construction) and consumer loans, and expires on June 30, 2020 for single-family residential mortgage loans, as explained in Note 9.

For a summary of the accounting policies related to loans, interest recognition and allowance for loan losses refer to the summary of significant accounting policies included in Note 2 of the 2016 Form10K.

During the quarter ended March 31, 2017, the Corporation recorded purchases (including repurchases) of mortgage loans amounting to $136 million, consumer loans of $42 million and leasing loans of $2 million. During the quarter ended March 31, 2016, the Corporation recorded purchases of mortgage loans amounting to $122 million, consumer loans of $106 million and commercial loans of $51 million.

The Corporation performed whole-loan sales involving approximately $28 million of residential mortgage loans during the quarter ended March 31, 2017 (March 31, 2016 - $21 million). Also, during the quarter ended March 31, 2017, the Corporation securitized approximately $147 million of mortgage loans into Government National Mortgage Association (“GNMA”) mortgage-backed securities and $28 million of mortgage loans into Federal National Mortgage Association (“FNMA”) mortgage-backed securities, compared to $134 million and $36 million, respectively, during the quarter ended March 31, 2016.

Non-covered loans

The following table presents the composition of non-covered loans held-in-portfolio (“HIP”), net of unearned income, by past due status at March 31, 2017 and December 31, 2016, including loans previously covered by the commercial FDIC loss sharing agreements.


March 31, 2017
Puerto Rico
	Past due										Non-covered
(In thousands)	30-59 days		60-89 days		90 days or more		Total past due		Current		loans HIP Puerto Rico
Commercial multi-family	$	1,727	$	—	$	578	$	2,305	$	144,547	$	146,852
Commercial real estate non-owner occupied		97,018		1,487		34,932		133,437		2,380,158		2,513,595
Commercial real estate owner occupied		13,055		1,768		115,260		130,083		1,608,195		1,738,278
Commercial and industrial		7,127		1,286		46,968		55,381		2,610,224		2,665,605
Construction		—		—		1,668		1,668		93,791		95,459
Mortgage		293,694		146,474		777,260		1,217,428		4,652,290		5,869,718
Leasing		8,141		1,052		2,444		11,637		708,006		719,643
Consumer:
Credit cards		12,330		7,835		19,330		39,495		1,038,989		1,078,484
Home equity lines of credit		492		—		572		1,064		7,085		8,149
Personal		13,131		7,382		19,460		39,973		1,103,362		1,143,335
Auto		30,214		6,228		12,685		49,127		779,832		828,959
Other		729		611		19,480		20,820		147,332		168,152

Total	$	477,658	$	174,123	$	1,050,637	$	1,702,418	$	15,273,811	$	16,976,229


March 31, 2017
U.S. mainland
	Past due
(In thousands)	30-59 days		60-89 days		90 days or more		Total past due		Current		Loans HIP U.S. mainland
Commercial multi-family	$	26	$	—	$	199	$	225	$	1,108,347	$	1,108,572
Commercial real estate non-owner occupied		1,030		—		1,629		2,659		1,445,550		1,448,209
Commercial real estate owner occupied		2,451		—		762		3,213		239,642		242,855
Commercial and industrial		5,426		1		101,756		107,183		840,551		947,734
Construction		100		—		—		100		735,746		735,846
Mortgage		13,873		3,458		11,889		29,220		729,049		758,269
Legacy		660		267		3,335		4,262		36,426		40,688
Consumer:
Credit cards		6		1		35		42		115		157
Home equity lines of credit		2,085		453		5,801		8,339		228,306		236,645
Personal		2,311		1,424		2,404		6,139		233,188		239,327
Auto		—		—		—		—		7		7
Other		—		4		—		4		179		183

Total	$	27,968	$	5,608	$	127,810	$	161,386	$	5,597,106	$	5,758,492


March 31, 2017
Popular, Inc.
	Past due										Non-covered
(In thousands)	30-59 days		60-89 days		90 days or more		Total past due		Current		loans HIP Popular, Inc. ^[1] [2]
Commercial multi-family	$	1,753	$	—	$	777	$	2,530	$	1,252,894	$	1,255,424
Commercial real estate non-owner occupied		98,048		1,487		36,561		136,096		3,825,708		3,961,804
Commercial real estate owner occupied		15,506		1,768		116,022		133,296		1,847,837		1,981,133
Commercial and industrial		12,553		1,287		148,724		162,564		3,450,775		3,613,339
Construction		100		—		1,668		1,768		829,537		831,305
Mortgage		307,567		149,932		789,149		1,246,648		5,381,339		6,627,987
Leasing		8,141		1,052		2,444		11,637		708,006		719,643
Legacy ^[3]		660		267		3,335		4,262		36,426		40,688
Consumer:
Credit cards		12,336		7,836		19,365		39,537		1,039,104		1,078,641
Home equity lines of credit		2,577		453		6,373		9,403		235,391		244,794
Personal		15,442		8,806		21,864		46,112		1,336,550		1,382,662
Auto		30,214		6,228		12,685		49,127		779,839		828,966
Other		729		615		19,480		20,824		147,511		168,335

Total	$	505,626	$	179,731	$	1,178,447	$	1,863,804	$	20,870,917	$	22,734,721

[1]	Non-covered loans held-in-portfolio are net of $124 million in unearned income and exclude $85 million in loans held-for-sale.

[2]

Includes $7.3 billion pledged to secure credit facilities and public funds that the secured parties are not permitted to sell or repledge the collateral, of which $4.5 billion were pledged at the Federal Home Loan Bank(“FHLB”) as collateral for borrowings, $2.3 billion at the Federal Reserve Bank (“FRB”) for discount window borrowings and $0.5 billion serve as collateral for public funds.

[3]	The legacy portfolio is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years at the BPNA segment.


December 31, 2016
Puerto Rico
	Past due										Non-covered
(In thousands)	30-59 days		60-89 days		90 days or more		Total past due		Current		loans HIP Puerto Rico
Commercial multi-family	$	232	$	—	$	664	$	896	$	173,644	$	174,540
Commercial real estate non-owner occupied		98,604		4,785		51,435		154,824		2,409,461		2,564,285
Commercial real estate owner occupied		12,967		5,014		112,997		130,978		1,660,497		1,791,475
Commercial and industrial		19,156		2,638		32,147		53,941		2,617,976		2,671,917
Construction		—		—		1,668		1,668		83,890		85,558
Mortgage		289,635		136,558		801,251		1,227,444		4,689,056		5,916,500
Leasing		6,619		1,356		3,062		11,037		691,856		702,893
Consumer:
Credit cards		11,646		8,752		18,725		39,123		1,061,484		1,100,607
Home equity lines of credit		—		65		185		250		8,101		8,351
Personal		12,148		7,918		20,686		40,752		1,109,425		1,150,177
Auto		32,441		7,217		12,320		51,978		774,614		826,592
Other		1,259		294		19,311		20,864		154,665		175,529

Total	$	484,707	$	174,597	$	1,074,451	$	1,733,755	$	15,434,669	$	17,168,424


December 31, 2016
U.S. mainland
	Past due
(In thousands)	30-59 days		60-89 days		90 days or more		Total past due		Current		Loans HIP U.S. mainland
Commercial multi-family	$	5,952	$	—	$	206	$	6,158	$	1,058,138	$	1,064,296
Commercial real estate non-owner occupied		1,992		379		1,195		3,566		1,353,750		1,357,316
Commercial real estate owner occupied		2,116		540		472		3,128		240,617		243,745
Commercial and industrial		960		610		101,257		102,827		828,106		930,933
Construction		—		—		—		—		690,742		690,742
Mortgage		15,974		5,272		11,713		32,959		746,902		779,861
Legacy		833		346		3,337		4,516		40,777		45,293
Consumer:
Credit cards		8		28		30		66		92		158
Home equity lines of credit		2,908		1,055		4,762		8,725		243,450		252,175
Personal		2,547		1,675		1,864		6,086		234,521		240,607
Auto		—		—		—		—		9		9
Other		—		—		8		8		180		188

Total	$	33,290	$	9,905	$	124,844	$	168,039	$	5,437,284	$	5,605,323


December 31, 2016
Popular, Inc.
	Past due										Non-covered
(In thousands)	30-59 days		60-89 days		90 days or more		Total past due		Current		loans HIP Popular, Inc. ^[1] [2]
Commercial multi-family	$	6,184	$	—	$	870	$	7,054	$	1,231,782	$	1,238,836
Commercial real estate non-owner occupied		100,596		5,164		52,630		158,390		3,763,211		3,921,601
Commercial real estate owner occupied		15,083		5,554		113,469		134,106		1,901,114		2,035,220
Commercial and industrial		20,116		3,248		133,404		156,768		3,446,082		3,602,850
Construction		—		—		1,668		1,668		774,632		776,300
Mortgage		305,609		141,830		812,964		1,260,403		5,435,958		6,696,361
Leasing		6,619		1,356		3,062		11,037		691,856		702,893
Legacy ^[3]		833		346		3,337		4,516		40,777		45,293
Consumer:
Credit cards		11,654		8,780		18,755		39,189		1,061,576		1,100,765
Home equity lines of credit		2,908		1,120		4,947		8,975		251,551		260,526
Personal		14,695		9,593		22,550		46,838		1,343,946		1,390,784
Auto		32,441		7,217		12,320		51,978		774,623		826,601
Other		1,259		294		19,319		20,872		154,845		175,717

Total	$	517,997	$	184,502	$	1,199,295	$	1,901,794	$	20,871,953	$	22,773,747

[1]	Non-covered loans held-in-portfolio are net of $121 million in unearned income and exclude $89 million in loans held-for-sale.

[2]

Includes $7.3 billion pledged to secure credit facilities and public funds that the secured parties are not permitted to sell or repledge the collateral, of which $4.5 billion were pledged at the FHLB as collateral for borrowings, $2.3 billion at the FRB for discount window borrowings and $0.5 billion serve as collateral for public funds.

[3]	The legacy portfolio is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years at the BPNA segment.

The following tables present non-covered loans held-in-portfolio by loan class that are in non-performing status or are accruing interest but are past due 90 days or more at March 31, 2017 and December 31, 2016. Accruing loans past due 90 days or more consist primarily of credit cards, Federal Housing Administration (“FHA”) / U.S. Department of Veterans Affairs (“VA”) and other insured mortgage loans, and delinquent mortgage loans which are included in the Corporation’s financial statements pursuant to GNMA’s buy-back option program. Servicers of loans underlying GNMA mortgage-backed securities must report as their own assets the defaulted loans that they have the option (but not the obligation) to repurchase, even when they elect not to exercise that option.


At March 31, 2017
	Puerto Rico				U.S. mainland				Popular, Inc.
			Accruing loans				Accruing loans				Accruing loans
	Non-accrual		past-due 90		Non-accrual		past-due 90		Non-accrual		past-due 90
(In thousands)	loans		days or more [1]		loans		days or more [1]		loans		days or more [1]
Commercial multi-family	$	578	$	—	$	199	$	—	$	777	$	—
Commercial real estate non-owner occupied		23,259		—		1,629		—		24,888		—
Commercial real estate owner occupied		104,950		—		762		—		105,712		—
Commercial and industrial		46,690		278		1,174		—		47,864		278
Mortgage ^[3]		319,450		387,641		11,889		—		331,339		387,641
Leasing		2,444		—		—		—		2,444		—
Legacy		—		—		3,335		—		3,335		—
Consumer:
Credit cards		—		19,330		35		—		35		19,330
Home equity lines of credit		—		572		5,801		—		5,801		572
Personal		19,365		9		2,404		—		21,769		9
Auto		12,685		—		—		—		12,685		—
Other		18,964		516		—		—		18,964		516

Total ^[2]	$	548,385	$	408,346	$	27,228	$	—	$	575,613	$	408,346

[1]

Non-covered loans of $194 million accounted for under ASC Subtopic 310-30 are excluded from the above table as they are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analysis.

[2]	For purposes of this table non-performing loans exclude non-performing loans held-for-sale.

[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. These balances include $173 million of residential mortgage loans in Puerto Rico insured by FHA or guaranteed by the VA that are no longer accruing interest as of March 31, 2017. Furthermore, the Corporation has approximately $59 million in reverse mortgage loans in Puerto Rico 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.


At December 31, 2016
	Puerto Rico				U.S. mainland				Popular, Inc.
			Accruing loans				Accruing loans				Accruing loans
	Non-accrual		past-due 90		Non-accrual		past-due 90		Non-accrual		past-due 90
(In thousands)	loans		days or more [1]		loans		days or more [1]		loans		days or more [1]
Commercial multi-family	$	664	$	—	$	206	$	—	$	870	$	—
Commercial real estate non-owner occupied		24,611		—		1,195		—		25,806		—
Commercial real estate owner occupied		102,771		—		472		—		103,243		—
Commercial and industrial		31,609		538		1,820		—		33,429		538
Mortgage ^[3]		318,194		406,583		11,713		—		329,907		406,583
Leasing		3,062		—		—		—		3,062		—
Legacy		—		—		3,337		—		3,337		—
Consumer:
Credit cards		—		18,725		30		—		30		18,725
Home equity lines of credit		—		185		4,762		—		4,762		185
Personal		20,553		34		1,864		—		22,417		34
Auto		12,320		—		—		—		12,320		—
Other		18,724		587		8		—		18,732		587

Total ^[2]	$	532,508	$	426,652	$	25,407	$	—	$	557,915	$	426,652

[1]

Non-covered loans by $215 million accounted for under ASC Subtopic 310-30 are excluded from the above table as they are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analysis.

[2]	For purposes of this table non-performing loans exclude non-performing loans held-for-sale.

[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. These balances include $181 million of residential mortgage loans in Puerto Rico insured by FHA or guaranteed by the VA that are no longer accruing interest as of December 31, 2016. Furthermore, the Corporation has approximately $68 million in reverse mortgage loans in Puerto Rico 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.

Covered loans

The following tables present the composition of loans by past due status at March 31, 2017 and December 31, 2016 for covered loans held-in-portfolio. The information considers covered loans accounted for under ASC Subtopic 310-20 and ASC Subtopic 310-30.


March 31, 2017
	Past due
	30-59		60-89		90 days		Total				Covered
(In thousands)	days		days		or more		past due		Current		loans HIP [1]
Mortgage	$	33,374	$	2,897	$	63,073	$	99,344	$	436,943	$	536,287
Consumer		1,164		—		732		1,896		13,797		15,693

Total covered loans	$	34,538	$	2,897	$	63,805	$	101,240	$	450,740	$	551,980

[1]	Includes $325 million pledged to secure credit facilities at the FHLB which are not permitted to sell or repledge the collateral.


December 31, 2016
	Past due
	30-59		60-89		90 days		Total				Covered
(In thousands)	days		days		or more		past due		Current		loans HIP [1]
Mortgage	$	25,506	$	12,904	$	69,856	$	108,266	$	448,304	$	556,570
Consumer		751		245		1,074		2,070		14,238		16,308

Total covered loans	$	26,257	$	13,149	$	70,930	$	110,336	$	462,542	$	572,878

[1]	Includes $337 million pledged to secure credit facilities at the FHLB which are not permitted to sell or repledge the collateral.

The following table presents covered loans in non-performing status and accruing loans past-due 90 days or more by loan class at March 31, 2017 and December 31, 2016.


	March 31, 2017				December 31, 2016
	Non-accrual		Accruing loans past		Non-accrual		Accruing loans past
(In thousands)	loans		due 90 days or more		loans		due 90 days or more
Mortgage	$	3,798	$	—	$	3,794	$	—
Consumer		142		—		121		—

Total ^[1]	$	3,940	$	—	$	3,915	$	—

[1]	Covered loans accounted for under ASC Subtopic 310-30 are excluded from the above table as they are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analyses.

The Corporation accounts for lines of credit with revolving privileges under the accounting guidance of ASC Subtopic 310-20, which requires that any differences between the contractually required loans payment receivable in excess of the initial investment in the loans be accreted into interest income over the life of the loans, if the loan is accruing interest. Covered loans accounted for under ASC Subtopic 310-20 amounted to $10 million at March 31, 2017 (December 31, 2016 - $10 million).

Loans acquired with deteriorated credit quality accounted for under ASC 310-30

The following provides information of loans acquired with evidence of credit deterioration as of the acquisition date, accounted for under the guidance of ASC 310-30.

Loans acquired from Westernbank as part of an FDIC-assisted transaction

The carrying amount of the Westernbank loans consisted of loans determined to be impaired at the time of acquisition, which are accounted for in accordance with ASC Subtopic 310-30 (“credit impaired loans”), and loans that were considered to be performing at the acquisition date, accounted for by analogy to ASC Subtopic 310-30 (“non-credit impaired loans”), as detailed in the following table.


	March 31, 2017									December 31, 2016
	Carrying amount									Carrying amount
(In thousands)	Non-credit impaired loans			Credit impaired loans			Total			Non-credit impaired loans			Credit impaired loans			Total
Commercial real estate	$	957,360		$	14,031		$	971,391		$	985,181		$	14,440		$	999,621
Commercial and industrial		100,759			—			100,759			103,476			—			103,476
Construction		—			1,668			1,668			—			1,668			1,668
Mortgage		571,594			23,990			595,584			587,949			25,781			613,730
Consumer		18,615			883			19,498			18,775			1,059			19,834

Carrying amount [1]		1,648,328			40,572			1,688,900			1,695,381			42,948			1,738,329
Allowance for loan losses		(59,283	)		(7,261	)		(66,544	)		(61,855	)		(7,022	)		(68,877	)

Carrying amount, net of allowance	$	1,589,045		$	33,311		$	1,622,356		$	1,633,526		$	35,926		$	1,669,452

[1]	The carrying amount of loans acquired from Westernbank and accounted for under ASC 310-30 which remains subject to the loss sharing agreement with the FDIC amounted to approximately $542 million as of March 31, 2017 and $563 million as of December 31, 2016.

The outstanding principal balance of Westernbank loans accounted pursuant to ASC Subtopic 310-30, amounted to $2.1 billion at March 31, 2017 (December 31, 2016 - $2.1 billion). At March 31, 2017, none of the acquired loans from the Westernbank FDIC-assisted transaction accounted for under ASC Subtopic 310-30 were considered non-performing loans. Therefore, interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, was recognized on all acquired loans.

Changes in the carrying amount and the accretable yield for the Westernbank loans accounted pursuant to the ASC Subtopic 310-30, for the quarters ended March 31, 2017 and 2016, were as follows:


	Activity in the accretable yield
	Westernbank loans ASC 310-30
	For the quarters ended
	March 31, 2017									March 31, 2016
(In thousands)	Non-credit impaired loans			Credit impaired loans			Total			Non-credit impaired loans			Credit impaired loans			Total
Beginning balance	$	1,001,908		$	8,179		$	1,010,087		$	1,105,732		$	6,726		$	1,112,458
Accretion		(36,016	)		(876	)		(36,892	)		(42,000	)		(1,533	)		(43,533	)
Change in expected cash flows		7,789			222			8,011			54,544			5,339			59,883

Ending balance	$	973,681		$	7,525		$	981,206		$	1,118,276		$	10,532		$	1,128,808


	Carrying amount of Westernbank loans accounted for pursuant to ASC 310-30
	For the quarters ended
	March 31, 2017									March 31, 2016
(In thousands)	Non-credit impaired loans			Credit impaired loans			Total			Non-credit impaired loans			Credit impaired loans			Total
Beginning balance	$	1,695,381		$	42,948		$	1,738,329		$	1,898,146		$	76,355		$	1,974,501
Accretion		36,016			876			36,892			42,000			1,533			43,533
Collections / loan sales / charge-offs		(83,069	)		(3,252	)		(86,321	)		(74,206	)		(8,387	)		(82,593	)

Ending balance ^[1]	$	1,648,328		$	40,572		$	1,688,900		$	1,865,940		$	69,501		$	1,935,441
Allowance for loan losses ASC 310-30 Westernbank loans		(59,283	)		(7,261	)		(66,544	)		(58,703	)		(4,264	)		(62,967	)

Ending balance, net of ALLL	$	1,589,045		$	33,311		$	1,622,356		$	1,807,237		$	65,237		$	1,872,474

[1]	The carrying amount of loans acquired from Westernbank and accounted for under ASC 310-30 which remain subject to the loss sharing agreement with the FDIC amounted to approximately $ 542 million as of March 31, 2017 (March 31, 2016-$615 million).

Other loans acquired with deteriorated credit quality

The outstanding principal balance of other acquired loans accounted pursuant to ASC Subtopic 310-30, amounted to $689 million at March 31, 2017 (December 31, 2016 - $700 million). At March 31, 2017, none of the other acquired loans accounted under ASC Subtopic 310-30 were considered non-performing loans. Therefore, interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, was recognized on all acquired loans.

Changes in the carrying amount and the accretable yield for the other acquired loans accounted pursuant to the ASC Subtopic 310-30, for the quarters ended March 31, 2017 and 2016 were as follows:


Activity in the accretable yield - Other acquired loans ASC 310-30
	For the quarters ended
(In thousands)	March 31, 2017			March 31, 2016
Beginning balance	$	278,896		$	221,128
Additions		3,254			4,340
Accretion		(8,836	)		(8,555	)
Change in expected cash flows		36,464			50,855

Ending balance	$	309,778		$	267,768


Carrying amount of other acquired loans accounted for pursuant to ASC 310-30
	For the quarters ended
(In thousands)	March 31, 2017			March 31, 2016
Beginning balance	$	562,695		$	564,050
Purchase accounting adjustments related to the Doral Bank Transaction (Refer to Note14)		—			(4,707	)
Additions		5,581			10,051
Accretion		8,836			8,555
Collections and charge-offs		(20,388	)		(15,226	)

Ending balance	$	556,724		$	562,723
Allowance for loan losses ASC 310-30 non-covered loans		(28,909	)		(15,258	)

Ending balance, net of allowance for loan losses	$	527,815		$	547,465

Note 8 – Allowance for loan losses

The Corporation follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan losses to provide for inherent losses in the loan portfolio. This methodology includes the consideration of factors such as current economic conditions, portfolio risk characteristics, prior loss experience and results of periodic credit reviews of individual loans. The provision for loan losses charged to current operations is based on this methodology. Loan losses are charged and recoveries are credited to the allowance for loan losses.

The Corporation’s assessment of the allowance for loan losses is determined in accordance with the guidance of loss contingencies in ASC Subtopic 450-20 and loan impairment guidance in ASC Section 310-10-35. Also, the Corporation determines the allowance for loan losses on purchased impaired loans and purchased loans accounted for under ASC Subtopic 310-30, by evaluating decreases in expected cash flows after the acquisition date.

The accounting guidance provides for the recognition of a loss allowance for groups of homogeneous loans. The determination for general reserves of the allowance for loan losses includes the following principal factors:

•

Base net loss rates, which are based on the moving average of annualized net loss rates computed over a 5-year historical loss period for the commercial and construction loan portfolios, and an 18-month period for the consumer and mortgage loan portfolios. The base net loss rates are applied by loan type and by legal entity.

•

Recent loss trend adjustment, which replaces the base loss rate with a 12-month average loss rate, when these trends are higher than the respective base loss rates. The objective of this adjustment is to allow for a more recent loss trend to be captured and reflected in the ALLL estimation process.

For the period ended March 31, 2017, 55% (March 31, 2016 - 44%) of the ALLL for non-covered BPPR segment loan portfolios utilized the recent loss trend adjustment instead of the base loss. The effect of replacing the base loss with the recent loss trend adjustment was mainly concentrated in the mortgage, other consumer and commercial real estate owner occupied portfolios for 2017 and in the mortgage, commercial multi-family and commercial and industrial loan portfolios for 2016.

For the period ended March 31, 2017, 0.35% (March 31, 2016 - 2%) of our BPNA segment loan portfolios utilized the recent loss trend adjustment instead of the base loss. The effect of replacing the base loss with the recent loss trend adjustment was concentrated in the commercial multifamily loan and legacy portfolios for 2017 and in the consumer loan portfolio for 2016.

•

Environmental factors, which include credit and macroeconomic indicators such as unemployment rate, economic activity index and delinquency rates, adopted to account for current market conditions that are likely to cause estimated credit losses to differ from historical losses. The Corporation reflects the effect of these environmental factors on each loan group as an adjustment that, as appropriate, increases the historical loss rate applied to each group. Environmental factors provide updated perspective on credit and economic conditions. Regression analysis is used to select these indicators and quantify the effect on the general reserve of the allowance for loan losses.

The following tables present the changes in the allowance for loan losses, loan ending balances and whether such loans and the allowance pertain to loans individually or collectively evaluated for impairment for the quarters ended March 31, 2017 and 2016.


For the quarter ended March 31, 2017
Puerto Rico - Non-covered loans
(In thousands)	Commercial			Construction			Mortgage			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	189,686		$	1,353		$	143,320		$	7,662		$	125,963		$	467,984
Provision		583			464			15,172			1,048			14,211			31,478
Charge-offs		(11,071	)		(3,587	)		(14,983	)		(1,341	)		(21,812	)		(52,794	)
Recoveries		8,433			3,731			1,428			528			5,729			19,849

Ending balance	$	187,631		$	1,961		$	144,937		$	7,897		$	124,091		$	466,517

Specific ALLL	$	51,276		$	—		$	41,067		$	522		$	22,331		$	115,196

General ALLL	$	136,355		$	1,961		$	103,870		$	7,375		$	101,760		$	351,321

Loans held-in-portfolio:
Impaired non-covered loans	$	348,823		$	—		$	501,647		$	1,803		$	106,236		$	958,509
Non-covered loans held-in-portfolio excluding impaired loans		6,715,507			95,459			5,368,071			717,840			3,120,843			16,017,720

Total non-covered loans held-in-portfolio	$	7,064,330		$	95,459		$	5,869,718		$	719,643		$	3,227,079		$	16,976,229


For the quarter ended March 31, 2017
Puerto Rico - Covered loans
(In thousands)	Commercial			Construction			Mortgage			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	—		$	—		$	30,159		$	—		$	191		$	30,350
Provision (reversal of provision)		—			—			(1,690	)		—			331			(1,359	)
Charge-offs		—			—			(1,231	)		—			(93	)		(1,324	)
Recoveries		—			—			103			—			1			104

Ending balance	$	—		$	—		$	27,341		$	—		$	430		$	27,771

Specific ALLL	$	—		$	—		$	—		$	—		$	—		$	—

General ALLL	$	—		$	—		$	27,341		$	—		$	430		$	27,771

Loans held-in-portfolio:
Impaired covered loans	$	—		$	—		$	—		$	—		$	—		$	—
Covered loans held-in-portfolio excluding impaired loans		—			—			536,287			—			15,693			551,980

Total covered loans held-in-portfolio	$	—		$	—		$	536,287		$	—		$	15,693		$	551,980


For the quarter ended March 31, 2017
U.S. Mainland
(In thousands)	Commercial			Construction			Mortgage			Legacy			Consumer			Total
Allowance for credit losses:
Beginning balance	$	12,968		$	8,172		$	4,614		$	1,343		$	15,220		$	42,317
Provision (reversal of provision)		7,622			(136	)		(436	)		(665	)		4,194			10,579
Charge-offs		(70	)		—			(106	)		(41	)		(4,733	)		(4,950	)
Recoveries		533			—			210			529			990			2,262

Ending balance	$	21,053		$	8,036		$	4,282		$	1,166		$	15,671		$	50,208

Specific ALLL	$	—		$	—		$	2,197		$	—		$	679		$	2,876

General ALLL	$	21,053		$	8,036		$	2,085		$	1,166		$	14,992		$	47,332

Loans held-in-portfolio:
Impaired loans	$	—		$	—		$	8,921		$	—		$	2,780		$	11,701
Loans held-in-portfolio excluding impaired loans		3,747,370			735,846			749,348			40,688			473,539			5,746,791

Total loans held-in-portfolio	$	3,747,370		$	735,846		$	758,269		$	40,688		$	476,319		$	5,758,492


For the quarter ended March 31, 2017
Popular, Inc.
(In thousands)	Commercial			Construction			Mortgage			Legacy			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	202,654		$	9,525		$	178,093		$	1,343		$	7,662		$	141,374		$	540,651
Provision (reversal of provision)		8,205			328			13,046			(665	)		1,048			18,736			40,698
Charge-offs		(11,141	)		(3,587	)		(16,320	)		(41	)		(1,341	)		(26,638	)		(59,068	)
Recoveries		8,966			3,731			1,741			529			528			6,720			22,215

Ending balance	$	208,684		$	9,997		$	176,560		$	1,166		$	7,897		$	140,192		$	544,496

Specific ALLL	$	51,276		$	—		$	43,264		$	—		$	522		$	23,010		$	118,072

General ALLL	$	157,408		$	9,997		$	133,296		$	1,166		$	7,375		$	117,182		$	426,424

Loans held-in-portfolio:
Impaired loans	$	348,823		$	—		$	510,568		$	—		$	1,803		$	109,016		$	970,210
Loans held-in-portfolio excluding impaired loans		10,462,877			831,305			6,653,706			40,688			717,840			3,610,075			22,316,491

Total loans held-in-portfolio	$	10,811,700		$	831,305		$	7,164,274		$	40,688		$	719,643		$	3,719,091		$	23,286,701


For the quarter ended March 31, 2016
Puerto Rico - Non-covered loans
(In thousands)	Commercial			Construction			Mortgage			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	186,925		$	4,957		$	128,327		$	10,993		$	138,721		$	469,923
Provision (reversal of provision)		13,369			(409	)		10,869			1,680			18,362			43,871
Charge-offs		(8,968	)		(544	)		(15,972	)		(2,127	)		(27,379	)		(54,990	)
Recoveries		6,264			233			1,276			489			6,081			14,343

Ending balance	$	197,590		$	4,237		$	124,500		$	11,035		$	135,785		$	473,147

Specific ALLL	$	55,098		$	172		$	41,660		$	608		$	24,326		$	121,864

General ALLL	$	142,492		$	4,065		$	82,840		$	10,427		$	111,459		$	351,283

Loans held-in-portfolio:
Impaired non-covered loans	$	338,980		$	2,020		$	471,183		$	2,391		$	109,920		$	924,494
Non-covered loans held-in-portfolio excluding impaired loans		7,029,311			103,124			5,628,576			640,751			3,199,171			16,600,933

Total non-covered loans held-in-portfolio	$	7,368,291		$	105,144		$	6,099,759		$	643,142		$	3,309,091		$	17,525,427


For the quarter ended March 31, 2016
Puerto Rico - Covered Loans
(In thousands)	Commercial			Construction			Mortgage			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	—		$	—		$	33,967		$	—		$	209		$	34,176
Provision (reversal of provision)		—			—			(3,149	)		—			44			(3,105	)
Charge-offs		—			—			(1,221	)		—			(33	)		(1,254	)
Recoveries		—			—			225			—			3			228

Ending balance	$	—		$	—		$	29,822		$	—		$	223		$	30,045

Specific ALLL	$	—		$	—		$	—		$	—		$	—		$	—

General ALLL	$	—		$	—		$	29,822		$	—		$	223		$	30,045

Loans held-in-portfolio:
Impaired covered loans	$	—		$	—		$	—		$	—		$	—		$	—
Covered loans held-in-portfolio excluding impaired loans		—			—			606,711			—			18,419			625,130

Total covered loans held-in-portfolio	$	—		$	—		$	606,711		$	—		$	18,419		$	625,130


For the quarter ended March 31, 2016
U.S. Mainland
(In thousands)	Commercial			Construction		Mortgage			Legacy			Consumer			Total
Allowance for credit losses:
Beginning balance	$	9,908		$	3,912	$	4,985		$	2,687		$	11,520		$	33,012
Provision (reversal of provision)		(116	)		827		344			(450	)		3,464			4,069
Charge-offs		(495	)		—		(441	)		(109	)		(2,648	)		(3,693	)
Recoveries		290			—		211			356			1,035			1,892

Ending balance	$	9,587		$	4,739	$	5,099		$	2,484		$	13,371		$	35,280

Specific ALLL	$	—		$	—	$	1,592		$	—		$	581		$	2,173

General ALLL	$	9,587		$	4,739	$	3,507		$	2,484		$	12,790		$	33,107

Loans held-in-portfolio:
Impaired loans	$	—		$	—	$	7,909		$	—		$	2,247		$	10,156
Loans held-in-portfolio excluding impaired loans		2,860,098			629,714		871,533			61,044			549,765			4,972,154

Total loans held-in-portfolio	$	2,860,098		$	629,714	$	879,442		$	61,044		$	552,012		$	4,982,310


For the quarter ended March 31, 2016
Popular, Inc.
(In thousands)	Commercial			Construction			Mortgage			Legacy			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	196,833		$	8,869		$	167,279		$	2,687		$	10,993		$	150,450		$	537,111
Provision (reversal of provision)		13,253			418			8,064			(450	)		1,680			21,870			44,835
Charge-offs		(9,463	)		(544	)		(17,634	)		(109	)		(2,127	)		(30,060	)		(59,937	)
Recoveries		6,554			233			1,712			356			489			7,119			16,463

Ending balance	$	207,177		$	8,976		$	159,421		$	2,484		$	11,035		$	149,379		$	538,472

Specific ALLL	$	55,098		$	172		$	43,252		$	—		$	608		$	24,907		$	124,037

General ALLL	$	152,079		$	8,804		$	116,169		$	2,484		$	10,427		$	124,472		$	414,435

Loans held-in-portfolio:
Impaired loans	$	338,980		$	2,020		$	479,092		$	—		$	2,391		$	112,167		$	934,650
Loans held-in-portfolio excluding impaired loans		9,889,409			732,838			7,106,820			61,044			640,751			3,767,355			22,198,217

Total loans held-in-portfolio	$	10,228,389		$	734,858		$	7,585,912		$	61,044		$	643,142		$	3,879,522		$	23,132,867

The following table provides the activity in the allowance for loan losses related to Westernbank loans accounted for pursuant to ASC Subtopic 310-30.


	ASC 310-30 Westernbank loans
	For the quarters ended
(In thousands)	March 31, 2017			March 31, 2016
Balance at beginning of period	$	68,877		$	63,563
Provision for loan losses		(322	)		1,791
Net charge-offs		(2,011	)		(2,387	)

Balance at end of period	$	66,544		$	62,967

Impaired loans

The following tables present loans individually evaluated for impairment at March 31, 2017 and December 31, 2016.


March 31, 2017
Puerto Rico
	Impaired Loans – With an						Impaired Loans
	Allowance						With No Allowance				Impaired Loans - Total
			Unpaid						Unpaid				Unpaid
	Recorded		principal		Related		Recorded		principal		Recorded		principal		Related
(In thousands)	investment		balance		allowance		investment		balance		investment		balance		allowance
Commercial multi-family	$	79	$	79	$	29	$	—	$	—	$	79	$	79	$	29
Commercial real estate non-owner occupied		103,811		104,740		23,847		13,807		27,503		117,618		132,243		23,847
Commercial real estate owner occupied		134,455		173,707		16,873		30,972		46,625		165,427		220,332		16,873
Commercial and industrial		53,283		55,352		10,527		12,416		16,067		65,699		71,419		10,527
Mortgage		424,770		466,629		41,067		76,877		94,113		501,647		560,742		41,067
Leasing		1,803		1,803		522		—		—		1,803		1,803		522
Consumer:
Credit cards		37,952		37,952		5,686		—		—		37,952		37,952		5,686
Personal		65,622		65,622		16,145		—		—		65,622		65,622		16,145
Auto		2,070		2,070		409		—		—		2,070		2,070		409
Other		592		592		91		—		—		592		592		91

Total Puerto Rico	$	824,437	$	908,546	$	115,196	$	134,072	$	184,308	$	958,509	$	1,092,854	$	115,196


March 31, 2017
U.S. mainland
	Impaired Loans – With an						Impaired Loans
	Allowance						With No Allowance				Impaired Loans - Total
			Unpaid						Unpaid				Unpaid
	Recorded		principal		Related		Recorded		principal		Recorded		principal		Related
(In thousands)	investment		balance		allowance		investment		balance		investment		balance		allowance
Mortgage	$	6,449	$	8,130	$	2,197	$	2,472	$	3,364	$	8,921	$	11,494	$	2,197
Consumer:
HELOCs		2,367		2,375		673		298		313		2,665		2,688		673
Personal		38		38		6		77		77		115		115		6

Total U.S. mainland	$	8,854	$	10,543	$	2,876	$	2,847	$	3,754	$	11,701	$	14,297	$	2,876


March 31, 2017
Popular, Inc.
	Impaired Loans – With an						Impaired Loans
	Allowance						With No Allowance				Impaired Loans - Total
			Unpaid						Unpaid				Unpaid
	Recorded		principal		Related		Recorded		principal		Recorded		principal		Related
(In thousands)	investment		balance		allowance		investment		balance		investment		balance		allowance
Commercial multi-family	$	79	$	79	$	29	$	—	$	—	$	79	$	79	$	29
Commercial real estate non-owner occupied		103,811		104,740		23,847		13,807		27,503		117,618		132,243		23,847
Commercial real estate owner occupied		134,455		173,707		16,873		30,972		46,625		165,427		220,332		16,873
Commercial and industrial		53,283		55,352		10,527		12,416		16,067		65,699		71,419		10,527
Mortgage		431,219		474,759		43,264		79,349		97,477		510,568		572,236		43,264
Leasing		1,803		1,803		522		—		—		1,803		1,803		522
Consumer:
Credit Cards		37,952		37,952		5,686		—		—		37,952		37,952		5,686
HELOCs		2,367		2,375		673		298		313		2,665		2,688		673
Personal		65,660		65,660		16,151		77		77		65,737		65,737		16,151
Auto		2,070		2,070		409		—		—		2,070		2,070		409
Other		592		592		91		—		—		592		592		91

Total Popular, Inc.	$	833,291	$	919,089	$	118,072	$	136,919	$	188,062	$	970,210	$	1,107,151	$	118,072


December 31, 2016
Puerto Rico
	Impaired Loans – With an						Impaired Loans
	Allowance						With No Allowance				Impaired Loans - Total
			Unpaid						Unpaid				Unpaid
	Recorded		principal		Related		Recorded		principal		Recorded		principal		Related
(In thousands)	investment		balance		allowance		investment		balance		investment		balance		allowance
Commercial multi-family	$	82	$	82	$	34	$	—	$	—	$	82	$	82	$	34
Commercial real estate non-owner occupied		104,119		105,047		24,537		15,935		29,631		120,054		134,678		24,537
Commercial real estate owner occupied		131,634		169,013		13,007		31,962		50,094		163,596		219,107		13,007
Commercial and industrial		46,862		49,301		4,797		7,828		11,478		54,690		60,779		4,797
Mortgage		426,737		466,249		42,428		70,751		87,806		497,488		554,055		42,428
Leasing		1,817		1,817		535		—		—		1,817		1,817		535
Consumer:
Credit cards		37,464		37,464		5,588		—		—		37,464		37,464		5,588
Personal		66,043		66,043		16,955		—		—		66,043		66,043		16,955
Auto		2,117		2,117		474		—		—		2,117		2,117		474
Other		991		991		168		—		—		991		991		168

Total Puerto Rico	$	817,866	$	898,124	$	108,523	$	126,476	$	179,009	$	944,342	$	1,077,133	$	108,523


December 31, 2016
U.S. mainland
	Impaired Loans – With an						Impaired Loans
	Allowance						With No Allowance				Impaired Loans - Total
			Unpaid						Unpaid				Unpaid
	Recorded		principal		Related		Recorded		principal		Recorded		principal		Related
(In thousands)	investment		balance		allowance		investment		balance		investment		balance		allowance
Mortgage	$	6,381	$	7,971	$	2,182	$	2,495	$	3,369	$	8,876	$	11,340	$	2,182
Consumer:
HELOCs		2,421		2,429		667		300		315		2,721		2,744		667
Personal		39		39		5		79		79		118		118		5

Total U.S. mainland	$	8,841	$	10,439	$	2,854	$	2,874	$	3,763	$	11,715	$	14,202	$	2,854


December 31, 2016
Popular, Inc.
	Impaired Loans – With an						Impaired Loans
	Allowance						With No Allowance				Impaired Loans - Total
			Unpaid						Unpaid				Unpaid
	Recorded		principal		Related		Recorded		principal		Recorded		principal		Related
(In thousands)	investment		balance		allowance		investment		balance		investment		balance		allowance
Commercial multi-family	$	82	$	82	$	34	$	—	$	—	$	82	$	82	$	34
Commercial real estate non-owner occupied		104,119		105,047		24,537		15,935		29,631		120,054		134,678		24,537
Commercial real estate owner occupied		131,634		169,013		13,007		31,962		50,094		163,596		219,107		13,007
Commercial and industrial		46,862		49,301		4,797		7,828		11,478		54,690		60,779		4,797
Mortgage		433,118		474,220		44,610		73,246		91,175		506,364		565,395		44,610
Leasing		1,817		1,817		535		—		—		1,817		1,817		535
Consumer:
Credit Cards		37,464		37,464		5,588		—		—		37,464		37,464		5,588
HELOCs		2,421		2,429		667		300		315		2,721		2,744		667
Personal		66,082		66,082		16,960		79		79		66,161		66,161		16,960
Auto		2,117		2,117		474		—		—		2,117		2,117		474
Other		991		991		168		—		—		991		991		168

Total Popular, Inc.	$	826,707	$	908,563	$	111,377	$	129,350	$	182,772	$	956,057	$	1,091,335	$	111,377

The following tables present the average recorded investment and interest income recognized on impaired loans for the quarters ended March 31, 2017 and 2016.


