BPOP 10-Q Quarter ended June 30, 2018

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 June 30, 2018

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:

Large accelerated filer		☒		Accelerated filer		☐
Non-accelerated filer		☐  (Do not check if a smaller reporting company)		Smaller reporting company		☐
				Emerging growth company		☐

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

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

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, 102,318,442 shares outstanding as of August 3, 2018.

POPULAR, INC.

INDEX

		Page
Part I – Financial Information
Item 1. Financial Statements
Unaudited Consolidated Statements of Financial Condition at June  30, 2018 and December 31, 2017			5
Unaudited Consolidated Statements of Operations for the quarters and six months ended June 30, 2018 and 2017			6
Unaudited Consolidated Statements of Comprehensive Income for the quarters and six months ended June 30, 2018 and 2017			7
Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2018 and 2017			8
Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017			9
Notes to Unaudited Consolidated Financial Statements			11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			125
Item 3. Quantitative and Qualitative Disclosures about Market Risk			167
Item 4. Controls and Procedures			167
Part II – Other Information
Item 1. Legal Proceedings			167
Item 1A. Risk Factors			168
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			168
Item 3. Defaults Upon Senior Securities			168
Item 4. Mine Safety Disclosures			168
Item 5. Other Information			168
Item 6. Exhibits			169
Signatures			170

2

Forward-Looking Information

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

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

•

the rate of growth 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 private borrowers that have relationships with the government, and the possibility that these actions may result in credit losses that are higher than currently expected;

•

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

•

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

•

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

•

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

•

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 ability to successfully integrate the auto finance business acquired from Wells Fargo, as well as unexpected costs, including, without limitation, costs due to exposure to any unrecorded liabilities or issues not identified during the due diligence investigation of the business or that are not subject to indemnification or reimbursement, and risks that the business may suffer as a result of the transaction, including due to adverse effects on relationships with customers, employees and service providers;

•

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;

3

•

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, including as a result of Hurricanes Irma and Maria, 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/or juries. Investors should refer to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2017 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 or information which speak as of their respective dates.

4

POPULAR, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(UNAUDITED)

(In thousands, except share information)		June 30, 2018				December 31, 2017
Assets:
Cash and due from banks		$	400,568			$	402,857
Money market investments:
Time deposits with other banks			8,628,442				5,255,119
Total money market investments			8,628,442				5,255,119
Trading account debt securities, at fair value:
Pledged securities with creditors’ right to repledge			610				625
Other trading securities			41,027				33,301
Debt securities available-for-sale, at fair value:
Pledged securities with creditors’ right to repledge			305,934				393,634
Other investment securities available-for-sale			10,236,076				9,783,289
Debt securities held-to-maturity, at amortized cost (fair value 2018 - $107,396; 2017 - $97,501)			104,937				107,019
Equity securities (realizable value 2018 -$163,316); (2017 - $168,417)			159,017				165,103
Loans held-for-sale, at lower of cost or fair value			73,859				132,395
Loans held-in-portfolio:
Loans not covered under loss-sharing agreements with the FDIC			24,752,700				24,423,427
Loans covered under loss-sharing agreements with the FDIC			—				517,274
Less – Unearned income			144,184				130,633
Allowance for loan losses			643,018				623,426
Total loans held-in-portfolio, net			23,965,498				24,186,642
FDIC loss-share asset			—				45,192
Premises and equipment, net			548,432				547,142
Other real estate not covered under loss-sharing agreements with the FDIC			142,063				169,260
Other real estate covered under loss-sharing agreements with the FDIC			—				19,595
Accrued income receivable			165,592				213,844
Mortgage servicing assets, at fair value			164,025				168,031
Other assets			1,940,780				1,991,323
Goodwill			627,294				627,294
Other intangible assets			31,023				35,672
Total assets		$	47,535,177			$	44,277,337
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing		$	9,392,263			$	8,490,945
Interest bearing			29,985,298				26,962,563
Total deposits			39,377,561				35,453,508
Assets sold under agreements to repurchase			306,911				390,921
Other short-term borrowings			1,200				96,208
Notes payable			1,561,663				1,536,356
Other liabilities			998,181				1,696,439
Total liabilities			42,245,516				39,173,432
Commitments and contingencies (Refer to Note 21)
Stockholders’ equity:
Preferred stock, 30,000,000 shares authorized; 2,006,391 shares issued and outstanding			50,160				50,160
Common stock, $0.01 par value; 170,000,000 shares authorized; 104,285,694 shares issued (2017 - 104,238,159) and 102,296,440 shares outstanding (2017 - 102,068,981)			1,043				1,042
Surplus			4,302,946				4,298,503
Retained earnings			1,515,058				1,194,994
Treasury stock - at cost, 1,989,254 shares (2017 - 2,169,178)			(82,754	)			(90,142	)
Accumulated other comprehensive loss, net of tax			(496,792	)			(350,652	)
Total stockholders’ equity			5,289,661				5,103,905
Total liabilities and stockholders’ equity		$	47,535,177			$	44,277,337

