Popular Inc Annual Report 2014

Plain-text annual report

2014 ANNUAL REPORT INFORME ANUAL e c i d n Í / s t n e t n o C 1 Popular, Inc. Year in Review 3 Fast Facts 4 25-Year Historical Financial Summary 6 Popular, Inc. Management 7 Popular, Inc. – Resumen del Año 9 Cifras a la Mano 10 Resumen Financiero Histórico – 25 Años 12 Popular, Inc. Gerencia Popular, Inc. (NASDAQ:BPOP) is a full-service ﬁnancial Popular, Inc. (NASDAQ:BPOP) es un proveedor de servicios provider based in Puerto Rico, with operations in Puerto ﬁnancieros con sede en Puerto Rico y operaciones en Puerto Rico, the Virgin Islands and the United States. In Puerto Rico, Rico, Islas Vírgenes y Estados Unidos. En Puerto Rico es la Popular is the leading banking institution, by both assets and institución bancaria líder, tanto en activos como en depósitos, deposits, and ranks among the largest 40 banks in the U.S. y se encuentra entre los 40 bancos más grandes de Estados by assets. Unidos por total de activos. CORPORATE INFORMATION INFORMACIÓN CORPORATIVA Independent Registered Public Accounting Firm: Firma Registrada de Contabilidad Pública Independiente: PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP The company’s Form 10-K, proxy statement, corporate social El Formulario 10-K, proxy, reporte de responsabilidad social, responsibility report and any other ﬁnancial information, is así como otra información ﬁnanciera, están disponibles en available on our website www.popular.com nuestra página de Internet www.popular.com Annual Meeting Reunión Anual The 2015 Annual Stockholders’ Meeting of Popular, Inc. will La Reunión Anual de Accionistas 2015 de Popular, Inc., se be held on Wednesday, April 29, at 9:00 a.m. at Centro Europa Building in San Juan, Puerto Rico. llevará a cabo el miércoles, 29 de abril, a las 9:00 a.m. en el ediﬁcio Centro Europa en San Juan, Puerto Rico. POPULAR, INC. 2014 ANNUAL REPORT POPULAR, INC. Year in Review THE REPAYMENT OF THE TARP FUNDS BETTER POSITIONS US FOR MORE ACTIVE CAPITAL MANAGEMENT IN THE FUTURE. RICHARD L. CARRIÓN Chairman & Chief Executive Ofﬁcer In 2014 we achieved signiﬁcant milestones and July of 2014 without issuing additional equity, made important progress on various fronts. better positions us for more active capital The repayment of TARP and the restructuring management in the future. of our U.S. op of our U.S. operations were two of our main The restructuring of our U.S. operations was a achievement s during the year. Including the deﬁning event of 2014. In April, we announced impact of the ese events, we reported a net loss our plan to sell our California, Chicago and of $313 millio on. Although these actions affected Central Florida regions in order to focus our the year’s res sults, we are now in a much business on the New York Metro and Miami stronger pos ition moving forward. Adjusted net regions. The plan also includes the transfer of income for th he year, excluding these events, most support functions to Puerto Rico and New was $301 mil llion. These solid results in 2014 York to leverage the talent and infrastructure were driven b by higher net interest income due we have in place in our headquarters and to to lower inter rest expense, a lower provision for beneﬁt from Puerto Rico’s lower personnel loan losses, l lower operating expenses, mainly cost structure. During the course of the year, pension costs s and FDIC insurance, and lower we completed the sale of the three regions and income taxes s. Credit quality y remained stable despite the challenging e economic conditions in Puerto Rico. Net cha arge-offs declined in Puerto Rico and the United States, both in absolute terms as wel ll as a percentage of loans. Non- performing lo oans as a percentage of total loans closed 2014 at 2.95%, fairly stable when compared to the previous year if we exclude loan balances s from the regions that were sold as part of the e U.S. restructuring. While we remain vigila nt due to economic conditions in Puerto Rico, w we are encouraged by the general performance of our portfolios. We continue to enjoy strong capital levels relative to pe ers and regulatory requirements. Our Tier 1 co mmon equity ratio stood at 15.9% at year-end, o or 110 basis points higher than in 2013, whic h still included our TARP capital. The repayme ent of TARP funds, completed in made signiﬁcant progress in the operational restructuring. Once the transfer of support functions is completed in the ﬁrst half of 2015, we will have reduced the number of back-ofﬁce employees supporting our U.S. operations by 43%, with approximately two- thirds of them based in Puerto Rico. I would like to acknowledge the hard work of all of our colleagues at Popular Community Bank and those supporting them in Puerto Rico that have made possible the successful execution of an extremely complex restructuring project. We are now ready to move forward with a leaner, more focused operation in the U.S. Our franchise in Puerto Rico was strengthened in 2014. We increased our market share in most categories and maintained our leadership position in the majority of them. In the auto business, where we have intensiﬁed our sales efforts, we reached the second position in the market for the ﬁrst time. Despite a weak 1 Puerto Rico economy, we also experienced in Puerto Rico to $9.00, which applied to growth in the corporate segment. approximately 2,400 of our colleagues. In 2015 we will increase salaries to $10.00 POPULAR, INC. Year in Review FUNDACIÓN BANCO POPULAR AND THE COMMUNITY BANK FOUNDATION DONATED OVER $3.1 MILLION TO 128 NONPROFIT ORGANIZATIONS. We deepened our efforts to enhance service and offer greater convenience to our clients. Most business units improved their customer satisfaction metrics. Results reﬂect the conscientious effort of all groups, as well as initiatives related to efﬁciency that have also had a positive impact on customer satisfaction. The redesign of branch processes, based on the LEAN methodology, was completed in 17% of our branches which account for 28% of total transactions. Results to date in these branches show higher service levels and signiﬁcant reductions in waiting times. As we roll out this project to other branches, we expect to see additional improvements in our customer satisfaction. We also continued the implementation of projects designed to transform our retail delivery network, placing a greater emphasis on digital transactions. The digitalization of our clients’ interactions is a critical move to offer convenient alternatives and generate cost efﬁciencies. In December of 2014, deposits made through automatic teller 2 2 machines (ATMs) in Puerto Rico reached Health and Wellness Center in Puerto Rico, 29% of deposits in branches with upgraded focused on the prevention and early detection ATMs, compared to 17% in December of 2013. of health conditions. The objective of this At the same time we migrate transactional, innovative approach is to improve the health of service and sales interactions to digital our employees, which will translate into lower channels, we will revise our physical footprint medical expenses and increased productivity. in order to meet our clients’ needs in a more As a result of these and other efforts, our effective way. We also embarked on several key initiatives regarding our most important asset – our people. In August, we increased the minimum hourly base salary for all our employees employee engagement metrics, which were already solid, improved even more in 2014. We are continuously raising the bar, expecting a higher level of performance from our employees. We feel conﬁdent that our focus on performance, coupled with the investments we are making on our people, make them our strongest competitive advantage. for those employees demonstrating good Our commitment to our communities performance. We are well aware that it is continued unabated. We expanded our critical to attract, retain and develop the ﬁnancial education program Finance in Your best talent available in order to reach our Hands, which has reached over 100,000 ambitious goals. We are convinced that this individuals in Puerto Rico and was recognized investment will produce beneﬁts in terms by the American Banking Association as of retention, engagement, customer service the best ﬁnancial education program in the and productivity. Another important event United States. We remain committed to Echar this year was the inauguration of the On-Site Pa’lante, a multisectoral social collaboration BPOP STOCK PRICE CHANGE vs. PEERS (2013-2014) 30% 20% 10% 0% -10% -20% -30% -40% 3 1 - C E D 19% BPOP 8% 7% US Peers KBW Index -32% PR Peers 4 1 - N A J 4 1 - B E F 4 1 - R A M 4 1 - R P A 4 1 - Y A M 4 1 - N U J 4 1 - L U J 4 1 - G U A 4 1 - T P E S 4 1 - T C O 4 1 - V O N 4 1 - C E D POPULAR, INC. 2014 ANNUAL REPORT program we launched in 2011, that has the Government Development Bank for brought together over 300 organizations Puerto Rico, Javier brings with him extensive and experts to foster education and experience in the corporate and banking entrepreneurship. Employee contributions to law ﬁelds and has been a great addition to FAST FACTS 2014 Highlights our foundations increased in 2014, reaching our team. $730,000. In large part thanks to these contributions, Fundación Banco Popular and the Popular Community Bank Foundation donated over $3.1 million to 128 nonproﬁt organizations. Volunteerism also remained strong. Our employees donated their time to collaborate with many of the organizations we support ﬁnancially. In December, as part of the celebration of the 35th anniversary of the Banco Popular Foundation in Puerto Rico, we inaugurated its new headquarters. In addition to serving as a home to our Foundation, the building houses 11 other nonproﬁt organizations, turning our space into a center for collaboration and social innovation. Our stock closed the year at $34.05, 19% higher than at the end of 2013. This performance compares favorably to that of industry indices, our U.S. peers, and other banks in Puerto Rico. In September of 2014, Ignacio Alvarez, Esq. was named President and Chief Operating Ofﬁcer of Popular, Inc. and Banco Popular de Puerto Rico, as well as President of Banco Popular North America. Ignacio had been serving as General Counsel since 2010, demonstrating outstanding leadership and making important contributions in strategic initiatives across the organization. We are pleased to have brought on board Javier D. Ferrer, Esq. as the new General Counsel and Secretary of the Board of Directors of Popular, Inc. As one of the founding partners of Pietrantoni Méndez & Alvarez LLC and a former president of I want to express my deepest gratitude to Jorge A. Junquera for 43 years of outstanding service to Popular. From his early years in Investments, to his most recent role as Vice- Chairman, Jorge’s passion and dedication made him an integral part of the management team. It is impossible for me to enumerate the countless initiatives he led, but I would like to highlight that his advice, expertise and leadership during his 17 years as Chief Financial Ofﬁcer were key to help strengthen the ﬁnancial position of our organization. Finally, I would also like to acknowledge $301 MILLION in adjusted net income $1.8 BILLION adjusted gross revenues $2 BILLION amount by which our total capital exceeded the current well-capitalized threshold Samuel T. Céspedes, Esq. who decided to aggressive business goals. In Puerto Rico, the retire after serving as the Secretary of the economy still presents signiﬁcant challenges, Board of Directors for 24 years. I know I speak but we will remain focused on serving our on behalf of the entire Board when I say that clients and growing our business where we are all grateful for his commitment and his opportunities exist. contributions throughout these years. I am conﬁdent that, guided by clear objectives As you can see, our accomplishments for 2014 and energized by the opportunities that lie extend well beyond ﬁnancial results. They ahead of us, we will continue forging ahead demonstrate how commitment to our clients, in 2015. employees, shareholders and communities translates into concrete results that pave the way for future successes. I am grateful to the management team and Board of Directors for their support and leadership. They are responsible for all of these achievements. The year 2015 brings a new set of opportunities and challenges. In the case of our U.S. operations, we will complete the transfer of the support functions to Puerto Rico and, at the same time, strive to achieve RICHARD L. CARRIÓN Chairman & Chief Executive Ofﬁcer 3 25 YEAR Historical Financial Summary (Dollars in millions, except per share data) Selected Financial Information 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Net Income (Loss) $ 63.4 $ 64.6 $ 85.1 $ 109.4 $ 124.7 $ 146.4 $ 185.2 $ 209.6 $ 232.3 $ 257.6 $ 276.1 Assets Gross Loans Deposits Stockholders’ Equity Market Capitalization Return on Assets (ROA) Return on Common Equity (ROE) Per Common Share1 8,983.6 8,780.3 10,002.3 11,513.4 12,778.4 15,675.5 16,764.1 19,300.5 23,160.4 25,460.5 28,057.1 5,373.3 7,422.7 588.9 5,195.6 5,252.1 6,346.9 7,781.3 8,677.5 9,779.0 11,376.6 13,078.8 14,907.8 16,057.1 7,207.1 8,038.7 8,522.7 9,012.4 9,876.7 10,763.3 11,749.6 13,672.2 14,173.7 14,804.9 631.8 752.1 834.2 1,002.4 1,141.7 1,262.5 1,503.1 1,709.1 1,661.0 1,993.6 $ 479.1 $ 579.0 $ 987.8 $ 1,014.7 $ 923.7 $ 1,276.8 $ 2,230.5 $ 3,350.3 $ 4,611.7 $ 3,790.2 $ 3,578.1 1.09% 15.55% 0.72% 10.57% 0.89% 1.02% 1.02% 1.04% 1.14% 1.14% 12.72% 13.80% 13.80% 14.22% 16.17% 15.83% 1.14% 15.41% 1.08% 1.04% 15.45% 15.00% Net Income (Loss) – Basic $ 3.94 $ $ 4.59 $ 5.24 $ 6.69 $ Net Income (Loss) – Diluted Dividends (Declared) Book Value Market Price Assets by Geographical Area Puerto Rico United States Caribbean and Latin America Total Traditional Delivery System Banking Branches Puerto Rico Virgin Islands United States Subtotal Non-Banking Offices Popular Financial Holdings Popular Cash Express Popular Finance Popular Auto Popular Leasing, U.S.A. Popular Mortgage Popular Securities Popular One Popular Insurance Popular Insurance Agency, U.S.A. Popular Insurance, V.I. E-LOAN EVERTEC Subtotal Total Electronic Delivery System ATMs Owned Puerto Rico Virgin Islands United States Total Transactions (in millions) Electronic Transactions2 Items Processed 3 3.94 1.00 24.58 20.00 89% 9% 2% 100% 173 3 24 200 26 9 35 235 211 3 2.69 2.69 1.00 26.24 24.06 $ 3.49 $ 3.49 1.00 28.79 37.81 4.18 4.18 1.20 31.86 39.38 87% 11% 2% 87% 10% 3% 79% 16% 5% 100% 100% 100% 161 3 24 188 27 26 9 62 250 206 3 162 3 30 195 41 26 9 76 271 211 3 6 220 165 8 32 205 58 26 8 92 297 234 8 11 253 33.2 171.8 214 209 18.0 164.0 23.9 166.1 28.6 170.4 4.59 1.25 34.35 35.16 76% 20% 4% 100% 166 8 34 208 73 28 10 111 319 262 8 26 296 43.0 174.5 5.24 1.54 39.52 48.44 6.69 1.83 43.98 84.38 7.51 7.51 2.00 51.83 123.75 $ 8.26 $ 8.26 2.50 59.32 170.00 $ 9.19 9.19 3.00 57.54 139.69 9.85 9.85 3.20 69.62 131.56 75% 21% 4% 74% 22% 4% 74% 23% 3% 71% 25% 4% 71% 25% 4% 72% 26% 2% 100% 100% 100% 100% 100% 100% 166 8 40 214 91 31 9 3 134 348 281 8 38 327 56.6 175.0 7,815 178 8 44 230 102 39 8 3 1 153 383 327 9 53 389 201 8 63 272 117 44 10 7 3 2 183 455 391 17 71 479 198 8 89 295 128 51 48 10 8 11 2 258 553 421 59 94 574 199 8 91 298 137 102 47 12 10 13 2 4 327 625 442 68 99 609 199 8 95 302 136 132 61 12 11 21 3 2 4 382 684 478 37 109 624 78.0 173.7 111.2 171.9 130.5 170.9 159.4 171.0 199.5 160.2 7,996 8,854 10,549 11,501 10,651 Employees (full-time equivalent) 7,023 7,006 7,024 7,533 7,606 4 4 POPULAR, INC. 2014 ANNUAL REPORT 1 Per common share data adjusted for stock splits and reverse stock split executed in May 2012. 2 From 1981 to 2003, electronic transactions include ACH, Direct Payment, TelePago Popular, Internet Banking and ATH Network transactions in Puerto Rico. From 2004 to 2009, these numbers were adjusted to include ATH Network transactions in the Dominican Republic, Costa Rica, El Salvador and the United States, health care transactions, wire transfers, and other electronic payment transactions in addition to those previously stated. After 2010, the summary only includes electronic transactions made by Popular, Inc.'s clients and excludes electronic transactions processed by EVERTEC for other clients. 3 After the sale in 2010 of EVERTEC, Popular’s information technology subsidiary, the Corporation does not process electronic items. 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 $ 304.5 $ 351.9 $ 470.9 $ 489.9 $ (cid:2)540.7 $ (cid:2)357.7 $ (cid:2)(64.5) $ (1,243.9) $ (cid:2)(573.9) $ 137.4 $ 151.3 $ 245.3 $ 599.3 $ (313.5) 30,744.7 33,660.4 36,434.7 44,401.6 48,623.7 47,404.0 44,411.4 38,882.8 34,736.3 38,815.0 37,348.4 36,507.5 35,749.3 33,096.7 18,168.6 19,582.1 22,602.2 28,742.3 31,710.2 32,736.9 29,911.0 26,268.9 23,803.9 26,458.9 25,314.4 25,093.6 24,706.7 22,053.2 16,370.0 17,614.7 18,097.8 20,593.2 22,638.0 24,438.3 28,334.4 27,550.2 25,924.9 26,762.2 27,942.1 27,000.6 26,711.1 24,807.5 2,272.8 2,410.9 2,754.4 3,104.6 3,449.2 3,620.3 3,581.9 3,268.4 2,538.8 3,800.5 3,918.8 4,110.0 4,626.2 4,267.4 $ 3,965.4 $ 4,476.4 $ 5,960.2 $ 7,685.6 $ 5,836.5 $ 5,003.4 $ 2,968.3 $ 1,455.1 $ 1,445.4 $ 3,211.4 $ 1,426.0 $ 2,144.9 $ 2,970.6 $ 3,523.4 1.09% 1.11% 1.36% 14.84% 16.29% 19.30% 1.23% 17.60% 1.17% 0.74% -0.14% -3.04% -1.57% 17.12% 9.73% -2.08% -44.47% -32.95% 0.36% 4.37% 0.40% 4.01% 0.68% 1.65% -0.89% 6.37% 14.43% -7.04% $ 10.87 $ 13.05 $ 17.36 $ 17.95 $ 19.78 $ 12.41 $ (2.73) $ (45.51) $ 2.39 $ (0.62) $ 10.87 3.80 79.67 13.05 4.00 91.02 145.40 169.00 17.36 5.05 96.60 224.25 17.92 6.20 109.45 288.30 19.74 6.40 118.22 211.50 12.41 6.40 123.18 179.50 (2.73) 6.40 121.24 106.00 (45.51) 4.80 63.29 51.60 2.39 0.20 38.91 22.60 (0.62) – 36.67 31.40 1.44 1.44 – 37.71 13.90 $ 2.36 $ 5.80 $ (3.08) 2.35 – 39.35 20.79 5.78 – 44.26 28.73 (3.08) – 40.76 34.05 68% 30% 2% 100% 66% 32% 2% 62% 36% 2% 55% 43% 2% 53% 45% 2% 52% 45% 3% 59% 38% 3% 100% 100% 100% 100% 100% 100% 64% 33% 3% 100% 65% 32% 3% 74% 23% 3% 74% 23% 3% 73% 24% 3% 72% 25% 3% 80% 17% 3% 100% 100% 100% 100% 100% 100% 196 8 96 300 149 154 55 20 13 25 4 2 1 4 427 727 524 39 118 681 195 8 96 299 153 195 36 18 13 29 7 2 1 1 5 460 759 539 53 131 723 193 8 97 298 181 129 43 18 11 32 8 2 1 1 5 431 729 557 57 129 743 192 8 128 328 183 114 43 18 15 30 9 2 1 1 5 421 749 568 59 163 790 194 8 136 338 212 4 49 17 14 33 12 2 1 1 1 5 351 689 583 61 181 825 191 8 142 341 158 52 15 11 32 12 2 1 1 1 7 292 633 605 65 192 862 196 8 147 351 134 51 12 24 32 13 2 1 1 1 9 280 631 615 69 187 871 179 8 139 326 2 9 12 22 32 7 1 1 1 1 9 97 423 605 74 176 855 173 8 101 282 10 33 6 1 1 1 9 61 343 571 77 136 784 185 8 96 289 10 36 6 1 1 1 55 344 624 17 138 779 183 9 94 286 10 37 4 4 1 1 1 58 344 613 20 135 768 175 9 92 276 10 37 4 5 1 1 1 59 335 597 20 134 751 171 9 90 270 9 38 3 6 1 1 1 59 329 599 22 132 753 168 9 47 224 9 25 3 6 1 1 1 46 270 602 21 83 706 206.0 149.9 236.6 145.3 255.7 138.5 568.5 133.9 625.9 140.3 690.2 150.0 772.7 175.2 849.4 202.2 804.1 191.7 381.6 410.4 420.4 425.4 438.4 11,334 11,037 11,474 12,139 13,210 12,508 12,303 10,587 9,407 8,277 8,329 8,072 8,059 7,752 5 5 POPULAR, INC. Management SENIOR MANAGEMENT TEAM RICHARD L. CARRIÓN Chairman & Chief Executive Ofﬁcer Popular, Inc. IGNACIO ÁLVAREZ President & Chief Operating Ofﬁcer Popular, Inc., Banco Popular de Puerto Rico President Popular Community Bank CARLOS J. VÁZQUEZ Executive Vice President & Chief Financial Ofﬁcer Popular, Inc. JAVIER D. FERRER Executive Vice President & Chief Legal Ofﬁcer General Counsel & Corporate Matters Group Popular, Inc. RICHARD L. CARRIÓN Chairman & Chief Executive Ofﬁcer Popular, Inc. JOAQUÍN E. BACARDÍ, III President & Chief Executive Ofﬁcer Bacardí Corporation NÉSTOR O. RIVERA Executive Vice President Retail Banking Group Banco Popular de Puerto Rico ELI S. SEPÚLVEDA Executive Vice President & Chief Lending Ofﬁcer Commercial Credit Group Banco Popular de Puerto Rico LIDIO SORIANO Executive Vice President & Chief Risk Ofﬁcer Corporate Risk Management Group Popular, Inc. ILEANA GONZÁLEZ Executive Vice President Commercial Credit Administration Group Banco Popular de Puerto Rico JUAN O. GUERRERO Executive Vice President Financial & Insurance Services Group Banco Popular de Puerto Rico GILBERTO MONZÓN Executive Vice President Individual Credit Group Banco Popular de Puerto Rico EDUARDO J. NEGRÓN Executive Vice President Administration Group Popular, Inc. JOHN W. DIERCKSEN Principal Greycrest, LLC C. KIM GOODWIN Private Investor MARÍA LUISA FERRÉ President & Chief Executive Ofﬁcer Grupo Ferré Rangel WILLIAM J. TEUBER JR. Vice Chairman EMC Corporation ALEJANDRO M. BALLESTER President Ballester Hermanos, Inc. DAVID E. GOEL Managing Member Matrix Capital Management Company, L.P. CARLOS A. UNANUE President Goya de Puerto Rico BOARD OF DIRECTORS 6 6 POPULAR, INC. 2014 INFORME ANUAL POPULAR, INC. Resumen del Año EL REPAGO DE LOS FONDOS TARP NOS COLOCA EN MEJOR POSICIÓN PARA UN MANEJO MÁS EFECTIVO DEL CAPITAL EN EL FUTURO. RICHARD L. CARRIÓN RICHARD L. CARRIÓN Presidente de la Junta Presidente de la Junta de Directores y de Directores y Principal Oﬁcial Ejecutivo Principal Oﬁcial Ejecutivo En el 2014 alcanzamos logros signiﬁcativos y todavía incluía nuestro capital de TARP. El progresamos en varios frentes. repago de los fondos TARP, completado en julio El repago del TARP y la reestructuración de nuestras operaciones en los Estados Unidos p fueron dos de e los logros principales durante el de 2014 sin emitir capital adicional, nos coloca en mejor posición para un manejo de capital más activo en el futuro. año. Incluyen ndo el impacto de estos eventos, La reestructuración de nuestras operaciones reportamos u una pérdida neta de $313 millones. en los Estados Unidos fue un evento clave en Aunque estas s acciones afectaron nuestros el 2014. En abril anunciamos nuestro plan de resultados, n os encontramos ahora en una vender las regiones de California, Chicago y posición muc cho más fuerte de cara al futuro. Al Florida Central para enfocar nuestro negocio excluir estos eventos, el ingreso neto ajustado en las regiones de Nueva York Metro y Miami. fue de $301 m millones. Estos sólidos resultados El plan también incluye la transferencia de fueron impul sados por un ingreso neto por la mayor parte de las funciones de apoyo a intereses má ás alto, debido a un gasto menor en Puerto Rico y Nueva York para aprovechar el intereses, un a reducción en la provisión para talento y la infraestructura que tenemos en pérdidas en p préstamos, gastos operacionales nuestra sede y beneﬁciarnos de costos de más bajos, pr rincipalmente en costos de personal más bajos en Puerto Rico. Durante pensión y seg guro del FDIC, y contribuciones el año, completamos la venta de las tres sobre ingreso os más bajas. regiones y progresamos signiﬁcativamente La calidad de e crédito se mantuvo estable a pesar de los retos que presenta la economía de Puerto Rico. Las pérdidas netas en préstamos se redujeron en Puerto Rico y los Estados Unidos en tér rminos absolutos y como por ciento de pré stamos. Del total de préstamos, cerramos el 2 2014 con 2.95% en préstamos no acumulativos s, una cifra estable, si se excluyen los balances de las regiones vendidas como parte de la re eestructuración en Estados Unidos. Nos mantenemos atentos, dadas las condiciones e económicas en Puerto Rico, pero nos sentimos s satisfechos con el desempeño general de nu uestras carteras. Continuamos s disfrutando de niveles de capital sólidos con re elación a nuestros pares y los requerimient tos regulatorios. Nuestra relación de capital bás sico (“Tier 1 Common Equity”) se encontrab ba en 15.9% al ﬁnal del año, o 110 puntos b ase más alto que el de 2013, que en la reestructuración operacional. Una vez se complete la transferencia de las operaciones de apoyo en la primera mitad de 2015, habremos reducido en 43% el número de empleados administrativos que proveen apoyo a nuestra operación en los Estados Unidos, con aproximadamente dos terceras partes de ellos con base en Puerto Rico. Quiero reconocer el trabajo arduo de todos nuestros compañeros en Popular Community Bank y los que apoyaron desde Puerto Rico, haciendo posible la ejecución exitosa de un proceso de reestructuración extremadamente complejo. Ahora estamos listos para seguir adelante con una operación en los Estados Unidos más eﬁciente y enfocada. Nuestra franquicia en Puerto Rico se fortaleció en el 2014. Aumentó nuestra participación de mercado en muchas categorías y mantuvimos nuestro liderato en la mayoría de ellas. En el negocio de autos, en el cual intensiﬁcamos 7 7 POPULAR, INC. Resumen del Año LA FUNDACIÓN BANCO POPULAR Y POPULAR COMMUNITY BANK FOUNDATION DONARON MÁS DE $3.1 MILLONES A 128 ORGANIZACIONES SIN FINES DE LUCRO. nuestros esfuerzos de ventas, alcanzamos La digitalización de las interacciones de metas. Estamos convencidos que esta nuestros clientes es vital para ofrecer inversión será beneﬁciosa en términos de alternativas convenientes y generar retención, compromiso, servicio al cliente y eﬁciencias en costos. Durante el mes productividad. de diciembre del 2014, los depósitos realizados en cajeros automáticos en Puerto Rico alcanzaron el 29% de los depósitos en sucursales con cajeros avanzados, comparado con un 17% para la misma fecha en el 2013. Al mismo tiempo que migramos transacciones, servicios y ventas a canales digitales, revisaremos nuestra red de locales físicos para satisfacer de una forma más efectiva las necesidades de nuestros clientes. Otro suceso importante este año fue la inauguración del Centro Interno de Salud y Bienestar en Puerto Rico, enfocado en la prevención y detección temprana de condiciones de salud. El objetivo de este enfoque innovador es mejorar la salud de nuestros empleados, que se traducirá en gastos médicos menores y en un aumento en productividad. Como resultado de estos y otros esfuerzos, la métrica del compromiso por primera vez la segunda posición en el Además, emprendimos iniciativas claves de nuestros empleados, que ya de por sí era mercado. A pesar de la debilidad económica relacionadas a nuestro activo más importante alta, mejoró aún más en 2014. Continuamente en Puerto Rico, también experimentamos – nuestra gente. En agosto, aumentamos estamos elevando las expectativas, esperando crecimiento en el segmento corporativo. a $9.00 el salario base mínimo por hora un nivel más alto en el desempeño de Intensiﬁcamos nuestros esfuerzos por mejorar el servicio y ofrecer mayor conveniencia a nuestros clientes. La mayor parte de las unidades de negocio mejoraron sus métricas de satisfacción al cliente. Los resultados reﬂejan el esfuerzo consciente de todos los grupos, así como iniciativas relacionadas a la eﬁciencia que han tenido, además, un impacto positivo en la satisfacción para nuestros empleados en Puerto Rico, nuestros empleados. Estamos conﬁados beneﬁciando aproximadamente 2,400 que este enfoque, sumado a las inversiones compañeros. En el 2015, lo aumentaremos que estamos haciendo en nuestra gente, a $10.00 para aquellos empleados con los convierten en nuestra mayor ventaja buen desempeño. Estamos conscientes competitiva. que es crítico, atraer, retener y desarrollar el mejor talento disponible, para así poder alcanzar nuestras ambiciosas Nuestro compromiso con nuestras comunidades continuó ﬁrme. Expandimos nuestro programa de educación ﬁnanciera, de nuestros clientes. El rediseño de procesos CAMBIO EN PRECIO DE LA ACCIÓN COMPARADO CON LOS PARES (2013-2014) en sucursales, basado en la metodología LEAN, se completó en 17% de nuestras sucursales que representan un 28% del total de transacciones. Los resultados hasta el momento reﬂejan una mejora en los niveles de servicio y reducciones signiﬁcativas en el tiempo de espera. A medida que vayamos extendiendo el proyecto a otras sucursales, anticipamos mejoras adicionales en la satisfacción de nuestros clientes. También continuamos la implementación de proyectos diseñados para transformar nuestra red de distribución, poniendo mayor énfasis en las transacciones digitales. 