For the quarter ended March 31, 2017
	Puerto Rico				U.S. Mainland				Popular, Inc.
	Average		Interest		Average		Interest		Average		Interest
	recorded		income		recorded		income		recorded		income
(In thousands)	investment		recognized		investment		recognized		investment		recognized
Commercial multi-family	$	81	$	1	$	—	$	—	$	81	$	1
Commercial real estate non-owner occupied		118,836		1,375		—		—		118,836		1,375
Commercial real estate owner occupied		164,512		1,598		—		—		164,512		1,598
Commercial and industrial		60,195		497		—		—		60,195		497
Mortgage		499,568		3,369		8,899		44		508,467		3,413
Leasing		1,810		—		—		—		1,810		—
Consumer:
Credit cards		37,708		—		—		—		37,708		—
Helocs		—		—		2,693		—		2,693		—
Personal		65,833		—		117		—		65,950		—
Auto		2,094		—		—		—		2,094		—
Other		792		—		—		—		792		—

Total Popular, Inc.	$	951,429	$	6,840	$	11,709	$	44	$	963,138	$	6,884


For the quarter ended March 31, 2016
	Puerto Rico				U.S. Mainland				Popular, Inc.
	Average		Interest		Average		Interest		Average		Interest
	recorded		income		recorded		income		recorded		income
(In thousands)	investment		recognized		investment		recognized		investment		recognized
Commercial real estate non-owner occupied	$	118,660	$	1,159	$	—	$	—	$	118,660	$	1,159
Commercial real estate owner occupied		158,046		1,393		—		—		158,046		1,393
Commercial and industrial		61,351		516		—		—		61,351		516
Construction		2,251		21		—		—		2,251		21
Mortgage		468,150		3,387		7,362		—		475,512		3,387
Leasing		2,398		—		—		—		2,398		—
Consumer:
Credit cards		38,256		—		—		—		38,256		—
Helocs		—		—		1,599		—		1,599		—
Personal		68,172		—		613		—		68,785		—
Auto		2,878		—		—		—		2,878		—
Other		485		—		—		—		485		—

Total Popular, Inc.	$	920,647	$	6,476	$	9,574	$	—	$	930,221	$	6,476

Modifications

Troubled debt restructurings related to non-covered loan portfolios amounted to $ 1.3 billion at March 31, 2017 (December 31, 2016 - $ 1.2 billion). The amount of outstanding commitments to lend additional funds to debtors owing receivables whose terms have been modified in troubled debt restructurings amounted $10 million related to the commercial loan portfolio at March 31, 2017 (December 31, 2016 - $8 million).

At March 31, 2017, the mortgage loan TDRs include $421 million guaranteed by U.S. sponsored entities at BPPR, compared to $407 million at December 31, 2016.

A modification of a loan constitutes a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the modification constitutes a concession. For a summary of the accounting policy related to TDRs, refer to the summary of significant accounting policies included in Note 2 of the 2016 Form 10-K.

The following tables present the non-covered and covered loans classified as TDRs according to their accruing status and the related allowance at March 31, 2017 and December 31, 2016.


	Popular, Inc.
	Non-Covered Loans
	March 31, 2017								December 31, 2016
(In thousands)	Accruing		Non-Accruing		Total		Related Allowance		Accruing		Non-Accruing		Total		Related Allowance
Commercial	$	171,238	$	79,571	$	250,809	$	45,327	$	176,887	$	83,157	$	260,044	$	40,810
Mortgage		761,151		130,589		891,740		43,264		744,926		127,071		871,997		44,610
Leases		1,574		230		1,804		522		1,383		434		1,817		535
Consumer		98,581		12,421		111,002		23,010		100,277		12,442		112,719		23,857

Total	$	1,032,544	$	222,811	$	1,255,355	$	112,123	$	1,023,473	$	223,104	$	1,246,577	$	109,812


	Popular, Inc.
	Covered Loans
	March 31, 2017								December 31, 2016
(In thousands)	Accruing		Non-Accruing		Total		Related Allowance		Accruing		Non-Accruing		Total		Related Allowance
Mortgage	$	2,954	$	2,804	$	5,758	$	—	$	2,950	$	2,580	$	5,530	$	—

Total	$	2,954	$	2,804	$	5,758	$	—	$	2,950	$	2,580	$	5,530	$	—

The following tables present the loan count by type of modification for those loans modified in a TDR during the quarters ended March 31, 2017 and 2016. Loans modified as TDRs for the U.S. operations are considered insignificant to the Corporation.


Popular, Inc.
For the quarter ended March 31, 2017
	Reduction in interest rate		Extension of maturity date		Combination of reduction in interest rate and extension of maturity date		Other
Commercial real estate non-owner occupied		—		1		—		—
Commercial real estate owner occupied		2		1		—		—
Commercial and industrial		2		6		—		—
Mortgage		14		6		104		68
Leasing		—		—		3		—
Consumer:
Credit cards		126		—		1		158
Personal		262		4		—		1
Auto		—		1		1		—
Other		8		—		—		—

Total		414		19		109		227


Popular, Inc.
For the quarter ended March 31, 2016
	Reduction in interest rate		Extension of maturity date		Combination of reduction in interest rate and extension of maturity date		Other
Commercial real estate non-owner occupied		1		1		—		—
Commercial real estate owner occupied		16		1		—		—
Commercial and industrial		6		—		—		—
Mortgage		20		10		123		55
Consumer:
Credit cards		175		—		—		174
HELOCs		—		—		1		—
Personal		261		5		—		—
Auto		—		2		2		—
Other		10		—		—		—

Total		489		19		126		229

The following tables present by class, quantitative information related to loans modified as TDRs during the quarters ended March 31, 2017 and 2016. Loans modified as TDRs for the U.S. operations are considered insignificant to the Corporation.


Popular, Inc.
For the quarter ended March 31, 2017
(Dollars in thousands)	Loan count		Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment		Increase (decrease) in the allowance for loan losses as a result of modification
Commercial real estate non-owner occupied		1	$	141	$	139	$	(11	)
Commercial real estate owner occupied		3		1,157		1,147		56
Commercial and industrial		8		319		2,388		419
Mortgage		192		21,068		19,513		1,014
Leasing		3		114		115		32
Consumer:
Credit cards		285		2,402		2,643		312
Personal		267		4,598		4,595		1,033
Auto		2		36		37		6
Other		8		65		65		9

Total		769	$	29,900	$	30,642	$	2,870


Popular, Inc.
For the quarter ended March 31, 2016
(Dollars in thousands)	Loan count		Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment		Increase (decrease) in the allowance for loan losses as a result of modification
Commercial real estate non-owner occupied		2	$	6,323	$	6,307	$	4,163
Commercial real estate owner occupied		17		3,095		3,149		136
Commercial and industrial		6		2,529		2,527		5
Mortgage		208		25,572		24,474		2,229
Consumer:
Credit cards		349		3,256		3,665		576
HELOCs		1		147		147		77
Personal		266		4,413		4,411		887
Auto		4		72		76		12
Other		10		23		24		4

Total		863	$	45,430	$	44,780	$	8,089

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 at March 31, 2017 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.


Popular, Inc.
Defaulted during the quarter ended March 31, 2017
(Dollars In thousands)	Loan count		Recorded investment as of first default date
Commercial real estate non-owner occupied		1	$	262
Commercial real estate owner occupied		1		267
Commercial and industrial		2		544
Mortgage		36		3,695
Leasing		1		45
Consumer:
Credit cards		128		1,349
HELOCs		1		97
Personal		42		1,024
Auto		2		57

Total		214	$	7,340


Popular, Inc.
Defaulted during the quarter ended March 31, 2016
(Dollars In thousands)	Loan count		Recorded investment as of first default date
Commercial real estate non-owner occupied		2	$	327
Commercial real estate owner occupied		6		2,456
Mortgage		27		3,235
Consumer:
Credit cards		106		1,122
Personal		43		1,139
Auto		1		17
Other		1		4

Total		186	$	8,300

Commercial, consumer and mortgage loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Corporation evaluates the loan for possible further impairment. The allowance for loan losses may be increased or partial charge-offs may be taken to further write-down the carrying value of the loan.

Credit Quality

The following table presents the outstanding balance, net of unearned income, of non-covered loans held-in-portfolio based on the Corporation’s assignment of obligor risk ratings as defined at March 31, 2017 and December 31, 2016.


March 31, 2017
(In thousands)	Watch		Special Mention		Substandard		Doubtful		Loss		Sub-total		Pass/ Unrated		Total
Puerto Rico ^[1]
Commercial multi-family	$	2,231	$	371	$	5,943	$	—	$	—	$	8,545	$	138,307	$	146,852
Commercial real estate non-owner occupied		322,673		367,288		348,580		133		—		1,038,674		1,474,921		2,513,595
Commercial real estate owner occupied		281,761		129,010		356,280		17,749		—		784,800		953,478		1,738,278
Commercial and industrial		261,003		149,306		207,528		11,159		10		629,006		2,036,599		2,665,605

Total Commercial		867,668		645,975		918,331		29,041		10		2,461,025		4,603,305		7,064,330
Construction		100		3,091		1,668		—		—		4,859		90,600		95,459
Mortgage		4,187		1,664		192,283		—		—		198,134		5,671,584		5,869,718
Leasing		—		—		2,427		—		17		2,444		717,199		719,643
Consumer:
Credit cards		—		—		19,330		—		—		19,330		1,059,154		1,078,484
HELOCs		—		—		572		—		—		572		7,577		8,149
Personal		1,146		599		20,157		—		—		21,902		1,121,433		1,143,335
Auto		—		—		12,484		—		201		12,685		816,274		828,959
Other		—		—		17,590		—		2,004		19,594		148,558		168,152

Total Consumer		1,146		599		70,133		—		2,205		74,083		3,152,996		3,227,079

Total Puerto Rico	$	873,101	$	651,329	$	1,184,842	$	29,041	$	2,232	$	2,740,545	$	14,235,684	$	16,976,229

U.S. mainland
Commercial multi-family	$	16,085	$	7,749	$	645	$	—	$	—	$	24,479	$	1,084,093	$	1,108,572
Commercial real estate non-owner occupied		78,015		17,140		2,465		—		—		97,620		1,350,589		1,448,209
Commercial real estate owner occupied		15,569		895		9,629		—		—		26,093		216,762		242,855
Commercial and industrial		1,060		1,437		152,118		—		—		154,615		793,119		947,734

Total Commercial		110,729		27,221		164,857		—		—		302,807		3,444,563		3,747,370
Construction		2,966		85		26,222		—		—		29,273		706,573		735,846
Mortgage		—		—		11,888		—		—		11,888		746,381		758,269
Legacy		856		549		4,195		—		—		5,600		35,088		40,688
Consumer:
Credit cards		—		—		35		—		—		35		122		157
HELOCs		—		—		2,276		—		3,525		5,801		230,844		236,645
Personal		—		—		1,452		—		950		2,402		236,925		239,327
Auto		—		—		—		—		—		—		7		7
Other		—		—		—		—		—		—		183		183

Total Consumer		—		—		3,763		—		4,475		8,238		468,081		476,319

Total U.S. mainland	$	114,551	$	27,855	$	210,925	$	—	$	4,475	$	357,806	$	5,400,686	$	5,758,492

Popular, Inc.
Commercial multi-family	$	18,316	$	8,120	$	6,588	$	—	$	—	$	33,024	$	1,222,400	$	1,255,424
Commercial real estate non-owner occupied		400,688		384,428		351,045		133		—		1,136,294		2,825,510		3,961,804
Commercial real estate owner occupied		297,330		129,905		365,909		17,749		—		810,893		1,170,240		1,981,133
Commercial and industrial		262,063		150,743		359,646		11,159		10		783,621		2,829,718		3,613,339

Total Commercial		978,397		673,196		1,083,188		29,041		10		2,763,832		8,047,868		10,811,700
Construction		3,066		3,176		27,890		—		—		34,132		797,173		831,305
Mortgage		4,187		1,664		204,171		—		—		210,022		6,417,965		6,627,987
Legacy		856		549		4,195		—		—		5,600		35,088		40,688
Leasing		—		—		2,427		—		17		2,444		717,199		719,643
Consumer:
Credit cards		—		—		19,365		—		—		19,365		1,059,276		1,078,641
HELOCs		—		—		2,848		—		3,525		6,373		238,421		244,794
Personal		1,146		599		21,609		—		950		24,304		1,358,358		1,382,662
Auto		—		—		12,484		—		201		12,685		816,281		828,966
Other		—		—		17,590		—		2,004		19,594		148,741		168,335

Total Consumer		1,146		599		73,896		—		6,680		82,321		3,621,077		3,703,398

Total Popular, Inc.	$	987,652	$	679,184	$	1,395,767	$	29,041	$	6,707	$	3,098,351	$	19,636,370	$	22,734,721

The following table presents the weighted average obligor risk rating at March 31, 2017 for those classifications that consider a range of rating scales.


Weighted average obligor risk rating	(Scales 11 and 12)		(Scales 1 through 8)
Puerto Rico: ^[1]	Substandard		Pass
Commercial multi-family		11.11		6.13
Commercial real estate non-owner occupied		11.07		6.89
Commercial real estate owner occupied		11.23		7.08
Commercial and industrial		11.14		7.14

Total Commercial		11.15		7.03

Construction		11.00		7.65


U.S. mainland:	Substandard		Pass
Commercial multi-family		11.31		7.22
Commercial real estate non-owner occupied		11.66		6.65
Commercial real estate owner occupied		11.11		7.24
Commercial and industrial		11.67		6.12

Total Commercial		11.63		6.75

Construction		11.00		7.64

Legacy		11.11		7.91

[1]	Excludes covered loans acquired in the Westernbank FDIC-assisted transaction.


December 31, 2016
			Special										Pass/
(In thousands)	Watch		Mention		Substandard		Doubtful		Loss		Sub-total		Unrated		Total
Puerto Rico ^[1]
Commercial multi-family	$	2,016	$	383	$	6,108	$	—	$	—	$	8,507	$	166,033	$	174,540
Commercial real estate non-owner occupied		310,510		377,858		342,054		155		—		1,030,577		1,533,708		2,564,285
Commercial real estate owner occupied		310,484		109,873		360,941		17,788		—		799,086		992,389		1,791,475
Commercial and industrial		136,091		133,270		227,360		11,514		12		508,247		2,163,670		2,671,917

Total Commercial		759,101		621,384		936,463		29,457		12		2,346,417		4,855,800		7,202,217
Construction		50		1,705		1,668		—		—		3,423		82,135		85,558
Mortgage		4,407		1,987		190,090		—		—		196,484		5,720,016		5,916,500
Leasing		—		—		3,062		—		—		3,062		699,831		702,893
Consumer:
Credit cards		—		—		18,725		—		—		18,725		1,081,882		1,100,607
HELOCs		—		—		185		—		—		185		8,166		8,351
Personal		1,068		812		21,496		—		—		23,376		1,126,801		1,150,177
Auto		—		—		12,321		—		—		12,321		814,271		826,592
Other		—		—		19,311		—		—		19,311		156,218		175,529

Total Consumer		1,068		812		72,038		—		—		73,918		3,187,338		3,261,256

Total Puerto Rico	$	764,626	$	625,888	$	1,203,321	$	29,457	$	12	$	2,623,304	$	14,545,120	$	17,168,424

U.S. mainland
Commercial multi-family	$	13,537	$	7,796	$	658	$	—	$	—	$	21,991	$	1,042,305	$	1,064,296
Commercial real estate non-owner occupied		57,111		9,778		1,720		—		—		68,609		1,288,707		1,357,316
Commercial real estate owner occupied		9,271		—		9,119		—		—		18,390		225,355		243,745
Commercial and industrial		3,048		937		153,793		—		—		157,778		773,155		930,933

Total Commercial		82,967		18,511		165,290		—		—		266,768		3,329,522		3,596,290
Construction		3,000		8,153		16,950		—		—		28,103		662,639		690,742
Mortgage		—		—		11,711		—		—		11,711		768,150		779,861
Legacy		921		786		4,400		—		—		6,107		39,186		45,293
Consumer:
Credit cards		—		—		30		—		—		30		128		158
HELOCs		—		—		1,923		—		2,839		4,762		247,413		252,175
Personal		—		—		1,252		—		609		1,861		238,746		240,607
Auto		—		—		—		—		—		—		9		9
Other		—		—		8		—		—		8		180		188

Total Consumer		—		—		3,213		—		3,448		6,661		486,476		493,137

Total U.S. mainland	$	86,888	$	27,450	$	201,564	$	—	$	3,448	$	319,350	$	5,285,973	$	5,605,323

Popular, Inc.
Commercial multi-family	$	15,553	$	8,179	$	6,766	$	—	$	—	$	30,498	$	1,208,338	$	1,238,836
Commercial real estate non-owner occupied		367,621		387,636		343,774		155		—		1,099,186		2,822,415		3,921,601
Commercial real estate owner occupied		319,755		109,873		370,060		17,788		—		817,476		1,217,744		2,035,220
Commercial and industrial		139,139		134,207		381,153		11,514		12		666,025		2,936,825		3,602,850

Total Commercial		842,068		639,895		1,101,753		29,457		12		2,613,185		8,185,322		10,798,507
Construction		3,050		9,858		18,618		—		—		31,526		744,774		776,300
Mortgage		4,407		1,987		201,801		—		—		208,195		6,488,166		6,696,361
Legacy		921		786		4,400		—		—		6,107		39,186		45,293
Leasing		—		—		3,062		—		—		3,062		699,831		702,893
Consumer:
Credit cards		—		—		18,755		—		—		18,755		1,082,010		1,100,765
HELOCs		—		—		2,108		—		2,839		4,947		255,579		260,526
Personal		1,068		812		22,748		—		609		25,237		1,365,547		1,390,784
Auto		—		—		12,321		—		—		12,321		814,280		826,601
Other		—		—		19,319		—		—		19,319		156,398		175,717

Total Consumer		1,068		812		75,251		—		3,448		80,579		3,673,814		3,754,393

Total Popular, Inc.	$	851,514	$	653,338	$	1,404,885	$	29,457	$	3,460	$	2,942,654	$	19,831,093	$	22,773,747

The following table presents the weighted average obligor risk rating at December 31, 2016 for those classifications that consider a range of rating scales.


Weighted average obligor risk rating Puerto Rico: ^[1]	(Scales 11 and 12) Substandard		(Scales 1 through 8) Pass
Commercial multi-family		11.12		5.95
Commercial real estate non-owner occupied		11.07		6.91
Commercial real estate owner occupied		11.23		7.09
Commercial and industrial		11.09		7.19

Total Commercial		11.14		7.06

Construction		11.00		7.67


U.S. mainland:	Substandard		Pass
Commercial multi-family		11.31		7.26
Commercial real estate non-owner occupied		11.70		6.67
Commercial real estate owner occupied		11.05		7.32
Commercial and industrial		11.65		6.15

Total Commercial		11.62		6.78

Construction		11.00		7.67

Legacy		11.10		7.91

[1]	Excludes covered loans acquired in the Westernbank FDIC-assisted transaction.

Note 9 – FDIC loss-share asset and true-up payment obligation

In connection with the Westernbank FDIC-assisted transaction, BPPR entered into loss-share arrangements with the FDIC with respect to the covered loans and other real estate owned. Pursuant to the terms of the loss-share arrangements, the FDIC’s obligation to reimburse BPPR for losses with respect to covered assets begins with the first dollar of loss incurred. The FDIC reimburses BPPR for 80% of losses with respect to covered assets, and BPPR reimburses the FDIC for 80% of recoveries with respect to losses for which the FDIC paid reimbursement under loss-share arrangements. The loss-share agreement applicable to single-family residential mortgage loans provides for FDIC loss and recoveries sharing for ten years expiring at the end of the quarter ending June 30, 2020.

The following table sets forth the activity in the FDIC loss-share asset for the periods presented.


	Quarters ended March 31,
(In thousands)	2017			2016
Balance at beginning of period	$	69,334		$	310,221
Amortization of loss-share indemnification asset		(776	)		(4,042	)
Credit impairment losses (reversal) to be covered under loss-sharing agreements		148			(2,093	)
Reimbursable expenses		921			3,950
Net payments from FDIC under loss-sharing agreements		—			(88,588	)
Other adjustments attributable to FDIC loss-sharing agreements		(5,550	)		—

Balance at end of period	$	64,077		$	219,448

Balance due to the FDIC for recoveries on covered assets [1]		(5,284	)		(6,301	)

Balance at end of period	$	58,793		$	213,147

[1]	Balance due to the FDIC for recoveries on covered assets for the quarter ended March 31, 2016 amounting to $6.3 million was included in other liabilities in the accompanying consolidated statement of condition (December 31, 2016 - $27.6 million).

The loss-share component of the arrangements applicable to commercial (including construction) loans expired during the quarter ended June 30, 2015. The agreement provides for reimbursement of recoveries to the FDIC to continue through the quarter ending June 30, 2018, and for the single family mortgage loss-share component of such agreement to expire on April 30, 2020.

The weighted average life of the single family loan portfolio accounted for under ASC 310-30 subject to the FDIC loss-sharing agreement at March 31, 2017 is 7.4 years.

As part of the loss-share agreements, BPPR has agreed to make a true-up payment to the FDIC on the date that is 45 days following the last day (such day, the “true-up measurement date”) of the final shared-loss month, or upon the final disposition of all covered assets under the loss-share agreements, in the event losses on the loss-share agreements fail to reach expected levels. The estimated fair value of such true-up payment obligation is recorded as contingent consideration, which is included in the caption of other liabilities in the consolidated statements of financial condition. Under the loss sharing agreements, BPPR will pay to the FDIC 50% of the excess, if any, of: (i) 20% of the intrinsic loss estimate of $4.6 billion (or $925 million) (as determined by the FDIC) less (ii) the sum of: (A) 25% of the asset discount (per bid) (or ($1.1 billion)); plus (B) 25% of the cumulative shared-loss payments (defined as the aggregate of all of the payments made or payable to BPPR minus the aggregate of all of the payments made or payable to the FDIC); plus (C) the sum of the period servicing amounts for every consecutive twelve-month period prior to and ending on the true-up measurement date in respect of each of the loss-sharing agreements during which the loss-sharing provisions of the applicable loss-sharing agreement is in effect (defined as the product of the simple average of the principal amount of shared- loss loans and shared-loss assets at the beginning and end of such period times 1%).

Of the four components used to estimate the true-up payment obligation (intrinsic loss estimate, asset discount, cumulative shared-loss payments, and period servicing amounts) only the cumulative shared-loss payments and the period servicing amounts will change on a quarterly basis. These two variables are the main drivers of changes in the undiscounted true-up payment obligation. In order to estimate the true-up obligation, actual and expected portfolio performance for loans under both the commercial and residential loss sharing agreement are contemplated. The cumulative shared loss payments and cumulative servicing amounts are derived from our quarterly loss reassessment process for covered loans accounted for under ASC 310-30.

Once the undiscounted true-up payment obligation is determined, the fair value is estimated based on the contractual remaining term to settle the obligation and a discount rate that is composed of the sum of the interpolated U.S. Treasury Note (“T Note”), defined by the remaining term of the true-up payment obligation, and a risk premium determined by the spread of the Corporation’s outstanding senior unsecured debt over the equivalent T Note.

The following table provides the fair value and the undiscounted amount of the true-up payment obligation at March 31, 2017 and December 31, 2016.


(In thousands)	March 31, 2017		December 31, 2016
Carrying amount (fair value)	$	160,543	$	153,158
Undiscounted amount	$	188,990	$	188,258

The increase in the fair value of the true-up payment obligation was principally driven by a decrease in the discount rate from 5.97% in 2016 to 5.03% in 2017 due to a lower risk premium. The estimated fair value of the true-up payment obligation corresponds to the difference between the initial estimated losses to be reimbursed by the FDIC and the revised estimate of reimbursable losses. As the amount of estimated reimbursable losses decreases, the value of the true-up payment obligation increases.

As described above, the estimate of the true-up payment obligation is determined by applying the provisions of the loss sharing agreements and will change on a quarterly basis. The amount of the estimate of the true-up payment obligation is expected to change in future periods and may be subject to the interpretation of provisions of the loss sharing agreements.

The loss-share agreements contain specific terms and conditions regarding the management of the covered assets that BPPR must follow in order to receive reimbursement on losses from the FDIC. Under the loss-share agreements, BPPR must:

•

manage and administer the covered assets and collect and effect charge-offs and recoveries with respect to such covered assets in a manner consistent with its usual and prudent business and banking practices and, with respect to single family shared-loss loans, the procedures (including collection procedures) customarily employed by BPPR in servicing and administering mortgage loans for its own account and the servicing procedures established by FNMA or the Federal Home Loan Mortgage Corporation (“FHLMC”), as in effect from time to time, and in accordance with accepted mortgage servicing practices of prudent lending institutions;

•

exercise its best judgment in managing, administering and collecting amounts on covered assets and effecting charge-offs with respect to the covered assets;

•

use commercially reasonable efforts to maximize recoveries with respect to losses on single family shared-loss assets and best efforts to maximize collections with respect to commercial shared-loss assets;

•

retain sufficient staff to perform the duties under the loss-share agreements;

•

adopt and implement accounting, reporting, record-keeping and similar systems with respect to the commercial shared-loss assets;

•

comply with the terms of the modification guidelines approved by the FDIC or another federal agency for any single-family shared-loss loan;

•

provide notice with respect to proposed transactions pursuant to which a third party or affiliate will manage, administer or collect any commercial shared-loss assets;

•

file monthly and quarterly certificates with the FDIC specifying the amount of losses, charge-offs and recoveries; and

•

maintain books and records sufficient to ensure and document compliance with the terms of the loss-share agreements.

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 securitizations of residential mortgage loans and trading gains and losses on derivative contracts used to hedge the Corporation’s securitization activities. In 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.

The following table presents the components of mortgage banking activities:


	Quarters ended March 31,
(In thousands)	2017			2016
Mortgage servicing fees, net of fair value adjustments:
Mortgage servicing fees	$	13,452		$	14,802
Mortgage servicing rights fair value adjustments		(5,954	)		(8,477	)

Total mortgage servicing fees, net of fair value adjustments		7,498			6,325

Net gain on sale of loans, including valuation on loans		5,381			7,110

Trading account loss:
Unrealized losses on outstanding derivative positions		(40	)		(80	)
Realized losses on closed derivative positions		(1,470	)		(2,804	)

Total trading account loss		(1,510	)		(2,884	)

Total mortgage banking activities	$	11,369		$	10,551

Note 11 – Transfers of financial assets and mortgage servicing assets

The Corporation typically transfers conforming residential mortgage loans in conjunction with GNMA and FNMA securitization transactions whereby the loans are exchanged for cash or securities and servicing rights. As seller, the Corporation has made certain representations and warranties with respect to the originally transferred loans and, in the past, has sold certain loans with credit recourse to a government-sponsored entity, namely FNMA. Refer to Note 20 to the Consolidated Financial Statements for a description of such arrangements.

No liabilities were incurred as a result of these securitizations during the quarters ended March 31, 2017 and 2016 because they did not contain any credit recourse arrangements. During the quarter ended March 31, 2017 the Corporation recorded a net gain of $5.0 million (March 31, 2016 - $6.4 million) 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 quarters ended March 31, 2017 and 2016.


	Proceeds Obtained During the Quarter Ended March 31, 2017
(In thousands)	Level 1		Level 2		Level 3		Initial Fair Value
Assets
Investments securities available for sale:
Mortgage-backed securities - FNMA	$	—	$	4,752	$	—	$	4,752

Total investment securities available-for-sale	$	—	$	4,752	$	—	$	4,752

Trading account securities:
Mortgage-backed securities - GNMA	$	—	$	146,977	$	—	$	146,977
Mortgage-backed securities - FNMA		—		22,891		—		22,891

Total trading account securities	$	—	$	169,868	$	—	$	169,868

Mortgage servicing rights	$	—	$	—	$	2,470	$	2,470

Total	$	—	$	174,620	$	2,470	$	177,090


	Proceeds Obtained During the Quarter Ended March 31, 2016
(In thousands)	Level 1		Level 2		Level 3		Initial Fair Value
Assets
Trading account securities:
Mortgage-backed securities - GNMA	$	—	$	134,012	$	—	$	134,012
Mortgage-backed securities - FNMA		—		36,236		—		36,236

Total trading account securities	$	—	$	170,248	$	—	$	170,248

Mortgage servicing rights	$	—	$	—	$	1,870	$	1,870

Total	$	—	$	170,248	$	1,870	$	172,118

During the quarter ended March 31, 2017, the Corporation retained servicing rights on whole loan sales involving approximately $18.2 million in principal balance outstanding (March 31, 2016 - $18.5 million), with realized gains of approximately $0.4 million (March 31, 2016 - gains of $0.7 million). All loan sales performed during the quarters ended March 31, 2017 and 2016 were without credit recourse agreements.

The Corporation recognizes as assets the rights to service loans for others, whether these rights are purchased or result from asset transfers such as sales and securitizations. These mortgage servicing rights (“MSR”) are measured at fair value.

The Corporation uses a discounted cash flow model to estimate the fair value of MSRs. The discounted cash flow model incorporates assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, prepayment and late fees, among other considerations. Prepayment speeds are adjusted for the Corporation’s loan characteristics and portfolio behavior.

The following table presents the changes in MSRs measured using the fair value method for the quarters ended March 31, 2017 and 2016.


Residential MSRs
(In thousands)	March 31, 2017			March 31, 2016
Fair value at beginning of period	$	196,889		$	211,405
Additions		2,763			2,123
Changes due to payments on loans ^[1]		(4,587	)		(4,254	)
Reduction due to loan repurchases		(644	)		(357	)
Changes in fair value due to changes in valuation model inputs or assumptions		(723	)		(3,866	)

Fair value at end of period	$	193,698		$	205,051

[1]	Represents changes due to collection / realization of expected cash flows over time.

Residential mortgage loans serviced for others were $17.7 billion at March 31, 2017 (December 31, 2016 - $18.0 billion).

Net mortgage servicing fees, a component of mortgage banking activities in the Consolidated Statements of 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. At March 31, 2017, those weighted average mortgage servicing fees were 0.30% (March 31, 2016 – 0.29%). 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 quarters ended March 31, 2017 and 2016 were as follows:


	Quarters ended
	March 31, 2017			March 31, 2016
Prepayment speed		4.4	%		5.4	%
Weighted average life (in years)		10.9			10.0
Discount rate (annual rate)		11.0	%		11.1	%

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:


	Originated MSRs						Purchased MSRs
(In thousands)	March 31, 2017			December 31, 2016			March 31, 2017			December 31, 2016
Fair value of servicing rights	$	85,508		$	88,056		$	108,190		$	108,833
Weighted average life (in years)		7.6			7.8			6.7			6.9
Weighted average prepayment speed (annual rate)		5.1	%		4.6	%		5.4	%		4.8	%
Impact on fair value of 10% adverse change	$	(1,744	)	$	(1,668	)	$	(2,109	)	$	(2,051	)
Impact on fair value of 20% adverse change	$	(3,692	)	$	(3,590	)	$	(4,561	)	$	(4,400	)
Weighted average discount rate (annual rate)		11.5	%		11.5	%		11.0	%		11.0	%
Impact on fair value of 10% adverse change	$	(3,695	)	$	(3,851	)	$	(4,269	)	$	(4,369	)
Impact on fair value of 20% adverse change	$	(7,360	)	$	(7,699	)	$	(8,624	)	$	(8,778	)

The sensitivity analyses presented in the tables 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 March 31, 2017, the Corporation serviced $1.6 billion (December 31, 2016 - $1.7 billion) in residential mortgage loans with credit recourse to the Corporation.

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 individual loans meet GNMA’s specified delinquency criteria and are eligible for repurchase, the Corporation is deemed to have regained effective control over these loans if the Corporation was the pool issuer. At March 31, 2017, the Corporation had recorded $46 million in mortgage loans on its Consolidated Statements of Financial Condition related to this buy-back option program (December 31, 2016 - $49 million). 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 quarter ended March 31, 2017, the Corporation repurchased approximately $ 45 million (March 31, 2016 - $17 million) of mortgage loans under the GNMA buy-back option program. 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. Furthermore, due to their guaranteed nature, the risk associated with the loans is minimal. The Corporation places these loans under its loss mitigation programs and once brought back to current status, these may be either retained in portfolio or re-sold in the secondary market.

Note 12 – Other real estate owned

The following tables present the activity related to Other Real Estate Owned (“OREO”), for the quarters ended March 31, 2017 and 2016.


	For the quarter ended March 31, 2017
(In thousands)	Non-covered OREO Commercial/ Construction			Non-covered OREO Mortgage			Covered OREO Mortgage			Total
Balance at beginning of period	$	20,401		$	160,044		$	32,128		$	212,573
Write-downs in value		(1,259	)		(2,755	)		(772	)		(4,786	)
Additions		4,538			26,254			4,109			34,901
Sales		(993	)		(20,409	)		(5,397	)		(26,799	)
Other adjustments		(133	)		148			(142	)		(127	)

Ending balance	$	22,554		$	163,282		$	29,926		$	215,762


	For the quarter ended March 31, 2016
(In thousands)	Non-covered OREO Commercial/ Construction			Non-covered OREO Mortgage			Covered OREO Mortgage			Total
Balance at beginning of period	$	32,471		$	122,760		$	36,685		$	191,916
Write-downs in value		(1,717	)		(2,016	)		(500	)		(4,233	)
Additions		1,810			24,276			4,483			30,569
Sales		(1,595	)		(8,500	)		(3,649	)		(13,744	)
Other adjustments		(615	)		(914	)		(622	)		(2,151	)

Ending balance	$	30,354		$	135,606		$	36,397		$	202,357

Note 13 – Other assets

The caption of other assets in the consolidated statements of financial condition consists of the following major categories:


(In thousands)	March 31, 2017		December 31, 2016
Net deferred tax assets (net of valuation allowance)	$	1,217,549	$	1,243,668
Investments under the equity method		224,029		218,062
Prepaid taxes		161,596		172,550
Other prepaid expenses		85,673		90,320
Derivative assets		13,097		14,085
Trades receivable from brokers and counterparties		53,192		46,630
Principal, interest and escrow servicing advances		61,697		69,711
Guaranteed mortgage loan claims receivable		171,771		152,403
Others		123,202		138,081

Total other assets	$	2,111,806	$	2,145,510

Note 14 – Goodwill and other intangible assets

Goodwill

There were no changes in the carrying amount of goodwill for the quarter ended March 31, 2017. The changes in the carrying amount of goodwill for the quarter ended March 31, 2016, allocated by reportable segments, were as follows (refer to Note 33 for the definition of the Corporation’s reportable segments):


2016
					Purchase
	Balance at		Goodwill on		accounting		Goodwill		Balance at
(In thousands)	January 1, 2016		acquisition		adjustments		impairment		March 31, 2016
Banco Popular de Puerto Rico	$	280,221	$	—	$	—	$	—	$	280,221
Banco Popular North America		346,167		—		4,707		—		350,874

Total Popular, Inc.	$	626,388	$	—	$	4,707	$	—	$	631,095

On February 27, 2015, BPPR, in alliance with other co-bidders, including BPNA, acquired certain assets and all deposits (other than certain brokered deposits) of former Doral Bank, from the Federal Deposit Insurance Corporation (“FDIC”) as receiver (the “Doral Bank Transaction”). During the quarter ended March 31, 2016, the Corporation recorded purchase accounting adjustments of $4.7 million, resulting in a total goodwill of $167.8 million recognized related to the Doral Bank Transaction.

The following tables present the gross amount of goodwill and accumulated impairment losses by reportable segments.


March 31, 2017
	Balance at				Balance at		Balance at				Balance at
	January 1,		Accumulated		January 1,		March 31,		Accumulated		March 31,
	2017		impairment		2017		2017		impairment		2017
(In thousands)	(gross amounts)		losses		(net amounts)		(gross amounts)		losses		(net amounts)
Banco Popular de Puerto Rico	$	280,221	$	3,801	$	276,420	$	280,221	$	3,801	$	276,420
Banco Popular North America		515,285		164,411		350,874		515,285		164,411		350,874

Total Popular, Inc.	$	795,506	$	168,212	$	627,294	$	795,506	$	168,212	$	627,294


December 31, 2016
	Balance at				Balance at		Balance at				Balance at
	January 1,		Accumulated		January 1,		December 31,		Accumulated		December 31,
	2016		impairment		2016		2016		impairment		2016
(In thousands)	(gross amounts)		losses		(net amounts)		(gross amounts)		losses		(net amounts)
Banco Popular de Puerto Rico	$	280,221	$	—	$	280,221	$	280,221	$	3,801	$	276,420
Banco Popular North America		510,578		164,411		346,167		515,285		164,411		350,874

Total Popular, Inc.	$	790,799	$	164,411	$	626,388	$	795,506	$	168,212	$	627,294

Other Intangible Assets

At March 31, 2017 and December 31, 2016, the Corporation had $ 6.1 million of identifiable intangible assets, with indefinite useful lives, mostly associated with the E-LOAN trademark.

The following table reflects the components of other intangible assets subject to amortization:


	Gross				Net
	Carrying		Accumulated		Carrying
(In thousands)	Amount		Amortization		Value
March 31, 2017
Core deposits	$	37,224	$	19,555	$	17,669
Other customer relationships		36,449		17,576		18,873

Total other intangible assets	$	73,673	$	37,131	$	36,542

December 31, 2016
Core deposits	$	37,274	$	18,624	$	18,650
Other customer relationships		36,449		16,162		20,287

Total other intangible assets	$	73,723	$	34,786	$	38,937

During the quarter ended March 31, 2017, the Corporation recognized $ 2.3 million in amortization expense related to other intangible assets with definite useful lives (March 31, 2016 - $ 3.1 million).

The following table presents the estimated amortization of the intangible assets with definite useful lives for each of the following periods:


(In thousands)
Remaining 2017	$	7,033
Year 2018		9,286
Year 2019		9,042
Year 2020		4,967
Year 2021		2,157
Year 2022		1,281
Later years		2,776

Note 15 – Deposits

Total interest bearing deposits as of the end of the periods presented consisted of:


(In thousands)	March 31, 2017		December 31, 2016
Savings accounts	$	8,040,047	$	7,793,533
NOW, money market and other interest bearing demand deposits		9,197,237		8,012,706

Total savings, NOW, money market and other interest bearing demand deposits		17,237,284		15,806,239

Certificates of deposit:
Under $100,000		3,552,834		3,570,956
$100,000 and over		4,160,133		4,138,586

Total certificates of deposit		7,712,967		7,709,542

Total interest bearing deposits	$	24,950,251	$	23,515,781

A summary of certificates of deposit by maturity at March 31, 2017 follows:


(In thousands)
2017	$	3,366,802
2018		1,625,145
2019		742,426
2020		976,220
2021		772,869
2022 and thereafter		229,505

Total certificates of deposit	$	7,712,967

At March 31, 2017, the Corporation had brokered deposits amounting to $ 0.6 billion (December 31, 2016 - $ 0.6 billion).

The aggregate amount of overdrafts in demand deposit accounts that were reclassified to loans was $7 million at March 31, 2017 (December 31, 2016 - $6 million).

Note 16 – Borrowings

The following table presents the composition of assets sold under agreements to repurchase at March 31, 2017 and December 31, 2016.


(In thousands)	March 31, 2017		December 31, 2016
Assets sold under agreements to repurchase	$	434,714	$	479,425

Total assets sold under agreements to repurchase	$	434,714	$	479,425

The following table presents information related to the Corporation’s repurchase transactions accounted for as secured borrowings that are collateralized with investment 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


	March 31, 2017		December 31, 2016
(In thousands)	Repurchase liability		Repurchase liability
U.S. Treasury Securities
Within 30 days	$	103,338	$	32,700
After 30 to 90 days		12,415		—
After 90 days		107,354		19,819

Total U.S. Treasury Securities		223,107		52,519

Obligations of U.S. government sponsored entities
Within 30 days		15,963		95,720
After 30 to 90 days		75,368		142,299
After 90 days		32,629		25,380

Total obligations of U.S. government sponsored entities		123,960		263,399

Mortgage-backed securities
Within 30 days		55,817		39,108
After 30 to 90 days		24,734		58,552
After 90 days		—		54,560

Total mortgage-backed securities		80,551		152,220

Collateralized mortgage obligations
Within 30 days		7,096		11,287

Total collateralized mortgage obligations		7,096		11,287

Total	$	434,714	$	479,425

Repurchase agreements in 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 funding globally from a diverse group of counterparties, providing a range of securities collateral and pursuing longer durations, when appropriate.

The following table presents information related to the Corporation’s other short-term borrowings for the periods ended March 31, 2017 and December 31, 2016.


(In thousands)	March 31, 2017		December 31, 2016
Others	$	1,200	$	1,200

Total other short-term borrowings	$	1,200	$	1,200

Note: Refer to the Corporation’s 2016 Form 10-K for rates information at December 31, 2016.

The following table presents the composition of notes payable at March 31, 2017 and December 31, 2016.


(In thousands)	March 31, 2017		December 31, 2016
Advances with the FHLB with maturities ranging from 2017 through 2029 paying interest at monthly fixed rates ranging from 0.81% to 4.19 %	$	596,338	$	608,193
Advances with the FHLB with maturities ranging from 2018 through 2019 paying interest monthly at a floating rate ranging from 0.22% to 0.34% over the 1 month LIBOR		34,164		34,164
Advances with the FHLB with maturities ranging from 2018 through 2019 paying interest quarterly at a floating rate from 0.09% to 0.24% over the 3 month LIBOR		25,019		30,313
Unsecured senior debt securities maturing on 2019 paying interest semiannually at a fixed rate of 7.00%, net of debt issuance costs of $4,691 (2016 - $5,212)		445,309		444,788
Junior subordinated deferrable interest debentures (related to trust preferred securities) with maturities ranging from 2027 to 2034 with fixed interest rates ranging from 6.125% to 8.327%, net of debt issuance costs of $470 (2016 - $476)		439,330		439,323
Others		17,812		18,071

Total notes payable	$	1,557,972	$	1,574,852

Note: Refer to the Corporation’s 2016 Form 10-K for rates information at December 31, 2016.

