Edgar Filing: POPULAR INC

Large accelerated filer

Accelerated filer

Non-accelerated filer

☐ (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended June 30, 2018

Commission File Number: 001-34084

POPULAR, INC.

(Exact name of registrant as specified in its charter)

Puerto Rico

66-0667416

(State or other jurisdiction of

Incorporation or organization)

(IRS Employer
Identification Number)

Popular Center Building

209 Muñoz Rivera Avenue

Hato Rey, Puerto Rico

00918

(Address of principal executive offices)

(Zip code)

(787) 765-9800

(Registrant’s telephone number, including area code)

NOT APPLICABLE

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, $0.01 par value, 102,318,442 shares outstanding as of August 3, 2018.

POPULAR, INC.

INDEX


	Page

Part I – Financial Information

Item 1. Financial Statements

Unaudited Consolidated Statements of Financial Condition at June 30, 2018 and December 31, 2017		5

Unaudited Consolidated Statements of Operations for the quarters and six months ended June 30, 2018 and 2017		6

Unaudited Consolidated Statements of Comprehensive Income for the quarters and six months ended June 30, 2018 and 2017		7

Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2018 and 2017		8

Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017		9

Notes to Unaudited Consolidated Financial Statements		11

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		125

Item 3. Quantitative and Qualitative Disclosures about Market Risk		167

Item 4. Controls and Procedures		167

Part II – Other Information

Item 1. Legal Proceedings		167

Item 1A. Risk Factors		168

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		168

Item 3. Defaults Upon Senior Securities		168

Item 4. Mine Safety Disclosures		168

Item 5. Other Information		168

Item 6. Exhibits		169

Signatures		170

Forward-Looking Information

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

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

•

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

•

the impact of the current fiscal and economic crisis of the Commonwealth of Puerto Rico (the “Commonwealth” or “Puerto Rico”) and the measures taken and to be taken by the Puerto Rico Government and the Federally-appointed oversight board on the economy, our customers and our business;

•

the impact of the pending debt restructuring proceedings under Title III of the Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”) and of other actions taken or to be taken to address Puerto Rico’s fiscal crisis on the value of our portfolio of Puerto Rico government securities and loans to governmental entities and private borrowers that have relationships with the government, and the possibility that these actions may result in credit losses that are higher than currently expected;

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

the performance of the stock and bond markets;

•

competition in the financial services industry;

•

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

•

possible legislative, tax or regulatory changes; and

•

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

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

•

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

•

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

•

liabilities resulting from litigation and regulatory investigations;

•

changes in accounting standards, rules and interpretations;

•

our ability to grow our core businesses;

•

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

•

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

Moreover, the outcome of legal proceedings, as discussed in “Part II, Item I. Legal Proceedings,” is inherently uncertain and depends on judicial interpretations of law and the findings of regulators, judges and/or juries. Investors should refer to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2017 as well as “Part II, Item 1A” of this Form 10-Q for a discussion of such factors and certain risks and uncertainties to which the Corporation is subject.

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(UNAUDITED)


(In thousands, except share information)	June 30, 2018			December 31, 2017
Assets:
Cash and due from banks	$	400,568		$	402,857

Money market investments:
Time deposits with other banks		8,628,442			5,255,119

Total money market investments		8,628,442			5,255,119

Trading account debt securities, at fair value:
Pledged securities with creditors’ right to repledge		610			625
Other trading securities		41,027			33,301
Debt securities available-for-sale, at fair value:
Pledged securities with creditors’ right to repledge		305,934			393,634
Other investment securities available-for-sale		10,236,076			9,783,289
Debt securities held-to-maturity, at amortized cost (fair value 2018 - $107,396; 2017 - $97,501)		104,937			107,019
Equity securities (realizable value 2018 -$163,316); (2017 - $168,417)		159,017			165,103
Loans held-for-sale, at lower of cost or fair value		73,859			132,395

Loans held-in-portfolio:
Loans not covered under loss-sharing agreements with the FDIC		24,752,700			24,423,427
Loans covered under loss-sharing agreements with the FDIC		—			517,274
Less – Unearned income		144,184			130,633
Allowance for loan losses		643,018			623,426

Total loans held-in-portfolio, net		23,965,498			24,186,642

FDIC loss-share asset		—			45,192
Premises and equipment, net		548,432			547,142
Other real estate not covered under loss-sharing agreements with the FDIC		142,063			169,260
Other real estate covered under loss-sharing agreements with the FDIC		—			19,595
Accrued income receivable		165,592			213,844
Mortgage servicing assets, at fair value		164,025			168,031
Other assets		1,940,780			1,991,323
Goodwill		627,294			627,294
Other intangible assets		31,023			35,672

Total assets	$	47,535,177		$	44,277,337

Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	9,392,263		$	8,490,945
Interest bearing		29,985,298			26,962,563

Total deposits		39,377,561			35,453,508

Assets sold under agreements to repurchase		306,911			390,921
Other short-term borrowings		1,200			96,208
Notes payable		1,561,663			1,536,356
Other liabilities		998,181			1,696,439

Total liabilities		42,245,516			39,173,432

Commitments and contingencies (Refer to Note 21)
Stockholders’ equity:
Preferred stock, 30,000,000 shares authorized; 2,006,391 shares issued and outstanding		50,160			50,160
Common stock, $0.01 par value; 170,000,000 shares authorized; 104,285,694 shares issued (2017 - 104,238,159) and 102,296,440 shares outstanding (2017 - 102,068,981)		1,043			1,042
Surplus		4,302,946			4,298,503
Retained earnings		1,515,058			1,194,994
Treasury stock - at cost, 1,989,254 shares (2017 - 2,169,178)		(82,754	)		(90,142	)
Accumulated other comprehensive loss, net of tax		(496,792	)		(350,652	)

Total stockholders’ equity		5,289,661			5,103,905

Total liabilities and stockholders’ equity	$	47,535,177		$	44,277,337

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Quarters ended June 30,						Six months ended June 30,
(In thousands, except per share information)	2018			2017			2018			2017
Interest income:
Loans	$	386,277		$	367,669		$	759,861		$	730,805
Money market investments		36,392			11,131			58,677			17,704
Investment securities		58,181			49,933			115,390			96,219

Total interest income		480,850			428,733			933,928			844,728

Interest expense:
Deposits		45,228			34,092			83,916			67,849
Short-term borrowings		1,752			1,115			3,765			2,210
Long-term debt		19,734			19,047			39,064			38,092

Total interest expense		66,714			54,254			126,745			108,151

Net interest income		414,136			374,479			807,183			736,577
Provision for loan losses—non-covered loans		60,054			49,965			129,387			92,022
Provision for loan losses—covered loans		—			2,514			1,730			1,155

Net interest income after provision for loan losses		354,082			322,000			676,066			643,400

Service charges on deposit accounts		37,102			41,073			73,557			80,609
Other service fees		62,876			59,168			123,478			115,343
Mortgage banking activities (Refer to Note 10)		10,071			10,741			22,139			22,110
Other-than-temporary impairment losses on debt securities		—			(8,299	)		—			(8,299	)
Net gain (loss), including impairment on equity securities		234			19			(412	)		181
Net profit (loss) on trading account debt securities		21			(655	)		(177	)		(933	)
Adjustments (expense) to indemnity reserves on loans sold		(527	)		(2,930	)		(3,453	)		(4,896	)
FDIC loss-share income (expense) (Refer to Note 28)		102,752			(475	)		94,725			(8,732	)
Other operating income		22,280			18,151			38,449			37,279

