Edgar Filing: POPULAR INC

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10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended June 30, 2016

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. x 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). x Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 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 x 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, 103,738,891 shares outstanding as of August 3, 2016.

POPULAR, INC.

INDEX


	Page
Part I – Financial Information

Item 1. Financial Statements

Unaudited Consolidated Statements of Financial Condition at June 30, 2016 and December 31, 2015		5

Unaudited Consolidated Statements of Operations for the quarters and six months ended June 30, 2016 and 2015		6

Unaudited Consolidated Statements of Comprehensive Income (Loss) for the quarters and six months ended June 30, 2016 and 2015		7

Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2016 and 2015		8

Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015		9

Notes to Unaudited Consolidated Financial Statements		10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		135

Item 3. Quantitative and Qualitative Disclosures about Market Risk		196

Item 4. Controls and Procedures		196

Part II – Other Information

Item 1. Legal Proceedings		197

Item 1A. Risk Factors		197

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		197

Item 3. Defaults Upon Senior Securities		198

Item 4. Mine Safety Disclosures		198

Item 5. Other information		198

Item 6. Exhibits		199

Signatures		200

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;

•

changes in interest rates, as well as the magnitude of such changes;

•

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 impact of the Commonwealth of Puerto Rico’s fiscal crisis, and the measures taken and to be taken by the Puerto Rico Government, on the economy and our business, and the ability of the Government to manage this crisis in an orderly manner;

•

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

•

risks related to the Doral Transaction, including (a) our ability to maintain customer relationships and (b) risks associated with the limited amount of diligence able to be conducted by a buyer in an FDIC transaction.

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;

•

risks associated with maintaining customer relationships from our acquisition of certain assets and deposits (other than certain brokered deposits) of Doral Bank from the FDIC as receiver;

•

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;

•

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, 2015 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)


(In thousands, except share information)	June 30, 2016			December 31, 2015
Assets:
Cash and due from banks	$	365,308		$	363,674

Money market investments:
Securities purchased under agreements to resell		86,328			96,338
Time deposits with other banks		2,699,172			2,083,754

Total money market investments		2,785,500			2,180,092

Trading account securities, at fair value:
Pledged securities with creditors’ right to repledge		11,088			19,506
Other trading securities		61,442			52,153
Investment securities available-for-sale, at fair value:
Pledged securities with creditors’ right to repledge		863,594			739,045
Other investment securities available-for-sale		6,379,082			5,323,947
Investment securities held-to-maturity, at amortized cost (fair value 2016 - $81,469; 2015 - $82,889)		99,525			100,903
Other investment securities, at lower of cost or realizable value (realizable value 2016 - $171,569; 2015 - $175,291)		168,563			172,248
Loans held-for-sale, at lower of cost or fair value		122,338			137,000

Loans held-in-portfolio:
Loans not covered under loss-sharing agreements with the FDIC		22,655,877			22,453,813
Loans covered under loss-sharing agreements with the FDIC		607,170			646,115
Less – Unearned income		115,216			107,698
Allowance for loan losses		548,720			537,111

Total loans held-in-portfolio, net		22,599,111			22,455,119

FDIC loss-share asset		214,029			310,221
Premises and equipment, net		535,865			502,611
Other real estate not covered under loss-sharing agreements with the FDIC		177,025			155,231
Other real estate covered under loss-sharing agreements with the FDIC		37,984			36,685
Accrued income receivable		120,979			124,234
Mortgage servicing assets, at fair value		203,577			211,405
Other assets		2,179,060			2,193,162
Goodwill		631,095			626,388
Other intangible assets		50,983			58,109

Total assets	$	37,606,148		$	35,761,733

Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	6,531,108		$	6,401,515
Interest bearing		22,206,748			20,808,208

Total deposits		28,737,856			27,209,723

Federal funds purchased and assets sold under agreements to repurchase		821,604			762,145
Other short-term borrowings		31,200			1,200
Notes payable		1,575,948			1,662,508
Other liabilities		1,077,894			1,019,018
Liabilities from discontinued operations (Refer to Note 4)		1,815			1,815

Total liabilities		32,246,317			30,656,409

Commitments and contingencies (Refer to Note 23)
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;
103,952,715 shares issued (2015 - 103,816,185) and 103,703,041 shares outstanding (2015 - 103,618,976)		1,039			1,038
Surplus		4,232,835			4,229,156
Retained earnings		1,228,979			1,087,957
Treasury stock - at cost, 249,674 shares (2015 - 197,209)		(7,570	)		(6,101	)
Accumulated other comprehensive loss, net of tax		(145,612	)		(256,886	)

Total stockholders’ equity		5,359,831			5,105,324

Total liabilities and stockholders’ equity	$	37,606,148		$	35,761,733

The accompanying notes are an integral part of these consolidated financial statements.

POPULAR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Quarters ended June 30,						Six months ended June 30,
(In thousands, except per share information)	2016			2015			2016			2015
Interest income:
Loans	$	369,721		$	374,133		$	732,918		$	729,764
Money market investments		3,889			1,845			6,752			3,291
Investment securities		36,725			31,297			72,996			61,598
Trading account securities		1,875			3,026			3,564			5,722

Total interest income		412,210			410,301			816,230			800,375

Interest expense:
Deposits		30,599			26,258			60,473			52,122
Short-term borrowings		2,058			1,863			3,919			3,597
Long-term debt		19,002			19,627			38,875			38,908

Total interest expense		51,659			47,748			103,267			94,627

Net interest income		360,551			362,553			712,963			705,748
Provision for loan losses - non-covered loans		39,668			60,468			87,608			90,179
Provision (reversal) for loan losses - covered loans		804			15,766			(2,301	)		26,090

Net interest income after provision for loan losses		320,079			286,319			627,656			589,479

Service charges on deposit accounts		40,296			40,138			80,158			79,155
Other service fees (Refer to Note 29)		56,945			59,421			110,327			113,047
Mortgage banking activities (Refer to Note 12)		16,227			21,325			26,778			34,177
Net gain on sale of investment securities		1,583			5			1,583			5
Other-than-temporary impairment losses on investment securities		(209	)		(14,445	)		(209	)		(14,445	)
Trading account profit (loss)		1,117			(3,108	)		955			(2,694	)
Net gain (loss) on sale of loans, including valuation adjustments on loans held-for-sale		—			681			(304	)		602
Adjustments (expense) to indemnity reserves on loans sold		(5,746	)		419			(9,844	)		(4,107	)
FDIC loss-share (expense) income (Refer to Note 30)		(12,576	)		19,075			(15,722	)		23,214
Other operating income		12,866			17,248			28,411			27,040

Total non-interest income		110,503			140,759			222,133			255,994

Operating expenses:
Personnel costs		116,708			120,977			243,799			237,435
Net occupancy expenses		21,714			23,286			42,144			44,995
Equipment expenses		15,261			15,925			29,809			29,336
Other taxes		10,170			11,113			20,365			19,687
Professional fees		80,625			78,449			156,084			153,977
Communications		6,012			6,153			12,332			12,329
Business promotion		13,705			13,776			24,815			24,589
FDIC deposit insurance		5,362			8,542			12,732			14,940
Other real estate owned (OREO) expenses		12,980			44,816			22,121			67,885
Other operating expenses		23,515			31,082			40,680			48,430
Amortization of intangibles		3,097			2,881			6,211			4,985
Restructuring costs (Refer to Note 4)		—			6,174			—			16,927

Total operating expenses		309,149			363,174			611,092			675,515

Income from continuing operations before income tax		121,433			63,904			238,697			169,958
Income tax expense (benefit)		32,446			(533,533	)		64,711			(500,964	)

Income from continuing operations		88,987			597,437			173,986			670,922
Income from discontinued operations, net of tax (Refer to Note 4)		—			15			—			1,356

Net Income	$	88,987		$	597,452		$	173,986		$	672,278

Net Income Applicable to Common Stock	$	88,056		$	596,521		$	172,124		$	670,417

Net Income per Common Share – Basic
Net income from continuing operations	$	0.85		$	5.80		$	1.67		$	6.51
Net income from discontinued operations		—			—			—			0.01

Net Income per Common Share – Basic	$	0.85		$	5.80		$	1.67		$	6.52

Net Income per Common Share – Diluted
Net income from continuing operations	$	0.85		$	5.79		$	1.67		$	6.49
Net income from discontinued operations		—			—			—			0.01

Net Income per Common Share – Diluted	$	0.85		$	5.79		$	1.67		$	6.50

Dividends Declared per Common Share	$	0.15		$	—		$	0.30		$	—

The accompanying notes are an integral part of these consolidated financial statements.