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

5

POPULAR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

		Quarters ended June 30,								Six months ended June 30,
(In thousands, except per share information)		2018				2017				2018				2017
Interest income:
Loans		$	386,277			$	367,669			$	759,861			$	730,805
Money market investments			36,392				11,131				58,677				17,704
Investment securities			58,181				49,933				115,390				96,219
Total interest income			480,850				428,733				933,928				844,728
Interest expense:
Deposits			45,228				34,092				83,916				67,849
Short-term borrowings			1,752				1,115				3,765				2,210
Long-term debt			19,734				19,047				39,064				38,092
Total interest expense			66,714				54,254				126,745				108,151
Net interest income			414,136				374,479				807,183				736,577
Provision for loan losses—non-covered loans			60,054				49,965				129,387				92,022
Provision for loan losses—covered loans			—				2,514				1,730				1,155
Net interest income after provision for loan losses			354,082				322,000				676,066				643,400
Service charges on deposit accounts			37,102				41,073				73,557				80,609
Other service fees			62,876				59,168				123,478				115,343
Mortgage banking activities (Refer to Note 10)			10,071				10,741				22,139				22,110
Other-than-temporary impairment losses on debt securities			—				(8,299	)			—				(8,299	)
Net gain (loss), including impairment on equity securities			234				19				(412	)			181
Net profit (loss) on trading account debt securities			21				(655	)			(177	)			(933	)
Adjustments (expense) to indemnity reserves on loans sold			(527	)			(2,930	)			(3,453	)			(4,896	)
FDIC loss-share income (expense) (Refer to Note 28)			102,752				(475	)			94,725				(8,732	)
Other operating income			22,280				18,151				38,449				37,279
Total non-interest income			234,809				116,793				348,306				232,662
Operating expenses:
Personnel costs			124,332				116,948				250,184				240,688
Net occupancy expenses			22,425				22,265				45,227				43,041
Equipment expenses			17,775				16,250				34,981				32,220
Other taxes			10,876				10,740				21,778				21,709
Professional fees			93,903				72,934				176,888				142,184
Communications			5,382				5,899				11,288				11,848
Business promotion			16,778				13,366				28,787				24,942
FDIC deposit insurance			7,004				6,172				13,924				12,665
Other real estate owned (OREO) expenses			6,947				16,670				13,078				29,488
Other operating expenses			29,922				23,247				58,886				54,679
Amortization of intangibles			2,324				2,344				4,649				4,689
Total operating expenses			337,668				306,835				659,670				618,153
Income before income tax			251,223				131,958				364,702				257,909
Income tax (benefit) expense			(28,560	)			35,732				(6,405	)			68,738
Net Income		$	279,783			$	96,226			$	371,107			$	189,171
Net Income Applicable to Common Stock		$	278,852			$	95,295			$	369,245			$	187,309
Net Income per Common Share – Basic		$	2.74			$	0.94			$	3.63			$	1.83
Net Income per Common Share – Diluted		$	2.73			$	0.94			$	3.62			$	1.83
Dividends Declared per Common Share		$	0.25			$	0.25			$	0.50			$	0.50

