Edgar Filing: POPULAR INC

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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 September 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 every Interactive Data File required to be submitted 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 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, 100,352,514 shares outstanding as of November 5, 2018.

POPULAR, INC.

INDEX


Part I – Financial Information	Page

Item 1. Financial Statements

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

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

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

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

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

Notes to Unaudited Consolidated Financial Statements		10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		127

Item 3. Quantitative and Qualitative Disclosures about Market Risk		170

Item 4. Controls and Procedures		170

Part II – Other Information

Item 1. Legal Proceedings		170

Item 1A. Risk Factors		171

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		171

Item 3. Defaults Upon Senior Securities		171

Item 4. Mine Safety Disclosures		171

Item 5. Other Information		171

Item 6. Exhibits		172

Signatures

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, including, without limitation, statements about Popular Inc.’s (the “Corporation,” “Popular,” “we,” “us,” “our”) business, financial condition, results of operations, plans, objectives and future performance. These statements are not guarantees of future performance, are based on management’s current expectations and, by their nature, involve risks, uncertainties, estimates and assumptions. Potential factors, some of which are beyond the Corporation’s control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. Risks and uncertainties include 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 & Company, 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)	September 30, 2018			December 31, 2017
Assets:
Cash and due from banks	$	400,949		$	402,857

Money market investments:
Time deposits with other banks		4,609,061			5,255,119

Total money market investments		4,609,061			5,255,119

Trading account debt securities, at fair value:
Pledged securities with creditors’ right to repledge		600			625
Other trading securities		37,131			33,301
Debt securities available-for-sale, at fair value:
Pledged securities with creditors’ right to repledge		295,437			393,634
Other investment securities available-for-sale		12,752,180			9,783,289
Debt securities held-to-maturity, at amortized cost (fair value 2018 - $105,074; 2017 - $97,501)		101,238			107,019
Equity securities (realizable value 2018 -$162,741); (2017 - $168,417)		157,962			165,103
Loans held-for-sale, at lower of cost or fair value		51,742			132,395

Loans held-in-portfolio:
Loans not covered under loss-sharing agreements with the FDIC		26,661,951			24,423,427
Loans covered under loss-sharing agreements with the FDIC		—			517,274
Less – Unearned income		149,783			130,633
Allowance for loan losses		633,718			623,426

Total loans held-in-portfolio, net		25,878,450			24,186,642

FDIC loss-share asset		—			45,192
Premises and equipment, net		557,104			547,142
Other real estate not covered under loss-sharing agreements with the FDIC		133,780			169,260
Other real estate covered under loss-sharing agreements with the FDIC		—			19,595
Accrued income receivable		163,443			213,844
Mortgage servicing assets, at fair value		162,779			168,031
Other assets		1,900,850			1,991,323
Goodwill		687,536			627,294
Other intangible assets		29,186			35,672

Total assets	$	47,919,428		$	44,277,337

Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	8,803,752		$	8,490,945
Interest bearing		30,845,075			26,962,563

Total deposits		39,648,827			35,453,508

Assets sold under agreements to repurchase		300,116			390,921
Other short-term borrowings		1,200			96,208
Notes payable		1,744,687			1,536,356
Other liabilities		980,249			1,696,439

Total liabilities		42,675,079			39,173,432

Commitments and contingencies (Refer to Note 22)
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; 104,304,529 shares issued (2017 - 104,238,159) and 100,336,341 shares outstanding (2017 - 102,068,981)		1,043			1,042
Surplus		4,281,515			4,298,503
Retained earnings		1,629,692			1,194,994
Treasury stock - at cost, 3,968,188 shares (2017 - 2,169,178)		(183,872	)		(90,142	)
Accumulated other comprehensive loss, net of tax		(534,189	)		(350,652	)

Total stockholders’ equity		5,244,349			5,103,905

Total liabilities and stockholders’ equity	$	47,919,428		$	44,277,337

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Quarters ended September 30,						Nine months ended September 30,
(In thousands, except per share information)	2018			2017			2018			2017
Interest income:
Loans	$	430,637		$	371,979		$	1,190,498		$	1,102,784
Money market investments		27,581			15,529			86,258			33,233
Investment securities		70,147			48,375			185,537			144,594

Total interest income		528,365			435,883			1,462,293			1,280,611

Interest expense:
Deposits		55,134			37,058			139,050			104,907
Short-term borrowings		1,622			1,524			5,387			3,734
Long-term debt		20,140			19,130			59,204			57,222

Total interest expense		76,896			57,712			203,641			165,863

Net interest income		451,469			378,171			1,258,652			1,114,748
Provision for loan losses - non-covered loans		54,387			157,659			183,774			249,681
Provision for loan losses - covered loans		—			3,100			1,730			4,255

Net interest income after provision for loan losses		397,082			217,412			1,073,148			860,812

Service charges on deposit accounts		38,147			39,273			111,704			119,882
Other service fees		64,316			53,481			187,794			168,824
Mortgage banking activities (Refer to Note 11)		11,269			5,239			33,408			27,349
Net gain on sale of debt securities		—			83			—			83
Other-than-temporary impairment losses on debt securities		—			—			—			(8,299	)
Net gain (loss), including impairment on equity securities		370			20			(42	)		201
Net (loss) profit on trading account debt securities		(122	)		253			(299	)		(680	)
Net loss on sale of loans, including valuation adjustments on loans held-for-sale		—			(420	)		—			(420	)
Adjustments (expense) to indemnity reserves on loans sold		(3,029	)		(6,406	)		(6,482	)		(11,302	)
FDIC loss-share (expense) income (Refer to Note 29)		—			(3,948	)		94,725			(12,680	)
Other operating income		40,070			12,799			78,519			50,078

Total non-interest income		151,021			100,374			499,327			333,036

Operating expenses:
Personnel costs		139,757			117,769			389,941			358,457
Net occupancy expenses		18,602			22,254			63,829			65,295
Equipment expenses		18,303			16,457			53,284			48,677
Other taxes		11,923			10,858			33,701			32,567
Professional fees		83,860			70,772			260,748			212,956
Communications		6,054			5,394			17,342			17,242
Business promotion		15,478			15,216			44,265			40,158
FDIC deposit insurance		8,610			6,271			22,534			18,936
Other real estate owned (OREO) expenses		7,950			11,724			21,028			41,212
Other operating expenses		52,576			38,028			111,462			92,707
Amortization of intangibles		2,324			2,345			6,973			7,034