POPULAR, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)


	Quarters ended,						Six months ended,
	June 30,						June 30,
(In thousands)	2016			2015			2016			2015
Net income	$	88,987		$	597,452		$	173,986		$	672,278

Other comprehensive income (loss) before tax:
Foreign currency translation adjustment		(1,435	)		(1,092	)		(2,140	)		(1,673	)
Amortization of net losses of pension and postretirement benefit plans		5,487			5,025			10,973			10,050
Amortization of prior service cost of pension and postretirement benefit plans		(950	)		(950	)		(1,900	)		(1,900	)
Unrealized holding gains (losses) on investments arising during the period		38,092			(41,191	)		114,328			(5,849	)
Other-than-temporary impairment included in net income		209			14,445			209			14,445
Reclassification adjustment for gains included in net income		—			(5	)		—			(5	)
Unrealized net (losses) gains on cash flow hedges		(1,539	)		1,004			(3,539	)		(1,530	)
Reclassification adjustment for net losses included in net income		1,271			951			2,816			2,309

Other comprehensive income (loss) before tax		41,135			(21,813	)		120,747			15,847
Income tax expense		(4,997	)		(2,818	)		(9,473	)		(5,006	)

Total other comprehensive income (loss) , net of tax		36,138			(24,631	)		111,274			10,841

Comprehensive income, net of tax	$	125,125		$	572,821		$	285,260		$	683,119


Tax effect allocated to each component of other comprehensive income (loss):

	Quarters ended						Six months ended,
	June 30,						June 30,
(In thousands)	2016			2015			2016			2015
Amortization of net losses of pension and postretirement benefit plans	$	(2,140	)	$	(1,960	)	$	(4,280	)	$	(3,920	)
Amortization of prior service cost of pension and postretirement benefit plans		370			371			740			742
Unrealized holding gains (losses) on investments arising during the period		(3,289	)		2,019			(6,174	)		962
Other-than-temporary impairment included in net income		(42	)		(2,486	)		(42	)		(2,486	)
Reclassification adjustment for gains included in net income		—			1			—			1
Unrealized net (losses) gains on cash flow hedges		600			(392	)		1,381			597
Reclassification adjustment for net losses included in net income		(496	)		(371	)		(1,098	)		(902	)

Income tax expense	$	(4,997	)	$	(2,818	)	$	(9,473	)	$	(5,006	)

The accompanying notes are an integral part of the 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, 2014	$	1,036	$	50,160	$	4,196,458		$	253,717		$	(4,117	)	$	(229,872	)	$	4,267,382
Net income									672,278									672,278
Issuance of stock		1				2,536												2,537
Tax windfall benefit on vesting of restricted stock						171												171
Dividends declared:
Preferred stock									(1,861	)								(1,861	)
Common stock purchases												(1,741	)					(1,741	)
Common stock reissuance												46						46
Other comprehensive income, net of tax															10,841			10,841

Balance at June 30, 2015	$	1,037	$	50,160	$	4,199,165		$	924,134		$	(5,812	)	$	(219,031	)	$	4,949,653

Balance at December 31, 2015	$	1,038	$	50,160	$	4,229,156		$	1,087,957		$	(6,101	)	$	(256,886	)	$	5,105,324
Net income									173,986									173,986
Issuance of stock		1				3,708												3,709
Tax shortfall expense on vesting of restricted stock						(29	)											(29	)
Dividends declared:
Common stock									(31,102	)								(31,102	)
Preferred stock									(1,862	)								(1,862	)
Common stock purchases												(1,476	)					(1,476	)
Common stock reissuance												7						7
Other comprehensive income, net of tax															111,274			111,274

Balance at June 30, 2016	$	1,039	$	50,160	$	4,232,835		$	1,228,979		$	(7,570	)	$	(145,612	)	$	5,359,831


														June 30,			June 30,
Disclosure of changes in number of shares:														2016			2015
Preferred Stock:
Balance at beginning and end of period															2,006,391			2,006,391

Common Stock – Issued:
Balance at beginning of period															103,816,185			103,614,553
Issuance of stock															136,530			76,206

Balance at end of the period															103,952,715			103,690,759
Treasury stock															(249,674	)		(187,745	)

Common Stock – Outstanding															103,703,041			103,503,014

The accompanying notes are an integral part of these consolidated financial statements.

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Six months ended June 30,
(In thousands)	2016			2015
Cash flows from operating activities:
Net income	$	173,986		$	672,278

Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		85,307			116,269
Amortization of intangibles		6,211			4,985
Depreciation and amortization of premises and equipment		23,141			23,949
Net accretion of discounts and amortization of premiums and deferred fees		(24,724	)		(42,167	)
Other-than-temporary impairment on investment securities		209			14,445
Fair value adjustments on mortgage servicing rights		12,817			6,846
FDIC loss share expense (income)		15,722			(23,214	)
Adjustments (expense) to indemnity reserves on loans sold		9,844			4,107
Earnings from investments under the equity method		(13,681	)		(9,806	)
Deferred income tax expense (benefit)		49,316			(511,128	)
Loss (gain) on:
Disposition of premises and equipment and other productive assets		2,424			(1,429	)
Sale and valuation adjustments of investment securities		(1,583	)		(5	)
Sale of loans, including valuation adjustments on loans held-for-sale and mortgage banking activities		(15,577	)		(15,034	)
Sale of foreclosed assets, including write-downs		9,571			54,711
Acquisitions of loans held-for-sale		(148,725	)		(249,059	)
Proceeds from sale of loans held-for-sale		43,110			51,062
Net originations on loans held-for-sale		(247,287	)		(379,264	)
Net decrease (increase) in:
Trading securities		393,178			481,271
Accrued income receivable		3,255			(656	)
Other assets		(21,351	)		33,552
Net (decrease) increase in:
Interest payable		(1,208	)		475
Pension and other postretirement benefits obligation		2,300			1,641
Other liabilities		6,310			(41,438	)

Total adjustments		188,579			(479,887	)

Net cash provided by operating activities		362,565			192,391

Cash flows from investing activities:
Net increase in money market investments		(605,407	)		(1,432,552	)
Purchases of investment securities:
Available-for-sale		(1,682,199	)		(985,427	)
Held-to-maturity		—			(250	)
Other		(70,302	)		(12,805	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale		632,284			867,168
Held-to-maturity		2,209			2,389
Other		47,859			31,592
Proceeds from sale of investment securities:
Available-for-sale		—			70,005
Other		27,710			8,399
Net (disbursements) repayments on loans		(61,199	)		374,224
Proceeds from sale of loans		95,940			27,780
Acquisition of loan portfolios		(308,949	)		(140,671	)
Net payments from FDIC under loss sharing agreements		88,588			164,423
Net cash received and acquired from business combination		—			738,296
Acquisition of servicing advances		—			(3,897	)
Cash paid related to business acquisition		—			(17,250	)
Return of capital from equity method investments		324			—
Mortgage servicing rights purchased		—			(2,400	)
Acquisition of premises and equipment		(60,744	)		(30,817	)
Proceeds from sale of:
Premises and equipment and other productive assets		2,839			7,901
Foreclosed assets		28,895			98,287

Net cash used in investing activities		(1,862,152	)		(235,605	)

Cash flows from financing activities:
Net increase (decrease) in:
Deposits		1,530,091			745,787
Federal funds purchased and assets sold under agreements to repurchase		59,460			(150,413	)
Other short-term borrowings		30,000			(48,215	)
Payments of notes payable		(216,501	)		(430,003	)
Proceeds from issuance of notes payable		128,883			103,231
Proceeds from issuance of common stock		3,710			2,536
Dividends paid		(32,953	)		(1,861	)
Net payments for repurchase of common stock		(1,469	)		(1,695	)

Net cash provided by financing activities		1,501,221			219,367

Net increase in cash and due from banks		1,634			176,153
Cash and due from banks at beginning of period		363,674			381,095

Cash and due from banks at the end of the period	$	365,308		$	557,248

The accompanying notes are an integral part of these consolidated financial statements.

During the six months ended June 30, 2016 there have not been any cash flows associated with discontinued operations. The Consolidated Statement of Cash Flows for the six months ended June 30, 2015 includes the cash flows from operating, investing and financing activities associated with discontinued operations.