Total non-interest income		234,809			116,793			348,306			232,662

Operating expenses:
Personnel costs		124,332			116,948			250,184			240,688
Net occupancy expenses		22,425			22,265			45,227			43,041
Equipment expenses		17,775			16,250			34,981			32,220
Other taxes		10,876			10,740			21,778			21,709
Professional fees		93,903			72,934			176,888			142,184
Communications		5,382			5,899			11,288			11,848
Business promotion		16,778			13,366			28,787			24,942
FDIC deposit insurance		7,004			6,172			13,924			12,665
Other real estate owned (OREO) expenses		6,947			16,670			13,078			29,488
Other operating expenses		29,922			23,247			58,886			54,679
Amortization of intangibles		2,324			2,344			4,649			4,689

Total operating expenses		337,668			306,835			659,670			618,153

Income before income tax		251,223			131,958			364,702			257,909
Income tax (benefit) expense		(28,560	)		35,732			(6,405	)		68,738

Net Income	$	279,783		$	96,226		$	371,107		$	189,171

Net Income Applicable to Common Stock	$	278,852		$	95,295		$	369,245		$	187,309

Net Income per Common Share – Basic	$	2.74		$	0.94		$	3.63		$	1.83

Net Income per Common Share – Diluted	$	2.73		$	0.94		$	3.62		$	1.83

Dividends Declared per Common Share	$	0.25		$	0.25		$	0.50		$	0.50

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)


	Quarters ended, June 30,						Six months ended, June 30,
(In thousands)	2018			2017			2018			2017
Net income	$	279,783		$	96,226		$	371,107		$	189,171

Reclassification to retained earnings due to cumulative effect of accounting change		—			—			(605	)		—
Other comprehensive (loss) income before tax:
Foreign currency translation adjustment		(3,456	)		(1,588	)		(3,363	)		(1,449	)
Amortization of net losses of pension and postretirement benefit plans		5,385			5,606			10,771			11,213
Amortization of prior service credit of pension and postretirement benefit plans		(868	)		(950	)		(1,735	)		(1,900	)
Unrealized holding (losses) gains on debt securities arising during the period		(36,223	)		8,758			(157,412	)		5,732
Other-than-temporary impairment included in net income		—			8,299			—			8,299
Unrealized holding gains on equity securities arising during the period		—			46			—			165
Reclassification adjustment for gains included in net income		—			(19	)		—			(181	)
Unrealized net (losses) gains on cash flow hedges		(270	)		(377	)		955			(1,014	)
Reclassification adjustment for net losses (gains) included in net income		250			1,035			(1,017	)		1,890

Other comprehensive (loss) income before tax		(35,182	)		20,810			(152,406	)		22,755
Income tax benefit (expense)		1,228			(3,841	)		6,266			(5,412	)

Total other comprehensive (loss) income, net of tax		(33,954	)		16,969			(146,140	)		17,343

Comprehensive income, net of tax	$	245,829		$	113,195		$	224,967		$	206,514


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

	Quarters ended June 30,						Six months ended, June 30,
(In thousands)	2018			2017			2018			2017
Amortization of net losses of pension and postretirement benefit plans	$	(2,099	)	$	(2,185	)	$	(4,200	)	$	(4,371	)
Amortization of prior service credit of pension and postretirement benefit plans		339			370			677			740
Unrealized holding (losses) gains on debt securities arising during the period		2,980			(205	)		9,765			117
Other-than-temporary impairment included in net income		—			(1,559	)		—			(1,559	)
Unrealized holding gains on equity securities arising during the period		—			(9	)		—			(33	)
Reclassification adjustment for gains included in net income		—			4			—			36
Unrealized net (losses) gains on cash flow hedges		105			147			(373	)		395
Reclassification adjustment for net losses (gains) included in net income		(97	)		(404	)		397			(737	)

Income tax benefit (expense)	$	1,228		$	(3,841	)	$	6,266		$	(5,412	)

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)


(In thousands)	Common stock		Preferred stock		Surplus		Retained earnings			Treasury stock			Accumulated other comprehensive loss			Total
Balance at December 31, 2016	$	1,040	$	50,160	$	4,255,022	$	1,220,307		$	(8,286	)	$	(320,286	)	$	5,197,957
Net income								189,171									189,171
Issuance of stock		1				3,830											3,831
Dividends declared:
Common stock								(51,112	)								(51,112	)
Preferred stock								(1,862	)								(1,862	)
Common stock purchases						4,518					(81,801	)					(77,283	)
Other comprehensive income, net of tax														17,343			17,343

Balance at June 30, 2017	$	1,041	$	50,160	$	4,263,370	$	1,356,504		$	(90,087	)	$	(302,943	)	$	5,278,045

Balance at December 31, 2017	$	1,042	$	50,160	$	4,298,503	$	1,194,994		$	(90,142	)	$	(350,652	)	$	5,103,905
Cumulative effect of accounting change								1,935									1,935
Net income								371,107									371,107
Issuance of stock		1				1,742											1,743
Dividends declared:
Common stock								(51,116	)								(51,116	)
Preferred stock								(1,862	)								(1,862	)
Common stock purchases											(2,344	)					(2,344	)
Common stock reissuance						40					1,297						1,337
Stock based compensation						2,661					8,435						11,096
Other comprehensive income, net of tax														(146,140	)		(146,140	)

Balance at June 30, 2018	$	1,043	$	50,160	$	4,302,946	$	1,515,058		$	(82,754	)	$	(496,792	)	$	5,289,661


Disclosure of changes in number of shares:													June 30, 2018			June 30, 2017
Preferred Stock:
Balance at beginning and end of period														2,006,391			2,006,391

Common Stock – Issued:
Balance at beginning of period														104,238,159			104,058,684
Issuance of stock														47,535			95,942

Balance at end of period														104,285,694			104,154,626
Treasury stock														(1,989,254	)		(2,167,868	)

Common Stock – Outstanding														102,296,440			101,986,758

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Six months ended June 30,
(In thousands)	2018			2017
Cash flows from operating activities:
Net income	$	371,107		$	189,171

Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		131,117			93,177
Amortization of intangibles		4,649			4,689
Depreciation and amortization of premises and equipment		25,575			23,928
Net accretion of discounts and amortization of premiums and deferred fees		(15,246	)		(13,510	)
Share-based compensation		5,445			—
Impairment losses on long-lived assets		272			—
Other-than-temporary impairment on debt securities		—			8,299
Fair value adjustments on mortgage servicing rights		8,929			14,000
FDIC loss share (income) expense		(94,725	)		8,732
Adjustments (expense) to indemnity reserves on loans sold		3,453			4,896
Earnings from investments under the equity method, net of dividends or distributions		(5,400	)		(6,743	)
Deferred income tax (benefit) expense		(141,066	)		52,354
(Gain) loss on:
Disposition of premises and equipment and other productive assets		(680	)		5,517
Sale of loans, including valuation adjustments on loans held-for-sale and mortgage banking activities		(3,602	)		(12,631	)
Sale of foreclosed assets, including write-downs		566			13,603
Acquisitions of loans held-for-sale		(112,687	)		(153,085	)
Proceeds from sale of loans held-for-sale		29,519			58,857
Net originations on loans held-for-sale		(112,975	)		(224,278	)
Net decrease (increase) in:
Trading debt securities		218,904			334,136
Equity securities		(1,124	)		(80	)
Accrued income receivable		48,252			1,939
Other assets		189,540			(6,747	)
Net increase (decrease) in:
Interest payable		50			(189	)
Pension and other postretirement benefits obligation		2,363			883
Other liabilities		(181,094	)		(16,018	)