Total operating expenses		365,437			317,088			1,025,107			935,241

Income before income tax		182,666			698			547,368			258,607
Income tax expense (benefit)		42,018			(19,966	)		35,613			48,772

Net Income	$	140,648		$	20,664		$	511,755		$	209,835

Net Income Applicable to Common Stock	$	139,718		$	19,734		$	508,963		$	207,043

Net Income per Common Share – Basic	$	1.38		$	0.19		$	5.01		$	2.03

Net Income per Common Share – Diluted	$	1.38		$	0.19		$	5.00		$	2.03

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)


	Quarters ended, September 30,						Nine months ended, September 30,
(In thousands)	2018			2017			2018			2017
Net income	$	140,648		$	20,664		$	511,755		$	209,835

Reclassification to retained earnings due to cumulative effect of accounting change		—			—			(605	)		—
Other comprehensive (loss) income before tax:
Foreign currency translation adjustment		(605	)		(390	)		(3,968	)		(1,839	)
Amortization of net losses of pension and postretirement benefit plans		5,386			5,606			16,157			16,819
Amortization of prior service credit of pension and postretirement benefit plans		(868	)		(950	)		(2,603	)		(2,850	)
Unrealized holding (losses) gains on debt securities arising during the period		(43,781	)		9,180			(201,193	)		14,912
Other-than-temporary impairment included in net income		—			—			—			8,299
Reclassification adjustment for gains included in net income		—			(83	)		—			(83	)
Unrealized holding gains on equity securities arising during the period		—			60			—			225
Reclassification adjustment for gains included in net income		—			(20	)		—			(201	)
Unrealized net gains (losses) on cash flow hedges		341			(410	)		1,296			(1,424	)
Reclassification adjustment for net losses (gains) included in net income		147			232			(870	)		2,122

Other comprehensive (loss) income before tax		(39,380	)		13,225			(191,786	)		35,980
Income tax benefit (expense)		1,983			(1,614	)		8,249			(7,026	)

Total other comprehensive (loss) income, net of tax		(37,397	)		11,611			(183,537	)		28,954

Comprehensive income, net of tax	$	103,251		$	32,275		$	328,218		$	238,789

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


	Quarters ended September 30,						Nine months ended, September 30,
(In thousands)	2018			2017			2018			2017
Amortization of net losses of pension and postretirement benefit plans	$	(2,101	)	$	(2,185	)	$	(6,301	)	$	(6,556	)
Amortization of prior service credit of pension and postretirement benefit plans		339			370			1,016			1,110
Unrealized holding (losses) gains on debt securities arising during the period		3,936			122			13,701			239
Other-than-temporary impairment included in net income		—			—			—			(1,559	)
Reclassification adjustment for gains included in net income		—			17			—			17
Unrealized holding gains on equity securities arising during the period		—			(12	)		—			(45	)
Reclassification adjustment for gains included in net income		—			4			—			40
Unrealized net gains (losses) on cash flow hedges		(133	)		160			(506	)		555
Reclassification adjustment for net losses (gains) included in net income		(58	)		(90	)		339			(827	)

Income tax benefit (expense)	$	1,983		$	(1,614	)	$	8,249		$	(7,026	)

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									209,835									209,835
Issuance of stock		2				5,513												5,515
Dividends declared:
Common stock									(76,620	)								(76,620	)
Preferred stock									(2,792	)								(2,792	)
Common stock purchases						4,518						(81,936	)					(77,418	)
Other comprehensive income, net of tax															28,954			28,954

Balance at September 30, 2017	$	1,042	$	50,160	$	4,265,053		$	1,350,730		$	(90,222	)	$	(291,332	)	$	5,285,431

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									511,755									511,755
Issuance of stock		1				2,564												2,565
Dividends declared:
Common stock									(76,200	)								(76,200	)
Preferred stock									(2,792	)								(2,792	)
Common stock purchases						(23,020	)					(104,423	)					(127,443	)
Common stock reissuance						143						2,008						2,151
Stock based compensation						3,325						8,685						12,010
Other comprehensive income, net of tax															(183,537	)		(183,537	)

Balance at September 30, 2018	$	1,043	$	50,160	$	4,281,515		$	1,629,692		$	(183,872	)	$	(534,189	)	$	5,244,349


Disclosure of changes in number of shares:	September 30, 2018			September 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		66,370			138,840

Balance at end of period		104,304,529			104,197,524
Treasury stock		(3,968,188	)		(2,171,107	)

Common Stock – Outstanding		100,336,341			102,026,417

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Nine months ended September 30,
(In thousands)	2018			2017
Cash flows from operating activities:
Net income	$	511,755		$	209,835

Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		185,504			253,936
Amortization of intangibles		6,973			7,034
Depreciation and amortization of premises and equipment		39,083			35,966
Net accretion of discounts and amortization of premiums and deferred fees		(43,533	)		(17,371	)
Share-based compensation		5,962			—
Impairment losses on long-lived assets		272			11,286
Other-than-temporary impairment on debt securities		—			8,299
Fair value adjustments on mortgage servicing rights		13,123			24,262
FDIC loss share (income) expense		(94,725	)		12,680
Adjustments (expense) to indemnity reserves on loans sold		6,482			11,302
Earnings from investments under the equity method, net of dividends or distributions		(14,772	)		(11,514	)
Deferred income tax (benefit) expense		(97,708	)		30,471
Loss (gain) on:
Disposition of premises and equipment and other productive assets		17,694			5,018
Proceeds from insurance claims		(14,411	)		—
Sale and valuation adjustments of debt securities		—			(83	)
Sale of loans, including valuation adjustments on loans held-for-sale and mortgage banking activities		(6,734	)		(16,455	)
Sale of foreclosed assets, including write-downs		(638	)		19,228
Acquisitions of loans held-for-sale		(173,644	)		(204,813	)
Proceeds from sale of loans held-for-sale		51,131			68,326
Net originations on loans held-for-sale		(186,063	)		(283,709	)
Net decrease (increase) in:
Trading debt securities		346,455			499,714
Equity securities		(2,480	)		(613	)
Accrued income receivable		51,868			(8,297	)
Other assets		234,836			(1,882	)
Net (decrease) increase in:
Interest payable		(9,933	)		(9,299	)
Pension and other postretirement benefits obligation		3,392			(13,760	)
Other liabilities		(197,035	)		15,178