Notes to Consolidated Financial

Statements (Unaudited)


Note 1 -	Nature of operations	11
Note 2 -	Basis of presentation and summary of significant accounting policies	12
Note 3 -	New accounting pronouncements	13
Note 4 -	Discontinued operations and restructuring plan	16
Note 5 -	Business combination	17
Note 6 -	Restrictions on cash and due from banks and certain securities	19
Note 7 -	Investment securities available-for-sale	20
Note 8 -	Investment securities held-to-maturity	24
Note 9 -	Loans	26
Note 10 -	Allowance for loan losses	36
Note 11 -	FDIC loss share asset and true-up payment obligation	60
Note 12 -	Mortgage banking activities	62
Note 13 -	Transfers of financial assets and mortgage servicing assets	63
Note 14 -	Other real estate owned	67
Note 15 -	Other assets	68
Note 16 -	Goodwill and other intangible assets	69
Note 17 -	Deposits	71
Note 18 -	Borrowings	72
Note 19 -	Offsetting of financial assets and liabilities	74
Note 20 -	Stockholders’ equity	76
Note 21 -	Other comprehensive loss	77
Note 22 -	Guarantees	79
Note 23 -	Commitments and contingencies	81
Note 24 -	Non-consolidated variable interest entities	88
Note 25 -	Related party transactions	92
Note 26 -	Fair value measurement	96
Note 27 -	Fair value of financial instruments	103
Note 28 -	Net income per common share	110
Note 29 -	Other service fees	111
Note 30 -	FDIC loss share (expense) income	112
Note 31 -	Pension and postretirement benefits	113
Note 32 -	Stock-based compensation	114
Note 33 -	Income taxes	117
Note 34 -	Supplemental disclosure on the consolidated statements of cash flows	120
Note 35 -	Segment reporting	121
Note 36 -	Condensed consolidating financial information of guarantor and issuers of registered guaranteed securities	126

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. Refer to Note 4 for discussion of the sales of the California, Illinois and Central Florida regional operations during 2014. Note 35 to the consolidated financial statements presents information about the Corporation’s business segments.

On February 27, 2015, BPPR, in an alliance with other bidders, including BPNA, acquired certain assets and all deposits (other than certain brokered deposits) of former Doral Bank (“Doral”) from the Federal Deposit Insurance Corporation (FDIC), as receiver (the “Doral Bank Transaction”). Under the FDIC’s bidding format, BPPR was the lead bidder and party to the purchase and assumption agreement with the FDIC covering all assets and deposits acquired by it and its alliance co-bidders. BPPR entered into back to back purchase and assumption agreements with the alliance co-bidders for the transfer of certain assets and deposits. BPPR entered into transition service agreements with each of the alliance co-bidders. Refer to Note 5 for further details on the Doral Bank Transaction.

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, 2015 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 2015 consolidated financial statements and notes to the financial statements to conform with the 2016 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, 2015, included in the Corporation’s 2015 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 Issued Accounting Standards Updates

FASB Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

The FASB issued ASU 2016-13 in June 2016, which replaces the incurred loss model with a current expected credit loss (“CECL”) model. The CECL model applies to financial assets subject to credit losses and measured at amortized cost and certain off-balance sheet exposures. Under current U.S. GAAP, an entity reflects credit losses on financial assets measured on an amortized cost basis only when losses are probable or have been incurred, generally considering only past events and current conditions in making these determinations. ASU 2016-13 prospectively replaces this approach with a forward-looking methodology that reflects the expected credit losses over the lives of financial assets, starting when such assets are first acquired. Under the revised methodology, credit losses will be measured based on past events, current conditions and reasonable and supportable forecasts that affect the collectability of financial assets. ASU 2016-13 also revises the approach to recognizing credit losses for available-for-sale securities by replacing the direct write-down approach with the allowance approach and limiting the allowance to the amount at which the security’s fair value is less than the amortized cost. In addition, ASU 2016-13 provides that the initial allowance for credit losses on purchased credit impaired financial assets will be recorded as an increase to the purchase price, with subsequent changes to the allowance recorded as a credit loss expense.

ASU 2016-13 also expands disclosure requirements regarding an entity’s assumptions, models and methods for estimating the allowance for credit losses.

The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted as of January 1, 2019.

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

FASB Accounting Standards Update (“ASU”) 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients

The FASB issued ASU 2016-12 in May 2016. The amendments in this update, among other things, clarify the objective of the collectability criterion, provide guidance on noncash and variable consideration, provide a practical expedient for contract modifications at transition, and clarify the meaning of a completed contract for purposes of transition.

The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017.

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

FASB Accounting Standards Update (“ASU”) 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing

The FASB issued ASU 2016-10 in April 2016 which clarifies two aspects of Topic 606, in particular, the identification of performance obligations. Among other things, an entity is not required to assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer. In addition, in determining whether promises to transfer goods or services are separately identifiable, an entity should determine whether the nature of its promise in the contract is to transfer each of the goods or services or whether the promise is to transfer a combined item (or items) to which the promised goods and/or services are inputs.

The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017.

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

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 of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted.

The Corporation does not anticipate that the adoption of this accounting pronouncement will have a material effect on its consolidated statements of financial condition, results of operations, cash flows or presentation and disclosures.

FASB Accounting Standards Update (“ASU”) 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)

The FASB issued ASU 2016-08 in March 2016, which amends the implementation guidance in ASU 2014-09 by clarifying, among other things, that an entity should determine the nature of the goods or services provided to the customer and whether it controls each specified good or service before it is transferred to the customer, that an entity can be a principal for some goods or services and an agent for others with the same contract, and that an entity is a principal if it controls the goods or services before transferring them to the customer.

The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017.

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

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

The FASB issued ASU 2016-07 in March 2016, which eliminates the requirement to retroactively adopt the equity method of accounting. Therefore, as of the date the investment becomes qualified for equity method accounting, an entity should add the cost of acquiring the additional interest in the investee to the current basis of its previously held interest. For available-for-sale securities, an entity should recognize through earnings the unrealized holding gains/losses in accumulated other comprehensive income/loss as of that date.

The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted.

The Corporation does not anticipate that the adoption of this accounting pronouncement will have a material effect on its consolidated statements of financial condition or results of operations.

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

The FASB issued ASU 2016-06 in March 2016, which clarifies that in assessing whether an embedded contingent put or call option is not clearly and closely related to the debt instrument, which is part of the assessment made to determine whether an embedded

derivative must be bifurcated from the host contract, an entity is required to perform only the four step decision sequence. The four-step decision sequence requires an entity to consider whether (1) the payoff is adjusted based on changes in an index, (2) the payoff is indexed to an underlying other than interest rates or credit risk, (3) the debt involves a substantial premium or discount and (4) the put or call option is contingently exercisable. It does not have to separately assess whether the event that triggers its ability to exercise the contingent option itself is indexed only to interest rates and credit risk.

The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted.

The Corporation does not anticipate that the adoption of this accounting pronouncement will have a material effect on its consolidated statements of financial condition or results of operations.

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

The FASB issued ASU 2016-05 in March 2016, which clarifies that a novation, or a change in the counterparty to the derivative instrument that has been designated as a hedging instrument under Topic 815 does not, in and of itself, require de-designation of that hedging relationship, and therefore discontinuance of the application of hedge accounting, provided that all other hedge accounting criteria continue to be met.

The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted.

The Corporation does not anticipate that the adoption of this accounting pronouncement will have a material effect on its consolidated statements of financial condition or results of operations.

For recently issued Accounting Standards Updates not yet effective, refer to Note 3 to the consolidated financial statements included in the 2015 Form 10-K.

Note 4 – Discontinued operations and restructuring plan

During the year ended December 31, 2014, the Corporation completed the sale of its California, Illinois and Central Florida regional operations and relocated certain back office operations to Puerto Rico and New York.

As defined in ASC 805-10-55, the regional operations sold constituted a business, and for financial reporting purposes, the results of the discontinued operations are presented as “Assets / Liabilities from discontinued operations” in the consolidated statement of condition and “(Loss) income from discontinued operations, net of tax” in the consolidated statement of operations.

As of June 30, 2016 and December 31, 2015, there were no assets held within the discontinued operations and liabilities within discontinued operations amounted to approximately $1.8 million, mainly comprised of the indemnity reserve related to the California regional sale.

There were no activities from the discontinued operations during the six month period ended June 30, 2016. Net income from the discontinued operations amounted to $1.4 million for the six months ended June 30, 2015.

Also, in connection with the sale, the Corporation has undertaken a restructuring plan (the “PCB Restructuring Plan”) which has been completed by December 31, 2015, for which the Corporation incurred restructuring charges of $45.1 million. During the six month period ended June 30, 2015, the Corporation incurred $16.9 million in restructuring costs, mostly comprised of $12.2 million in personnel costs.