A breakdown of borrowings by contractual maturities at March 31, 2017 is included in the table below.


	Assets sold under		Short-term
(In thousands)	agreements to repurchase		borrowings		Notes payable		Total
Year
2017	$	434,714	$	1,200	$	78,854	$	514,768
2018		—		—		210,281		210,281
2019		—		—		597,793		597,793
2020		—		—		112,237		112,237
2021		—		—		21,694		21,694
Later years		—		—		537,113		537,113

Total borrowings	$	434,714	$	1,200	$	1,557,972	$	1,993,886

At March 31, 2017 and December 31, 2016, the Corporation had FHLB borrowing facilities whereby the Corporation could borrow up to $3.7 billion and $3.8 billion, respectively, of which $656 million and $673 million, respectively, were used. In addition, at March 31, 2017 and December 31, 2016, the Corporation had placed $200 million of the available FHLB credit facility as collateral for a municipal letter of credit to secure deposits. The FHLB borrowing facilities are collateralized with loans held-in-portfolio, and do not have restrictive covenants or callable features.

Also, at March 31, 2017, the Corporation has a borrowing facility at the discount window of the Federal Reserve Bank of New York amounting to $1.3 billion (2016 - $1.2 billion), which remained unused at March 31, 2017 and December 31, 2016. The facility is a collateralized source of credit that is highly reliable even under difficult market conditions.

Note 17 – Offsetting of financial assets and liabilities

The following tables present the potential effect of rights of setoff associated with the Corporation’s recognized financial assets and liabilities at March 31, 2017 and December 31, 2016.


As of March 31, 2017
							Gross Amounts Not Offset in the Statement of Financial Position
(In thousands)	Gross Amount of Recognized Assets		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Assets Presented in the Statement of Financial Position		Financial Instruments		Securities Collateral Received		Cash Collateral Received		Net Amount
Derivatives	$	13,097	$	—	$	13,097	$	85	$	—	$	—	$	13,012

Total	$	13,097	$	—	$	13,097	$	85	$	—	$	—	$	13,012


As of March 31, 2017
							Gross Amounts Not Offset in the Statement of Financial Position
(In thousands)	Gross Amount of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Liabilities Presented in the Statement of Financial Position		Financial Instruments		Securities Collateral Pledged		Cash Collateral Pledged		Net Amount
Derivatives	$	11,196	$	—	$	11,196	$	85	$	156	$	—	$	10,955
Repurchase agreements		434,714		—		434,714		—		434,714		—		—

Total	$	445,910	$	—	$	445,910	$	85	$	434,870	$	—	$	10,955


As of December 31, 2016
							Gross Amounts Not Offset in the Statement of Financial Position
(In thousands)	Gross Amount of Recognized Assets		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Assets Presented in the Statement of Financial Position		Financial Instruments		Securities Collateral Received		Cash Collateral Received		Net Amount
Derivatives	$	14,094	$	—	$	14,094	$	551	$	—	$	—	$	13,543
Reverse repurchase agreements		23,637		—		23,637		—		23,637		—		—

Total	$	37,731	$	—	$	37,731	$	551	$	23,637	$	—	$	13,543


As of December 31, 2016
							Gross Amounts Not Offset in the Statement of Financial Position
(In thousands)	Gross Amount of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Liabilities Presented in the Statement of Financial Position		Financial Instruments		Securities Collateral Pledged		Cash Collateral Received		Net Amount
Derivatives	$	12,842	$	—	$	12,842	$	551	$	747	$	—	$	11,544
Repurchase agreements		479,425		—		479,425		—		479,425		—		—

Total	$	492,267	$	—	$	492,267	$	551	$	480,172	$	—	$	11,544

The Corporation’s derivatives are subject to agreements which allow a right of set-off with each respective counterparty. In addition, the Corporation’s Repurchase Agreements and Reverse 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.

Note 18 – Stockholders’ equity

On January 23, 2017, the Corporation’s Board of Directors approved an increase in the Company’s quarterly common stock dividend from $0.15 per share to $0.25 per share. During the quarter ended March 31, 2017, the Corporation declared dividends on its common stock of $ 25.6 million, which were paid on April 3, 2017, and completed a $75 million privately negotiated accelerated share repurchase transaction (“ASR”). As part of this transaction, the Corporation received 1,847,372 shares and recognized $79.5 million in treasury stock, based on the stock’s spot price, offset by a $4.5 million adjustment to capital surplus, resulting from the decline in the Corporation’s stock price during the term of the ASR.

BPPR 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 prior consent of the Puerto Rico Commissioner of Financial Institutions. The failure to maintain sufficient statutory reserves would preclude BPPR from paying dividends. BPPR’s statutory reserve fund amounted to $513 million at March 31, 2017 (December 31, 2016 - $513 million). There were no transfers between the statutory reserve account and the retained earnings account during the quarters ended March 31, 2017 and March 31, 2016.

Note 19 – Other comprehensive loss

The following table presents changes in accumulated other comprehensive loss by component for the quarters ended March 31, 2017 and 2016.


	Changes in Accumulated Other Comprehensive Loss by Component [1]
		Quarters ended
		March 31,
(In thousands)		2017			2016
Foreign currency translation	Beginning Balance	$	(39,956	)	$	(35,930	)

	Other comprehensive income (loss)		139			(705	)

	Net change		139			(705	)

	Ending balance	$	(39,817	)	$	(36,635	)

Adjustment of pension and postretirement benefit plans	Beginning Balance	$	(211,610	)	$	(211,276	)

	Amounts reclassified from accumulated other comprehensive loss for amortization of net losses		3,421			3,346
	Amounts reclassified from accumulated other comprehensive loss for amortization of prior service credit		(580	)		(580	)

	Net change		2,841			2,766

	Ending balance	$	(208,769	)	$	(208,510	)

Unrealized net holding (losses) gains on investments	Beginning Balance	$	(68,318	)	$	(9,560	)

	Other comprehensive (loss) income before reclassifications		(2,609	)		73,351
	Amounts reclassified from accumulated other comprehensive (loss) income		(130	)		—

	Net change		(2,739	)		73,351

	Ending balance	$	(71,057	)	$	63,791

Unrealized net losses on cash flow hedges	Beginning Balance	$	(402	)	$	(120	)

	Other comprehensive loss before reclassifications		(389	)		(1,219	)
	Amounts reclassified from other accumulated other comprehensive loss		522			943

	Net change		133			(276	)

	Ending balance	$	(269	)	$	(396	)

	Total	$	(319,912	)	$	(181,750	)

[1]	All amounts presented are net of tax.

The following table presents the amounts reclassified out of each component of accumulated other comprehensive loss during the quarters ended March 31, 2017 and 2016.


	Reclassifications Out of Accumulated Other Comprehensive Loss
	Affected Line Item in the	Quarters ended March 31,
(In thousands)	Consolidated Statements of Operations	2017			2016
Adjustment of pension and postretirement benefit plans

Amortization of net losses	Personnel costs	$	(5,607	)	$	(5,486	)

Amortization of prior service credit	Personnel costs		950			950

	Total before tax		(4,657	)		(4,536	)

	Income tax benefit		1,816			1,770

	Total net of tax	$	(2,841	)	$	(2,766	)

Unrealized holding (losses) gains on investments

Realized gain on sale of securities	Net gain on sale and valuation adjustments of investment securities	$	162		$	—

	Total before tax		162			—

	Income tax expense		(32	)		—

	Total net of tax	$	130		$	—

Unrealized net losses on cash flow hedges

Forward contracts	Mortgage banking activities	$	(855	)	$	(1,545	)

	Total before tax		(855	)		(1,545	)

	Income tax benefit		333			602

	Total net of tax	$	(522	)	$	(943	)

	Total reclassification adjustments, net of tax	$	(3,233	)	$	(3,709	)

Note 20 – Guarantees

At March 31, 2017 the Corporation recorded a liability of $0.2 million (December 31, 2016 - $0.3 million), which represents the unamortized balance of the obligations undertaken in issuing the guarantees under the standby letters of credit. Management does not anticipate any material losses related to these instruments.

From time to time, the Corporation securitized mortgage loans into guaranteed mortgage-backed securities subject to limited, and in certain instances, 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. At March 31, 2017 the Corporation serviced $1.6 billion (December 31, 2016 - $1.7 billion) in residential mortgage loans subject to credit recourse provisions, principally loans associated with FNMA and FHLMC residential mortgage loan securitization programs. In the event of any customer default, pursuant to the credit recourse provided, the Corporation is required to repurchase the loan or reimburse the third party investor for the incurred loss. The maximum potential amount of future payments that the Corporation would be required to make under the recourse arrangements in the event of nonperformance by the borrowers is equivalent to the total outstanding balance of the residential mortgage loans serviced with recourse and interest, if applicable. During the quarter ended March 31, 2017, the Corporation repurchased approximately $ 9 million of unpaid principal balance in mortgage loans subject to the credit recourse provisions (March 31, 2016 - $ 13 million). In the event of nonperformance by the borrower, the Corporation has rights to the underlying collateral securing the mortgage loan. The Corporation suffers ultimate 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 March 31, 2017 the Corporation’s liability established to cover the estimated credit loss exposure related to loans sold or serviced with credit recourse amounted to $ 52 million (December 31, 2016 - $ 54 million).

The following table shows the changes in the Corporation’s liability of estimated losses related to loans serviced with credit recourse provisions during the quarters ended March 31, 2017 and 2016.


	March 31,
(In thousands)	2017			2016
Balance as of beginning of period	$	54,489		$	58,663
Provision for recourse liability		2,134			3,920
Net charge-offs		(5,083	)		(4,589	)

Balance as of end of period	$	51,540		$	57,994

When the Corporation sells or securitizes mortgage loans, it generally makes customary representations and warranties regarding the characteristics of the loans sold. 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. During the quarters ended March 31, 2017 and March 31, 2016, BPPR did not repurchase loans under representation and warranty arrangements.A substantial amount of these loans reinstate to performing status or have mortgage insurance, and thus the ultimate losses on the loans are not deemed significant.

From time to time, the Corporation sells loans and agrees to indemnify the purchaser for credit losses or any breach of certain representations and warranties made in connection with the sale. The following table presents the changes in the Corporation’s liability for estimated losses associated with indemnifications and representations and warranties related to loans sold by BPPR for the quarters ended March 31, 2017 and 2016.


(In thousands)	2017			2016
Balance as of beginning of period	$	10,936		$	8,087
Provision (reversal) for representation and warranties		(399	)		106
Net charge-offs		—			(191	)

Balance as of end of period	$	10,537		$	8,002

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 March 31, 2017, the Corporation serviced $17.7 billion in mortgage loans for third-parties, including the loans serviced with credit recourse (December 31, 2016 - $18.0 billion). The Corporation generally recovers funds advanced pursuant to these arrangements from the mortgage owner, from liquidation proceeds when the mortgage loan is foreclosed or, in the case of FHA/VA loans, under the applicable FHA and VA insurance and guarantees programs. However, in the meantime, 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 March 31, 2017, the outstanding balance of funds advanced by the Corporation under such mortgage loan servicing agreements was approximately $62 million, including advances on the portfolio acquired from Doral Bank (December 31, 2016 - $70 million). To the extent the mortgage loans 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.

Popular, Inc. Holding Company (“PIHC”) fully and unconditionally guarantees certain borrowing obligations issued by certain of its wholly-owned consolidated subsidiaries amounting to $ 149 million at March 31, 2017 and December 31, 2016. In addition, at March 31, 2017 and December 31, 2016, PIHC fully and unconditionally guaranteed on a subordinated basis $ 427 million of capital securities (trust preferred securities) issued by wholly-owned issuing trust entities to the extent set forth in the applicable guarantee agreement. Refer to Note 23 to the Consolidated Financial Statements in the 2016 Form 10-K for further information on the trust preferred securities.

Note 21 – Commitments and contingencies

Off-balance sheet risk

The Corporation is a party to financial instruments with off-balance sheet credit risk in the normal course of business to meet the financial needs of 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)	March 31, 2017		December 31, 2016
Commitments to extend credit:
Credit card lines	$	4,812,061	$	4,562,981
Commercial and construction lines of credit		2,831,925		2,966,656
Other consumer unused credit commitments		264,240		261,856
Commercial letters of credit		1,346		1,490
Standby letters of credit		28,863		34,644
Commitments to originate or fund mortgage loans		21,897		25,622

At March 31, 2017 and December 31, 2016, the Corporation maintained a reserve of approximately $9 million, for potential losses associated with unfunded loan commitments related to commercial and consumer lines of credit.

Other commitments

At March 31, 2017 and December 31, 2016, the Corporation also maintained other non-credit commitments for approximately $372 thousand, primarily for the acquisition of other investments.

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 Rico economy and, in particular, the residential and 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 33 to the Consolidated Financial Statements.

Puerto Rico is in the midst of a profound fiscal and economic crisis and has commenced several proceedings under PROMESA to restructure its outstanding obligations and those of certain of its instrumentalities. As of the date of this report, the credit ratings for the Commonwealth’s general obligation bonds are as follows: S&P, ‘D’, Moody’s, ‘Caa3’, and Fitch, ‘D’.

The U.S. Congress enacted PROMESA on June 30, 2016 in response to the Commonwealth’s ongoing fiscal and economic crisis. PROMESA, among other things, (i) established a seven-member oversight board (the “Oversight Board”) with broad powers over the finances of the Commonwealth and its instrumentalities, (ii) established an automatic stay on litigation, which expired on May 1, 2017, that applied to all financial obligations of the Commonwealth, its instrumentalities and municipalities (including to all municipal obligations owned by the Corporation), (iii) required the Commonwealth (and any instrumentality thereof designed as a “covered entity’ under PROMESA) to submit its budgets, and if the Oversight Board so requests, a fiscal plan for certification by the Oversight Board, and (iv) established two separate processes for the restructuring of the outstanding liabilities of the Commonwealth, its instrumentalities and municipalities: (a) Title VI, a largely out-of-court process through which a government entity and its financial creditors can agree on terms to restructure such entity’s debts, and (b) Title III, a court-supervised process for a comprehensive restructuring similar to Chapter 9 of the U.S. Bankruptcy Code.

The Oversight Board has designated a number of entities as “covered entities” under PROMESA, including the Commonwealth, all of its public corporations (including COFINA) and retirement systems, and all affiliates and subsidiaries of the foregoing. While the Oversight Board has the power to designate any of the Commonwealth’s

municipalities as covered entities under PROMESA, it has not done so as of the date hereof. The Oversight Board has further approved fiscal plans for certain of these “covered entities,” including the Commonwealth, Government Development Bank for Puerto Rico (“GDB”) and several other public corporations. The Commonwealth’s fiscal plan covers various public instrumentalities with outstanding debts payable from taxes, fees or other government revenues, including COFINA. The approved fiscal plans indicate that the applicable government entities are unable to pay their outstanding obligations as currently scheduled, thus recognizing a need for debt restructuring.

Although as of the date hereof the Commonwealth and COFINA are the only entities for which the Oversight Board has sought to use the restructuring authority provided by Title III of PROMESA, the Oversight Board may use the restructuring authority of Title III or Title VI of PROMESA for other Commonwealth instrumentalities, including its municipalities, in the future.

At March 31, 2017, the Corporation’s direct exposure to the Puerto Rico government and its instrumentalities and municipalities amounted to $ 520 million, of which approximately $ 516 million is outstanding ($584 million and $ 529 million, respectively, at December 31, 2016). Of the amount outstanding, $ 451 million consists of loans and $ 65 million are securities ($ 459 million and $ 70 million at December 31, 2016). Also, of the amount outstanding, $ 15 million represents senior obligations from COFINA ($ 17 million at December 31, 2016). As indicated in Note 5 to these Consolidated Financial Statements, the Oversight Board has initiated a Title III filing with respect to COFINA, which will require the Corporation to evaluate during the second quarter whether its holdings of senior COFINA obligations are other than temporarily impaired, which could result in a charge to earnings to recognize estimated credit losses determined to be other-than-temporary. The remaining $ 501 million outstanding ($ 512 million at December 31, 2016) represents obligations from various municipalities in Puerto Rico for which, in most cases, the good faith, credit and unlimited taxing power of the applicable municipality has been pledged to their repayment. Such general obligation bonds and notes are payable primarily from certain special property taxes, which each municipality is required by law to levy in an amount sufficient for the payment of its outstanding general obligation bonds and notes. Said special property taxes are collected by the Municipal Revenue Collection Center (“CRIM”) and deposited into each municipality’s Redemption Fund (a trust for which GDB acts as trustee and which is currently held in various accounts and subaccounts at BPPR (except for the portion corresponding to repayment of municipal general obligation bonds held by GDB, which is held at GDB)). Funds in the Redemption Fund are required to be used for the payment of the municipality’s general obligation bonds and notes. To the extent that the funds deposited in a municipality’s Redemption Fund are insufficient to pay said obligations in full, CRIM is required to transfer to such Redemption Fund other property tax revenues of said municipality to satisfy said insufficiency.

The following table details the loans and investments representing the Corporation’s direct exposure to the Puerto Rico government according to their maturities:


(In thousands)	Investment Portfolio		Loans		Total Outstanding		Total Exposure
Central Government
After 5 to 10 years	$	3,054	$	—	$	3,054	$	3,054
After 10 years		11,563		—		11,563		11,563

Total Central Government		14,617		—		14,617		14,617

Government Development Bank (GDB)
After 1 to 5 years		1		—		1		1

Total Government Development Bank (GDB)		1		—		1		1

Puerto Rico Highways and Transportation Authority
After 5 to 10 years		4		—		4		4

Total Puerto Rico Highways and Transportation Authority		4		—		4		4

Municipalities
Within 1 year		3,235		18,974		22,209		25,659
After 1 to 5 years		15,200		128,008		143,208		143,208
After 5 to 10 years		17,485		144,975		162,460		162,460
After 10 years		15,070		158,660		173,730		173,730

Total Municipalities		50,990		450,617		501,607		505,057

Total Direct Government Exposure	$	65,612	$	450,617	$	516,229	$	519,679

In addition, at March 31, 2017, the Corporation had $400 million in indirect exposure to loans or securities that are payable by non-governmental entities, but which carry a government guarantee to cover any shortfall in collateral in the event of borrower default ($406 million at December 31, 2016). These included $320 million in residential mortgage loans that are guaranteed by the Puerto Rico Housing Finance Authority (December 31, 2016 - $326 million). These mortgage loans are secured by the underlying properties and the guarantees serve to cover shortfalls in collateral in the event of a borrower default. Under recently enacted legislation, the Governor is authorized to impose a temporary moratorium on the financial obligations of Puerto Rico Housing Finance Authority. Also, the Corporation had $43 million in Puerto Rico housing bonds which are backed-up by second mortgage residential loans, $7 million in pass-through securities that have been economically defeased and refunded and for which collateral including U.S. agencies and Treasury obligations has been escrowed, and $30 million of commercial real estate notes issued by government entities, but payable from rent paid by third parties ($43 million, $6 million and $31 million at December 31, 2016, respectively).

The Corporation has operations in the United States Virgin Islands (the “USVI”) and has approximately $79 million in direct exposure to USVI government entities. The USVI is 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.

Other contingencies

As indicated in Note 9 to the Consolidated Financial Statements, as part of the loss sharing agreements related to the Westernbank FDIC-assisted transaction, the Corporation agreed to make a true-up payment to the FDIC on the date that is 45 days following the last day of the final shared loss month, or upon the final disposition of all covered assets under the loss sharing agreements in the event losses on the loss sharing agreements fail to reach expected levels. The fair value of the true-up payment obligation was estimated at $ 161 million at March 31, 2017 (December 31, 2016 - $ 153 million). For additional information refer to Note 9.

Legal Proceedings

The nature of Popular’s business ordinarily results in a certain number of claims, litigation, investigations, and legal and administrative cases and 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 both the Corporation and its shareholders to do so.

On at least a quarterly basis, Popular assesses its liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest 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 an accrual for the loss. Once established, the accrual is adjusted on at least a quarterly basis as appropriate to reflect any relevant developments. For matters where a material loss is not probable or the amount of the loss cannot be estimated, no accrual is established.

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 aggregate 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 ranges from $0 to approximately $22.3 million as of March 31, 2017. For certain other cases, management cannot reasonably estimate the possible loss at this time. Any estimate involves significant judgment, given the varying stages of the proceedings (including the fact that many of them are currently in preliminary stages), the existence of multiple defendants in several of the current proceedings whose share of liability has yet to be determined, the numerous unresolved issues in many of the proceedings, and the inherent uncertainty of the various potential outcomes of such proceedings. Accordingly, management’s estimate will change from time-to-time, and actual losses may be more or less than the current estimate.

While the final outcome of legal proceedings is inherently uncertain, based on information currently available, advice of counsel, and available insurance coverage, management believes that the amount it has already accrued is adequate and any incremental liability arising from the Corporation’s legal proceedings will not have a material adverse effect on the Corporation’s consolidated financial position as a whole. However, in the event of unexpected future developments, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to the Corporation’s consolidated financial position in a particular period.

Set forth below is a description of the Corporation’s significant legal proceedings.

BANCO POPULAR DE PUERTO RICO

Hazard Insurance Commission-Related Litigation

Popular, Inc., BPPR and Popular Insurance, LLC (the “Popular Defendants”) have recently been named defendants in a putative class action complaint captioned Perez Díaz v. Popular, Inc., et al, filed before the Court of First Instance, Arecibo Part. The complaint seeks damages and preliminary and permanent injunctive relief on behalf of the purported class against the Popular Defendants, as well as Antilles Insurance Company, Real Legacy Insurance Company and MAPFRE-PRAICO Insurance Company (the “Defendant Insurance Companies”). Plaintiffs essentially 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 $400,000,000, plus legal interest, for the “good experience” commissions allegedly paid by the Defendant Insurance Companies during the relevant 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 hearing on the request for preliminary injunction and other matters was held on February 15, 2017, as a result of which plaintiffs withdrew their request for preliminary injunctive relief. A motion for dismissal on the merits filed by all defendants, which was unopposed as of the date of the hearing, was denied with a right to replead following limited targeted discovery. On March 24, 2017, the Popular defendants filed a certiorari petition with the Puerto Rico Court of Appeals seeking a review of the lower court’s denial of the motion to dismiss. Popular and MAPFRE recently asked the Court of Appeals to stay lower-court proceedings pending resolution of certiorari petitions, which the Court denied. Popular has asked the Court to reconsider such denial. A class certification hearing is scheduled for June 23, 2017.

BPPR has separately been named a defendant in a putative class action complaint captioned Ramirez Torres, et al. v. Banco Popular de Puerto Rico, et al , filed before the Puerto Rico Court of First Instance, San Juan Part . The complaint seeks damages and preliminary and permanent injunctive relief on behalf of the purported class against the Popular Defendants, as well other financial institutions with insurance brokerage subsidiaries in Puerto Rico. Plaintiffs essentially contend that in November 2015, Antilles Insurance Company obtained approval from the Puerto Rico Insurance Commissioner to market an endorsement that allowed its customers to obtain a reimbursement on their insurance deductible for good experience, but that defendants failed to offer this product or disclose its existence to their customers, favoring other products instead, in violation of their duties as insurance brokers. Plaintiffs seek a determination that defendants unlawfully failed to comply with their legal and contractual duty to disclose the existence of this new insurance product, as well as double or treble damages (the latter subject to a determination that defendants engaged in anti-monopolistic practices in failing to offer this product). Between late March and early April, co-defendants filed motions to dismiss and opposed the request for preliminary injunctive relief. A co-defendant filed a third-party Complaint against Antilles Insurance Company. A preliminary injunction and class certification hearing originally scheduled for April 6 ^th was re-scheduled at the request of plaintiffs’ counsel for May 17, 2017.

Mortgage-Related Litigation

BPPR has been named a defendant in a putative class action captioned Lilliam González Camacho, et al. v. Banco Popular de Puerto Rico, et al. , filed before the United States District Court for the District of Puerto Rico on behalf of mortgage-holders who have allegedly been subjected to illegal foreclosures and/or loan modifications through their mortgage servicers. Plaintiffs essentially contend that when they sought to reduce their loan payments, defendants failed to provide them with reduced loan payments, instead subjecting them to lengthy loss mitigation processes while filing foreclosure claims against them in parallel. Plaintiffs assert that such actions violate HAMP, HARP and other loan modification programs, as well as the Puerto Rico Mortgage Debtor Assistance Act and TILA. For the alleged violations stated above, Plaintiffs request that all Defendants (over 20 separate defendants have been named, including all local banks), jointly and severally, respond in an amount of no less than $400,000,000.00. BPPR has not yet been served.

Mortgage-Related Investigations

Separately, the Corporation and its subsidiaries from time to time receive requests for information from departments of the U.S. government that investigate mortgage-related conduct. In particular, the BPPR has received subpoenas and other requests for information from the Federal Housing Finance Agency’s Office of the Inspector General, the Civil Division of the Department of Justice, the Special Inspector General for the Troubled Asset Relief Program and the Federal Department of Housing and Urban Development’s Office of the Inspector General mainly concerning real estate appraisals and residential and construction loans in Puerto Rico. The Corporation is cooperating with these requests.

POPULAR SECURITIES

Popular Securities has been named a defendant in a putative class action complaint captioned Nora Fernandez, et al. v. UBS, et al ., filed in the United States District Court for the Southern District of New York (SDNY) on May 5, 2014 on behalf of investors in 23 Puerto Rico closed-end investment companies. UBS Financial Services Incorporated of Puerto Rico, another named defendant, is the sponsor and co-sponsor of all 23 funds, while BPPR, who was originally named in the complaint as well, was co-sponsor, together with UBS, of nine (9) of those funds. Plaintiffs allege breach of fiduciary duty and breach of contract against Popular Securities, aiding and abetting breach of fiduciary duty against BPPR, and similar claims against the UBS entities. The complaint seeks unspecified damages, including disgorgement of fees and attorneys’ fees. On May 30, 2014, plaintiffs voluntarily dismissed their class action in the SDNY and on that same date, they filed a virtually identical complaint in the USDC-PR and requested that the case be consolidated with the matter of In re: UBS Financial Services Securities Litigation, a class action currently pending before the USDC-PR in which neither BPPR nor Popular Securities are parties. The UBS defendants filed an opposition to the consolidation request and moved to transfer the case back to the SDNY on the ground that the relevant agreements between the parties contain a choice of forum clause, with New York as the selected forum. The Popular defendants joined the opposition and motion filed by UBS. By order dated January 30, 2015, the court denied the plaintiffs’ motion to consolidate. By order dated March 30, 2015, the court granted defendants’ motion to transfer. On May 8, 2015, plaintiffs filed an amended complaint in the SDNY containing virtually identical allegations with respect to Popular Securities and BPPR. Defendants filed motions to dismiss the amended complaint on June 18, 2015. Oral arguments were held on the motions to dismiss in front of Judge Stein of the SDNY on October 14, 2016. On December 7, 2016, Judge Stein largely granted the motion to dismiss of BPPR and Popular Securities. Judge Stein’s order (“Order”) dismissed all claims against BPPR and all but two breach of contract claims against Popular Securities brought by one named plaintiff. Specifically, the Order dismissed claims stemming from purchases of the funds in 2005, 2007 and 2011 as time-barred by the Puerto Rico Uniform Securities Act. The Order also dismissed the claims for breach of fiduciary duty, aiding and abetting of a breach of fiduciary duty, and breach of the covenant of good faith and fair dealing stemming from a 2012 purchase for failure to state a claim. The Court granted Plaintiffs 21 days to amend the complaint for the 2012 claims only, but plaintiffs chose not to replead. The Order stated that the final two contract claims, which allege that Popular Securities failed to conduct a suitability analysis for the named plaintiff as required by the parties’ contract would be allowed to proceed, because the Court was not prepared at the motion to dismiss stage, to conclude that the plaintiff was responsible for all investments enough to eliminate Popular Securities’ obligations regarding suitability. The parties are currently in the discovery phase of the case. On March 24, 2017, the sole named plaintiff filed a Notice of Death, as a result of which plaintiff has 90 days to either find a substitute plaintiff or dismiss the complaint against Popular Securities. This term expires on June 22, 2017.

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 is named as a respondent (among other broker-dealers) in 56 arbitration proceedings with aggregate claimed damages of approximately $168 million, including one arbitration with claimed damages of $78 million in which one other Puerto Rico broker-dealer is a co-defendant. It is the view of the Corporation that Popular Securities has meritorious defenses to the claims asserted. The Government’s defaults on its debt, its intention to pursue a comprehensive debt restructuring, including specifically its decisions to declare a moratorium on certain principal payments on bonds including those issued by Government Development Bank for Puerto Rico (the “GDB”), may increase the number of customer complaints (and claimed damages) against Popular Securities concerning Puerto Rico bonds, including bonds issued by GDB, and closed-end investment companies that invest primarily in Puerto Rico bonds. An adverse result in the matters described above or a significant increase in customer complaints could have a material adverse effect on Popular.

POPULAR COMMUNITY BANK

Josefina Valle v. Popular Community Bank

PCB has been named a defendant in a putative class action complaint captioned Josefina Valle, et al. v. Popular Community Bank, filed in November 2012 in the New York State Supreme Court (New York County). Plaintiffs, PCB customers, allege among other things that PCB has engaged in unfair and deceptive acts and trade practices in connection with the assessment of overdraft fees and payment processing on consumer deposit accounts. The complaint further alleges that PCB improperly disclosed its consumer overdraft policies and that the overdraft rates and fees assessed by PCB violate New York’s usury laws. Plaintiffs seek unspecified damages, including punitive damages, interest, disbursements, and attorneys’ fees and costs.

A motion to dismiss was filed on September 9, 2013. On October 25, 2013, plaintiffs filed an amended complaint seeking to limit the putative class to New York account holders. A motion to dismiss the amended complaint was filed in February 2014. In August 2014, the Court entered an order granting in part PCB’s motion to dismiss. The sole surviving claim relates to PCB’s item processing policy. On September 10, 2014, plaintiffs filed a motion for leave to file a second amended complaint to correct certain deficiencies noted in the court’s decision and order. PCB subsequently filed a motion in opposition to plaintiff’s motion for leave to amend and further sought to compel arbitration. In June 2015, this matter was reassigned to a new judge and on July 22, 2015, such Court denied PCB’s motion to compel arbitration and granted plaintiffs’ motion for leave to amend the complaint to replead certain claims based on item processing reordering, misstatement of balance information and failure to notify customers in advance of potential overdrafts. The Court did not, however, allow plaintiffs to replead their claim for the alleged breach of the implied covenant of good faith and fair dealing. On August 12, 2015, the Plaintiffs filed a second amended complaint. On August 24, 2015, PCB filed a Notice of Appeal as to the order granting leave to file the second amended complaint and on September 17, 2015, it filed a motion to dismiss the second amended complaint. On February 18, 2016, the Court granted in part and denied in part PCB’s pending motion to dismiss. The Court dismissed plaintiffs’ unfair and deceptive acts and trade practices claim to the extent it sought to recover overdraft fees incurred prior to September 2011. On March 28, 2016, PCB filed an answer to second amended complaint and on April 7, 2016, it filed a notice of appeal on the partial denial of PCB’s motion to dismiss. A mediation session held on September 21, 2016 proved unsuccessful. Discovery is ongoing. On January 3, 2017, PCB filed a brief with the Appellate Division in support of its appeal of the lower Court’s prior order that granted in part and denied in part PCB’s motion to dismiss plaintiffs’ second amended complaint. Oral argument was held on April 4, 2017. On April 25, 2017, the Court issued an order denying PCB’s appeal from the partial denial of our motion to dismiss.

In re: RFC and RESCAP Liquidating Trust Litigation

E-LOAN, Inc., a wholly-owned subsidiary of Banco Popular North America, has been named a defendant in a complaint for breach of contract regarding certain alleged repurchase obligations in connection with the origination and sale of residential mortgage loans

sold by E-LOAN, Inc., among other mortgage lenders, to plaintiff. In January 2015, the court consolidated this action with the matter of In re: RFC and RESCAP Liquidating Trust Litigation , which is composed of approximately 70 other matters involving repurchase obligation claims filed by RFC, for pretrial purposes. A joint mediation hearing was held on September 21, 2016 but did not result in the settlement of this matter. More recently, however, the parties resumed settlement negotiations and on April 25, 2017, the parties entered into a definitive agreement to settle all claims against E-LOAN, Inc. The terms of the settlement did not have a material effect on the financial results of the Corporation.

FDIC Commercial Loss Share Arbitration Proceedings

As described under “Note 9 – FDIC loss share asset and true-up payment obligation”, in connection with the Westernbank FDIC-assisted transaction, on April 30, 2010, BPPR entered into loss share agreements with the FDIC, as receiver, with respect to the covered loans and other real estate owned (“OREO”) that it acquired in the transaction. Pursuant to the terms of the loss share agreements, the FDIC’s obligation to reimburse BPPR for losses with respect to covered assets began with the first dollar of loss incurred. The FDIC was obligated to reimburse BPPR for 80% of losses with respect to covered assets, and BPPR must reimburse the FDIC for 80% of recoveries with respect to losses for which the FDIC paid 80% reimbursement under those loss share agreements. The loss share agreements contain specific terms and conditions regarding the management of the covered assets that BPPR must follow in order to receive reimbursement for losses from the FDIC. BPPR believes that it has complied with such terms and conditions. The loss share agreement applicable to the covered commercial and OREO described below provided for loss sharing by the FDIC through the quarter ending June 30, 2015 and provides for reimbursement to the FDIC for recoveries through the quarter ending June 30, 2018.

Between 2013 and 2017, BPPR and the FDIC became involved in five separate proceedings under the commercial loss share agreement. Of these, only two remained active as of December 31, 2016, and as further described below, they were resolved on March 27, 2017.

January 2016 Dispute

On November 12, 2015, the FDIC notified BPPR that it (a) would deny certain claims included in BPPR’s Second Quarter 2015 Quarterly Certificate and (b) withhold payment of approximately $5.5 million attributed to $6.9 million in losses BPPR claimed under that certificate. In support of its denial, the FDIC alleged that BPPR did not comply with its obligations under the commercial loss share agreement, including compliance with certain provisions of GAAP, acting in accordance with prudent banking practices, managing Shared-Loss Assets in the same manner as BPPR’s non-Shared-Loss Assets, and using best efforts to maximize collections on the Shared-Loss Assets. BPPR disagreed with the FDIC’s allegations relating to the denied claims included in BPPR’s Second Quarter 2015 Quarterly Certificate, and accordingly, on January 27, 2016 delivered to the FDIC a notice of dispute under the commercial loss share agreement. On May 20, 2016, BPPR filed a demand for arbitration with the American Arbitration Association requesting that a review board, comprised of one arbitrator appointed by the BPPR, one arbitrator appointed by the FDIC and a third arbitrator selected by agreement of those arbitrators, resolve the disputes arising from BPPR’s filing of the Second Quarter 2015 Quarterly Certificate and award BPPR damages in the amount of $4.9 million. On June 29, 2016, the FDIC filed its answering statement and counterclaim, seeking a declaration that the FDIC properly denied a portion of the bank’s shared-loss claim for one of the subject assets. In December 2016, the FDIC withdrew its counterclaim with prejudice on the condition that BPPR agree not to challenge the FDIC’s refusal to reimburse the losses on the loan that was the subject of the FDIC’s counterclaim. On February 10, 2017, BPPR withdrew one of its claims, as a result of which its damages demand was reduced to approximately $4.3 million.

December 2016 Dispute

On December 16, 2016, the FDIC initiated a proceeding before the chair of the review board that sat on a prior arbitration proceeding between BPPR and the FDIC that resulted in a settlement among the parties dated as of October 2014. The panel’s chair also sat on the review board in the December 2014 Dispute that resulted in an adverse award for BPPR. Through this proceeding, the FDIC sought to claw back a $12.6 million reimbursement paid on one of the Shared-Loss Assets at issue in the January 2016 Dispute.

On February 23, 2017, the FDIC and BPPR entered into a settlement in principle whereby the parties agreed to withdraw both the January 2016 and the December 2016 Disputes in exchange for a payment by BPPR to the FDIC of approximately $5.5 million. On March 27, 2017, Banco Popular submitted a payment of $5.5 million in connection with the filing of its quarterly certificate to the FDIC. On March 28, 2017, the parties informed the separate arbitrators that the parties had reached a definitive agreement and the proceedings should be dismissed with prejudice.

The loss sharing agreement applicable to single-family residential mortgage loans provides for FDIC loss sharing and BPPR reimbursement to the FDIC for ten years (ending on June 30, 2020). As of March 31, 2017, the carrying value of covered loans approximated $552 million, mainly comprised of single-family residential mortgage loans. To the extent that estimated losses on covered loans are not realized before the expiration of the applicable loss sharing agreement, such losses would not be subject to reimbursement from the FDIC and, accordingly, would require us to make a material adjustment in the value of our loss share asset and the related true up payment obligation to the FDIC and could have a material adverse effect on our financial results for the period in which such adjustment is taken.

Note 22 – Non-consolidated variable interest entities

The Corporation is involved with four statutory trusts which it created 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 trusts since the decisions of the trusts are predetermined through the trust documents and the guarantee of the trust preferred securities is irrelevant since in substance the sponsor is guaranteeing its own debt.

Also, the Corporation is involved with various special purpose entities mainly in guaranteed mortgage securitization transactions, including GNMA and FNMA. These special purpose entities are deemed to be VIEs since they lack equity investments at risk. The Corporation’s continuing involvement 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 provide additional financial support to any of the variable interest entities to which it has transferred the financial assets. The mortgage-backed securities, to the extent retained, are classified in the Corporation’s consolidated statements of financial condition as available-for-sale or trading securities. The Corporation concluded that, essentially, these entities (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, agency collateralized mortgage obligations and private label collateralized mortgage obligations issued by third party VIEs in which it has no other form of continuing involvement. Refer to Note 24 to the Consolidated Financial Statements for additional information on the debt securities outstanding at March 31, 2017 and December 31, 2016, which are classified as available-for-sale and trading securities in the Corporation’s consolidated statements of financial condition. In addition, the Corporation holds variable interests in the form of servicing fees, since it retains the right to service the transferred loans in those government-sponsored special purpose entities (“SPEs”) and may also purchase the right to service loans in other government-sponsored SPEs that were transferred to those SPEs by a third-party.

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 March 31, 2017 and December 31, 2016.


(In thousands)	March 31, 2017		December 31, 2016
Assets
Servicing assets:
Mortgage servicing rights	$	156,199	$	158,562

Total servicing assets	$	156,199	$	158,562

Other assets:
Servicing advances	$	18,255	$	20,787

Total other assets	$	18,255	$	20,787

Total assets	$	174,454	$	179,349

Maximum exposure to loss	$	174,454	$	179,349

The size of the non-consolidated VIEs, in which the Corporation has a variable interest in the form of servicing fees, measured as the total unpaid principal balance of the loans, amounted to $12.1 billion at March 31, 2017 (December 31, 2016 - $12.3 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 March 31, 2017 and December 31, 2016, will not be recovered. The agency debt securities are not included as part of the maximum exposure to loss since they are guaranteed by the related agencies.

In September of 2011, BPPR sold construction and commercial real estate loans to a newly created joint venture, PRLP 2011 Holdings, LLC. In March of 2013, BPPR completed a sale of commercial and construction loans, and commercial and single family real estate owned to a newly created joint venture, PR Asset Portfolio 2013-1 International, LLC.

These joint ventures were created for the limited purpose of acquiring the loans from BPPR; servicing the loans through a third-party servicer; ultimately working out, resolving and/or foreclosing the loans; and indirectly owning, operating, constructing, developing, leasing and selling any real properties acquired by the joint ventures through deed in lieu of foreclosure, foreclosure, or by resolution of any loan.

BPPR provided financing to PRLP 2011 Holdings, LLC and PR Asset Portfolio 2013-1 International, LLC for the acquisition of the assets in an amount equal to the acquisition loan of $86 million and $182 million, respectively. The acquisition loans have a 5-year maturity and bear a variable interest at 30-day LIBOR plus 300 basis points and are secured by a pledge of all of the acquiring entity’s assets. In addition, BPPR provided these joint ventures with a non-revolving advance facility (the “advance facility”) of $69 million and $35 million, respectively, to cover unfunded commitments and costs-to-complete related to certain construction projects, and a revolving working capital line (the “working capital line”) of $20 million and $30 million, respectively, to fund certain operating expenses of the joint venture. As part of these transactions, BPPR received $48 million and $92 million, respectively, in cash and a 24.9% equity interest in each joint venture. The Corporation is not required to provide any other financial support to these joint ventures.

BPPR accounted for both transactions as a true sale pursuant to ASC Subtopic 860-10.

The Corporation has determined that PRLP 2011 Holdings, LLC and PR Asset Portfolio 2013-1 International, LLC are VIEs but it is not the primary beneficiary. All decisions are made by Caribbean Property Group (“CPG”) (or an affiliate thereof) (the “Manager”), except for certain limited material decisions which would require the unanimous consent of all members. The Manager is authorized to execute and deliver on behalf of the joint ventures any and all documents, contracts, certificates, agreements and instruments, and to take any action deemed necessary in the benefit of the joint ventures.

The Corporation holds variable interests in these VIEs in the form of the 24.9% equity interests and the financing provided to these joint ventures. The equity interest is accounted for under the equity method of accounting pursuant to ASC Subtopic 323-10.