Total adjustments		35			191,729

Net cash provided by operating activities		371,142			380,900

Cash flows from investing activities:
Net increase in money market investments		(3,371,774	)		(1,332,447	)
Purchases of investment securities:
Available-for-sale		(2,767,257	)		(1,738,915	)
Equity		(11,176	)		(4,900	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale		2,291,230			541,660
Held-to-maturity		3,030			2,860
Proceeds from sale of investment securities:
Equity		18,387			2,541
Net repayments on loans		61,890			5,088
Acquisition of loan portfolios		(326,503	)		(261,987	)
Net payments (to) from FDIC under loss sharing agreements		(25,012	)		(14,819	)
Return of capital from equity method investments		1,519			3,362
Acquisition of premises and equipment		(31,690	)		(29,992	)
Proceeds from insurance claims		720			—
Proceeds from sale of:
Premises and equipment and other productive assets		5,222			5,186
Foreclosed assets		59,497			60,603

Net cash used in investing activities		(4,091,917	)		(2,761,760	)

Cash flows from financing activities:
Net increase (decrease) in:
Deposits		3,921,033			2,625,731
Assets sold under agreements to repurchase		(84,010	)		(73,040	)
Other short-term borrowings		(95,008	)		—
Payments of notes payable		(115,749	)		(35,074	)
Proceeds from issuance of notes payable		140,000			20,000


Proceeds from issuance of common stock		8,818			3,831
Dividends paid		(52,617	)		(43,045	)
Net payments for repurchase of common stock		(270	)		(75,666	)
Payments related to tax withholding for share-based compensation		(2,162	)		(1,617	)

Net cash provided by financing activities		3,720,035			2,421,120

Net (decrease) increase in cash and due from banks, and restricted cash		(740	)		40,260
Cash and due from banks, and restricted cash at beginning of period		412,629			374,196

Cash and due from banks, and restricted cash at the end of the period	$	411,889		$	414,456

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

Notes to Consolidated Financial

Statements (Unaudited)


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

Note 1—Nature of operations

Popular, Inc. (the “Corporation”) is a diversified, publicly-owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation has operations in Puerto Rico, the mainland United States and U.S. and British Virgin Islands. In Puerto Rico, the Corporation provides retail, mortgage, and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as investment banking, broker-dealer, auto and equipment leasing and financing, and insurance services through specialized subsidiaries. In the U.S. mainland, the Corporation provides retail, mortgage and commercial banking services through its New York-chartered banking subsidiary, Popular Bank (“PB”), which has branches located in New York, New Jersey and Florida.

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

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

Basis of Presentation

The consolidated interim financial statements have been prepared without audit. The consolidated statement of financial condition data at December 31, 2017 was derived from audited financial statements. The unaudited interim financial statements are, in the opinion of management, a fair statement of the results for the periods reported and include all necessary adjustments, all of a normal recurring nature, for a fair statement of such results.

Certain reclassifications have been made to the 2017 Consolidated Financial Statements and notes to the financial statements to conform to the 2018 presentation.

Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from the unaudited financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these financial statements should be read in conjunction with the audited Consolidated Financial Statements of the Corporation for the year ended December 31, 2017, included in the Corporation’s 2017 Form 10-K. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

Use of Estimates in the Preparation of Financial Statements

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

Note 3 – New accounting pronouncements

Recently Adopted Accounting Standards Updates

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Recently Issued Accounting Standards Updates

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

At June 30, 2018, the Corporation held $43 million in restricted assets in the form of funds deposited in money market accounts, debt securities available for sale and equity securities (December 31, 2017 - $41 million). The amounts held in debt securities available for sale and equity securities consist primarily of restricted assets held for the Corporation’s non-qualified retirement plans and fund deposits guaranteeing possible liens or encumbrances over the title of insured properties.

Note 5—Debt securities available-for-sale

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


	At June 30, 2018
(In thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value		Weighted average yield
U.S. Treasury securities
Within 1 year	$	1,277,840	$	30	$	4,517	$	1,273,353		1.42	%
After 1 to 5 years		3,372,451		977		58,687		3,314,741		1.93
After 5 to 10 years		394,072		—		5,201		388,871		2.50

Total U.S. Treasury securities		5,044,363		1,007		68,405		4,976,965		1.85

Obligations of U.S. Government sponsored entities
Within 1 year		288,749		10		937		287,822		1.37
After 1 to 5 years		248,546		—		4,492		244,054		1.50

Total obligations of U.S. Government sponsored entities		537,295		10		5,429		531,876		1.43

Obligations of Puerto Rico, States and political subdivisions
After 1 to 5 years		6,796		—		153		6,643		1.76

Total obligations of Puerto Rico, States and political subdivisions		6,796		—		153		6,643		1.76

Collateralized mortgage obligations - federal agencies
After 1 to 5 years		1,075		—		8		1,067		1.93
After 5 to 10 years		124,736		—		6,214		118,522		1.69
After 10 years		721,252		1,389		32,561		690,080		2.09

Total collateralized mortgage obligations - federal agencies		847,063		1,389		38,783		809,669		2.03

Mortgage-backed securities
Within 1 year		962		8		—		970		4.25
After 1 to 5 years		6,768		38		202		6,604		2.70
After 5 to 10 years		333,026		1,558		9,239		325,345		2.24
After 10 years		4,029,804		11,325		157,872		3,883,257		2.43

Total mortgage-backed securities		4,370,560		12,929		167,313		4,216,176		2.42

Other
After 5 to 10 years		677		4		—		681		3.62

Total other		677		4		—		681		3.62

Total debt securities available-for-sale^[1]	$	10,806,754	$	15,339	$	280,083	$	10,542,010		2.07	%

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


	At December 31, 2017
(In thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value		Weighted average yield
U.S. Treasury securities
Within 1 year	$	1,112,791	$	8	$	2,101	$	1,110,698		1.06	%
After 1 to 5 years		2,550,116		—		26,319		2,523,797		1.55
After 5 to 10 years		293,579		281		191		293,669		2.24

Total U.S. Treasury securities		3,956,486		289		28,611		3,928,164		1.46

Obligations of U.S. Government sponsored entities
Within 1 year		276,304		21		818		275,507		1.26
After 1 to 5 years		336,922		22		3,518		333,426		1.48

Total obligations of U.S. Government sponsored entities		613,226		43		4,336		608,933		1.38

Obligations of Puerto Rico, States and political subdivisions
After 1 to 5 years		6,668		—		59		6,609		2.30

Total obligations of Puerto Rico, States and political subdivisions		6,668		—		59		6,609		2.30

Collateralized mortgage obligations—federal agencies
Within 1 year		40		—		—		40		2.60
After 1 to 5 years		16,972		173		75		17,070		2.90
After 5 to 10 years		36,186		57		526		35,717		2.31
After 10 years		914,568		2,789		26,431		890,926		2.01

Total collateralized mortgage obligations—federal agencies		967,766		3,019		27,032		943,753		2.03

Mortgage-backed securities
Within 1 year		484		8		—		492		4.23
After 1 to 5 years		14,599		206		211		14,594		3.50
After 5 to 10 years		339,161		2,390		3,765		337,786		2.21
After 10 years		4,385,368		19,493		69,071		4,335,790		2.46

Total mortgage-backed securities		4,739,612		22,097		73,047		4,688,662		2.44

Other
After 5 to 10 years		789		13		—		802		3.62

Total other		789		13		—		802		3.62

Total debt securities available-for-sale^[1]	$	10,284,547	$	25,461	$	133,085	$	10,176,923		1.96	%

[1]	Includes $6.6 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 $5.6 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 based on 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 six months ended June 30, 2018 and 2017.