The following table presents the activity in the reserve for the restructuring costs associated with the PCB Restructuring Plan:


	Six months ended June 30,
(In thousands)	2016			2015
Beginning balance	$	620		$	13,536
Charges expensed during the period		—			8,312
Payments made during the period		(367	)		(18,759	)

Ending balance	$	253		$	3,089

Note 5 – Business combination

On February 27, 2015, BPPR, in an alliance with co-bidders, including BPNA, acquired certain assets and all deposits (other than certain brokered deposits) of former Doral Bank from the FDIC, as receiver. Under the FDIC’s bidding format, BPPR was the lead bidder and party to the purchase and assumption agreement with the FDIC covering all assets and deposits acquired by it and its alliance co-bidders. BPPR entered into back to back purchase and assumption agreements with the alliance co-bidders for the transfer of certain assets and deposits. BPPR entered into transition service agreements with each of the alliance co-bidders. There is no loss-sharing arrangement with the FDIC on the acquired assets.

The following table presents the fair values of major classes of identifiable assets acquired and liabilities assumed by the Corporation as of February 27, 2015.


(In thousands)	Book value prior to purchase accounting adjustments		Fair value adjustments			Additional consideration^[1]		As recorded by Popular, Inc.
Assets:
Cash and due from banks	$	339,633	$	—		$	—	$	339,633
Investment in available-for-sale securities		172,706		—			—		172,706
Investments in FHLB stock		30,785		—			—		30,785
Loans		1,679,792		(165,925	)		—		1,513,867
Accrued income receivable		7,808		—			—		7,808
Receivable from the FDIC		—		—			480,137		480,137
Core deposit intangible		23,572		(10,762	)		—		12,810
Other assets		67,676		7,569			—		75,245

Total assets	$	2,321,972	$	(169,118	)	$	480,137	$	2,632,991

Liabilities:
Deposits	$	2,193,404	$	9,987		$	—	$	2,203,391
Advances from the Federal Home Loan Bank		542,000		5,187			—		547,187
Other liabilities		50,728		(511	)		—		50,217

Total liabilities	$	2,786,132	$	14,663		$	—	$	2,800,795

Excess of liabilities assumed over assets acquired	$	464,160
Aggregate fair value adjustments			$	(183,781	)

Additional consideration						$	480,137

Goodwill on acquisition								$	167,804

[1]	The additional consideration represents the cash to be received from the FDIC for the difference between the net liabilities assumed and the net premium paid on the transaction.

In accordance with ASC Topic 805, the fair values assigned to the assets acquired and liabilities assumed are subject to refinement up to one year after the closing date of the acquisition as new information relative to closing date fair values become available, and thus the recognized goodwill may increase or decrease. During the second and third quarters of 2015, retrospective adjustments were made to the estimated fair values of certain assets acquired and liabilities assumed as part of the Doral Bank Transaction to reflect new information obtained about facts and circumstances that existed as of the acquisition date. The retrospective adjustments resulted in a decrease of $2.1 million to the initial fair value estimate of the mortgage servicing rights, a decrease in other liabilities assumed of $0.5 million and, an increase of $2.6 million in the receivable from the FDIC related to the acquisition cost of deposits, all of which were adjusted against goodwill.

During the fourth quarter of 2015 the Corporation early adopted ASU 2015-16 “Business Combination”. Accordingly, adjustments to the initial fair value estimates identified during the measurement period were recognized in the reporting period in which the adjustment amounts were determined. Pursuant to ASU 2015-16, adjustments were made effective in the fourth quarter of 2015 to the estimated fair values of assets and liabilities assumed with the Doral Bank Transaction to reflect new information obtained during the measurement period about facts and circumstances that existed as of the acquisition date that, if known, would have affected the acquisition-date fair value measurements.

During the quarter ended March 31, 2016, the Corporation recorded adjustments to its initial fair value estimates in connection with the Doral Bank Transaction. As a result, the discount on the loans increased by $4.7 million with a corresponding increase to goodwill.

The following table presents the principal changes in fair value and the revised amounts recorded during the measurement period.


(In thousands)	February 27, 2015 As recasted^[a]		February 27, 2015 As previously reported^[b]		Change
Assets:
Loans	$	1,513,867	$	1,665,756	$	(151,889	)
Goodwill		167,804		41,633		126,171
Core deposit intangible		12,810		23,572		(10,762	)
Receivable from the FDIC		480,137		441,721		38,416
Other assets		626,177		626,177		—

Total assets	$	2,800,795	$	2,798,859	$	1,936

Liabilities:
Deposits	$	2,203,391	$	2,201,455	$	1,936
Advances from the Federal Home Loan Bank		547,187		547,187		—
Other liabilities		50,217		50,217		—

Total liabilities	$	2,800,795	$	2,798,859	$	1,936

[a]	Amounts reported include retrospective adjustments during the measurement period, in accordance with U.S. GAAP, related to the Doral Bank Transaction.

[b]	Amounts are presented as previously reported as of September 30, 2015.

The impact in the results of operations for the quarter and the six months ended June 30, 2015 as a result of the recasting was an increase in net income of approximately $2.7 million and $3.4 million, respectively, as detailed in the following table:


	Quarter ended June 30, 2015							Six months ended June 30, 2015
(In thousands)	As recasted		As reported		Difference			As recasted		As reported		Difference
Net Interest Income	$	29,629	$	27,164	$	2,465		$	39,935	$	36,932	$	3,003
Non-Interest Income		7,210		7,210		—			11,472		11,472		—
Operating Expenses		26,506		26,775		(269	)		40,903		41,262		(359	)

Income Before Taxes	$	10,333	$	7,599	$	2,734		$	10,504	$	7,142	$	3,362

Note 6 - 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 $ 1.1 billion at June 30, 2016 (December 31, 2015 - $ 1.1 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, 2016, the Corporation held $23 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, 2015 - $44 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 7 – 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 June 30, 2016 and December 31, 2015.


	At June 30, 2016
(In thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value		Weighted average yield
U.S. Treasury securities
Within 1 year	$	45,014	$	90	$	—	$	45,104		0.72	%
After 1 to 5 years		1,557,118		12,141		—		1,569,259		1.05
After 5 to 10 years		9,942		471		—		10,413		1.99

Total U.S. Treasury securities		1,612,074		12,702		—		1,624,776		1.05

Obligations of U.S. Government sponsored entities
Within 1 year		50,045		150		—		50,195		0.90
After 1 to 5 years		716,459		7,026		90		723,395		1.36
After 5 to 10 years		250		1		—		251		5.64

Total obligations of U.S. Government sponsored entities		766,754		7,177		90		773,841		1.33

Obligations of Puerto Rico, States and political subdivisions
After 1 to 5 years		7,150		17		—		7,167		4.27
After 5 to 10 years		5,915		1		1,562		4,354		4.02
After 10 years		18,614		1		4,501		14,114		6.99

Total obligations of Puerto Rico, States and political subdivisions		31,679		19		6,063		25,635		5.82

Collateralized mortgage obligations - federal agencies
Within 1 year		159		—		—		159		0.97
After 1 to 5 years		19,667		972		—		20,639		2.86
After 5 to 10 years		36,988		771		—		37,759		2.86
After 10 years		1,369,388		17,599		6,823		1,380,164		1.98

Total collateralized mortgage obligations - federal agencies		1,426,202		19,342		6,823		1,438,721		2.01

Mortgage-backed securities
Within 1 year		18		—		—		18		4.72
After 1 to 5 years		19,790		872		9		20,653		4.50
After 5 to 10 years		268,493		7,414		184		275,723		2.41
After 10 years		3,002,023		69,496		670		3,070,849		2.63

Total mortgage-backed securities		3,290,324		77,782		863		3,367,243		2.63

Equity securities (without contractual maturity)		1,351		1,169		—		2,520		7.86

Other
After 1 to 5 years		8,725		35		—		8,760		1.73
After 5 to 10 years		1,136		44		—		1,180		3.62

Total other		9,861		79		—		9,940		1.95

Total investment securities available-for-sale^[1]	$	7,138,245	$	118,270	$	13,839	$	7,242,676		2.02	%

[1]	Includes $3.6 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 $2.9 billion serve as collateral for public funds.