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

6

POPULAR, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

		Quarters ended, June 30,								Six months ended, June 30,
(In thousands)		2018				2017				2018				2017
Net income		$	279,783			$	96,226			$	371,107			$	189,171
Reclassification to retained earnings due to cumulative effect of accounting change			—				—				(605	)			—
Other comprehensive (loss) income before tax:
Foreign currency translation adjustment			(3,456	)			(1,588	)			(3,363	)			(1,449	)
Amortization of net losses of pension and postretirement benefit plans			5,385				5,606				10,771				11,213
Amortization of prior service credit of pension and postretirement benefit plans			(868	)			(950	)			(1,735	)			(1,900	)
Unrealized holding (losses) gains on debt securities arising during the period			(36,223	)			8,758				(157,412	)			5,732
Other-than-temporary impairment included in net income			—				8,299				—				8,299
Unrealized holding gains on equity securities arising during the period			—				46				—				165
Reclassification adjustment for gains included in net income			—				(19	)			—				(181	)
Unrealized net (losses) gains on cash flow hedges			(270	)			(377	)			955				(1,014	)
Reclassification adjustment for net losses (gains) included in net income			250				1,035				(1,017	)			1,890
Other comprehensive (loss) income before tax			(35,182	)			20,810				(152,406	)			22,755
Income tax benefit (expense)			1,228				(3,841	)			6,266				(5,412	)
Total other comprehensive (loss) income, net of tax			(33,954	)			16,969				(146,140	)			17,343
Comprehensive income, net of tax		$	245,829			$	113,195			$	224,967			$	206,514
Tax effect allocated to each component of other comprehensive (loss) income:
		Quarters ended June 30,								Six months ended, June 30,
(In thousands)		2018				2017				2018				2017
Amortization of net losses of pension and postretirement benefit plans		$	(2,099	)		$	(2,185	)		$	(4,200	)		$	(4,371	)
Amortization of prior service credit of pension and postretirement benefit plans			339				370				677				740
Unrealized holding (losses) gains on debt securities arising during the period			2,980				(205	)			9,765				117
Other-than-temporary impairment included in net income			—				(1,559	)			—				(1,559	)
Unrealized holding gains on equity securities arising during the period			—				(9	)			—				(33	)
Reclassification adjustment for gains included in net income			—				4				—				36
Unrealized net (losses) gains on cash flow hedges			105				147				(373	)			395
Reclassification adjustment for net losses (gains) included in net income			(97	)			(404	)			397				(737	)
Income tax benefit (expense)		$	1,228			$	(3,841	)		$	6,266			$	(5,412	)