The following tables present the carrying amount and classification of the assets and liabilities related to the Corporation’s variable interests in the non-consolidated VIEs, PRLP 2011 Holdings, LLC and PR Asset Portfolio 2013- International, LLC, and their maximum exposure to loss at March 31, 2017 and December 31, 2016.


	PRLP 2011 Holdings, LLC						PR Asset Portfolio 2013-1 International, LLC
(In thousands)	March 31, 2017			December 31, 2016			March 31, 2017			December 31, 2016
Assets
Loans held-in-portfolio:
Advances under the working capital line	$	—		$	—		$	—		$	1,391
Advances under the advance facility		—			—			—			2,475

Total loans held-in-portfolio	$	—		$	—		$	—		$	3,866

Accrued interest receivable	$	—		$	—		$	—		$	19
Other assets:
Equity investment	$	8,656		$	9,167		$	18,862		$	22,378

Total assets	$	8,656		$	9,167		$	18,862		$	26,263

Liabilities
Deposits	$	(1,118	)	$	(1,127	)	$	(22,564	)	$	(9,692	)

Total liabilities	$	(1,118	)	$	(1,127	)	$	(22,564	)	$	(9,692	)

Total net assets (liabilities)	$	7,538		$	8,040		$	(3,702	)	$	16,571

Maximum exposure to loss	$	7,538		$	8,040		$	—		$	16,571

The Corporation determined that the maximum exposure to loss under a worst case scenario at March 31, 2017 would be not recovering the net assets held by the Corporation as of the reporting date.

ASU 2009-17 requires that an ongoing primary beneficiary assessment should be made to determine whether 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 March 31, 2017.

Note 23 – Related party transactions

EVERTEC

The Corporation has an investment in EVERTEC, Inc. (“EVERTEC”), which provides various processing 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 March 31, 2017, the Corporation’s stake in EVERTEC was 16.06%. The Corporation continues to have significant influence over EVERTEC. Accordingly, the investment in EVERTEC is accounted for under the equity method and is evaluated for impairment if events or circumstances indicate that a decrease in value of the investment has occurred that is other than temporary.

The Corporation received $1.2 million in dividend distributions during the quarter ended March 31, 2017 from its investments in EVERTEC’s holding company (March 31, 2016 - $1.2 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 statements of financial condition.


(In thousands)	March 31, 2017		December 31, 2016
Equity investment in EVERTEC	$	42,408	$	38,904

The Corporation had the following financial condition balances outstanding with EVERTEC at March 31, 2017 and December 31, 2016. Items that represent liabilities to the Corporation are presented with parenthesis.


(In thousands)	March 31, 2017			December 31, 2016
Accounts receivable (Other assets)	$	4,424		$	6,394
Deposits		(12,937	)		(14,899	)
Accounts payable (Other liabilities)		(3,154	)		(20,372	)

Net total	$	(11,667	)	$	(28,877	)

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 quarters ended March 31, 2017 and 2016.


	Quarters ended March 31,
(In thousands)	2017		2016
Share of income from investment in EVERTEC	$	3,700	$	2,983
Share of other changes in EVERTEC’s stockholders’ equity		619		242

Share of EVERTEC’s changes in equity recognized in income	$	4,319	$	3,225

The following table 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 quarters ended March 31, 2017 and 2016. Items that represent expenses to the Corporation are presented with parenthesis.


	Quarters ended March 31,
(In thousands)	2017			2016			Category
Interest expense on deposits	$	(9	)	$	(19	)		Interest expense
ATH and credit cards interchange income from services to EVERTEC		7,666			6,918			Other service fees
Rental income charged to EVERTEC		1,759			1,736			Net occupancy
Processing fees on services provided by EVERTEC		(42,370	)		(43,516	)		Professional fees
Other services provided to EVERTEC		266			256			Other operating expenses

Total	$	(32,688	)	$	(34,625	)

PRLP 2011 Holdings, LLC

As indicated in Note 22 to the Consolidated Financial Statements, the Corporation holds a 24.9% equity interest in PRLP 2011 Holdings, LLC and currently holds certain deposits from the entity.

The Corporation’s equity in PRLP 2011 Holdings, LLC is presented in the table which follows and is included as part of “other assets” in the Consolidated Statements of Financial Condition.


(In thousands)	March 31, 2017		December 31, 2016
Equity investment in PRLP 2011 Holdings, LLC	$	8,656	$	9,167

The Corporation had the following financial condition balances outstanding with PRLP 2011 Holdings, LLC at March 31, 2017 and December 31, 2016.


(In thousands)	March 31, 2017			December 31, 2016
Deposits (non-interest bearing)	$	(1,118	)	$	(1,127	)

The Corporation’s proportionate share of income or loss from PRLP 2011 Holdings, LLC is included in other operating income in the Consolidated Statements of Operations. The following table presents the Corporation’s proportionate share of loss from PRLP 2011 Holdings, LLC for the quarters ended March 31, 2017 and 2016.


	Quarters ended March 31,
(In thousands)	2017			2016
Share of loss from the equity investment in PRLP 2011 Holdings, LLC	$	(511	)	$	(542	)

During the quarter ended March 31, 2016, the Corporation received $1.8 million in capital distributions from its investment in PRLP 2011 Holdings, LLC. The following table presents transactions between the Corporation and PRLP 2011 Holdings, LLC and their impact on the Corporation’s results of operations for the quarters ended March 31, 2017 and 2016.


	Quarters ended March 31,
(In thousands)	2017		2016		Category
Interest income on loan to PRLP 2011 Holdings, LLC	$	—	$	11		Interest income

PR Asset Portfolio 2013-1 International, LLC

As indicated in Note 22 to the Consolidated Financial Statements, effective March 2013 the Corporation holds a 24.9% equity interest in PR Asset Portfolio 2013-1 International, LLC and currently provides certain financing to the joint venture as well as holds certain deposits from the entity.

The Corporation’s equity in PR Asset Portfolio 2013-1 International, LLC is presented in the table which follows and is included as part of “other assets” in the Consolidated Statements of Financial Condition.


(In thousands)	March 31, 2017		December 31, 2016
Equity investment in PR Asset Portfolio 2013-1 International, LLC	$	18,862	$	22,378

The Corporation had the following financial condition balances outstanding with PR Asset Portfolio 2013-1 International, LLC, at March 31, 2017 and December 31, 2016.


(In thousands)	March 31, 2017			December 31, 2016
Loans	$	—		$	3,866
Accrued interest receivable		—			19
Deposits		(22,564	)		(9,692	)

Net total	$	(22,564	)	$	(5,807	)

The Corporation’s proportionate share of income or loss from PR Asset Portfolio 2013-1 International, LLC is included in other operating income in the Consolidated Statements of Operations. The following table presents the Corporation’s proportionate share of loss from PR Asset Portfolio 2013-1 International, LLC for quarters ended March 31, 2017 and 2016.


	Quarters ended March 31,
(In thousands)	2017			2016
Share of loss from the equity investment in PR Asset Portfolio 2013-1 International, LLC	$	(154	)	$	(522	)

During the quarter ended March 31, 2017, the Corporation received $3.4 million in capital distribution from its investment in PR Asset Portfolio 2013-1 International, LLC. The following table presents transactions between the Corporation and PR Asset Portfolio 2013-1 International, LLC and their impact on the Corporation’s results of operations for the quarters March 31, 2017 and 2016.


	Quarters ended March 31,
(In thousands)	2017			2016			Category
Interest income on loan to PR Asset Portfolio 2013-1 International, LLC	$	9		$	445			Interest income
Interest expense on deposits		(4	)		(1	)		Interest expense

Total	$	5		$	444

Centro Financiero BHD León

At March 31, 2017, the Corporation had a 15.84% stake in Centro Financiero BHD Leon, S.A. (“BHD Leon”), one of the largest banking and financial services groups in the Dominican Republic. During the quarter ended March 31, 2017 the Corporation recorded $6.1 million in earnings from its investment in BHD Leon (2016- $6.2 million), which had a carrying amount of $131.4 million, as of the end of the quarter (December 31, 2016 - $125.5 million). BPPR has extended a credit facility of $50 million to BHD León, which had no outstanding balance at March 31, 2017 (December 31, 2016 – $25 million).

Puerto Rico Investment Companies

The Corporation provides advisory services to several Puerto Rico investment companies in exchange for a fee. The Corporation also provides administrative, custody and transfer agency services to these investment companies. These fees are calculated at an annual rate of the average net assets of the investment company, as defined in each agreement. Due to its advisory role, the Corporation considers these investment companies as related parties.

For the quarter ended March 31, 2017 administrative fees charged to these investment companies amounted to $2.0 million (2016- $2.0 million) and waived fees amounted to $0.6 million (2016 - $0.7million), for a net fee of $1.4 million (2016 - $1.3 million).

The Corporation, through its subsidiary Banco Popular de Puerto Rico, has also entered into lines of credit facilities with these companies. As of March 31, 2017, the available lines of credit facilities amounted to $357 million ( December 31 2016 - $357 million). The aggregate sum of all outstanding balances under all credit facilities that may be made available by BPPR, from time to time, to those Puerto Rico investment companies for which BPPR acts as investment advisor or co-investment advisor, shall never exceed the lesser of $200 million or 10% of BPPR’s capital.

Note 24 – Fair value measurement

ASC Subtopic 820-10 “Fair Value Measurements and Disclosures” establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels in order 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:

•

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 assumptions 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 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 that reflect counterparty credit quality, the Corporation’s credit standing, constraints on liquidity and unobservable parameters that are applied consistently. There have been no changes in the Corporation’s methodologies used to estimate the fair value of assets and liabilities from those disclosed in the 2016 Form 10-K.

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 March 31, 2017 and December 31, 2016:


At March 31, 2017
(In thousands)	Level 1		Level 2			Level 3			Total
RECURRING FAIR VALUE MEASUREMENTS
Assets
Investment securities available-for-sale:
U.S. Treasury securities	$	—	$	2,943,120		$	—		$	2,943,120
Obligations of U.S. Government sponsored entities		—		712,282			—			712,282
Obligations of Puerto Rico, States and political subdivisions		—		20,909			—			20,909
Collateralized mortgage obligations - federal agencies		—		1,146,886			—			1,146,886
Mortgage-backed securities		—		4,361,767			1,289			4,363,056
Equity securities		—		1,859			—			1,859
Other		—		9,415			—			9,415

Total investment securities available-for-sale	$	—	$	9,196,238		$	1,289		$	9,197,527

Trading account securities:
Obligations of Puerto Rico, States and political subdivisions	$	—	$	189		$	—		$	189
Collateralized mortgage obligations		—		—			1,061			1,061
Mortgage-backed securities - federal agencies		—		31,279			4,345			35,624
Other		—		13,528			583			14,111

Total trading account securities	$	—	$	44,996		$	5,989		$	50,985

Mortgage servicing rights	$	—	$	—		$	193,698		$	193,698
Derivatives		—		13,097			—			13,097

Total assets measured at fair value on a recurring basis	$	—	$	9,254,331		$	200,976		$	9,455,307

Liabilities
Derivatives	$	—	$	(11,196	)	$	—		$	(11,196	)
Contingent consideration		—		—			(160,543	)		(160,543	)

Total liabilities measured at fair value on a recurring basis	$	—	$	(11,196	)	$	(160,543	)	$	(171,739	)


At December 31, 2016
(In thousands)	Level 1		Level 2			Level 3			Total
RECURRING FAIR VALUE MEASUREMENTS
Assets
Investment securities available-for-sale:
U.S. Treasury securities	$	—	$	2,136,620		$	—		$	2,136,620
Obligations of U.S. Government sponsored entities		—		711,850			—			711,850
Obligations of Puerto Rico, States and political subdivisions		—		22,771			—			22,771
Collateralized mortgage obligations - federal agencies		—		1,221,526			—			1,221,526
Mortgage-backed securities		—		4,103,940			1,392			4,105,332
Equity securities		—		2,122			—			2,122
Other		—		9,585			—			9,585

Total investment securities available-for-sale	$	—	$	8,208,414		$	1,392		$	8,209,806

Trading account securities, excluding derivatives:
Obligations of Puerto Rico, States and political subdivisions	$	—	$	1,164		$	—		$	1,164
Collateralized mortgage obligations		—		—			1,321			1,321
Mortgage-backed securities - federal agencies		—		37,991			4,755			42,746
Other		—		13,963			602			14,565

Total trading account securities, excluding derivatives	$	—	$	53,118		$	6,678		$	59,796

Mortgage servicing rights	$	—	$	—		$	196,889		$	196,889
Derivatives		—		14,094			—			14,094

Total assets measured at fair value on a recurring basis	$	—	$	8,275,626		$	204,959		$	8,480,585

Liabilities
Derivatives	$	—	$	(12,842	)	$	—		$	(12,842	)
Contingent consideration		—		—			(153,158	)		(153,158	)

Total liabilities measured at fair value on a recurring basis	$	—	$	(12,842	)	$	(153,158	)	$	(166,000	)

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 quarters ended March 31, 2017 and 2016 and excludes nonrecurring fair value measurements of assets no longer outstanding as of the reporting date.


Quarter ended March 31, 2017
(In thousands)	Level 1		Level 2		Level 3		Total
NONRECURRING FAIR VALUE MEASUREMENTS
Assets										Write- downs
Loans ^[1]	$	—	$	—	$	45,133	$	45,133	$	(16,491	)
Other real estate owned ^[2]		—		—		17,155		17,155		(4,578	)
Other foreclosed assets ^[2]		—		—		165		165		(73	)

Total assets measured at fair value on a nonrecurring basis	$	—	$	—	$	62,453	$	62,453	$	(21,142	)

[1]

Relates mostly to certain impaired collateral dependent loans. The impairment was measured based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations, in accordance with the provisions of ASC Section 310-10-35. Costs to sell are excluded from the reported fair value amount.

[2]	Represents the fair value of foreclosed real estate and other collateral owned that were written down to their fair value. Costs to sell are excluded from the reported fair value amount.


Quarter ended March 31, 2016
(In thousands)	Level 1		Level 2		Level 3		Total
NONRECURRING FAIR VALUE MEASUREMENTS
Assets										Write-downs
Loans ^[1]	$	—	$	—	$	30,785	$	30,785	$	(22,850	)
Loans held-for-sale ^[2]		—		—		1,829		1,829		(296	)
Other real estate owned ^[3]		—		—		18,592		18,592		(3,920	)
Other foreclosed assets ^[3]		—		—		66		66		(11	)

Total assets measured at fair value on a nonrecurring basis	$	—	$	—	$	51,272	$	51,272	$	(27,077	)

[1]

[2]	Relates to lower of cost or fair value adjustments on loans held-for-sale and loans transferred from loans held-in-portfolio to 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.

The following tables present the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the quarters ended March 31, 2017 and 2016.


Quarter ended March 31, 2017
(In thousands)	MBS classified as investment securities available- for-sale			CMOs classified as trading account securities			MBS classified as trading account securities			Other securities classified as trading account securities			Mortgage servicing rights			Total assets			Contingent consideration			Total liabilities
Balance at January 1, 2017	$	1,392		$	1,321		$	4,755		$	602		$	196,889		$	204,959		$	(153,158	)	$	(153,158	)
Gains (losses) included in earnings		—			(4	)		(43	)		(19	)		(5,954	)		(6,020	)		(7,385	)		(7,385	)
Gains (losses) included in OCI		10			—			—			—			—			10			—			—
Additions		—			—			164			—			2,763			2,927			—			—
Sales		—			(205	)		(156	)		—			—			(361	)		—			—
Settlements		(25	)		(51	)		(375	)		—			—			(451	)		—			—
Transfers out of Level 3		(88	)		—			—			—			—			(88	)		—			—

Balance at March 31, 2017	$	1,289		$	1,061		$	4,345		$	583		$	193,698		$	200,976		$	(160,543	)	$	(160,543	)

Changes in unrealized gains (losses) included in earnings relating to assets still held at March 31, 2017	$	—		$	(4	)	$	(27	)	$	9		$	(723	)	$	(745	)	$	(7,385	)	$	(7,385	)


Quarter ended March 31, 2016
(In thousands)	MBS classified as investment securities available- for-sale			CMOs classified as trading account securities			MBS classified as trading account securities			Other securities classified as trading account securities			Mortgage servicing rights			Total assets			Contingent consideration			Total liabilities
Balance at January 1, 2016	$	1,434		$	1,831		$	6,454		$	687		$	211,405		$	221,811		$	(120,380	)	$	(120,380	)
Gains (losses) included in earnings		(2	)		(6	)		89			(24	)		(8,477	)		(8,420	)		(443	)		(443	)
Gains (losses) included in OCI		15			—			—			—			—			15			—			—
Additions		—			174			338			—			2,123			2,635			—			—
Sales		—			(106	)		(1,120	)		—			—			(1,226	)		—			—
Settlements		(25	)		(110	)		(364	)		—			—			(499	)		—			—

Balance at March 31, 2016	$	1,422		$	1,783		$	5,397		$	663		$	205,051		$	214,316		$	(120,823	)	$	(120,823	)

Changes in unrealized gains (losses) included in earnings relating to assets still held at March 31, 2016	$	—		$	(3	)	$	86		$	11		$	(3,866	)	$	(3,772	)	$	(443	)	$	(443	)

During the quarter ended March 31, 2017, a certain MBS amounting to $88 thousand was 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. There were no transfers in and/or out of Level 1, Level 2, or Level 3 for financial instruments measured at fair value on a recurring basis during the quarter ended March 31, 2016.

Gains and losses (realized and unrealized) included in earnings for the quarters ended March 31, 2017 and 2016 for Level 3 assets and liabilities included in the previous tables are reported in the consolidated statements of operations as follows:


	Quarter ended March 31, 2017						Quarter ended March 31, 2016
(In thousands)	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
Interest income	$	—		$	—		$	(2	)	$	—
FDIC loss share expense		(7,385	)		(7,385	)		(443	)		(443	)
Mortgage banking activities		(5,954	)		(723	)		(8,477	)		(3,866	)
Trading account loss		(66	)		(22	)		59			94

Total	$	(13,405	)	$	(8,130	)	$	(8,863	)	$	(4,215	)

The following table includes 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.

Fair value

at March 31,

(In thousands)

2017

Valuation technique

Unobservable inputs

Weighted average (range)

CMO’s - trading

1,061

Discounted cash flow model

Weighted average life

2.8 years (0.1 - 4.1 years)

Yield

3.5% (0.7% - 4.2%)

Prepayment speed

20.3% (18.0% - 22.4%)

Other - trading

583

Discounted cash flow model

Weighted average life

5.4 years

Yield

12.3%

Prepayment speed

10.8%

Mortgage servicing rights

193,698

Discounted cash flow model

Prepayment speed

5.3% (0.2% - 15.5%)

Weighted average life

7.0 years (0.1 - 16.6 years)

Discount rate

11.2% (9.5% - 15.0%)

Contingent consideration

(160,543

)

Discounted cash flow model

Credit loss rate on covered loans

3.5% (0.0% - 100.0%)

Risk premium component

of discount rate

3.4%

Loans held-in-portfolio

45,133

^[1]

External appraisal

Haircut applied on

external appraisals

25.1% (22.5% - 27.1%)

Other real estate owned

14,049

^[2]

External appraisal

Haircut applied on

external appraisals

15.5% (15.0% - 30.0%)

[1]	Loans held-in-portfolio in which haircuts were not applied to external appraisals were excluded from this table.

[2]	Other real estate owned in which haircuts were not applied to external appraisals were excluded from this table.

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 the constant prepayment rate will generate a directionally opposite change in the weighted average life. For example, as the average life is reduced by a higher constant prepayment rate, a lower yield will be realized, and when there is a reduction in the constant prepayment rate, the average life of these collateralized mortgage obligations will extend, thus resulting in a higher yield. These particular financial instruments are valued internally by the Corporation’s investment banking and broker-dealer unit utilizing internal valuation techniques. The unobservable inputs incorporated into the internal discounted cash flow models used to derive the fair value of collateralized mortgage obligations and interest-only collateralized mortgage obligation (reported as “other”), which are classified in the “trading” category, are reviewed by the Corporation’s Corporate Treasury unit on a quarterly basis. In the case of

Level 3 financial instruments which fair value is based on broker quotes, the Corporation’s Corporate Treasury unit reviews the inputs used by the broker-dealers for reasonableness utilizing information available from other published sources and validates that the fair value measurements were developed in accordance with ASC Topic 820. The Corporate Treasury unit also substantiates the inputs used by validating the prices with other broker-dealers, whenever possible.

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. The Corporation’s Corporate Comptroller’s unit is responsible for determining the fair value of MSRs, which is based on discounted cash flow methods based on assumptions developed by an external service provider, except for prepayment speeds, which are adjusted internally for the local market based on historical experience. The Corporation’s Corporate Treasury unit validates the economic assumptions developed by the external service provider on a quarterly basis. In addition, an analytical review of prepayment speeds is performed quarterly by the Corporate Comptroller’s unit. The Corporation’s MSR Committee analyzes changes in fair value measurements of MSRs and approves the valuation assumptions at each reporting period. Changes in valuation assumptions must also be approved by the MSR Committee. The fair value of MSRs are compared with those of the external service provider on a quarterly basis in order to validate if the fair values are within the materiality thresholds established by management to monitor and investigate material deviations. Back-testing is performed to compare projected cash flows with actual historical data to ascertain the reasonability of the projected net cash flow results.

Note 25 – 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 judgment with respect to current economic conditions, including discount rates, estimates of future cash flows, and prepayment assumptions. Many of these estimates involve various assumptions and may vary significantly from amounts that could be realized in actual transactions.

The fair values reflected herein have been determined based on the prevailing rate environment at March 31, 2017 and December 31, 2016, as applicable. In different interest rate environments, fair value estimates can differ significantly, especially for certain fixed rate financial instruments. In addition, the fair values presented do not attempt to estimate the value of the Corporation’s fee generating businesses and anticipated future business activities, that is, 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, but for which the fair value is disclosed from those disclosed in the 2016 Form 10-K.

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.


	March 31, 2017
	Carrying
(In thousands)	amount		Level 1		Level 2		Level 3		Fair value
Financial Assets:
Cash and due from banks	$	340,225	$	340,225	$	—	$	—	$	340,225
Money market investments		3,653,347		3,644,623		8,724		—		3,653,347
Trading account securities, excluding derivatives ^[1]		50,985		—		44,996		5,989		50,985
Investment securities available-for-sale ^[1]		9,197,527		—		9,196,238		1,289		9,197,527
Investment securities held-to-maturity:
Obligations of Puerto Rico, States and political subdivisions	$	94,253	$	—	$	—	$	71,589	$	71,589
Collateralized mortgage obligation-federal agency		73		—		—		77		77
Other		2,000		—		1,736		226		1,962

Total investment securities held-to-maturity	$	96,326	$	—	$	1,736	$	71,892	$	73,628

Other investment securities:
FHLB stock	$	57,262	$	—	$	57,262	$	—	$	57,262
FRB stock		93,911		—		93,911		—		93,911
Trust preferred securities		13,198		—		13,198		—		13,198
Other investments		1,915		—		—		5,246		5,246

Total other investment securities	$	166,286	$	—	$	164,371	$	5,246	$	169,617

Loans held-for-sale	$	85,309	$	—	$	289	$	87,230	$	87,519
Loans not covered under loss sharing agreement with the FDIC		22,217,996		—		—		20,479,513		20,479,513
Loans covered under loss sharing agreements with the FDIC		524,209		—		—		491,393		491,393
FDIC loss share asset		58,793		—		—		54,171		54,171
Mortgage servicing rights		193,698		—		—		193,698		193,698
Derivatives		13,097		—		13,097		—		13,097


	March 31, 2017
(In thousands)	Carrying amount		Level 1		Level 2		Level 3		Fair value
Financial Liabilities:
Deposits:
Demand deposits	$	24,499,612	$	—	$	24,499,612	$	—	$	24,499,612
Time deposits		7,712,967		—		7,712,363		—		7,712,363

Total deposits	$	32,212,579	$	—	$	32,211,975	$	—	$	32,211,975

Assets sold under agreements to repurchase	$	434,714	$	—	$	434,715	$	—	$	434,715
Other short-term borrowings ^[2]	$	1,200	$	—	$	1,200	$	—	$	1,200
Notes payable:
FHLB advances	$	655,521	$	—	$	654,939	$	—	$	654,939
Unsecured senior debt securities		445,309		—		471,753		—		471,753
Junior subordinated deferrable interest debentures (related to trust preferred securities)		439,330		—		402,973		—		402,973
Others		17,812		—		—		17,812		17,812

Total notes payable	$	1,557,972	$	—	$	1,529,665	$	17,812	$	1,547,477

Derivatives	$	11,196	$	—	$	11,196	$	—	$	11,196

Contingent consideration	$	160,543	$	—	$	—	$	160,543	$	160,543

[1]	Refer to Note 24 to the Consolidated Financial Statements for the fair value by class of financial asset and its hierarchy level.

[2]	Refer to Note 16 to the Consolidated Financial Statements for the composition of other short-term borrowings.


	December 31, 2016
(In thousands)	Carrying amount		Level 1		Level 2		Level 3		Fair value
Financial Assets:
Cash and due from banks	$	362,394	$	362,394	$	—	$	—	$	362,394
Money market investments		2,890,217		2,854,777		35,440		—		2,890,217
Trading account securities, excluding derivatives ^[1]		59,796		—		53,118		6,678		59,796
Investment securities available-for-sale ^[1]		8,209,806		—		8,208,414		1,392		8,209,806
Investment securities held-to-maturity:
Obligations of Puerto Rico, States and political subdivisions	$	96,027	$	—	$	—	$	73,540	$	73,540
Collateralized mortgage obligation-federal agency		74		—		—		78		78
Other		2,000		—		1,738		220		1,958

Total investment securities held-to-maturity	$	98,101	$	—	$	1,738	$	73,838	$	75,576

Other investment securities:
FHLB stock	$	58,033	$	—	$	58,033	$	—	$	58,033
FRB stock		94,672		—		94,672		—		94,672
Trust preferred securities		13,198		—		13,198		—		13,198
Other investments		1,915		—		—		4,987		4,987

Total other investment securities	$	167,818	$	—	$	165,903	$	4,987	$	170,890

Loans held-for-sale	$	88,821	$	—	$	504	$	89,509	$	90,013
Loans not covered under loss sharing agreement with the FDIC		22,263,446		—		—		20,578,904		20,578,904
Loans covered under loss sharing agreements with the FDIC		542,528		—		—		515,808		515,808
FDIC loss share asset		69,334		—		—		63,187		63,187
Mortgage servicing rights		196,889		—		—		196,889		196,889
Derivatives		14,094		—		14,094		—		14,094


	December 31, 2016
	Carrying
(In thousands)	amount		Level 1		Level 2		Level 3		Fair value
Financial Liabilities:
Deposits:
Demand deposits	$	22,786,682	$	—	$	22,786,682	$	—	$	22,786,682
Time deposits		7,709,542		—		7,708,724		—		7,708,724

Total deposits	$	30,496,224	$	—	$	30,495,406	$	—	$	30,495,406

Assets sold under agreements to repurchase	$	479,425	$	—	$	479,439	$	—	$	479,439
Other short-term borrowings ^[2]	$	1,200	$	—	$	1,200	$	—	$	1,200
Notes payable:
FHLB advances	$	672,670	$	—	$	671,872	$	—	$	671,872
Unsecured senior debt		444,788		—		466,263		—		466,263
Junior subordinated deferrable interest debentures (related to trust preferred securities)		439,323		—		399,370		—		399,370
Others		18,071		—		—		18,071		18,071

Total notes payable	$	1,574,852	$	—	$	1,537,505	$	18,071	$	1,555,576

Derivatives	$	12,842	$	—	$	12,842	$	—	$	12,842

Contingent consideration	$	153,158	$	—	$	—	$	153,158	$	153,158

[1]	Refer to Note 24 to the Consolidated Financial Statements for the fair value by class of financial asset and its hierarchy level.

[2]	Refer to Note 16 to the Consolidated Financial Statements for the composition of other short-term borrowings.

The notional amount of commitments to extend credit at March 31, 2017 and December 31, 2016 is $ 7.9 billion and $7.8 billion, respectively, and represents the unused portion of credit facilities granted to customers. The notional amount of letters of credit at March 31, 2017 and December 31, 2016 is $30 million and $36 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 26 – Net income per common share

The following table sets forth the computation of net income per common share (“EPS”), basic and diluted, for the quarters ended March 31, 2017 and 2016:


	Quarters ended March 31,
(In thousands, except per share information)	2017			2016
Net income	$	92,945		$	84,999
Preferred stock dividends		(931	)		(931	)

Net income applicable to common stock	$	92,014		$	84,068

Average common shares outstanding		102,932,989			103,188,815
Average potential dilutive common shares		180,906			80,998

Average common shares outstanding - assuming dilution		103,113,895			103,269,813

Basic EPS	$	0.89		$	0.81

Diluted EPS	$	0.89		$	0.81

As disclosed in Note 18, during the quarter ended March 31, 2017, the Corporation completed a $75 million privately negotiated accelerated share repurchase transaction. As part of this transaction, the Corporation entered into a forward contract in which the final number of shares delivered at settlement was based on the average daily volume weighted average price (“VWAP”) of its common stock during the term of the ASR, net of a discount. Based on the discounted VWAP of $40.60, the Corporation received 1,847,372 shares of its outstanding common stock.

For the quarter ended March 31, 2017, the Corporation calculated the impact of potential dilutive common shares under the treasury stock method, consistent with the method used for the preparation of the financial statements for the year ended December 31, 2016. For a discussion of the calculation under the treasury stock method, refer to Note 35 of the Consolidated Financial Statements included in the 2016 Form 10-K.

For the quarters ended March 31, 2017 and 2016, there were no stock options outstanding.

Note 27 – Other service fees

The caption of other services fees in the consolidated statements of operations consists of the following major categories:


	Quarters ended March 31,
(In thousands)	2017		2016
Debit card fees	$	11,543	$	11,287
Insurance fees		12,805		12,850
Credit card fees		18,276		16,858
Sale and administration of investment products		5,082		4,839
Trust fees		4,955		4,235
Other fees		3,514		3,313

Total other service fees	$	56,175	$	53,382

Note 28 – FDIC loss share (expense) income

The caption of FDIC loss-share (expense) income in the consolidated statements of operations consists of the following major categories:


	Quarters ended March 31,
(In thousands)	2017			2016
Amortization of loss share indemnification asset	$	(776	)	$	(4,042	)
80% mirror accounting on credit impairment losses (reversal) ^[1]		148			(2,093	)
80% mirror accounting on reimbursable expenses		921			3,950
80% mirror accounting on recoveries on covered assets, including rental income on OREOs, subject to reimbursement to the FDIC		4,833			(645	)
Change in true-up payment obligation		(7,385	)		(443	)
Other		(5,998	)		127

Total FDIC loss share expense	$	(8,257	)	$	(3,146	)

[1]

Reductions in expected cash flows for ASC 310-30 loans, which may impact the provision for loan losses, may consider reductions in both principal and interest cash flow expectations. The amount covered under the FDIC loss sharing agreements for interest not collected from borrowers is limited under the agreements (approximately 90 days); accordingly, these amounts are not subject fully to the 80% mirror accounting.

Note 29 – Pension and postretirement benefits

The Corporation has a non-contributory defined benefit pension plan and supplementary pension benefit restoration plans for regular employees of certain of its subsidiaries. The accrual of benefits under the plans is frozen to all participants.

The components of net periodic pension cost for the periods presented were as follows:


	Pension Plan						Benefit Restoration Plans
	Quarters ended March 31,						Quarters ended March 31,
(In thousands)	2017			2016			2017			2016
Interest cost	$	6,120		$	6,291		$	352		$	348
Expected return on plan assets		(10,186	)		(9,623	)		(502	)		(538	)
Amortization of net loss		5,054			4,880			411			331

Total net periodic pension cost (benefit)	$	988		$	1,548		$	261		$	141

During the quarter ended March 31, 2017 the Corporation made a contribution to the pension and benefit restoration plans of $59 thousand. The total contributions expected to be paid during the year 2017 for the pension and benefit restoration plans amount to approximately $236 thousand.

The Corporation also provides certain postretirement health care benefits for retired employees of certain subsidiaries. The table that follows presents the components of net periodic postretirement benefit cost.


	Quarters ended March 31,
(In thousands)	2017			2016
Service cost	$	256		$	289
Interest cost		1,426			1,505
Amortization of prior service cost		(950	)		(950	)
Amortization of net loss		142			275

Total postretirement cost	$	874		$	1,119

Contributions made to the postretirement benefit plan for the quarter ended March 31, 2017 amounted to approximately $1.5 million. The total contributions expected to be paid during the year 2017 for the postretirement benefit plan amount to approximately $6.4 million.

Note 30 - Stock-based compensation

In April 2004, the Corporation’s shareholders adopted the Popular, Inc. 2004 Omnibus Incentive Plan (the “Incentive Plan”). The Incentive Plan permits the granting of incentive awards in the form of Annual Incentive Awards, Long-term Performance Unit Awards, Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Units or Performance Shares. Participants in the Incentive Plan are designated by the Compensation Committee of the Board of Directors (or its delegate as determined by the Board). Employees and directors of the Corporation and/or any of its subsidiaries are eligible to participate in the Incentive Plan.

Under the Incentive Plan, the Corporation has issued restricted shares, which become 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 and the second part is vested at termination of employment after attainment of 55 years of age and 10 years of service. The five-year vesting part 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 was modified as follows, the first part is vested ratably over four years commencing at the date of the grant and the second part is vested at termination of employment after attainment of the earlier of 55 years of age and 10 years of service or 60 years of age and 5 years of service. The four year vesting part is accelerated at termination of employment after attaining the earlier of 55 years of age and 10 years of service or 60 years of age and 5 years of service.

The following table summarizes the restricted stock activity under the Incentive Plan for members of management.


(Not in thousands)	Shares			Weighted-Average Grant Date Fair Value
Non-vested at December 31, 2015		495,731		$	28.25
Granted		344,488			25.86
Quantity adjusted by TSR factor		39,566			24.37
Vested		(487,784	)		27.72
Forfeited		(8,019	)		29.13

Non-vested at December 31, 2016		383,982		$	26.35
Granted		138,163			42.69
Quantity adjusted by TSR factor		(55,515	)		36.09
Vested		(67,983	)		40.28

Non-vested at March 31, 2017		398,647		$	28.29

During the quarter ended March 31, 2017, 64,479 shares of restricted stock were awarded to management under the Incentive Plan (March 31, 2016 - 161,500).

Beginning in 2015, the Corporation authorized the issuance of performance shares, in addition to restricted shares, under the Incentive Plan. The performance share awards 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. 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 metric is considered to be a performance condition under ASC 718. The fair value is determined based on the probability of achieving the EPS goal as of each reporting period. The TSR and EPS 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) conditions. The performance shares vest at the end of the three-year performance cycle. The vesting 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. For the quarter ended March 31, 2017, 73,684 performance shares were granted under this plan (March 31, 2016 - 64,598).

During the quarter ended March 31, 2017, the Corporation recognized $2.0 million of restricted stock expense related to management incentive awards, with a tax benefit of $0.2 million (March 31, 2016 - $3.7 million, with a tax benefit of $0.5 million). For the quarter ended March 31, 2017, the fair market value of the restricted stock vested was $1.6 million at grant date and $2.6 million

at vesting date. This triggers a windfall, of $0.4 million that was recorded as a reduction on income tax expense. For the quarter ended March 31, 2017, the Corporation recognized $1.7 million of performance shares expense, with a tax benefit of $0.1 million (March 31, 2016 - $1.0 million, with a tax benefit of $0.1 million). The total unrecognized compensation cost related to non-vested restricted stock awards and performance shares to members of management at March 31, 2017 was $8.3 million and is expected to be recognized over a weighted-average period of 2.3 years.

The following table summarizes the restricted stock activity under the Incentive Plan for members of the Board of Directors:


(Not in thousands)	Restricted Stock			Weighted-Average Grant Date Fair Value
Non-vested at December 31, 2015		—		$	—
Granted		40,517			29.77
Vested		(40,517	)		29.77
Forfeited		—			—

Non-vested at December 31, 2016		—		$	—
Granted		—			—
Vested		—			—
Forfeited		—			—

Non-vested at March 31, 2017		—		$	—

During the quarter ended March 31, 2017, no shares of restricted stock were granted to members of the Board of Directors of Popular, Inc. (March 31, 2016 – 2,338). During this period, the Corporation recognized $0.3 million of restricted stock expense related to restricted stock previously granted, with a tax benefit of $31 thousand (March 31, 2016 - $0.1 million, with a tax benefit of $15 thousand). There was no fair value at vesting date of the restricted stock vested during the quarter ended March 31, 2017 for directors.

Note 31 – Income taxes

The reason 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:


	Quarters ended
	March 31, 2017						March 31, 2016
(In thousands)	Amount			% of pre-tax income			Amount			% of pre-tax income
Computed income tax expense at statutory rates	$	49,121			39	%	$	45,733			39	%
Net benefit of tax exempt interest income		(18,004	)		(14	)		(15,584	)		(13	)
Deferred tax asset valuation allowance		5,056			4			5,273			5
Difference in tax rates due to multiple jurisdictions		(959	)		(1	)		(864	)		(1	)
Effect of income subject to preferential tax rate		(3,019	)		(3	)		(3,414	)		(3	)
State and local taxes		1,279			1			2,927			3
Others		(468	)		—			(1,806	)		(2	)

Income tax expense	$	33,006			26	%	$	32,265			28	%

The following table presents a breakdown of the significant components of the Corporation’s deferred tax assets and liabilities.


(In thousands)	March 31, 2017		December 31, 2016
Deferred tax assets:
Tax credits available for carryforward	$	20,220	$	18,510
Net operating loss and other carryforward available		1,235,780		1,238,222
Postretirement and pension benefits		93,054		94,741
Deferred loan origination fees		6,065		6,622
Allowance for loan losses		634,690		649,107
Deferred gains		4,676		4,884
Accelerated depreciation		10,115		9,828
Intercompany deferred gains		2,328		2,496
Difference between the assigned values and the tax basis of assets and liabilities recognized in purchase business combinations		11,344		13,160
Other temporary differences		29,922		31,127

Total gross deferred tax assets		2,048,194		2,068,697

Deferred tax liabilities:
FDIC-assisted transaction		56,331		58,363
Indefinite-lived intangibles		76,576		73,974
Unrealized net gain on trading and available-for-sale securities		20,851		21,335
Other temporary differences		8,959		8,477

Total gross deferred tax liabilities		162,717		162,149

Valuation allowance		669,335		664,287

Net deferred tax asset	$	1,216,142	$	1,242,261

The net deferred tax asset shown in the table above at March 31, 2017 is reflected in the consolidated statements of financial condition as $1.2 billion in net deferred tax assets in the “Other assets” caption (December 31, 2016 - $1.2 billion) and $1.4 million in deferred tax liabilities in the “Other liabilities” caption (December 31, 2016 - $1.4 million), reflecting the aggregate deferred tax assets or liabilities of individual tax-paying subsidiaries of the Corporation.

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 analysis considers all sources of taxable income available to realize the deferred tax asset, including the future reversal of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in prior carryback years and tax-planning strategies.

At March 31, 2017 the net deferred tax asset of the U.S. operations amounted to $1.1 billion with a valuation allowance of approximately $617 million, for a net deferred tax asset after valuation allowance of approximately $520 million. During the year ended December 31, 2015, after weighting all positive and negative evidence, the Corporation concluded that it is more likely than not that a portion of the total 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 for the remaining carryforward period of eighteen years beginning with the 2016 fiscal year, available to utilize the deferred tax asset, to reduce its income tax obligations. The historical level of book income adjusted by permanent differences, together with the estimated earnings after the reorganization of the U.S. operations and additional estimated earnings from the Doral Bank Transaction were objective positive evidence considered by the Corporation. As of December 31, 2015 the U.S. operations were not in a three year loss cumulative position, taking into account taxable income exclusive of reversing temporary differences. All of these factors led management to conclude that it is more likely than not that a portion of the deferred tax asset from its U.S. operations will be realized. Accordingly, the Corporation recorded a partial reversal of the valuation allowance on the deferred tax asset from the U.S. operations amounting to approximately $589 million. As of March 31, 2017, management estimated that the U.S. operations would earn enough pre-tax Income during the carryover period to realize the total amount of net deferred tax asset after valuation allowance. After weighting all available positive and negative evidence, management concluded that is more likely than not that a portion of the deferred tax asset from the U.S. operation, amounting to approximately $520 million, will be realized. Management will continue to evaluate the realization of the deferred tax asset each quarter and adjust as any changes arises.

At March 31, 2017, the Corporation’s net deferred tax assets related to its Puerto Rico operations amounted to $697 million.

The Corporation’s Puerto Rico Banking operation is not in a cumulative three year loss position and has sustained profitability for the three year period ended March 31, 2017. This is considered a strong piece of objectively verifiable positive evidence that outweights 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.

The Holding Company operation is in a cumulative loss position taking into account taxable income exclusive of reversing temporary differences, for the three year period ended March 31, 2017. 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, a full valuation allowance is recorded on the deferred tax asset at the Holding Company, which amounted to $52 million as of March 31, 2017.

The reconciliation of unrecognized tax benefits, excluding interest, was as follows:


(In millions)	2017		2016
Balance at January 1	$	7.4	$	9.0
Additions for tax positions -January through March		0.2		0.4

Balance at March 31	$	7.6	$	9.4

At March 31, 2017, the total amount of interest recognized in the statement of financial condition approximated $3.0 million (December 31, 2016 - $2.9 million). The total interest expense recognized during the quarter ended March 31, 2017 was $145 thousand (December 31, 2016 - $1.2 million). Management determined that at March 31, 2017 and December 31, 2016 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 expense, whiles the penalties, if any, are reported in other operating expenses in the consolidated statements of operations.