The following tables present the Corporation’s fair value and gross unrealized losses of debt securities available-for-sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2018 and December 31, 2017.


	At June 30, 2018
	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	$	2,742,979	$	50,265	$	1,264,938	$	18,140	$	4,007,917	$	68,405
Obligations of U.S. Government sponsored entities		147,211		847		381,273		4,582		528,484		5,429
Obligations of Puerto Rico, States and political subdivisions		6,643		153		—		—		6,643		153
Collateralized mortgage obligations—federal agencies		195,626		4,469		541,559		34,314		737,185		38,783
Mortgage-backed securities		1,360,340		43,508		2,544,264		123,805		3,904,604		167,313

Total debt securities available-for-sale in an unrealized loss position	$	4,452,799	$	99,242	$	4,732,034	$	180,841	$	9,184,833	$	280,083


	At December 31, 2017
	Less than 12 months				12 months or more				Total
(In thousands)	Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Fair value		Gross unrealized losses
U.S. Treasury securities	$	2,608,473	$	14,749	$	1,027,066	$	13,862	$	3,635,539	$	28,611
Obligations of U.S. Government sponsored entities		214,670		1,108		376,807		3,228		591,477		4,336
Obligations of Puerto Rico, States and political subdivisions		6,609		59		—		—		6,609		59
Collateralized mortgage obligations—federal agencies		153,336		2,110		595,339		24,922		748,675		27,032
Mortgage-backed securities		1,515,295		12,529		2,652,359		60,518		4,167,654		73,047

Total debt securities available-for-sale in an unrealized loss position	$	4,498,383	$	30,555	$	4,651,571	$	102,530	$	9,149,954	$	133,085

As of June 30, 2018, the portfolio of available-for-sale debt securities reflects gross unrealized losses of approximately $280 million, driven mainly by mortgage-backed securities, U.S. Treasury securities, and collateralized mortgage obligations.

Management evaluates debt 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. 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.

At June 30, 2018, management performed its quarterly analysis of all debt securities in an unrealized loss position. Based on the analysis performed, management concluded that no individual debt security was other-than-temporarily impaired as of such date. At June 30, 2018, the Corporation did not have the intent to sell debt securities in an unrealized loss position and it was not more likely than not that the Corporation would have to sell the debt securities prior to recovery of their amortized cost basis.

The following table states the name of issuers, and the aggregate amortized cost and fair value of the debt securities of such issuer (includes available-for-sale and held-to-maturity debt securities), in which the aggregate amortized cost of such securities exceeds 10% of stockholders’ equity. This information excludes debt 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, 2018				December 31, 2017
(In thousands)	Amortized cost		Fair value		Amortized cost		Fair value
FNMA	$	3,330,286	$	3,207,410	$	3,621,537	$	3,572,474
Freddie Mac		1,212,413		1,164,737		1,358,708		1,335,685

Note 6—Debt securities held-to-maturity

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


	At June 30, 2018
(In thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value		Weighted average yield
Obligations of Puerto Rico, States and political subdivisions
Within 1 year	$	3,445	$	—	$	7	$	3,438		5.98	%
After 1 to 5 years		16,195		89		144		16,140		6.06
After 5 to 10 years		26,140		317		1,369		25,088		3.62
After 10 years		45,148		3,636		60		48,724		1.90

Total obligations of Puerto Rico, States and political subdivisions		90,928		4,042		1,580		93,390		3.29

Collateralized mortgage obligations—federal agencies
After 5 to 10 years		61		4		—		65		5.44

Total collateralized mortgage obligations—federal agencies		61		4		—		65		5.44

Trust preferred securities
After 5 to 10 years		1,637		—		—		1,637		8.33
After 10 years		11,561		—		—		11,561		6.51

Total trust preferred securities		13,198		—		—		13,198		6.73

Other
Within 1 year		250		—		—		250		3.52
After 1 to 5 years		500		—		7		493		2.97

Total other		750		—		7		743		3.15

Total debt securities held-to-maturity^[1]	$	104,937	$	4,046	$	1,587	$	107,396		3.72	%

[1]	Includes $90.9 million pledged to secure public and trust deposits that the secured parties are not permitted to sell or repledge the collateral.


	At December 31, 2017
(In thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value		Weighted average yield
Obligations of Puerto Rico, States and political subdivisions
Within 1 year	$	3,295	$	—	$	79	$	3,216		5.96	%
After 1 to 5 years		15,485		—		4,143		11,342		6.05
After 5 to 10 years		29,240		—		8,905		20,335		3.89
After 10 years		44,734		3,834		222		48,346		1.93

Total obligations of Puerto Rico, States and political subdivisions		92,754		3,834		13,349		83,239		3.38

Collateralized mortgage obligations—federal agencies
After 5 to 10 years		67		4		—		71		5.45

Total collateralized mortgage obligations—federal agencies		67		4		—		71		5.45

Trust preferred securities
After 5 to 10 years		1,637		—		—		1,637		8.33
After 10 years		11,561		—		—		11,561		6.51

Total trust preferred securities		13,198		—		—		13,198		6.73

Other
Within 1 year		500		—		7		493		1.96
After 1 to 5 years		500		—		—		500		2.97

Total other		1,000		—		7		993		2.47

Total debt securities held-to-maturity^[1]	$	107,019	$	3,838	$	13,356	$	97,501		3.79	%

[1]	Includes $92.8 million pledged to secure public and trust deposits that the secured parties are not permitted to sell or repledge the collateral.

Debt 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 debt securities held-to-maturity, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2018 and December 31, 2017.


	At June 30, 2018
	Less than 12 months				12 months or more				Total
(In thousands)	Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Fair value		Gross unrealized losses
Obligations of Puerto Rico, States and political subdivisions	$	7,236	$	19	$	29,524	$	1,561	$	36,760	$	1,580
Other		250		—		493		7		743		7

Total debt securities held-to-maturity in an unrealized loss position	$	7,486	$	19	$	30,017	$	1,568	$	37,503	$	1,587


	At December 31, 2017
	Less than 12 months				12 months or more				Total
(In thousands)	Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Fair value		Gross unrealized losses
Obligations of Puerto Rico, States and political subdivisions	$	—	$	—	$	35,696	$	13,349	$	35,696	$	13,349
Other		—		—		743		7		743		7

Total debt securities held-to-maturity in an unrealized loss position	$	—	$	—	$	36,439	$	13,356	$	36,439	$	13,356

As indicated in Note 5 to these Consolidated Financial Statements, management evaluates debt 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, 2018 are primarily associated with securities issued by municipalities of Puerto Rico and are generally not rated by a credit rating agency. This includes $47 million of general and special obligation bonds issued by three municipalities of Puerto Rico, which are payable primarily from, and have a lien on, certain property taxes imposed by the issuing municipality. In the case of general obligations, they also benefit from a pledge of the full faith, credit and unlimited taxing power of the issuing municipality and issuing municipalities are required by law to levy property taxes in an amount sufficient for the payment of debt service on such general obligations bonds.