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

7

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

(In thousands)		Common stock				Preferred stock				Surplus				Retained earnings				Treasury stock				Accumulated other comprehensive loss				Total
Balance at December 31, 2016		$	1,040			$	50,160			$	4,255,022			$	1,220,307			$	(8,286	)		$	(320,286	)		$	5,197,957
Net income															189,171												189,171
Issuance of stock			1								3,830																3,831
Dividends declared:
Common stock															(51,112	)											(51,112	)
Preferred stock															(1,862	)											(1,862	)
Common stock purchases											4,518								(81,801	)							(77,283	)
Other comprehensive income, net of tax																							17,343				17,343
Balance at June 30, 2017		$	1,041			$	50,160			$	4,263,370			$	1,356,504			$	(90,087	)		$	(302,943	)		$	5,278,045
Balance at December 31, 2017		$	1,042			$	50,160			$	4,298,503			$	1,194,994			$	(90,142	)		$	(350,652	)		$	5,103,905
Cumulative effect of accounting change															1,935												1,935
Net income															371,107												371,107
Issuance of stock			1								1,742																1,743
Dividends declared:
Common stock															(51,116	)											(51,116	)
Preferred stock															(1,862	)											(1,862	)
Common stock purchases																			(2,344	)							(2,344	)
Common stock reissuance											40								1,297								1,337
Stock based compensation											2,661								8,435								11,096
Other comprehensive income, net of tax																							(146,140	)			(146,140	)
Balance at June 30, 2018		$	1,043			$	50,160			$	4,302,946			$	1,515,058			$	(82,754	)		$	(496,792	)		$	5,289,661
Disclosure of changes in number of shares:																						June 30, 2018				June 30, 2017
Preferred Stock:
Balance at beginning and end of period																							2,006,391				2,006,391
Common Stock – Issued:
Balance at beginning of period																							104,238,159				104,058,684
Issuance of stock																							47,535				95,942
Balance at end of period																							104,285,694				104,154,626
Treasury stock																							(1,989,254	)			(2,167,868	)
Common Stock – Outstanding																							102,296,440				101,986,758

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

8

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

		Six months ended June 30,
(In thousands)		2018				2017
Cash flows from operating activities:
Net income		$	371,107			$	189,171
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			131,117				93,177
Amortization of intangibles			4,649				4,689
Depreciation and amortization of premises and equipment			25,575				23,928
Net accretion of discounts and amortization of premiums and deferred fees			(15,246	)			(13,510	)
Share-based compensation			5,445				—
Impairment losses on long-lived assets			272				—
Other-than-temporary impairment on debt securities			—				8,299
Fair value adjustments on mortgage servicing rights			8,929				14,000
FDIC loss share (income) expense			(94,725	)			8,732
Adjustments (expense) to indemnity reserves on loans sold			3,453				4,896
Earnings from investments under the equity method, net of dividends or distributions			(5,400	)			(6,743	)
Deferred income tax (benefit) expense			(141,066	)			52,354
(Gain) loss on:
Disposition of premises and equipment and other productive assets			(680	)			5,517
Sale of loans, including valuation adjustments on loans held-for-sale and mortgage banking activities			(3,602	)			(12,631	)
Sale of foreclosed assets, including write-downs			566				13,603
Acquisitions of loans held-for-sale			(112,687	)			(153,085	)
Proceeds from sale of loans held-for-sale			29,519				58,857
Net originations on loans held-for-sale			(112,975	)			(224,278	)
Net decrease (increase) in:
Trading debt securities			218,904				334,136
Equity securities			(1,124	)			(80	)
Accrued income receivable			48,252				1,939
Other assets			189,540				(6,747	)
Net increase (decrease) in:
Interest payable			50				(189	)
Pension and other postretirement benefits obligation			2,363				883
Other liabilities			(181,094	)			(16,018	)
Total adjustments			35				191,729
Net cash provided by operating activities			371,142				380,900
Cash flows from investing activities:
Net increase in money market investments			(3,371,774	)			(1,332,447	)
Purchases of investment securities:
Available-for-sale			(2,767,257	)			(1,738,915	)
Equity			(11,176	)			(4,900	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale			2,291,230				541,660
Held-to-maturity			3,030				2,860
Proceeds from sale of investment securities:
Equity			18,387				2,541
Net repayments on loans			61,890				5,088
Acquisition of loan portfolios			(326,503	)			(261,987	)
Net payments (to) from FDIC under loss sharing agreements			(25,012	)			(14,819	)
Return of capital from equity method investments			1,519				3,362
Acquisition of premises and equipment			(31,690	)			(29,992	)
Proceeds from insurance claims			720				—
Proceeds from sale of:
Premises and equipment and other productive assets			5,222				5,186
Foreclosed assets			59,497				60,603
Net cash used in investing activities			(4,091,917	)			(2,761,760	)
Cash flows from financing activities:
Net increase (decrease) in:
Deposits			3,921,033				2,625,731
Assets sold under agreements to repurchase			(84,010	)			(73,040	)
Other short-term borrowings			(95,008	)			—
Payments of notes payable			(115,749	)			(35,074	)
Proceeds from issuance of notes payable			140,000				20,000