Total adjustments		121,099			434,904

Net cash provided by operating activities		632,854			644,739

Cash flows from investing activities:
Net increase (decrease) in money market investments		647,519			(2,600,853	)
Purchases of investment securities:
Available-for-sale		(6,968,920	)		(2,356,385	)
Equity		(11,304	)		(23,822	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale		3,925,362			1,225,915
Held-to-maturity		7,184			6,229
Proceeds from sale of investment securities:
Available-for-sale		—			14,423
Equity		20,925			17,675
Net disbursements on loans		(15,604	)		(77,400	)
Proceeds from sale of loans		1,354			415
Acquisition of loan portfolios		(461,117	)		(448,121	)
Net payments (to) from FDIC under loss sharing agreements		(25,012	)		(11,520	)
Payments to acquire businesses, net of cash acquired		(1,830,050	)		—
Return of capital from equity method investments		2,501			8,056
Acquisition of premises and equipment		(53,144	)		(40,158	)
Proceeds from insurance claims		14,411			—
Proceeds from sale of:
Premises and equipment and other productive assets		6,991			6,982
Foreclosed assets		85,622			85,705

Net cash used in investing activities		(4,653,282	)		(4,192,859	)

Cash flows from financing activities:
Net increase (decrease) in:
Deposits		4,193,859			3,751,367
Assets sold under agreements to repurchase		(90,805	)		(105,020	)
Other short-term borrowings		(95,008	)		239,398
Payments of notes payable		(226,976	)		(89,375	)
Proceeds from issuance of notes payable		434,706			45,000
Proceeds from issuance of common stock		10,852			5,515
Dividends paid		(79,115	)		(69,162	)
Net payments for repurchase of common stock		(125,326	)		(75,662	)
Payments related to tax withholding for share-based compensation		(2,205	)		(1,756	)

Net cash provided by financing activities		4,019,982			3,700,305

Net (decrease) increase in cash and due from banks, and restricted cash		(446	)		152,185
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	$	412,183		$	526,381

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

Notes to Consolidated Financial

Statements (Unaudited)


Note 1 - Nature of operations			11
Note 2 - Basis of presentation and summary of significant accounting policies			12
Note 3 - New accounting pronouncements			13
Note 4 - Business combination			19
Note 5 - Restrictions on cash and due from banks and certain securities			21
Note 6 - Debt securities available-for-sale			22
Note 7 - Debt securities held-to-maturity			25
Note 8 - Loans			27
Note 9 - Allowance for loan losses			33
Note 10 - FDIC loss share asset and true-up payment obligation			51
Note 11 - Mortgage banking activities			53
Note 12 - Transfers of financial assets and mortgage servicing assets			54
Note 13 - Other real estate owned			58
Note 14 - Other assets			59
Note 15 - Goodwill and other intangible assets			60
Note 16 - Deposits			64
Note 17 - Borrowings			65
Note 18 - Trust preferred securities			68
Note 19 - Stockholders’ equity			70
Note 20 - Other comprehensive loss			71
Note 21 - Guarantees			73
Note 22 - Commitments and contingencies			75
Note 23 - Non-consolidated variable interest entities			82
Note 24 - Related party transactions			84
Note 25 - Fair value measurement			88
Note 26 - Fair value of financial instruments			95
Note 27 - Net income per common share			99
Note 28 - Revenue from contracts with customers			100
Note 29 - FDIC loss share expense			102
Note 30 - Pension and postretirement benefits			103
Note 31 - Stock-based compensation			105
Note 32 - Income taxes			107
Note 33 - Supplemental disclosure on the consolidated statements of cash flows			111
Note 34 - Segment reporting			112
Note 35 - Condensed consolidating financial information of guarantor and issuers of registered guaranteed securities			117

Note 1 – Nature of operations

Popular, Inc. (the “Corporation” or “Popular”) is a diversified, publicly-owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation has operations in Puerto Rico, the mainland United States 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.

On August 1, 2018, Popular, Inc., through its subsidiary Popular Auto, LLC, acquired and assumed from Reliable Financial Services, Inc. and Reliable Finance Holding Co. (“Reliable”), subsidiaries of Wells Fargo & Company, certain assets and liabilities related to their auto finance business in Puerto Rico (the “Reliable Transaction” or “Transaction”). Refer to Note 4, Business combination, for further details on the Reliable Transaction.

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.

Business Combination

The Corporation determined that the acquisition of certain assets and assumption of certain liabilities in connection with the Reliable Transaction constitutes a business combination as defined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805 “Business Combinations”. The assets and liabilities, both tangible and intangible, were initially recorded at their estimated fair values. Fair values were determined based on the requirements of FASB ASC Topic 820 “Fair Value Measurements”. These fair value estimates are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair value becomes available. Acquisition-related costs are expensed as incurred. Refer to Note 4, Business combination, for additional information of assets acquired and liabilities assumed in connection with the Transaction.

Note 3 – New accounting pronouncements

Recently Adopted Accounting Standards Updates

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 Corporation was not impacted by these technical corrections and improvements upon adoption of this ASU.

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 $6.7 million during the nine months ended September 30, 2018 (September 30, 2017—$5.6 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. Refer to Note 4, Business combination, for additional information on assets acquired and liabilities assumed in connection with the Reliable Transaction.

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 requires 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 $11.2 million at September 30, 2018 (September 30, 2017—$8.9 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 33, 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 nine months ended September 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 28, 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”) 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606

The FASB issued ASU 2018-18 in November 2018 which, among other things, provides guidance on how to assess whether certain collaborative arrangement transactions should be accounted for under Topic 606.

The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted.