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, would affect the Corporation’s effective tax rate, was approximately $9.3 million at March 31, 2017 (December 31, 2016 - $9.0 million).

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.

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. At March 31, 2017, the following years remain subject to examination in the U.S. Federal jurisdiction: 2013 and thereafter; and in the Puerto Rico jurisdiction, 2012 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 $4.9 million.

Note 32 – Supplemental disclosure on the consolidated statements of cash flows

Additional disclosures on cash flow information and non-cash activities for the quarters ended March 31, 2017 and March 31, 2016 are listed in the following table:


(In thousands)	March 31, 2017		March 31, 2016
Non-cash activities:
Loans transferred to other real estate	$	32,597	$	26,919
Loans transferred to other property		8,956		7,693

Total loans transferred to foreclosed assets		41,553		34,612
Financed sales of other real estate assets		2,904		3,943
Financed sales of other foreclosed assets		3,161		4,072

Total financed sales of foreclosed assets		6,065		8,015
Transfers from loans held-for-sale to loans held-in-portfolio		—		3,821
Loans securitized into investment securities[1]		174,620		170,248
Trades receivable from brokers and counterparties		53,192		87,590
Trades payable to brokers and counterparties		5,128		32,774
Recognition of mortgage servicing rights on securitizations or asset transfers		2,763		2,136

[1]	Includes loans securitized into trading securities and subsequently sold before quarter end.

Note 33 – Segment reporting

The Corporation’s corporate structure consists of two reportable segments – Banco Popular de Puerto Rico and Banco Popular North America. These reportable segments pertain only to the continuing operations of Popular, Inc.

Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. The segments were determined based on the organizational structure, which focuses primarily on the markets the segments serve, as well as on the products and services offered by the segments.

Banco Popular de Puerto Rico:

Given that Banco Popular de Puerto Rico constitutes a significant portion of the Corporation’s results of operations and total assets at March 31, 2017, additional disclosures are provided for the business areas included in this reportable segment, as described below:

•

Commercial banking represents the Corporation’s banking operations conducted at BPPR, which are targeted mainly to corporate, small and middle size businesses. It includes aspects of the lending and 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 financing, while Popular Mortgage 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.

•

Other financial services include the trust and asset management service units of BPPR, the brokerage and investment banking operations of Popular Securities, and the insurance agency and reinsurance businesses of Popular Insurance, Popular Insurance V.I., Popular Risk Services, and Popular Life Re. Most of the services that are provided by these subsidiaries generate profits based on fee income.

Banco Popular North America:

Banco Popular North America’s reportable segment consists of the banking operations of BPNA, E-LOAN, Inc., Popular Equipment Finance, Inc. and Popular Insurance Agency, U.S.A. BPNA operates through a retail branch network in the U.S. mainland under the name of Popular Community Bank, while E-LOAN, Inc. supported BPNA’s deposit gathering through its online platform until March 31, 2017, when said operations were transferred to Popular Direct, a division of BPNA. Popular Equipment Finance, Inc. also holds a running-off loan portfolio as this subsidiary ceased originating loans during 2009. Popular Insurance Agency, U.S.A. offers investment and insurance services across the BPNA branch network.

The Corporate group consists primarily of the holding companies: Popular, Inc., Popular North America, Popular International Bank and certain of the Corporation’s investments accounted for under the equity method, including EVERTEC and Centro Financiero BHD, Leon. The Corporate group also includes the expenses of certain corporate areas that are identified as critical to the organization: Finance, Risk Management and Legal.

The accounting policies of the individual operating segments are the same as those of the Corporation. Transactions between reportable segments are primarily conducted at market rates, resulting in profits that are eliminated for reporting consolidated results of operations.

The tables that follow present the results of operations and total assets by reportable segments:


2017
For the quarter ended March 31, 2017
(In thousands)	Banco Popular de Puerto Rico		Banco Popular North America		Intersegment Eliminations
Net interest income	$	310,212	$	67,119	$	(164	)
Provision for loan losses		30,118		10,580		—
Non-interest income		99,732		4,931		(144	)
Amortization of intangibles		2,179		166		—
Depreciation expense		9,733		1,903		—
Other operating expenses		236,301		41,713		(138	)
Income tax expense		33,998		7,290		(70	)

Net income	$	97,615	$	10,398	$	(100	)

Segment assets		$31,217,093	$	8,832,246	$	(22,946	)


For the quarter ended March 31, 2017
(In thousands)	Reportable Segments		Corporate			Eliminations			Total Popular, Inc.
Net interest income (expense)	$	377,167	$	(15,069	)	$	—		$	362,098
Provision for loan losses		40,698		—			—			40,698
Non-interest income		104,519		11,427			(77	)		115,869
Amortization of intangibles		2,345		—			—			2,345
Depreciation expense		11,636		163			—			11,799
Other operating expenses		277,876		19,926			(628	)		297,174
Income tax expense (benefit)		41,218		(8,423	)		211			33,006

Net income (loss)	$	107,913	$	(15,308	)	$	340		$	92,945

Segment assets	$	40,026,393	$	5,004,658		$	(4,771,769	)	$	40,259,282


2016
For the quarter ended March 31, 2016
(In thousands)	Banco Popular de Puerto Rico		Banco Popular North America		Intersegment Eliminations
Net interest income	$	305,350	$	62,257	$	—
Provision for loan losses		40,800		4,069		—
Non-interest income		98,566		4,950		—
Amortization of intangibles		2,948		166		—
Depreciation expense		10,197		1,333		—
Other operating expenses		224,669		41,331		—
Income tax expense		31,877		8,456		—

Net income	$	93,425	$	11,852	$	—

Segment assets		$28,108,702	$	7,880,357	$	(52,740	)


For the quarter ended March 31, 2016
(In thousands)	Reportable Segments		Corporate			Eliminations			Total Popular, Inc.
Net interest income (expense)	$	367,607	$	(15,195	)	$	—		$	352,412
Provision (reversal of provision) for loan losses		44,869		(34	)		—			44,835
Non-interest income		103,516		8,177			(63	)		111,630
Amortization of intangibles		3,114		—			—			3,114
Depreciation expense		11,530		177			—			11,707
Other operating expenses		266,000		21,731			(609	)		287,122
Income tax expense (benefit)		40,333		(8,281	)		213			32,265

Net income (loss)	$	105,277	$	(20,611	)	$	333		$	84,999

Segment assets	$	35,936,319	$	4,938,750		$	(4,728,060	)	$	36,147,009

Additional disclosures with respect to the Banco Popular de Puerto Rico reportable segment are as follows:


2017
For the quarter ended March 31, 2017
Banco Popular de Puerto Rico
(In thousands)	Commercial Banking			Consumer and Retail Banking		Other Financial Services		Eliminations			Total Banco Popular de Puerto Rico
Net interest income	$	120,296		$	188,132	$	1,787	$	(3	)	$	310,212
Provision for loan losses		(573	)		30,691		—		—			30,118
Non-interest income		19,428			58,071		22,311		(78	)		99,732
Amortization of intangibles		54			1,067		1,058		—			2,179
Depreciation expense		4,262			5,267		204		—			9,733
Other operating expenses		60,833			161,264		14,292		(88	)		236,301
Income tax expense		22,076			8,983		2,939		—			33,998

Net income	$	53,072		$	38,931	$	5,605	$	7		$	97,615

Segment assets	$	17,559,586		$	18,178,373	$	325,217	$	(4,846,093	)	$	31,217,093


2016
For the quarter ended March 31, 2016
Banco Popular de Puerto Rico
(In thousands)	Commercial Banking		Consumer and Retail Banking		Other Financial Services		Eliminations			Total Banco Popular de Puerto Rico
Net interest income	$	115,553	$	186,545	$	1,615	$	1,637		$	305,350
Provision for loan losses		15,461		25,339		—		—			40,800
Non-interest income		22,412		54,927		21,311		(84	)		98,566
Amortization of intangibles		22		1,836		1,090		—			2,948
Depreciation expense		4,286		5,680		231		—			10,197
Other operating expenses		58,161		149,283		17,309		(84	)		224,669
Income tax expense		18,169		12,379		1,329		—			31,877

Net income	$	41,866	$	46,955	$	2,967	$	1,637		$	93,425

Segment assets	$	11,317,146	$	17,046,370	$	342,867	$	(597,681	)	$	28,108,702


Geographic Information


	Quarter ended
(In thousands)	March 31, 2017		March 31, 2016
Revenues: ^[1]
Puerto Rico	$	384,448	$	380,036
United States		74,843		64,640
Other		18,676		19,366

Total consolidated revenues	$	477,967	$	464,042

[1]

Total revenues include net interest income (expense), service charges on deposit accounts, other service fees, mortgage banking activities, net gain (loss) and valuation adjustments on investment securities, trading account (loss) profit, net (loss) gain on sale of loans and valuation adjustments on loans held-for-sale, adjustments to indemnity reserves on loans sold, FDIC loss share (expense) income and other operating income.


Selected Balance Sheet Information:


(In thousands)	March 31, 2017		December 31, 2016
Puerto Rico
Total assets	$	30,185,470	$	28,813,289
Loans		16,619,906		16,880,868
Deposits		24,722,769		23,185,551

United States
Total assets	$	9,159,712	$	8,928,475
Loans		6,003,805		5,799,562
Deposits		6,445,544		6,266,473

Other
Total assets	$	914,100	$	919,845
Loans		748,299		755,017
Deposits ^[1]		1,044,266		1,044,200

[1]	Represents deposits from BPPR operations located in the U.S. and British Virgin Islands.

Note 34 – Condensed consolidating financial information of guarantor and issuers of registered guaranteed securities

The following condensed consolidating financial information presents the financial position of Popular, Inc. Holding Company (“PIHC”) (parent only), Popular North America, Inc. (“PNA”) and all other subsidiaries of the Corporation at March 31, 2017 and December 31, 2016, and the results of their operations and cash flows for periods ended March 31, 2017 and 2016.

PNA is an operating, wholly-owned subsidiary of PIHC and is the holding company of its wholly-owned subsidiaries: Equity One, Inc. and Banco Popular North America (“BPNA”), including BPNA’s wholly-owned subsidiaries Popular Equipment Finance, Inc., Popular Insurance Agency, U.S.A., and E-LOAN, Inc.

PIHC fully and unconditionally guarantees all registered debt securities issued by PNA.

100

Condensed Consolidating Statement of Financial Condition (Unaudited)


	At March 31, 2017
							All other
	Popular Inc.			PNA			subsidiaries and			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			eliminations			entries			Consolidated
Assets:
Cash and due from banks	$	33,766		$	462		$	340,239		$	(34,242	)	$	340,225
Money market investments		282,365			8,209			3,652,982			(290,209	)		3,653,347
Trading account securities, at fair value		2,994			—			48,118			(127	)		50,985
Investment securities available-for-sale, at fair value		—			—			9,197,527			—			9,197,527
Investment securities held-to-maturity, at amortized cost		—			—			96,326			—			96,326
Other investment securities, at lower of cost or realizable value		9,850			4,492			151,944			—			166,286
Investment in subsidiaries		5,581,176			1,826,778			—			(7,407,954	)		—
Loans held-for-sale, at lower of cost or fair value		—			—			85,309			—			85,309

Loans held-in-portfolio:
Loans not covered under loss-sharing agreements with the FDIC		1,134			—			22,857,422			—			22,858,556
Loans covered under loss-sharing agreements with the FDIC		—			—			551,980			—			551,980
Less - Unearned income		—			—			123,835			—			123,835
Allowance for loan losses		1			—			544,495			—			544,496

Total loans held-in-portfolio, net		1,133			—			22,741,072			—			22,742,205

FDIC loss-share asset		—			—			58,793			—			58,793
Premises and equipment, net		2,939			—			546,056			—			548,995
Other real estate not covered under loss- sharing agreements with the FDIC		81			—			185,755			—			185,836
Other real estate covered under loss- sharing agreements with the FDIC		—			—			29,926			—			29,926
Accrued income receivable		108			34			127,938			(62	)		128,018
Mortgage servicing assets, at fair value		—			—			193,698			—			193,698
Other assets		66,531			26,378			2,034,382			(15,485	)		2,111,806
Goodwill		—			—			627,294			—			627,294
Other intangible assets		553			—			42,153			—			42,706

Total assets	$	5,981,496		$	1,866,353		$	40,159,512		$	(7,748,079	)	$	40,259,282

Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	—		$	—		$	7,296,570		$	(34,242	)	$	7,262,328
Interest bearing		—			—			25,240,460			(290,209	)		24,950,251

Total deposits		—			—			32,537,030			(324,451	)		32,212,579

Assets sold under agreements to repurchase		—			—			434,714			—			434,714
Other short-term borrowings		—			—			1,200			—			1,200
Notes payable		736,121			148,518			673,333			—			1,557,972
Other liabilities		55,068			2,798			820,810			(16,072	)		862,604

Total liabilities		791,189			151,316			34,467,087			(340,523	)		35,069,069

Stockholders’ equity:
Preferred stock		50,160			—			—			—			50,160
Common stock		1,041			2			56,307			(56,309	)		1,041
Surplus		4,252,819			4,111,207			5,717,066			(9,819,746	)		4,261,346
Retained earnings (accumulated deficit)		1,295,233			(2,374,242	)		236,969			2,128,746			1,286,706
Treasury stock, at cost		(89,034	)		—			—			(94	)		(89,128	)
Accumulated other comprehensive loss, net of tax		(319,912	)		(21,930	)		(317,917	)		339,847			(319,912	)

Total stockholders’ equity		5,190,307			1,715,037			5,692,425			(7,407,556	)		5,190,213

Total liabilities and stockholders’ equity	$	5,981,496		$	1,866,353		$	40,159,512		$	(7,748,079	)	$	40,259,282

101

Condensed Consolidating Statement of Financial Condition (Unaudited)


	At December 31, 2016
							All other
	Popular, Inc.			PNA			subsidiaries and			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			eliminations			entries			Consolidated
Assets:
Cash and due from banks	$	47,783		$	591		$	362,101		$	(48,081	)	$	362,394
Money market investments		252,347			13,263			2,891,670			(267,063	)		2,890,217
Trading account securities, at fair value		2,640			—			57,297			(132	)		59,805
Investment securities available-for-sale, at fair value		—			—			8,209,806			—			8,209,806
Investment securities held-to-maturity, at amortized cost		—			—			98,101			—			98,101
Other investment securities, at lower of cost or realizable value		9,850			4,492			153,476			—			167,818
Investment in subsidiaries		5,609,611			1,818,127			—			(7,427,738	)		—
Loans held-for-sale, at lower of cost or fair value		—			—			88,821			—			88,821

Loans held-in-portfolio:
Loans not covered under loss-sharing agreements with the FDIC		1,142			—			22,894,030			—			22,895,172
Loans covered under loss-sharing agreements with the FDIC		—			—			572,878			—			572,878
Less - Unearned income		—			—			121,425			—			121,425
Allowance for loan losses		2			—			540,649			—			540,651

Total loans held-in-portfolio, net		1,140			—			22,804,834			—			22,805,974

FDIC loss-share asset		—			—			69,334			—			69,334
Premises and equipment, net		3,067			—			540,914			—			543,981
Other real estate not covered under loss-sharing agreements with the FDIC		81			—			180,364			—			180,445
Other real estate covered under loss-sharing agreements with the FDIC		—			—			32,128			—			32,128
Accrued income receivable		112			138			137,882			(90	)		138,042
Mortgage servicing assets, at fair value		—			—			196,889			—			196,889
Other assets		61,770			25,146			2,073,562			(14,968	)		2,145,510
Goodwill		—			—			627,294			—			627,294
Other intangible assets		553			—			44,497			—			45,050

Total assets	$	5,988,954		$	1,861,757		$	38,568,970		$	(7,758,072	)	$	38,661,609

Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	—		$	—		$	7,028,524		$	(48,081	)	$	6,980,443
Interest bearing		—			—			23,782,844			(267,063	)		23,515,781

Total deposits		—			—			30,811,368			(315,144	)		30,496,224

Assets sold under agreements to repurchase		—			—			479,425			—			479,425
Other short-term borrowings		—			—			1,200			—			1,200
Notes payable		735,600			148,512			690,740			—			1,574,852
Other liabilities		55,309			6,034			865,861			(15,253	)		911,951

Total liabilities		790,909			154,546			32,848,594			(330,397	)		33,463,652

Stockholders’ equity:
Preferred stock		50,160			—			—			—			50,160
Common stock		1,040			2			56,307			(56,309	)		1,040
Surplus		4,246,495			4,111,207			5,717,066			(9,819,746	)		4,255,022
Retained earnings (accumulated deficit)		1,228,834			(2,382,049	)		264,944			2,108,578			1,220,307
Treasury stock, at cost		(8,198	)		—			—			(88	)		(8,286	)
Accumulated other comprehensive loss, net of tax		(320,286	)		(21,949	)		(317,941	)		339,890			(320,286	)

Total stockholders’ equity		5,198,045			1,707,211			5,720,376			(7,427,675	)		5,197,957

Total liabilities and stockholders’ equity	$	5,988,954		$	1,861,757		$	38,568,970		$	(7,758,072	)	$	38,661,609

102

Condensed Consolidating Statement of Operations (Unaudited)


	Quarter ended March 31, 2017
							All other
	Popular, Inc.			PNA			subsidiaries and			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			eliminations			entries			Consolidated
Interest and dividend income:
Dividend income from subsidiaries	$	129,000		$	—		$	—		$	(129,000	)	$	—
Loans		15			—			363,121			—			363,136
Money market investments		481			21			6,572			(501	)		6,573
Investment securities		142			80			44,664			—			44,886
Trading account securities		—			—			1,400			—			1,400

Total interest and dividend income		129,638			101			415,757			(129,501	)		415,995

Interest expense:
Deposits		—			—			34,258			(501	)		33,757
Short-term borrowings		—			—			1,095			—			1,095
Long-term debt		13,118			2,692			3,235			—			19,045

Total interest expense		13,118			2,692			38,588			(501	)		53,897

Net interest income (expense)		116,520			(2,591	)		377,169			(129,000	)		362,098
Provision for loan losses- non-covered loans		—			—			42,057			—			42,057
Provision (reversal) for loan losses- covered loans		—			—			(1,359	)		—			(1,359	)

Net interest income (expense) after provision for loan losses		116,520			(2,591	)		336,471			(129,000	)		321,400

Service charges on deposit accounts		—			—			39,536			—			39,536
Other service fees		—			—			56,258			(83	)		56,175
Mortgage banking activities		—			—			11,369			—			11,369
Net gain on sale of investment securities		—			—			162			—			162
Trading account loss		(120	)		—			(169	)		11			(278	)
Adjustments (expense) to indemnity reserves on loans sold		—			—			(1,966	)		—			(1,966	)
FDIC loss-share expense		—			—			(8,257	)		—			(8,257	)
Other operating income		4,655			809			13,670			(6	)		19,128

Total non-interest income		4,535			809			110,603			(78	)		115,869

Operating expenses:
Personnel costs		13,814			—			111,793			—			125,607
Net occupancy expenses		914			—			19,862			—			20,776
Equipment expenses		582			—			15,388			—			15,970
Other taxes		46			—			10,923			—			10,969
Professional fees		2,513			(525	)		67,345			(83	)		69,250
Communications		152			—			5,797			—			5,949
Business promotion		419			—			11,157			—			11,576
FDIC deposit insurance		—			—			6,493			—			6,493
Other real estate owned (OREO) expenses		—			—			12,818			—			12,818
Other operating expenses		(18,790	)		13			48,888			(546	)		29,565
Amortization of intangibles		—			—			2,345			—			2,345

Total operating expenses		(350	)		(512	)		312,809			(629	)		311,318

Income (loss) before income tax and equity in (losses) earnings of subsidiaries		121,405			(1,270	)		134,265			(128,449	)		125,951
Income tax (benefit) expense		—			(445	)		33,240			211			33,006

Income (loss) before equity in (losses) earnings of subsidiaries		121,405			(825	)		101,025			(128,660	)		92,945
Equity in undistributed (losses) earnings of subsidiaries		(28,460	)		8,633			—			19,827			—

Net Income	$	92,945		$	7,808		$	101,025		$	(108,833	)	$	92,945

Comprehensive income, net of tax	$	93,319		$	7,827		$	101,049		$	(108,876	)	$	93,319

103

Condensed Consolidating Statement of Operations (Unaudited)


	Quarter ended March 31, 2016
							All other
	Popular, Inc.			PNA			subsidiaries and			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			eliminations			entries			Consolidated
Interest and dividend income:
Dividend income from subsidiaries	$	29,700		$	—		$	—		$	(29,700	)	$	—
Loans		19			—			363,178			—			363,197
Money market investments		255			21			2,863			(276	)		2,863
Investment securities		238			80			35,953			—			36,271
Trading account securities		—			—			1,689			—			1,689

Total interest and dividend income		30,212			101			403,683			(29,976	)		404,020

Interest expense:
Deposits		—			—			30,150			(276	)		29,874
Short-term borrowings		—			—			1,861			—			1,861
Long-term debt		13,117			2,693			4,063			—			19,873

Total interest expense		13,117			2,693			36,074			(276	)		51,608

Net interest income (expense)		17,095			(2,592	)		367,609			(29,700	)		352,412
Provision (reversal) for loan losses- non-covered loans		(34	)		—			47,974			—			47,940
Provision (reversal) for loan losses- covered loans		—			—			(3,105	)		—			(3,105	)

Net interest income (expense) after provision for loan losses		17,129			(2,592	)		322,740			(29,700	)		307,577

Service charges on deposit accounts		—			—			39,862			—			39,862
Other service fees		—			—			53,439			(57	)		53,382
Mortgage banking activities		—			—			10,551			—			10,551
Trading account profit (loss)		24			—			(186	)		—			(162	)
Net loss on sale of loans, including valuation adjustments on loans held-for-sale		—			—			(304	)		—			(304	)
Adjustments (expense) to indemnity reserves on loans sold		—			—			(4,098	)		—			(4,098	)
FDIC loss-share expense		—			—			(3,146	)		—			(3,146	)
Other operating income (loss)		3,256			(1,303	)		13,599			(7	)		15,545

Total non-interest income (expense)		3,280			(1,303	)		109,717			(64	)		111,630

Operating expenses:
Personnel costs		15,421			—			111,670			—			127,091
Net occupancy expenses		916			—			19,514			—			20,430
Equipment expenses		445			—			14,103			—			14,548
Other taxes		47			—			10,148			—			10,195
Professional fees		2,881			30			72,605			(57	)		75,459
Communications		137			—			6,183			—			6,320
Business promotion		465			—			10,645			—			11,110
FDIC deposit insurance		—			—			7,370			—			7,370
Other real estate owned (OREO) expenses		—			—			9,141			—			9,141
Other operating expenses		(20,428	)		39			38,106			(552	)		17,165
Amortization of intangibles		—			—			3,114			—			3,114

Total operating expenses		(116	)		69			302,599			(609	)		301,943

Income (loss) before income tax and equity in earnings of subsidiaries		20,525			(3,964	)		129,858			(29,155	)		117,264
Income tax expense (benefit)		3			(1,387	)		33,436			213			32,265

Income (loss) before equity in earnings of subsidiaries		20,522			(2,577	)		96,422			(29,368	)		84,999
Equity in undistributed earnings of subsidiaries		64,477			8,923			—			(73,400	)		—

Net Income	$	84,999		$	6,346		$	96,422		$	(102,768	)	$	84,999

Comprehensive income, net of tax	$	160,135		$	27,295		$	172,035		$	(199,330	)	$	160,135

104

Condensed Consolidating Statement of Cash Flows (Unaudited)


	Quarter ended March 31, 2017
(In thousands)	Popular, Inc. Holding Co.			PNA Holding Co.			All other subsidiaries and eliminations			Elimination entries			Popular, Inc. Consolidated
Cash flows from operating activities:

Net income	$	92,945		$	7,808		$	101,025		$	(108,833	)	$	92,945

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity in losses (earnings) of subsidiaries, net of dividends or distributions		28,460			(8,633	)		—			(19,827	)		—
Provision for loan losses		—			—			40,698			—			40,698
Amortization of intangibles		—			—			2,345			—			2,345
Depreciation and amortization of premises and equipment		163			—			11,636			—			11,799
Net accretion of discounts and amortization of premiums and deferred fees		521			7			(6,991	)		—			(6,463	)
Fair value adjustments on mortgage servicing rights		—			—			5,954			—			5,954
FDIC loss-share expense		—			—			8,257			—			8,257
Adjustments (expense) to indemnity reserves on loans sold		—			—			1,966			—			1,966
Earnings from investments under the equity method		(4,652	)		(809	)		(5,418	)		—			(10,879	)
Deferred income tax (benefit) expense		—			(445	)		25,295			210			25,060
(Gain) loss on:
Disposition of premises and equipment and other productive assets		(17	)		—			6,483			—			6,466
Sale and valuation adjustments of investment securities		—			—			(162	)		—			(162	)
Sale of loans, including valuation adjustments on loans held for sale and mortgage banking activities		—			—			(5,381	)		—			(5,381	)
Sale of foreclosed assets, including write-downs		—			—			4,512			—			4,512
Acquisitions of loans held-for-sale		—			—			(73,043	)		—			(73,043	)
Proceeds from sale of loans held-for-sale		—			—			29,364			—			29,364
Net originations on loans held-for-sale		—			—			(123,336	)		—			(123,336	)
Net (increase) decrease in:
Trading securities		(355	)		—			177,514			(6	)		177,153
Accrued income receivable		5			104			9,943			(28	)		10,024
Other assets		(256	)		22			13,088			307			13,161
Net (decrease) increase in:
Interest payable		(7,875	)		(2,685	)		(749	)		28			(11,281	)
Pension and other postretirement benefits obligations		—			—			331			—			331
Other liabilities		(2,413	)		(551	)		(9,844	)		(846	)		(13,654	)

Total adjustments		13,581			(12,990	)		112,462			(20,162	)		92,891

Net cash provided by (used in) operating activities		106,526			(5,182	)		213,487			(128,995	)		185,836


Cash flows from investing activities:
Net (increase) decrease in money market investments		(30,018	)		5,053			(761,312	)		23,147			(763,130	)
Purchases of investment securities:
Available-for-sale		—			—			(1,216,880	)		—			(1,216,880	)
Other		—			—			(225	)		—			(225	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale		—			—			222,677			—			222,677
Held-to-maturity		—			—			2,184			—			2,184
Proceeds from sale of investment securities:
Available for sale		—			—			381			—			381
Other		—			—			1,757			—			1,757
Net repayments on loans		7			—			99,299			—			99,306
Acquisition of loan portfolios		—			—			(109,098	)		—			(109,098	)
Net payments from FDIC under loss-sharing agreements		—			—			(23,574	)		—			(23,574	)
Return of capital from equity method investments		500			—			3,362			—			3,862
Acquisition of premises and equipment		(39	)		—			(18,607	)		—			(18,646	)
Proceeds from sale of:
Premises and equipment and other productive assets		18			—			2,993			—			3,011
Foreclosed assets		—			—			27,547			—			27,547

Net cash (used in) provided by investing activities		(29,532	)		5,053			(1,769,496	)		23,147			(1,770,828	)


Cash flows from financing activities:
Net increase (decrease) in:
Deposits		—			—			1,725,266			(9,308	)		1,715,958
Assets sold under agreements to repurchase		—			—			(44,711	)		—			(44,711	)
Payments of notes payable		—			—			(17,408	)		—			(17,408	)
Proceeds from issuance of common stock		1,806			—			—			—			1,806
Dividends paid to parent company		—			—			(129,000	)		129,000			—
Dividends paid		(16,499	)		—			—			—			(16,499	)
Net payments for repurchase of common stock		(75,599	)		—			—			(5	)		(75,604	)
Payments related to tax withholding for share-based compensation		(719	)		—			—			—			(719	)

Net cash (used in) provided by financing activities		(91,011	)		—			1,534,147			119,687			1,562,823

Net (decrease) increase in cash and due from banks		(14,017	)		(129	)		(21,862	)		13,839			(22,169	)
Cash and due from banks at beginning of period		47,783			591			362,101			(48,081	)		362,394

Cash and due from banks at end of period	$	33,766		$	462		$	340,239		$	(34,242	)	$	340,225

During the quarter ended March 31, 2017 there have not been any cash flows associated with discontinued operations.

105

Condensed Consolidating Statement of Cash Flows (Unaudited)


	Quarter ended March 31, 2016
							All other
	Popular, Inc.			PNA			subsidiaries			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			and eliminations			entries			Consolidated
Cash flows from operating activities:

Net income	$	84,999		$	6,346		$	96,422		$	(102,768	)	$	84,999

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity in earnings of subsidiaries, net of dividends or distributions		(64,477	)		(8,923	)		—			73,400			—
Provision (reversal) for loan losses		(34	)		—			44,869			—			44,835
Amortization of intangibles		—			—			3,114			—			3,114
Depreciation and amortization of premises and equipment		177			—			11,530			—			11,707
Net accretion of discounts and amortization of premiums and deferred fees		521			8			(11,687	)		—			(11,158	)
Fair value adjustments on mortgage servicing rights		—			—			8,477			—			8,477
FDIC loss-share income		—			—			3,146			—			3,146
Adjustments (expense) to indemnity reserves on loans sold		—			—			4,098			—			4,098
(Earnings) losses from investments under the equity method		(3,256	)		1,303			(5,136	)		—			(7,089	)
Deferred income tax expense (benefit)		3			(1,387	)		24,389			213			23,218
(Gain) loss on:
Disposition of premises and equipment and other productive assets		—			—			(1,946	)		—			(1,946	)
Sale of loans, including valuation adjustments on loans held for sale and mortgage banking activities		—			—			(7,101	)		—			(7,101	)
Sale of foreclosed assets, including write-downs		—			—			2,802			—			2,802
Acquisitions of loans held-for-sale		—			—			(66,451	)		—			(66,451	)
Proceeds from sale of loans held-for-sale		—			—			22,253			—			22,253
Net originations on loans held-for-sale		—			—			(110,528	)		—			(110,528	)
Net (increase) decrease in:
Trading securities		(101	)		—			176,699			—			176,598
Accrued income receivable		12			79			3,842			(7	)		3,926
Other assets		1			21			22,194			(1,220	)		20,996
Net (decrease) increase in:
Interest payable		(7,875	)		(2,685	)		(1,708	)		7			(12,261	)
Pension and other postretirement benefits obligations		—			—			1,536			—			1,536
Other liabilities		(4,622	)		(382	)		(12,681	)		675			(17,010	)

Total adjustments		(79,651	)		(11,966	)		111,711			73,068			93,162

Net cash provided by (used in) operating activities		5,348			(5,620	)		208,133			(29,700	)		178,161

Cash flows from investing activities:
Net decrease in money market investments		6,952			5,412			262,679			(12,411	)		262,632
Purchases of investment securities:
Available-for-sale		—			—			(742,859	)		—			(742,859	)
Other		—			—			(59,786	)		—			(59,786	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale		—			—			239,399			—			239,399
Held-to-maturity		—			—			2,108			—			2,108
Other		—			—			41,664			—			41,664
Proceeds from sale of investment securities:
Other		—			—			26,346			—			26,346
Net repayments on loans		8			—			13,327			—			13,335
Proceeds from sale of loans		—			—			1,128			—			1,128
Acquisition of loan portfolios		—			—			(212,798	)		—			(212,798	)
Net payments from FDIC under loss-sharing agreements		—			—			88,588			—			88,588
Return of capital from equity method investments		—			206			—			—			206
Acquisition of premises and equipment		(398	)		—			(38,421	)		—			(38,819	)
Proceeds from sale of:
Premises and equipment and other productive assets		46			—			5,046			—			5,092
Foreclosed assets		—			—			14,513			—			14,513

Net cash provided by (used in) investing activities		6,608			5,618			(359,066	)		(12,411	)		(359,251	)

Cash flows from financing activities:
Net increase (decrease) in:
Deposits		—			—			302,718			15,832			318,550
Federal funds purchased and assets sold under agreements to repurchase		—			—			(1,991	)		—			(1,991	)
Other short-term borrowings		—			—			5,170			—			5,170
Payments of notes payable		—			—			(108,452	)		—			(108,452	)
Proceeds from issuance of notes payable		—			—			28,883			—			28,883
Proceeds from issuance of common stock		2,109			—			—			—			2,109
Dividends paid to parent company		—			—			(29,700	)		29,700			—
Dividends paid		(16,473	)		—			—			—			(16,473	)
Net payments for repurchase of common stock		(77	)		—			—			—			(77	)
Payments related to tax withholding for share-based compensation		(680	)		—			—			—			(680	)

Net cash (used in) provided by financing activities		(15,121	)		—			196,628			45,532			227,039

Net (decrease) increase in cash and due from banks		(3,165	)		(2	)		45,695			3,421			45,949
Cash and due from banks at beginning of period		24,298			600			363,620			(24,844	)		363,674

Cash and due from banks at end of period	$	21,133		$	598		$	409,315		$	(21,423	)	$	409,623

During the quarter ended March 31, 2016 there have not been any cash flows associated with discontinued operations.

106

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report includes management’s discussion and analysis (“MD&A”) of the consolidated financial position and financial performance of Popular, Inc. (the “Corporation” or “Popular”). All accompanying tables, financial statements and notes included elsewhere in this report should be considered an integral part of this analysis.

The Corporation is a diversified, publicly-owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation has operations in Puerto Rico, the United States (“U.S.”) mainland, and the U.S. and British Virgin Islands. In Puerto Rico, the Corporation provides retail, mortgage, and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as investment banking, broker-dealer, auto and equipment leasing and financing, and insurance services through specialized subsidiaries. The Corporation’s mortgage origination business is conducted under the brand name Popular Mortgage, a division of BPPR. In the U.S. mainland, the Corporation operates Banco Popular North America (“BPNA”), including its wholly owned subsidiary E-LOAN, Inc. The BPNA franchise operates under the name Popular Community Bank (“PCB”). BPNA focuses efforts and resources on the core community banking business. BPNA operates branches in New York, New Jersey and Southern Florida. E-LOAN, Inc. marketed deposits accounts under its name for the benefit of BPNA until March 31, 2017, when said operations were transferred to Popular Direct, a division of BPNA. Note 33 to the Consolidated Financial Statements presents information about the Corporation’s business segments.

The Corporation has several investments which it accounts for under the equity method. As of March 31, 2017, the Corporation had a 16.06% interest in the holding company of EVERTEC, which provides transaction processing services throughout the Caribbean and Latin America, including servicing many of the Corporation’s system infrastructures and transaction processing businesses. During the quarter ended March 31, 2017 the Corporation recorded $ 4.3 million in earnings from its investment in EVERTEC which had a carrying amount of $ 42 million as of the end of the quarter. Also, the Corporation had a 15.84% stake in Centro Financiero BHD Leon, S.A. (“BHD Leon”), one of the largest banking and financial services groups in the Dominican Republic. During the quarter ended March 31, 2017 the Corporation recorded $6.1 million in earnings from its investment in BHD Leon, which had a carrying amount of $131 million, as of the end of the quarter.

SIGNIFICANT EVENTS

•

During the quarter ended March 31, 2017, the Corporation completed the previously announced common stock repurchase plan of $75 million, acquiring 1,847,372 shares at a price of $40.60. The plan was completed under an accelerated share repurchase transaction (“ASR”). The Corporation recognized $79.5 million in treasury stock, based on the Corporation’s stock price at the commencement and settlement of the term of the ASR, offset by a $4.5 million adjustment to capital surplus resulting from the decline in the Corporation’s stock price during the term of the ASR.

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OVERVIEW

Table 1 provides selected financial data and performance indicators for the quarters ended March 31, 2017 and 2016.

Table 1 - Financial highlights


Financial Condition Highlights								Average for the First Quarter
(In thousands)	March 31, 2017		December 31, 2016		Variance			March 31, 2017		March 31, 2016		Variance
Money market investments	$	3,653,347	$	2,890,217	$	763,130		$	3,297,350	$	2,186,771	$	1,110,579
Investment and trading securities		9,511,124		8,535,530		975,594			9,125,496		6,764,453		2,361,043
Loans		23,372,010		23,435,446		(63,436	)		23,352,589		22,985,578		367,011
Earning assets		36,536,481		34,861,193		1,675,288			35,775,435		31,936,802		3,838,633
Total assets		40,259,282		38,661,609		1,597,673			39,546,252		35,891,768		3,654,484
Deposits		32,212,579		30,496,224		1,716,355			31,339,873		27,337,586		4,002,287
Borrowings		1,993,886		2,055,477		(61,591	)		2,024,830		2,440,979		(416,149	)
Stockholders’ equity		5,190,213		5,197,957		(7,744	)		5,285,204		5,191,395		93,809
Liabilities from discontinued operations		—		—		—			—		1,815		(1,815	)


Operating Highlights	First Quarter
(In thousands, except per share information)	2017			2016			Variance
Net interest income	$	362,098		$	352,412		$	9,686
Provision for loan losses - non-covered loans		42,057			47,940			(5,883	)
Provision for loan losses - covered loans		(1,359	)		(3,105	)		1,746
Non-interest income		115,869			111,630			4,239
Operating expenses		311,318			301,943			9,375

Income from continuing operations before income tax		125,951			117,264			8,687
Income tax expense		33,006			32,265			741

Income from continuing operations		92,945		$	84,999		$	7,946

Net income	$	92,945		$	84,999		$	7,946

Net income applicable to common stock	$	92,014		$	84,068		$	7,946

Net income per common share - Basic	$	0.89		$	0.81		$	0.08

Net income per common share - Diluted	$	0.89		$	0.81		$	0.08

Dividends declared per common share - Basic	$	0.25		$	0.15		$	0.10


	First Quarter
Selected Statistical Information	2017			2016
Common Stock Data
Market price
High	$	45.75		$	28.80
Low		38.46			22.62
End		40.73			28.61
Book value per common share at period end		50.41			50.16

Profitability Ratios
Return on assets		0.95	%		0.95	%
Return on common equity		7.13			6.58
Net interest spread		3.86			4.20
Net interest spread (taxable equivalent) (non-GAAP)		4.15			4.47
Net interest margin		4.08			4.43
Net interest margin (taxable equivalent) (non-GAAP)		4.37			4.70

Capitalization Ratios
Average equity to average assets		13.36	%		14.46	%
Common equity Tier 1 capital		16.34			15.79
Tier I capital		16.34			15.79
Total capital		19.34			18.78
Tier 1 leverage		10.61			11.46

108

Adjusted results of operations – Non-GAAP financial measure

Adjusted net income

The Corporation prepares its Consolidated Financial Statements using accounting principles generally accepted in the United States (“U.S. GAAP” or the “reported basis”). In addition to analyzing the Corporation’s results on a reported basis, management monitors Adjusted net income of the Corporation and excludes the impact of certain transactions on the results of its operations. Management believes that Adjusted net income provides meaningful information about the underlying performance of the Corporation’s ongoing operations. Adjusted net income is a non-GAAP financial measure.

For the quarters ended March 31, 2017 and 2016, there were no adjustments identified by management to arrive at an Adjusted net income presentation.

Net interest income on a taxable equivalent basis

Net interest income, on a taxable equivalent basis, is presented with its different components in Table 2 for the quarter ended March 31, 2017 as compared with the same period in 2016, 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 municipalities and assets held by the Corporation’s international banking entities. To facilitate the comparison of all interest related to these assets, the interest income has been converted to a taxable equivalent basis, using the applicable statutory income tax rates for each period. The taxable equivalent computation considers the interest expense and other related expense disallowances required by the Puerto Rico tax law. Under this 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 information since it facilitates the comparison of revenues arising from taxable and exempt sources.

Non-GAAP financial measures used by the Corporation may not be comparable to similarly named Non-GAAP financial measures used by other companies.

Financial highlights for the quarter ended March 31, 2017

•

For the quarter ended March 31, 2017, the Corporation recorded net income of $ 92.9 million, compared to a net income of $ 85.0 million for the same quarter of the previous year, an increase of 9.3%.

•

Net interest income was $362.1 million, an increase of $9.7 million when compared to the $352.4 million for the same quarter of 2016. Net interest income, on a taxable equivalent basis, increased by $13.7 million, driven by higher volume of money market and investment securities due to the increase in funds from deposits. Net interest margin was 4.08%, compared to 4.43% for the same quarter of the previous year. Net interest margin, on a taxable equivalent basis, for the first quarter of 2017 was 4.37 %, compared to 4.70% in the same quarter of 2016, due mainly to changes in the asset mix. Refer to the net interest income section of this MD&A for additional information.

•

Non-interest income increased by $4.2 million mainly due to higher income from equity method investments, higher other service fees and a favorable variance in adjustment to indemnity reserves, offset by an unfavorable variance in the FDIC loss share expense.

109

•

The total provision for loan losses decreased by $4.1 million, reflecting a lower provision in Puerto Rico, partially offset by a higher provision in the U.S., as a result of higher impairments for the taxi medallion portfolio.

•

Total non-performing assets, including covered assets, were $795 million at March 31, 2017, an increase of $21 million, or 2.6% from December 31, 2016. The increase was mainly due to higher commercial non-performing loans of $16 million, driven by a single $24.5 million relationship at the BPPR segment. At March 31, 2017, NPLs to total loans held-in-portfolio remained at 2.5 % flat from December 31, 2016. Refer to the Credit Risk section of this MD&A for an explanation of the main factors impacting the provision for loan losses and a detailed analysis of net charge-offs, non-performing assets, allowance for loan losses and selected loan losses statistics.