The portfolio also includes $44 million in securities for which the underlying source of payment is not the central government, but in which a government instrumentality provides a guarantee in the event of default. The Corporation performs periodic credit quality reviews on these issuers. Based on the quarterly analysis performed, management concluded that no individual debt security held-to-maturity was other-than-temporarily impaired at June 30, 2018. Further deterioration of the Puerto Rico economy or of the fiscal crisis of the Government of Puerto Rico (including if any of the issuing municipalities become subject to a debt restructuring proceeding under PROMESA) could further affect the value of these securities, resulting in losses to the Corporation. The Corporation does not have the intent to sell debt securities held-to-maturity and it is more likely than not that the Corporation will not have to sell these investment securities prior to recovery of their amortized cost basis.

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

Note 7—Loans

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 2017 Form 10-K.

The Corporation has presented the loans covered by the loss-sharing agreements with the FDIC separately as “covered loans” since the risk of loss was significantly different than those not covered under the loss-sharing agreements, due to the loss protection provided by the FDIC. As discussed in Note 9, on May 22, 2018, the Corporation entered into a Termination Agreement with the FDIC to terminate all loss-share arrangements in connection with the Westernbank FDIC-assisted transaction. As a result of the Termination Agreement, assets that were covered by the loss share agreement, including covered loans in the amount of approximately $514.6 million as of March 31, 2018, were reclassified as non-covered. The Corporation now recognizes entirely all future credit losses, expenses, gains, and recoveries related to the formerly covered assets with no offset due to or from the FDIC.

During the quarter and six months ended June 30, 2018, the Corporation recorded purchases (including repurchases) of mortgage loans amounting to $177 million and $333 million, respectively and consumer loans of $53 million and $105 million, respectively. During the quarter and six months ended June 30, 2017, the Corporation recorded purchases (including repurchases) of mortgage loans amounting to $124 million and $260 million, respectively; consumer loans of $108 million and $150 million, respectively; and leases of $2 million, for the six months ended June 30, 2017.

The Corporation performed whole-loan sales involving approximately $16 million and $26 million of residential mortgage loans during the quarter and six months ended June 30, 2018, respectively (June 30, 2017—$26 million and $54 million, respectively). Also, the Corporation securitized approximately $97 million and $210 million of mortgage loans into Government National Mortgage Association (“GNMA”) mortgage-backed securities during the quarter and six months ended June 30, 2018, respectively (June 30, 2017— $136 million and $283 million, respectively). Furthermore, the Corporation securitized approximately $20 million and $46 million of mortgage loans into Federal National Mortgage Association (“FNMA”) mortgage-backed securities during the quarter and six months ended June 30, 2018, respectively (June 30, 2017 - $37 million and $65 million, respectively).

Delinquency status

The following table presents the composition of loans held-in-portfolio (“HIP”), net of unearned income, by past due status, and by loan class including those that are in non-performing status or that accruing interest but are past due 90 days or more at June 30, 2018 and December 31, 2017.


June 30, 2018
Puerto Rico
	Past due												Past due 90 days or more
(In thousands)	30-59 days		60-89 days		90 days or more		Total past due		Current		Loans HIP		Non-accrual loans		Accruing loans^[1]
Commercial multi-family	$	331	$	—	$	2,274	$	2,605	$	144,860	$	147,465	$	790	$	—
Commercial real estate:
Non-owner occupied		3,703		126,456		34,861		165,020		2,148,452		2,313,472		27,506		—
Owner occupied		28,402		9,722		112,786		150,910		1,584,275		1,735,185		86,000		—
Commercial and industrial		3,308		3,004		49,058		55,370		2,796,106		2,851,476		48,485		573
Construction		—		—		2,559		2,559		94,616		97,175		2,559		—
Mortgage		308,128		132,591		1,389,963		1,830,682		4,812,444		6,643,126		373,257		871,011
Leasing		6,392		2,008		3,696		12,096		860,002		872,098		3,696		—
Consumer:
Credit cards		9,997		7,700		29,024		46,721		1,032,813		1,079,534		—		29,024
Home equity lines of credit		54		176		349		579		5,044		5,623		12		337
Personal		11,757		8,066		21,051		40,874		1,198,261		1,239,135		19,910		32
Auto		24,984		7,377		12,855		45,216		869,847		915,063		12,855		—
Other		169		143		15,264		15,576		132,189		147,765		14,768		496

Total	$	397,225	$	297,243	$	1,673,740	$	2,368,208	$	15,678,909	$	18,047,117	$	589,838	$	901,473

[1]

Loans HIP of $183 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.


June 30, 2018
Popular U.S.
	Past due												Past due 90 days or more
(In thousands)	30-59 days		60-89 days		90 days or more		Total past due		Current		Loans HIP		Non-accrual loans		Accruing loans^[1]
Commercial multi-family	$	633	$	19	$	—	$	652	$	1,319,746	$	1,320,398	$	—	$	—
Commercial real estate:
Non-owner occupied		—		10,852		365		11,217		1,865,077		1,876,294		365		—
Owner occupied		1,587		1,918		1,435		4,940		279,742		284,682		1,435		—
Commercial and industrial		222		1,661		82,738		84,621		976,400		1,061,021		368		—
Construction		4,428		—		17,901		22,329		779,819		802,148		17,901		—
Mortgage		1,051		3,804		11,398		16,253		717,332		733,585		11,398		—
Legacy		471		15		3,663		4,149		25,101		29,250		3,663		—
Consumer:
Credit cards		1		—		12		13		56		69		12		—
Home equity lines of credit		1,287		425		15,900		17,612		140,181		157,793		15,900		—
Personal		2,075		1,666		2,318		6,059		289,889		295,948		2,318		—
Other		—		—		1		1		210		211		1		—

Total	$	11,755	$	20,360	$	135,731	$	167,846	$	6,393,553	$	6,561,399	$	53,361	$	—

[1]

Loans HIP of $82 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.