The Corporation does not expect to be impacted by these amendments since it does not have collaborative arrangements.

FASB Accounting Standards Update (“ASU”) 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities

The FASB issued ASU 2018-17 in October 2018, which requires entities to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety when determining whether a decision-making fee is a variable interest.

The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. These amendments should be applied retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented.

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

FASB Accounting Standards Update (“ASU”) 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes

The FASB issued ASU 2018-16 in October 2018 which permit use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to other permissible U.S. benchmark rates.

The amendments in this ASU are required to be adopted concurrently with the amendments in ASU 2017-12, which are effective in the first quarter of 2019. The amendments should be adopted on a prospective basis for qualifying new or re-designated hedging relationships entered into on or after the date of adoption.

The Corporation will consider this guidance for qualifying new hedging relationships entered into on or after the effective date.

FASB Accounting Standards Update (“ASU”) 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

The FASB issued ASU 2018-15 in August 2018 which, among other things, aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software, and clarifies the term over which such capitalized implementation costs should be amortized.

The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted.

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

FASB Accounting Standards Update (“ASU”) 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans

The FASB issued ASU 2018-14 in August 2018, which modifies the disclosure requirements for employers that sponsor defined benefit pension or postretirement plans. The most significant changes include the removal of the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year and the effects of a one-percentage point change in assumed health care cost trend rates on the aggregate of the service and interest cost components of net periodic benefit costs and benefit obligation for postretirement health care benefits. In addition, certain disclosure requirements were added which include, but are not limited to, an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period.

The amendments in this ASU are effective for fiscal years ending after December 15, 2020, with early adoption permitted. The amendments in this ASU should be applied on a retrospective basis to all periods presented.

Upon adoption of this standard, the Corporation will be impacted principally by the simplified disclosures on defined benefit plans.

FASB Accounting Standards Update (“ASU”) 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement

The FASB issued ASU 2018-13 in August 2018, which modifies the disclosure requirements on fair value measurements. The most significant changes include, among other things, the removal of the requirements to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. In addition, certain disclosure requirements were added, which include but are not limited to, how the weighted average of significant unobservable inputs used to develop Level 3 fair value measurements was calculated.

The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted.

Upon adoption of this standard, the Corporation will be impacted principally by the simplified disclosures on fair value measurements.

FASB Accounting Standards Update (“ASU”) 2018-12, Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts

The FASB issued ASU 2018-12 in August 2018, which makes targeted improvements to the existing recognition, measurement, presentation, and disclosure requirements for long-duration contracts issued by an insurance entity.

The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted.

The Corporation does not anticipate that the adoption of this accounting pronouncement will have a significant impact on its Consolidated Financial Statements.

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

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 ASU 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 – Business combination

On August 1, 2018, Popular Auto, LLC (“Popular Auto”), Banco Popular de Puerto Rico’s auto finance subsidiary, completed the acquisition of certain assets and the assumption of certain liabilities related to Wells Fargo & Company’s (“Wells Fargo”) auto finance business in Puerto Rico (“Reliable”). Popular Auto acquired approximately $1.6 billion in retail auto loans and $341 million in primarily auto-related commercial loans. Reliable will continue operating as a Division of Popular Auto in parallel with Popular Auto’s existing operations for a period after closing to provide continuity of service to Reliable customers while allowing Popular to assess best practices before completing the integration of the two operations.

Wells Fargo retained approximately $398 million in retail auto loans and has separately entered into a loan servicing agreement with Popular Auto with respect to such loans.

Popular entered into the Transaction as part of its growth strategy to increase its market share in the auto finance business in Puerto Rico.

The following table presents the fair values of the consideration and major classes of identifiable assets acquired and liabilities assumed by the Corporation as of August 1, 2018.


(In thousands)	Book value prior to purchase accounting adjustments		Fair value adjustments			As recorded by Popular, Inc.
Cash consideration	$	1,843,256	$	—		$	1,843,256

Assets:
Loans		1,912,866		(126,908	)^[1]		1,785,958
Premises and equipment		1,246		—			1,246
Accrued income receivable		1,466		—			1,466
Other assets		5,020		—			5,020
Trademark		—		488			488

Total assets	$	1,920,598	$	(126,420	)	$	1,794,178

Liabilities:
Other liabilities	$	11,164	$	—		$	11,164

Total liabilities	$	11,164	$	—		$	11,164

Net assets acquired	$	1,909,434	$	(126,420	)	$	1,783,014

Goodwill on acquisition						$	60,242

[1] The fair value discount is comprised of $118 million related to the retail auto loans portfolio and $9 million related to the commercial loans portfolio.

The fair values initially assigned to the assets acquired and liabilities assumed are preliminary and are subject to refinement for up to one year after the closing date of the acquisition as new information relative to closing date fair values becomes available. Because of the short time period between the August 1, 2018 closing of the transaction and the September 30, 2018 reporting date, the Corporation continues to analyze its estimates of fair value on loans acquired. As the Corporation finalizes its analyses, there may be adjustments to the recorded carrying values, and thus the recognized goodwill may increase or decrease.

Following is a description of the methods used to determine the fair values of significant assets acquired on the Reliable Transaction:

Loans

Retail Auto Loans

Fair values for retail auto loans were based on a discounted cash flow methodology. Aggregation into pools considered characteristics such as payment terms, remaining terms, and credit quality. Principal and interest projections considered prepayment rates and credit loss expectations. The discount rates were developed based on the relative risk of the cash flows as of the valuation date, taking into account the expected life of the loans. Retail auto loans were accounted for under ASC Subtopic 310-20. As of August 1, 2018, contractual cash flows amounted to $1.8 billion, from which $112 million are not expected to be collected.

Commercial Loans

Fair values for commercial loans were based on a probability of default/loss given default (“PD/LGD”) methodology. The PD was determined based on characteristics such as payment terms, remaining terms, and credit quality. Commercial loans were accounted for under ASC Subtopic 310-20. As of August 1, 2018, contractual cash flows amounted to $348 million, from which $8 million are not expected to be collected.

Goodwill

The amount of goodwill is the residual difference between the consideration transferred to Wells Fargo and the fair value of the assets acquired, net of the liabilities assumed. The goodwill is deductible for income tax purposes.