•

Operating expenses increased by $9.4 million, mainly due to a write-down of $7.6 million recognized during the first quarter of 2017, related to capitalized software costs for a project which was discontinued by the Corporation.

•

Total assets at March 31, 2017 amounted to $40.3 billion, compared to $38.7 billion, at December 31, 2016. The increase of $1.6 billion was mainly at BPPR due to higher investment securities available-for-sale due to purchases of U.S. Treasury securities and mortgage-backed agency pools in anticipation of upcoming maturities, and an increase in money market investments due to higher liquidity driven by an increase in deposits balances.

•

Total deposits increased by $1.7 billion, mainly due to an increase in retail demand deposits and deposits from the Puerto Rico public sector, and increases in savings and time deposits at BPPR and BPNA.

•

Stockholders’ equity totaled $5.2 billion at March 31, 2017, and at December 31, 2016, reflecting a slight decrease of $7.7 million, from December 31, 2016, resulting from declared dividends of $25.6 million on common stock of $0.25 per share and $0.9 million in dividends on preferred stock and the impact of the $75 million share repurchase completed during the quarter, partially offset by the Corporation’s net income of $93 million. Refer to the Financial Condition Analysis section of this MD&A for additional information.

•

Capital ratios continued to be strong. As of March 31, 2017, the Corporation’s Common equity Tier 1 Capital ratio was 16.34 % while the Total Capital ratio was 19.34%. Refer to Table 13 for capital ratios.

As a financial services company, the Corporation’s earnings are significantly affected by general business and economic conditions. Lending and deposit activities and fee income generation are influenced by the level of business spending and investment, consumer income, spending and savings, capital market activities, competition, customer preferences, interest rate conditions and prevailing market rates on competing products.

The Corporation continuously monitors general business and economic conditions, industry-related indicators and trends, competition, interest rate volatility, credit quality indicators, loan and deposit demand, operational and systems efficiencies, revenue enhancements and changes in the regulation of financial services companies.

The Corporation operates in a highly regulated environment and may be adversely affected by changes in federal and local laws and regulations. Also, competition with other financial institutions could adversely affect its profitability.

The description of the Corporation’s business contained in Item 1 of the Corporation’s 2016 Form 10-K, while not all inclusive, discusses additional information about the business of the Corporation and risk factors, many beyond the Corporation’s control that, in addition to the other information in this Form 10-Q, readers should consider.

The Corporation’s common stock is traded on the NASDAQ Global Select Market under the symbol BPOP.

CRITICAL ACCOUNTING POLICIES / ESTIMATES

The accounting and reporting policies followed by the Corporation and its subsidiaries conform to generally accepted accounting principles in the United States of America and general practices within the financial services industry. Various elements of the

110

Corporation’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. These estimates are made under facts and circumstances at a point in time and changes in those facts and circumstances could produce actual results that differ from those estimates.

Management has discussed the development and selection of the critical accounting policies and estimates with the Corporation’s Audit Committee. The Corporation has identified as critical accounting policies those related to: (i) Fair Value Measurement of Financial Instruments; (ii) Loans and Allowance for Loan Losses; (iii) Acquisition Accounting for Loans and Related Indemnification Asset; (iv) Income Taxes; (v) Goodwill, and (vi) Pension and Postretirement Benefit Obligations. For a summary of these critical accounting policies and estimates, refer to that particular section in the MD&A included in Popular, Inc.’s 2016 Form 10-K. Also, refer to Note 2 to the Consolidated Financial Statements included in the 2016 Form 10-K for a summary of the Corporation’s significant accounting policies.

OPERATING RESULTS ANALYSIS

NET INTEREST INCOME

Net interest income was $362.1 million for the first quarter of 2017, an increase of $9.7 million when compared to $352.4 million for the same quarter of 2016. Taxable equivalent net interest income was $387.6 million for the first quarter of 2017, an increase of $13.7 million when compared to $373.9 million for the same quarter of 2016. Net interest margin for the first quarter of 2017 was 4.08%, a decrease of 35 basis points when compared to 4.43% for the same quarter of the previous year. Net interest margin, on a taxable equivalent basis, for the first quarter of 2017 was 4.37%, a decrease of 33 basis points when compared to 4.70% for the same quarter of 2016. The decrease in net interest margin is mostly related to the change in asset mix, due to a higher proportion of money market, investment and trading securities to total earning assets (35% this quarter versus 28% in the first quarter of 2016) as compared to the proportion of loans to earning assets which carry a higher yield. The main reasons for the increase in net interest income are described below:

•

Higher interest income from investment securities due to higher volumes particularly on the U.S. Treasuries and mortgage-backed securities portfolios related to recent purchases. Also, an increase in volume and yield of money market investments due to the increase in funds available, related mostly to government deposits, and the two 25 basis points increase in rates by the U.S. Federal Reserve in December, 2016 and March, 2017, respectively;

•

Higher income from the commercial and construction loan portfolios mainly due to higher volume of loans in the U.S. and improved yields in Puerto Rico mostly associated to the impact on the variable rate portfolio of the above mentioned rise in market rates; and

•

Higher interest income from the leasing portfolio driven by a higher volume of loans from the auto and equipment leasing and financing subsidiary in Puerto Rico.

These positive variances were partially offset by:

•

Lower interest income from consumer loans driven by a lower volume due to the run-off of high yielding loan portfolios;

•

Decrease in interest income from mortgage loans related to a lower volume due in part to reduced origination activity; partially offset by higher yields;

•

Lower interest income from loans acquired in the Westernbank FDIC-assisted transaction (“WB loans”) related to the normal portfolio run-off, as well as lower yields resulting from the quarterly recasting process; and

•

Higher interest expense on deposits mainly due to higher volumes in most categories, predominantly the increase in deposits from the Puerto Rico government and higher volumes in the U.S. to fund loan growth. These increases were partially offset by a lower average volume of brokered certificates of deposits.

Interest income for the quarter ended March 31, 2017, included the amortization of deferred loans fees, prepayment penalties, late fees and the amortization of premium/ discounts amounting to $6.4 million, compared with $4.8 million for the same period in 2016.

111

Table 2 - Analysis of Levels & Yields on a Taxable Equivalent Basis for Continuing Operations (Non-GAAP)

Quarters ended March 31,


																								Variance
Average Volume							Average Yields /Costs										Interest							Attributable to
2017		2016		Variance			2017			2016			Variance				2017		2016		Variance			Rate			Volume
($ in millions)																	(In thousands)
$	3,297	$	2,187	$	1,110			0.81	%		0.53	%		0.28	%	Money market investments	$	6,573	$	2,863	$	3,710		$	2,041		$	1,669
	9,020		6,641		2,379			2.70			2.90			(0.20	)	Investment securities		60,819		48,117		12,702			(2,619	)		15,321
	106		123		(17	)		7.16			7.08			0.08		Trading securities		1,872		2,172		(300	)		6			(306	)

																Total money market,
																investment and trading
	12,423		8,951		3,472			2.24			2.38			(0.14	)	securities		69,264		53,152		16,112			(572	)		16,684

																Loans:
	9,704		8,957		747			5.15			5.12			0.03		Commercial		123,250		114,091		9,159			(333	)		9,492
	821		704		117			5.41			5.30			0.11		Construction		10,943		9,288		1,655			106			1,549
	708		630		78			6.54			6.78			(0.24	)	Leasing		11,586		10,675		911			(374	)		1,285
	6,606		6,830		(224	)		5.60			5.50			0.10		Mortgage		92,444		93,895		(1,451	)		1,669			(3,120	)
	3,704		3,807		(103	)		10.49			10.51			(0.02	)	Consumer		95,846		99,520		(3,674	)		(1,556	)		(2,118	)

	21,543		20,928		615			6.26			6.28			(0.02	)	Sub-total loans		334,069		327,469		6,600			(488	)		7,088
	1,810		2,058		(248	)		8.53			8.76			(0.23	)	WB loans		38,182		44,904		(6,722	)		(1,217	)		(5,505	)

	23,353		22,986		367			6.44			6.50			(0.06	)	Total loans		372,251		372,373		(122	)		(1,705	)		1,583

$	35,776	$	31,937	$	3,839			4.98	%		5.35	%		(0.37	)%	Total earning assets	$	441,515	$	425,525	$	15,990		$	(2,277	)	$	18,267

																Interest bearing deposits:
$	8,516	$	5,712	$	2,804			0.41	%		0.39	%		0.02	%	NOW and money market [1]	$	8,514	$	5,607	$	2,907		$	760		$	2,147
	8,041		7,275		766			0.25			0.23			0.02		Savings		4,897		4,248		649			190			459
	7,756		8,058		(302	)		1.06			1.00			0.06		Time deposits		20,346		20,019		327			1,009			(682	)

	24,313		21,045		3,268			0.56			0.57			(0.01	)	Total deposits		33,757		29,874		3,883			1,959			1,924

	456		812		(356	)		0.97			0.92			0.05		Short-term borrowings		1,095		1,861		(766	)		8			(774	)
																Other medium and
	1,569		1,629		(60	)		4.88			4.90			(0.02	)	long-term debt		19,045		19,873		(828	)		(279	)		(549	)

																Total interest bearing
	26,338		23,486		2,852			0.83			0.88			(0.05	)	liabilities		53,897		51,608		2,289			1,688			601

																Non-interest bearing
	7,027		6,293		734											demand deposits
	2,411		2,158		253											Other sources of funds

$	35,776	$	31,937	$	3,839			0.61	%		0.65	%		(0.04	)%	Total source of funds		53,897		51,608		2,289			1,688			601

																Net interest margin/
								4.37	%		4.70	%		(0.33	)%	income on a taxable equivalent basis		387,618		373,917		13,701		$	(3,965	)	$	17,666

								4.15	%		4.47	%		(0.32	)%	Net interest spread

																Taxable equivalent adjustment		25,520		21,505		4,015

																Net interest margin/ income
								4.08	%		4.43	%		(0.35	)%	non-taxable equivalent basis	$	362,098	$	352,412	$	9,686

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]	Includes interest bearing demand deposits corresponding to certain government entities in Puerto Rico.

112

Provision for Loan Losses

The Corporation’s total provision for loan losses was $40.7 million for the quarter ended March 31, 2017, compared to $44.8 million for the quarter ended March 31, 2016, a decrease of $4.1 million.

The provision for loan losses for the non-covered loan portfolio totaled $42.1 million, compared to $47.9 million for the same quarter in 2016, a decrease of $5.8 million, mostly related to a lower provision in the BPPR segment. Non-covered total net charge-offs, decreased by $6.8 million when compared with the same quarter in 2016.

The provision for loan losses for the non-covered loan portfolio at the BPPR segment totaled $31.5 million, compared to $43.9 million in the same quarter in 2016. The decrease in provision is mainly due to lower net charge-offs by $7.7 million, mostly in the consumer portfolio.

The provision for loan losses for the BPNA segment amounted to $10.6 million, compared to $4.1 million for the same quarter in 2016. The provision increase was mainly due to higher impairments for the taxi medallion.

For the first quarter of 2017, the covered loan portfolio reflected a reversal of provision of $1.4 million, compared to a provision release of $3.1 million for the same quarter in 2016.

Refer to the Credit Risk section of this MD&A for a detailed analysis of net charge-offs, non-performing assets, the allowance for loan losses and selected loan losses statistics.

Non-Interest Income

Non-interest income was $115.9 million for the first quarter of 2017, an increase of $4.2 million, when compared with the same quarter of the previous year, driven primarily by the following:

•

Higher other service fees by $2.8 million mainly in credit card fees as a result of higher interchange income resulting from higher transaction volumes and higher trust fees related to trustee, consulting and retirement plan services;

•

Lower provision for indemnity reserves by $2.1 million mostly due to lower reserves for loans sold with credit recourse at BPPR; and

•

Higher other operating income by $3.6 million mainly due to higher aggregated net earnings from investments under the equity method by $3.8 million.

These increases were partially offset by:

•

Unfavorable variance in FDIC loss share expense of $5.1 million as a result of lower mirror accounting on reimbursable expenses, an unfavorable change in the fair value of the true-up payment obligation, due mainly to changes in the discount rate, and a $5.5 million unfavorable adjustment related to the settlement of claims with the FDIC, partially offset by lower amortization of the indemnification asset, a favorable variance in the mirror accounting on credit impairment losses, and a favorable variance in the mirror accounting on recoveries to be shared with the FDIC on covered assets. Refer to Table 3 for a breakdown of FDIC loss share expense by major categories.

113

Table 3 - Financial Information - Westernbank FDIC-Assisted Transaction


	Quarters ended March 31,
(In thousands)	2017			2016
Interest income on WB loans	$	38,182		$	44,904

FDIC loss share expense:
Amortization of loss share indemnification asset		(776	)		(4,042	)
80% mirror accounting on credit impairment losses (reversal) ^[1]		148			(2,093	)
80% mirror accounting on reimbursable expenses		921			3,950
80% mirror accounting on recoveries on covered assets, including rental income on OREOs, subject to reimbursement to the FDIC		4,833			(645	)
Change in true-up payment obligation		(7,385	)		(443	)
Other		(5,998	)		127

Total FDIC loss share expense		(8,257	)		(3,146	)

Total (expenses) revenues		29,925			41,758

Provision (reversal) for loan losses- WB loans		(499	)		(356	)

Total (expenses) revenues less provision (reversal) for loan losses	$	30,424		$	42,114

[1]

Average balances


	Quarters ended March 31,
(In millions)	2017		2016
Loans	$	1,810	$	2,058
FDIC loss-share asset		44		233

Operating Expenses

Operating expenses for the quarter ended March 31, 2017 increased by $ 9.4 million when compared with the same quarter of 2016, driven primarily by:

•

Higher equipment expense by $1.4 million due to higher software maintenance expense at BPNA;

•

Higher other real estate owned expense by $3.7 million mainly due to higher loss on sale of mortgage properties at BPPR; and

•

Higher other operating expenses by $12.4 million as a result of a write-down of $7.6 million recognized during the first quarter of 2017, related to capitalized software costs for a project that was discontinued by the Corporation and higher mortgage operational losses at BPPR related to mortgage servicing.

These increases were partially offset by:

•

Lower personnel cost by $1.5 million mainly due to lower medical insurance expense; and

•

Lower professional fees by $6.2 million due to legal fees related to the FDIC arbitration proceedings incurred during the first quarter of 2016, and lower expenses related to programming, processing and other technology services.

114

Table 4 - Operating Expenses


	Quarters ended March 31,
(In thousands)	2017		2016		Variance
Personnel costs:
Salaries	$	78,376	$	77,298	$	1,078
Commissions, incentives and other bonuses		20,079		20,769		(690	)
Pension, postretirement and medical insurance		11,244		13,111		(1,867	)
Other personnel costs, including payroll taxes		15,908		15,913		(5	)

Total personnel costs		125,607		127,091		(1,484	)

Net occupancy expenses		20,776		20,430		346
Equipment expenses		15,970		14,548		1,422
Other taxes		10,969		10,195		774
Professional fees:
Collections, appraisals and other credit related fees		3,823		4,500		(677	)
Programming, processing and other technology services		48,091		49,864		(1,773	)
Legal fees, excluding collections		3,296		6,254		(2,958	)
Other professional fees		14,040		14,841		(801	)

Total professional fees		69,250		75,459		(6,209	)

Communications		5,949		6,320		(371	)
Business promotion		11,576		11,110		466
FDIC deposit insurance		6,493		7,370		(877	)
Other real estate owned (OREO) expenses		12,818		9,141		3,677
Other operating expenses:
Credit and debit card processing, volume and interchange expenses		5,532		5,722		(190	)
Operational losses		7,536		2,661		4,875
All other		16,497		8,782		7,715

Total other operating expenses		29,565		17,165		12,400

Amortization of intangibles		2,345		3,114		(769	)

Total operating expenses	$	311,318	$	301,943	$	9,375

INCOME TAXES

For the quarter ended March 31, 2017, the Corporation recorded income tax expense of $33.0 million, compared to $32.3 million for the same quarter of the previous year. The increase in income tax expense was mainly due to higher income on the Puerto Rico operations, net of higher tax exempt interest income.

The effective income tax rate for the quarter ended March 31, 2017 was 26%, compared to 28% for the same quarter of the previous year. The effective tax rate is impacted by the composition and source of the taxable income.

Refer to Note 31 to the Consolidated Financial Statements for a reconciliation of the statutory income tax rate to the effective tax rate and additional information on income taxes.

REPORTABLE SEGMENT RESULTS

The Corporation’s reportable segments for managerial reporting purposes consist of Banco Popular de Puerto Rico and Banco Popular North America. A Corporate group has been defined to support the reportable segments. For managerial reporting purposes, the costs incurred by the Corporate group are not allocated to 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 33 to the Consolidated Financial Statements.

The Corporate group reported a net loss of $15.3 million for the quarter ended March 31, 2017, compared with a net loss of $20.6 million for the quarter ended March 31, 2016, mostly driven by higher earnings from investments under the equity method and lower personnel costs.

115

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 income amounted to $97.6 million for the quarter ended March 31, 2017, compared with a net income of $93.4 million for the same quarter of the previous year. The principal factors that contributed to the variance in the financial results included the following:

•

Higher net interest income by $4.9 million mostly due to:

•

Higher income from money market and investment securities by $11.5 million due to higher liquidity driven by higher volume in deposits balances, mainly from P.R. government deposits, and advanced purchases of upcoming investment maturities.

Partially offset by:

•

Lower income from loans by $7.0 million mostly driven by lower interest income from WB loans due to normal portfolio run-off and loan resolutions and lower interest income from consumer loans due to the run-off of high yielding loan portfolios, partially offset by higher interest income from the leasing portfolio driven by a higher volume of loans from the auto and equipment leasing and financing company and higher interest income from the commercial loan portfolio due to higher yields mostly associated to the impact on the variable rate portfolio as a result of the rise in market rates.

The net interest margin was 4.46% for the quarter ended March 31, 2017, compared to 4.87% for the same period in 2016.

•

Lower provision for loan losses by $10.7 million, mainly due to lower net charge-offs in the non-covered consumer loan portfolio.

•

Higher non-interest income by $1.2 million mainly due to:

•

Higher other service fees by $3.1 million principally due to higher credit card fees and higher trust fees;

•

Higher mortgage banking activities by $0.8 million driven by a favorable variance in the valuation adjustment on mortgage servicing rights and lower losses on closed derivative positions, partially offset by lower gains from securitization transactions and lower mortgage servicing fees; and

•

Lower provision for indemnity reserves by $2.1 million principally due to lower reserves for loans sold with credit recourse.

Partially offset by:

•

Higher FDIC loss share expense by $5.1 million due to lower mirror accounting on reimbursable expenses, an unfavorable change in the fair value of the true-up payment obligation and a $5.5 million unfavorable adjustment related to the settlement of claims with the FDIC, partially offset by lower amortization of the indemnification asset, a favorable variance in the mirror accounting on credit impairment losses, and a favorable variance in the mirror accounting on recoveries to be shared with the FDIC on covered assets; and

•

Operating expenses were higher by $10.4 million mainly due to:

•

Higher OREO expenses by $3.6 million due to higher losses on sales of residential properties and higher holding costs on residential properties; and

116

•

Higher other operating expenses by $12.7 million mainly due to the impact of a write-down of $7.6 million recognized during the quarter related to capitalized software costs for a project which was discontinued by the Corporation and higher mortgage servicing operational losses by $5.3 million.

Partially offset by:

•

Lower professional fees by $5.2 million driven by a decrease in legal fees related to the FDIC arbitration proceedings incurred during the first quarter of 2016 and lower programming, processing and other technology services.

•

Higher income tax expense by $2.1 million due to higher taxable income.

Banco Popular North America

For the quarter ended March 31, 2017, the reportable segment of Banco Popular North America reported net income of $10.4 million, compared to net income of $11.9 million for the same quarter of the previous year. The factors that contributed to the variance in the financial results included the following:

•

Higher net interest income by $4.9 million due to:

•

Higher income from loans by $7.1 million, mostly driven by higher volumes of commercial and construction loan portfolios;

•

Higher income from investment securities by $1.3 million mainly due to a higher volume of mortgage-backed securities.

Partially offset by:

•

Higher deposits expense by $3.3 million due to higher volumes and costs, principally in money market and time deposits, to fund loan growth.

Net interest margin was 3.52% for the first quarter of 2017, compared to 3.70% for the same period of the previous year.

•

The provision for loan losses for the BPNA segment amounted to $10.6 million, compared to $4.1 million for the same quarter in 2016, mostly driven by higher impairments for the taxi medallion loan portfolio.

•

Non-interest income for first quarter of 2017 was $4.9 million, relatively flat when compared with the same period of the previous year.

•

Operating expenses for the quarter totaled $43.8 million, an increase of $1.0 million, compared to the first quarter in 2016, mainly driven by an increase in personnel costs due to higher incentive compensation and higher equipment expenses, partially offset by lower FDIC deposit insurance due to a lower assessment rate by the FDIC and lower other operating expenses due to lower operational losses.

•

Lower income taxes by $1.2 million.

117

FINANCIAL CONDITION ANALYSIS

Assets

The Corporation’s total assets were $40.3 billion at March 31, 2017 compared to $38.7 billion at December 31, 2016. Refer to the Consolidated Financial Statements included in this report.

Money market investments, trading and investment securities

Money market investments totaled $3.7 billion at March 31, 2017, compared to $2.9 billion at December 31, 2016. The increase was mainly at BPPR due to higher liquidity driven by an increase in deposits.

Trading account securities amounted to $51 million at March 31, 2017, compared to $60 million at December 31, 2016. Refer to the Market Risk section of this MD&A for a table that provides a breakdown of the trading portfolio by security type.

Investment securities available-for-sale and held-to-maturity amounted to $9.3 billion at March 31, 2017, compared with $8.3 billion at December 31, 2016. The increase of $1.0 billion was mainly at BPPR due to purchase of U.S. Treasury securities and mortgage-backed agency pools in anticipation of upcoming maturities.

Table 5 provides a breakdown of the Corporation’s portfolio of investment securities available-for-sale (“AFS”) and held-to-maturity (“HTM”) on a combined basis. Also, Notes 5 and 6 to the Consolidated Financial Statements provide additional information with respect to the Corporation’s investment securities AFS and HTM.

Table 5 - Breakdown of Investment Securities Available-for-Sale and Held-to-Maturity


(In thousands)	March 31, 2017		December 31, 2016
U.S. Treasury securities	$	2,943,120	$	2,136,620
Obligations of U.S. Government sponsored entities		712,282		711,850
Obligations of Puerto Rico, States and political subdivisions		115,162		118,798
Collateralized mortgage obligations		1,146,959		1,221,600
Mortgage-backed securities		4,363,056		4,105,332
Equity securities		1,859		2,122
Others		11,415		11,585

Total investment securities AFS and HTM	$	9,293,853	$	8,307,907

Loans

Refer to Table 6 for a breakdown of the Corporation’s loan portfolio, the principal category of earning assets. Loans covered under the FDIC loss sharing agreements are presented separately in Table 6. The risks on covered loans are significantly different as a result of the loss protection provided by the FDIC. The FDIC loss sharing agreements expired on June 30, 2015 for commercial (including construction) and consumer loans, and expires on June 30, 2020 for single-family residential loans. As of March 31, 2017, the Corporation’s covered loans portfolio amounted to $552 million, comprised mainly of residential mortgage loans.

The Corporation’s total loan portfolio amounted to $23.4 billion at March 31, 2017, which remained flat when compared to December 31, 2016. Refer to Note 7 for detailed information about the Corporation’s loan portfolio composition and loan purchases and sales.

118

Table 6 - Loans Ending Balances


(In thousands)	March 31, 2017		December 31, 2016		Variance
Loans not covered under FDIC loss sharing agreements:
Commercial	$	10,811,700	$	10,798,507	$	13,193
Construction		831,305		776,300		55,005
Legacy ^[1]		40,688		45,293		(4,605	)
Lease financing		719,643		702,893		16,750
Mortgage		6,627,987		6,696,361		(68,374	)
Consumer		3,703,398		3,754,393		(50,995	)

Total non-covered loans held-in-portfolio		22,734,721		22,773,747		(39,026	)

Loans covered under FDIC loss sharing agreements:
Mortgage		536,287		556,570		(20,283	)
Consumer		15,693		16,308		(615	)

Total covered loans held-in-portfolio		551,980		572,878		(20,898	)

Total loans held-in-portfolio		23,286,701		23,346,625		(59,924	)

Loans held-for-sale:
Mortgage		85,309		88,821		(3,512	)

Total loans held-for-sale		85,309		88,821		(3,512	)

Total loans	$	23,372,010	$	23,435,446	$	(63,436	)

[1]	The legacy portfolio is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years at the BPNA segment.

Non-covered loans

The non-covered loans held-in-portfolio decreased by $39 million to $22.7 billion at March 31, 2017. The net decrease is mainly at BPPR by $185 million driven by lower balances of residential mortgage and commercial loans, partially offset by growth in the commercial portfolio at BPNA by $151 million.

The loans held-for-sale portfolio decreased by $4 million from December 31, 2016, mainly at BPPR due to lower originations of mortgage loans held-for-sale.

Covered loans

The covered loans portfolio amounted to $552 million at March 31, 2017, compared to $573 million at December 31, 2016. The decrease of $21 million is mostly from residential mortgage loans due to the normal portfolio run-off. Refer to Table 6 for a breakdown of the covered loans by major loan type categories.

Tables 7 and 8 provide the activity in the carrying amount and outstanding discount on the Westernbank loans accounted for under ASC 310-30. The outstanding accretable discount is impacted by changes in cash flow expectations on the loan pool based on quarterly revisions of the portfolio. An increase in the accretable discount is recognized as interest income using the effective yield method over the estimated life of each applicable loan pool.

119

Table 7 - Activity in the Carrying Amount of Westernbank Loans Accounted for Under ASC 310-30


	Quarters ended
	March 31,
(In thousands)	2017			2016
Beginning balance	$	1,738,329		$	1,974,501
Accretion		36,892			43,533
Collections / loan sales / charge-offs		(86,321	)		(82,593	)

Ending balance ^[1]	$	1,688,900		$	1,935,441
Allowance for loan losses (ALLL)		(66,544	)		(62,967	)

Ending balance, net of ALLL	$	1,622,356		$	1,872,474

^[1]	The carrying amount of loans acquired from Westernbank and accounted for under ASC 310-30 which remain subject to the loss sharing agreement with the FDIC amounted to approximately $542 million as of March 31, 2017 (March 31, 2016 -$615 million).

Table 8 - Activity in the Accretable Yield on Westernbank Loans Accounted for Under ASC 310-30


	Quarters ended March 31,
(In thousands)	2017			2016
Beginning balance	$	1,010,087		$	1,112,458
Accretion ^[1]		(36,892	)		(43,533	)
Change in expected cash flows		8,011			59,883

Ending balance	$	981,206		$	1,128,808

[1]	Positive to earnings, which is included in interest income.

FDIC loss share asset

Table 9 sets forth the activity in the FDIC loss share asset for the quarters ended March 31, 2017 and 2016.

Table 9 – Activity of Loss Share Asset


	Quarters ended March 31,
(In thousands)	2017			2016
Balance at beginning of period	$	69,334		$	310,221
Amortization of loss-share indemnification asset		(776	)		(4,042	)
Credit impairment losses (reversal) to be covered under loss-sharing agreements		148			(2,093	)
Reimbursable expenses		921			3,950
Net payments from FDIC under loss-sharing agreements		—			(88,588	)
Other adjustments attributable to FDIC loss-sharing agreements		(5,550	)		—

Balance at end of period	$	64,077		$	219,448

Balance due to the FDIC for recoveries on covered assets [1]		(5,284	)		(6,301	)

Balance at end of period	$	58,793		$	213,147

[1]	Balance due to the FDIC for recoveries on covered assets for the quarter ended March 31, 2016 amounting to $6.3 million was included in other liablilities in the accompanying consolidated statement of condition.

The FDIC loss share indemnification asset is recognized on the same basis as the assets subject to the loss share protection from the FDIC, except that the amortization/accretion terms differ. Decreases in expected reimbursements from the FDIC due to improvements in expected cash flows to be received from borrowers, as compared with the initial estimates, are recognized as a reduction to non-interest income prospectively over the life of the loss share agreements. This is because the indemnification asset balance is being reduced to the expected reimbursement amount from the FDIC. Table 10 presents the activity associated with the outstanding balance of the FDIC loss share asset amortization (or negative discount) for the periods presented.

120

Table 10 - Activity in the Remaining FDIC Loss Share Asset Discount


	Quarters ended March 31,
(In thousands)	2017			2016
Balance at beginning of period ^[1]	$	4,812		$	26,100
Amortization of negative discount ^[2]		(776	)		(4,042	)
Impact of changes in (higher) lower projected losses		(107	)		3,147

Balance at end of period	$	3,929		$	25,205

[1]	Positive balance represents negative discount (debit to assets), while a negative balance represents a discount (credit to assets).

[2]	Amortization results in a negative impact to non-interest income, while a positive balance results in a positive impact to non-interest income, particularly FDIC loss share income / expense.

The Corporation revises its expected cash flows and estimated credit losses on a quarterly basis. The lowered loss estimates requires the Corporation to amortize the loss share asset to its currently lower expected collectible balance, thus resulting in negative accretion. Due to the shorter life of the indemnity asset compared with the expected life of the covered loans, this negative accretion temporarily offsets the benefit of higher cash flows accounted through the accretable yield on the loans.

Other real estate owned

Other real estate owned represents real estate property received in satisfaction of debt. At March 31, 2017, OREO increased to $216 million from $213 million at December 31, 2016 mainly at BPPR on residential and commercial properties, partially offset by sales of BPPR and WB residential OREOs. Refer to Note 12 to the Consolidated Financial Statements for the activity in other real estate owned. The amounts included as “covered other real estate” are subject to the FDIC loss sharing agreements.

Other assets

Refer to Note 13 for a breakdown of the principal categories that comprise the caption of “Other Assets” in the consolidated statements of financial condition at March 31, 2017 and December 31, 2016. Other assets decreased by $34 million from December 31, 2016 to March 31, 2017, mainly driven by a decrease in servicing assets and the change in deferred and prepaid income taxes. These unfavorable variances were partially offset by an increase in guaranteed mortgage loan claims receivables.

Liabilities

The Corporation’s total liabilities were $35.1 billion at March 31, 2017 compared to $33.5 billion at December 31, 2016. Refer to the Corporation’s Consolidated Statements of Financial Condition included in this Form 10-Q.

Deposits and Borrowings

The composition of the Corporation’s financing sources to total assets at March 31, 2017 and December 31, 2016 is included in Table 11.

121

Table 11 - Financing to Total Assets


	March 31,		December 31,		% increase (decrease)			% of total assets
(In millions)	2017		2016		from 2016 to 2017			2017			2016
Non-interest bearing deposits	$	7,263	$	6,980		4.1	%		18.0	%		18.0	%
Interest-bearing core deposits		20,198		18,776		7.6			50.2			48.6
Other interest-bearing deposits		4,752		4,740		0.3			11.8			12.3
Repurchase agreements		435		480		(9.4	)		1.1			1.2
Other short-term borrowings		1		1		—			—			—
Notes payable		1,558		1,575		(1.1	)		3.9			4.1
Other liabilities		862		912		(5.5	)		2.1			2.4
Stockholders’ equity		5,190		5,198		(0.2	)		12.9			13.4

Deposits

The Corporation’s deposits totaled $32.2 billion at March 31, 2017 compared to $30.5 billion at December 31, 2016. The deposits increase of $1.7 billion was mainly due to an increase in retail demand deposits and deposits from the Puerto Rico public sector at BPPR, and increases in savings and time deposits at BPPR and BPNA. Refer to Table 12 for a breakdown of the Corporation’s deposits at March 31, 2017 and December 31, 2016.

Table 12 - Deposits Ending Balances


(In thousands)	March 31, 2017		December 31, 2016		Variance
Demand deposits [1]	$	10,136,435	$	9,053,897	$	1,082,538
Savings, NOW and money market deposits (non-brokered)		13,939,838		13,327,298		612,540
Savings, NOW and money market deposits (brokered)		423,339		405,487		17,852
Time deposits (non-brokered)		7,508,726		7,486,717		22,009
Time deposits (brokered CDs)		204,241		222,825		(18,584	)

Total deposits	$	32,212,579	$	30,496,224	$	1,716,355

[1]	Includes interest and non-interest bearing demand deposits.

Borrowings

The Corporation’s borrowings totaled $2.0 billion at March 31, 2017 compared to $2.1 billion at December 31, 2016. The favorable variance is mostly driven by a decrease in assets sold under agreements to repurchase and a decrease in balance due to advances with the FHLB. Refer to Note 16 to the Consolidated Financial Statements for detailed information on the Corporation’s borrowings. Also, refer to the Liquidity section in this MD&A for additional information on the Corporation’s funding sources.

Stockholders’ Equity

Stockholders’ equity remained flat at $5.2 billion at March 31, 2017. A slight decrease resulted from the declaration of dividends of $25.6 million on common stock of $0.25 per share and $0.9 million in dividends on preferred stock and the impact of the common stock repurchase plan of $75 million completed during the quarter, partially offset by the Corporation’s net income of $93 million for the quarter ended March 31, 2017. Refer to the consolidated statements of financial condition, comprehensive income and of changes in stockholders’ equity for information on the composition of stockholders’ equity.

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REGULATORY CAPITAL

The Corporation, BPPR and BPNA are subject to regulatory capital requirements established by the Federal Reserve Board. The current risk-based capital standards applicable to the Corporation, BPPR and BPNA (“Basel III capital rules”), which have been effective since January 1, 2015, are based on the December 2010 final capital framework for strengthening international capital standards, known as Basel III, of the Basel Committee on Banking Supervision. As of March 31, 2017, the Corporation’s, BPPR’s and BPNA’s capital ratios continue to exceed the minimum requirements for being “well-capitalized” under the Basel III capital rules.

The risk-based capital ratios presented in Table 13, which include common equity tier 1, Tier 1 capital, total capital and leverage capital as of March 31, 2017 and December 31, 2016, are calculated based on the Basel III capital rules related to the measurement of capital, risk-weighted assets and average assets.

Table 13 - Capital Adequacy Data


(Dollars in thousands)	March 31, 2017			December 31, 2016
Common equity tier 1 capital:
Common stockholders equity - GAAP basis	$	5,140,053		$	5,147,797
AOCI related adjustments due to opt-out election		280,095			280,330
Goodwill, net of associated deferred tax liability (DTL)		(551,991	)		(554,614	)
Intangible assets, net of associated DTLs		(32,341	)		(25,662	)
Deferred tax assets and other deductions		(776,102	)		(726,643	)

Common equity tier 1 capital	$	4,059,714		$	4,121,208

Additional tier 1 capital:
Preferred stock		50,160			50,160
Trust preferred securities subject to phase out of additional tier 1		—			—
Other additional tier 1 capital deductions		(50,160	)		(50,160	)

Additional tier 1 capital	$	—		$	—

Tier 1 capital	$	4,059,714		$	4,121,208

Tier 2 capital:
Trust preferred securities subject to phase in as tier 2		426,602			426,602
Other inclusions (deductions), net		318,592			321,405

Tier 2 capital	$	745,194		$	748,007

Total risk-based capital	$	4,804,908		$	4,869,215

Minimum total capital requirement to be well capitalized	$	2,484,679		$	2,500,133

Excess total capital over minimum well capitalized	$	2,320,229		$	2,369,082

Total risk-weighted assets	$	24,846,788		$	25,001,334

Total assets for leverage ratio	$	38,255,329		$	37,785,070

Risk-based capital ratios:
Common equity tier 1 capital		16.34	%		16.48	%
Tier 1 capital		16.34			16.48
Total capital		19.34			19.48
Tier 1 leverage		10.61			10.91

The Basel III capital rules provide that a depository institution will be deemed to be well capitalized if it maintains a leverage ratio of at least 5%, a common equity Tier 1 ratio of at least 6.5%, a Tier 1 capital ratio of at least 8% and a total risk-based ratio of at least 10%. Management has determined that as of March 31, 2017, the Corporation, BPPR and BPNA continue to exceed the minimum requirements for being “well-capitalized” under the Basel III capital rules.

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The decrease in the common equity tier I capital ratio, tier I capital ratio and total capital ratio on March 31, 2017 as compared to December 31, 2016 was mainly attributed to the common stock repurchase of $75 million and the transition period impact on deferred tax assets, partially offset by the three month period earnings and a reduction in risk-weighted assets driven by a decrease in loans meeting the high volatility commercial real estate loans criteria. The decrease in the leverage ratio was mainly attributed to the increase in average total assets. Refer to Table 1, Financial Condition Highlights, for information of average assets and to the Financial Condition Analysis section of this MD&A for a discussion of significant variances in assets.

Non-GAAP financial measures

The tangible common equity ratio, tangible assets and tangible book value per common share, which are presented in the table that follows, are non-GAAP measures. Management and many stock analysts use the tangible common equity ratio and tangible book value per common share in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, typically stemming from the use of the purchase accounting method 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 GAAP. Moreover, the manner in which the Corporation calculates its tangible common equity, tangible assets and any other related measures may differ from that of other companies reporting measures with similar names.

Table 14 provides a reconciliation of total stockholders’ equity to tangible common equity and total assets to tangible assets as of March 31, 2017, and December 31, 2016.

Table 14 - Reconciliation of Tangible Common Equity and Tangible Assets


(In thousands, except share or per share information)	March 31, 2017			December 31, 2016
Total stockholders’ equity	$	5,190,213		$	5,197,957
Less: Preferred stock		(50,160	)		(50,160	)

	$	5,140,053		$	5,147,797
Common shares outstanding at end of period		101,956,740			103,790,932
Common equity per share	$	50.41		$	49.60

Total stockholders’ equity	$	5,190,213		$	5,197,957
Less: Preferred stock		(50,160	)		(50,160	)
Less: Goodwill		(627,294	)		(627,294	)
Less: Other intangibles		(42,706	)		(45,050	)

Total tangible common equity	$	4,470,053		$	4,475,453

Total assets	$	40,259,282		$	38,661,609
Less: Goodwill		(627,294	)		(627,294	)
Less: Other intangibles		(42,706	)		(45,050	)

Total tangible assets	$	39,589,282		$	37,989,265

Tangible common equity to tangible assets		11.29	%		11.78	%
Common shares outstanding at end of period		101,956,740			103,790,932
Tangible book value per common share	$	43.84		$	43.12

OFF-BALANCE SHEET ARRANGEMENTS AND OTHER COMMITMENTS

In the ordinary course of business, the Corporation engages in financial transactions that are not recorded on the balance sheet, or may be recorded on the balance sheet in amounts that are different than the full contract or notional amount of the transaction. As a provider of financial services, the Corporation routinely enters into commitments with off-balance sheet risk to meet the financial needs of its customers. These commitments may include loan commitments and standby letters of credit. These commitments are subject to the same credit policies and approval process used for on-balance sheet instruments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position. Other types of off-balance sheet arrangements that the Corporation enters in the ordinary course of business include derivatives, operating leases and provision of guarantees, indemnifications, and representation and warranties. Refer to Note 20 for a detailed discussion related to the Corporation’s obligations under credit recourse and representation and warranties arrangements.

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Contractual Obligations and Commercial Commitments

The Corporation has various financial obligations, including contractual obligations and commercial commitments, which require future cash payments on debt and lease agreements. Also, in the normal course of business, the Corporation enters into contractual arrangements whereby it commits to future purchases of products or services from third parties. Obligations that are legally binding agreements, whereby the Corporation agrees to purchase products or services with a specific minimum quantity defined at a fixed, minimum or variable price over a specified period of time, are defined as purchase obligations.

Purchase obligations include major legal and binding contractual obligations outstanding at March 31, 2017, primarily for services, equipment and real estate construction projects. Services include software licensing and maintenance, facilities maintenance, supplies purchasing, and other goods or services used in the operation of the business. Generally, these contracts are renewable or cancelable at least annually, although in some cases the Corporation has committed to contracts that may extend for several years to secure favorable pricing concessions. Purchase obligations amounted to $201 million at March 31, 2017 of which approximately 61% mature in 2017, 21% in 2018, 13% in 2019 and 5% thereafter.

The Corporation also enters into derivative contracts under which it is required either to receive or pay cash, depending on changes in interest rates. These contracts are carried at fair value on the Consolidated Statement of Financial Condition with the fair value representing the net present value of the expected future cash receipts and payments based on market rates of interest as of the statement of condition date. The fair value of the contract changes daily as interest rates change. The Corporation may also be required to post additional collateral on margin calls on the derivatives and repurchase transactions.

Refer to Note 16 for a breakdown of long-term borrowings by maturity.

The Corporation utilizes lending-related financial instruments in the normal course of business to accommodate the financial needs of its customers. The Corporation’s exposure to credit losses in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit and commercial letters of credit is represented by the contractual notional amount of these instruments. The Corporation uses credit procedures and policies in making those commitments and conditional obligations as it does in extending loans to customers. Since many of the commitments may expire without being drawn upon, the total contractual amounts are not representative of the Corporation’s actual future credit exposure or liquidity requirements for these commitments.

Table 15 presents the contractual amounts related to the Corporation’s off-balance sheet lending and other activities at March 31, 2017.