June 30, 2018
Popular, Inc.
	Past due												Past due 90 days or more
(In thousands)	30-59 days		60-89 days		90 days or more		Total past due		Current		Loans HIP^{[3] [4]}		Non-accrual loans		Accruing loans^[5]
Commercial multi-family	$	964	$	19	$	2,274	$	3,257	$	1,464,606	$	1,467,863	$	790	$	—
Commercial real estate:
Non-owner occupied		3,703		137,308		35,226		176,237		4,013,529		4,189,766		27,871		—
Owner occupied		29,989		11,640		114,221		155,850		1,864,017		2,019,867		87,435		—
Commercial and industrial		3,530		4,665		131,796		139,991		3,772,506		3,912,497		48,853		573
Construction		4,428		—		20,460		24,888		874,435		899,323		20,460		—
Mortgage^[1]		309,179		136,395		1,401,361		1,846,935		5,529,776		7,376,711		384,655		871,011
Leasing		6,392		2,008		3,696		12,096		860,002		872,098		3,696		—
Legacy^[2]		471		15		3,663		4,149		25,101		29,250		3,663		—
Consumer:
Credit cards		9,998		7,700		29,036		46,734		1,032,869		1,079,603		12		29,024
Home equity lines of credit		1,341		601		16,249		18,191		145,225		163,416		15,912		337
Personal		13,832		9,732		23,369		46,933		1,488,150		1,535,083		22,228		32
Auto		24,984		7,377		12,855		45,216		869,847		915,063		12,855		—
Other		169		143		15,265		15,577		132,399		147,976		14,769		496

Total	$	408,980	$	317,603	$	1,809,471	$	2,536,054	$	22,072,462	$	24,608,516	$	643,199	$	901,473

[1]	It is the Corporation’s policy to report delinquent residential mortgage loans insured by FHA or guaranteed by the VA as accruing loans past due 90 days or more as opposed to non-performing since the principal repayment is insured.

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

[3]	Loans held-in-portfolio are net of $144 million in unearned income and exclude $74 million in loans held-for-sale.

[4]

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 $4.7 billion were pledged at the Federal Home Loan Bank (“FHLB”) as collateral for borrowings, $2.2 billion at the Federal Reserve Bank (“FRB”) for discount window borrowings and $0.4 billion serve as collateral for public funds.

[5]

Loans HIP of $265 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.


December 31, 2017
Puerto Rico
	Past due												Past due 90 days or more
(In thousands)	30-59 days		60-89 days		90 days or more		Total past due		Current		Non-covered loans HIP		Non-accrual loans		Accruing loans^[1]
Commercial multi-family	$	—	$	426	$	1,210	$	1,636	$	144,763	$	146,399	$	1,115	$	—
Commercial real estate:
Non-owner occupied		39,617		131		28,045		67,793		2,336,766		2,404,559		18,866		—
Owner occupied		7,997		2,291		123,929		134,217		1,689,397		1,823,614		101,068		—
Commercial and industrial		3,556		1,251		40,862		45,669		2,845,658		2,891,327		40,177		685
Construction		—		—		170		170		95,199		95,369		—		—
Mortgage		217,890		77,833		1,596,763		1,892,486		4,684,293		6,576,779		306,697		1,204,691
Leasing		10,223		1,490		2,974		14,687		795,303		809,990		2,974		—
Consumer:
Credit cards		7,319		4,464		18,227		30,010		1,063,211		1,093,221		—		18,227
Home equity lines of credit		438		395		257		1,090		4,997		6,087		—		257
Personal		13,926		6,857		19,981		40,764		1,181,548		1,222,312		19,460		141
Auto		24,405		5,197		5,466		35,068		815,745		850,813		5,466		—
Other		537		444		16,765		17,746		139,842		157,588		15,617		1,148

Total	$	325,908	$	100,779	$	1,854,649	$	2,281,336	$	15,796,722	$	18,078,058	$	511,440	$	1,225,149

[1]

Non-covered loans HIP of $118 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.


December 31, 2017
Popular U.S.
	Past due												Past due 90 days or more
(In thousands)	30-59 days		60-89 days		90 days or more		Total past due		Current		Non-covered loans HIP		Non-accrual loans		Accruing loans^[1]
Commercial multi-family	$	395	$	—	$	784	$	1,179	$	1,209,514	$	1,210,693	$	784	$	—
Commercial real estate:
Non-owner occupied		4,028		1,186		1,599		6,813		1,681,498		1,688,311		1,599		—
Owner occupied		2,684		—		862		3,546		315,429		318,975		862		—
Commercial and industrial		1,121		5,278		97,427		103,826		901,157		1,004,983		594		—
Construction		—		—		—		—		784,660		784,660		—		—
Mortgage		13,453		6,148		14,852		34,453		659,175		693,628		14,852		—
Legacy		291		417		3,039		3,747		29,233		32,980		3,039		—
Consumer:
Credit cards		3		2		11		16		84		100		11		—
Home equity lines of credit		4,653		3,675		14,997		23,325		158,760		182,085		14,997		—
Personal		3,342		2,149		2,779		8,270		289,732		298,002		2,779		—
Other		—		—		—		—		319		319		—		—

Total	$	29,970	$	18,855	$	136,350	$	185,175	$	6,029,561	$	6,214,736	$	39,517	$	—

[1]

Non-covered loans HIP of $97 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.


December 31, 2017
Popular, Inc.
	Past due												Past due 90 days or more
(In thousands)	30-59 days		60-89 days		90 days or more		Total past due		Current		Non-covered loans HIP^{[3] [4]}		Non-accrual loans		Accruing loans^[5]
Commercial multi-family	$	395	$	426	$	1,994	$	2,815	$	1,354,277	$	1,357,092	$	1,899	$	—
Commercial real estate:
Non-owner occupied		43,645		1,317		29,644		74,606		4,018,264		4,092,870		20,465		—
Owner occupied		10,681		2,291		124,791		137,763		2,004,826		2,142,589		101,930		—
Commercial and industrial		4,677		6,529		138,289		149,495		3,746,815		3,896,310		40,771		685
Construction		—		—		170		170		879,859		880,029		—		—
Mortgage^[1]		231,343		83,981		1,611,615		1,926,939		5,343,468		7,270,407		321,549		1,204,691
Leasing		10,223		1,490		2,974		14,687		795,303		809,990		2,974		—
Legacy^[2]		291		417		3,039		3,747		29,233		32,980		3,039		—
Consumer:
Credit cards		7,322		4,466		18,238		30,026		1,063,295		1,093,321		11		18,227
Home equity lines of credit		5,091		4,070		15,254		24,415		163,757		188,172		14,997		257
Personal		17,268		9,006		22,760		49,034		1,471,280		1,520,314		22,239		141
Auto		24,405		5,197		5,466		35,068		815,745		850,813		5,466		—
Other		537		444		16,765		17,746		140,161		157,907		15,617		1,148

Total	$	355,878	$	119,634	$	1,990,999	$	2,466,511	$	21,826,283	$	24,292,794	$	550,957	$	1,225,149

[1]	It is the Corporation’s policy to report delinquent residential mortgage loans insured by FHA or guaranteed by the VA as accruing loans past due 90 days or more as opposed to non-performing since the principal repayment is insured.

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

[3]	Loans held-in-portfolio are net of $131 million in unearned income and exclude $132 million in loans held-for-sale.

[4]

Includes $7.1 billion pledged to secure credit facilities and public funds that the secured parties are not permitted to sell or repledge the collateral, of which $4.6 billion were pledged at the FHLB as collateral for borrowings, $2.0 billion at the FRB for discount window borrowings and $0.5 billion serve as collateral for public funds.