Trademark

The fair value of the Reliable trademark was calculated using the relief-from-royalty method. The Reliable trademark is subject to amortization, since Popular intends to use the trademark for a limited period of time.

The operating results of the Corporation for the quarter ended September 30, 2018 include the operating results produced by the acquired assets and liabilities assumed for the period of August 1, 2018 to September 30, 2018. This includes approximately $35.7 million in gross revenues, including $13.4 million in accretion of the fair value discount, and approximately $8.6 million in operating expenses, including $3.8 million of transaction-related expenses. The Corporation believes that given the amount of assets and liabilities assumed and the size of the operations acquired in relation to Popular’s operations, the historical results of Reliable are not significant to Popular’s results, and thus no pro forma information is presented.

Note 5 – Restrictions on cash and due from banks and certain securities

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 September 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 September 30, 2018, the Corporation held $47 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 restricted assets held in debt securities available for sale and equity securities consist primarily of assets held for the Corporation’s non-qualified retirement plans and fund deposits guaranteeing possible liens or encumbrances over the title of insured properties.

Note 6 – Debt securities available-for-sale

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


	At September 30, 2018
(In thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value		Weighted average yield
U.S. Treasury securities
Within 1 year	$	3,305,842	$	16	$	6,510	$	3,299,348		1.75	%
After 1 to 5 years		4,348,322		—		76,258		4,272,064		2.22
After 5 to 10 years		295,352		9		4,811		290,550		2.64

Total U.S. Treasury securities		7,949,516		25		87,579		7,861,962		2.04

Obligations of U.S. Government sponsored entities
Within 1 year		220,063		1		1,081		218,983		1.46
After 1 to 5 years		188,811		4		4,004		184,811		1.45

Total obligations of U.S. Government sponsored entities		408,874		5		5,085		403,794		1.45

Obligations of Puerto Rico, States and political subdivisions
After 1 to 5 years		6,861		—		182		6,679		1.33

Total obligations of Puerto Rico, States and political subdivisions		6,861		—		182		6,679		1.33

Collateralized mortgage obligations—federal agencies
After 1 to 5 years		906		—		8		898		1.92
After 5 to 10 years		115,854		—		6,397		109,457		1.67
After 10 years		681,359		1,208		34,310		648,257		2.10

Total collateralized mortgage obligations—federal agencies		798,119		1,208		40,715		758,612		2.03

Mortgage-backed securities
Within 1 year		879		11		—		890		4.46
After 1 to 5 years		4,748		23		148		4,623		2.31
After 5 to 10 years		351,597		949		11,726		340,820		2.21
After 10 years		3,834,855		9,383		174,558		3,669,680		2.43

Total mortgage-backed securities		4,192,079		10,366		186,432		4,016,013		2.41

Other
After 5 to 10 years		556		1		—		557		3.62

Total other		556		1		—		557		3.62

Total debt securities available-for-sale^[1]	$	13,356,005	$	11,605	$	319,993	$	13,047,617		2.14	%

[1]	Includes $8.5 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 $7.6 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 nine months ended September 30, 2018. During the nine months ended September 30, 2017, the Corporation sold obligations from the Puerto Rico government and its political subdivisions with a realized gain of $83 thousand. The proceeds from these sales were $14.4 million.

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 September 30, 2018 and December 31, 2017.


	At September 30, 2018
	Less than 12 months				12 months or more				Total
			Gross				Gross				Gross
	Fair		unrealized		Fair		unrealized		Fair		unrealized
(In thousands)	value		losses		value		losses		value		losses
U.S. Treasury securities	$	5,699,061	$	57,506	$	1,617,265	$	30,073	$	7,316,326	$	87,579
Obligations of U.S. Government sponsored entities		62,347		135		340,364		4,950		402,711		5,085
Obligations of Puerto Rico, States and political subdivisions		6,679		182		—		—		6,679		182
Collateralized mortgage obligations—federal agencies		122,520		2,481		576,298		38,234		698,818		40,715
Mortgage-backed securities		973,548		35,262		2,760,024		151,170		3,733,572		186,432

Total debt securities available-for-sale in an unrealized loss position	$	6,864,155	$	95,566	$	5,293,951	$	224,427	$	12,158,106	$	319,993


	At December 31, 2017
	Less than 12 months				12 months or more				Total
			Gross				Gross				Gross
	Fair		unrealized		Fair		unrealized		Fair		unrealized
(In thousands)	value		losses		value		losses		value		losses
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 September 30, 2018, the portfolio of available-for-sale debt securities reflects gross unrealized losses of approximately $320 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 September 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 September 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.


	September 30, 2018				December 31, 2017
(In thousands)	Amortized cost		Fair value		Amortized cost		Fair value
FNMA	$	3,132,301	$	2,993,841	$	3,621,537	$	3,572,474
Freddie Mac		1,119,833		1,066,880		1,358,708		1,335,685

Note 7 –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 September 30, 2018 and December 31, 2017.


	At September 30, 2018
			Gross		Gross				Weighted
	Amortized		unrealized		unrealized		Fair		average
(In thousands)	cost		gains		losses		value		yield
Obligations of Puerto Rico, States and political subdivisions
Within 1 year	$	3,510	$	8	$	3	$	3,515		6.00	%
After 1 to 5 years		16,505		497		1		17,001		6.07
After 5 to 10 years		23,885		1,127		575		24,437		3.61
After 10 years		45,221		3,004		219		48,006		1.87

Total obligations of Puerto Rico, States and political subdivisions		89,121		4,636		798		92,959		3.28

Collateralized mortgage obligations - federal agencies
After 5 to 10 years		56		3		—		59		5.45

Total collateralized mortgage obligations - federal agencies		56		3		—		59		5.45

Trust preferred securities
After 10 years		11,561		—		—		11,561		6.51

Total trust preferred securities		11,561		—		—		11,561		6.51

Other
After 1 to 5 years		500		—		5		495		2.97
Total other		500		—		5		495		2.97

Total debt securities held-to-maturity^[1]	$	101,238	$	4,639	$	803	$	105,074		3.65	%

[1]	Includes $89.1 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
			Gross		Gross				Weighted
	Amortized		unrealized		unrealized		Fair		average
(In thousands)	cost		gains		losses		value		yield
Obligations of Puerto Rico, States and political subdivisions
Within 1 year	$	3,295	$	—	$	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 September 30, 2018 and December 31, 2017.