	At December 31, 2015
(In thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value		Weighted average yield
U.S. Treasury securities
Within 1 year	$	24,861	$	335	$	—	$	25,196		4.31	%
After 1 to 5 years		1,149,807		365		1,999		1,148,173		1.03
After 5 to 10 years		9,937		22		—		9,959		1.99

Total U.S. Treasury securities		1,184,605		722		1,999		1,183,328		1.11

Obligations of U.S. Government sponsored entities
After 1 to 5 years		919,819		1,337		4,808		916,348		1.33
After 5 to 10 years		250		1		—		251		5.64
After 10 years		23,000		42		—		23,042		3.22

Total obligations of U.S. Government sponsored entities		943,069		1,380		4,808		939,641		1.38

Obligations of Puerto Rico, States and political subdivisions
After 1 to 5 years		7,227		—		199		7,028		3.94
After 5 to 10 years		5,925		—		2,200		3,725		4.02
After 10 years		18,585		—		6,979		11,606		6.99

Total obligations of Puerto Rico, States and political subdivisions		31,737		—		9,378		22,359		5.74

Collateralized mortgage obligations - federal agencies
After 1 to 5 years		21,446		594		37		22,003		2.81
After 5 to 10 years		44,585		733		—		45,318		2.85
After 10 years		1,518,662		8,137		33,283		1,493,516		1.99

Total collateralized mortgage obligations - federal agencies		1,584,693		9,464		33,320		1,560,837		2.02

Mortgage-backed securities
After 1 to 5 years		22,015		987		8		22,994		4.65
After 5 to 10 years		256,097		4,866		1,197		259,766		2.51
After 10 years		2,039,217		34,839		12,620		2,061,436		2.83

Total mortgage-backed securities		2,317,329		40,692		13,825		2,344,196		2.81

Equity securities (without contractual maturity)		1,350		1,053		5		2,398		7.92

Other
After 1 to 5 years		8,911		—		28		8,883		1.71
After 5 to 10 years		1,311		39		—		1,350		3.62

Total other		10,222		39		28		10,233		1.95

Total investment securities available-for-sale^[1]	$	6,073,005	$	53,350	$	63,363	$	6,062,992		2.07	%

[1]	Includes $2.4 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 $1.5 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.

There were no securities sold during the quarter and six months ended June 30, 2016. During the six months ended June 30, 2015, the Corporation sold U.S. agency securities with a carrying amount of $70 million at the BPPR segment, resulting in a realized gain of $5 thousand.

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 June 30, 2016 and December 31, 2015.


	At June 30, 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 U.S. Government sponsored entities	$	24,110	$	63	$	1,301	$	27	$	25,411	$	90
Obligations of Puerto Rico, States and political subdivisions		—		—		16,501		6,063		16,501		6,063
Collateralized mortgage obligations - federal agencies		—		—		405,082		6,823		405,082		6,823
Mortgage-backed securities		114,735		829		9,662		34		124,397		863

Total investment securities available-for-sale in an unrealized loss position	$	138,845	$	892	$	432,546	$	12,947	$	571,391	$	13,839


	At December 31, 2015
	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	$	589,689	$	1,999	$	—	$	—	$	589,689	$	1,999
Obligations of U.S. Government sponsored entities		390,319		2,128		181,744		2,680		572,063		4,808
Obligations of Puerto Rico, States and political subdivisions		884		164		19,490		9,214		20,374		9,378
Collateralized mortgage obligations - federal agencies		331,501		4,446		814,195		28,874		1,145,696		33,320
Mortgage-backed securities		1,641,663		12,992		22,362		833		1,664,025		13,825
Equity securities		45		5		—		—		45		5
Other		8,883		28		—		—		8,883		28

Total investment securities available-for-sale in an unrealized loss position	$	2,962,984	$	21,762	$	1,037,791	$	41,601	$	4,000,775	$	63,363

As of June 30, 2016, the available-for-sale investment portfolio reflects gross unrealized losses of approximately $14 million, driven by U.S. Agency collateralized mortgage obligations and Obligations of the Puerto Rico Government and its political subdivisions. As part of its analysis for all U.S. Agencies’ securities, management considers the U.S. Agency guarantee. The portfolio of obligations of the Puerto Rico Government is mostly comprised of securities with specific sources of income or revenues identified for repayments. The Corporation performs periodic credit quality reviews on these issuers.

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.

During the second quarter of 2016, the Corporation recognized an other-than-temporary impairment charge of $209 thousand on an investment security available-for-sale classified as obligations from the Puerto Rico government and its political subdivisions. At June 30, 2016 this security was rated Caa2 and CC by Moody’s and S&P, respectively. Puerto Rico’s fiscal and economic situation, together with, among other factors, the recent moratorium declared on the payment of principal and interest on obligations for certain Puerto Rico government securities, including those issued or guaranteed by the Commonwealth, led management to conclude that the unrealized losses on this security was other-than-temporary. The Corporation determined that the entire balance of the unrealized loss carried by this security was attributed to estimated credit losses. Accordingly, the other-than-temporary impairment was recognized in its entirety in the accompanying consolidated statement of operations and no amount remained recognized in the accompanying statement of other comprehensive income related to this specific security.

In the second quarter of 2015, the Corporation recognized an other-than-temporary impairment charge of $14.4 million on its portfolio of investment securities available-for-sale classified as obligations from the Puerto Rico government and its political subdivisions. At June 30, 2015 these securities were rated Caa2 and CCC- by Moody’s and S&P, respectively.

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.


	June 30, 2016				December 31, 2015
(In thousands)	Amortized cost		Fair value		Amortized cost		Fair value
FNMA	$	2,820,595	$	2,863,151	$	2,649,860	$	2,633,899
FHLB		286,449		289,572		340,119		338,700
Freddie Mac		1,377,651		1,390,990		1,088,691		1,079,956

Note 8 – 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 June 30, 2016 and December 31, 2015.


	At June 30, 2016
			Gross		Gross				Weighted
	Amortized		unrealized		unrealized		Fair		average
(In thousands)	cost		gains		losses		value		yield
Obligations of Puerto Rico, States and political subdivisions
Within 1 year	$	3,050	$	—	$	227	$	2,823		5.91	%
After 1 to 5 years		14,270		—		5,757		8,513		6.00
After 5 to 10 years		18,930		—		7,561		11,369		6.17
After 10 years		61,194		3,325		7,805		56,714		1.97

Total obligations of Puerto Rico, States and political subdivisions		97,444		3,325		21,350		79,419		3.50

Collateralized mortgage obligations - federal agencies
After 5 to 10 years		81		4		—		85		5.45

Total collateralized mortgage obligations - federal agencies		81		4		—		85		5.45

Other
After 1 to 5 years		2,000		—		35		1,965		1.81

Total other		2,000		—		35		1,965		1.81

Total investment securities held-to-maturity^[1]	$	99,525	$	3,329	$	21,385	$	81,469		3.47	%

[1]	Includes $97.8 million pledged to secure public and trust deposits that the secured parties are not permitted to sell or repledge the collateral.


	At December 31, 2015
			Gross		Gross				Weighted
	Amortized		unrealized		unrealized		Fair		average
(In thousands)	cost		gains		losses		value		yield
Obligations of Puerto Rico, States and political subdivisions
Within 1 year	$	2,920	$	—	$	291	$	2,629		5.90	%
After 1 to 5 years		13,655		—		5,015		8,640		5.98
After 5 to 10 years		20,020		—		8,020		12,000		6.14
After 10 years		62,222		3,604		8,280		57,546		2.08

Total obligations of Puerto Rico, States and political subdivisions		98,817		3,604		21,606		80,815		3.55

Collateralized mortgage obligations - federal agencies
After 5 to 10 years		86		5		—		91		5.45

Total collateralized mortgage obligations - federal agencies		86		5		—		91		5.45

Other
After 1 to 5 years		2,000		—		17		1,983		1.81

Total other		2,000		—		17		1,983		1.81

Total investment securities held-to-maturity^[1]	$	100,903	$	3,609	$	21,623	$	82,889		3.52	%

[1]	Includes $57.2 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 June 30, 2016 and December 31, 2015.


	At June 30, 2016
	Less than 12 months				12 months or more				Total
			Gross				Gross				Gross
	Fair		unrealized		Fair		unrealized		Fair		unrealized
(In thousands)	value		losses		value		losses		value		losses
Obligations of Puerto Rico, States and political subdivisions	$	—	$	—	$	32,650	$	21,350	$	32,650	$	21,350
Other		720		30		995		5		1,715		35

Total investment securities held-to-maturity in an unrealized loss position	$	720	$	30	$	33,645	$	21,355	$	34,365	$	21,385


	At December 31, 2015
	Less than 12 months				12 months or more				Total
			Gross				Gross				Gross
	Fair		unrealized		Fair		unrealized		Fair		unrealized
(In thousands)	value		losses		value		losses		value		losses
Obligations of Puerto Rico, States and political subdivisions	$	—	$	—	$	33,334	$	21,606	$	33,334	$	21,606
Other		1,483		17		—		—		1,483		17

Total investment securities held-to-maturity in an unrealized loss position	$	1,483	$	17	$	33,334	$	21,606	$	34,817	$	21,623

As indicated in Note 7 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 June 30, 2016 are primarily associated with securities issued by municipalities of Puerto Rico and are generally not rated by a credit rating agency. This includes $55 million of securities issued by three municipalities of Puerto Rico that are payable from the real and personal property taxes collected within such municipalities. These bonds have seniority to the payment of operating cost and expenses of the municipality. The portfolio also includes approximately $43 million in securities for which the underlying source of payment is not the central government, but in which it 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 June 30, 2016. 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.