Table 15 - Off-Balance Sheet Lending and Other Activities


	Amount of commitment - Expiration Period
(In millions)	2017		Years 2018 - 2019		Years 2020 - 2021		Years 2022 - thereafter		Total
Commitments to extend credit	$	6,661	$	1,068	$	92	$	87	$	7,908
Commercial letters of credit		1		—		—		—		1
Standby letters of credit		23		6		—		—		29
Commitments to originate or fund mortgage loans		21		1		—		—		22

Total	$	6,706	$	1,075	$	92	$	87	$	7,960

At March 31, 2017 and December 31, 2016, the Corporation maintained a reserve of approximately $9 million, for probable losses associated with unfunded loan commitments related to commercial and consumer lines of credit. The estimated reserve is principally based on the expected draws on these facilities using historical trends and the application of the corresponding reserve factors determined under the Corporation’s allowance for loan losses methodology. This reserve for unfunded loan commitments remains separate and distinct from the allowance for loan losses and is reported as part of other liabilities in the consolidated statement of financial condition.

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Refer to Note 21 to the Consolidated Financial Statements for additional information on credit commitments and contingencies.

RISK MANAGEMENT

Managing risk is an essential component of the Corporation’s business. Risk identification and monitoring are key elements in the overall risk management. Popular has a strong disciplined risk management culture where risk management is a share responsibility by all employees.

Risk Management Framework

Popular’s risk management framework seeks to ensure that there is an effective process in place to manage risk across the organization. Popular’s risk management framework incorporates three interconnected dependencies: risk appetite, stress testing, and capital planning. The stress testing process incorporates key risks within the context of the Risk Appetite Statement (RAS) defined in our Risk Management Policy. The process analyzes and delineates how much risk Popular is prepared to assume in pursuit of its business strategy and how much capital Popular’s activities will consume in light of a forward-looking assessment of the potential impact of adverse economic conditions. The RAS includes risk tolerance, limits, and types of risks the Corporation is willing to accept, as well as processes to maintain compliance with those limits.

Principal Risk Types

•

Credit Risk – Potential for default or loss resulting from an obligor’s failure to meet the terms of any contract with the Corporation or any of its subsidiaries, or failure otherwise to perform as agreed. Credit risk arises from all activities where success depends on counterparty, issuer, or borrower performance.

•

Interest Rate Risk (“IRR”) – The risk to earnings or capital arising from changes in interest rates. Interest rate risk arises from differences between the timing of rate changes and the timing of cash flows (repricing risk); from changing rate relationships among different yield curves affecting bank lending and borrowing activities (basis risk); from changing rate relationships across the spectrum of maturities (yield curve risk); and from interest related options embedded in bank products (options risk).

•

Market Risk – Potential for economic loss resulting from changes in market prices of the assets or liabilities in the Corporation’s or in any of its subsidiaries’ portfolios.

•

Liquidity Risk – Potential for loss resulting from the Corporation or its subsidiaries not being able to meet their financial obligations when they come due. This could be a result of market conditions, the ability of the Corporation to liquidate assets or manage or diversify various funding sources. This risk also encompasses the possibility that an instrument cannot be closed out or sold at its economic value, which might be a result of stress in the market or in a specific security type given its credit, volume and maturity.

•

Operational Risk – Possibility that inadequate or failed systems and internal controls or procedures, human error, fraud or external influences such as disasters, can cause losses. It includes the risk for those processes that have been outsourced to third parties and the risk of the inadequate use of models.

•

Compliance Risk – Potential for loss resulting from violations of or non-conformance with laws, rules, regulations, or prescribed practices.

•

Regulatory and Legal Risk - Risk of negative impact to business activities, earnings or capital, regulatory relationships or reputation as a result of failure to comply with or a failure to adapt to current and changing regulations, law, rules, regulatory expectations, existing contracts or ethical standards.

•

Strategic Risk – Potential for loss arising from adverse business decisions or improper implementation of business decisions. Also, it incorporates how management analyzes external factors that impact the strategic direction of the Corporation.

•

Reputational Risk – Potential for loss arising from negative public opinion.

Risk Governance

The Corporation’s Board of Directors (the “Board”) has established a Risk Management Committee (“RMC”) to undertake the responsibilities of overseeing and approving the Corporation’s Risk Management Program, as well as the Corporation’s Capital

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Plan. The Capital Plan is a plan to maintain sufficient regulatory capital at the Corporation, BPPR and BPNA, which considers current and future regulatory capital requirements, expected future profitability and credit trends and, at least, two macroeconomic scenarios, including a base and stress scenario.

The RMC, as an oversight body, monitors and approves corporate policies to identify measure, monitor and control risks while maintaining the effectiveness and efficiency of the business and operational processes. As an approval body for the Corporation, the RMC reviews and approves relevant risk management policies and critical processes. Also, it periodically reports to the Board about its activities.

The Board and RMC have delegated to the Corporation’s management the implementation of the risk management processes. This implementation is split into two separate but coordinated efforts that include (i) business and / or operational units who identify, manage and control the risks resulting from their activities, and (ii) a Risk Management Group (“RMG”). In general, the RMG is mandated with responsibilities such as assessing and reporting to the Corporation’s management and RMC the risk positions of the Corporation; developing and implementing mechanisms, policies and procedures to identify, measure and monitor risks; implementing measurement mechanisms and infrastructure to achieve effective risk monitoring; developing and implementing the necessary management information and reporting mechanisms; and monitoring and testing the adequacy of the Corporation’s policies, strategies and guidelines.

The RMG is responsible for the overall coordination of risk management efforts throughout the Corporation and is composed of three reporting divisions: (i) Credit Risk Management, (ii) Compliance Management, and (iii) Financial and Operational Risk Management. The latter includes an Enterprise Risk Management function that facilitates, among other aspects, the identification, coordination, and management of multiple and cross-enterprise risks. The Corporation’s Model Validation and Loan Review group, which reports directly to the RMC and administratively to the Chief Risk Officer, also provides important risk management functions by validating critical models used in the Corporation and by assessing the adequacy of the Corporation’s lending risk function.

Additionally, the Internal Auditing Division provides an independent assessment of the Corporation’s internal control structure and related systems and processes. The Internal Audit Division also provides an assessment of the effectiveness of the Corporation’s risk management function.

Moreover, management oversight of the Corporation’s risk-taking and risk management activities is conducted through management committees:

•

CRESCO (Credit Strategy Committee) – Manages the Corporation’s overall credit exposure and approves credit policies, standards and guidelines that define, quantify, and monitor credit risk. Through this committee, management reviews asset quality ratios, trends and forecasts, problem loans, establishes the provision for loan losses and assesses the methodology and adequacy of the allowance for loan losses on a quarterly basis.

•

ALCO (Asset / Liability Management Committee) – Oversees and approves the policies and processes designed to ensure sound market risk and balance sheet strategies, including the interest rate, liquidity, investment and trading policies. The ALCO monitors the capital position and plan for the Corporation and approves all capital management strategies, including capital market transactions and capital distributions. The ALCO also monitors forecasted results and their impact on capital, liquidity, and net interest margin of the Corporation.

•

ORCO (Operational Risk Committee) – Monitors operational risk management activities to ensure the development and consistent application of operational risk policies, processes and procedures that measure, limit and manage the Corporation’s operational risks while maintaining the effectiveness and efficiency of the operating and businesses’ processes.

•

Compliance Committees – Monitors regulatory compliance activities to ensure to compliance with legal and regulatory requirements and the Corporation’s policies.

•

ERM (Enterprise Management Committee) – Monitors Market, Interest, Liquidity, Compliance, Regulatory, Legal, Strategic, Operational (including Information Security & Cyber), and Reputational risks in the Risk Appetite Statement (RAS) and within the Corporation’s ERM framework.

There are other management committees such as the Fair Lending, Section 23A & B, New Products, Fiduciary Risk, and the BSA/Anti-Money Laundering Committees, among others, which provide oversight of specific business risks.

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Market / Interest Rate Risk

The financial results and capital levels of the Corporation are constantly exposed to market, interest rate and liquidity risks. The ALCO and the Corporate Finance Group are responsible for planning and executing the Corporation’s market, interest rate risk, funding activities and strategy, and for implementing the policies and procedures approved by the RMC and the ALCO. In addition, the Financial and Operational Risk Management Division is responsible for the independent monitoring and reporting of adherence with established policies to the Risk Management Committee, and enhancing and strengthening controls surrounding interest, liquidity and market risk. The ALCO generally meets on a weekly basis and reviews the Corporation’s current and forecasted asset and liability levels as well as desired pricing strategies and other relevant financial management and interest rate and risk topics. Also, on a monthly basis the ALCO reviews various interest rate risk sensitivity metrics, ratios and portfolio information, including but not limited to, the Corporation’s liquidity positions, projected sources and uses of funds, interest rate risk positions and economic conditions.

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 securities in the investment portfolio classified as available-for-sale. Refer to Notes 5 and 6 for further information on the investment portfolio. Investment securities classified as available-for-sale amounted to $9.2 billion as of March 31, 2017. Other assets subject to market risk include loans held-for-sale, which amounted to $85 million, mortgage servicing rights (“MSRs”) which amounted to $194 million and securities classified as “trading”, which amounted to $51 million, as of March 31, 2017.

Liabilities subject to market risk include the FDIC clawback obligation, which amounted to $161 million at March 31, 2017.

Management believes that market risk is currently not a material source of risk at the Corporation. A significant portion of the Corporation’s financial activities is concentrated in Puerto Rico, which has been going through a fiscal and economic crisis. Refer to the Geographic and Government Risk section of this MD&A for highlights on the current status of Puerto Rico’s fiscal and economic condition.

Interest Rate Risk (“IRR’)

The Corporation’s net interest income is subject to various categories of interest rate risk, including repricing, basis, yield curve and option risks. In managing interest rate risk, management may alter the mix of floating and fixed rate assets and liabilities, change pricing schedules, adjust maturities through sales and purchases of investment securities, and enter into derivative contracts, among other alternatives.

Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate rate risk position given line of business forecasts, management objectives, market expectations and policy constraints.

Management utilizes various tools to assess IRR, including simulation modeling, static gap analysis, and Economic Value of Equity (EVE). The three methodologies complement each other and are used jointly in the evaluation of the Corporation’s IRR. Simulation modeling is prepared for a five-year period, which in conjunction with the EVE analysis, provides Management a better view of long term IRR.

Net interest income simulation analysis performed by legal entity and on a consolidated basis is a tool used by the Corporation in estimating the potential change in net interest income resulting from hypothetical changes in interest rates. Sensitivity analysis is calculated using a simulation model which incorporates actual balance sheet figures detailed by maturity and interest yields or costs.

Management assesses interest rate risk by comparing various net interest income simulations under different interest rate scenarios that differ in direction of interest rate changes, the degree of change over time, the speed of change and the projected shape of the yield curve. For example, the types of rate scenarios processed during the year included economic most likely scenarios, flat rates, yield curve twists, and 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 sensitivity analysis as well as validations of results on a monthly basis. In addition, the model and processes used to assess IRR are subject to

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independent validations according to the guidelines established in the Model Governance and Validation policy. Due to the importance of critical assumptions in measuring market risk, the risk models incorporate third-party developed data for critical assumptions such as prepayment speeds on mortgage loans and mortgage-backed securities.

The Corporation processes net interest income simulations under interest rate scenarios in which the yield curve is assumed to rise and decline by the same amount. The rate scenarios considered in these market risk simulations reflect parallel changes of -200, +200 and +400 basis points during the succeeding twelve-month period. Simulation analyses are based on many assumptions, including relative levels of market interest rates across all yield curve points and indexes, interest rate spreads, loan prepayments and deposit elasticity. Thus, they should not be relied upon as indicative of actual results. Further, the estimates do not contemplate actions that management could take to respond to changes in interest rates. By their nature, these forward-looking computations are only estimates and may be different from what may actually occur in the future. The following table presents the results of the simulations at March 31, 2017 and December 31, 2016, assuming a static balance sheet and a one-year time horizon:

Table 16 - Net Interest Income Sensitivity (One Year Projection)


	March 31, 2017						December 31, 2016
(Dollars in thousands)	Amount Change			Percent Change			Amount Change			Percent Change
+400 basis points	$	260,536			17.66	%	$	236,945			16.52	%
+200 basis points		134,380			9.11			121,181			8.45
-200 basis points		(66,188	)		(4.49	)		(35,314	)		(2.46	)

At March 31, 2017, the simulations showed that the Corporation maintains an asset-sensitive position. The increase in sensitivity in the +200 and +400 scenarios is mainly driven by a higher balance of money market investments that was due to growth in deposits. In March 2017, the Federal Reserve increased the range for the Federal Funds Target Rate, which led to an increase in the magnitude of the -200 basis points scenario. Mainly as a result of this change, and in part due to the higher levels of money market investments, the Corporation’s sensitivity to declining rates also increased.

The Corporation maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in net interest income or market value that are caused by interest rate volatility. The market value of these derivatives is subject to interest rate fluctuations and counterparty credit risk adjustments which could have a positive or negative effect in the Corporation’s earnings.

The Corporation’s loan and investment portfolios are subject to prepayment risk, which results from the ability of a third-party to repay debt obligations prior to maturity. Prepayment risk also could have a significant impact on the duration of mortgage-backed securities and collateralized mortgage obligations, since prepayments could shorten (or lower prepayments could extend) the weighted average life of these portfolios.

Trading

The Corporation engages in trading activities in the ordinary course of business at its subsidiaries, Banco Popular de Puerto Rico and Popular Securities. Popular Securities’ trading activities consist primarily of market-making activities to meet expected customers’ needs related to its retail brokerage business and purchases and sales 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 to benefit from short-term market movements. In addition, BPPR uses forward contracts or TBAs to hedge its securitization pipeline. Risks related to variations in interest rates and market volatility are hedged with TBAs that have characteristics similar to that of the forecasted security and its conversion timeline.

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At March 31, 2017, the Corporation held trading securities with a fair value of $51 million, representing approximately 0.1% of the Corporation’s total assets, compared with $60 million and 0.2%, respectively, at December 31, 2016. As shown in Table 17, the trading portfolio consists principally of mortgage-backed securities relating to BPPR’s mortgage activities described above, which at March 31, 2017 were investment grade securities. As of March 31, 2017, the trading portfolio also included $1.5 million in Puerto Rico government obligations and shares of closed-end funds that invest primarily in Puerto Rico government obligations ($2.6 million as of December 31, 2016). Trading instruments are recognized at fair value, with changes resulting from fluctuations in market prices, interest rates or exchange rates reported in current period earnings. The Corporation recognized a net trading account gain of $0.3 million for the quarter ended March 31, 2017, compared to a loss of $0.2 million for the quarter ended March 31, 2016. Table 17 provides the composition of the trading portfolio at March 31, 2017 and December 31, 2016.

Table 17 - Trading Portfolio


	March 31, 2017					December 31, 2016
(Dollars in thousands)	Amount		Weighted Average Yield [1]			Amount		Weighted Average Yield [1]
Mortgage-backed securities	$	35,624		5.28	%	$	42,746		4.85	%
Collateralized mortgage obligations		1,061		5.34			1,321		5.27
Puerto Rico government obligations		189		1.77			1,164		5.51
Interest-only strips		583		12.31			602		12.35
Other [2]		13,528		2.79			13,972		3.03

Total	$	50,985		4.69	%	$	59,805		4.52	%

[1]	Not on a taxable equivalent basis.

[2]	Includes related trading derivatives for the period ended December 31, 2016.

The Corporation’s trading activities are limited by internal policies. For each of the two subsidiaries, the market risk assumed under trading activities is measured by the 5-day net value-at-risk (“VAR”), with a confidence level of 99%. The VAR measures the maximum estimated loss that may occur over a 5-day holding period, given a 99% probability.

The Corporation’s trading portfolio had a 5-day VAR of approximately $0.3 million for the last week in March 2017. There are numerous assumptions and estimates associated with VAR modeling, and actual results could differ from these assumptions and estimates. Backtesting is performed to compare actual results against maximum estimated losses, in order to evaluate model and assumptions accuracy.

In the opinion of management, the size and composition of the trading portfolio does not represent a significant source of market risk for the Corporation.

FAIR VALUE MEASUREMENT OF FINANCIAL INSTRUMENTS

The Corporation currently measures at fair value on a recurring basis its trading assets, available-for-sale securities, derivatives, mortgage servicing rights and contingent consideration. Occasionally, the Corporation may be required to record at fair value other assets on a nonrecurring basis, such as loans held-for-sale, impaired loans held-in-portfolio that are collateral dependent and certain other assets. These nonrecurring fair value adjustments typically result from the application of lower of cost or fair value accounting or write-downs of individual assets.

The fair value of assets and liabilities may include market or credit related adjustments, where appropriate. During the quarter ended March 31, 2017, inclusion of credit risk in the fair value of the derivatives resulted in a net loss of $106 thousand recorded in the other operating income and interest expense captions of the Consolidated Statement of Operations, which consisted of a loss of $40 thousand resulting from the Corporation’s own credit standing adjustment and a loss of $66 thousand from the assessment of the counterparties’ credit risk.

The Corporation categorizes its 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.

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Refer to Note 24 to the Consolidated Financial Statements for information on the Corporation’s fair value measurement required by the applicable accounting standard. At March 31, 2017, approximately $9.3 billion, or 98%, of the assets measured at fair value on a recurring basis used market-based or market-derived valuation inputs in their valuation methodology and, therefore, were classified as Level 1 or Level 2. The majority of instruments measured at fair value were classified as Level 2, including U.S. Treasury securities, obligations of U.S. Government sponsored entities, obligations of Puerto Rico, States and political subdivisions, most mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMOs”), and derivative instruments.

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 $14 million at March 31, 2017, of which $6 million were Level 3 assets and $8 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.

Refer to Note 34 to the Consolidated Financial Statements in the 2016 Form 10-K for a description of the Corporation’s valuation methodologies used for the assets and liabilities measured at fair value. Also, refer to the Critical Accounting Policies / Estimates in the 2016 Form 10-K for additional information on the accounting guidance and the Corporation’s policies or procedures related to fair value measurements.

Inputs are evaluated to ascertain that they consider current market conditions, including the relative liquidity of 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 quarter ended March 31, 2017, none of the Corporation’s investment 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. In addition, during the quarter ended March 31, 2017, the Corporation did not adjust any prices obtained from pricing service providers or broker dealers for its trading account securities and investment securities available-for-sale.

Furthermore, management assesses the fair value of its portfolio of investment securities at least on a quarterly basis, which includes analyzing changes in fair value that have resulted in losses that may be considered other-than-temporary. Factors considered include, for example, the nature of the investment, severity and duration of possible impairments, industry reports, sector credit ratings, economic environment, creditworthiness of the issuers and any guarantees.

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 fair value hierarchy for each asset or liability measured. The fair value measurement analysis performed by the Corporation includes validation procedures with alternate pricing sources when available and review of market changes, pricing methodology, assumption and level hierarchy changes, and evaluation of distressed transactions. 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.

Liquidity

The objective of effective liquidity management is to ensure that the Corporation has sufficient liquidity to meet all of its financial obligations, finance expected future growth and maintain a reasonable safety margin for cash commitments under both normal and stressed market conditions. The Board is responsible for establishing the Corporation’s tolerance for liquidity risk, including approving relevant risk limits and policies. The Board has delegated the monitoring of these risks to the RMC and the ALCO. 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 and for monitoring the Corporation’s liquidity position on an ongoing basis. Also, the Corporate Treasury Division coordinates corporate wide liquidity management strategies and activities with the reportable segments, oversees policy breaches and manages the escalation process. The Financial and Operational Risk Management Division is responsible for the independent monitoring and reporting of adherence with established policies.

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An institution’s liquidity may be pressured if, for example, its credit rating is downgraded, it experiences a sudden and unexpected substantial cash outflow, 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. The Corporation has adopted policies and limits to monitor more effectively the Corporation’s liquidity position and that of the banking subsidiaries. Additionally, contingency funding plans are used to model various stress events of different magnitudes and affecting different time horizons that assist management in evaluating the size of the liquidity buffers needed if those stress events occur. However, such models may not predict accurately how the market and customers might react to every event, and are dependent on many assumptions.

Deposits, including customer deposits, brokered deposits and public funds deposits, continue to be the most significant source of funds for the Corporation, funding 80% of the Corporation’s total assets at March 31, 2017 and 79% at December 31, 2016. The ratio of total ending loans to deposits was 73% at March 31, 2017, compared to 77% at December 31, 2016. In addition to traditional deposits, the Corporation maintains borrowing arrangements. At March 31, 2017, these borrowings consisted primarily of $435 million in assets sold under agreement to repurchase, $656 million in advances with the FHLB, $439 million in junior subordinated deferrable interest debentures (net of debt issuance cost) related to trust preferred securities and $445 million in term notes (net of debt issuance cost) issued to partially fund the repayment of TARP funds. A detailed description of the Corporation’s borrowings, including their terms, is included in Note 16 to the Consolidated Financial Statements. Also, the Consolidated Statements of Cash Flows in the accompanying Consolidated Financial Statements provide information on the Corporation’s cash inflows and outflows.

The following sections provide further information on the Corporation’s major funding activities and needs, as well as the risks involved in these activities. A detailed description of the Corporation’s borrowings and available lines of credit, including its terms, is included in Note 16 to the Consolidated Financial Statements. Also, the Consolidated Statements of Cash Flows in the accompanying Consolidated Financial Statements provide information on the Corporation’s cash inflows and outflows.

Banking Subsidiaries

Primary sources of funding for the Corporation’s banking subsidiaries (BPPR and BPNA), or “the banking subsidiaries,” include retail and commercial 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 Board (the “FRB”), and has a considerable amount of collateral pledged that can be used to quickly raise funds under these facilities.

The principal uses of funds for the banking subsidiaries include loan originations, investment portfolio purchases, loan purchases and repurchases, repayment of outstanding obligations (including deposits), and operational expenses. Also, the banking subsidiaries assume liquidity risk related to collateral posting requirements for certain activities mainly in connection with contractual commitments, recourse provisions, servicing advances, derivatives, credit card licensing agreements and support to several mutual funds administered by BPPR.

During the quarter ended March 31, 2017, BPPR declared cash dividends of $123 million, a portion of which was used by Popular for the payments of the cash dividends on its outstanding common stock, as mentioned above.

Note 34 to the Consolidated Financial Statements provides a consolidating statement of cash flows which includes the Corporation’s banking subsidiaries as part of the “All other subsidiaries and eliminations” column.

The banking subsidiaries maintain sufficient funding capacity to address large increases in funding requirements such as deposit outflows. This capacity is comprised mainly of available liquidity derived from secured funding sources, as well as on-balance sheet liquidity in the form of cash balances maintained at the Fed and unused secured lines held at the FRB and FHLB, in addition to liquid unpledged securities. 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.

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The Corporation’s ability to compete successfully in the marketplace for deposits, excluding brokered deposits, depends on various factors, including pricing, service, convenience and financial stability as reflected by operating results, credit ratings (by nationally recognized credit rating agencies), and importantly, FDIC deposit insurance. Although a downgrade in the credit ratings of the Corporation’s banking subsidiaries may impact their ability to raise retail and commercial deposits or the rate that it is required to pay on such deposits, management does not believe that the impact should be material. Deposits at all of the Corporation’s banking subsidiaries are federally insured (subject to FDIC limits) and this is expected to mitigate the potential effect of a downgrade in the credit ratings.

Deposits are a key source of funding as they tend to be less volatile than institutional borrowings and their cost is less sensitive to changes in market rates. Refer to Table 12 for a breakdown of deposits by major types. Core deposits are generated from a large base of consumer, corporate and institutional customers. Core deposits include all non-interest bearing deposits, savings deposits and certificates of deposit under $100,000, excluding brokered deposits with denominations under $100,000. Core deposits have historically provided the Corporation with a sizable source of relatively stable and low-cost funds. Core deposits totaled $27.5 billion, or 85% of total deposits, at March 31, 2017, compared with $25.8 billion, or 84% of total deposits, at December 31, 2016. Core deposits financed 75% of the Corporation’s earning assets at March 31, 2017, compared with 76% at December 31, 2016.

Certificates of deposit with denominations of $100,000 and over at March 31, 2017 totaled $4.2 billion, or 13% of total deposits (December 31, 2016 - $4.1 billion, or 14% of total deposits). Their distribution by maturity at March 31, 2017 is presented in the table that follows:

Table 18 - Distribution by Maturity of Certificate of Deposits of $100,000 and Over


(In thousands)
3 months or less	$	1,581,162
3 to 6 months		389,835
6 to 12 months		505,521
Over 12 months		1,683,615

Total	$	4,160,133

At March 31, 2017 and December 31, 2016 approximately 2% of the Corporation’s assets were financed by brokered deposits. The Corporation had $0.6 billion in brokered deposits at March 31, 2017 and December 31, 2016. 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.

To the extent that the banking subsidiaries are unable to obtain sufficient liquidity through core deposits, the Corporation may meet its liquidity needs through short-term borrowings by pledging securities for borrowings under repurchase agreements, by pledging additional loans and securities through the available secured lending facilities, or by selling liquid assets. These measures are subject to availability of collateral.

The Corporation’s banking subsidiaries have the ability to borrow funds from the FHLB. At March 31, 2017 and December 31, 2016, the banking subsidiaries had credit facilities authorized with the FHLB aggregating to $3.7 billion and $3.8 billion, respectively, based on assets pledged with the FHLB at those dates. Outstanding borrowings under these credit facilities totaled $656 million at March 31, 2017 and $673 million at December 31, 2016. Such advances are collateralized by loans held-in-portfolio, do not have restrictive covenants and do not have any callable features. At March 31, 2017 the credit facilities authorized with the FHLB were collateralized by $4.8 billion in loans held-in-portfolio, compared with $4.9 billion at December 31, 2016. Refer to Note 16 to the Consolidated Financial Statements for additional information on the terms of FHLB advances outstanding.

At March 31, 2017 and December 31, 2016, the Corporation’s borrowing capacity at the Fed’s Discount Window amounted to approximately $1.3 billion and $1.2 billion, respectively, which remained unused as of both dates. The amount available under this borrowing facility is dependent upon the balance of performing loans, securities pledged as collateral and the haircuts assigned to such collateral. At March 31, 2017 and December 31, 2016, this credit facility with the Fed was collateralized by $2.3 billion, in loans held-in-portfolio.

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At March 31, 2017, 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 its banking subsidiaries are unable to maintain access to funding or if adequate financing is not available to accommodate future financing needs at acceptable interest rates. The banking subsidiaries also are required to deposit cash or qualifying securities to meet margin requirements. To the extent that the value of securities previously pledged as collateral declines because of market changes, the Corporation will be required to deposit additional cash or securities to meet its margin requirements, thereby adversely affecting its liquidity. Finally, if management is required to rely more heavily on more expensive funding sources to meet its future growth, revenues may not increase proportionately to cover costs. In this case, profitability would be adversely affected.

Bank Holding Companies

The principal sources of funding for the bank holding companies (the “BHC’s”), which are Popular, Inc. (holding company only) (“PIHC”) and Popular North America, Inc. (“PNA”), include cash on hand, investment securities, dividends received from banking and non-banking subsidiaries (subject to regulatory limits and authorizations) asset sales, credit facilities available from affiliate banking subsidiaries and proceeds from potential securities offerings.

The principal use of these funds include the repayment of debt, and interest payments to holders of senior debt and junior subordinated deferrable interest (related to trust preferred securities) and capitalizing its banking subsidiaries.

During the quarter ended March 31, 2017, PIHC received $123.0 million in dividends from BPPR and $1.2 million in dividends from EVERTEC’s parent company. PIHC also received $0.5 million in distributions from its investment in PRB Investors LP, an equity method investment, and $6.0 million in dividends from its non-banking subsidiaries.

Another use of liquidity at the parent holding company is the payment of dividends on its outstanding stock. During the quarter ended March 31, 2017, the Corporation declared quarterly dividends on its outstanding common stock of $0.25 per share, for a total of $25.6 million. The dividends for the Corporation’s Series A and Series B preferred stock amounted to $0.9 million for the quarter ended March 31, 2017.

The BHC’s have in the past borrowed in the money markets and in the corporate debt market primarily to finance their non-banking subsidiaries, however, the cash needs of the Corporation’s non-banking subsidiaries other than to repay indebtedness and interest are now minimal. These sources of funding have become more costly due to the reductions in the Corporation’s credit ratings. The Corporation’s principal credit ratings are below “investment grade” which affects the Corporation’s ability to raise funds in the capital markets. The Corporation has an automatic shelf registration statement filed and effective with the Securities and Exchange Commission, which permits the Corporation to issue an unspecified amount of debt or equity securities.

Note 34 to the Consolidated Financial Statements provides a statement of condition, of operations and of cash flows for the two BHC’s. The loans held-in-portfolio in such financial statements is principally associated with intercompany transactions.

The outstanding balance of notes payable at the BHC’s amounted to $885 million at March 31, 2017, compared with $884 million at December 31, 2016. The repayment of the BHC’s obligations represents a potential cash need which is expected to be met with a combination of internal liquidity resources stemming mainly from future dividend receipts and new borrowings.

The contractual maturities of the BHC’s notes payable at March 31, 2017 are presented in Table 19.

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Table 19 - Distribution of BHC’s Notes Payable by Contractual Maturity


Year	(In thousands)
2017	$	—
2018		—
2019		445,309
2020		—
2021		—
Later years		439,330

Total	$	884,639

As indicated previously, the BHC did not issue new registered debt in the capital markets during the quarter ended March 31, 2017.

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.

Non-banking subsidiaries

The principal sources of funding for the non-banking subsidiaries include internally generated cash flows from operations, loan sales, repurchase agreements, capital injection and borrowed funds from their direct parent companies or the holding companies. The principal uses of funds for the non-banking subsidiaries include repayment of maturing debt, operational expenses and payment of dividends to the BHCs. The liquidity needs of the non-banking subsidiaries are minimal since most of them are funded internally from operating cash flows or from intercompany borrowings from their holding companies, BPPR or BPNA.

Other Funding Sources and Capital

The investment securities portfolio provides an additional source of liquidity, which may be realized through either securities sales or repurchase agreements. The Corporation’s investment securities portfolio consists primarily of liquid U.S. government investment securities, sponsored U.S. agency securities, government sponsored mortgage-backed securities, and collateralized mortgage obligations that can be used to raise funds in the repo markets. The availability of the repurchase agreement would be subject to having sufficient unpledged collateral available at the time the transactions are to be consummated, in addition to overall liquidity and risk appetite of the various counterparties. The Corporation’s unpledged investment and trading securities, excluding other investment securities, amounted to $3.9 billion at March 31, 2017 and $3.8 billion at March 31, 2016. A substantial portion of these securities could be used to raise financing quickly in the U.S. money markets or from secured lending sources.

Additional liquidity may be provided through loan maturities, prepayments and sales. The loan portfolio can also be used to obtain funding in the capital markets. In particular, mortgage loans and some types of consumer loans, have secondary markets which the Corporation could use.

Risks to Liquidity

Total lines of credit outstanding are not necessarily a measure of the total credit available on a continuing basis. Some of these lines could be subject to collateral requirements, standards of creditworthiness, leverage ratios and other regulatory requirements, among other factors. Derivatives, such as those embedded in long-term repurchase transactions or interest rate swaps, and off-balance sheet exposures, such as recourse, performance bonds or credit card arrangements, are subject to collateral requirements. As their fair value increases, the collateral requirements may increase, thereby reducing the balance of unpledged securities.

The importance of the Puerto Rico market for the Corporation is an additional risk factor that could affect its financing activities. In the case of a deterioration in economic and fiscal conditions in Puerto Rico, the credit quality of the Corporation could be affected and result in higher credit costs. The Puerto Rico economy continues to face various challenges, including significant pressures in some sectors of the residential real estate market. 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 adopted contingency plans for raising financing under stress scenarios when important sources of funds that are usually fully available are temporarily unavailable. These plans call for using alternate funding mechanisms, such as the pledging of certain asset classes and accessing secured credit lines and loan facilities put in place with the FHLB and the FRB.

The credit ratings of Popular’s debt obligations are a relevant factor for liquidity because they impact the Corporation’s ability to borrow in the capital markets, its cost and access to funding sources. Credit ratings are based on the financial strength, credit

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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 core retail and commercial deposits, and the Corporation’s ability to access a broad array of wholesale funding sources, among other factors.

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. At the BHCs, the volume of capital market borrowings has declined substantially, as the non-banking lending businesses that it had historically funded have been shut down and the need to raise unsecured senior debt has been substantially reduced.

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 $14 million in deposits at March 31, 2017 that are subject to rating triggers.

Some of the Corporation’s derivative instruments include financial covenants tied to the bank’s well-capitalized status and certain formal regulatory actions. These agreements could require exposure collateralization, early termination or both. The fair value of derivative instruments in a liability position subject to financial covenants approximated $182 thousand at March 31, 2017, with the Corporation providing collateral totaling $2 million to cover the net liability position with counterparties on these derivative instruments.

In addition, certain mortgage servicing and custodial agreements that BPPR has with third parties include rating covenants. In the event of a credit rating downgrade, the third parties have the right to require the institution to engage a substitute cash custodian for escrow deposits and/or increase collateral levels securing the recourse obligations. Also, as discussed in Note 20 to the Consolidated Financial Statements, the Corporation services residential mortgage loans subject to credit recourse provisions. Certain contractual agreements require the Corporation to post collateral to secure such recourse obligations if the institution’s required credit ratings are not maintained. Collateral pledged by the Corporation to secure recourse obligations amounted to approximately $58 million at March 31, 2017. 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.

Credit Risk

Geographic and Government Risk

The Corporation is exposed to geographic and government risk. The Corporation’s assets and revenue composition by geographical area and by business segment reporting are presented in Note 33 to the Consolidated Financial Statements.

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 is experiencing a severe economic and fiscal crisis resulting from continuing 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. Further, the Commonwealth and one of its public instrumentalities, the Puerto Rico Sales Tax Financing Corporation (“COFINA”), are currently in the process of restructuring their outstanding obligations in bankruptcy-like proceedings pursuant to Title III of the Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”).

The Commonwealth’s deficits were historically covered with bond financings, loans from the Government Development Bank for Puerto Rico (“GDB”) and other extraordinary one-time revenue measures, as well through the deferment of the cost of certain legacy obligations, such as pensions. The Commonwealth’s structural imbalance between revenue and expenditure and unfunded legacy obligations, coupled with the deterioration of GDB’s liquidity situation and the Commonwealth’s recent inability to access the capital markets, resulted in the government becoming unable to pay scheduled debt payments while continuing to provide government services.

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In response to this crisis, in June 2016 the U.S. Federal Government enacted PROMESA, discussed below.

Recent Economic Performance

Puerto Rico entered into recession in the fourth quarter of fiscal year 2006. Puerto Rico’s gross national product (GNP) has thereafter contracted in real terms every year between fiscal year 2007 and fiscal year 2016 (inclusive), with the exception of growth of 0.5% in fiscal year 2012 (likely as a result of the large amount of governmental stimulus and deficit spending in that fiscal year). According to Puerto Rico Planning Board estimates released in March 2017, gross national product is projected to further contract by 1.7% and 1.5% during fiscal years 2017 and 2018, respectively. The latest Economic Activity Index issued by the Puerto Rico Fiscal Agency and Financial Advisory Authority, which is an indicator of general economic activity and not a direct measurement of GNP, reflected a 1.4% reduction in the average for fiscal year 2016, compared to the prior fiscal year. During the first six months of fiscal year 2017 (July to December 2016), the Economic Activity Index reflected a 1.9% average reduction compared to the corresponding figure for fiscal year 2016.

Fiscal and Liquidity Measures; Defaults in Debt Service Payments

The Commonwealth’s challenges have resulted in a severe fiscal and liquidity crisis, which has forced the government to implement extraordinary measures in order to continue to fund its operational expenses and provide essential services to its residents. Measures taken by the previous administration to tackle the government’s structural budgetary imbalance included (a) reforming the Commonwealth’s retirement systems, (b) enacting Act No. 66-2014, as amended (“Act 66”), a fiscal emergency law that, among other things, froze formula appropriations, salaries and benefits under collective bargaining agreements, (c) implementing certain extraordinary revenue raising measures, including an increase in the sales and use tax (“SUT”) rate from 7% to 11.5% and the implementation of a Commonwealth SUT of 4% with respect to certain business-to-business services, (d) requiring the two largest government retirement systems to pre-fund the payment of retirement benefits to participants, (e) delaying the payment of third-party payables, income tax refunds and amounts due to public corporations, and (f) enacting Puerto Rico Emergency Moratorium and Rehabilitation Act (the “Moratorium Act”), pursuant to which the Commonwealth and certain of its instrumentalities suspended the payment of debt service on their respective debts and retained certain revenues assigned to particular public corporations, redirecting the same for the funding of operational expenses. The Moratorium Act also imposed significant constraints on the operation of GDB, including stringent restrictions on the withdrawal of deposits from GDB (including deposits of the Commonwealth’s municipalities).

The Administration of Governor Ricardo Rosselló Nevares, sworn in January 2017, has also implemented various measures to address the Commonwealth’s fiscal crisis and liquidity problems, including enacting legislation to (a) extend until fiscal year 2021 certain of the provisions of Act 66, (b) extend for 10 years the temporary excise tax imposed by Act No. 154-2010, (c) reduce government expenses (including by reducing payroll related-expenses, such as employee benefits), (d) increase government revenues (including by increasing fines and cigarette excise taxes), and (e) authorize the Commonwealth’s central government to use funds from public corporation to cover its liquidity and budgetary needs (including, under certain circumstances, COFINA’s securitized sales-and-use tax revenue).

Pursuant to Executive Orders issued under the Moratorium Act, the following entities have not made payments of principal and/or interest in full on certain of their respective bonds and notes as of the date hereof: the Commonwealth, GDB, the Puerto Rico Public Buildings Authority, the Puerto Rico Infrastructure Financing Authority (“PRIFA”) and the Puerto Rico Highways and Transportation Authority (“HTA”) (with respect to certain subordinated bonds). Certain other entities have not made scheduled deposits required under the governing bond documentation, including HTA, the Convention Center District Authority, PRIFA, the Employees Retirement System, and the University of Puerto Rico. Debt service on bonds issued by the Puerto Rico Public Finance Corporation has also not been appropriated since fiscal year 2016. Consistent with the provisions of the Moratorium Act and the executive orders issued thereunder, the approved budget for the Commonwealth for fiscal year 2017 does not allocate funds for the payment of debt service on the Commonwealth’s general obligation debt or any other debt payable from Commonwealth appropriations. As of the date hereof, the Governor has not taken action under the Moratorium Act with respect to COFINA, which continues to make debt service payments when due. However, as mentioned above, the Legislative Assembly recently enacted legislation that allows the Commonwealth to use COFINA’s sales tax under certain circumstances and the Oversight Board filed a petition to restructure COFINA’s obligations under Title III of PROMESA on May 5, 2017.

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On January 29, 2017, the Rosselló Administration enacted Act No. 5-2017 (“Act 5”), also known as the “Financial Emergency and Fiscal Responsibility Act,” to replace certain provisions of the Moratorium Act. Among other things, Act 5 extended the Governor’s power to suspend debt service obligations until May 1, 2017 (which was extended for an additional three-month by an executive order) by prioritizing the payment of essential services over debt service. Act 5 grandfathers executive orders issued pursuant to the Moratorium Act and stipulates that the same shall continue in full force and effect until amended, rescinded or superseded.

The Government has stated that certain of these emergency liquidity measures are unsustainable and have significant negative economic effects. Also, the Commonwealth has indicated that it expects that these measures will not be sufficient to address the Commonwealth’s liquidity needs and that it will need to implement additional extraordinary measures to continue providing essential government services. Absent such additional liquidity measures, the Commonwealth has indicated it may experience significant bank cash shortfalls in upcoming months.

Enactment of PROMESA

In general terms, PROMESA seeks to provide the Commonwealth with (i) fiscal and economic discipline through the creation of the Oversight Board, (ii) relief from creditor lawsuits through the enactment of a temporary stay on litigation to enforce rights or remedies related to outstanding liabilities of the Commonwealth and its instrumentalities and municipalities (which expired on May 1, 2017) and (iii) two separate processes for the restructuring of the debt obligations of such entities. PROMESA also includes other miscellaneous provisions, including relief from certain wage and hour laws and regulations and provisions for identification and expedited permitting of critical infrastructure projects.

On August 31, 2016, President Obama appointed the seven voting members of the Oversight Board. Pursuant to PROMESA, the Oversight Board shall 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.

The Oversight Board has designated a number of entities as covered entities under PROMESA, including the Commonwealth, all of its public corporations and retirement systems, and all affiliates and subsidiaries of the foregoing. While the Oversight Board has the power to designate any of the Commonwealth’s municipalities as covered entities under PROMESA, it has not done so as of the date hereof. The designation of an entity as a covered entity has various implications under PROMESA. First, it means that the Governor will have to submit such entity’s annual budgets and, if the Oversight Board so requests, its fiscal plans, to the Oversight Board for its review and approval. Second, covered territorial instrumentalities may not issue debt or guarantee, exchange, modify, repurchase, redeem, or enter into similar transactions with respect to their debts without the prior approval of the Oversight Board. Finally, covered entities could also potentially be eligible to use the restructuring procedures provided by PROMESA. The first, Title VI, is a largely out-of-court process through which a government entity and its financial creditors can agree on terms to restructure such entity’s debt. If a supermajority of creditors of a certain category agree, that agreement can bind all other creditors in such category. The second, Title III, draws on the federal bankruptcy code and provides a court-supervised process for a comprehensive restructuring led by the Oversight Board. Access to either of these procedures is dependent on compliance with certain requirements established in PROMESA, including the approval of the Oversight Board.

The initial stay of litigation imposed by PROMESA expired on May 1, 2017. The automatic stay imposed by PROMESA applied to covered actions against all government instrumentalities in Puerto Rico, even those that may not be immediately within the jurisdiction and purview of the Oversight Board, such as municipalities.