9

Proceeds from issuance of common stock			8,818				3,831
Dividends paid			(52,617	)			(43,045	)
Net payments for repurchase of common stock			(270	)			(75,666	)
Payments related to tax withholding for share-based compensation			(2,162	)			(1,617	)
Net cash provided by financing activities			3,720,035				2,421,120
Net (decrease) increase in cash and due from banks, and restricted cash			(740	)			40,260
Cash and due from banks, and restricted cash at beginning of period			412,629				374,196
Cash and due from banks, and restricted cash at the end of the period		$	411,889			$	414,456

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

10

Notes to Consolidated Financial

Statements (Unaudited)

Note 1 —		Nature of operations		12
Note 2 —		Basis of presentation and summary of significant accounting policies		13
Note 3 —		New accounting pronouncements		14
Note 4 —		Restrictions on cash and due from banks and certain securities		18
Note 5 —		Debt securities available-for-sale		19
Note 6 —		Debt securities held-to-maturity		23
Note 7 —		Loans		25
Note 8 —		Allowance for loan losses		31
Note 9 —		FDIC loss share asset and true-up payment obligation		49
Note 10 —		Mortgage banking activities		51
Note 11 —		Transfers of financial assets and mortgage servicing assets		52
Note 12 —		Other real estate owned		56
Note 13 —		Other assets		57
Note 14 —		Goodwill and other intangible assets		58
Note 15 —		Deposits		60
Note 16 —		Borrowings		61
Note 17 —		Offsetting of financial assets and liabilities		63
Note 18 —		Stockholders’ equity		65
Note 19 —		Other comprehensive loss		66
Note 20 —		Guarantees		68
Note 21 —		Commitments and contingencies		70
Note 22 —		Non-consolidated variable interest entities		77
Note 23 —		Related party transactions		79
Note 24 —		Fair value measurement		83
Note 25 —		Fair value of financial instruments		90
Note 26 —		Net income per common share		94
Note 27 —		Revenue from contracts with customers		95
Note 28 —		FDIC loss share expense		97
Note 29 —		Pension and postretirement benefits		98
Note 30 —		Stock-based compensation		100
Note 31 —		Income taxes		102
Note 32 —		Supplemental disclosure on the consolidated statements of cash flows		106
Note 33 —		Segment reporting		107
Note 34 —		Subsequent events		112
Note 35 —		Condensed consolidating financial information of guarantor and issuers of registered guaranteed securities		113

11

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 mainland United States and U.S. and British Virgin Islands. In Puerto Rico, the Corporation provides retail, mortgage, and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as investment banking, broker-dealer, auto and equipment leasing and financing, and insurance services through specialized subsidiaries. In the U.S. mainland, the Corporation provides retail, mortgage and commercial banking services through its New York-chartered banking subsidiary, Popular Bank (“PB”), which has branches located in New York, New Jersey and Florida.

Prior to April 9, 2018, PB operated under the legal name of Banco Popular North America and conducted business under the assumed name of Popular Community Bank.

12

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

Basis of Presentation

The consolidated interim financial statements have been prepared without audit. The consolidated statement of financial condition data at December 31, 2017 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 reclassifications have been made to the 2017 Consolidated Financial Statements and notes to the financial statements to conform to the 2018 presentation.

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, 2017, included in the Corporation’s 2017 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.

13

Note 3 – New accounting pronouncements

Recently Adopted Accounting Standards Updates

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 of pension and postretirement benefit plans. 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.