Note 9 – 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 11.

For a summary of the accounting policies related to loans, interest recognition and allowance for loan losses refer to Note 2 - Summary of significant accounting policies, of the 2015 Form 10-K.

During the quarter and six months ended June 30, 2016, the Corporation recorded purchases (including repurchases) of mortgage loans amounting to $118 million and $240 million, respectively; consumer loans of $58 million and $164 million, respectively; and commercial loans amounting to $51 million during the six months ended June 30, 2016. Excluding the impact of the Doral Bank Transaction, during the quarter and six months ended June 30, 2015, the Corporation recorded purchases (including repurchases) of mortgage loans amounting to $213 million and $382 million, respectively.

Excluding the bulk sale of Westernbank loans with a carrying value of approximately $100 million, the Corporation sold commercial and construction loans with a carrying value of approximately $1 million during the six months ended June 30, 2016 (during the quarter and six months ended June 30, 2015 - $8 million and $9 million). The Corporation sold approximately $19 million and $40 million of residential mortgage loans (on a whole loan basis) during the quarter and six months ended June 30, 2016, respectively (June 30, 2015 - $25 million and $65 million, respectively). Also, the Corporation securitized approximately $ 170 million and $ 304 million of mortgage loans into Government National Mortgage Association (“GNMA”) mortgage-backed securities during the quarter and six months ended June 30, 2016, respectively (June 30, 2015 - $ 243 million and $ 400 million, respectively). Furthermore, the Corporation securitized approximately $ 43 million and $ 79 million of mortgage loans into Federal National Mortgage Association (“FNMA”) mortgage-backed securities during the quarter and six months ended June 30, 2016, respectively (June 30, 2015 - $ 70 million and $ 117 million, respectively).

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 June 30, 2016 and December 31, 2015, including loans previously covered by the commercial FDIC loss sharing agreements.


June 30, 2016
Puerto Rico
	Past due										Non-covered
	30-59		60-89		90 days		Total				loans HIP
(In thousands)	days		days		or more		past due		Current		Puerto Rico
Commercial multi-family	$	359	$	63	$	1,004	$	1,426	$	174,085	$	175,511
Commercial real estate non-owner occupied		98,373		6,624		57,017		162,014		2,436,617		2,598,631
Commercial real estate owner occupied		9,570		4,969		122,337		136,876		1,679,956		1,816,832
Commercial and industrial		8,286		2,348		34,944		45,578		2,580,500		2,626,078
Construction		—		—		4,848		4,848		98,794		103,642
Mortgage		292,558		159,972		802,407		1,254,937		4,765,625		6,020,562
Leasing		6,611		1,034		3,019		10,664		653,430		664,094
Consumer:
Credit cards		11,024		8,109		17,225		36,358		1,078,082		1,114,440
Home equity lines of credit		49		206		293		548		8,945		9,493
Personal		13,660		7,510		20,349		41,519		1,146,847		1,188,366
Auto		32,909		6,925		11,117		50,951		778,906		829,857
Other		512		255		18,158		18,925		160,601		179,526

Total	$	473,911	$	198,015	$	1,092,718	$	1,764,644	$	15,562,388	$	17,327,032


June 30, 2016
U.S. mainland
	Past due
	30-59		60-89		90 days		Total				Loans HIP
(In thousands)	days		days		or more		past due		Current		U.S. mainland
Commercial multi-family	$	—	$	—	$	375	$	375	$	888,457	$	888,832
Commercial real estate non-owner occupied		251		375		317		943		1,092,910		1,093,853
Commercial real estate owner occupied		2,072		97		746		2,915		279,637		282,552
Commercial and industrial		1,800		7,786		80,312		89,898		787,628		877,526
Construction		—		—		100		100		613,590		613,690
Mortgage		1,381		5,009		14,390		20,780		822,776		843,556
Legacy		623		176		3,839		4,638		45,071		49,709
Consumer:
Credit cards		19		83		535		637		—		637
Home equity lines of credit		2,684		674		3,861		7,219		272,232		279,451
Personal		1,299		1,098		1,351		3,748		279,788		283,536
Auto		—		—		—		—		15		15
Other		4		—		—		4		268		272

Total	$	10,133	$	15,298	$	105,826	$	131,257	$	5,082,372	$	5,213,629


June 30, 2016
Popular, Inc.
	Past due										Non-covered
	30-59		60-89		90 days		Total				loans HIP
(In thousands)	days		days		or more		past due		Current		Popular, Inc.^[1] [2]
Commercial multi-family	$	359	$	63	$	1,379	$	1,801	$	1,062,542	$	1,064,343
Commercial real estate non-owner occupied		98,624		6,999		57,334		162,957		3,529,527		3,692,484
Commercial real estate owner occupied		11,642		5,066		123,083		139,791		1,959,593		2,099,384
Commercial and industrial		10,086		10,134		115,256		135,476		3,368,128		3,503,604
Construction		—		—		4,948		4,948		712,384		717,332
Mortgage		293,939		164,981		816,797		1,275,717		5,588,401		6,864,118
Leasing		6,611		1,034		3,019		10,664		653,430		664,094
Legacy^[3]		623		176		3,839		4,638		45,071		49,709
Consumer:
Credit cards		11,043		8,192		17,760		36,995		1,078,082		1,115,077
Home equity lines of credit		2,733		880		4,154		7,767		281,177		288,944
Personal		14,959		8,608		21,700		45,267		1,426,635		1,471,902
Auto		32,909		6,925		11,117		50,951		778,921		829,872
Other		516		255		18,158		18,929		160,869		179,798

Total	$	484,044	$	213,313	$	1,198,544	$	1,895,901	$	20,644,760	$	22,540,661

[1]	Non-covered loans held-in-portfolio are net of $115 million in unearned income and exclude $122 million in loans held-for-sale.

[2]

Includes $7.6 billion pledged to secure credit facilities and public funds that the secured parties are not permitted to sell or repledge the collateral, of which $4.7 billion were pledged at the FHLB as collateral for borrowings, $2.4 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.


December 31, 2015
Puerto Rico
	Past due										Non-covered
	30-59		60-89		90 days		Total				loans HIP
(In thousands)	days		days		or more		past due		Current		Puerto Rico
Commercial multi-family	$	459	$	217	$	1,316	$	1,992	$	130,154	$	132,146
Commercial real estate non-owner occupied		166,732		12,520		84,982		264,234		2,404,858		2,669,092
Commercial real estate owner occupied		14,245		5,624		138,778		158,647		1,750,597		1,909,244
Commercial and industrial		6,010		6,059		38,464		50,533		2,607,204		2,657,737
Construction		238		253		13,738		14,229		86,719		100,948
Mortgage		344,858		162,341		863,869		1,371,068		4,756,423		6,127,491
Leasing		7,844		1,630		3,009		12,483		615,167		627,650
Consumer:
Credit cards		11,078		9,414		19,098		39,590		1,088,755		1,128,345
Home equity lines of credit		186		292		394		872		9,816		10,688
Personal		13,756		7,889		22,625		44,270		1,158,565		1,202,835
Auto		33,554		7,500		11,640		52,694		763,256		815,950
Other		1,069		298		19,232		20,599		167,885		188,484

Total	$	600,029	$	214,037	$	1,217,145	$	2,031,211	$	15,539,399	$	17,570,610


December 31, 2015
U.S. mainland
	Past due								Current		Loans HIP U.S. mainland
(In thousands)	30-59 days		60-89 days		90 days or more		Total past due		Current		Loans HIP U.S. mainland
Commercial multi-family	$	33	$	253	$	—	$	286	$	693,647	$	693,933
Commercial real estate non-owner occupied		160		—		253		413		962,610		963,023
Commercial real estate owner occupied		1,490		429		221		2,140		200,204		202,344
Commercial and industrial		13,647		1,526		75,575		90,748		780,896		871,644
Construction		—		—		—		—		580,158		580,158
Mortgage		18,957		3,424		13,538		35,919		872,671		908,590
Legacy		1,160		662		3,649		5,471		58,965		64,436
Consumer:
Credit cards		327		134		437		898		13,037		13,935
Home equity lines of credit		3,149		1,114		4,176		8,439		296,045		304,484
Personal		1,836		690		1,240		3,766		168,860		172,626
Auto		—		—		6		6		22		28
Other		—		10		5		15		289		304