	At September 30, 2018
	Less than 12 months				12 months or more				Total
			Gross				Gross				Gross
	Fair		unrealized		Fair		unrealized		Fair		unrealized
(In thousands)	value		losses		value		losses		value		losses
Obligations of Puerto Rico, States and political subdivisions	$	17,359	$	219	$	14,431	$	579	$	31,790	$	798
Other		—		—		495		5		495		5

Total debt securities held-to-maturity in an unrealized loss position	$	17,359	$	219	$	14,926	$	584	$	32,285	$	803


	At December 31, 2017
	Less than 12 months				12 months or more				Total
			Gross				Gross				Gross
	Fair		unrealized		Fair		unrealized		Fair		unrealized
(In thousands)	value		losses		value		losses		value		losses
Obligations of Puerto Rico, States and political subdivisions	$	—	$	—	$	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 6 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 September 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 $45 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 September 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 22 for additional information on the Corporation’s exposure to the Puerto Rico Government.

Note 8 – Loans

For a summary of the accounting policies related to loans, interest recognition and allowance for loan losses refer to Note 3 - 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 10, 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.

As previously disclosed in Note 4, as a result of the Reliable Transaction completed on August 1, 2018, Popular Auto, LLC, acquired approximately $1.6 billion in retail auto loans and $341 million in primarily auto-related commercial loans. These loans are included in the information presented in this note.

During the quarter and nine months ended September 30, 2018, the Corporation recorded purchases (including repurchases) of mortgage loans amounting to $147 million and $480 million, respectively and consumer loans of $48 million and $152 million, respectively. During the quarter and nine months ended September 30, 2017, the Corporation recorded purchases (including repurchases) of mortgage loans amounting to $104 million and $364 million, respectively; consumer loans of $133 million and $283 million, respectively; and leases of $2 million, for the nine months ended September 30, 2017.

The Corporation performed whole-loan sales involving approximately $19 million and $45 million of residential mortgage loans during the quarter and nine months ended September 30, 2018, respectively (September 30, 2017 - $9 million and $63 million, respectively). Also, the Corporation securitized approximately $110 million and $320 million of mortgage loans into Government National Mortgage Association (“GNMA”) mortgage-backed securities during the quarter and nine months ended September 30, 2018, respectively (September 30, 2017 - $86 million and $369 million, respectively). Furthermore, the Corporation securitized approximately $26 million and $72 million of mortgage loans into Federal National Mortgage Association (“FNMA”) mortgage-backed securities during the quarter and nine months ended September 30, 2018, respectively (September 30, 2017 - $21 million and $86 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 are accruing interest but are past due 90 days or more at September 30, 2018 and December 31, 2017.


September 30, 2018
Puerto Rico
	Past due												Past due 90 days or more
	30-59		60-89		90 days		Total						Non-accrual		Accruing
(In thousands)	days		days		or more		past due		Current		Loans HIP		loans		loans^[1]
Commercial multi-family	$	466	$	242	$	2,061	$	2,769	$	145,459	$	148,228	$	577	$	—
Commercial real estate:
Non-owner occupied		34,587		1,612		86,831		123,030		2,234,301		2,357,331		29,288		—
Owner occupied		12,947		3,260		120,401		136,608		1,598,897		1,735,505		93,192		—
Commercial and industrial		8,313		503		48,425		57,241		3,109,171		3,166,412		48,214		211
Construction		2,306		—		1,829		4,135		73,658		77,793		1,829		—
Mortgage		285,917		136,265		1,215,269		1,637,451		4,893,825		6,531,276		348,779		735,454
Leasing		7,416		2,259		3,009		12,684		890,856		903,540		3,009		—
Consumer:
Credit cards		9,515		6,178		16,768		32,461		1,005,372		1,037,833		—		16,768
Home equity lines of credit		159		391		107		657		4,824		5,481		11		96
Personal		12,609		7,162		19,780		39,551		1,203,845		1,243,396		18,939		1
Auto		53,347		10,783		22,165		86,295		2,382,315		2,468,610		22,097		68
Other		443		92		15,344		15,879		132,069		147,948		14,868		476

Total	$	428,025	$	168,747	$	1,551,989	$	2,148,761	$	17,674,592	$	19,823,353	$	580,803	$	753,074

[1]

Loans HIP of $218 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.


September 30, 2018
Popular U.S.
	Past due												Past due 90 days or more
	30-59		60-89		90 days		Total						Non-accrual		Accruing
(In thousands)	days		days		or more		past due		Current		Loans HIP		loans		loans^[1]
Commercial multi-family	$	2,581	$	17	$	—	$	2,598	$	1,325,974	$	1,328,572	$	—	$	—
Commercial real estate:
Non-owner occupied		—		13,993		365		14,358		1,885,035		1,899,393		365		—
Owner occupied		1,578		618		389		2,585		285,820		288,405		389		—
Commercial and industrial		1,350		2,036		86,220		89,606		980,255		1,069,861		660		—
Construction		20,588		—		17,866		38,454		827,118		865,572		17,866		—
Mortgage		932		3,112		12,306		16,350		756,544		772,894		12,306		—
Legacy		23		269		3,403		3,695		23,871		27,566		3,403		—
Consumer:
Credit cards		1		—		5		6		57		63		5		—
Home equity lines of credit		1,739		594		13,938		16,271		129,274		145,545		13,938		—
Personal		2,164		1,778		2,753		6,695		283,966		290,661		2,753		—
Other		—		4		—		4		279		283		—		—

Total	$	30,956	$	22,421	$	137,245	$	190,622	$	6,498,193	$	6,688,815	$	51,685	$	—

[1]

Loans HIP of $86 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.