30% 20% 10% 0% -10% -20% -30% -40% 3 1 - C E D 8 8 19% BPOP 8% 7% Pares EE.UU. Índice KBW -32% Pares PR 4 1 - E N E 4 1 - B E F 4 1 - R A M 4 1 - R B A 4 1 - Y A M 4 1 - N U J 4 1 - L U J 4 1 - O G A 4 1 - T P E S 4 1 - T C O 4 1 - V O N 4 1 - C E D POPULAR, INC. 2014 INFORME ANUAL CIFRAS A LA MANO Puntos Principales de 2014 $301 MILLONES en ingreso neto ajustado $1,800 MILLONES en ingreso bruto ajustado $2,000 MILLONES cantidad por la cual el capital total excedió el mínimo requerido para ser considerado bien capitalizado. Finanzas en tus Manos, que ha llegado a Nos complace la llegada del Lcdo. Javier más de 100,000 personas en Puerto Rico D. Ferrer como el nuevo Principal Oﬁcial y fue reconocido por la American Banking Legal y Secretario de la Junta de Directores Association como el mejor programa de de Popular, Inc. Como uno de los socios educación ﬁnanciera en los Estados Unidos. fundadores de la ﬁrma de abogados Continuamos comprometidos con Echar Pietrantoni Méndez & Alvarez LLC y pasado Pa’lante, un programa social de colaboración presidente del Banco Gubernamental de multisectorial que lanzamos en 2011, Fomento para Puerto Rico, Javier trae consigo enlazando a más de 300 organizaciones una vasta experiencia en el campo de ley y expertos para fomentar la educación corporativa y bancaria y ha sido un gran y el empresarismo. La aportación de complemento a nuestro equipo. los empleados a nuestras fundaciones aumentó en 2014, alcanzando $730,000. En gran medida gracias a esta contribución, la Fundación Banco Popular y Popular Community Bank Foundation donaron más de $3.1 millones a 128 organizaciones sin ﬁnes de lucro. El voluntariado también se mantuvo sólido. Nuestros empleados donaron su tiempo para colaborar con muchas organizaciones que apoyamos ﬁnancieramente. En diciembre, como parte de la celebración del 35to aniversario de la Fundación Banco Popular en Puerto Rico, inauguramos su nueva sede. Además de servir como base para nuestra Fundación, el ediﬁcio alberga otras 11 organizaciones sin ﬁnes de lucro, convirtiendo así nuestro espacio en un centro de colaboración e innovación social. Nuestra acción cerró el año en $34.05, 19% más alto que al ﬁnal de 2013. Este desempeño compara favorablemente con índices de la industria, nuestros pares en los Estados Unidos y otros bancos en Puerto Rico. En septiembre de 2014, el Lcdo. Ignacio Álvarez fue nombrado Presidente y Principal Oﬁcial de Operaciones de Popular, Inc. y Banco Popular de Puerto Rico, así como Presidente de Banco Popular North America. Ignacio se desempeñaba como Principal Oﬁcial Legal desde 2010, demostrando gran liderazgo y realizando aportaciones importantes a iniciativas estratégicas a través de la organización. Quiero expresar mi más profunda gratitud a Jorge A. Junquera por sus 43 años de servicio excepcional a Popular. Desde sus primeros años en Inversiones, hasta su función más reciente como Vicepresidente de la Junta de Directores, la pasión y dedicación de Jorge lo hizo una parte integral de nuestro equipo gerencial. Es imposible enumerar las múltiples iniciativas que dirigió, pero me gustaría resaltar que su asesoramiento, El 2015 trae consigo nuevas oportunidades experiencia y liderazgo en sus 17 años como y desafíos. En términos de nuestras Principal Oﬁcial Financiero fueron clave para operaciones en los Estados Unidos, ayudar a fortalecer la posición ﬁnanciera de completaremos la transferencia de las nuestra organización. Finalmente, quiero reconocer al Lcdo. Samuel T. Céspedes, quien decidió retirarse luego de servir como Secretario de la Junta de Directores durante 24 años. Sé que hablo en representación de toda la Junta cuando digo que estamos muy agradecidos de su compromiso y su contribución todos estos años. Como pueden ver, nuestros logros en el 2014 se extienden más allá de los resultados ﬁnancieros. Demuestran como el compromiso con nuestros clientes, empleados, accionistas y comunidades se traduce en resultados concretos que preparan el camino para éxitos futuros. Le agradezco a nuestro equipo gerencial y a la Junta de Directores, quienes son responsables de estos logros, por su apoyo y liderazgo. funciones de apoyo a Puerto Rico y, a la vez, nos esforzaremos por lograr metas ambiciosas de negocio. En Puerto Rico, la economía todavía representa retos signiﬁcativos, pero permaneceremos enfocados en servir a nuestros clientes y hacer crecer nuestro negocio donde existan oportunidades. Confío que, guiados por objetivos claros y motivados por las oportunidades que vemos en el futuro, continuaremos avanzando con determinación en el 2015. RICHARD L. CARRIÓN Presidente de la Junta de Directores y Principal Oﬁcial Ejecutivo 9 9 25 AÑOS Resumen Financiero Histórico (Dólares en millones, excepto información por acción) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Información Financiera Seleccionada Ingreso neto (Pérdida Neta) $ 63.4 $ 64.6 $ 85.1 $ 109.4 $ 124.7 $ 146.4 $ 185.2 $ 209.6 $ 232.3 $ 257.6 $ 276.1 Activos Préstamos Brutos Depósitos Capital de Accionistas 8,983.6 8,780.3 10,002.3 11,513.4 12,778.4 15,675.5 16,764.1 19,300.5 23,160.4 25,460.5 28,057.1 5,373.3 7,422.7 588.9 5,195.6 5,252.1 6,346.9 7,781.3 8,677.5 9,779.0 11,376.6 13,078.8 14,907.8 16,057.1 7,207.1 8,038.7 8,522.7 9,012.4 9,876.7 10,763.3 11,749.6 13,672.2 14,173.7 14,804.9 631.8 752.1 834.2 1,002.4 1,141.7 1,262.5 1,503.1 1,709.1 1,661.0 1,993.6 Valor agregado en el mercado $ 479.1 $ 579.0 $ 987.8 $ 1,014.7 $ 923.7 $ 1,276.8 $ 2,230.5 $ 3,350.3 $ 4,611.7 $ 3,790.2 $ 3,578.1 Rendimiento de Activos (ROA) Rendimiento de Capital Común (ROE) 1.09% 15.55% 0.72% 10.57% 0.89% 1.02% 1.02% 1.04% 1.14% 1.14% 12.72% 13.80% 13.80% 14.22% 16.17% 15.83% 1.14% 15.41% 1.08% 1.04% 15.45% 15.00% Por Acción Común1 Ingreso neto (Pérdida Neta) - Básico $ 3.94 $ $ 4.59 $ 5.24 $ 6.69 $ 5.24 1.54 39.52 48.44 6.69 1.83 43.98 84.38 $ 7.51 7.51 2.00 51.83 123.75 8.26 8.26 2.50 59.32 170.00 $ $ 9.19 9.19 3.00 57.54 139.69 9.85 9.85 3.20 69.62 131.56 75% 21% 4% 74% 22% 4% 74% 23% 3% 71% 25% 4% 71% 25% 4% 72% 26% 2% 100% 100% 100% 100% 100% 100% 3.94 1.00 24.58 20.00 89% 9% 2% 100% 173 3 24 200 26 9 2.69 2.69 1.00 26.24 24.06 $ 3.49 $ 3.49 1.00 28.79 37.81 4.18 4.18 1.20 31.86 39.38 87% 11% 2% 87% 10% 3% 79% 16% 5% 100% 100% 100% 161 3 24 188 27 26 9 162 3 30 195 41 26 9 165 8 32 205 58 26 8 4.59 1.25 34.35 35.16 76% 20% 4% 100% 166 8 34 208 73 28 10 166 8 40 214 91 31 9 3 178 8 44 230 102 39 8 3 1 201 8 63 272 117 44 10 7 3 2 35 235 62 250 76 271 92 297 111 319 134 348 153 383 183 455 211 3 206 3 214 209 211 3 6 220 18.0 164.0 23.9 166.1 28.6 170.4 234 8 11 253 33.2 171.8 262 8 26 296 43.0 174.5 281 8 38 327 56.6 175.0 7,815 327 9 53 389 78.0 173.7 391 17 71 479 111.2 171.9 Empleados (equivalente a tiempo completo) 7,023 7,006 7,024 7,533 7,606 10 10 7,996 8,854 10,549 11,501 10,651 Ingreso neto (Pérdida Neta) - Diluido Dividendos (Declarados) Valor en los Libros Precio en el Mercado Activos por Área Geográfica Puerto Rico Estados Unidos Caribe y Latinoamérica Total Sistema de Distribución Tradicional Sucursales Bancarias Puerto Rico Islas Vírgenes Estados Unidos Subtotal Oficinas No Bancarias Popular Financial Holdings Popular Cash Express Popular Finance Popular Auto Popular Leasing, U.S.A. Popular Mortgage Popular Securities Popular One Popular Insurance Popular Insurance Agency, U.S.A. Popular Insurance, V.I. E-LOAN EVERTEC Subtotal Total Sistema Electrónico de Distribución Cajeros Automáticos Propios y Administrados Puerto Rico Islas Virgenes Estados Unidos Total Transacciones (en millones) Transacciones Electrónicas2 Efectos Procesados3 198 8 89 295 128 51 48 10 8 11 2 258 553 421 59 94 574 199 8 91 298 137 102 47 12 10 13 2 4 327 625 442 68 99 609 199 8 95 302 136 132 61 12 11 21 3 2 4 382 684 478 37 109 624 130.5 170.9 159.4 171.0 199.5 160.2 POPULAR, INC. 2014 INFORME ANUAL 1 Los datos de las acciones comunes han sido ajustados por las divisiones en acciones y la división de acciones a la inversa realizada en mayo de 2012. 2 Desde el 1981 hasta el 2003, las transacciones electrónicas incluyen transacciones ACH, Pago Directo, TelePago Popular, Banca por Internet y transacciones por la Red ATH en Puerto Rico. Desde el 2004 hasta el 2009, estos números incluyen el total de transacciones por la Red ATH en República Dominicana, Costa Rica, El Salvador y Estados Unidos, transacciones de facturación médica, transferencias cablegráficas y otros pagos electrónicos además de lo previamente señalado. A partir del 2010, esta cifra incluye solamente las transacciones realizadas por los clientes de Popular, Inc. y excluye las transacciones procesadas por EVERTEC para otros clientes. 3 A partir del 2010, luego de la venta de EVERTEC, la subsidiaria de tecnología de Popular, Inc., no se procesan efectos electrónicos. 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 $ 304.5 $ 351.9 $ 470.9 $ 489.9 $ (cid:2)540.7 $ (cid:2)357.7 $ (cid:2)(64.5) $ (1,243.9) $ (cid:2)(573.9) $ 137.4 $ 151.3 $ 245.3 $ 599.3 $ (313.5) 30,744.7 33,660.4 36,434.7 44,401.6 48,623.7 47,404.0 44,411.4 38,882.8 34,736.3 38,815.0 37,348.4 36,507.5 35,749.3 33,096.7 18,168.6 19,582.1 22,602.2 28,742.3 31,710.2 32,736.9 29,911.0 26,268.9 23,803.9 26,458.9 25,314.4 25,093.6 24,706.7 22,053.2 16,370.0 17,614.7 18,097.8 20,593.2 22,638.0 24,438.3 28,334.4 27,550.2 25,924.9 26,762.2 27,942.1 27,000.6 26,711.1 24,807.5 2,272.8 2,410.9 2,754.4 3,104.6 3,449.2 3,620.3 3,581.9 3,268.4 2,538.8 3,800.5 3,918.8 4,110.0 4,626.2 4,267.4 $ 3,965.4 $ 4,476.4 $ 5,960.2 $ 7,685.6 $ 5,836.5 $ 5,003.4 $ 2,968.3 $ 1,455.1 $ 1,445.4 $ 3,211.4 $ 1,426.0 $ 2,144.9 $ 2,970.6 $ 3,523.4 1.09% 1.11% 1.36% 14.84% 16.29% 19.30% 1.23% 17.60% 1.17% 0.74% -0.14% -3.04% -1.57% 17.12% 9.73% -2.08% -44.47% -32.95% 0.36% 4.37% 0.40% 4.01% 0.68% 1.65% -0.89% 6.37% 14.43% -7.04% $ 10.87 $ 13.05 $ 17.36 $ 17.95 $ 19.78 $ 12.41 $ (2.73) $ (45.51) $ 2.39 $ (0.62) $ 10.87 3.80 79.67 13.05 4.00 91.02 145.40 169.00 17.36 5.05 96.60 224.25 17.92 6.20 109.45 288.30 19.74 6.40 118.22 211.50 12.41 6.40 123.18 179.50 (2.73) 6.40 121.24 106.00 (45.51) 4.80 63.29 51.60 2.39 0.20 38.91 22.60 (0.62) – 36.67 31.40 1.44 1.44 – 37.71 13.90 $ 2.36 $ 5.80 $ (3.08) 2.35 – 39.35 20.79 5.78 – 44.26 28.73 (3.08) – 40.76 34.05 68% 30% 2% 100% 66% 32% 2% 62% 36% 2% 55% 43% 2% 53% 45% 2% 52% 45% 3% 59% 38% 3% 100% 100% 100% 100% 100% 100% 64% 33% 3% 100% 65% 32% 3% 74% 23% 3% 74% 23% 3% 73% 24% 3% 72% 25% 3% 80% 17% 3% 100% 100% 100% 100% 100% 100% 196 8 96 300 149 154 55 20 13 25 4 2 1 4 427 727 524 39 118 681 195 8 96 299 153 195 36 18 13 29 7 2 1 1 5 460 759 539 53 131 723 193 8 97 298 181 129 43 18 11 32 8 2 1 1 5 431 729 557 57 129 743 192 8 128 328 183 114 43 18 15 30 9 2 1 1 5 421 749 568 59 163 790 194 8 136 338 212 4 49 17 14 33 12 2 1 1 1 5 351 689 583 61 181 825 191 8 142 341 158 52 15 11 32 12 2 1 1 1 7 292 633 605 65 192 862 196 8 147 351 134 51 12 24 32 13 2 1 1 1 9 280 631 615 69 187 871 179 8 139 326 2 9 12 22 32 7 1 1 1 1 9 97 423 605 74 176 855 173 8 101 282 10 33 6 1 1 1 9 61 343 571 77 136 784 185 8 96 289 10 36 6 1 1 1 183 9 94 286 10 37 4 4 1 1 1 55 344 58 344 624 17 138 779 613 20 135 768 175 9 92 276 10 37 4 5 1 1 1 59 335 597 20 134 751 171 9 90 270 9 38 3 6 1 1 1 59 329 599 22 132 753 168 9 47 224 9 25 3 6 1 1 1 46 270 602 21 83 706 206.0 149.9 236.6 145.3 255.7 138.5 568.5 133.9 625.9 140.3 690.2 150.0 772.7 175.2 849.4 202.2 804.1 191.7 381.6 410.4 420.4 425.4 438.4 11,334 11,037 11,474 12,139 13,210 12,508 12,303 10,587 9,407 8,277 8,329 8,072 8,059 7,752 11 11 POPULAR, INC. Gerencia EQUIPO GERENCIAL EJECUTIVO RICHARD L. CARRIÓN Presidente de la Junta de Directores y Principal Oﬁcial Ejecutivo Popular, Inc. IGNACIO ÁLVAREZ Presidente y Principal Oﬁcial de Operaciones Popular, Inc., Banco Popular de Puerto Rico Presidente Popular Community Bank CARLOS J. VÁZQUEZ Vicepresidente Ejecutivo y Principal Oﬁcial Financiero Popular, Inc. JAVIER D. FERRER Vicepresidente Ejecutivo y Principal Oﬁcial Legal Grupo de Consejería General y Asuntos Corporativos Popular, Inc. ILEANA GONZÁLEZ Vicepresidenta Ejecutiva Grupo de Administración de Crédito Comercial Banco Popular de Puerto Rico JUAN O. GUERRERO Vicepresidente Ejecutivo Grupo de Servicios Financieros y Seguros Banco Popular de Puerto Rico GILBERTO MONZÓN Vicepresidente Ejecutivo Grupo de Crédito a Individuo Banco Popular de Puerto Rico EDUARDO J. NEGRÓN Vicepresidente Ejecutivo Grupo de Administración Popular, Inc. NÉSTOR O. RIVERA Vicepresidente Ejecutivo Grupo de Banca Individual Banco Popular de Puerto Rico ELI S. SEPÚLVEDA Vicepresidente Ejecutivo y Principal Oﬁcial de Préstamos Grupo de Crédito Comercial Banco Popular de Puerto Rico LIDIO SORIANO Vicepresidente Ejecutivo y Principal Oﬁcial de Riesgo Grupo Corporativo de Manejo de Riesgo Popular, Inc. JUNTA DE DIRECTORES RICHARD L. CARRIÓN Presidente de la Junta de Directores y Principal Oﬁcial Ejecutivo Popular, Inc. JOAQUÍN E. BACARDÍ, III Presidente y Principal Oﬁcial Ejecutivo Bacardí Corporation JOHN W. DIERCKSEN Principal Greycrest, LLC C. KIM GOODWIN Inversionista Privada MARÍA LUISA FERRÉ Presidenta y Principal Oﬁcial Ejecutiva Grupo Ferré Rangel WILLIAM J. TEUBER JR. Vicepresidente Ejecutivo EMC Corporation ALEJANDRO M. BALLESTER Presidente Ballester Hermanos, Inc. DAVID E. GOEL Socio Gerente Matrix Capital Management Company, L.P. CARLOS A. UNANUE Presidente Goya de Puerto Rico 12 12 Financial Review and Supplementary Information Management’s Discussion and Analysis of Financial Condition and Results of Operations Statistical Summaries Financial Statements Management’s Report to Stockholders Report of Independent Registered Public Accounting Firm Consolidated Statements of Financial Condition as of December 31, 2014 and 2013 Consolidated Statements of Operations for the years ended December 31, 2014, 2013 and 2012 Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2014, 2013 and 2012 Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2014, 2013 and 2012 Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012 Notes to Consolidated Financial Statements 2 101 106 107 109 110 111 112 113 114 Management’s Discussion and Analysis of Financial Condition and Results of Operations 2 03 03 12 25 25 29 31 33 34 36 36 39 39 45 46 46 50 50 52 54 56 62 68 96 97 101 102 103 105 Forward-Looking Statements Overview Critical Accounting Policies / Estimates Statement of Operations Analysis Net Interest Income Provision for Loan Losses Non-Interest Income Operating Expenses Income Taxes Fourth Quarter Results Reportable Segment Results Statement of Financial Condition Analysis Assets Deposits and Borrowings Stockholders’ Equity Regulatory Capital Off-Balance Sheet Arrangements and Other Commitments Contractual Obligations and Commercial Commitments Guarantees Risk Management Market / Interest Rate Risk Liquidity Credit Risk Management and Loan Quality Enterprise Risk and Operational Risk Management Adoption of New Accounting Standards and Issued But Not Yet Effective Accounting Standards Statistical Summaries Statements of Financial Condition Statements of Operations Average Balance Sheet and Summary of Net Interest Income Quarterly Financial Data 3 POPULAR, INC. 2014 ANNUAL REPORT Inc. and its following Management’s Discussion The and Analysis (“MD&A”) provides information which management believes is necessary for understanding the financial performance of (the “Corporation” or subsidiaries Popular, “Popular”). All accompanying tables, consolidated financial statements, and corresponding notes included in this “Financial Review and Supplementary Information - 2014 Annual Report” (“the report”) should be considered an integral part of this MD&A. FORWARD-LOOKING STATEMENTS The information included in this report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may relate to the Corporation’s financial condition, results of operations, plans, objectives, future performance and business, including, but not limited to, statements with respect to the adequacy of the allowance for loan losses, delinquency trends, market risk and the impact of interest rate changes, capital market conditions, capital adequacy and liquidity, the anticipated impacts of our acquisition of certain assets and deposits (other than certain brokered deposits) of Doral Bank from the Federal Deposit Insurance Corporation (“FDIC”) as receiver, including transaction expenses and our expectation that the transaction will be accretive and the effect of legal proceedings the Corporation’s financial condition and results of operations. All statements contained herein that are not clearly historical in nature are forward-looking, and the words “anticipate”, “believe”, “continues”, “expect”, “estimate”, “intend”, “project” and similar expressions and future or conditional verbs such as “will”, “would”, “should”, “could”, “might”, “can”, “may” or similar expressions are generally intended to identify forward- looking statements. new accounting standards and on services financial competition in 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 industry; markets; additional FDIC assessments; and possible legislative, tax or regulatory changes. Other possible events or factors that could cause results or performance to differ materially from those expressed in these forward-looking statements include the following: negative economic conditions that adversely affect the housing prices, the job market, consumer confidence and spending habits which may affect, among other things, the level of non-performing assets, charge-offs and provision expense; risks associated with maintaining customer relationships from our acquisition of certain assets and deposits (other than certain brokered deposits) of Doral Bank from the Federal Deposit Insurance Corporation (FDIC) as receiver, including managing any potential customer confusion caused by the alliance structure; changes in interest rates and market liquidity which may reduce interest margins, impact funding sources and affect our ability to originate and distribute financial products in the primary and secondary markets; changes in market rates and prices which may adversely impact the value of financial assets and liabilities; difficulties in converting or integrating the Doral branches or difficulties in providing transition support to alliance co-bidders; 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 I, Item 3. Legal Proceedings”, is inherently uncertain and depends on judicial interpretations of law and the findings of regulators, judges and juries. Forward-looking statements are not guarantees of future performance, are based on management’s current expectations involve certain risks, uncertainties, and, by their nature, estimates and assumptions by management that are difficult to predict. Various 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. 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; changes in interest rates, as well as the magnitude of such changes; the fiscal and monetary policies of the federal government and its agencies; changes in federal bank regulatory and supervisory policies, including required levels of capital and the impact of proposed capital standards on our capital ratios; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Financial Reform Act) on the Corporation’s businesses, business practices and costs of operations; the relative strength or weakness of the All forward-looking statements included in this report are based upon information available to the Corporation as of the date of this report, and other than as required by law, including the requirements of applicable securities laws, management assumes no obligation to update or revise any such forward- looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements. The description of the Corporation’s business and risk factors contained in Item 1 and 1A of its Form 10-K for the year ended December 31, 2014 discusses additional information about the business of the Corporation and the material risk factors that, in addition to the other information in this report, readers should consider. OVERVIEW The Corporation is a diversified, publicly-owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation has operations in Puerto Rico, the United States and services the Corporation provides loans originations, (“U.S.”) mainland, and the U.S. and British Virgin Islands. In retail, Puerto Rico, including residential mortgage and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as investment leasing and banking, broker-dealer, auto and equipment financing, specialized through insurance subsidiaries. Effective December 31, 2012, Popular Mortgage, which was a wholly-owned subsidiary of BPPR prior to that date, was merged with and into BPPR as part of an internal reorganization. The Corporation’s mortgage origination business continues to be conducted under the brand name Popular Mortgage, a division of BPPR. In the U.S. mainland, the Corporation operates Banco Popular North America (“BPNA”), including its wholly-owned subsidiary E-LOAN. The BPNA the brand name of Popular franchise operates under Community Bank. BPNA focuses efforts and resources on the core community banking business. BPNA operates branches in New York, New Jersey and Southern Florida. E-LOAN markets deposit accounts under its name for the benefit of BPNA. Note 41 presents information about the Corporation’s business segments. consolidated statements financial the to 4 Significant events Acquisition of certain assets and deposits of Doral Bank from the FDIC as receiver On February 27, 2015, the Corporation’s Puerto Rico banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), in an alliance with co-bidders, including the Corporation’s U.S. mainland banking subsidiary, Banco Popular North America, doing business as Popular Community Bank (“PCB”), had acquired certain assets and all deposits (other than certain brokered deposits) of Doral Bank from the Federal Deposit Insurance Corporation (FDIC) as receiver. Under the FDIC’s bidding format, BPPR was the lead bidder and party to the purchase and assumption agreement with the FDIC covering all assets and deposits to be acquired by it and its alliance co-bidders. BPPR entered into back to back purchase and assumption agreements with the alliance co-bidders for the transferred assets and deposits. After taking into account the transfers to the unaffiliated assumed alliance acquired approximately approximately $1.8 billion in performing commercial and residential loans, including: co-bidders, BPPR and PCB together and deposits billion $2.3 in The Corporation has several investments which accounts for under the equity method. These include the 14.96% interest in EVERTEC, a 15.82% interest in Centro Financiero BHD Leon, S.A. (“BHD Leon”), a 24.9% interest in PR Asset Portfolio 2013-1 International, LLC and a 24.9% interest in PRLP 2011 Holdings LLP, among other investments in limited partnerships which mainly hold investment securities. EVERTEC provides transaction processing services throughout the Caribbean and Latin America, including servicing many of the Corporation’s systems infrastructure and transaction processing businesses. Centro Financiero BHD is a diversified financial services institution operating in the Dominican Republic. PR Asset Portfolio 2013-1 International, LLC is a joint venture to which the Corporation sold construction and commercial loans and commercial and residential real estate owned assets, most of which were non-performing, with a fair value of $306 million during the year 2013. PRLP 2011 Holdings LLP is a joint venture to which the Corporation sold construction and commercial loans, most of which were non-performing, with a fair value of $148 million during the year 2011. For the year ended December the Corporation recorded approximately $38.2 million in earnings from these investments these on an aggregate basis. The carrying amounts of investments as of December 31, 2014 were $188.1 million. Refer to Note 16 to the consolidated financial statements for additional the Corporation’s investments at equity. information of 31, 2014, • BPPR assumed approximately $612 million in deposits associated with eight of the 18 Puerto Rico branches of Doral Bank and approximately $431 million from its online deposit platform, and approximately $848 million in performing Puerto Rico residential and commercial loans. BPPR purchased the loans at an aggregate discount of 4.71% or $40 million and paid an aggregate premium of 0.93% or $10 million for the deposits it assumed. • PCB assumed approximately $1.3 billion in deposits in three New York branches of Doral Bank, and acquired approximately $931 million in performing commercial loans primarily in the New York metropolitan area. PCB purchased the loans at an aggregate premium of 0.57% or $5 million and paid an aggregate premium of 1.99% or $25 million for the deposits it assumed. In addition, on February 27, 2015, the FDIC, as Receiver for Doral Bank, awarded BPPR the mortgage servicing rights for a loan portfolio of approximately $5 billion in unpaid principal balance, for a purchase price currently estimated at $48.6 million. The transfers of the mortgage servicing rights are subject to a number of specified closing conditions, including the consent of each of Ginnie Mae, Fannie Mae and Freddie Mac in a form acceptable to BPPR, and other customary closing conditions. The transfers are expected to close within the next 60 days, subject to the conditions described above. There is no loss-sharing arrangement with the FDIC on the acquired assets. Management believes the Corporation to effectively deploy excess capital by acquiring banking operations that complement its main market in Puerto transaction allows that this 5 POPULAR, INC. 2014 ANNUAL REPORT Rico and further support the recent reorganization