Total	$	40,759	$	8,242	$	99,100	$	148,101	$	4,627,404	$	4,775,505


December 31, 2015
Popular, Inc.
	Past due								Current		Non-covered loans HIP Popular, Inc.^[1] [2]
(In thousands)	30-59 days		60-89 days		90 days or more		Total past due		Current		Non-covered loans HIP Popular, Inc.^[1] [2]
Commercial multi-family	$	492	$	470	$	1,316	$	2,278	$	823,801	$	826,079
Commercial real estate non-owner occupied		166,892		12,520		85,235		264,647		3,367,468		3,632,115
Commercial real estate owner occupied		15,735		6,053		138,999		160,787		1,950,801		2,111,588
Commercial and industrial		19,657		7,585		114,039		141,281		3,388,100		3,529,381
Construction		238		253		13,738		14,229		666,877		681,106
Mortgage		363,815		165,765		877,407		1,406,987		5,629,094		7,036,081
Leasing		7,844		1,630		3,009		12,483		615,167		627,650
Legacy^[3]		1,160		662		3,649		5,471		58,965		64,436
Consumer:
Credit cards		11,405		9,548		19,535		40,488		1,101,792		1,142,280
Home equity lines of credit		3,335		1,406		4,570		9,311		305,861		315,172
Personal		15,592		8,579		23,865		48,036		1,327,425		1,375,461
Auto		33,554		7,500		11,646		52,700		763,278		815,978
Other		1,069		308		19,237		20,614		168,174		188,788

Total	$	640,788	$	222,279	$	1,316,245	$	2,179,312	$	20,166,803	$	22,346,115

[1]	Non-covered loans held-in-portfolio are net of $108 million in unearned income and exclude $137 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 $4.3 billion were pledged at the FHLB as collateral for borrowings, $2.5 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 June 30, 2016 and December 31, 2015. Accruing loans past due 90 days or more consist primarily of credit cards, FHA / 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 June 30, 2016
	Puerto Rico				U.S. mainland				Popular, Inc.
(In thousands)	Non-accrual loans		Accruing loans past-due 90 days or more [1]		Non-accrual loans		Accruing loans past-due 90 days or more [1]		Non-accrual loans		Accruing loans past-due 90 days or more [1]
Commercial multi-family	$	1,004	$	—	$	375	$	—	$	1,379	$	—
Commercial real estate non-owner occupied		25,348		—		317		—		25,665		—
Commercial real estate owner occupied		111,713		—		746		—		112,459		—
Commercial and industrial		34,519		270		1,593		—		36,112		270
Construction		2,423		—		100		—		2,523		—
Mortgage^[3]		323,658		394,936		14,390		—		338,048		394,936
Leasing		3,019		—		—		—		3,019		—
Legacy		—		—		3,839		—		3,839		—
Consumer:
Credit cards		—		17,225		535		—		535		17,225
Home equity lines of credit		—		293		3,861		—		3,861		293
Personal		20,271		13		1,351		—		21,622		13
Auto		11,117		—		—		—		11,117		—
Other		17,560		582		—		—		17,560		582

Total^[2]	$	550,632	$	413,319	$	27,107	$	—	$	577,739	$	413,319

[1]

Non-covered loans of $207 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 $ 40 million in 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 $149 million of residential mortgage loans in Puerto Rico insured by FHA or guaranteed by the VA that are no longer accruing interest as of June 30, 2016. Furthermore, the Corporation has approximately $63 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, 2015
	Puerto Rico				U.S. mainland				Popular, Inc.
(In thousands)	Non-accrual loans		Accruing loans past-due 90 days or more [1]		Non-accrual loans		Accruing loans past-due 90 days or more [1]		Non-accrual loans		Accruing loans past-due 90 days or more [1]
Commercial multi-family	$	1,062	$	—	$	—	$	—	$	1,062	$	—
Commercial real estate non-owner occupied		33,720		—		253		—		33,973		—
Commercial real estate owner occupied		106,449		—		221		—		106,670		—
Commercial and industrial		36,671		555		3,440		—		40,111		555
Construction		3,550		—		—		—		3,550		—
Mortgage^[3]		337,933		426,094		13,538		—		351,471		426,094
Leasing		3,009		—		—		—		3,009		—
Legacy		—		—		3,649		—		3,649		—
Consumer:
Credit cards		—		19,098		437		—		437		19,098
Home equity lines of credit		—		394		4,176		—		4,176		394
Personal		22,102		523		1,240		—		23,342		523
Auto		11,640		—		6		—		11,646		—
Other		18,698		61		5		—		18,703		61

Total^[2]	$	574,834	$	446,725	$	26,965	$	—	$	601,799	$	446,725

[1]

Non-covered loans by $268 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 $ 45 million in 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 $164 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, 2015. Furthermore, the Corporation has approximately $70 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.

The following table provides a breakdown of loans held-for-sale (“LHFS”) at June 30, 2016 and December 31, 2015 by main categories.


(In thousands)	June 30, 2016		December 31, 2015
Commercial	$	39,544	$	45,074
Construction		—		95
Mortgage		82,794		91,831

Total loans held-for-sale	$	122,338	$	137,000

The following table provides a breakdown of loans held-for-sale (“LHFS”) in non-performing status at June 30, 2016 and December 31, 2015 by main categories.


(In thousands)	June 30, 2016		December 31, 2015
Commercial	$	39,544	$	45,074
Construction		—		95

Total	$	39,544	$	45,169

The following table presents loans acquired as part of the Doral Bank Transaction accounted for under ASC subtopic 310-20 as of the February 27, 2015 acquisition date:


(In thousands)
Fair value of loans accounted under ASC Subtopic 310-20	$	1,178,543

Gross contractual amounts receivable (principal and interest)	$	1,666,695

Estimate of contractual cash flows not expected to be collected	$	34,646

Covered loans

The following tables present the composition of loans by past due status at June 30, 2016 and December 31, 2015 for covered loans held-in-portfolio. The information considers covered loans accounted for under ASC Subtopic 310-20 and ASC Subtopic 310-30.


June 30, 2016
	Past due								Current		Covered loans HIP [1]
(In thousands)	30-59 days		60-89 days		90 days or more		Total past due		Current		Covered loans HIP [1]
Mortgage	$	30,197	$	15,806	$	74,541	$	120,544	$	468,712	$	589,256
Consumer		905		396		1,680		2,981		14,933		17,914

Total covered loans	$	31,102	$	16,202	$	76,221	$	123,525	$	483,645	$	607,170

[1]	Includes $361 million pledged to secure credit facilities at the FHLB which are not permitted to sell or repledge the collateral.


December 31, 2015
	Past due								Current		Covered loans HIP [1]
(In thousands)	30-59 days		60-89 days		90 days or more		Total past due		Current		Covered loans HIP [1]
Mortgage	$	31,413	$	16,593	$	83,132	$	131,138	$	495,964	$	627,102
Consumer		1,246		444		1,283		2,973		16,040		19,013

Total covered loans	$	32,659	$	17,037	$	84,415	$	134,111	$	512,004	$	646,115

[1]	Includes $386 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 June 30, 2016 and December 31, 2015.


	June 30, 2016				December 31, 2015
(In thousands)	Non-accrual loans		Accruing loans past due 90 days or more		Non-accrual loans		Accruing loans past due 90 days or more
Mortgage	$	3,335	$	—	$	3,790	$	—
Consumer		147		—		97		—

Total^[1]	$	3,482	$	—	$	3,887	$	—

[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 June 30, 2016 (December 31, 2015 - $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.


	June 30, 2016 [1]									December 31, 2015 [1]
	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	$	1,028,516		$	14,844		$	1,043,360		$	1,114,368		$	35,393		$	1,149,761
Commercial and industrial		80,040			—			80,040			84,765			519			85,284
Construction		4,723			1,723			6,446			8,943			6,027			14,970
Mortgage		621,229			27,181			648,410			667,023			33,090			700,113
Consumer		20,105			1,582			21,687			23,047			1,326			24,373

Carrying amount		1,754,613			45,330			1,799,943			1,898,146			76,355			1,974,501
Allowance for loan losses		(57,895	)		(9,100	)		(66,995	)		(59,753	)		(3,810	)		(63,563	)

Carrying amount, net of allowance	$	1,696,718		$	36,230		$	1,732,948		$	1,838,393		$	72,545		$	1,910,938

[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 $597 million as of June 30, 2016 and $636 million as of December 31, 2015.