Fiscal Plans

PROMESA requires the Commonwealth to submit a fiscal plan to the Oversight Board that, among other things, (i) provides for estimates of revenues and expenditures in conformance with agreed accounting standards, (ii) ensures the funding of essential services, (iii) eliminates structural deficits, (iv) provides adequate funding for public pension systems and (v) provides for a debt burden that is sustainable. Furthermore, the fiscal plan must respect the relative lawful priorities or lawful liens under local law.

At the request of the Oversight Board, on October 14, 2016, the previous administration submitted a fiscal plan for consideration by the Oversight Board (the “October Fiscal Plan”). In a meeting held on November 18, 2016, the Oversight Board rejected the October Fiscal Plan and established a set of guiding principles for the evaluation of the fiscal plan. On February 28, 2017, the Rosselló administration submitted its draft fiscal plan to the Oversight Board. The Rosselló administration submitted a revised

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version of the Commonwealth’s fiscal plan to the Oversight Board on March 13, 2017, which the Oversight Board certified on such date, after introducing certain amendments. The Commonwealth’s fiscal plan covers, in addition to the Commonwealth itself, various public instrumentalities with outstanding debts payable from taxes, fees or other government revenues (including COFINA).

The Commonwealth’s fiscal plan estimates that, absent the revenue enhancing and expense reduction measures set forth therein and assuming the payment of debt service as contracted, the Commonwealth’s 10-year budget gap would reach approximately $66.9 billion. Further, the fiscal plan projects that, assuming the successful implementation of all measures set forth therein, the Commonwealth and the entities covered by the Commonwealth’s fiscal plan will only have $7.8 billion available for the payment of debt service during said 10-year period (compared to $35 billion of contractual debt service) and thus recognizes the need for debt restructuring by the Commonwealth and the instrumentalities covered by said fiscal plan (including COFINA).

The Commonwealth’s fiscal plan does not contemplate a restructuring of the debt of Puerto Rico’s municipalities. The Commonwealth’s fiscal plan contemplates, however, as part of its expense reduction measures, the gradual elimination of budgetary subsidies provided to municipalities. Those subsidies constitute a material portion of the operating revenues of certain municipalities. The Commonwealth’s fiscal plan is publicly available in the Oversight Board’s website.

Pursuant to PROMESA, the Oversight Board has also requested and approved fiscal plans for (i) GDB, (ii) HTA, (iii) the Puerto Rico Electric Power Authority (“PREPA”) and (iv) the Puerto Rico Aqueduct and Sewer Authority. All such fiscal plans reflect that the applicable government entity is unable to pay its financial obligations in full, thus recognizing the need for debt relief. The Oversight Board has also requested fiscal plans from certain other public corporations and instrumentalities, which are subject to ongoing review and have not been approved by the Oversight Board as of the date hereof.

PREPA’s fiscal plan assumes changes to the treatment of the municipal contribution in lieu of taxes, which could result in increased electricity expenses for municipalities. GDB’s fiscal plan contemplates the wind-down of GDB’s operations and the distribution of the cash flows of GDB’s loan portfolio among its creditors (including its depositors), although it does not resolve the mechanism by which such distribution would be made. It recognizes that deposits of municipalities held at GDB are an important source of funds for their normal operations, and that GDB’s inability to gradually disburse said deposits could affect the ability of municipalities to cover essential services.

Title III Proceedings

On May 3, 2017, the Oversight Board, on behalf of the Commonwealth, filed a petition in the U.S. District Court for the District of Puerto Rico to restructure the Commonwealth’s liabilities under Title III of PROMESA. On May 5, 2017, the Oversight Board filed an analogous petition with respect to COFINA pursuant to Title III of PROMESA. As of the date of this report, a plan of adjustment for the Commonwealth’s or COFINA’s debts has not been filed. Based on the projection of funds available for debt service under the Commonwealth’s fiscal plan, however, the restructuring is expected to result in significant discounts on creditor recoveries.

Exposure of the Corporation

The credit quality of BPPR’s loan portfolio necessarily 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 are reflected in limited loan demand, an increase in the rate of foreclosures and delinquencies on loans granted in Puerto Rico. In addition, the measures taken to address the fiscal crisis and those that may have to be taken in the near future will likely affect many of our individual customers and customers’ businesses, which could cause credit losses that adversely affect us and may negatively affect consumer confidence. Any reduction in consumer spending as a result of these issues may also adversely impact our interest and non-interest revenues. If global or local economic conditions worsen or the Government of Puerto Rico is unable to manage its fiscal crisis, including consummating an orderly restructuring of its debt obligations while continuing to provide essential services, these adverse effects could continue or worsen in ways that we are not able to predict.

At March 31, 2017, the Corporation’s direct exposure to the Puerto Rico government and its instrumentalities and municipalities amounted to $520 million, of which approximately $516 million is outstanding ($584 million and $529 million, respectively, at December 31, 2016). Deterioration of the Commonwealth’s fiscal and economic situation, including any negative ratings implications, could further adversely affect the value of our Puerto Rico government obligations, resulting in losses to us. Of the amount outstanding, $451 million consists of loans and $65 million are securities ($459 million and $70 million, respectively, at December 31, 2016). Of the amount outstanding, $15 million represents senior obligations of COFINA, which has been designated as a covered entity under PROMESA and the Oversight Board has initiated Title III proceedings. Obligations from various municipalities in Puerto Rico constitute, however, the bulk of our direct exposure to Puerto Rico government obligations ($17 million at December 31, 2016). The remaining $501 million are in most cases “general obligations”, to which the applicable municipality has pledged its good faith, credit and unlimited taxing power, or “special obligations”, to which the applicable municipality has pledged other revenues ($512 million at December 31, 2016). Although the PROMESA Oversight Board has not designated any of the Commonwealth’s 78 municipalities as covered entities under PROMESA, it may decide to do so in the future. For a more detailed description of the Corporation’s direct exposure to the Puerto Rico government and its instrumentalities and municipalities, refer to Note 21.

139

In addition, at March 31, 2017, the Corporation had $400 million in indirect exposure to loans or securities that are payable by non-governmental entities, but which carry the guarantee of a Puerto Rico governmental entity to cover any shortfall in collateral in the event of borrower default ($406 million at December 31, 2016). These included $320 million in residential mortgage loans that are guaranteed by the Puerto Rico Housing Finance Authority (“HFA”), an entity that has been designated as a covered entity under PROMESA (December 31, 2016 - $326 million). These mortgage loans are secured by the underlying properties and the “HFA” guarantee serves to cover shortfalls in collateral in the event of a borrower default. Also, the Corporation had $43 million in Puerto Rico housing bonds which are backed-up by second mortgage residential loans, $7 million in pass-through securities that have been economically defeased and refunded and for which collateral including U.S. agencies and Treasury obligations has been escrowed, and $30 million of commercial real estate notes issued by government entities, but payable from rent paid by third parties ($43 million, $6 million and $31 million at December 31, 2016, respectively).

United States Virgin Islands

The Corporation has operations in the United States Virgin Islands (the “USVI”) and has credit exposure to USVI government entities.

The USVI is 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. 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.

At March 31, 2017, the Corporation’s direct exposure to USVI instrumentalities and public corporations amounted to approximately $79 million, of which approximately $65 million is outstanding. Of the amount outstanding, approximately (i) $38 million represents loans to the West Indian Company LTD, a government-owned company that owns and operates a cruise ship pier and shopping mall complex in St. Thomas, (ii) $14 million represents loans to the Virgin Islands Water and Power Authority, a public corporation of the USVI that operates USVI’s water production and electric generation plants, and (iii) $13 million represents loans to the Virgin Islands Public Finance Authority, a public corporation of the USVI created for the purpose of raising capital for public projects.

British Virgin Islands

The Corporation has operations in the British Virgin Islands (the “BVI”) and has credit exposure to BVI government entities. The fiscal situation of the BVI government is currently stable. At March 31, 2017, the Corporation’s direct exposure to BVI instrumentalities and public corporations amounted to approximately $36 million, all of which is currently outstanding. Of the amount outstanding, approximately (i) $29 million represents a loan to the BVI government and (ii) $7 million represents a loan to the British Virgin Islands Electricity Corporation, a statutory corporation of the BVI in charge of the generation, supply and distribution of electricity in the BVI.

U.S. Government

As further detailed in Notes 5 and 6 to the Consolidated Financial Statements, a substantial portion of the Corporation’s investment securities represented exposure to the U.S. Government in the form of U.S. Government sponsored entities, as well as agency mortgage-backed and U.S. Treasury securities. In addition, $850 million of residential mortgages and $93 million commercial loans were insured or guaranteed by the U.S. Government or its agencies at March 31, 2017.

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Non-Performing Assets

Non-performing assets include primarily past-due loans that are no longer accruing interest, renegotiated loans, and real estate property acquired through foreclosure. A summary, including certain credit quality metrics, is presented in Table 20.

On June 30, 2015, the shared-loss arrangement under the commercial loss share agreement with the FDIC related to the loans acquired from Westernbank as part of the FDIC assisted transaction in 2010 expired. Loans and OREO’s that remain covered under the terms of the single-family loss share agreement continue to be presented as covered assets in the accompanying tables and credit metrics as of March 31, 2017.

Because of the application of ASC Subtopic 310-30 to the Westernbank acquired loans and the loss protection provided by the FDIC which limits the risks on the covered loans, the Corporation has determined to provide certain quality metrics in this MD&A that exclude such covered loans to facilitate the comparison between loan portfolios and across periods. The Corporation believes the inclusion of these loans in certain asset quality ratios in the numerator or denominator (or both) would result in a distortion to these ratios. In addition, because charge-offs related to the acquired loans are recorded against the non-accretable balance, the net charge-off ratio including the acquired loans is lower for the single-family loan portfolios which includes covered loans. The inclusion of these loans in the asset quality ratios could result in a lack of comparability across periods, and could negatively impact comparability with other portfolios that were not impacted by acquisition accounting. The Corporation believes that the presentation of asset quality measures, excluding covered loans and related amounts from both the numerator and denominator, provides a better perspective into underlying trends related to the quality of its loan portfolio.

The Corporation continued to experience stable credit trends despite challenging economic conditions in Puerto Rico. The shift in the composition and the risk profile of the credit portfolios over the last few years has better positioned the Corporation to operate in the Island’s environment. The Corporation continues to closely monitor changes in credit quality trends and is focused on taking measures to minimize risks. The U.S. operation continued to reflect positive results with strong growth and favorable credit quality metrics.

Non-performing assets, excluding covered loans and OREO, increased by $23 million when compared with December 31, 2016, mostly related to higher commercial NPLs of $16 million due to the addition of a single $25 million relationship.

At March 31, 2017, non-performing loans secured by real estate held-in-portfolio, excluding covered loans, amounted to $468 million in the Puerto Rico operations and $23 million in the U.S. operations. These figures compare to $467 million in the Puerto Rico operations and $21 million in the U.S. operations at December 31, 2016. In addition to the non-performing loans included in Table 20 at March 31, 2017 and December 31, 2016, there were $169 million of non-covered performing loans, mostly commercial loans, which in management’s opinion, are currently subject to potential future classification as non-performing and are considered impaired.

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Table 20 - Non-Performing Assets


	March 31, 2017										December 31, 2016
(Dollars in thousands)	BPPR		BPNA		Popular, Inc.			As a % of loans HIP by category [4]			BPPR		BPNA		Popular, Inc.			As a % of loans HIP by category [4]
Commercial	$	175,477	$	3,764	$	179,241			1.7	%	$	159,655	$	3,693	$	163,348			1.5	%
Legacy ^[1]		—		3,335		3,335			8.2			—		3,337		3,337			7.4
Leasing		2,444		—		2,444			0.3			3,062		—		3,062			0.4
Mortgage		319,450		11,889		331,339			5.0			318,194		11,713		329,907			4.9
Consumer		51,014		8,240		59,254			1.6			51,597		6,664		58,261			1.6

Total non-performing loans held-in- portfolio, excluding covered loans		548,385		27,228		575,613			2.5	%		532,508		25,407		557,915			2.5	%
Non-performing loans held-for-sale ^[2]		—		—		—						—		—		—
Other real estate owned (“OREO”), excluding covered OREO		183,582		2,254		185,836						177,412		3,033		180,445

Total non-performing assets, excluding covered assets	$	731,967	$	29,482	$	761,449					$	709,920	$	28,440	$	738,360
Covered loans and OREO ^[3]		33,866		—		33,866						36,044		—		36,044

Total non-performing assets	$	765,833	$	29,482	$	795,315					$	745,964	$	28,440	$	774,404

Accruing loans past due 90 days or more ^[5] [6]	$	408,346	$	—	$	408,346					$	426,652	$	—	$	426,652

Ratios excluding covered loans: ^[7]
Non-performing loans held-in- portfolio to loans held-in-portfolio		3.23		0.47		2.53	%					3.10		0.45		2.45	%
Allowance for loan losses to loans held-in-portfolio		2.75		0.87		2.27						2.73		0.75		2.24
Allowance for loan losses to non-performing loans, excluding held-for-sale		85.07		184.40		89.77						87.88		166.56		91.47

Ratios including covered loans:
Non-performing assets to total assets		2.46		0.32		1.98	%					2.51		0.32		2.00	%
Non-performing loans held-in- portfolio to loans held-in-portfolio		3.15		0.47		2.49						3.02		0.45		2.41
Allowance for loan losses to loans held-in-portfolio		2.82		0.87		2.34						2.81		0.75		2.32
Allowance for loan losses to non-performing loans, excluding held-for-sale		89.49		184.40		93.95						92.90		166.56		96.23

HIP = “held-in-portfolio”

[1]	The legacy portfolio is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years at the BPNA segment.

[2]	There were no non-performing loans held-for-sale s as of March 31, 2017 and December 31, 2016.

[3]

The amount consists of $4 million in non-performing covered loans accounted for under ASC Subtopic 310-20 and $30 million in covered OREO as of March 31, 2017 (December 31, 2016 - $4 million and $32 million, respectively). It excludes covered loans accounted for under ASC Subtopic 310-30 as they are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analyses.

[4]	Loans held-in-portfolio used in the computation exclude $552 million in covered loans at March 31, 2017 (December 31, 2016 - $573 million).

[5]

The carrying value of loans accounted for under ASC Sub-topic 310-30 that are contractually 90 days or more past due was $254 million at March 31, 2017 (December 31, 2016 - $282 million). This amount is excluded from the above table as the loans’ accretable yield interest recognition is independent from the underlying contractual loan delinquency status.

[6]

It is the Corporation’s policy to report delinquent residential mortgage loans insured by FHA or guaranteed by the VA as accruing loans past due 90 days or more as opposed to non-performing since the principal repayment is insured. These balances include $173 million of residential mortgage loans insured by FHA or guaranteed by the VA that are no longer accruing interest as of March 31, 2017 (December 31, 2016 - $181 million). Furthermore, the Corporation has approximately $59 million in reverse mortgage loans which are guaranteed by FHA, but which are currently not accruing interest. Due to the guaranteed nature of the loans, it is the Corporation’s policy to exclude these balances from non-performing assets (December 31, 2016 - $68 million).

[7]

These asset quality ratios have been adjusted to remove the impact of covered loans and covered foreclosed property. Appropriate adjustments to the numerator and denominator have been reflected in the calculation of these ratios. Management believes the inclusion of acquired loans in certain asset quality ratios that include non-performing assets, past due loans or net charge-offs in the numerator and denominator results in distortions of these ratios and they may not be comparable to other periods presented or to other portfolios that were not impacted by purchase accounting.

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Accruing loans past due 90 days or more are composed primarily of credit cards, residential mortgage loans insured by FHA / VA, and delinquent mortgage loans included in the Corporation’s financial statements pursuant to GNMA’s buy-back option program. Servicers of loans underlying GNMA mortgage-backed securities must report as their own assets the defaulted loans that they have the option to purchase, even when they elect not to exercise that option. Also, accruing loans past due 90 days or more include residential conventional loans purchased from other financial institutions that, although delinquent, the Corporation has received timely payment from the sellers / servicers, and, in some instances, have partial guarantees under recourse agreements.

The Corporation’s commercial loan portfolio secured by real estate (“CRE”), excluding covered loans, amounted to $7.2 billion, of which $2.0 billion was secured with owner occupied properties at March 31, 2017 and December 31, 2016. CRE non-performing loans, excluding covered loans, amounted to $131 million at March 31, 2017, compared with $130 million at December 31, 2016. The CRE non-performing loans ratios for the BPPR and BPNA segments were 2.93% and 0.09%, respectively, at March 31, 2017, compared with 2.83% and 0.07%, respectively, at December 31, 2016.

For the quarter ended March 31, 2017, total non-performing loan inflows, excluding consumer loans, decreased by $2 million, or 2%, when compared to the inflows for the same quarter in 2016. Inflows of non-performing loans held-in-portfolio at the BPPR segment increased by $15 million, or 15%, compared to the inflows for the first quarter of 2016, mostly related to higher commercial and mortgage inflows by $12 million and $3 million, respectively. Inflows of non-performing loans held-in-portfolio at the BPNA segment decreased by $17 million, or 74%, from the same quarter in 2016, mostly driven by lower commercial inflows of $14 million.

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Table 21 - Activity in Non-Performing Loans Held-in-Portfolio (Excluding Consumer and Covered Loans)


	For the quarter ended March 31, 2017
(Dollars in thousands)	BPPR			BPNA			Popular, Inc.
Beginning balance	$	477,849		$	18,743		$	496,592
Plus:
New non-performing loans		115,749			6,108			121,857
Advances on existing non-performing loans		—			47			47
Less:
Non-performing loans transferred to OREO		(14,766	)		(46	)		(14,812	)
Non-performing loans charged-off		(14,581	)		(117	)		(14,698	)

Loans returned to accrual status / loan collections		(69,324	)		(5,747	)		(75,071	)

Ending balance NPLs	$	494,927		$	18,988		$	513,915

Table 22 - Activity in Non-Performing Loans Held-in-Portfolio (Excluding Consumer and Covered Loans)


	For the quarter ended March 31, 2016
(Dollars in thousands)	BPPR			BPNA			Popular, Inc.
Beginning balance	$	519,385		$	21,101		$	540,486

Plus:
New non-performing loans		100,543			23,259			123,802
Advances on existing non-performing loans		—			3			3
Less:
Non-performing loans transferred to OREO		(10,633	)		—			(10,633	)
Non-performing loans charged-off		(15,948	)		(657	)		(16,605	)

Loans returned to accrual status / loan collections		(84,600	)		(11,928	)		(96,528	)

Ending balance NPLs	$	508,747		$	31,778		$	540,525

Table 23 - Activity in Non-Performing Commercial Loans Held-In-Portfolio (Excluding Covered Loans)


	For the quarter ended March 31, 2017
(In thousands)	BPPR			BPNA			Popular, Inc.
Beginning Balance - NPLs	$	159,655		$	3,693		$	163,348
Plus:
New non-performing loans		33,600			1,355			34,955
Less:
Non-performing loans transferred to OREO		(3,510	)		—			(3,510	)
Non-performing loans charged-off		(5,153	)		(46	)		(5,199	)
Loans returned to accrual status / loan collections		(9,115	)		(1,238	)		(10,353	)

Ending balance - NPLs	$	175,477		$	3,764		$	179,241

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Table 24 - Activity in Non-Performing Commercial Loans Held-In-Portfolio (Excluding Covered Loans)


	For the quarter ended March 31, 2016
(In thousands)	BPPR			BPNA			Popular, Inc.
Beginning Balance - NPLs	$	177,902		$	3,914		$	181,816
Plus:
New non-performing loans		21,657			15,064			36,721
Advances on existing non-performing loans		—			1			1
Less:
Non-performing loans transferred to OREO		(1,103	)		—			(1,103	)
Non-performing loans charged-off		(4,949	)		(381	)		(5,330	)
Loans returned to accrual status / loan collections		(10,868	)		(3,606	)		(14,474	)

Ending balance - NPLs	$	182,639		$	14,992		$	197,631

Table 25 - Activity in Non-Performing Construction Loans Held-In-Portfolio (Excluding Covered Loans)


	For the quarter ended March 31, 2016 ⁽¹⁾
(In thousands)	BPPR			BPNA		Popular, Inc.
Beginning Balance - NPLs	$	3,550		$	—	$	3,550
Plus:
New non-performing loans		207			671		878
Less:
Non-performing loans transferred to OREO		(304	)		—		(304	)
Non-performing loans charged-off		(110	)		—		(110	)
Loans returned to accrual status / loan collections		(73	)		—		(73	)

Ending balance - NPLs	$	3,270		$	671	$	3,941

(1)	There were no non-performing construction loans at March 31, 2017.

Table 26 - Activity in Non-Performing Mortgage Loans Held-in-Portfolio (Excluding Covered Loans)


	For the quarter ended March 31, 2017
(Dollars in thousands)	BPPR			BPNA			Popular, Inc.
Beginning balance - NPLs	$	318,194		$	11,713		$	329,907
Plus:
New non-performing loans		82,149			4,753			86,902
Less:
Non-performing loans transferred to OREO		(11,256	)		(46	)		(11,302	)
Non-performing loans charged-off		(9,428	)		(69	)		(9,497	)
Loans returned to accrual status / loan collections		(60,209	)		(4,462	)		(64,671	)

Ending balance - NPLs	$	319,450		$	11,889		$	331,339

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Table 27 - Activity in Non-Performing Mortgage Loans Held-in-Portfolio (Excluding Covered Loans)


	For the quarter ended March 31, 2016
(Dollars in thousands)	BPPR			BPNA			Popular, Inc.
Beginning balance - NPLs	$	337,933		$	13,538		$	351,471
Plus:
New non-performing loans		78,679			6,920			85,599
Less:
Non-performing loans transferred to OREO		(9,226	)		—			(9,226	)
Non-performing loans charged-off		(10,889	)		(276	)		(11,165	)
Loans returned to accrual status / loan collections		(73,659	)		(8,113	)		(81,772	)

Ending balance - NPLs	$	322,838		$	12,069		$	334,907

Allowance for Loan Losses

Non-Covered Loan Portfolio

The allowance for loan losses, which represents management’s estimate of credit losses inherent in the loan portfolio, is maintained at a sufficient level to provide for estimated credit losses on individually evaluated loans as well as estimated credit losses inherent in the remainder of the loan portfolio. The Corporation’s management evaluates the adequacy of the allowance for loan losses on a quarterly basis. In this evaluation, management considers current economic conditions and the resulting impact on Popular Inc.’s loan portfolio, the composition of the portfolio by loan type and risk characteristics, historical loss experience, results of periodic credit reviews of individual loans, regulatory requirements and loan impairment measurement, among other factors.

The Corporation must rely on estimates and exercise judgment regarding matters where the ultimate outcome is unknown, such as economic developments affecting specific customers, industries or markets. Other factors that can affect management’s estimates are the years of historical data when estimating losses, changes in underwriting standards, financial accounting standards and loan impairment measurements, among others. Changes in the financial condition of individual borrowers, in economic conditions, in historical loss experience and in the condition of the various markets in which collateral may be sold may all affect the required level of the allowance for loan losses. Consequently, the business financial condition, liquidity, capital and results of operations could also be affected. Refer to Note 2 “Summary of Significant Accounting Policies” to the Consolidated Financial Statements in the 2016 Form 10-K for a description of the Corporation’s allowance for loans losses methodology.

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Refer to the following table for a summary of the activity in the allowance for loan losses and selected loan losses statistics for the quarters ended March 31, 2017 and 2016.

Table 28 - Allowance for Loan Losses and Selected Loan Losses Statistics - Quarterly Activity


	Quarters ended March 31,
	2017		2017			2017		2016		2016			2016
(Dollars in thousands)	Non-covered loans		Covered loans			Total		Non-covered loans		Covered loans			Total
Balance at beginning of period	$	510,301	$	30,350		$	540,651	$	502,935	$	34,176		$	537,111
Provision (reversal) for loan losses		42,057		(1,359	)		40,698		47,940		(3,105	)		44,835

		552,358		28,991			581,349		550,875		31,071			581,946

Charged-offs:
BPPR
Commercial		11,071		—			11,071		8,968		—			8,968
Construction		3,587		—			3,587		544		—			544
Leases		1,341		—			1,341		2,127		—			2,127
Mortgage		14,983		1,231			16,214		15,972		1,221			17,193
Consumer		21,812		93			21,905		27,379		33			27,412

Total BPPR charged-offs		52,794		1,324			54,118		54,990		1,254			56,244

BPNA
Commercial		70		—			70		495		—			495
Legacy ^[1]		41		—			41		109		—			109
Mortgage		106		—			106		441		—			441
Consumer		4,733		—			4,733		2,648		—			2,648

Total BPNA charged-offs		4,950		—			4,950		3,693		—			3,693

Popular, Inc.
Commercial		11,141		—			11,141		9,463		—			9,463
Construction		3,587		—			3,587		544		—			544
Leases		1,341		—			1,341		2,127		—			2,127
Legacy		41		—			41		109		—			109
Mortgage		15,089		1,231			16,320		16,413		1,221			17,634
Consumer		26,545		93			26,638		30,027		33			30,060

Total charge-offs		57,744		1,324			59,068		58,683		1,254			59,937

Recoveries:
BPPR
Commercial		8,433		—			8,433		6,264		—			6,264
Construction		3,731		—			3,731		233		—			233
Leases		528		—			528		489		—			489
Mortgage		1,428		103			1,531		1,276		225			1,501
Consumer		5,729		1			5,730		6,081		3			6,084

Total BPPR recoveries		19,849		104			19,953		14,343		228			14,571

BPNA
Commercial		533		—			533		290		—			290
Legacy ^[1]		529		—			529		356		—			356
Mortgage		210		—			210		211		—			211
Consumer		990		—			990		1,035		—			1,035

Total BPNA recoveries		2,262		—			2,262		1,892		—			1,892

Popular, Inc.
Commercial		8,966		—			8,966		6,554		—			6,554
Construction		3,731		—			3,731		233		—			233
Leases		528		—			528		489		—			489
Legacy		529		—			529		356		—			356
Mortgage		1,638		103			1,741		1,487		225			1,712
Consumer		6,719		1			6,720		7,116		3			7,119

Total recoveries		22,111		104			22,215		16,235		228			16,463

147


Net loans charged-offs (recovered):
BPPR
Commercial		2,638			—		2,638			2,704			—		2,704
Construction		(144	)		—		(144	)		311			—		311
Leases		813			—		813			1,638			—		1,638
Mortgage		13,555			1,128		14,683			14,696			996		15,692
Consumer		16,083			92		16,175			21,298			30		21,328

Total BPPR net loans charged-offs (recovered)		32,945			1,220		34,165			40,647			1,026		41,673

BPNA
Commercial		(463	)		—		(463	)		205			—		205
Legacy ^[1]		(488	)		—		(488	)		(247	)		—		(247	)
Mortgage		(104	)		—		(104	)		230			—		230
Consumer		3,743			—		3,743			1,613			—		1,613

Total BPNA net loans charged-offs (recovered)		2,688			—		2,688			1,801			—		1,801

Popular, Inc.
Commercial		2,175			—		2,175			2,909			—		2,909
Construction		(144	)		—		(144	)		311			—		311
Leases		813			—		813			1,638			—		1,638
Legacy		(488	)		—		(488	)		(247	)		—		(247	)
Mortgage		13,451			1,128		14,579			14,926			996		15,922
Consumer		19,826			92		19,918			22,911			30		22,941

Total net loans charged-offs (recovered)		35,633			1,220		36,853			42,448			1,026		43,474

Balance at end of period	$	516,725		$	27,771	$	544,496		$	508,427		$	30,045	$	538,472

Specific ALLL	$	118,072		$	—	$	118,072		$	124,037		$	—	$	124,037

General ALLL	$	398,653		$	27,771	$	426,424		$	384,390		$	30,045	$	414,435

Ratios:

Annualized net charge-offs to average loans held-in-portfolio		0.63	%				0.63	%		0.76	%				0.76	%
Provision for loan losses to net charge-offs		1.18	x				1.10	x		1.13	x				1.03	x

[1]	The legacy portfolio is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years at the BPNA segment.

The following table presents annualized net charge-offs to average loans held-in-portfolio (“HIP”) for the non-covered portfolio by loan category for the quarters ended March 31, 2017 and 2016.

148

Table 29 - Annualized Net Charge-offs (Recoveries) to Average Loans Held-in-Portfolio (Non-Covered Loans)


	Quarter ended March 31, 2017									Quarter ended March 31, 2016
	BPPR			BPNA			Popular, Inc.			BPPR			BPNA			Popular, Inc.
Commercial		0.15	%		(0.05	)%		0.08	%		0.15	%		0.03	%		0.11	%
Construction		(0.65	)		—			(0.07	)		1.13			—			0.18
Leases		0.46			—			0.46			1.04			—			1.04
Legacy		—			(4.48	)		(4.48	)		—			(1.57	)		(1.57	)
Mortgage		0.93			(0.05	)		0.81			0.98			0.10			0.87
Consumer		1.99			3.11			2.13			2.57			1.28			2.40

Total annualized net charge-offs to average loans held-in-portfolio		0.77	%		0.19	%		0.63	%		0.93	%		0.15	%		0.76	%

Net charge-offs, excluding covered loans, for the quarter ended March 31, 2017, decreased by $6.8 million, when compared to the quarter ended March 31, 2016.

149

Table 30 - Composition of ALLL


March 31, 2017
(Dollars in thousands)	Commercial			Construction			Legacy ^[2]			Leasing			Mortgage			Consumer			Total ^[3]
Specific ALLL	$	51,276		$	—		$	—		$	522		$	43,264		$	23,010		$	118,072
Impaired loans ^[1]	$	348,823		$	—		$	—		$	1,803		$	510,568		$	109,016		$	970,210

Specific ALLL to impaired loans ^[1]		14.70	%		—	%		—	%		28.95	%		8.47	%		21.11	%		12.17	%

General ALLL	$	157,408		$	9,997		$	1,166		$	7,375		$	105,955		$	116,752		$	398,653
Loans held-in-portfolio, excluding impaired loans ^[1]	$	10,462,877		$	831,305		$	40,688		$	717,840		$	6,117,419		$	3,594,382		$	21,764,511
General ALLL to loans held-in-portfolio, excluding impaired loans ^[1]		1.50	%		1.20	%		2.87	%		1.03	%		1.73	%		3.25	%		1.83	%

Total ALLL	$	208,684		$	9,997		$	1,166		$	7,897		$	149,219		$	139,762		$	516,725
Total non-covered loans held-in-portfolio ^[1]	$	10,811,700		$	831,305		$	40,688		$	719,643		$	6,627,987		$	3,703,398		$	22,734,721
ALLL to loans held-in-portfolio ^[1]		1.93	%		1.20	%		2.87	%		1.10	%		2.25	%		3.77	%		2.27	%

[1]	Excludes covered loans acquired on the Westernbank FDIC-assisted transaction.

[2]	The legacy portfolio is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years at the BPNA segment.

[3]	Excludes covered loans acquired on the Westernbank FDIC-assisted transaction. At March 31, 2017, the general allowance on the covered loans amounted to $27.8 million.

Table 31 - Composition of ALLL


December 31, 2016
(Dollars in thousands)	Commercial			Construction			Legacy ^[2]			Leasing			Mortgage			Consumer			Total ^[3]
Specific ALLL	$	42,375		$	—		$	—		$	535		$	44,610		$	23,857		$	111,377
Impaired loans ^[1]	$	338,422		$	—		$	—		$	1,817		$	506,364		$	109,454		$	956,057
Specific ALLL to impaired loans ^[1]		12.52	%		—	%		—	%		29.44	%		8.81	%		21.80	%		11.65	%

General ALLL	$	160,279		$	9,525		$	1,343		$	7,127		$	103,324		$	117,326		$	398,924
Loans held-in-portfolio, excluding impaired loans ^[1]	$	10,460,085		$	776,300		$	45,293		$	701,076		$	6,189,997		$	3,644,939		$	21,817,690
General ALLL to loans held-in-portfolio, excluding impaired loans ^[1]		1.53	%		1.23	%		2.97	%		1.02	%		1.67	%		3.22	%		1.83	%

Total ALLL	$	202,654		$	9,525		$	1,343		$	7,662		$	147,934		$	141,183		$	510,301
Total non-covered loans held-in-portfolio ^[1]	$	10,798,507		$	776,300		$	45,293		$	702,893		$	6,696,361		$	3,754,393		$	22,773,747
ALLL to loans held-in-portfolio ^[1]		1.88	%		1.23	%		2.97	%		1.09	%		2.21	%		3.76	%		2.24	%

[1]	Excludes covered loans acquired on the Westernbank FDIC-assisted transaction.

[2]	The legacy portfolio is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years at the BPNA segment.

[3]	Excludes covered loans acquired on the Westernbank FDIC-assisted transaction. At December 31, 2016, the general allowance on the covered loans amounted to $30.4 million.

Non-covered loans portfolio

At March 31, 2017, the allowance for loan losses, increased by $6 million when compared with December 31, 2016, mostly driven by higher reserves for the U.S. taxi medallion portfolio.

At March 31, 2017, the allowance for loan losses at the BPPR segment remained relatively flat at $467 million, or 2.75% of non-covered loans held-in-portfolio, compared with $468 million, or 2.73% of non-covered loans held-in-portfolio, at December 31, 2016.

150

The ratio of the allowance to non-performing loans held-in-portfolio was 85.07% at March 31, 2017, compared with 87.88% at December 31, 2016.

The allowance for loan losses at the BPNA segment increased to $50 million, or 0.87% of loans held-in-portfolio, compared with $42 million, or 0.75% of loans held-in-portfolio, at December 31, 2016, mainly driven by higher reserves for the U.S. taxi medallion portfolio. Credit trends for the BPNA segment continued strong with minimal non-performing loans and net charge-offs. The ratio of the allowance to non-performing loans held-in-portfolio at the BPNA segment was 184.40% at March 31, 2017, compared with 166.56% at December 31, 2016.

Covered loans portfolio

The Corporation’s allowance for loan losses for the covered loan portfolio acquired in the Westernbank FDIC-assisted transaction amounted to $28 million at March 31, 2017, compared to $30 million at December 31, 2016. This allowance covers the estimated credit loss exposure primarily related to acquired loans accounted for under ASC Subtopic 310-30.

Decreases in expected cash flows after the acquisition date for loans (pools) accounted for under ASC Subtopic 310-30 are recognized by recording an allowance for loan losses in the current period. For purposes of loans accounted for under ASC Subtopic 310-20 and new loans originated as a result of loan commitments assumed, the Corporation’s assessment of the allowance for loan losses is determined in accordance with the accounting guidance of loss contingencies in ASC Subtopic 450-20 (general reserve for inherent losses) and loan impairment guidance in ASC Section 310-10-35 for loans individually evaluated for impairment. Concurrently, the Corporation records an increase in the FDIC loss share asset for the expected reimbursement from the FDIC under the loss sharing agreements.

Troubled debt restructurings

The Corporation’s TDR loans, excluding covered loans, amounted to $1.3 billion at March 31, 2017, increasing by $9 million, or 0.7%, from December 31, 2016. TDRs in accruing status increased by $9 million from December 31, 2016, due to sustained borrower performance, while non-accruing TDRs decreased slightly by $293 thousand.

Refer to Note 8 to the Consolidated Financial Statements for additional information on modifications considered troubled debt restructurings, including certain qualitative and quantitative data about troubled debt restructurings performed in the past twelve months.

The tables that follow present the approximate amount and percentage of non-covered commercial impaired loans for which the Corporation relied on appraisals dated more than one year old for purposes of impairment requirements at March 31, 2017 and December 31, 2016.

151

Table 32 - Non-Covered Impaired Loans with Appraisals Dated 1 year or Older


March 31, 2017
	Total Impaired Loans – Held-in-portfolio (HIP)
(In thousands)	Loan Count		Outstanding Principal Balance		Impaired Loans with Appraisals Over One- Year Old [1]
Commercial		116	$	292,609		22	%

[1]	Based on outstanding balance of total impaired loans.



December 31, 2016
	Total Impaired Loans – Held-in-portfolio (HIP)
(In thousands)	Loan Count		Outstanding Principal Balance		Impaired Loans with Appraisals Over One- Year Old [1]
Commercial		118	$	283,782		8	%

[1]	Based on outstanding balance of total impaired loans.

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.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Quantitative and qualitative disclosures for the current period can be found in the Market Risk section of this report, which includes changes in market risk exposures from disclosures presented in the Corporation’s 2016 Form 10-K.

Item 4.

Controls and Procedures

Disclosure Controls and Procedures

The Corporation’s management, with the participation of the Corporation’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Corporation’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Corporation’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Corporation in the reports that it files or submits under the Exchange Act and such information is accumulated and communicated to management, as appropriate, to allow timely decisions regarding required disclosures.

Internal Control Over Financial Reporting

There have been no changes in the Corporation’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

Part II - Other Information

Item 1.

Legal Proceedings

For a discussion of Legal Proceedings, see Note 21, “Commitments and Contingencies, to the Consolidated Financial Statements.

152

Item 1A.

Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed under “Part I - Item 1A -Risk Factors” in our 2016 Form 10-K. These factors could materially adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report. Also refer to the discussion in “Part I - Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report for additional information that may supplement or update the discussion of risk factors in our 2016 Form 10-K.

There have been no material changes to the risk factors previously disclosed under Item 1A of the Corporation’s 2016 Form 10-K.

The risks described in our 2016 Form 10-K and in this report are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

In April 2004, the Corporation’s shareholders adopted the Popular, Inc. 2004 Omnibus Incentive Plan. The Corporation has to date used shares purchased in the market to make grants under the Plan. During the quarter ended March 31, 2017, the Corporation purchased 64,479 shares in the market to make grants under the Plan. As of March 31, 2017 the maximum number of shares of common stock that may have been granted under this plan was 3,500,000.

On January 23, 2017, the Corporation’s Board of Directors approved a common stock repurchase plan of up to $75 million. During the quarter ended March 31, 2017 the Corporation completed a $75 million privately negotiated accelerated share repurchase transaction. As part of this transaction, the Corporation received 1,847,372 shares at an average repurchase price of $40.60. Such shares are held as treasury stock.

The following table sets forth the details of purchases of Common Stock during the quarter ended March 31, 2017:

Issuer Purchases of Equity Securities


Not in thousands
Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs
January 1- January 31		—		—		—	$	75,000,000
February 1- February 28 [1] [2]		1,417,354	$	40.78		1,352,875		15,000,000
March 1- March 31 [2]		494,497		40.60		494,497		—

Total March 31, 2017		1,911,851	$	40.73		1,847,372		—

[1]

As described above, during March 2017, the Corporation purchased 64,479 shares in the market to make grants under the Popular, Inc. 2004 Omnibus Incentive Plan.

[2]

As described above, during the quarter ended March 31, 2017, the Corporation completed a $75 million accelerated share repurchase transaction, in which it received 1,352,875 shares in February 2017 and 494,497 shares in March 2017, upon settlement.

Item 3.

Defaults upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.

153

Item 6.

Exhibits


Exhibit No.		Exhibit Description

10.1		Form of 2017 Long-Term Incentive Equity Incentive Award and Agreement ⁽¹⁾

12.1		Computation of the ratios of earnings to fixed charges and preferred stock dividends ⁽¹⁾

31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 ⁽¹⁾

31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 ⁽¹⁾

32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ⁽¹⁾

32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ⁽¹⁾

101.INS		XBRL Instance Document ⁽¹⁾

101.SCH		XBRL Taxonomy Extension Schema Document ⁽¹⁾

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document ⁽¹⁾

101.DEF		XBRL Taxonomy Extension Definitions Linkbase Document ⁽¹⁾

101.LAB		XBRL Taxonomy Extension Label Linkbase Document ⁽¹⁾

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document ⁽¹⁾

(1)	Included herewith

154

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	POPULAR, INC.

	(Registrant)

Date: May 10, 2017	By:	/s/ Carlos J. Vázquez
	Carlos J. Vázquez
	Executive Vice President &
	Chief Financial Officer

Date: May 10, 2017	By:	/s/ Jorge J. García
	Jorge J. García
	Senior Vice President & Corporate Comptroller

155

TABLE OF CONTENTS

Note 1 Nature Of Operations Note 2 Basis Of Presentation and Summary Of Significant Accounting Policies Note 3 New Accounting Pronouncements Note 4 - Restrictions on Cash and Due From Banks and Certain Securities Note 5 Investment Securities Available-for-sale Note 7 Loans Note 8 Allowance For Loan Losses Note 9 Fdic Loss-share Asset and True-up Payment Obligation Note 10 Mortgage Banking Activities Note 11 Transfers Of Financial Assets and Mortgage Servicing Assets Note 12 Other Real Estate Owned Note 13 Other Assets Note 14 Goodwill and Other Intangible Assets Note 15 Deposits Note 16 Borrowings Note 17 Offsetting Of Financial Assets and Liabilities Note 18 Stockholders Equity Note 19 Other Comprehensive Loss Note 20 Guarantees Note 21 Commitments and Contingencies Note 22 Non-consolidated Variable Interest Entities Note 23 Related Party Transactions Note 24 Fair Value Measurement Note 25 Fair Value Of Financial Instruments Note 26 Net Income Per Common Share Note 27 Other Service Fees Note 28 Fdic Loss Share (expense) Income Note 29 Pension and Postretirement Benefits Note 30 - Stock-based Compensation Note 31 Income Taxes Note 32 Supplemental Disclosure on The Consolidated Statements Of Cash Flows Note 33 Segment Reporting Note 34 Condensed Consolidating Financial Information Of Guarantor and Issuers Of Registered Guaranteed Securities Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II - Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Mine Safety Disclosures Item 5. Other Information Item 6. Exhibits

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