As a result of the adoption of this accounting pronouncement, the Corporation recognized $4.4 million during the six months ended June 30, 2018 (June 30, 2017—$3.7 million) as components of net periodic benefit cost other than service cost in the other operating expenses caption, which would have otherwise previously been recognized as personnel cost. The presentation for prior periods has been adjusted to reflect the new classification. Effective January 1, 2018, these expenses are no longer capitalized as part of loan origination costs.

FASB Accounting Standards Update (“ASU”) 2017-05, Other Income– Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets

The FASB issued ASU 2017-05 in February 2017, which, among other things, clarifies the scope of the derecognition of nonfinancial assets, the definition of in substance financial assets, and impacts the accounting for partial sales of nonfinancial assets by requiring full gain recognition upon the sale.

The adoption of this standard during the first quarter of 2018 did not have a material impact on the Corporation’s financial statements.

FASB Accounting Standards Update (“ASU”) 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business

The FASB issued ASU 2017-01 in January 2017, which revises the definition of a business by providing an initial screen to determine when an integrated set of assets and activities (“set”) is not a business. Also, the amendments, among other things, specify the minimum inputs and processes required for a set to meet the definition of a business when the initial screen is not met and narrow the definition of the term output so that the term is consistent with Topic 606.

The Corporation adopted ASU 2017-01 during the first quarter of 2018. As such, the Corporation will consider this guidance in any business combinations completed after the effective date.

FASB Accounting Standards Update (“ASU”) 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash

The FASB issued ASU 2016-18 in November 2016, which require entities to present the changes in total cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The new guidance also requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet if restricted cash and restricted cash equivalents are presented in a different line item in the balance sheet.

As a result of the adoption of this accounting pronouncement, the Corporation included restricted cash and restricted cash equivalents within money market investments of $11.3 million at June 30, 2018 (June 30, 2017—$8.8 million) in the Consolidated Statements of Cash Flows. In addition, the Corporation presented a reconciliation of the totals in the Consolidated Statements of Cash Flows to the related captions in the Consolidated Statements of Condition in Note 32, Supplemental disclosure on the consolidated statements of cash flows.

14

FASB Accounting Standards Update (“ASU”) 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory

The FASB issued ASU 2016-16 in October 2016, which eliminates the exception for all intra-entity sales of assets other than inventory that requires deferral of the tax effects until the transferred asset is sold to a third party or otherwise recovered through use. The new guidance requires a reporting entity to recognize the tax impact from the sale of the asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer.

As a result of the adoption of this accounting pronouncement during the first quarter of 2018, the Corporation recorded a positive cumulative effect adjustment of $1.3 million to retained earnings to reflect the net tax benefit resulting from intra-entity sales of assets.

FASB Accounting Standards Update (“ASU”) 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments

The FASB issued ASU 2016-15 in August 2016, which addresses specific cash flow issues with the objective of reducing existing diversity in practice, which may lead to a difference in the classification of transactions between operating, financing or investing activities. Among other things, the guidance provides an accounting policy election for classifying distributions received from equity method investees and clarifies the application of the predominance principle.

As a result of the adoption of this accounting pronouncement, the Corporation reclassified from investing to operating activities $0.5 million in the Consolidated Statements of Cash Flows for the six months ended June 30, 2017 as a result of electing the cumulative earnings approach for classifying distributions received from equity investees.

FASB Accounting Standards Updates (“ASUs”), Revenue from Contracts with Customers (Topic 606)

The FASB has issued a series of ASUs which, among other things, clarify the principles for recognizing revenue and develop a common revenue standard. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services, that is, the satisfaction of performance obligations, to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. A five-step process is defined to achieve this core principle. The new guidance also requires disclosures to enable users of financial statements to understand the nature, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

The Corporation adopted this accounting pronouncement during the first quarter of 2018 using the modified retrospective approach. The Corporation elected the practical expedient that permits an entity to expense incremental costs of obtaining contracts, given the amortization periods were one year or less. There were no material changes in the presentation and timing of when revenues are recognized. ASC Topic 606 was applied to contracts that were not completed as of January 1, 2018. There was no impact in the evaluation of these contracts. Refer to additional disclosures on Note 27, Revenue from contracts with customers.