[5]

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

At June 30, 2018, mortgage loans held-in-portfolio include $1.5 billion of loans insured by the Federal Housing Administration (“FHA”), or guaranteed by the U.S. Department of Veterans Affairs (“VA”) of which $877 million are 90 days or more past due, including $298 million of loans rebooked under the GNMA buyback option, discussed below (December 31, 2017—$1.8 billion, $1.2 billion and $840 million, respectively). Within this portfolio, loans in a delinquency status of 90 days or more are reported as accruing loans as opposed to non-performing since the principal repayment is insured. These balances include $216 million of residential mortgage loans in Puerto Rico that are no longer accruing interest as of June 30, 2018 (December 31, 2017—$178 million). Additionally, the Corporation has approximately $66 million in reverse mortgage loans in Puerto Rico which are guaranteed by FHA, but which are currently not accruing interest at June 30, 2018 (December 31, 2017—$58 million).

Loans with a delinquency status of 90 days past due as of June 30, 2018 include $298 million in loans previously pooled into GNMA securities (December 31, 2017—$840 million). Under the GNMA program, issuers such as BPPR have the option but not the obligation to repurchase loans that are 90 days or more past due. For accounting purposes, these loans subject to the repurchase option are required to be reflected on the financial statements of the Bank with an offsetting liability.

Covered loans

The following table presents the composition of covered loans held-in-portfolio by past due status, and by loan class that are in non-performing status or are accruing interest but are past due 90 days or more at December 31, 2017.


December 31, 2017
	Past due												Past due 90 days or more
(In thousands)	30-59 days		60-89 days		90 days or more		Total past due		Current		Covered loans HIP^[2]		Non-accrual loans		Accruing loans
Mortgage	$	16,640	$	5,453	$	59,018	$	81,111	$	421,818	$	502,929	$	3,165	$	—
Consumer		518		147		988		1,653		12,692		14,345		188		—

Total covered loans^[1]	$	17,158	$	5,600	$	60,006	$	82,764	$	434,510	$	517,274	$	3,353	$	—

[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.

[2]	Includes $279 million pledged to secure credit facilities at the FHLB which are not permitted to sell or repledge the collateral.

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.

The outstanding principal balance of acquired loans accounted pursuant to ASC Subtopic 310-30, amounted to $2.3 billion at June 30, 2018 (December 31, 2017—$2.5 billion). The carrying amount of these loans consisted of loans determined to be impaired at the time of acquisition, which are accounted for in accordance with ASC Subtopic 310-30 (“credit impaired loans”), and loans that were considered to be performing at the acquisition date, accounted for by analogy to ASC Subtopic 310-30 (“non-credit impaired loans”), as detailed in the following table.

At June 30, 2018, none of the acquired loans 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 loans accounted pursuant to the ASC Subtopic 310-30, for the quarters ended June 30, 2018 and 2017, were as follows:


Carrying amount of acquired loans accounted for pursuant to ASC 310-30
	For the quarter ended						For the six months ended
(In thousands)	June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
Beginning balance	$	2,085,191		$	2,245,624		$	2,108,993		$	2,301,024
Additions		—			4,298			5,272			9,879
Accretion		40,806			44,910			82,866			90,638
Collections / loan sales / charge-offs		(92,540	)		(126,168	)		(163,674	)		(232,877	)

Ending balance^[1]	$	2,033,457		$	2,168,664		$	2,033,457		$	2,168,664
Allowance for loan losses		(156,328	)		(103,597	)		(156,328	)		(103,597	)

Ending balance, net of ALLL	$	1,877,129		$	2,065,067		$	1,877,129		$	2,065,067

[1]	At June 30, 2018, includes $1.5 billion of loans considered non-credit impaired at the acquisition date (June 30, 2017—$1.6 billion).


Activity in the accretable yield of acquired loans accounted for pursuant to ASC 310-30
	For the quarter ended						For the six months ended
(In thousands)	June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
Beginning balance	$	1,204,726		$	1,290,984		$	1,214,488		$	1,288,983
Additions		—			2,601			3,437			5,855
Accretion		(40,806	)		(44,910	)		(82,866	)		(90,638	)
Change in expected cash flows		14,122			(3,003	)		42,983			41,472

Ending balance^[1]	$	1,178,042		$	1,245,672		$	1,178,042		$	1,245,672

[1]	At June 30, 2018, includes $0.9 billion of loans considered non-credit impaired at the acquisition date (June 30, 2017—$0.9 billion).

Note 8—Allowance for loan losses

The Corporation follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan losses (“ALLL”) 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, 2018, 78% (June 30, 2017—39%) of the ALLL for non-covered BPPR segment loan portfolios utilized the recent loss trend adjustment instead of the base loss. The effect of replacing the base loss with the recent loss trend adjustment was mainly concentrated in the mortgage, leasing and overall consumer portfolios for 2018 and in the personal, other consumer and commercial and industrial portfolios for 2017.

For the period ended June 30, 2018, 6% (June 30, 2017—2 %) of our Popular U.S. 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 portfolios for 2018 and commercial multifamily and legacy portfolios for 2017.

•

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, 2018 and 2017.


For the quarter ended June 30, 2018
Puerto Rico - Non-covered loans
(In thousands)	Commercial			Construction			Mortgage			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	188,522		$	2,657		$	153,301		$	12,912		$	176,203		$	533,595
Provision (reversal of provision)		10,364			(2,193	)		6,955			2,530			26,749			44,405
Charge-offs		(11,502	)		(18	)		(12,847	)		(1,803	)		(31,151	)		(57,321	)
Recoveries		3,542			319			1,272			646			7,077			12,856
Allowance transferred from covered loans ^[1]		—			—			33,422			—			188			33,610

Ending balance	$	190,926		$	765		$	182,103		$	14,285		$	179,066		$	567,145

Specific ALLL	$	46,626		$	—		$	45,039		$	362		$	23,553		$	115,580

General ALLL	$	144,300		$	765		$	137,064		$	13,923		$	155,513		$	451,565

Loans held-in-portfolio:
Impaired non-covered loans	$	359,447		$	2,559		$	507,580		$	1,130		$	105,922		$	976,638
Non-covered loans held-in-portfolio excluding impaired loans		6,688,151			94,616			6,135,546			870,968			3,281,198			17,070,479

Total non-covered loans held-in-portfolio	$	7,047,598		$	97,175		$	6,643,126		$	872,098		$	3,387,120		$	18,047,117

[1]	Represents the allowance transferred from covered to non-covered loans at June 30, 2018, due to the Termination Agreement with the FDIC.