September 30, 2018
Popular, Inc.
	Past due												Past due 90 days or more
	30-59		60-89		90 days		Total						Non-accrual		Accruing
(In thousands)	days		days		or more		past due		Current		Loans HIP^{[3] [4]}		loans		loans^[5]
Commercial multi-family	$	3,047	$	259	$	2,061	$	5,367	$	1,471,433	$	1,476,800	$	577	$	—
Commercial real estate:
Non-owner occupied		34,587		15,605		87,196		137,388		4,119,336		4,256,724		29,653		—
Owner occupied		14,525		3,878		120,790		139,193		1,884,717		2,023,910		93,581		—
Commercial and industrial		9,663		2,539		134,645		146,847		4,089,426		4,236,273		48,874		211
Construction		22,894		—		19,695		42,589		900,776		943,365		19,695		—
Mortgage^[1]		286,849		139,377		1,227,575		1,653,801		5,650,369		7,304,170		361,085		735,454
Leasing		7,416		2,259		3,009		12,684		890,856		903,540		3,009		—
Legacy^[2]		23		269		3,403		3,695		23,871		27,566		3,403		—
Consumer:
Credit cards		9,516		6,178		16,773		32,467		1,005,429		1,037,896		5		16,768
Home equity lines of credit		1,898		985		14,045		16,928		134,098		151,026		13,949		96
Personal		14,773		8,940		22,533		46,246		1,487,811		1,534,057		21,692		1
Auto		53,347		10,783		22,165		86,295		2,382,315		2,468,610		22,097		68
Other		443		96		15,344		15,883		132,348		148,231		14,868		476

Total	$	458,981	$	191,168	$	1,689,234	$	2,339,383	$	24,172,785	$	26,512,168	$	632,488	$	753,074

[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 $150 million in unearned income and exclude $52 million in loans held-for-sale.

[4]

Includes $7.2 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, $2.1 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 $304 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
	30-59		60-89		90 days		Total				Non-covered		Non-accrual		Accruing
(In thousands)	days		days		or more		past due		Current		loans HIP		loans		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
	30-59		60-89		90 days		Total				Non-covered		Non-accrual		Accruing
(In thousands)	days		days		or more		past due		Current		loans HIP		loans		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
	30-59		60-89		90 days		Total				Non-covered		Non-accrual		Accruing
(In thousands)	days		days		or more		past due		Current		loans HIP^{[3] [4]}		loans		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 September 30, 2018, mortgage loans held-in-portfolio include $1.4 billion of loans insured by the Federal Housing Administration (“FHA”), or guaranteed by the U.S. Department of Veterans Affairs (“VA”) of which $739 million are 90 days or more past due, including $195 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 $238 million of residential mortgage loans in Puerto Rico that are no longer accruing interest as of September 30, 2018 (December 31, 2017 - $178 million). Additionally, the Corporation has approximately $53 million in reverse mortgage loans in Puerto Rico which are guaranteed by FHA, but which are currently not accruing interest at September 30, 2018 (December 31, 2017—$58 million).

Loans with a delinquency status of 90 days past due as of September 30, 2018 include $195 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
	30-59		60-89		90 days		Total				Covered		Non-accrual		Accruing
(In thousands)	days		days		or more		past due		Current		loans HIP^[2]		loans		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 September 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”).

The following table provides the carrying amount of acquired loans accounted for under ASC 310-30 by portfolio at September 30, 2018 and December 31, 2017.


Carrying amount
(In thousands)	September 30, 2018			December 31, 2017
Commercial real estate	$	876,521		$	923,424
Commercial and industrial		86,000			88,130
Construction		—			170
Mortgage		1,012,789			1,079,611
Consumer		15,312			17,658

Carrying amount		1,990,622			2,108,993
Allowance for loan losses		(168,559	)		(119,505	)

Carrying amount, net of allowance	$	1,822,063		$	1,989,488

At September 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 and the nine months ended September 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 nine months ended
(In thousands)	September 30, 2018			September 30, 2017			September 30, 2018			September 30, 2017
Beginning balance	$	2,033,457		$	2,168,664		$	2,108,993		$	2,301,024
Additions		3,062			4,792			8,334			14,671
Accretion		38,886			42,735			121,752			133,373
Collections / loan sales / charge-offs		(84,783	)		(82,245	)		(248,457	)		(315,122	)

Ending balance^[1]	$	1,990,622		$	2,133,946		$	1,990,622		$	2,133,946
Allowance for loan losses		(168,559	)		(138,030	)		(168,559	)		(138,030	)

Ending balance, net of ALLL	$	1,822,063		$	1,995,916		$	1,822,063		$	1,995,916

[1]	At September 30, 2018, includes $1.5 billion of loans considered non-credit impaired at the acquisition date (September 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 nine months ended
(In thousands)	September 30, 2018			September 30, 2017			September 30, 2018			September 30, 2017
Beginning balance	$	1,178,042		$	1,245,672		$	1,214,488		$	1,288,983
Additions		315			2,882			3,752			8,737
Accretion		(38,886	)		(42,735	)		(121,752	)		(133,373	)
Change in expected cash flows		(16,739	)		(6,475	)		26,244			34,997

Ending balance^[1]	$	1,122,732		$	1,199,344		$	1,122,732		$	1,199,344

[1]	At September 30, 2018, includes $0.8 billion of loans considered non-credit impaired at the acquisition date (September 30, 2017 - $0.9 billion).

Note 9 – 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 ALLL.

The Corporation’s assessment of the ALLL 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 ALLL 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 of the general ALLL 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 September 30, 2018, 80% (September 30, 2017—45%) of the ALLL for the BPPR segment loan portfolios utilized the recent loss trend adjustment instead of the base loss. The recent loss trends were impacted by charge-off activity related to the impact of Hurricanes Irma and Maria. 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 leasing, credit cards, personal, auto and other consumer loans for 2017.

For the period ended September 30, 2018, 6% (September 30, 2017—5 %) of the 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 portfolio for 2018 and 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 ALLL.

During the third quarter of 2018, management completed the annual review of the components of the ALLL models. As part of this review, management updated core metrics related to the estimation process for evaluating the adequacy of the general ALLL. These updates to the ALLL models, which are described in the paragraph below, were implemented as of September 30, 2018 and resulted in a net decrease to the ALLL of $6.1 million.