and focus of its US mainland operations in the New York and South Florida markets. The transaction will reduce regulatory capital ratios by approximately 1.5%, excluding the impact of goodwill. The Corporation would continue to reflect excess capital over well capitalized targets in excess of approximately $1.7 billion. The Company expects to record goodwill based on the pricing for the acquired loans at a discount and deposits at a premium of 1.9% and 1.5%, respectively. The transaction is expected to be accretive to earnings in the first twelve months, including transaction costs estimated between $20 to $25 million. Please revise “Forward-Looking Statements” factors to include these statements as forward-looking statements. Furthermore, the incremental earnings expected to be generated from the US based operations would be considered additional positive evidence in our analysis that could result in the realization of a portion of the fully reserved deferred tax asset recorded at PCB. The transaction was completed based on December 31, 2014 balances and is subject to customary true-up and purchase accounting adjustments through the date of the close. The $1.8 billion in loans and $2.3 billion in deposits acquired by Popular in the transaction did not include any non-performing assets and do not enjoy a loss sharing agreement with the FDIC. Repayment of TARP funds On July 2, 2014, the Corporation completed the repayment of TARP funds to the U.S. Treasury through the repurchase of $935 million of trust capital securities issued to the U.S. Treasury under the TARP Capital Purchase Program. The Corporation funded the repurchase through a combination of available cash and approximately $400 million from the proceeds of the issuance of its $450 million aggregate principal amount of 7% Senior Notes due on 2019 which settled on July 1, 2014. On July 23, 2014, the Corporation also completed the repurchase of the outstanding warrant initially issued to the U.S. Treasury under the TARP Capital Purchase Program in 2008 for a repurchase price of $3.0 million. The warrant represented the right to purchase 2,093,284 shares of the Corporation’s common stock at an exercise price of $67 per share with an original term of 10 years. With the completion of this transaction, the Corporation completed its exit from the TARP Capital Purchase Program. Reorganization of the U.S operations During the year ended December 31, 2014, the Corporation completed the sale of its California, Illinois and Central Florida regional operations to three different buyers as part of an internal reorganization. The Corporation recorded a net gain of approximately $33.8 million, after customary transaction costs, as a result of these transactions. In connection with these transactions, the Corporation is relocating certain back office the operations to Puerto Rico and New York. After result that will from the sale of reorganization is complete, annual operating expenses are expected to decrease by approximately $34 million. This decrease in expenses is expected to offset a similar reduction in the regional revenues operations. The Corporation recorded a non-cash goodwill impairment charge of $186.5 million, related to the goodwill asset allocated to these regions. This non-cash charge had no impact on the Corporation’s tangible capital or regulatory capital ratios. The Corporation also executed other transactions as part of the reorganization of its U.S. operations. These included the refinancing of $638 million in structured repos, which resulted in increased margins, at a cost of approximately $39.8 million recognized during 2014. Also, the Corporation completed bulk sales or agreements to sell of non-performing and legacy book value of assets with an aggregate approximately $249 million, at a net loss of $11.1 million. Current and prior period’s financial information covering income and expense amounts presented in this MD&A has been retrospectively adjusted for the impact of the discontinued operations for comparative purposes. The financial information for prior periods included in this MD&A does not reflect the reclassification of to discontinued operations. and liabilities assets prepares its Consolidated Adjusted results of operations - Non-GAAP financial measure The Corporation Financial Statements using accounting principles generally accepted in the U.S. (“U.S. GAAP”), the (“reported basis”). These financial statements appear on pages 109 to 113. In addition to analyzing the Corporation’s results on a reported basis, management monitors the performance of the Corporation on an “adjusted basis” and excludes the impact of certain unusual transactions on the results of its operations. Throughout this MD&A, the Corporation presents a discussion of results excluding the impact of these events to arrive at the “adjusted the “adjusted results” results”. Management believes that provide meaningful underlying about performance of the Corporation’s ongoing operations. The “adjusted results” are a Non-GAAP financial measure. Refer to Tables 72-74, for a reconciliation of the reported results to the “adjusted results” for the years ended December 31, 2014 and 2013. its financial information the Non-GAAP financial measures used by the Corporation may not be comparable to similarly named non-GAAP financial measures used by other companies. Adjustment to our reserve for loans sold with credit recourse Our net loss from continuing operations for the year ended December 31, 2014 reported in this annual report is different from what we reported in our earnings release issued on January 23, 2014. The difference is related to an adjustment recorded to increase our reserve for loans sold with credit for the from continuing recourse by approximately $6.5 million. The impact of the adjustment after the applicable income tax is to increase our net loss ended operations December 31, 2014 by approximately $4.0 million. The impact on our total basic and diluted earnings (loss) per share for the year ended December 31, 2014 was an increase in the net loss of $.03 per share. The impact on our total basic and diluted earnings per share for the quarter ended December 31, 2014 was a reduction in the net income of $0.03 and $0.04 per share, respectively. year Financial highlights for the year ended December 31, 2014 The Corporation’s net loss for the year ended December 31, 2014 amounted to $313.5 million, compared to a net income $599.3 million and $245.3 million, for 2013 and 2012, respectively. Net loss from continuing operations for the year ended December 31, 2014 was $190.5 million, compared to a net income of $558.9 million and $207.5 million, for 2013 and 2012, respectively. The continuing operations for the year 2014 reflect a $414.1 million expense related to the amortization of the discount associated with the TARP funds which were repaid during 2014; a positive adjustment of $12.5 million in the amortization of the FDIC indemnification asset to reverse the impact of accelerated amortization expense recorded in prior periods; and the impact of the BPNA reorganization which included losses on bulk sales of non-performing assets totalling $11.1 million, a $39.7 million expense related to the refinancing of structured repos and restructuring charges of In addition, during 2014 the Corporation $26.7 million. recorded an income tax expense of $20.0 million related to the change in the capital gains tax rate from 15% to 20% and a $8.0 million charge to record a valuation allowance on the deferred tax asset at the holding company, offset by an income tax benefit of $23.4 million resulting from the Closing Agreement with the PR Treasury Department related to the treatment of certain charge-offs for the loans acquired from Westernbank. 6 The results for 2013 reflect the impact of two bulk sale of non-performing assets resulting in an aggregate after tax loss of $287.7 million, $412.8 million in after tax gains resulting from the initial and subsequent public offerings and related transactions completed by EVERTEC in which the Corporation participated as a selling stockholder and an income tax benefit of $197.5 million reflecting the impact on the deferred tax asset related to the change in the corporate tax rate from 30% to 39%. The results for 2012 reflect an income tax benefit of $72.9 million related to reduction of the deferred tax liability on the estimated gains for tax purposes related to the loans acquired from Westernbank as a result of the closing agreement with the Puerto Rico Department of Treasury, which established that these would be taxed at a capital gain rate. Also, the results from 2012 reflect a benefit of approximately $26.9 million from the Corporation’s share of a tax benefit from a grant received by EVERTEC from the Puerto Rico Government. Excluding the impact of the above mentioned transactions, the adjusted net income from continuing operations for the year ended December 31, 2014 was $300.7 million, compared to $215.7 million for 2013, while the net income was $343.6 million and $256.2 million for 2014 and 2013, respectively. Refer to Table 72-74 for the reconciliation to the adjusted, Non- GAAP net income. results for 2014 include For the year ended December 31, 2014, net loss from discontinued operations was $123.0 million, compared to a net income of $40.9 million and $37.8 million for 2013 and 2012, respectively. The a goodwill impairment charge of $186.5 million and the net gain on the sale of the U.S. regional operations amounting to $33.8 million. Table 1 provides selected financial data for the past five years. For purposes of the discussions, assets subject to loss sharing agreements with the FDIC, including loans and other real estate owned, are referred to as “covered assets” or “covered loans” since the Corporation expects to be reimbursed for 80% of any future losses on those assets, subject to the terms of the FDIC loss sharing agreements. 7 POPULAR, INC. 2014 ANNUAL REPORT Table 1 - Selected Financial Data (Dollars in thousands, except per common share data) CONDENSED STATEMENTS OF OPERATIONS Interest income Interest expense Net interest income Provision for loan losses: Non-covered loans Covered loans Non-interest income Operating expenses Income tax expense (benefit) (Loss) income from continuing operations (Loss) income from discontinued operations, net of tax Net (loss) income Net (loss) income applicable to common stock PER COMMON SHARE DATA [1] Net (loss) income: Basic: From continuing operations From discontinued operations Total Diluted: From continuing operations From discontinued operations Total Book Value Market Price Outstanding shares: Average - basic Average - assuming dilution End of period AVERAGE BALANCES Net loans [2] Earning assets Total assets Deposits Borrowings Total stockholders’ equity PERIOD END BALANCE Net loans [2] Allowance for loan losses Earning assets Total assets Deposits Borrowings Total stockholders’ equity SELECTED RATIOS 2014 Years ended December 31, 2012 2011 2013 2010 $ 1,633,543 688,471 945,072 $ 1,647,940 303,366 1,344,574 $ 1,644,386 362,759 1,281,627 $ 1,806,408 484,860 1,321,548 $ 1,789,836 622,246 1,167,590 223,999 46,135 386,515 1,193,684 58,279 (190,510) (122,980) (313,490) $ 536,710 69,396 791,013 1,221,990 (251,327) 558,818 40,509 599,327 (317,213) $ 595,604 (1.88) $ (1.20) (3.08) $ (1.88) $ (1.20) (3.08) $ 40.76 34.05 5.41 0.39 5.80 5.39 0.39 5.78 44.26 28.73 322,234 74,839 511,489 1,214,989 (26,403) 207,457 37,818 245,275 241,552 1.99 0.37 2.36 1.98 0.37 2.35 39.35 20.79 395,853 145,635 603,842 1,143,860 114,927 125,115 26,210 151,325 147,602 1.19 0.25 1.44 1.19 0.25 1.44 37.71 13.90 $ $ $ $ $ $ $ $ $ $ $ $ 911,564 – 1,279,407 1,261,226 108,230 165,977 (28,576) 137,401 (54,576) (0.30) (0.32) (0.62) (0.30) (0.32) (0.62) 36.67 31.40 $ $ $ $ $ $ $ $ $ $ $ $ 102,848,792 102,848,792 103,476,847 102,693,685 103,061,475 103,397,699 102,429,755 102,653,610 103,169,806 102,179,393 102,289,496 102,590,457 88,515,404 88,515,404 102,272,780 $ 22,366,750 29,897,273 35,181,857 24,654,954 3,514,203 4,555,752 $ 22,053,217 601,792 29,594,365 33,096,695 24,807,535 3,004,685 4,267,382 $ 22,799,878 29,741,099 36,266,993 24,571,382 4,291,861 4,176,349 $ 24,706,719 640,555 31,521,963 35,749,333 26,711,145 3,645,246 4,626,150 $ 22,786,545 29,510,753 36,264,031 24,702,622 4,414,483 3,843,652 $ 25,093,632 730,607 31,906,198 36,507,535 27,000,613 4,430,673 4,110,000 $ 23,156,980 30,470,545 38,066,268 25,185,910 5,845,407 3,732,836 $ 25,314,392 815,308 32,441,983 37,348,432 27,942,127 4,293,669 3,918,753 $ 22,959,995 31,292,238 38,378,966 24,126,467 7,444,013 3,259,167 $ 26,458,855 793,225 33,507,582 38,814,998 26,762,200 6,946,955 3,800,531 Net interest margin (taxable equivalent basis) [3] Return on average total assets Return on average common stockholders’ equity Tier I Capital to risk-adjusted assets Total Capital to risk-adjusted assets 4.96% (0.89) (7.04) 18.13 19.41 Per share data is based on the average number of shares outstanding during the periods, except for the book value and market price which are based on the information at the end of the periods. All per share data has been adjusted to retroactively reflect the 1-for-10 reverse stock split effected on May 29, 2012. Includes loans held-for-sale and covered loans. [2] [3] Net interest margin for the year ended December 31, 2014 excludes the impact of the cost associated with the refinancing of structured repos at BPNA and the accelerated amortization of the discount related to the TARP funds amounting to $39.2 million and $414.1 million, respectively. The U.S. GAAP net Interest margin for the year ended December 31, 2014, on a taxable equivalent basis, was 3.45%. Refer additional information on the Net Interest Income section of this MD&A and to the reconciliation in Table 73. 4.73% 1.65 14.43 19.15 20.42 4.47% 0.68 6.37 17.35 18.63 4.48% 0.40 4.01 15.97 17.25 3.82% 0.36 4.37 14.52 15.79 [1] 8 The Corporation has strived to mitigate the decline in earning assets amid challenging economic conditions in Puerto Rico. During the first half of 2013, the Corporation completed institutions two bulk purchases from Puerto Rico financial acquiring $761.3 million in mortgage loans. Also, during 2012, the BPPR reportable segment purchased $265 million in consumer loans. During the first half of 2011, the Corporation completed two bulk purchases of residential mortgage loans from a Puerto Rico financial institution, adding $518 million in performing mortgage loans to its portfolio. The Corporation will continue to look for opportunities to supplement its organic growth with portfolio purchases. On April 30, 2010, BPPR acquired certain assets and assumed certain liabilities of Westernbank from the FDIC in an assisted transaction. Table 2 provides a summary of the gross revenues derived from the assets acquired in the FDIC-assisted transaction during 2014, 2013 and 2012. Table 2 - Financial Information - Westernbank FDIC-Assisted Transaction (In thousands) Interest income: Interest income on covered loans Total interest income on covered loans FDIC loss share expense: Amortization of loss share indemnification asset Reversal of accelerated amortization in prior periods 80% mirror accounting on credit impairment losses [1] 80% mirror accounting on reimbursable expenses 80% mirror accounting on recoveries on covered assets, including rental income on OREOs, subject to reimbursement to the FDIC 80% mirror accounting on amortization of contingent liability on unfunded commitments Change in true-up payment obligation Other Total FDIC loss share expense Fair value change in equity appreciation instrument Amortization of contingent liability on unfunded commitments (included in other operating income) Total revenues Provision for loan losses Total revenues less provision for loan losses Years ended December 31, 2013 2014 2012 $293,610 $300,745 $301,441 293,610 300,745 301,441 (189,959) 12,492 32,038 58,117 (13,124) – (1,791) (797) (103,024) – – (161,635) – 60,454 50,985 (129,676) – 58,187 30,771 (16,057) (473) (15,993) 668 (82,051) – 593 (2,979) (969) (13,178) 1,633 (56,211) – 1,211 190,586 219,287 246,441 46,135 69,396 74,839 $144,451 $149,891 $171,602 [1] Reductions in expected cash flows for ASC 310-30 loans, which may impact the provision for loan losses, may consider reductions in both principal and interest cash flow expectations. The amount covered under the FDIC loss sharing agreements for interest not collected from borrowers is limited under the agreements (approximately 90 days); accordingly, these amounts are not subject fully to the 80% mirror accounting. Average balances (In millions) Covered loans FDIC loss share asset for Interest income on covered loans the year 2014 amounted to $ 294 million vs. $ 301million in 2013, reflecting a yield of 10.60% vs. 9.32%, for each year respectively. The increase in the yield was due to higher expected cash flows which are reflected in the accretable yield and recognized over the life of the loans and resolutions of loans during the year. This portfolio, due to its nature, should continue to decline as scheduled payments are received and workout arrangements are made. The yield improvement in 2014 reflects higher collections and estimated cash flows, which increase the accretable yield to be taken over the life of the loan pools. Years ended December 31, 2013 2014 2012 $2,771 748 $3,228 1,310 $4,050 1,680 The FDIC loss share reflected an expense of $ 103 million for 2014, compared to $ 82 million for 2013. This was mainly the result of higher amortization of the indemnification asset by $ 28 million, lower mirror accounting on credit impairment losses of $ 28 million, offset by lower unfavorable valuation adjustment on true up payment obligation of $14 million and higher mirror accounting income on reimbursable expenses of $7 million. For 2013, when compared to 2012 this line reflected a negative variance of $ 26 million due to higher amortization of the indemnification asset partially offset by higher mirror accounting on reimbursable expenses. 9 POPULAR, INC. 2014 ANNUAL REPORT Although the increase in cash flows increases the accretable yield to be recognized over the life of the loans, it also has the effect of lowering the realizable value of the loss share asset since the Corporation would receive lower FDIC payments under the loss share agreements. This is reflected in the increased amortization of the loss share asset for 2014. The change in the amortization of the loss share asset from 2012 to 2013 also reflected higher expected cash flows from year to year. the year The discussion that results of operations follows provides highlights of for the Corporation’s ended December 31, 2014 compared to the results of operations of 2013. It also provides some highlights with respect to the Corporation’s financial condition, credit quality, capital and liquidity. Table 3 presents a five-year the components of net income (loss) as a percentage of average total assets. summary of Table 3 - Components of Net Income (Loss) as a Percentage of Average Total Assets 2014 2013 2012 2011 2010 Net interest income Provision for loan losses Mortgage banking activities Net gain and valuation adjustments on investment securities Net gain (loss) on sale of loans, including valuation adjustments on loans held-for-sale Adjustments (expense) to indemnity reserves Trading account profit (loss) FDIC loss share (expense) income Fair value change in equity appreciation instrument Gain on sale of processing and technology business Other non-interest income Total net interest income and non-interest income, net of provision for loan losses Operating expenses (Loss) income from continuing operations before income tax Income tax expense (benefit) (Loss) income from continuing operations (Loss) income from discontinued operations, net of tax Net (loss) income 2.69% 3.71% 3.54% 3.47% 3.04% (1.10) (0.77) 0.23 0.09 – – (0.08) 0.12 (0.06) (0.12) 0.01 0.01 (0.15) (0.29) – – – – 1.46 1.29 (2.37) 0.04 0.01 0.01 (0.19) 0.09 (0.07) 0.11 1.67 1.66 (1.67) 0.21 0.02 (0.15) (0.10) (0.04) (0.23) – – 2.47 (1.42) (0.01) 0.03 0.01 (0.09) 0.13 0.17 0.02 – 1.32 3.02 (3.39) (0.37) 0.17 (0.54) (0.35) 4.22 (3.37) 0.85 (0.69) 1.54 0.11 3.85 (3.34) 0.51 (0.07) 0.58 0.10 3.63 (3.00) 4.00 (3.29) 0.63 0.30 0.33 0.07 0.71 0.28 0.43 (0.07) (0.89)% 1.65% 0.68% 0.40% 0.36% Net interest income from the continuing business, on a taxable equivalent basis, for the year ended December 31, 2014 was $1.0 billion compared to $1.4 billion in 2013. Excluding the impact of the repayment of TARP funds and the refinancing of structured repos in the US, the net interest income, on a taxable equivalent basis, in 2014 was $1.5 billion compared to $1.4 billion during 2013. Net interest margin, on a taxable equivalent basis, was 3.45% in 2014. The adjusted net interest margin was 4.96% compared to 4.73% for 2013. The increase in the adjusted net interest margin was mainly related to higher yields from the commercial and mortgage loan portfolios as well as the impact of lower expected losses for the covered portfolio, which increases the accretable yield. Also, the renewal of time deposits at lower rates and lower cost of borrowings, after the repayment of TARP funds and refinancing of structured repos, helped improve margins for 2014. Refer to the Net Interest Income section of this MD&A for a discussion of the major variances in net interest income, including yields and costs. The provision for loan losses for the non-covered portfolio was $224.0 million for the year ended December 31, 2014, compared to 536.7 million for 2013. Excluding the impact of the bulk loan sales in each respective year, the adjusted provision for the non-covered portfolio was $211.2 million and $218.6 million for 2014 and 2013, respectively. The decline in the adjusted provision was mainly related to higher reserve releases at BPNA, offset by higher provisions at the BPPR segment. The continued economic weakness in Puerto Rico, our principal market, continues to present challenges which are being reflected in its overall reserve levels. The credit metrics in the U.S. reflect strong performance led by the improved risk profile of its loan portfolios, further strengthened by the sale of certain non-performing and legacy assets during the second half of the year 2014. Non-performing loans held in portfolio, at December 31, 2014 were $630.5 million, an increase of $32.6 million from 2013, driven by higher inflows in the BPPR segment, offset by a decline in BPNA due in part to the aforementioned bulk sales of non-performing and legacy assets. Refer to the Provision for Loan Losses and Credit Risk Management and Loan Quality section of this MD&A for information on the allowance for loan losses, non-performing assets, troubled debt restructurings, net charge-offs and credit quality metrics. Non-interest income for the year ended December 31, 2014 amounted to $386.5 million, a decrease of $404.5 million, compared with 2013. The FDIC indemnity asset amortization for the year 2014 included a benefit of approximately $12.5 million to reverse the impact of accelerated amortization expense recorded in prior periods. This amount will be recognized as expense over the remaining portion of the loss sharing agreement that expires in the quarter ending June 30, 2015. Excluding the impact of the $12.5 million FDIC indemnity asset amortization adjustment during 2014 and the $357.2 million of significant events during 2013, which include the impact of the NPA’s sales and EVERTEC’s public offerings, non-interest income decreased by $61.5 million principally due to lower income from mortgage banking activities, higher provision for indemnity reserves, and lower service fees and charges on deposits, offset by higher gain on sales of loans, mainly at BPNA, and trading account profits. Refer to the Non- Interest Income section of this MD&A for a table that provides a breakdown of the different categories of non-interest income. Total operating expenses for the year 2014 amounted to $1.2 billion, a decrease of $28.3 million, when compared with the previous year. Operating expenses for 2014 included non- recurring restructuring charges related to the U.S. operations for $26.7 million, executive compensation costs for $3.0 million, lease cancellation costs for $1.9 million and early debt extinguishment costs for $532 thousand. For the year 2013, operating expenses included $37.0 million in OREO expenses related to the bulk sale of non-performing assets and $1.1 million in professional services mainly related to EVERTEC’s public offerings. Excluding the impact of these charges, detailed in tables 72 and 73, operating expenses for 2014 declined by $22.3 million due mainly to lower pension and medical costs and lower FDIC insurance expense, partially offset by higher professional fees and OREO expenses. Refer to the Operating Expenses section of this MD&A for additional explanations on the major variances in the different categories of operating expenses. the year 2013. During the year 2014, For the year 2014, the Corporation recorded an income tax expense of $58.3 million, compared to a benefit of $251.3 million for the Corporation recorded an income tax benefit of $23.4 million in connection with a Closing Agreement with the Puerto Rico Department of Treasury related to the income tax treatment of certain charge-offs of the covered portfolio and an expense of approximately $8.0 million to record a valuation allowance in the deferred tax asset at the Holding Company, which were partially offset by an expense of $20.0 million related to the change in the capital gains tax rate from 15% to 20%, pursuant to an amendment to the Puerto Rico Internal Revenue Code. During the year 2013, the Corporation recorded an income tax benefit of $197.5 million reflecting the impact on its deferred tax assets of an amendment to the Puerto Rico Internal Revenue Code which, among other things, increased the marginal tax 10 rate from 30% to 39%. In addition, the Corporation recorded an income tax benefit of $146.4 million in connection with the loss generated on the Puerto Rico operations by the sales of non-performing assets that took place during the year 2013 and a tax expense of $23.7 million related to the gain realized on the sale of a portion of EVERTEC’s shares which was taxable at a preferential tax rate. Refer to the Income Taxes section in this MD&A and Note 43 to the consolidated financial statements for additional information on income taxes. At December 31, 2014, the Corporation’s total assets were $33.1 billion, compared with $35.7 billion at December 31, 2013, a decrease of $2.6 billion, or 7%. Total earning assets at December 31, 2014 amounted to $29.5 billion, a decrease of $2.0 billion, or 7%, compared with December 31, 2013. Loans held-in-portfolio, excluding covered loans, totaled $19.4 billion, a decrease of $2.2 billion compared to 2013. The decrease is due mainly to the sale of approximately $1.8 billion in loans from the U.S. discontinued businesses in California, Illinois and Central Florida. Also, during the year, the U.S. operations completed the sale or entered into agreements to sell approximately $249 million of non-performing and legacy loans in addition to sales under its normal workout strategies. The covered portfolio declined by $442.0 million as this portfolio continues its normal run-off. Loans held-for-sale declined by $4.3 million from 2013, due to a decline in mortgage originations for sale in the secondary market, offset by a higher volume of consumer loans, particularly auto loans. 