For the quarter ended June 30, 2018
Puerto Rico - Covered loans
(In thousands)	Commercial		Construction		Mortgage			Leasing		Consumer			Total
Allowance for credit losses:
Beginning balance	$	—	$	—	$	33,422		$	—	$	188		$	33,610
Provision		—		—		—			—		—			—
Charge-offs		—		—		—			—		—			—
Recoveries		—		—		—			—		—			—
Allowance transferred to non-covered loans		—		—		(33,422	)		—		(188	)		(33,610	)

Ending balance	$	—	$	—	$	—		$	—	$	—		$	—

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

General ALLL	$	—	$	—	$	—		$	—	$	—		$	—

Loans held-in-portfolio:
Impaired covered loans	$	—	$	—	$	—		$	—	$	—		$	—
Covered loans held-in-portfolio excluding impaired loans		—		—		—			—		—			—

Total covered loans held-in-portfolio	$	—	$	—	$	—		$	—	$	—		$	—


For the quarter ended June 30, 2018
Popular U.S.
(In thousands)	Commercial			Construction			Mortgage			Legacy			Consumer			Total
Allowance for credit losses:
Beginning balance	$	47,859		$	7,092		$	4,727		$	652		$	13,043		$	73,373
Provision (reversal of provision)		13,193			(155	)		(346	)		(229	)		3,186			15,649
Charge-offs		(11,247	)		—			(61	)		(14	)		(4,998	)		(16,320	)
Recoveries		1,115			—			43			291			1,722			3,171

Ending balance	$	50,920		$	6,937		$	4,363		$	700		$	12,953		$	75,873

Specific ALLL	$	—		$	—		$	2,476		$	—		$	1,283		$	3,759

General ALLL	$	50,920		$	6,937		$	1,887		$	700		$	11,670		$	72,114

Loans held-in-portfolio:
Impaired loans	$	—		$	17,901		$	9,728		$	—		$	6,563		$	34,192
Loans held-in-portfolio excluding impaired loans		4,542,395			784,247			723,857			29,250			447,458			6,527,207

Total loans held-in-portfolio	$	4,542,395		$	802,148		$	733,585		$	29,250		$	454,021		$	6,561,399


For the quarter ended June 30, 2018
Popular, Inc.
(In thousands)	Commercial			Construction			Mortgage			Legacy			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	236,381		$	9,749		$	191,450		$	652		$	12,912		$	189,434		$	640,578
Provision (reversal of provision)		23,557			(2,348	)		6,609			(229	)		2,530			29,935			60,054
Charge-offs		(22,749	)		(18	)		(12,908	)		(14	)		(1,803	)		(36,149	)		(73,641	)
Recoveries		4,657			319			1,315			291			646			8,799			16,027

Ending balance	$	241,846		$	7,702		$	186,466		$	700		$	14,285		$	192,019		$	643,018

Specific ALLL	$	46,626		$	—		$	47,515		$	—		$	362		$	24,836		$	119,339

General ALLL	$	195,220		$	7,702		$	138,951		$	700		$	13,923		$	167,183		$	523,679

Loans held-in-portfolio:
Impaired loans	$	359,447		$	20,460		$	517,308		$	—		$	1,130		$	112,485		$	1,010,830
Loans held-in-portfolio excluding impaired loans		11,230,546			878,863			6,859,403			29,250			870,968			3,728,656			23,597,686

Total loans held-in-portfolio	$	11,589,993		$	899,323		$	7,376,711		$	29,250		$	872,098		$	3,841,141		$	24,608,516


For the six months ended June 30, 2018
Puerto Rico - Non-covered loans
(In thousands)	Commercial			Construction			Mortgage			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	171,531		$	1,286		$	159,081		$	11,991		$	174,215		$	518,104
Provision (reversal of provision)		31,298			(1,030	)		14,419			5,444			50,992			101,123
Charge-offs		(18,291	)		30			(26,638	)		(4,316	)		(59,523	)		(108,738	)
Recoveries		6,388			479			1,819			1,166			13,194			23,046
Allowance transferred from covered loans ^[1]		—			—			33,422			—			188			33,610

Ending balance	$	190,926		$	765		$	182,103		$	14,285		$	179,066		$	567,145

Specific ALLL	$	46,626		$	—		$	45,039		$	362		$	23,553		$	115,580

General ALLL	$	144,300		$	765		$	137,064		$	13,923		$	155,513		$	451,565

Loans held-in-portfolio:
Impaired non-covered loans	$	359,447		$	2,559		$	507,580		$	1,130		$	105,922		$	976,638
Non-covered loans held-in-portfolio excluding impaired loans		6,688,151			94,616			6,135,546			870,968			3,281,198			17,070,479

Total non-covered loans held-in-portfolio	$	7,047,598		$	97,175		$	6,643,126		$	872,098		$	3,387,120		$	18,047,117

[1]	Represents the allowance transferred from covered to non-covered loans at June 30, 2018, due to the Termination Agreement with the FDIC.


For the six months ended June 30, 2018
Puerto Rico - Covered loans
(In thousands)	Commercial		Construction		Mortgage			Leasing		Consumer			Total
Allowance for credit losses:
Beginning balance	$	—	$	—	$	32,521		$	—	$	723		$	33,244
Provision (reversal of provision)		—		—		2,265			—		(535	)		1,730
Charge-offs		—		—		(1,446	)		—		(2	)		(1,448	)
Recoveries		—		—		82			—		2			84
Allowance transferred to non-covered loans		—		—		(33,422	)		—		(188	)		(33,610	)

Ending balance	$	—	$	—	$	—		$	—	$	—		$	—

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

General ALLL	$	—	$	—	$	—		$	—	$	—		$	—

Loans held-in-portfolio:
Impaired covered loans	$	—	$	—	$	—		$	—	$	—		$	—
Covered loans held-in-portfolio excluding impaired loans		—		—		—			—		—			—

Total covered loans held-in-portfolio	$	—	$	—	$	—		$	—	$	—		$	—


For the six months ended June 30, 2018
Popular U.S.
(In thousands)	Commercial			Construction			Mortgage			Legacy			Consumer			Total
Allowance for credit losses:
Beginning balance	$	44,134		$	7,076		$	4,541		$	798		$	15,529		$	72,078
Provision (reversal of provision)		23,748			(139	)		(464	)		(706	)		5,825			28,264
Charge-offs		(19,643	)		—			(143	)		(171	)		(11,314	)		(31,271	)
Recoveries		2,681			—			429			779			2,913			6,802

Ending balance	$	50,920		$	6,937		$	4,363		$	700		$	12,953		$	75,873

Specific ALLL	$	—		$	—		$	2,476		$	—		$	1,283		$	3,759

General ALLL	$	50,920		$	6,937		$	1,887		$	700		$	11,670		$	72,114

Loans held-in-portfolio:
Impaired loans	$	—		$	17,901		$	9,728		$	—		$	6,563		$	34,192
Loans held-in-portfolio excluding impaired loans		4,542,395			784,247			723,857			29,250			447,458			6,527,207

Total loans held-in-portfolio	$	4,542,395		$	802,148		$	733,585		$	29,250		$	454,021		$	6,561,399


For the six months ended June 30, 2018
Popular, Inc.
(In thousands)	Commercial			Construction			Mortgage			Legacy			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	215,665		$	8,362		$	196,143		$	798		$	11,991		$	190,467		$	623,426
Provision (reversal of provision)		55,046			(1,169	)		16,220			(706	)		5,444			56,282			131,117
Charge-offs		(37,934	)		30			(28,227	)		(171	)		(4,316	)		(70,839	)		(141,457	)
Recoveries		9,069			479			2,330			779			1,166			16,109			29,932

Ending balance	$	241,846		$	7,702		$	186,466		$	700		$	14,285		$	192,019		$	643,018

Specific ALLL	$	46,626		$	—		$	47,515		$	—		$	362		$	24,836		$	119,339

General ALLL	$	195,220		$	7,702		$	138,951		$	700		$	13,923		$	167,183		$	523,679

Loans held-in-portfolio:
Impaired loans	$	359,447		$	20,460		$	517,308		$	—		$	1,130		$	112,485		$	1,010,830
Loans held-in-portfolio excluding impaired loans		11,230,546