Management made the following revisions to the ALLL models during the third quarter of 2018:

•

Annual review and recalibration of the environmental factors adjustments. The environmental factors adjustments are developed by performing regression analyses on selected credit and economic indicators for each applicable loan segment. During the third quarter of 2018, the environmental factor models used to account for changes in current credit and macroeconomic conditions were reviewed and recalibrated based on the latest applicable trends.

The effect of the recalibration to the environmental factors adjustments resulted in a decrease to the ALLL of $5.9 million and $0.2 million at the BPPR and Popular U.S. segments, respectively.

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 nine months ended September 30, 2018 and 2017.


For the quarter ended September 30, 2018
Puerto Rico
(In thousands)	Commercial			Construction			Mortgage			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	190,926		$	765		$	182,103		$	14,285		$	179,066		$	567,145
Provision (reversal of provision)		21,548			(12	)		10,145			(422	)		20,618			51,877
Charge-offs		(7,335	)		(21	)		(23,526	)		(2,088	)		(42,180	)		(75,150	)
Recoveries		4,966			146			1,564			531			9,097			16,304

Ending balance	$	210,105		$	878		$	170,286		$	12,306		$	166,601		$	560,176

Specific ALLL	$	52,250		$	—		$	43,841		$	297		$	24,906		$	121,294

General ALLL	$	157,855		$	878		$	126,445		$	12,009		$	141,695		$	438,882

Loans held-in-portfolio:
Impaired non-covered loans	$	356,007		$	1,829		$	508,258		$	931		$	107,184		$	974,209
Non-covered loans held-in-portfolio excluding impaired loans		7,051,469			75,964			6,023,018			902,609			4,796,084			18,849,144

Total non-covered loans held-in-portfolio	$	7,407,476		$	77,793		$	6,531,276		$	903,540		$	4,903,268		$	19,823,353


For the quarter ended September 30, 2018
Popular U.S.
(In thousands)	Commercial			Construction			Mortgage			Legacy			Consumer			Total
Allowance for credit losses:
Beginning balance	$	50,920		$	6,937		$	4,363		$	700		$	12,953		$	75,873
Provision (reversal of provision)		(14,744	)		7,305			(65	)		(1,008	)		11,022			2,510
Charge-offs		(2,792	)		—			(17	)		(81	)		(5,015	)		(7,905	)
Recoveries		1,051			—			20			766			1,227			3,064

Ending balance	$	34,435		$	14,242		$	4,301		$	377		$	20,187		$	73,542

Specific ALLL	$	—		$	5,530		$	2,364		$	—		$	1,349		$	9,243

General ALLL	$	34,435		$	8,712		$	1,937		$	377		$	18,838		$	64,299

Loans held-in-portfolio:
Impaired loans	$	—		$	17,866		$	8,825		$	—		$	7,388		$	34,079
Loans held-in-portfolio excluding impaired loans		4,586,231			847,706			764,069			27,566			429,164			6,654,736

Total loans held-in-portfolio	$	4,586,231		$	865,572		$	772,894		$	27,566		$	436,552		$	6,688,815


For the quarter ended September 30, 2018
Popular, Inc.
(In thousands)	Commercial			Construction			Mortgage			Legacy			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	241,846		$	7,702		$	186,466		$	700		$	14,285		$	192,019		$	643,018
Provision (reversal of provision)		6,804			7,293			10,080			(1,008	)		(422	)		31,640			54,387
Charge-offs		(10,127	)		(21	)		(23,543	)		(81	)		(2,088	)		(47,195	)		(83,055	)
Recoveries		6,017			146			1,584			766			531			10,324			19,368

Ending balance	$	244,540		$	15,120		$	174,587		$	377		$	12,306		$	186,788		$	633,718

Specific ALLL	$	52,250		$	5,530		$	46,205		$	—		$	297		$	26,255		$	130,537

General ALLL	$	192,290		$	9,590		$	128,382		$	377		$	12,009		$	160,533		$	503,181

Loans held-in-portfolio:
Impaired loans	$	356,007		$	19,695		$	517,083		$	—		$	931		$	114,572		$	1,008,288
Loans held-in-portfolio excluding impaired loans		11,637,700			923,670			6,787,087			27,566			902,609			5,225,248			25,503,880

Total loans held-in-portfolio	$	11,993,707		$	943,365		$	7,304,170		$	27,566		$	903,540		$	5,339,820		$	26,512,168


For the nine months ended September 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)		52,846			(1,042	)		24,564			5,022			71,610			153,000
Charge-offs		(25,626	)		9			(50,164	)		(6,404	)		(101,703	)		(183,888	)
Recoveries		11,354			625			3,383			1,697			22,291			39,350
Allowance transferred from covered loans ^[1]		—			—			33,422			—			188			33,610

Ending balance	$	210,105		$	878		$	170,286		$	12,306		$	166,601		$	560,176

Specific ALLL	$	52,250		$	—		$	43,841		$	297		$	24,906		$	121,294

General ALLL	$	157,855		$	878		$	126,445		$	12,009		$	141,695		$	438,882

Loans held-in-portfolio:
Impaired non-covered loans	$	356,007		$	1,829		$	508,258		$	931		$	107,184		$	974,209
Non-covered loans held-in-portfolio excluding impaired loans		7,051,469			75,964			6,023,018			902,609			4,796,084			18,849,144

Total non-covered loans held-in-portfolio	$	7,407,476		$	77,793		$	6,531,276		$	903,540		$	4,903,268		$	19,823,353

[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 nine months ended September 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 nine months ended September 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)		9,004			7,166		(529	)		(1,714	)		16,847			30,774
Charge-offs		(22,435	)		—		(160	)		(252	)		(16,329	)		(39,176	)
Recoveries		3,732			—		449			1,545			4,140			9,866

Ending balance	$	34,435		$	14,242	$	4,301		$	377		$	20,187		$	73,542

Specific ALLL	$	—		$	5,530	$	2,364		$	—		$	1,349		$	9,243

General ALLL	$	34,435		$	8,712	$	1,937		$	377		$	18,838		$	64,299

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Non-accelerated filer

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Emerging growth company