2014, compared with $3.6 Refer to Table 19 in the Statement of Financial Condition Analysis section of this MD&A for the percentage allocation of the composition of the Corporation’s financing to total assets. Deposits amounted to $24.8 billion at December 31, 2014, compared with $26.7 billion at December 31, 2013. Table 20 presents a breakdown of deposits by major categories. The decrease in deposits is due mainly to the sale of approximately $2.0 billion in deposits in connection with the sale of the California, Illinois and Central Florida regional operations. The amounted to $3.0 billion at Corporation’s borrowings December billion at 31, December 31, 2013. The decline in borrowings is mainly due to lower balance of repos and advances from the Federal Home Loan Bank of NY. Stockholders’ 31, billion at December billion at December 31, 2013. The Corporation continues to be well- capitalized at December 31, 2014. The Tier 1 risk-based capital and Tier 1 common equity to risk-weighted assets stood at 18.13% and 15.89%, respectively, at December 31, 2014, compared with at December 31, 2013. The change in the Corporation’s regulatory capital ratios from the end of 2013 to December 31, 2014 was principally due to the repurchase on July 2, 2014 of $935 million of capital securities held by the U.S. Treasury in connection with the TARP Capital Purchase Program. This $4.3 compared with $4.6 equity 2014, 19.15% and respectively, amounted 14.83%, to 11 POPULAR, INC. 2014 ANNUAL REPORT unfavorable impact to the regulatory capital ratios was in part off-set by a reduction in risk-weighted assets, mostly driven by the U.S. regional sales. In summary, during 2014, the Corporation achieved significant milestones on its continuing efforts to strengthen its operations and the outlook for future profitability as evidenced by the repayment of TARP funds and substantial progress the U.S. toward the completion of operations. The Corporation continues to benefit from its stake in EVERTEC and BHD, the second largest bank in the Dominican Republic, and improved performance of its U.S. operations. the restructuring of Moving forward, the Corporation will in Puerto Rico, continue to focus on its credit performance and to identify Table 4 - Common Stock Performance its organic to complement opportunities growth with opportunistic portfolio acquisitions. In the U.S. mainland, the Corporation expects to solidify the trend of improving credit legacy quality by continuing the run-off or disposition of portfolios, actively managing the existing classified portfolio, and identifying new asset growth opportunities in selected loan categories. For financial further discussion of operating results, condition and business risks refer to the narrative and tables included herein. The shares of the Corporation’s common stock are traded on the NASDAQ Global Select Market under the symbol BPOP. Table 4 shows the Corporation’s common stock performance on a quarterly basis during the last five years. Market Price High Low Cash Dividends Declared per Share Book Value Per Share Dividend Yield [1] Price/ Earnings Ratio Market/Book Ratio $40.76 N.M. (11.06)x 83.54% $34.14 34.64 34.18 31.50 $29.17 34.20 30.60 28.92 $20.90 18.74 21.20 23.00 $19.00 28.30 32.40 35.33 $31.40 29.50 40.20 29.10 $27.34 29.44 28.93 25.50 $24.07 26.25 26.88 21.70 $17.42 13.55 13.58 14.30 $11.15 13.70 26.30 28.70 $27.01 24.50 26.40 17.50 $– – – – $– – – – $– – – – $– – – – $– – – – 44.26 N.M. 4.95 64.91 39.35 N.M. 8.85 52.83 37.71 N.M. 9.65 36.86 36.67 N.M. (50.65) 85.63 2014 4th quarter 3rd quarter 2nd quarter 1st quarter 2013 4th quarter 3rd quarter 2nd quarter 1st quarter 2012 4th quarter 3rd quarter 2nd quarter 1st quarter 2011 4th quarter 3rd quarter 2nd quarter 1st quarter 2010 4th quarter 3rd quarter 2nd quarter 1st quarter Based on the average high and low market price for the four quarters. [1] Note: All per share data has been adjusted to retroactively reflect the 1-for-10 reverse stock split effected on May 29, 2012. N.M. – Not meaningful. 12 CRITICAL ACCOUNTING POLICIES / ESTIMATES followed by the The accounting and reporting policies Corporation and its subsidiaries conform with generally accepted accounting principles (“GAAP”) in the United States of America and general practices within the financial services industry. The Corporation’s significant accounting policies are described in detail in Note 2 to the consolidated financial statements and should be read in conjunction with this section. Critical accounting policies require management to make estimates and assumptions, which involve significant judgment about the effect of matters that are inherently uncertain and that involve a high degree of subjectivity. These estimates are made under facts and circumstances at a point in time and changes in those facts and circumstances could produce actual results that differ from those estimates. The following MD&A section is a summary of what management considers the Corporation’s critical accounting policies / estimates. Fair Value Measurement of Financial Instruments The Corporation measures fair value as required by ASC Subtopic 820-10 “Fair Value Measurements and Disclosures”, which defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Corporation currently measures at fair value on a recurring basis its trading assets, available-for-sale securities, derivatives, mortgage servicing rights and contingent consideration. Occasionally, the Corporation may be required to record at fair value other assets on a nonrecurring basis, such as loans held-for-sale, impaired loans held-in-portfolio that are collateral assets. These nonrecurring fair value adjustments typically result from the application of lower of cost or fair value accounting or write- downs of individual assets. dependent certain other and its assets The Corporation categorizes and liabilities measured at fair value under the three-level hierarchy. The level within the hierarchy is based on whether the inputs to the valuation methodology used for fair value measurement are observable. The hierarchy is broken down into three levels based on the reliability of inputs as follows: • Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date. No significant degree of judgment for these valuations is needed, as they are based on quoted prices that are readily available in an active market. • Level 2 - Quoted prices other than those included in Level 1 that are observable either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and that inputs other can be corroborated by observable market data for substantially the full term of the financial instrument. are observable or that inputs • Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair the financial asset or liability. value measurement of the Corporation’s own reflect Unobservable assumptions about what market participants would use to price the asset or liability, including assumptions about risk. The inputs are developed based on the best available information, which might include the Corporation’s own data such as internally-developed models and discounted cash flow analyses. The Corporation requires the use of observable inputs when available, in order to minimize the use of unobservable inputs to determine fair value. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing on those securities. The amount of judgment involved in estimating the fair value of a financial instrument depends upon the availability of quoted market prices or observable market parameters. In addition, it may be affected by other factors such as the type of instrument, the liquidity of the market for the instrument, transparency around the inputs the contractual characteristics of the instrument. to the valuation, as well as If listed prices or quotes are not available, the Corporation employs valuation models that primarily use market-based inputs including yield curves, interest rate curves, volatilities, credit curves, and discount, prepayment and delinquency rates, among other considerations. When market observable data is not available, the valuation of financial instruments becomes more subjective and involves substantial judgment. The need to use unobservable inputs generally results from diminished observability of both actual trades and assumptions resulting from the lack of market liquidity for those types of loans or securities. When fair values are estimated based on modeling the techniques interest Corporation uses rates, prepayment speeds, default loss severity rates and discount rates. Valuation adjustments are limited to those necessary to ensure that the financial instrument’s fair value is adequately representative of the price that would be received or paid in the marketplace. such as discounted cash flow models, assumptions such as rates, The fair value measurements and disclosures guidance in ASC Subtopic 820-10 also addresses measuring fair value in situations where markets are inactive and transactions are not orderly. Transactions or quoted prices for assets and liabilities may not be determinative of fair value when transactions are not orderly and thus may require adjustments to estimate fair value. Price quotes based on transactions that are not orderly should be given little, if any, weight in measuring fair value. Price quotes based upon transactions that are orderly shall be 13 POPULAR, INC. 2014 ANNUAL REPORT considered in determining fair value and the weight given is based on facts and circumstances. If sufficient information is not available to determine if price quotes are based upon orderly transactions, less weight should be given to the price quote relative to other transactions that are known to be orderly. The lack of liquidity is incorporated into the fair value measurement based on the type of asset measured and the valuation methodology used. An illiquid market is one in which little or no observable activity has occurred or one that lacks willing buyers or willing sellers. Discounted cash flow techniques incorporate forecasting of expected cash flows discounted at appropriate market discount rates which reflect the lack of liquidity in the market which a market participant would value measurements inherently reflect any lack of liquidity in the market since they represent an exit price from the perspective of the market participants. consider. Broker quotes used fair for Management believes that fair values are reasonable and consistent with the fair value measurement guidance based on the Corporation’s internal validation procedure and consistency of the processes followed, which include obtaining market quotes when possible or using valuation techniques that incorporate market-based inputs. and political Refer to Note 35 to the consolidated financial statements for information on the Corporation’s fair value measurement disclosures required by the applicable accounting standard. At December 31, 2014, approximately $ 5.5 billion, or 97%, of the assets measured at fair value on a recurring basis used market- based or market-derived valuation methodology and, therefore, were classified as Level 1 or Level 2. The majority of instruments measured at fair value were classified as Level 2, securities, obligations of U.S. including U.S. Treasury Government sponsored entities, obligations of Puerto Rico, States subdivisions, most mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMOs”), and derivative instruments. U.S. Treasury securities were valued based on yields that were interpolated from the constant maturity of U.S. Government sponsored entities were priced based on an active exchange market and on quoted prices for similar securities. Obligations of Puerto Rico, States and political subdivisions were valued based on trades, bid price or spread, two sided markets, quotes, benchmark curves, market data feeds, discount and capital rates and trustee reports. MBS and CMOs were priced based on a bond’s theoretical value from similar bonds defined by credit quality and market sector. Refer to the Derivatives section below for a description of the valuation techniques used to value these derivative instruments. curve. Obligations treasury The remaining 3% of assets measured at fair value on a recurring basis at December 31, 2014 were classified as Level 3 since their valuation methodology considered significant unobservable inputs. The financial assets measured as Level 3 included mostly Puerto Rico tax-exempt GNMA mortgage- backed securities and mortgage servicing rights (“MSRs”). GNMA tax exempt mortgage-backed securities are priced using a local demand price matrix prepared from local dealer quotes, and other local investments such as corporate securities and local mutual funds which are priced by local dealers. MSRs, on the other hand, are priced internally using a discounted cash portfolio flow model which considers characteristics, prepayment assumptions, delinquency rates, late charges, other ancillary revenues, cost to service and other economic factors. Additionally, the Corporation reported $ 93 million of financial assets that were measured at fair value on a nonrecurring basis at December 31, 2014, all of which were classified as Level 3 in the hierarchy. servicing fees, Broker quotes used for fair value measurements inherently reflect any lack of liquidity in the market since they represent an exit price from the perspective of the market participants. Financial assets that were fair valued using broker quotes amounted to $ 22 million at December 31, 2014, of which $ 14 million were Level 3 assets and $ 8 million were Level 2 assets. Level 3 assets consisted principally of tax-exempt GNMA mortgage-backed securities. Fair value for these securities was based on an internally-prepared matrix derived from an average of two indicative local broker quotes. The main input used in the matrix pricing was non-binding local broker quotes obtained from limited trade activity. Therefore, these securities were classified as Level 3. There were no transfers in and/or out of Level 1, Level 2, or Level 3 for financial instruments measured at fair value on a recurring basis during the year ended December 31, 2014 and 2013. There were no transfers in and/or out of Level 1 for financial instruments measured at fair value on a recurring basis during the year ended December 31, 2012. There were $ 2 million in transfers from Level 2 to Level 3 and $8 million in transfers from Level 3 to Level 2 for financial instruments measured at fair value on a recurring basis during the year ended December 31, 2012. The transfers from Level 2 to Level 3 of trading mortgage-backed securities were the result of a change in valuation technique to a matrix pricing model, based on indicative prices provided by brokers. The transfers from trading mortgage-backed securities Level 3 to Level 2 of resulted from observable market data becoming available for these securities. The Corporation’s policy is to recognize transfers as of the end of the reporting period. Trading Account Securities and Investment Securities Available-for-Sale The majority of the values for trading account securities and investment securities available-for-sale are obtained from third- party pricing services and are validated with alternate pricing sources when available. Securities not priced by a secondary pricing source are documented and validated internally according to their significance to the Corporation’s financial statements. Management has established materiality thresholds according to the investment class to monitor and investigate material deviations in prices obtained from the primary pricing service provider and the secondary pricing source used as support for the valuation results. During the year ended December 31, 2014, the Corporation did not adjust any prices obtained from pricing service providers or broker dealers. including the relative liquidity of Inputs are evaluated to ascertain that they consider current market conditions, the market. When a market quote for a specific security is not available, the pricing service provider generally uses observable data to derive an exit price for the instrument, such as benchmark yield curves and trade data for similar products. To the extent trading data is not available, the pricing service provider relies on specific information including dialogue with brokers, buy side clients, credit ratings, spreads to established benchmarks and transactions on similar securities, to draw correlations based on the characteristics of the evaluated instrument. If for any reason the pricing service provider cannot observe data required to feed its model, it discontinues pricing the instrument. During the year ended December 31, 2014, none of the Corporation’s investment securities were subject to pricing discontinuance by the pricing service providers. The pricing methodology and approach of our primary pricing service providers is concluded to be consistent with the fair value measurement guidance. Furthermore, management assesses the fair value of its portfolio of investment securities at least on a quarterly basis, which includes analyzing changes in fair value that have resulted in losses that may be considered other-than-temporary. Factors considered include, for example, the nature of the investment, severity and duration of possible impairments, industry reports, sector credit ratings, economic environment, creditworthiness of the issuers and any guarantees. Securities are classified in the fair value hierarchy according to product type, characteristics and market liquidity. At the end of each period, management assesses the valuation hierarchy for each asset or liability measured. The fair value measurement analysis performed by the Corporation includes validation procedures pricing review of market methodology, assumption and level hierarchy changes, and evaluation of distressed transactions. changes, and At December 31, 2014, the Corporation’s portfolio of trading and investment securities available-for-sale amounted to $ 5.5 the Corporation’s assets billion and represented 97% of measured at fair value on a recurring basis. At December 31, 2014, net unrealized gains on the securities approximated $7 million and net unrealized losses on available- for-sale investment securities portfolio approximated to $ 8 million. Fair values for most of the Corporation’s trading and investment securities available-for-sale were classified as Level 2. Trading and investment securities available-for-sale classified as Level 3, which were the securities that involved the highest trading 14 degree of judgment, represent less than 1% of the Corporation’s total portfolio of trading and investment securities available-for- sale. Mortgage Servicing Rights Mortgage servicing rights (“MSRs”), which amounted to $ 149 million at December 31, 2014, and are primarily related to residential mortgage loans originated in Puerto Rico, do not trade in an active, open market with readily observable prices. Fair value is estimated based upon discounted net cash flows calculated from a combination of loan level data and market loans with assumptions. The valuation model combines common characteristics that impact servicing cash flows (e.g. investor, remittance cycle, interest rate, product type, etc.) in order to project net cash flows. Market valuation assumptions to service, include prepayment speeds, discount rate, cost escrow account earnings, and contractual servicing fee income, among other considerations. Prepayment speeds are derived from market data that is more relevant to the U.S. mainland loan portfolios and, thus, are adjusted for the Corporation’s loan characteristics and portfolio behavior since prepayment rates in Puerto Rico have been historically lower. Other assumptions are, in the most part, directly obtained from third- the key economic party providers. Disclosure of assumptions used to measure MSRs, which are prepayment speed and discount rate, and a sensitivity analysis to adverse changes to these assumptions, is included in Note 15 to the consolidated financial statements. two of Derivatives Derivatives, such as interest rate swaps, interest rate caps and indexed options, are traded in over-the-counter active markets. These derivatives are indexed to an observable interest rate benchmark, such as LIBOR or equity indexes, and are priced using an income approach based on present value and option pricing models using observable inputs. Other derivatives are liquid and have quoted prices, such as forward contracts or “to be announced securities” (“TBAs”). All of these derivatives held by the Corporation were classified as Level 2. Valuations of derivative assets and liabilities reflect the values associated with counterparty risk and nonperformance risk, respectively. The non-performance risk, which measures the Corporation’s own credit risk, is determined using internally-developed models that consider the net realizable value of the collateral posted, remaining term, and the creditworthiness or credit standing of the Corporation. The counterparty risk is also determined using internally-developed models the creditworthiness of the entity that bears the risk, net realizable value of the collateral received, and available public data or internally-developed data to determine their probability of default. To manage the level of credit risk, the Corporation employs procedures for credit approvals and credit limits, monitors the counterparties’ credit condition, enters into incorporate which 15 POPULAR, INC. 2014 ANNUAL REPORT master netting agreements whenever possible and, when appropriate, requests additional collateral. During the year ended December 31, 2014, inclusion of credit risk in the fair value of the derivatives resulted in a net gain of $1.1 million recorded in the other operating income and interest expense captions of the consolidated statement of operations, which consisted of a loss of $0.1 million resulting from the Corporation’s own credit standing adjustment and a gain of $1.2 million from the assessment of the counterparties’ credit risk. Contingent consideration liability The fair value of the true-up payment obligation (contingent consideration) to the FDIC as it relates to the Westernbank FDIC-assisted transaction amounted to $ 129 million at December 31, 2014. The fair value was estimated using projected cash flows related to the loss sharing agreements at the true-up measurement date, taking into consideration the intrinsic loss estimate, asset premium/discount, cumulative shared loss payments, and the cumulative servicing amount related to the loan portfolio. Refer to Note 13 to the consolidated financial statements for a description of the true- up payment formula. The true-up payment obligation was discounted using a term rate consistent with the time remaining until the payment is due. The discount rate was an estimate of the sum of the risk-free benchmark rate for the term remaining before the true-up payment is due and a risk premium to account for the credit risk profile of BPPR. The risk premium was calculated using a three day average of Popular, Inc.’s 5- year note issuance. Loans held-in-portfolio considered impaired under ASC Section 310-10-35 that are collateral dependent The impairment is measured based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations, size and supply and demand. The challenging conditions of the housing markets continue to affect the market activity related to real estate properties. These collateral dependent impaired loans are classified as Level 3 and are reported as a nonrecurring fair value measurement. Loans measured at fair value pursuant to lower of cost or fair value adjustments Loans measured at fair value on a nonrecurring basis pursuant to lower of cost or fair value were priced based on secondary market prices and discounted cash flow models which incorporate internally-developed assumptions for prepayments and credit loss estimates. These loans are classified as Level 3. Other real estate owned and other foreclosed assets Other real estate owned includes real estate properties securing mortgage, consumer, and commercial loans. Other foreclosed assets include automobiles securing auto loans. The fair value of foreclosed assets may be determined using an external appraisal, broker price opinion, internal valuation or binding offer. The majority of these foreclosed assets is classified as Level 3 since they are subject to internal adjustments and reported as a nonrecurring fair value measurement. Loans and Allowance for Loan Losses Interest on loans is accrued and recorded as interest income based upon the principal amount outstanding. Non-accrual loans are those loans on which the accrual of interest is discontinued. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is charged against income and the loan is accounted for either on a cash- basis method or on the cost-recovery method. Loans designated as non-accruing are returned to accrual status when the Corporation expects repayment of the remaining contractual principal and interest. The determination as to the ultimate collectability of the loan’s balance may involve management’s judgment in the evaluation of the borrower’s financial condition and prospects for repayment. Refer to the MD&A section titled Credit Risk Management and Loan Quality, particularly the Non-performing assets sub- section, for a detailed description of the Corporation’s non- accruing and charge-off policies by major loan categories. One of the most critical and complex accounting estimates is associated with the determination of the allowance for loan losses. The provision for loan losses charged to current operations is based on this determination. The Corporation’s assessment of the allowance for loan losses is determined in accordance with accounting guidance, specifically guidance of loss in ASC Subtopic 450-20 and loan impairment guidance in ASC Section 310-10-35. contingencies allowance The accounting guidance provides for the recognition of a loss loans. The for groups of homogeneous determination for general reserves of the allowance for loan losses includes the following principal factors: • Base net loss rates, which are based on the moving average of annualized net loss rates computed over a 3- year historical 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. loss period for • 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. As part of the annual review of the components of the ALLL models, as discussed in the following paragraphs and implemented as of June 30, 2014, the Corporation eliminated the use of caps in the loss trend adjustment recent for the consumer and mortgage portfolios, among other enhancements. For the period ended December 31, 2013, the recent loss trend adjustment caps for the consumer and mortgage portfolios were triggered in only one portfolio segment within the Puerto Rico consumer portfolio. Management assessed the impact of the applicable cap through a review of qualitative factors that specifically considered the drivers of loss trends and changes to the portfolio composition. The related effect of the aforementioned cap was immaterial for the overall level of the Allowance for Loan and Lease Losses for the Puerto Rico Consumer portfolio. recent For the period ended December 31, 2014, 50% (December 31, 2013 - 27%) of the ALLL for BPPR non- loss trend covered loan portfolios utilized the recent adjustment instead of the base loss. The effect of replacing the base loss with the recent loss trend adjustment was mainly concentrated in the commercial multi-family, commercial and industrial, personal and auto loan portfolios for 2014, and in the commercial multi-family, mortgage, and leasing portfolios for 2013. For the period ended December 31, 2014, 21% (December 31, 2013 - 29%) of the ALLL for BPNA loan portfolios utilized the recent loss trend adjustment instead of the base loss. The effect of replacing the base loss with the recent loss trend adjustment was mainly concentrated in the commercial multi-family, commercial and industrial and legacy loan portfolios for 2014 and in the commercial multi-family, commercial real estate non-owner occupied and commercial and industrial portfolios for 2013. • Environmental credit factors, which include 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 these losses. The Corporation reflects environmental an adjustment that, as appropriate, increases the historical loss rate applied to each group. Environmental factors provide updated perspective on credit and economic conditions. Regression analysis is used to select these indicators and quantify the effect on the general reserve of the allowance for loan losses. factors on each loan group as the effect of 16 implemented as of June 30, 2014 and resulted in a net decrease to the allowance for loan losses of $18.7 million for the non- covered portfolio and a net increase to the allowance for loan losses of $0.8 million for the covered portfolio. Management made the following principal enhancements to the methodology during the second quarter of 2014: • Annual review and recalibration of for changes indicators and economic the environmental factors adjustment. The environmental factor adjustments are developed by performing regression analyses on selected credit each applicable loan segment. During the second quarter of 2014, the environmental factor models used to account for and macroeconomic conditions were reviewed and recalibrated based on the latest applicable trends. Management also revised the application of environmental factors to the historical loss rates to consider last 12 month trends of the applicable credit and macroeconomic indicators applied as an incremental adjustment to account for emerging risks not necessarily considered in the historical loss rates. in current credit to enhancements environmental The combined effect of the aforementioned recalibration and factors the adjustment resulted in a decrease to the allowance for loan losses of $17 million at June 30, 2014, of which $14.1 million related to the non-covered BPPR segment and $3.7 million related to the BPNA segment, offset in part by a $0.8 million increase in the BPPR covered segment. loss • Increased the historical look-back period for determining the recent for consumer and trend adjustment mortgage loans. The Corporation increased the look-back trends applicable to the period for assessing recent determination of consumer and mortgage loan net charge- offs from 6 months to 12 months and eliminated the use of caps. Previously, the Corporation used a recent loss trend adjustment based on 6 months of net charge-offs up to a determined cap. Given the current overall consumer and mortgage credit quality improvements, management concluded that a 12-month look-back period for the loss trend adjustment aligns the Corporation’s recent allowance for loan losses methodology to current credit quality trends while limiting excessive pro-cyclicality given the thus, eliminating the aforementioned caps. look-back period analysis, longer During the second quarter of 2014, management completed the annual review of the components of the ALLL models. As part of this review management updated core metrics and revised certain components related to the estimation process for evaluating the adequacy of the general reserve of the allowance for loan losses. These enhancements to the ALLL methodology, below, were which are described in the paragraphs The combined effect of the aforementioned enhancements to the recent loss trend adjustment resulted in a decrease to the allowance for loan losses of $1 million at June 30, 2014, of which $0.9 million related to the non-covered BPPR segment and $0.1 million related to the BPNA segment. 17 POPULAR, INC. 2014 ANNUAL REPORT According to the loan impairment accounting guidance in ASC Section 310-10-35, a loan is impaired when, based on current information and events, it is probable that the principal and/or interest are not going to be collected according to the original contractual the loan agreement. Current information and events include “environmental” factors, e.g. existing industry, geographical, economic and political factors. Probable means the future event or events which will confirm the loss or impairment of the loan is likely to occur. terms of for thus evaluated impairment. Commercial The Corporation defines commercial and construction impaired loans as borrowers with total debt greater than or equal to $1 million with 90 days or more past due, as well as all loans whose terms have been modified in a trouble debt restructuring (“TDRs”). In addition, larger commercial and construction loans ($1 million and over) that exhibit probable or observed credit weaknesses are subject to individual review and and construction loans the Corporation’s that originally met threshold for impairment identification in a prior period, but due to charge-offs or payments are currently below the $1 million threshold and are still 90 days past due, except for TDRs, are accounted for under the Corporation’s general reserve methodology. Although the accounting codification guidance for specific impairment of a loan excludes large that are groups of collectively evaluated for (e.g. mortgage and consumer loans), it specifically requires that loan modifications considered troubled debt restructurings (“TDRs”) be analyzed under its provisions. An allowance for loan impairment is recognized to the extent that the carrying value of an impaired loan exceeds the present value of the expected future cash flows discounted at the loan’s effective rate, the observable market price of the loan, if available, or the fair value of the collateral if the loan is collateral dependent. smaller balance homogeneous impairment loans The fair value of the collateral on commercial and construction loans is generally derived from appraisals. The Corporation periodically requires updated appraisal reports for loans that are considered impaired. The frequency of updated appraisals depends on total debt outstanding and type of collateral. Currently, for commercial and construction loans secured by real estate, if the borrower’s total debt is equal to or greater than $1 million, the appraisal is updated annually. If the borrower’s total debt is less than $1 million, the appraisal is updated at least every two years. credits considered impaired following As a general procedure, the Corporation internally reviews appraisals as part of the underwriting and approval process and also for certain materiality benchmarks. Appraisals may be adjusted due to their age, property conditions, geographical area or general market conditions. The adjustments applied are based upon internal information, like other appraisals and/or loss severity information that can provide historical trends in the real estate market. Discount rates used may change from time-to-time based on management’s estimates. Refer to the Credit Risk Management and Loan Quality section of this MD&A for more detailed information on the Corporation’s collateral value estimation for other real estate. risks or markets. Other in the loan portfolio. The Corporation’s management evaluates the adequacy of the allowance for loan losses on a quarterly basis following a systematic methodology in order to provide for known and In developing its inherent assessment of the adequacy of the allowance for loan losses, the Corporation must rely on estimates and exercise judgment regarding matters where the ultimate outcome is unknown such as economic developments affecting specific customers, industries can affect management’s estimates are the years of historical data to include when estimating losses, the level of volatility of losses in a specific portfolio, changes in underwriting standards, financial impairment measurement, among others. Changes in the financial condition of individual borrowers, in economic conditions, in historical loss experience and in the condition of the various markets in which collateral may be sold may all affect the required level of the allowance for loan losses. Consequently, the business, financial condition, liquidity, capital and results of operations could also be affected. accounting standards factors loan that and The collateral dependent method is generally used for the impairment determination on commercial and construction loans since the expected realizable value of the loan is based upon the proceeds received from the liquidation of the collateral property. For commercial properties, the “as is” value or the “income approach” value is used depending on the financial condition of the subject borrower and/or the nature of the subject collateral. In most cases, impaired commercial loans do not have reliable or sustainable cash flow to use the discounted cash flow valuation method. On construction loans, “as developed” collateral values are used when the loan is originated since the assumption is that the cash flow of the property once leased or sold will provide sufficient funds to repay the loan. In the case of many impaired construction loans, the “as developed” collateral value is also used since completing the project reflects the best exit strategy in terms of potential loss reduction. In these cases, the costs to complete are considered as part of the impairment determination. As a general rule, the appraisal valuation used by the Corporation for impaired construction loans is based on discounted value to a single purchaser, discounted sell out or “as is” depending on the condition and status of the project and the performance of the same. A restructuring constitutes a TDR when the Corporation separately concludes that both of the following conditions exist: (i) the restructuring constitutes a concession and (ii) the debtor is experiencing financial difficulties. The concessions stem from an agreement between the creditor and the debtor or are imposed by law or a court. These concessions could include a including interest accrued at the Corporation routinely enters reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. A concession has been granted when, as a result of the restructuring, the Corporation does not expect to collect all amounts due, the original contract rate. If the payment of principal is dependent on the value of collateral, the current value of the collateral is taken into consideration in determining the amount of principal to be collected; therefore, all factors that changed are considered to determine if a concession was granted, including the change in the fair value of the underlying collateral that may be used to repay the loan. In addition, in order to expedite the resolution of delinquent construction and commercial loans, into liquidation agreements with borrowers and guarantors through the regular legal process, bankruptcy procedures and in certain occasions, out of Court transactions. These liquidation agreements, in general, contemplate the following conditions: (1) consent to judgment (2) acknowledgement by the borrower of debt, its liquidity and maturity; (3) acknowledgement of the default payments. The contractual interest rate is not reduced and continues to accrue during the term of the agreement. At the end of the period, borrower is obligated to remit all amounts due or be subject to the Corporation’s exercise of its foreclosure rights and further collection efforts. Likewise, the borrower’s failure to make stipulated payments will grant the Corporation the ability to exercise its to expedite the foreclosure process, resulting in a more effective and efficient collection process. Although in general, these liquidation agreements do not contemplate the forgiveness of required to cover all principal or it outstanding amounts when the agreement becomes due, could be construed that the Corporation has granted a concession by temporarily accepting a payment schedule that is different from the contractual payment schedule. Accordingly, loans under this program are considered TDRs. foreclosure rights. This interest as debtor strategy procures guarantors; borrowers and the by is Classification of loan modifications as TDRs involves a degree of judgment. Indicators that the debtor is experiencing financial difficulties which are considered include: (i) the borrower is currently in default on any of its debt or it is probable that the borrower would be in payment default on any of its debt in the foreseeable future without the modification; (ii) the borrower has declared or is in the process of declaring bankruptcy; (iii) there is significant doubt as to whether the borrower will continue to be a going concern; (iv) the borrower has securities that have been delisted, are in the process of being delisted, or are under threat of being delisted from an exchange; (v) based on estimates and projections that only encompass the borrower’s current business capabilities, it is forecasted that the entity-specific cash flows will be insufficient to service the debt (both interest and principal) in accordance with the contractual terms of the existing agreement through 18 the current modification, maturity; and (vi) absent the borrower cannot obtain funds from sources other than the existing creditors at an effective interest rate equal to the current market interest rate for similar debt for a non-troubled debtor. The in the determination of the adequacy of the allowance for loan losses. Loans classified as TDRs are excluded from TDR status if for a performance under reasonable period (at sustained performance) and the loan yields a market rate. identification of TDRs twelve months of restructured terms critical exists least the is For mortgage and other consumer loans that are modified with regard to payment terms and which constitute TDRs, the discounted cash flow value method is used as the impairment valuation is more appropriately calculated based on the ongoing cash flow from the individuals rather than the liquidation of the collateral asset. The computations give consideration to probability of default and loss-given default on the related estimated cash flows. Refer to Note 12 to the consolidated financial statements for disclosures on the impact of adopting ASU 2011-02 and to Note 3 for a general description of the ASU 2011-02 guidance. Acquisition Accounting for Covered Loans and Related Indemnification Asset The Corporation accounted for the Westernbank FDIC-assisted transaction under the accounting guidance of ASC Topic 805, Business Combinations, which requires the use of the purchase method of accounting. All identifiable assets and liabilities acquired were initially recorded at fair value. No allowance for loan losses related to the acquired loans was recorded on the acquisition date as the fair value of the loans acquired incorporated assumptions regarding credit risk. Loans acquired were recorded at fair value in accordance with the fair value methodology prescribed in ASC Topic 820, exclusive of the shared-loss agreements with the FDIC. These fair value estimates associated with the loans included estimates related to expected prepayments and the amount and timing of expected principal, interest and other cash flows. fair value subject Because the FDIC has agreed to reimburse the Corporation for losses related to the acquired loans in the Westernbank to certain provisions FDIC-assisted transaction, specified in the agreements, an indemnification asset was recorded at acquisition date. The indemnification asset was recognized at the same time as the indemnified loans, and is measured on the same basis, subject to collectability or contractual limitations. The loss share indemnification asset on the acquisition date reflected the reimbursements expected to be received from the FDIC, using an appropriate discount rate, which reflected counterparty credit risk and other uncertainties. the at The initial valuation related of indemnification asset required management to make subjective judgments concerning estimates about how the acquired loans loans these and 19 POPULAR, INC. 2014 ANNUAL REPORT would perform in the future using valuation methods, including discounted cash flow analyses and independent third- party appraisals. Factors that may significantly affect the initial valuation included, among others, market-based and industry data related to expected changes in interest rates, assumptions related to probability and severity of credit losses, estimated timing of credit losses including the timing of foreclosure and liquidation of collateral, expected prepayment rates, required or anticipated loan modifications, unfunded loan commitments, the specific terms and provisions of any loss share agreements, and specific industry and market conditions that may impact discount rates and independent third-party appraisals. The Corporation applied the guidance of ASC Subtopic 310-30 to all loans acquired in the Westernbank FDIC-assisted transaction (including loans that do not meet the scope of ASC Subtopic 310-30), except for credit cards and revolving lines of credit. ASC Subtopic 310-30 provides two specific criteria that have to be met in order for a loan to be within its scope: (1) credit deterioration on the loan from its inception until the acquisition date and (2) that it is probable that not all of the contractual cash flows will be collected on the loan. Once in the scope of ASC Subtopic 310-30, the credit portion of the fair value discount on an acquired loan cannot be accreted into income until the acquirer has assessed that it expects to receive more cash flows on the loan than initially anticipated. Acquired loans that meet the definition of nonaccrual status fall within the Corporation’s definition of impaired loans under ASC Subtopic 310-30. It is possible that performing loans would not meet criteria number 1 above related to evidence of credit deterioration since the date of loan origination, and therefore not fall within the scope of ASC Subtopic 310-30. Based on the fair value determined for the acquired portfolio, acquired loans that did not meet the Corporation’s definition of non-accrual status also resulted in the recognition of a significant discount attributable to credit quality. the Westernbank acquired portfolio, Given the significant discount related to credit in the the valuation of Corporation considered two possible options for the performing loans (1) accrete the entire fair value discount (including the credit portion) using the interest method over the life of the loan in accordance with ASC Subtopic 310-20; or (2) analogize to ASC Subtopic 310-30 and only accrete the portion of the fair value discount unrelated to credit. Pursuant to an AICPA letter dated December 18, 2009, the AICPA summarized the SEC Staff’s view regarding the accounting in subsequent periods for discount accretion associated with loan receivables acquired in a business combination or asset purchase. Regarding the accounting for such loan receivables, in the absence of further standard setting, the AICPA understands that the SEC Staff would not object to an accounting policy based on contractual cash flows (Option 1 - ASC Subtopic 310-20 approach) or an accounting policy based on expected cash flows (Option 2 - ASC Subtopic 310-30 approach). As such, allowable options as follows: the Corporation considered the two • Option 1 - Since the credit portion of the fair value discount is associated with an expectation of cash flows that an acquirer does not expect to receive over the life of the loan, it does not appear appropriate to accrete that portion over the life of the loan as doing so could eventually overstate the acquirer’s expected value of the loan and ultimately result in recognizing income (i.e. through the accretion of the yield) on a portion of the loan it does not expect the Corporation does not believe this is an appropriate method to apply. to receive. Therefore, • Option 2 - The Corporation believes analogizing to ASC Subtopic 310-30 is the more appropriate option to follow in accounting for the credit portion of the fair value discount. By doing so, the loan is only being accreted up to the value that the acquirer expected to receive at acquisition of the loan. Based on the above, the Corporation elected Option 2 - the ASC Subtopic 310-30 approach to the outstanding balance for all the acquired loans in the Westernbank FDIC-assisted transaction with the exception of revolving lines of credit with active privileges as of the acquisition date, which are explicitly scoped out by the ASC Subtopic 310-30 accounting guidance. New advances / draws after the acquisition date under existing credit lines that did not have revolving privileges as of the acquisition date, particularly for construction loans, will effectively be treated as a “new” loan for accounting purposes and accounted for under the provisions of ASC Subtopic 310- 20, resulting in a hybrid accounting for the overall construction loan balance. Management used judgment in evaluating factors impacting expected cash flows and probable loss assumptions, including the quality of the loan portfolio, portfolio concentrations, distressed economic conditions in Puerto Rico, quality of underwriting standards of the acquired institution, reductions in collateral real estate values, and material weaknesses disclosed by the acquired institution, including matters related to credit quality review and appraisal report review. At April 30, 2010, the acquired loans accounted for pursuant to ASC Subtopic 310-30 by the Corporation totaled $4.9 billion which represented undiscounted unpaid contractually-required principal and interest balances of $9.9 billion reduced by a discount of $5.0 billion resulting from acquisition date fair value adjustments. The non-accretable discount on loans accounted for under ASC Subtopic 310-30 amounted to $3.4 thus billion or approximately 68% of indicating a significant amount of expected credit losses on the acquired portfolios. the total discount, Pursuant the Corporation aggregated loans acquired in the FDIC-assisted transaction into to ASC Section 310-20-15-5, the and for purposes of pools with common risk characteristics applying disclosure recognition, measurement provisions of this subtopic. Each loan pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Characteristics considered in pooling loans in the Westernbank FDIC-assisted transaction included loan type, accruing status, amortization type, rate index and source type. Once the pools are defined, the Corporation maintains the integrity of the pool of multiple loans accounted for as a single asset. interest type, rate the pool represents Under ASC Subtopic 310-30, the difference between the undiscounted cash flows expected at acquisition and the fair value of the loans, or the “accretable yield,” is recognized as interest income using the effective yield method over the estimated life of the loan if the timing and amount of the future is reasonably estimable. The non- cash flows of accretable difference between the difference contractually required principal and interest and the cash flows expected to be collected. Subsequent to the acquisition date, increases in cash flows over those expected at the acquisition date are recognized as interest income prospectively as an adjustment to accretable yield over the pool’s remaining life. Decreases in expected cash flows after the acquisition date are generally recognized by recording an allowance for loan losses. The fair value discount of lines of credit with revolving privileges that are accounted for pursuant to the guidance of ASC Subtopic 310-20, represented the difference between the contractually required loan payment receivable in excess of the investment in the loan. Any cash flows collected in initial excess of the carrying amount of the loan are recognized in earnings at the time of collection. The carrying amount of lines of credit with revolving privileges, which are accounted pursuant to the guidance of ASC Subtopic 310-20, are subject to periodic review to determine the need for recognizing an allowance for loan losses. The FDIC loss share indemnification asset for loss share agreements is measured separately from the related covered assets as it is not contractually embedded in the assets and is not transferable with the assets should the assets be sold. The FDIC loss share indemnification asset is recognized on the same basis as the assets subject to loss share protection, except that the amortization / accretion terms differ for each asset. For covered loans accounted for pursuant to ASC Subtopic 310-30, decreases in expected reimbursements from the FDIC due to improvements in expected cash flows to be received from borrowers are recognized in non-interest income prospectively over the life of the FDIC loss sharing agreements. For covered loans accounted for under ASC Subtopic 310-20, as the loan discount recorded as of the acquisition date was accreted into income, a reduction of the related indemnification asset was recorded as a reduction in non-interest income. Increases in expected reimbursements from the FDIC are recognized in non-interest income in the same period that the 20 allowance for credit losses for the related loans is recognized. Over the life of the acquired loans that are accounted under ASC Subtopic 310-30, the Corporation continues to estimate cash flows expected to be collected on individual loans or on pools of loans sharing common risk characteristics. The Corporation evaluates at each balance sheet date whether the present value of its loans determined using the effective interest rates has decreased based on revised estimated cash flows and if so, recognizes a provision for loan loss in its consolidated statement of operations and an allowance for loan losses in its consolidated statement of financial condition. For any increases in cash flows expected to be collected from borrowers, the Corporation adjusts the amount of accretable yield recognized on the loans on a prospective basis over the pool’s remaining life. The evaluation of estimated cash flows expected to be collected subsequent to acquisition on loans accounted pursuant to ASC Subtopic 310-30 and inherent losses on loans accounted pursuant to ASC Subtopic 310-20 require the continued usage of key assumptions and estimates. Given the current economic environment, the Corporation must apply judgment to develop its estimates of cash flows considering the impact of home price and property value changes, changing in the loss expected cash flows for ASC Subtopic 310-30 loans and decreases in the net realizable value of ASC Subtopic 310-20 loans will generally result in a charge to the provision for credit losses resulting in an increase to the allowance for loan losses. These estimates are particularly sensitive to changes in loan credit quality. severities and prepayment speeds. Decreases The amount that the Corporation realizes on the covered loans and related indemnification assets could differ materially from the carrying value reflected in these financial statements, based upon the timing and amount of collections on the acquired loans in future periods. The Corporation’s losses on these assets may be mitigated to the extent covered under the specific terms and provisions of the loss share agreements. future recognized based on the Income Taxes Income taxes are accounted for using the asset and liability method. Under this method, deferred tax assets and liabilities are tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, and attributable to operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which the temporary differences are expected to be recovered or paid. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the changes are enacted. The calculation of periodic income taxes is complex and requires the use of estimates and judgments. The Corporation 21 POPULAR, INC. 2014 ANNUAL REPORT has recorded two accruals for income taxes: (i) the net estimated amount currently due or to be received from taxing jurisdictions, including any reserve for potential examination issues, and (ii) a deferred income tax that represents the estimated impact of temporary differences between how the Corporation recognizes assets and liabilities under accounting principles generally accepted in the United States (GAAP), and how such assets and liabilities are recognized under the tax code. Differences in the actual outcome of these future tax consequences could impact the Corporation’s financial position or its results of operations. In estimating taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions taking into consideration statutory, judicial and regulatory guidance. A deferred tax asset should be reduced by a valuation allowance if based on the weight of all available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or the entire deferred tax asset will not be realized. The valuation allowance should be sufficient to reduce the deferred tax asset to the amount that is more likely than not to be realized. The determination of whether a deferred tax asset is realizable is based on weighting all available evidence, including both positive and negative evidence. The realization of deferred tax assets, including carryforwards and deductible temporary differences, depends upon the existence of sufficient taxable income of the same character during the carryback or carryforward period. The realization of deferred tax assets requires the consideration of all sources of taxable income available to realize the deferred tax asset, including the future reversal of existing temporary differences, future taxable reversing temporary differences and income exclusive of carryforwards, taxable income in carryback years and tax- planning strategies. Management evaluates the realization of the deferred tax asset by taxing jurisdiction, the US mainland operations are evaluated as a whole since a consolidated income tax return is filed, on the other hand the deferred tax asset related to the Puerto Rico operations is evaluated on an entity by entity basis, since no consolidation is allowed in the income tax filing. Accordingly this evaluation is composed of three major components, US mainland operations, Puerto Rico banking operations and Holding Company. For purposes of assessing the realization of the deferred tax assets in the U.S. mainland operations management evaluates and weights all available positive and negative evidence. The Corporation’s U.S. mainland operations are no longer in a cumulative loss position for the three-year period ended December 31, 2014 taking into account taxable income exclusive of reversing temporary differences (“adjusted book income”). evidence within management’s evaluation. However, the book income for the years 2013 and 2014 was significantly impacted by a reversal of the loan loss provision due to the improved credit quality of the represents positive This of taxable income loan portfolios. The U.S. mainland operations did not report taxable income for the years 2011, 2012 and 2013, although it did report taxable income for the year ended December 31, 2014. Also, the normalized future performance of this operation is uncertain to estimate since the business operation has changed after the sale of three regions and the restructure of administrative functions has not been completed. The lack of a together with the sustained level uncertainties regarding the estimate of future normalized level of profitability and cost savings related to the restructure represents strong negative evidence within management’s evaluation. This determination is updated each quarter and adjusted as any changes arise. After weighting of all positive the and negative evidence management concluded, as of reporting date, the that Corporation will not be able to realize any portion of the deferred tax assets related to the U.S. mainland operations, considering the criteria of ASC Topic 740. If the Corporation is able to meet its operating targets in the U.S. and the results of the reorganization yield the expected results, this would be considered positive evidence within management’s evaluation which could outweigh the negative evidence and result in the realization of a portion of the fully reserved deferred tax asset recorded at PCB. is more likely than not that it At December 31, 2014, the Corporation’s net deferred tax assets related to its Puerto Rico operations amounted to $812 million. The Corporation’s Puerto Rico Banking operation is not in a cumulative loss position and has sustained profitability for the three year period ended December 31, 2014, exclusive of the loss generated on the sales of non performing assets that took place in 2013 which is not a continuing condition of the operations. This is considered a strong piece of objectively verifiable positive evidence that out weights any negative evidence considered by management in the evaluation of the realization of the deferred tax asset. Based on this evidence, the Corporation has concluded that it is more likely than not that such net deferred tax asset of the Puerto Rico operations will be realized. The Holding Company operation is not in a cumulative loss position for the three year period ended December 31, 2014. However, the interest expense under the newly issued $450 million subordinated notes which partially funded the repayment of TARP funds in 2014, bearing interest at 7%, will be tax deductible, and contrary to the interest expense payable on the note issued to the U.S. Treasury under TARP. Based on this new fact pattern the Holding Company is expecting to have losses for income tax purposes exclusive of reversing temporary differences. Since as required by ASC 740 the historical information should be supplemented by all currently available information about future years, the expected losses in future years is considered by management a strong negative evidence that suggests that income in future years will be insufficient to support the realization of all deferred tax asset. After weighting of all positive and negative evidence management concluded, as of the reporting date, that it is more likely than not that the Holding Company will not be able to realize any portion of the deferred tax assets, considering the criteria of ASC Topic 740. Under the Puerto Rico Internal Revenue Code, the Corporation and its subsidiaries are treated as separate taxable entities and are not entitled to file consolidated tax returns. The Code provides a dividends-received deduction of 100% on dividends received from “controlled” subsidiaries subject to taxation in Puerto Rico and 85% on dividends received from other taxable domestic corporations. Changes in the Corporation’s estimates can occur due to changes in tax rates, new business strategies, newly enacted guidance, and resolution of issues with taxing authorities regarding previously taken tax positions. Such changes could affect the amount of accrued taxes. The current income tax payable for 2014 has been paid during the year in accordance with estimated tax payments rules. Any remaining payment will not have any significant impact on liquidity and capital resources. profitability. The The valuation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in the financial statements or tax returns and tax future consequences represents management’s best estimate of those future events. Changes in management’s current estimates, due to unanticipated events, could have a material impact on the Corporation’s financial condition and results of operations. accounting deferred for tax law, In evaluating a tax position, the position. The Corporation’s estimate of The Corporation establishes tax liabilities or reduces tax assets for uncertain tax positions when, despite its assessment that its tax return positions are appropriate and supportable under local the Corporation believes it may not succeed in realizing the tax benefit of certain positions if challenged. the Corporation determines whether it is more-likely-than-not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the ultimate tax liability contains assumptions based on past experiences, and judgments about potential actions by taxing jurisdictions as well as judgments about the likely outcome of issues that have been raised by taxing jurisdictions. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The Corporation evaluates these uncertain tax positions each quarter and adjusts the related tax liabilities or assets in light of changing facts and circumstances, such as the progress of a tax audit or the expiration of a statute of the estimates and limitations. The Corporation believes assumptions used to support its evaluation of uncertain tax positions are reasonable. The amount of unrecognized tax benefits, including accrued interest, at December 31, 2014 amounted to $9.8 million. Refer 22 to Note 43 to the consolidated financial statements for further information on this subject matter. The Corporation anticipates a reduction in the total amount of unrecognized tax benefits to within the next 12 months, which could amount approximately $6.7 million. The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current tax year positions, expiration of open income tax returns due to the statutes of limitation, changes in management’s judgment about the level of uncertainty, status of examinations, litigation and legislative activity and the addition or elimination of uncertain tax positions. Although the outcome of tax audits is uncertain, the Corporation believes that adequate amounts of tax, interest and penalties have been provided for any adjustments that are expected to result from open years. From time to time, the Corporation is audited by various federal, state and local authorities regarding income tax matters. Although management believes its approach in determining the appropriate tax treatment is supportable and in accordance with the accounting standards, it is possible that the final tax authority will take a tax position that is different than the tax position reflected in the Corporation’s income tax provision and other tax reserves. As each audit is conducted, appropriately recorded in the adjustments, consolidated financial statement in the period determined. Such differences could have an adverse effect on the Corporation’s income tax provision or benefit, or other tax reserves, in the reporting period in which such determination is made and, consequently, on the Corporation’s results of operations, financial position and / or cash flows for such period. any, are if Under Goodwill The Corporation’s goodwill and other identifiable intangible assets having an indefinite useful life are tested for impairment. Intangibles with indefinite lives are evaluated for impairment at least annually, and on a more frequent basis, if events or circumstances indicate impairment could have taken place. Such events could include, among others, a significant adverse change in the business climate, an adverse action by a regulator, an unanticipated change in the competitive environment and a decision to change the operations or dispose of a reporting unit. goodwill accounting impairment analysis is a two-step test. The first step of the goodwill impairment test involves comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of is considered not impaired; however, if the carrying amount of the reporting unit exceeds its fair value, the second step must be performed. The second step involves calculating an implied fair value of goodwill for which the first step indicated possible impairment. The implied fair value of goodwill is determined in the same manner as the amount of for each reporting unit the reporting unit standards, applicable 23 POPULAR, INC. 2014 ANNUAL REPORT goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit, as determined in the first step, over the aggregate fair values of the individual liabilities and identifiable intangibles (including any assets, unrecognized intangible assets, such as unrecognized core deposits and trademark) as if the reporting unit was being acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The Corporation estimates the fair values of the assets and liabilities of a reporting unit, consistent with the requirements of the fair value measurements accounting standard, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of the assets and liabilities reflects market conditions, thus volatility in prices could have a material impact on the determination of the implied fair value of the reporting unit goodwill at test date. The adjustments to measure the assets, liabilities and intangibles at fair value are for the purpose of measuring the implied fair value of goodwill and such adjustments are not reflected in the consolidated statement of condition. If the implied fair value of goodwill exceeds the goodwill assigned to the reporting unit, there is no impairment. If the goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss recognized cannot exceed the amount of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted under applicable accounting standards. the impairment At December 31, 2014, goodwill amounted to $466 million. Note 20 to the consolidated financial statements provides the assignment of goodwill by reportable segment and the Corporate group. The Corporation performed the annual goodwill impairment evaluation for the entire organization during the third quarter of 2014 using July 31, 2014 as the annual evaluation date. The reporting units utilized for this evaluation were those that are one level below the business segments, which are the legal entities within the reportable segment. The Corporation assigns goodwill to the reporting units when carrying out a business combination. as well In determining the fair value of a reporting unit, the Corporation generally uses combination of methods, a including market price multiples of comparable companies and transactions, as discounted cash flow analysis. Management evaluates the particular circumstances of each reporting unit in order to determine the most appropriate valuation methodology. The Corporation evaluates the results obtained under each valuation methodology to identify and understand the key value drivers in order to ascertain that the results obtained are reasonable and appropriate under the circumstances. Elements considered include current market and economic conditions, developments in specific lines of business, and any particular features in the individual reporting units. The computations require management to make estimates and assumptions. Critical assumptions that are used as part of these evaluations include: • a selection of comparable publicly traded companies, based on nature of business, location and size; • a selection of comparable acquisition and capital raising transactions; • the discount rate applied to future earnings, based on an estimate of the cost of equity; • the potential future earnings of the reporting unit; and • the market growth and new business assumptions. For purposes of the market comparable approach, valuations were determined by calculating average price multiples of relevant value drivers from a group of companies that are comparable to the reporting unit being analyzed and applying those price multiples to the value drivers of the reporting unit. Multiples used are minority based multiples and thus, no control premium adjustment is made to the comparable companies market multiples. While the market price multiple is not an assumption, a presumption that it provides an indicator of the value of the reporting unit is inherent in the valuation. The determination of the market comparables also involves a degree of judgment. For purposes of the discounted cash flows financial projections presented to (“DCF”) approach, the valuation is based on estimated future cash flows. The financial projections used in the DCF valuation analysis for each reporting unit are based on the most recent (as of the the valuation date) / Liability Management Committee Corporation’s Asset (“ALCO”). The growth assumptions included in these projections are based on management’s expectations for each reporting unit’s financial prospects considering economic and industry conditions as well as particular plans of each entity (i.e. restructuring plans, de-leveraging, etc.). The cost of equity used to discount the cash flows was calculated using the Ibbotson Build-Up Method and ranged from 12.15% to 16.83% for the 2014 analysis. The Ibbotson Build-Up Method builds up a cost of equity starting with the rate of return of a “risk-free” asset (20-year U.S. Treasury note) and adds to it additional risk elements such as equity risk premium, size premium and industry risk premium. The resulting discount rates were analyzed in terms of reasonability given the current market conditions and adjustments were made when necessary. For BPNA reporting unit, the average estimated fair value calculated in Step 1, using all valuation methodologies exceeded BPNA’s equity value by approximately $205 million in the July 31, 2014 annual test. Accordingly, there is no indication of impairment of goodwill recorded in BPNA at July 31, 2014 and there is no need for a Step 2 analysis. BPNA failed Step 1 in the annual test as of July 31, 2013 requiring the completion of Step 2. The results of the Step 2 indicated that the implied fair value of goodwill exceeded the goodwill carrying value at July 31, 2013 resulting in no goodwill impairment. For the BPPR reporting unit, the average estimated fair value calculated in Step 1 using all valuation methodologies exceeded BPPR’s equity value by approximately $337 million in the July 31, 2014 annual test as compared with approximately $387 million at July 31, 2013. This result indicates there would be no indication of impairment on the goodwill recorded in BPPR at July 31, 2014. The goodwill balance of BPPR and BPNA, as legal entities, represented approximately 95% of the Corporation’s total goodwill balance as of the July 31, 2014 valuation date. the as part of Furthermore, analyses, management the aggregate fair values performed a reconciliation of determined for the reporting units to the market capitalization of Popular, the fair value results determined for the reporting units in the July 31, 2014 annual assessment were reasonable. Inc. concluding that The goodwill impairment evaluation process requires the Corporation to make estimates and assumptions with regard to the fair value of the reporting units. Actual values may differ significantly from these estimates. Such differences could result in future impairment of goodwill that would, in turn, negatively impact the Corporation’s results of operations and the reporting units where the goodwill in the is Corporation’s market capitalization could increase the risk of in the future. Management monitors goodwill events or changes in circumstances between annual tests to determine if these events or changes in circumstances would more likely than not reduce the fair value of a reporting unit below its carrying amount. recorded. Declines impairment At December 31, 2014 and 2013, other than goodwill, the Corporation had $ 6 million of identifiable intangible assets, with indefinite useful lives, mostly associated with E-LOAN’S trademark. The valuation of the E-LOAN trademark was performed using the “relief-from-royalty” valuation approach. The basis of the “relief-from-royalty” method is that, by virtue of having ownership of the trademark, the Corporation is relieved from having to pay a royalty, usually expressed as a percentage of revenue, for the use of trademark. The main attributes involved in the valuation of this intangible asset include the royalty rate, revenue projections that benefit from the use of this intangible, after-tax royalty savings derived from the ownership of the intangible, and the discount rate to apply to the projected benefits to arrive at the present value of this intangible. Since estimates are an integral part of this trademark impairment analysis, changes in these estimates could have a significant impact on the calculated fair value. There were no impairments recognized during the years ended December 31, 2014 and 2013 related to E-LOAN’s trademark. 