The outstanding principal balance of Westernbank loans accounted pursuant to ASC Subtopic 310-30, amounted to $2.2 billion at June 30, 2016 (December 31, 2015 - $2.4 billion). At June 30, 2016, 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 and six months ended June 30, 2016 and 2015, were as follows:


	Activity in the accretable yield
	Westernbank loans ASC 310-30
	For the quarters ended
	June 30, 2016						Total			June 30, 2015						Total
(In thousands)	Non-credit impaired loans			Credit impaired loans			Total			Non-credit impaired loans			Credit impaired loans			Total
Beginning balance	$	1,118,276		$	10,532		$	1,128,808		$	1,254,249		$	4,699		$	1,258,948
Accretion		(45,137	)		(3,339	)		(48,476	)		(50,228	)		(3,766	)		(53,994	)
Change in expected cash flows		(11,168	)		2,516			(8,652	)		35,755			5,215			40,970

Ending balance	$	1,061,971		$	9,709		$	1,071,680		$	1,239,776		$	6,148		$	1,245,924


	Activity in the accretable yield
	Westernbank loans ASC 310-30
	For the six months ended
	June 30, 2016						Total			June 30, 2015						Total
(In thousands)	Non-credit impaired loans			Credit impaired loans			Total			Non-credit impaired loans			Credit impaired loans			Total
Beginning balance	$	1,105,732		$	6,726		$	1,112,458		$	1,265,752		$	5,585		$	1,271,337
Accretion		(87,137	)		(4,872	)		(92,009	)		(104,004	)		(5,687	)		(109,691	)
Change in expected cash flows		43,376			7,855			51,231			78,028			6,250			84,278

Ending balance	$	1,061,971		$	9,709		$	1,071,680		$	1,239,776		$	6,148		$	1,245,924


	Carrying amount of Westernbank loans accounted for pursuant to ASC 310-30
	For the quarters ended
	June 30, 2016 [1]						Total			June 30, 2015						Total
(In thousands)	Non-credit impaired loans			Credit impaired loans			Total			Non-credit impaired loans			Credit impaired loans			Total
Beginning balance	$	1,865,940		$	69,501		$	1,935,441		$	2,211,781		$	155,315		$	2,367,096
Accretion		45,137			3,339			48,476			50,228			3,766			53,994
Collections/loan sales/charge-offs^[2]		(156,464	)		(27,510	)		(183,974	)		(239,516	)		(44,496	)		(284,012	)

Ending balance	$	1,754,613		$	45,330		$	1,799,943		$	2,022,493		$	114,585		$	2,137,078
Allowance for loan losses
ASC 310-30 Westernbank loans		(57,895	)		(9,100	)		(66,995	)		(42,503	)		(4,546	)		(47,049	)

Ending balance, net of ALLL	$	1,696,718		$	36,230		$	1,732,948		$	1,979,990		$	110,039		$	2,090,029

[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 $ 597 million as of June 30, 2016.

[2]	For the quarter ended June 30, 2016, includes the impact of the bulk sale of loans with a carrying value of approximately $99 million.


	Carrying amount of Westernbank loans accounted for pursuant to ASC 310-30
	For the six months ended
	June 30, 2016 [1]									June 30, 2015
	Non-credit			Credit						Non-credit			Credit
	impaired			impaired						impaired			impaired
(In thousands)	loans			loans			Total			loans			loans			Total
Beginning balance	$	1,898,146		$	76,355		$	1,974,501		$	2,272,142		$	172,030		$	2,444,172
Accretion		87,137			4,872			92,009			104,004			5,687			109,691
Collections/loan sales/charge-offs^[2]		(230,670	)		(35,897	)		(266,567	)		(353,653	)		(63,132	)		(416,785	)

Ending balance	$	1,754,613		$	45,330		$	1,799,943		$	2,022,493		$	114,585		$	2,137,078
Allowance for loan losses
ASC 310-30 Westernbank loans		(57,895	)		(9,100	)		(66,995	)		(42,503	)		(4,546	)		(47,049	)

Ending balance, net of ALLL	$	1,696,718		$	36,230		$	1,732,948		$	1,979,990		$	110,039		$	2,090,029

[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 $597 million as of June 30, 2016.

[2]	For the quarter ended June 30, 2016, includes the impact of the bulk sale of loans with a carrying value of approximately $99 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 $710 million at June 30, 2016 (December 31, 2015 - $710 million). At June 30, 2016, 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 and six months ended June 30, 2016 and 2015 were as follows:


Activity in the accretable yield - other acquired loans ASC 310-30
	For the quarter ended			For the quarter ended
(In thousands)	June 30, 2016			June 30, 2015
Beginning balance	$	267,768		$	158,424
Additions		4,171			5,406
Accretion		(8,730	)		(4,633	)
Change in expected cash flows		9,400			2,962

Ending balance	$	272,609		$	162,159


Activity in the accretable yield - other acquired loans ASC 310-30
	For the six months ended			For the six months ended
(In thousands)	June 30, 2016			June 30, 2015
Beginning balance	$	221,128		$	116,304
Additions		8,511			56,068
Accretion		(17,285	)		(7,856	)
Change in expected cash flows		60,255			(2,357	)

Ending balance	$	272,609		$	162,159


Carrying amount of other acquired loans accounted for pursuant to ASC 310-30
	For the quarter ended			For the quarter ended
(In thousands)	June 30, 2016			June 30, 2015
Beginning balance	$	562,723			363,097
Additions		8,354			17,089
Accretion		8,730			4,633
Collections and charge-offs		(17,062	)		(16,532	)

Ending balance	$	562,745		$	368,287
Allowance for loan losses ASC 310-30 other acquired loans		(16,059	)		(16,842	)

Ending balance, net of ALLL	$	546,686		$	351,445


Carrying amount of other acquired loans accounted for pursuant to ASC 310-30
	For the six months ended			For the six months ended
(In thousands)	June 30, 2016			June 30, 2015
Beginning balance	$	564,050		$	212,763
Purchase accounting adjustments related to the Doral Bank Transaction (Refer to Note 5)		(4,707	)		—
Additions		18,405			174,180
Accretion		17,285			7,856
Collections and charge-offs		(32,288	)		(26,512	)

Ending balance	$	562,745		$	368,287
Allowance for loan losses ASC 310-30 other acquired loans		(16,059	)		(16,842	)

Ending balance, net of ALLL	$	546,686		$	351,445

The following table presents loans acquired as part of the Doral Bank Transaction accounted for pursuant to ASC Subtopic 310-30 at the February 27, 2015 acquisition date.


(In thousands)
Contractually-required principal and interest	$	560,833
Non-accretable difference		112,153

Cash flows expected to be collected		448,680
Accretable yield		113,977

Fair value of loans accounted for under ASC Subtopic 310-30	$	334,703

Note 10 – 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 June 30, 2016, 51% (June 30, 2015 - 32%) 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 other consumer, mortgage, commercial and industrial and commercial multi-family loan portfolios for 2016, and in the commercial multi-family, commercial and industrial, personal and auto loan portfolios for 2015.

For the period ended June 30, 2016, 1% (June 30, 2015 - 19%) of the ALLL for 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 consumer loan portfolio for 2016 and in the commercial and industrial loan portfolio for 2015.

•

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 and six months ended June 30, 2016 and 2015.


For the quarter ended June 30, 2016
Puerto Rico - Non-covered loans
(In thousands)	Commercial			Construction			Mortgage			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	197,590		$	4,237		$	124,500		$	11,035		$	135,785		$	473,147
Provision (reversal of provision)		3,515			(4,772	)		25,688			(507	)		14,427			38,351
Charge-offs		(24,489	)		(1,531	)		(13,950	)		(879	)		(26,011	)		(66,860	)
Recoveries		18,842			4,757			486			445			6,108			30,638
Net recoveries (write-downs)		4,369			914			—			—			162			5,445

Ending balance	$	199,827		$	3,605		$	136,724		$	10,094		$	130,471		$	480,721

Specific ALLL	$	53,350		$	116		$	42,106		$	548		$	24,167		$	120,287

General ALLL	$	146,477		$	3,489		$	94,618		$	9,546		$	106,304		$	360,434

Loans held-in-portfolio:
Impaired non-covered loans	$	335,881		$	1,036		$	476,161		$	2,110		$	109,130		$	924,318
Non-covered loans held-in-portfolio excluding impaired loans		6,881,171			102,606			5,544,401			661,984			3,212,552			16,402,714

Total non-covered loans held-in-portfolio	$	7,217,052		$	103,642		$	6,020,562		$	664,094		$	3,321,682		$	17,327,032


For the quarter ended June 30, 2016
Puerto Rico - Covered loans
(In thousands)	Commercial			Construction			Mortgage			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	—		$	—		$	29,822		$	—		$	223		$	30,045
Provision (reversal of provision)		—			—			828			—			(24	)		804
Charge-offs		—			—			(884	)		—			427			(457	)
Recoveries		—			—			185			—			4			189

Ending balance	$	—		$	—		$	29,951		$

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