FASB Accounting Standards Update (“ASU”) 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities

The FASB issued ASU 2016-01 in January 2016, which primarily affects the accounting for equity investments and financial liabilities under the fair value option as follows: require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; simplify the impairment assessment of equity investments without readily determinable fair values; require changes in fair value due to instrument-specific credit risk to be presented separately in other comprehensive income for financial liabilities under the fair value option; and clarify that the need for a valuation allowance on a deferred tax asset related to available-for-sale securities should be evaluated in combination with the entity’s other deferred tax assets. In addition, the ASU also impacts the presentation and disclosure requirements of financial instruments.

As a result of the adoption of this accounting pronouncement during the first quarter of 2018, the Corporation aggregated $11 million previously classified as available-for-sale and as trading to those under the other investment securities caption and reclassified under the caption of equity securities. In addition, a positive cumulative effect adjustment of $0.6 million was recognized due to the reclassification of unrealized gains of equity securities available-for-sale, net of tax, from accumulated other comprehensive loss to retained earnings.

The adoption of FASB Accounting Standards Update (“ASU”) 2017-09, Compensation– Stock Compensation (Topic 718): Scope of Modification Accounting, effective during the first quarter of 2018, did not have a significant impact on the Consolidated Financial Statements.

15

Recently Issued Accounting Standards Updates

FASB Accounting Standards Update (“ASU”) 2018-11, Leases (Topic 842): Targeted Improvements

The FASB issued ASU 2018-11 in July 2018, which provides entities with an additional and optional transition method that allows entities to apply the transition provisions of the new leases standard at the adoption date, instead of at the earliest comparative period presented. If elected, comparative periods will continue to be presented in accordance with ASC Topic 840. Also, the amendments provide lessors with a practical expedient, by class of underlying asset, to not separate nonlease components, subject to certain circumstances.

The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

The Corporation will elect this optional transition method to initially apply the new leases standard as of January 1, 2019. On the other hand, the Corporation does not expect to elect the practical expedient provided to lessors.

FASB Accounting Standards Update (“ASU”) 2018-10, Codification Improvements to Topic 842, Leases

The FASB issued ASU 2018-10 in July 2018, which makes various technical corrections to clarify how to apply certain aspects of the new leases standard such as lease reassessment of lease classification, variable lease payments that depend on an index or a rate, lease term and purchase option, certain transition adjustments, among others.

The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

The Corporation does not expect to be materially impacted by these Codification improvements.

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

The FASB issued ASU 2018-09 in July 2018, which makes various codification improvements in the areas of excess tax benefits on share-based compensation awards, income tax accounting for business combinations, derivatives offsetting, liability or equity-classified financial instruments, among others.

The amendments in this Update are effective immediately, except for amendments that require transition guidance, which are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018; and amendments to guidance not yet effective which are effective on the same date as the original Updates.

The Corporation does not expect to be materially impacted by these Codification improvements.

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

The FASB issued ASU 2018-07 in June 2018, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees, although differences remain in the accounting for attribution and a contractual term election for valuing nonemployee equity share options.

The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted.

The Corporation does not expect to be impacted by these amendments since it does not enter into share-based payment transactions for acquiring goods and services from nonemployees.

FASB Accounting Standards Update (“ASU”) 2018-06, Codification Improvements to Topic 942, Financial Services – Depository and Lending

The FASB issued ASU 2018-06 in May 2018, which removes outdated guidance related to the Comptroller of the Currency’s Banking Circular 202, “Accounting for Net Deferred Taxes” in ASC Topic 942.

16

The amendments in this Update were effective upon issuance of the Update. The Corporation was not impacted by this Codification improvement.

FASB Accounting Standards Update (“ASU”) 2018-03, Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities

The FASB issued ASU 2018-03 in February 2018, which clarifies certain aspects of the guidance in ASU 2016-01, principally related to equity securities without a readily determinable fair value.

The amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Early adoption is permitted.

The Corporation does not expect to be significantly impacted by these technical corrections and improvements.

FASB Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842)

The FASB issued ASU 2016-02 in February 2016, which supersedes ASC Topic 840 and sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessors and lessees. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset (“ROU”) and a lease liability for all leases with a term greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases.

The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted.

The ASU is expected to impact the Corporation’s Consolidated Financial Statements since the Corporation has operating and land lease arrangements for which it is the lessee. The Corporation expects to recognize lease liabilities of approximately $0.2 billion, with a corresponding recognition of ROU assets on its operating leases.

For other recently issued Accounting Standards Updates not yet effective, refer to Note 4 to the Consolidated Financial Statements included in the 2017 Form 10-K.

17

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

The Corporation’s banking subsidiaries, BPPR and PB, are required by federal and state regulatory agencies to maintain average reserve balances with the Federal Reserve Bank of New York (the “Fed”) or other banks. Those required average reserve balances amounted to $1.5 billion at June 30, 2018 (December 31, 2017 - $1.4 billion). Cash and due from banks, as well as other highly liquid securities, are used to cover the required average reserve balances.

At June 30, 2018, the Corporation held $43 million in restricted assets in the form of funds deposited in money market accounts, debt securities available for sale and equity securities (December 31, 2017 - $41 million). The amounts held in debt securities available for sale and equity securities 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.

18

Note 5—Debt securities available-for-sale

The following tables present the amortized cost, gross unrealized gains and losses, approximate fair value, weighted average yield and contractual maturities of debt securities available-for-sale at June 30, 2018 and December 31, 2017.

		At June 30, 2018
(In thousands)		Amortized cost				Gross unrealized gains				Gross unrealized losses				Fair value				Weighted average yield
U.S. Treasury securities
Within 1 year		$	1,277,840			$	30			$	4,517			$	1,273,353				1.42	%
After 1 to 5 years			3,372,451				977				58,687				3,314,741				1.93
After 5 to 10 years			394,072				—				5,201				388,871				2.50
Total U.S. Treasury securities			5,044,363				1,007				68,405				4,976,965				1.85
Obligations of U.S. Government sponsored entities
Within 1 year			288,749				10				937				287,822				1.37
After 1 to 5 years			248,546				—				4,492				244,054				1.50
Total obligations of U.S. Government sponsored entities			537,295				10				5,429				531,876				1.43
Obligations of Puerto Rico, States and political subdivisions
After 1 to 5 years			6,796				—				153				6,643				1.76
Total obligations of Puerto Rico, States and political subdivisions			6,796				—				153				6,643				1.76
Collateralized mortgage obligations - federal agencies
After 1 to 5 years			1,075				—				8				1,067				1.93
After 5 to 10 years			124,736				—				6,214				118,522				1.69
After 10 years			721,252				1,389				32,561				690,080				2.09
Total collateralized mortgage obligations - federal agencies			847,063				1,389				38,783				809,669				2.03
Mortgage-backed securities
Within 1 year			962				8				—				970				4.25
After 1 to 5 years			6,768				38				202				6,604				2.70
After 5 to 10 years			333,026				1,558				9,239				325,345				2.24
After 10 years			4,029,804				11,325				157,872				3,883,257				2.43
Total mortgage-backed securities			4,370,560				12,929				167,313				4,216,176				2.42
Other
After 5 to 10 years			677				4				—				681				3.62
Total other			677				4				—				681				3.62
Total debt securities available-for-sale [1]		$	10,806,754			$	15,339			$	280,083			$	10,542,010				2.07	%

[1]	Includes $8.2 billion pledged to secure public and trust deposits, assets sold under agreements to repurchase, credit facilities and loan servicing agreements that the secured parties are not permitted to sell or repledge the collateral, of which $7.5 billion serve as collateral for public funds.

19