24 Pension and Postretirement Benefit Obligations The Corporation provides pension and restoration benefit plans for certain employees of various subsidiaries. The Corporation also provides certain health care benefits for retired employees of BPPR. The non-contributory defined pension and benefit restoration plans (“the Plans”) are frozen with regards to all future benefit accruals. The estimated benefit costs and obligations of the pension and postretirement benefit plans are impacted by the use of subjective assumptions, which can materially affect recorded amounts, including expected returns on plan assets, discount rates, termination rates, retirement rates and health care trend rates. Management applies judgment in the determination of these factors, which normally undergo evaluation against current industry practice and the actual experience of the Corporation. The Corporation uses an independent actuarial firm for assistance in the determination of the pension and postretirement obligations. Detailed information on the Plans and related valuation assumptions are included in Note 37 to the consolidated financial statements. benefit costs and The Corporation periodically reviews its assumption for the long-term expected return on pension plan assets. The Plans’ assets fair value at December 31, 2014 was $697.2 million. The expected return on plan assets is determined by considering various factors, including a total fund return estimate based on a weighted-average of estimated returns for each asset class in the plan. Asset class returns are estimated using current and projected economic and market factors such as real rates of inflation, credit spreads, equity risk premiums and return, excess return expectations. the review, As part of the Corporation’s independent consulting actuaries performed an analysis of expected returns based on the plan’s asset allocation at January 1, 2015. This analysis is reviewed by the Corporation and used as a tool to develop expected rates of return, together with other data. This forecast reflects the actuarial firm’s view of expected long-term rates of return for each significant asset class or economic indicator; for example, 8.8% for large cap stocks, 9.0% for small cap stocks, 9.2% for international stocks and 3.8% for aggregate fixed-income securities at January 1, 2015. A range of expected investment returns is developed, and this range relies both on forecasts and on broad-market historical benchmarks for expected returns, correlations, and volatilities for each asset class. As a consequence of recent reviews, the Corporation decreased its expected return on plan assets for year 2015 to 7.00%. The 7.25% had been used as the expected rate of return in 2014 and 2013. Since the expected return assumption is on a long-term basis, it is not materially impacted by the yearly fluctuations (either positive or negative) in the actual return on assets. During 2013, the Corporation offered a Lump Sum Distribution to terminated vested participants whose deferred pension has a current value of up to $40 thousand. The this offer was voluntary and relieved the acceptance of 25 POPULAR, INC. 2014 ANNUAL REPORT Corporation of all future obligations related to the terminated vested participants who accepted the offer. Pension expense for the Plans amounted to the credit of $8.9 million in 2014. The total pension expense included a credit of $48.9 million for the expected return on assets. Pension expense is sensitive to changes in the expected return on assets. For example, decreasing the expected rate of return for 2015 from 7.00% to 6.75% would increase the projected 2015 expense for the Banco Popular de Puerto Rico Retirement by the Corporation’s approximately $1.6 million. largest Plan, plan, If the projected benefit obligation exceeds the fair value of plan assets, the Corporation shall recognize a liability equal to the unfunded projected benefit obligation and vice versa, if the fair value of plan assets exceeds the projected benefit obligation, the Corporation recognizes an asset equal to the overfunded projected benefit obligation. This asset or liability may result in a taxable or deductible temporary difference and its tax effect shall be recognized as an income tax expense or benefit which shall be allocated to various components of the financial statements, including other comprehensive income. The determination of the fair value of pension plan obligations involves judgment, and any changes in those estimates could impact the Corporation’s consolidated statement of financial condition. The valuation of pension plan obligations is discussed above. Management believes that the fair value estimates of the pension plan assets are reasonable given the valuation methodologies used to measure the investments at fair value as described in Note 34. Also, the compositions of the plan assets are primarily in equity and debt securities, which have readily determinable quoted market prices. The Corporation uses the Towers Watson RATE: Link (10/90) Model to discount the expected program cash flows of the plans as a guide in the selection of the discount rate. The Corporation used a discount rate of 3.90% to determine the plans benefit obligation at December 31, 2014, compared with 4.70% at December 31, 2013. A 50 basis point decrease in the assumed discount rate of 3.90% as of the beginning of 2015 would increase the projected 2015 expense for the Banco Popular de Puerto Rico Retirement Plan by approximately $2.5 million. The change would not affect the minimum required contribution to the Plan. For 2014 the Corporation elected to use the base mortality table reviewed by the Society of Actuaries (“SOA”) (“RP 2014”) adjusted for its own experience using the Tower Watson’s Mortality Credibility Tool. The RP 2014 mortality rates were reduced by 6.5% at all ages. These rates are first applied as of December 31, 2014 for the financial statement obligation disclosure and 2015 expense. The Corporation also adopted, as of December 31, 2014, the future mortality improvement scale released by the SOA (“MP 2014”) without adjustments as the mortality improvement scale. MP 2014 is applied on a generational basis. The Corporation also provides a postretirement health care benefit plan for certain employees of BPPR. This plan was unfunded (no assets were held by the plan) at December 31, 2014. The Corporation had an accrual for postretirement benefit costs of $161.8 million at December 31, 2014 using a discount rate of 4.00%. Assumed health care trend rates may have significant effects on the amounts reported for the health care plan. Note 37 to the consolidated financial statements provides information on the assumed rates considered by the Corporation and on the sensitivity that a one-percentage point change in the assumed rate may have on specified cost components and the postretirement benefit obligation of the Corporation. STATEMENT OF OPERATIONS ANALYSIS Net Interest Income Net interest income is the principal source of earnings of the Corporation. It is defined as the difference between the revenue generated from earning assets less the interest cost of funding those assets. Net interest income is subject to several risk factors, including market driven events, changes in volumes and repricing characteristics of assets and liabilities, as well as strategic decisions made by the Corporation’s management. Net interest income from the continuing business, on a taxable equivalent basis, for the year ended December 31, 2014 was $1,032 million compared to $1,407 million in 2013. During the year 2014, interest margin of the Corporation: on July 2, 2014, upon repayment of TARP, the Corporation recognized $414.1 million as interest the related expense from the accelerated amortization of discount and deferred costs, and during the third quarter of 2014, $39.2 million was interest expense associated to the refinancing of $638 million in long term structured repos in the U.S. with a cost of 4.41%, which were replaced with lower cost short term repos of a similar amount. Excluding the impact of these transactions, the net interest income of the Corporation on a taxable equivalent basis was $1,485 million compared to $1,407 million during 2013. two important events affected the net recognized as As mentioned above, during 2014, the Corporation completed the sale of its California, Central Florida and Illinois regions, as part of the reorganization of its U.S. operations. The operating results from these regions have been separately presented for all periods as discontinued operations, as required by US GAAP. The 2013 levels and yields have been adjusted to exclude the net interest income and respective volumes of sold to present assets and liabilities comparable results. from the regions The average key index rates for the years 2012 through 2014 were as follows: Prime rate Fed funds rate 3-month LIBOR 3-month Treasury Bill 10-year Treasury FNMA 30-year 2014 2013 2012 3.25% 3.25% 3.25% 0.07 0.08 0.27 0.23 0.05 0.05 2.36 2.53 3.61 3.41 0.14 0.42 0.08 1.74 3.07 Net interest income on a taxable equivalent basis - Non-GAAP financial measure The interest earning assets include investment securities and loans that are exempt from income tax, principally in Puerto Rico. The main sources of tax-exempt interest income are certain investments in obligations of the U.S. Government, its agencies and sponsored entities, and certain obligations of the Commonwealth of Puerto Rico and its agencies and assets held by the Corporation’s international banking entities. To facilitate the comparison of all interest related to these assets, the interest income has been converted to a taxable equivalent basis, using the applicable statutory income tax rates for each period. The taxable equivalent computation considers the interest expense and other related expense disallowances required by the Puerto Rico tax law. Under this law, the exempt interest can be deducted up to the amount of taxable income. Net interest income on a taxable equivalent basis is a non-GAAP financial measure. Management believes that this presentation provides meaningful information since it facilitates the comparison of revenues arising from taxable and exempt sources. Tables 5 and 6 present the net interest income on a taxable equivalent basis and present the impact of the taxable equivalent adjustment to reconcile to the net income as presented in the Corporations’ financial statements under U.S.GAAP. interest The increase in the taxable equivalent adjustment in 2014 as compared to 2013 is mainly due to a higher yield on loans to the public sector, higher volume of US Treasury and Agency securities and higher exempt income from investments at the international banking entities. Also, the year 2014 reflected higher interest income from exempt mortgage loans due to the reversal of $5.9 million of interest from reverse mortgages at BPPR during the third quarter of 2013 which had been accrued in excess of the amount insured by FHA. Average outstanding securities balances are based upon amortized cost excluding any unrealized gains or losses on securities available-for-sale. Non-accrual loans have been included in the respective average loans and leases categories. Loan fees loans are collected and costs incurred in the origination of deferred and amortized over the term of the loan as an adjustment to interest yield. Prepayment penalties, late fees collected and the amortization of premiums / discounts on purchased loans are also included as part of the loan yield. Interest income for the period 26 ended December 31, 2014 included a favorable impact, excluding the discount accretion on covered loans accounted for under ASC Subtopic 310-30, of $5.2 million, related to those items, compared to a favorable impact of $12.0 million for the same period in 2013, and $18.4 million in 2012. The $6.8 million reduction from 2013 to 2014 resulted in part from higher amortization of fees, under SFAS 91, from commercial loans. components of Table 5 presents the the different Corporation’s net interest income, on a taxable equivalent basis, for the year ended December 31, 2014, as compared with the same period in 2013, segregated by major categories of interest interest earning assets and interest bearing liabilities. Net margin, on a taxable equivalent basis was 3.45% in 2014; excluding the above mentioned non recurring interest expense charges related to the repayment of TARP funds and the refinancing of structured repos in the US, the net interest margin was 4.96% compared to 4.73% and 4.47% for 2013 and 2012, respectively. The main variances are discussed below: • Higher yield from commercial loans mainly related to new or repriced loans at higher yields, particularly loans to the Puerto Rico public sector. • A higher yield from mortgage loans due to a reversal of $5.9 million of interest from reverse mortgages at BPPR during the third quarter of 2013 which had been accrued in excess of the amount insured by FHA. Higher volume of consumer loans, mainly auto loans from Popular Auto. • A higher yield from covered loans due to higher expected cash flows which are reflected in the accretable yield to be recognized over the average life of the loans and loan resolutions during 2014; partially offset by the change in the estimated life of certain commercial loans that resulted in an extension of the period in which the accretion of income will be recorded. The positive variance in yield was partially offset by a lower proportion of covered loans to total earning assets. This portfolio, due to its nature, will continue to decline as scheduled payments are received and workout arrangements are made. For a detailed movement of covered loans refer to Note 11 of this Annual Report. • Lower cost of interest bearing deposits, mainly individual certificates of deposits, IRAs and brokered CDs related to renewal of maturities in a low interest rate environment and management’s efforts to reduce deposit costs. • A lower cost of borrowings due to the repayment of TARP funds and the refinancing of US structure repos, as described above. Also, during the third quarter of 2013, $233.2 million in senior notes were repaid with an average cost of approximately 7.77%. These positive variances were partially offset by the issuance of $450 million of senior notes at 7%, which were used to partially fund the repayment of TARP. 27 POPULAR, INC. 2014 ANNUAL REPORT These positive variances were partially offset by a lower yield from leases due mainly to new activity at lower rates. Average earning assets increased $156 million when compared with 2013 mainly a higher volume of investment securities and consumer loans primarily related to Popular Auto initiatives, partially offset by a lower volume of construction loans and a reduction in the covered loan portfolio as mentioned above. Average interest bearing liabilities decreased $864 million in 2014 mainly a lower volume of borrowed money and broker CDs due to lower funding needs, partially offset by higher volume of non maturity deposits. Also, for 2014 there was a higher volume of non interest bearing sources of funds, which helped improve the net interest margin. Net interest margin, on a taxable equivalent basis, increased 26 basis points to 4.73% in 2013 compared to 4.47% for the year ended December 31, 2012. The taxable equivalent adjustment for the year ended December 31, 2013 increased by $25.7 million from the year 2012. This increase was mainly due to the amendment in 2013 of the Commonwealth’s Internal Revenue Code that increased the corporate marginal income tax rate from 30% to 39% and higher exempt loan volume resulting from approximately $225 million in consumer loans purchased at the end of the second quarter 2012. The main variances in net interest margin for the years ended December 31, 2013 and 2012 are discussed below: • A higher yield from commercial loans due to lower levels of non- performing loans after the bulk sale completed during the first quarter of 2013. • A higher yield from covered loans due to higher expected cash flows which are reflected in the accretable yield to be recognized over the average life of the loans and loan resolutions during 2013. The positive yield was partially offset by a lower proportion of covered loans to total earning assets. • Higher yield from consumer loans resulting from the loans purchased at the end of the second quarter 2012. • Lower cost of interest bearing deposits, mainly individual certificates of deposits, IRAs and brokered CDs related to renewal of maturities in a low interest rate environment and management’s efforts to reduce deposit costs. • A lower cost of borrowings due to the early repayment of $233.2 million in senior notes during the third quarter of 2013 with an average cost of approximately 7.77% and the cancellation, during June 2012 of $350 million in repurchase agreements with an average cost of 4.36%. The positive impacts in net interest margin detailed above were partially offset by the following: • Decrease loans due in the yield of mortgage to acquisitions made, mainly in the US, of high quality loans, which generally carry a lower rate and originations in a lower rate environment. Also during the third quarter of 2013 the Corporation reversed $5.9 million of interest income from reverse mortgages at BPPR, which had been accrued in excess of the amount insured by FHA. • Lower interest income from investment securities due to reinvestment of cash flows received from mortgage backed securities in lower yielding collateralized mortgage obligations as well as the acquisition of lower yielding agency securities. Average earning assets increased $230 million in 2013 when compared with 2012. An increase in mortgage loans, most through acquisitions both in PR and the US was partially offset Investment by reductions in the covered loans portfolio. securities also increased due to reinvestment and current investment strategy to shorten the duration of the portfolio. The decrease in commercial and construction loans can be attributed to the sale of non-performing loans in the first quarter of 2013 and slower origination activity both in Puerto Rico and the U.S. Average interest bearing liabilities decreased $593 million in 2013 mainly due to lower volumes of borrowed money, broker CDs and individual time deposits. Demand deposits increased by $338 million in 2013 on average when compared to 2012, positively impacting net interest margin. Table 5 - Analysis of Levels & Yields on a Taxable Equivalent Basis from Continuing Operations (Non-GAAP) Years ended December 31, 28 2014 Average Volume 2013 (In millions) Variance Average Yields / Costs 2013 Variance 2014 $1,305 $ 1,036 5,488 5,886 417 340 $ 269 398 (77) 0.32% 0.33% (0.01)% Money market investments 2.75 6.16 Investment securities Trading securities (0.20) (0.09) 2.95 6.25 2014 Interest 2013 Variance (In thousands) Variance Attributable to Rate Volume $ 4,224 $ 3,464 $ 162,008 20,914 161,868 26,026 $ 760 140 (5,112) 267 $ 728 (366) 493 (588) (4,746) 7,531 6,941 590 2.49 2.76 (0.27) trading securities 187,146 191,358 (4,212) 629 (4,841) Total money market, investment and 8,347 199 547 6,641 3,861 8,284 319 540 6,688 3,741 19,595 2,771 19,572 3,228 22,366 22,800 63 (120) 7 (47) 120 23 (457) (434) 5.12 6.78 7.33 5.40 10.36 6.33 10.60 6.85 4.97 4.73 8.07 5.33 10.45 6.22 9.32 6.66 0.15 2.05 (0.74) 0.07 (0.09) 0.11 1.28 0.19 Loans: Commercial Construction Leasing Mortgage Consumer Sub-total loans Covered loans 427,314 13,482 40,135 358,597 399,941 412,083 15,076 43,542 356,739 390,909 1,239,469 293,610 1,218,349 300,745 15,231 (1,594) (3,407) 1,858 9,032 21,120 (7,135) 12,116 5,210 (4,034) 4,377 (1,869) 3,115 (6,804) 627 (2,519) 10,901 15,800 33,600 5,320 (40,735) Total loans 1,533,079 1,519,094 13,985 49,400 (35,415) $29,897 $29,741 $ 156 5.75% 5.75% –% Total earning assets $1,720,225 $1,710,452 $ 9,773 $ 50,029 $(40,256) $4,825 $ 4,658 6,585 6,733 7,957 7,556 $ 167 148 (401) 19,114 19,200 1,887 267 1,360 2,572 515 1,205 22,628 23,492 5,534 1,735 5,371 878 (86) (685) (248) 155 (864) 163 857 0.32% 0.34% (0.02)% 0.22 0.99 (0.01) (0.19) 0.23 1.18 Interest bearing deposits: NOW and money market [1] Savings Time deposits $ 15,523 $ 14,664 74,900 15,718 $ 15,361 93,778 (195) (697) (18,878) $ (629) $ (987) (12,693) 434 290 (6,185) 0.55 1.49 16.05 4.34 1.04 0.65 (0.10) Total deposits 105,087 124,857 (19,770) (14,309) (5,461) 1.49 15.98 4.79 Short-term borrowings [2] TARP funds [3] – 0.07 (0.45) Other medium and long-term debt 28,123 42,906 59,034 38,430 82,345 57,734 (10,307) (39,439) 1,300 (5,504) 348 (4,720) (4,803) (39,787) 6,020 1.29 (0.25) Total interest bearing liabilities 235,150 303,366 (68,216) (24,185) (44,031) Non-interest bearing demand deposits Other sources of funds $29,897 $29,741 $ 156 0.79% 1.02% (0.23)% Total source of funds 235,150 303,366 (68,216) (24,185) (44,031) 4.96% 4.73% 0.23% on a taxable equivalent basis 1,485,075 1,407,086 77,989 $ 74,214 $ 3,775 Adjusted net interest margin/income 4.71% 4.46% 0.25% Adjusted net interest spread Accelerated amortization of TARP discount and BPNA repo refinancing fees Net interest margin/income on a 453,321 – 453,321 3.45% 4.73% (1.28)% taxable equivalent basis 1,031,754 1,407,086 (375,332) Taxable equivalent adjustment 86,682 62,512 24,170 Net interest income $ 945,072 $1,344,574 $(399,502) Note: The changes that are not due solely to volume or rate are allocated to volume and rate based on the proportion of the change in each category. Includes interest bearing demand deposits corresponding to certain government entities in Puerto Rico. [1] [2] Cost of short-term borrowings excludes the impact of the fees related to PCB repo refinancing. Cost of short-term borrowings for the year ended December 31, 2014 including such fees would have been 3.57%. [3] Cost of TARP funds excludes the impact of the accelerated amortization. Total cost of TARP funds for the year ended December 31, 2014 including the accelerated amortization of TARP discount would have been 170.91%. 29 POPULAR, INC. 2014 ANNUAL REPORT Table 6 - Analysis of Levels & Yields on a Taxable Equivalent Basis from Continuing Operations (Non-GAAP) Years ended December 31, 2013 Average Volume 2012 (In millions) Variance Average Yields / Costs 2012 Variance 2013 $1,036 5,488 417 $1,051 5,227 446 $(15) 261 (29) 0.33% 0.35% (0.02)% Money market investments 2.95 6.25 Investment securities Trading securities (0.53) 0.44 3.48 5.81 2013 Interest 2012 Variance (In thousands) Variance Attributable to Rate Volume $ 3,464 $ 3,704 $ 161,868 26,026 182,094 25,909 (240) (20,226) 117 $ (129) $ (22,125) 1,882 (111) 1,899 (1,765) 6,941 6,724 217 2.76 3.15 (0.39) trading securities 191,358 211,707 (20,349) (20,372) 23 Total money market, investment and 8,284 319 540 6,688 3,741 8,310 450 545 5,817 3,615 19,572 3,228 18,737 4,050 22,800 22,787 (26) (131) (5) 871 126 835 (822) 13 4.97 4.73 8.07 5.33 10.45 6.22 9.32 6.66 4.86 3.46 8.62 5.58 10.43 6.23 7.44 6.45 Loans: Commercial Construction Leasing Mortgage Consumer Sub-total loans Covered loans 0.11 1.27 (0.55) (0.25) 0.02 (0.01) 1.88 412,083 15,076 43,542 356,739 390,909 404,159 15,556 46,960 324,573 376,843 1,218,349 300,745 1,168,091 301,441 7,924 (480) (3,418) 32,166 14,066 50,258 (696) 9,169 4,803 (2,978) (14,814) 3,747 (1,245) (5,283) (440) 46,980 10,319 (73) 63,728 50,331 (64,424) 0.21 Total loans 1,519,094 1,469,532 49,562 63,655 (14,093) $29,741 $29,511 $ 230 5.75% 5.70% 0.05% Total earning assets $1,710,452 $1,681,239 $ 29,213 $ 43,283 $(14,070) $4,658 $ 4,449 $ 209 199 6,386 6,585 (878) 8,835 7,957 19,200 19,670 2,572 515 1,205 2,564 484 1,367 23,492 24,085 5,371 878 5,033 393 (470) 8 31 (162) (593) 338 485 0.34% 0.43% (0.09)% 0.23 1.18 (0.10) (0.27) 0.33 1.45 Interest bearing deposits: NOW and money market [1] Savings Time deposits $ 15,718 $ 15,361 93,778 19,011 $ (3,293) (5,697) 21,058 (33,918) 127,696 $ (4,402) $ 1,109 488 (12,076) (6,185) (21,842) 0.65 1.49 15.98 4.79 1.29 0.85 (0.20) Total deposits 124,857 167,765 (42,908) (32,429) (10,479) 1.83 15.92 5.21 Short-term borrowings TARP funds [2] (0.34) 0.06 (0.42) Other medium and long-term debt 38,430 82,345 57,734 46,802 76,977 71,215 (8,372) 5,368 (13,481) (7,515) 311 (2,761) (857) 5,057 (10,720) 1.51 (0.22) Total interest bearing liabilities 303,366 362,759 (59,393) (42,394) (16,999) Non-interest bearing demand deposits Other sources of funds $29,741 $29,511 $ 230 1.02% 1.23% (0.21)% Total source of funds 303,366 362,759 (59,393) (42,394) (16,999) 4.73% 4.47% 0.26% Net interest margin Net interest income on a taxable equivalent basis 1,407,086 1,318,480 88,606 $ 85,677 $ 2,929 4.46% 4.19% 0.27% Net interest spread Taxable equivalent adjustment 62,512 36,853 25,659 Net interest income $1,344,574 $1,281,627 $62,947 Note: The changes that are not due solely to volume or rate are allocated to volume and rate based on the proportion of the change in each category. [1] [2] Includes interest bearing demand deposits corresponding to certain government entities in Puerto Rico. Junior subordinated deferrable interest debentures held by the U.S. Treasury. Provision for Loan Losses The Corporation’s total provision for loan losses for continuing ended operations December 31, 2014, compared with $606.1 million for 2013, and $397.1 million for 2012. totaled $270.1 million for year the totaled The provision for loan losses for the non-covered loan ended $224.0 million for portfolio December 31, 2014, compared to $536.7 million for the year ended December 31, 2013. The decrease of $312.7 million from 2013 to 2014 was mostly due to the impact of $318.1 million related to the bulk loan sales completed during 2013. In year the transferred to loans held-for-sale as part of addition, the provision for 2014 includes an impact of $12.8 million related to certain non-performing and legacy loans sold the U.S. or reorganization, as these loans required a $35.7 million write- down and carried $21.7 million in reserves. Excluding the impact of these sales in 2013 and 2014, the provision would have declined by $7.4 million for year ended December 31, 2014, compared to same period in 2013, reflecting higher reserve releases at BPNA, offset by higher provisions at BPPR. The results for the year ended December 31, 2014 include a $18.7 million reserve release as part of the annual review of the components of the ALLL models during the second quarter of 2014, compared to a reserve increase of $19.3 million for the same period of 2013 due to enhancements to the allowance for loan losses methodology. Excluding the $35.7 million write- down mentioned above, net charge-offs for the continuing operations decreased by $49.2 million from the prior year, primarily driven by a reduction of $54.3 million in commercial net charge-offs. The provision for the Puerto Rico non-covered portfolio amounted to $242.9 million for the year ended December 31, 2014, compared to $547.9 million for the year ended December 31, 2013. The decrease of $305.0 million was predominantly driven by the above mentioned impact of $318.1 million related to the bulk loan sales completed during 2013. Excluding the bulk sales impact, the provision increased by factors due to $13.1 million mainly led by environmental challenging economic conditions that persist in Puerto Rico and the effect of downgrades in the internal risk ratings of certain large corporate and public sector relationships, in part offset by a $14.9 million reserve release as part of the annual review of the components of the ALLL models during the second quarter of 2014. Net charge-offs decreased by $23.3 million from the previous year mostly driven by lower commercial net charge- offs of $46.2 million, in part offset by an increase of $21.1 million in the consumer portfolio net charge-offs, which for 2013 included a recovery of $8.9 million associated with the sale of a portfolio of previously charged-off loans. The U.S. continuing operations recorded a provision release of $18.9 million for the year ended December 31, 2014, compared to a release of $11.2 million for the same period in 2013. The provision for 2014 includes the previously mentioned impact of $12.8 million related to loan sales or loans transferred to loans-held-for sale. Excluding the effect of these transactions, the provision for 2014 would have amounted to a release of $31.7 million, or $20.5 million higher release than in 2013. This reversal of provision was prompted by improved credit quality trends, the de-risking of the U.S. portfolio and the effect of a $3.8 million reserve release as part of the annual review of the components of the ALLL models during the second quarter of 2014. Net charge-offs decreased by $25.9 million from the previous year driven by improvements in all portfolios. The provision for the covered portfolio was $46.1 million for the year ended December 31, 2014, compared to $69.4 million for same period of the previous year. This decrease of $23.3 million was due to lower impairment losses on commercial loan pools accounted for under ASC 310-30 and the impact of a $7.5 30 million reserve increase related to the enhancements to the allowance for loan losses methodology implemented during the second quarter of 2013. These positive variances were offset by the $0.8 million reserve increase recorded during the second quarter of 2014, as part of the annual review of the components of the ALLL models. The provision for loan losses for the non-covered loan portfolio increased $214.5 million from 2012 to 2013. This increase was mostly due to the $318.1 million impact related to the bulk loan sales completed during 2013, as mentioned above. Excluding the impact of these sales, the provision for loan losses for the continuing operations declined by $103.6 million, mainly due to continued credit quality improvements evidenced by a decline in net charge-offs of $129.7 million, partly offset by the enhancements made to the allowance for loan losses implemented during the second quarter of 2013, which resulted in a reserve increase of $11.8 million for the non-covered portfolio. The results for 2012 reflect the impact of a reduction in the reserve of $24.8 million due to certain enhancements to the methodology implemented during the first quarter of 2012. The provision for the Puerto Rico non-covered portfolio declined by $52.3 million for 2013 compared to 2012, excluding the impact of the bulk non-performing assets sales. The reduction was the result of improved credit metrics, partly offset by the impact of the enhancements to the allowance for loan losses methodology which resulted in reserve increases of $22.6 million. Also, BPPR recorded a recovery of $8.9 million associated with the sale of a portfolio of previously charged-off credit cards and personal loans during 2013. The U.S. continuing operations recorded a reserve release of $11.2 million for 2013, compared to a provision of $40.2 million for 2012, a decrease of $51.4 million. The reserve release was due to improved credit performance and the impact of loan losses methodology implemented during 2013, which reduced reserve levels by $10.8 million. to the allowance for the enhancements The provision for covered loans totaled $69.4 million for the year ended December 31, 2013, compared with $74.8 million for the year ended December 31, 2012, reflecting a decrease of $5.4 million, mostly driven by lower impairment losses, in part offset by $7.5 million increase related to the enhancements to the allowance for loan losses methodology. Refer to the Credit Risk Management and Loan Quality sections of this MD&A for a detailed analysis of net charge-offs, non-performing assets, the allowance for loan losses and selected loan losses statistics. 31 POPULAR, INC. 2014 ANNUAL REPORT Non-Interest Income The following tables present the breakdown of non-interest income and mortgage banking activities by major categories for the past five years. Table 7 - Non-Interest Income (In thousands) Service charges on deposit accounts Other service fees: Debit card fees Credit card fees Insurance fees Processing fees Sale and administration of investment products Trust fees Check cashing fees Other fees Total other services fees Mortgage banking activities Net (loss) gain on sale and valuation adjustments of investment securities Trading account profit (loss) Net gain (loss) on sale of loans, including valuation adjustments on loans held-for-sale Adjustments (expense) to indemnity reserves on loans sold FDIC loss share (expense) income Fair value change in equity appreciation instrument Gain on sale of processing and technology business Other operating income Years ended December 31, 2014 2013 2012 2011 2010 $158,637 $162,870 $171,226 $171,218 $180,816 43,146 67,639 54,158 – 27,711 18,209 123 14,279 41,912 65,727 52,309 – 35,272 17,285 191 16,655 43,528 61,071 51,363 6,330 37,766 16,353 244 15,860 56,439 52,226 51,596 6,839 34,388 15,333 339 16,738 97,597 85,413 47,052 45,055 37,783 14,217 408 18,931 225,265 229,351 232,515 233,898 346,456 30,615 (870) 4,358 40,591 (40,629) (103,024) – – 71,572 71,657 7,966 (13,483) (52,708) (37,054) (82,051) – – 504,465 84,771 (1,707) 4,478 (29,414) (21,198) (56,211) – – 127,029 (4,505) 10,844 48,098 4,054 (33,068) 66,791 8,323 – 98,189 16,153 3,992 33,017 5,101 (72,013) (25,751) 42,555 640,802 108,279 Total non-interest income $386,515 $791,013 $511,489 $603,842 $1,279,407 Table 8 - Mortgage Banking Activities (In thousands) Mortgage servicing fees, net of fair value adjustments: Mortgage servicing fees Mortgage servicing rights fair value adjustments Total mortgage servicing fees, net of fair value adjustments Net gain on sale of loans, including valuation on loans held-for-sale Trading account (loss) profit: Unrealized (losses) gains on outstanding derivative positions Realized (losses) gains on closed derivative positions Total trading account (loss) profit Total mortgage banking activities Years ended December 31, 2014 2013 2012 2011 2010 $41,761 (24,683) $45,465 (11,403) $48,156 (17,406) $49,136 (37,061) $47,636 (22,860) 17,078 31,213 34,062 26,719 30,750 76,181 12,075 25,621 24,776 7,990 (726) (16,950) (17,676) 746 10,130 10,876 304 (22,464) 956 (43,157) (2,613) (14,000) (22,160) (42,201) (16,613) $30,615 $71,657 $84,771 $(4,505) $16,153 For the year ended December 31, 2014, non-interest income decreased by $404.5 million when compared with the previous year. The FDIC indemnity asset amortization for the year 2014 included a benefit of approximately $12.5 million to reverse the impact of accelerated amortization expense recorded in prior periods. This amount will be recognized as expense over the remaining portion of the loss sharing agreement that expires in the quarter ending June 30, 2015. Excluding the impact of the $12.5 million FDIC indemnity asset amortization adjustment during 2014 and the significant events during 2013 of $357.2 million that includes the impact of the NPA’s sales and the impact of EVERTEC’s public offerings during 2013, non- 32 For the year ended December 31, 2013, non-interest income increased by $279.5 million when compared to 2012. Excluding the impact of the significant events during 2013 mentioned income decreased by $77.6 million above, non-interest principally due to the following: • Lower other operating income by $52.9 million mostly due to lower net earnings on investments under the equity method mainly due to income of $31.6 million recorded in 2012 related to the Corporation’s proportionate share of a benefit from a tax grant received by EVERTEC from the Puerto Rico government; • Higher FDIC loss share expense by $25.8 million, principally due to higher amortization of the FDIC loss share asset due to a decrease in expected losses, higher mirror accounting on recoveries on covered loans, including rental income on OREOs, and the impact of fair value adjustments in the true-up payment obligation, partially offset by higher mirror accounting on credit impairment losses and reimbursable loan related expenses on covered loans; • Unfavorable variance in trading account profit / (loss) by $18.0 million mainly driven by higher unrealized losses on outstanding mortgage-backed securities and higher losses on Puerto Rico government obligations and closed- end funds; • Lower mortgage banking activities by $13.1 million due to lower gains on sale of loans driven by lower market prices, partially offset by higher trading account related to derivative positions and a favorable variance in the fair value adjustment of mortgage servicing rights; and • Lower service charges on deposit accounts by $8.4 million, mainly driven by lower commercial account fees and non-sufficient funds and overdraft fees. These unfavorable variances were partially offset by a favorable variance in net gains on sale of loans, net of valuation adjustments by $42.0 million driven mostly by valuation adjustments of $27.3 million on commercial and construction loans held-for-sale at the BPPR segment during 2012 as a result of updated appraisals and market indicators. interest income decreased by $61.5 million principally due to the following. Refer to tables 72 and 73 for non-GAAP reconciliations for the years 2014 and 2013. • Lower income from mortgage banking activities by $41.0 million mainly due to an unfavorable variance in the realized (losses) / gains on closed derivatives positions, in addition to an unfavorable variance in the fair value adjustment of mortgage servicing rights. Refer to Table 8 for additional details on mortgage banking activities; • Higher FDIC loss of to due lower mirror share expense by $33.5 million, the amortization higher principally indemnification asset due to a decrease in expected losses, and on credit accounting impairment losses; partially offset by lower unfavorable valuation adjustment on the true up payment obligation and higher mirror accounting income on reimbursable expenses. Refer to Table 2 for a breakdown of FDIC loss share (expense) income by major categories; income • Higher provision for indemnity reserves by $17.3 million, excluding the provision of $13.7 million related to the bulk sales of NPA’s during 2013, due to reserves for loans sold with credit recourse, mainly at BPPR; • Lower service charges on deposit accounts of $4.2 million due to lower volume of overdrafts and other transaction fees; and • Lower other service fees by $4.1 million due to a decline in the market value of assets under management, mainly Puerto Rico Government obligations and closed-end funds, which drive lower investment management fees and mutual funds administration fees. These unfavorable variances were partially offset by the following: • Higher net gains on sale of loans, net of valuation adjustments by $26.4 million, excluding the impact of the NPAs sales mentioned above, mostly driven by BPNA individual sales of non-performing commercial loans during 2014; and • A favorable variance in the trading account profit / (loss) caption of $17.8 million mainly at the BPPR segment due to inventory positions mark downs in 2013 (mostly Puerto Rico government obligations and closed-end funds), and a favorable variance in the realized and unrealized gains / (losses) on outstanding mortgage- backed securities, mainly market driven at BPPR. 33 POPULAR, INC. 2014 ANNUAL REPORT Operating Expenses Table 9 provides a breakdown of operating expenses by major categories. Table 9 - Operating Expenses (In thousands) Personnel costs: Salaries Commissions, incentives and other bonuses Pension, postretirement and medical insurance Other personnel costs, including payroll taxes Total personnel costs Net occupancy expenses Equipment expenses Other taxes Professional fees: Collections, appraisals and other credit related fees Programming, processing and other technology services Other professional fees Total professional fees Communications Business promotion FDIC deposit insurance Loss (gain) on early extinguishment of debt Other real estate owned (OREO) expenses Other operating expenses: Credit and debit card processing, volume, interchange and other expenses Transportation and travel Printing and supplies Operational losses All other Total other operating expenses Amortization of intangibles Restructuring costs Total operating expenses Personnel costs to average assets Operating expenses to average assets Employees (full-time equivalent) Average assets per employee (in millions) Years ended December 31, 2014 2013 2012 2011 2010 $ 281,252 59,138 32,416 45,873 $ 276,072 57,060 55,106 40,459 $ 279,590 51,320 64,325 39,098 $ 282,460 40,987 59,671 38,797 $ 330,073 50,364 58,956 44,354 418,679 428,697 434,333 421,915 483,747 86,707 48,917 56,918 26,257 173,814 81,984 282,055 25,684 54,016 40,307 532 49,611 21,588 6,474 3,732 18,543 45,036 95,373 8,160 26,725 86,651 46,028 58,028 32,727 174,921 70,479 278,127 25,385 59,453 56,728 3,388 79,658 19,901 6,973 3,185 17,954 43,863 91,876 7,971 – 84,687 43,618 49,844 41,029 169,927 60,052 271,008 25,687 60,784 82,065 25,196 28,823 18,789 6,284 4,195 23,681 47,834 100,783 8,161 – 84,966 42,238 51,628 30,261 164,716 61,248 256,225 25,343 53,200 87,942 8,693 20,900 16,552 6,753 4,805 12,682 42,276 83,068 7,742 – 98,019 84,078 50,342 23,149 59,192 89,841 172,182 37,219 45,305 60,276 38,787 43,399 39,636 7,503 8,823 18,494 66,153 140,609 7,263 – $1,193,684 $1,221,990 $1,214,989 $1,143,860 $1,261,226 1.19% 3.39 7,752 4.54 $ 1.18% 3.37 8,059 4.50 $ 1.20% 3.35 8,072 4.49 $ 1.11% 3.00 8,329 4.57 $ 1.26% 3.29 8,277 4.64 $ Operating expenses for the year ended December 31, 2014 decreased by $28.3 million, or 2%, when compared with the year ended December 31, 2013. Operating expenses for 2014 included restructuring charges related to the U.S. operations for $26.7 million, executive compensation costs for $3.0 million, lease cancellation costs for $1.9 million and early debt extinguishment costs for $532 thousand. For the year 2013, operating expenses included $37.0 million in OREO expenses related to the bulk sale of non-performing assets and $1.1 million in professional services mainly related to EVERTEC’s public offerings. Excluding the impact of the aforementioned significant events, detailed in tables 72 and 73, operating expenses decreased by $22.3 million compared with the year ended December 31, 2013, driven primarily by: • Lower FDIC deposit insurance by $16.4 million, reflecting lower levels of high risk assets; • A decrease in personnel costs by $13.0 million, mainly due to lower pension, postretirement and medical services due to changes to actuarial assumptions effective for the year 2014 resulting in lower amortization of pension costs and lower medical life insurance expense; partially offset by higher salaries and other personnel costs; and 34 • Lower loss on extinguishment of debt by $3.4 million, mainly due to the early cancellation of medium term notes during 2013. The above variances were partially offset by: • An increase in OREO expenses by $7.0 million mainly due to due to higher write downs on OREO properties, offset by higher gains on sales of mainly commercial and construction properties; and • Higher professional fees by $5.0 million, mainly at BPPR due to higher legal fees mostly as a result of the FDIC arbitration proceedings and other corporate matters. Operating expenses for the year ended December 31, 2013 increased by $7.0 million, or 6%, when compared with the year ended December 31, 2012. Excluding the impact of the significant events detailed in table 73 and discussed above, operating expenses decreased by $31.1 million compared with the year ended December 31, 2012, driven primarily by: • Lower FDIC deposit insurance by $25.3 million, which includes a credit of $11.3 million received from the FDIC during the first quarter, mainly driven by revisions in the deposit insurance premium calculation, lower levels of high risk assets and efficiencies achieved from the internal reorganization in which Popular Mortgage was merged into BPPR, completed at the end of 2012; • A decrease in loss on extinguishment of debt by $21.8 million as a result of prepayment expense of $25 million paid in 2012 related to the early termination of repurchase agreements of $350 million; and • Lower other operating expenses by $8.9 million mainly due to lower operational losses. The above variances were partially offset by: • An increase in OREO expenses by $13.8 million mainly due to the higher valuation write downs consisting primarily of covered assets which are subject to 80% reimbursement from the FDIC; • Higher other taxes by $8.2 million related to the new PR gross receipts tax enacted in June 2013, partially offset by lower personal property tax and lower income subject to municipal tax; and • An increase in professional fees by $6.0 million as a result of higher professional services, legal fees and attorneys fees, mainly in the BPPR reportable segment. INCOME TAXES Income tax expense amounted to $58.3 million for the year ended December 31, 2014, compared with an income tax benefit of $251.3 million for the previous year. The increase in income tax expense was primarily due to the recognition during the year 2013 of a tax benefit of $197.5 million and a corresponding increase in the net deferred tax asset of the Puerto Rico operations as a result of the increase in the statutory corporate income tax rate from 30% to 39% introduced as part of the amendments to the Puerto Rico Internal Revenue Code effective for taxable years beginning after December 31, 2012. In addition, during 2013 the Corporation recorded an income tax benefit due to the loss generated on the Puerto Rico operations by the sales of non- performing assets net of the gain realized on the sale of a portion of EVERTEC’s taxable at a preferential tax rate according to Act Number 73 of May 28, 2008 known as “Economic Incentives Act for the Development of Puerto Rico”. shares which was On July 1, 2014, the Government of Puerto Rico approved certain amendments to the Internal Revenue Code, which, among other things, changed the income tax rate for capital gains from 15% to 20%. As a result, the Corporation recognized an income tax expense of $20.0 million mainly related to the deferred tax liability associated with the portfolio acquired from Westernbank. During the second quarter of 2014 the Corporation entered into a Closing Agreement with the Puerto Rico Department of Treasury. The Agreement, among other matters, was related to the income tax treatment of certain charge-offs related to the loans acquired from Westernbank as part of the FDIC assisted transaction in the year 2010. As a result of the Agreement, the Corporation recorded a tax benefit of $23.4 million due to a reduction in the deferred tax liability associated with the Westernbank loan portfolio. Additionally, in connection with this Closing, the Corporation made an estimated tax payment of $45 million which will be used as a credit to offset future income tax liabilities. In addition, as further detailed below, during 2014 an initial valuation allowance on the deferred tax asset of approximately $8.0 million was recorded at the Holding Company, due to the difference in the tax treatment of the interest expense related to the TARP funds and the newly issued $450 million of senior notes, bearing interest at 7%. Excluding the impact of the events listed above, the income tax expense for the year ended December 31, 2014 was $51.1 million, compared to $89.4 million for 2013. The decrease in income taxes was mainly due to a higher level of exempt income, higher deductible interest expense related to the issuance of the $450 million Senior Notes as compared to the non-deductible interest related to the TARP funds and a lower income tax expense related to charge-offs of the covered portfolio, after the closing agreement with the PR Treasury Department. Income tax benefit for the year ended December 31, 2013 was $251.3 million, compared with an income tax benefit of $26.4 million for 2012. The increase in income tax benefit was primarily due to the recognition during 2013 of a tax benefit of $197.5 million as a result of the change in the statutory 35 POPULAR, INC. 2014 ANNUAL REPORT corporate income tax rate from 30% to 39% and the loss generated on the sale of non-performing assets as explained above., as compared with an income tax benefit of $72.9 million during 2012 related to the reduction of the deferred tax liability on the estimated gains for tax purposes related to the loans acquired from Westernbank as a result of a Closing Agreement signed by the Corporation and P.R. Department of the Treasury. The Corporation’s net deferred tax assets at December 31, 2014 amounted to $779 million (net of the valuation allowance of $1.2 billion) compared to $760 million at December 31, 2013 Table 10 - Components of Income Tax Expense (Benefit) (net of a valuation allowance of $1.3 billion). Note 43 to the consolidated financial statements provides the composition of the net deferred tax assets as of such dates. All of the net deferred tax assets at December 31, 2014 pertain to the Puerto Rico operations. Of the amount related to the U.S. operations, without considering the valuation allowance, $1.1 billion is attributable to net operating losses of such operations. The components of income tax expense (benefit) for the years ended December 31, 2014, 2013 and 2012 are included in the following table: (In thousands) Computed income tax at statutory rates Benefit of net tax exempt interest income Effect of income subject to preferential tax rate [1] Deferred tax asset valuation allowance Non-deductible expenses [2] Difference in tax rates due to multiple jurisdictions Initial adjustment in deferred tax due to change in tax rate Unrecognized tax benefits Others Income tax expense (benefit) 2014 2013 2012 Amount $(51,570) (55,862) (21,909) (4,281) 178,219 (14,178) 20,048 (3,601) 11,413 $58,279 % of pre-tax income 39% 43 18 3 (135) 10 (16) 3 (9) Amount $135,720 (36,993) (137,793) (32,990) 32,115 (12,029) (197,467) (7,727) 5,837 % of pre-tax income 39% (11) (40) (9) 9 (3) (57) (2) 2 Amount $65,662 (25,540) (78,132) 166 23,093 (6,034) – (8,985) 3,367 % of pre-tax income 30% (12) (36) – 11 (3) – (4) 2 (44)% $(251,327) (72)% $(26,403) (12)% [1] Includes the impact of the Closing Agreement with the P.R. Treasury signed in June 2012, the tax expense related to a gain on the sale of EVERTEC shares and income from investments in subsidiaries subject to preferential tax rates and the Closing Agreement with the P.R. Treasury signed in 2014. [2] For the year ended December 31, 2014, includes approximately $161.5 million of amortization of the discount and deferred cost associated with the TARP funds, which are not deductible. differences The Corporations maintains a valuation allowance on its deferred tax asset for the U.S. operations, since in consideration of the requirement of ASC 740 management considered that it is more likely than not that all of this deferred tax asset will not be realized. For purposes of assessing the realization of the deferred tax assets in the U.S. mainland management evaluates and weights all available positive and negative evidence. The Corporation’s U.S. mainland operations are not in a cumulative loss position for the three-year period ended December 31, 2014 taxable income exclusive of reversing taking into account income”). This (“adjusted temporary represents positive evidence within management’s evaluation. The book income for the years 2013 and 2014 was significantly impacted by a reversal of the loan loss provision due to the improved credit quality of the loan portfolios. However, the U.S. mainland operations did not report taxable income for the years 2011, 2012 and 2013, although they did report taxable income for the year ended December 31, 2014. Future realization of the deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character within the carryforward period available under the tax law. The lack of a sustained level of taxable income together with the uncertainties regarding the estimate of future normalized level of profitability book evidence within management’s and cost savings related to the restructure represents strong negative evaluation. This determination is updated each quarter and adjusted as any changes arise. After weighting of all positive and negative evidence management concluded, as of the reporting date, that it is more likely than not that the Corporation will not be able to realize any portion of the deferred tax assets related to the U.S. mainland operations, considering the criteria of ASC Topic 740. If the Corporation is able to meet its operating targets in the U.S. and the results of the reorganization yield the expected results, this would be considered positive evidence within management’s evaluation which could outweigh the negative evidence and result in the realization of a portion of the fully reserved deferred tax asset recorded at PCB. The Corporation’s Puerto Rico Banking operation is not in a cumulative loss position and has sustained profitability for the three year period ended December 31, 2014, exclusive of the loss generated on the sales of non-performing assets that took place in 2013 which is not a continuing condition of the operations. This is considered a strong piece of objectively verifiable positive evidence that out weight any negative evidence considered by management in the evaluation of the realization of the deferred tax asset. Based on this evidence and of estimate management’s the Corporation has concluded that it is more likely than not that such net deferred tax asset of the Puerto Rico Banking operations will be realized. income, taxable future The Holding Company operation is not in a cumulative loss position for the three year period ended December 31, 2014. However, the interest expense that will be paid on the newly issued $450 million subordinated notes which partially funded the repayment of TARP funds in 2014, bearing interest at 7%, will be tax deductible in contrast to the interest expense payable on the note issued to the U.S. Treasury under TARP. Based on this new fact pattern the Holding Company is expecting to have losses for income tax purposes exclusive of reversing temporary differences. Since as required by ASC 740 the historical information should be supplemented by all currently available information about future years, the expected losses in future years are considered by management strong negative evidence that suggests that income in future years will be insufficient to support the realization of all deferred tax asset. After weighting of all positive and negative evidence management concluded, as of the reporting date, that it is more likely than not that the Holding Company will not be able to realize any portion of the deferred tax assets, considering the criteria of ASC Topic 740. Accordingly, a valuation allowance on the deferred tax asset of $17.8 million was recorded during the year 2014. Refer to Note 43 to the consolidated financial statements for additional information on income taxes. Fourth Quarter Results The Corporation recognized net income of $48.8 million for the quarter ended December 31, 2014, compared with a net income of $163.0 million for the same quarter of 2013. The variance in the quarterly results was mainly driven by the after-tax gain of $88.4 million recorded in the fourth quarter of 2013 from the sale of EVERTEC shares in connection with its public offering. Net interest income for the fourth quarter of 2014 amounted to $326.9 million, compared with $354.5 million for the fourth quarter of 2013. The decrease in net interest income was primarily due to a decrease of $25.5 million on covered loans interest income, coupled with a decrease of $6.1 million from money market, trading and investment securities. This was partially offset by a decrease of $4.9 million on interest expense from total interest bearing liabilities. The provision for loan losses amounted to $48.0 million for the quarter ended December 31, 2014, compared to $58.8 million for the fourth quarter of 2013. The decrease of $10.8 million is mainly at BPPR due to a reserve release from the covered loans portfolio of $3.6 million during the fourth quarter of 2014 compared to a provision of $12.5 million for the same period of 2013, coupled with a decrease of provision from the non-covered portfolio of $10.1 million. This was offset by a $14.4 million reduction in reserve releases at BPNA. 36 Non-interest income amounted to $103.4 million for the quarter ended December 31, 2014, compared with $185.3 million for the same quarter in 2013. The decrease in non- interest income was mainly driven by a $92.4 million gain recorded in the fourth quarter of 2013 from the sale of EVERTEC shares in connection with its public offering, partially offset by a decrease of $18.5 million in FDIC loss share expense. Operating expenses totaled $330.0 million for the quarter ended December 31, 2014, compared with $304.6 million for the same quarter in the previous year. The increase is due mainly to restructuring costs of $13.9 million incurred in connection with the reorganization of the U.S. operations, higher OREO expenses of $10.5 million mainly due to higher write-downs on commercial and construction properties, and higher professional fees by $6.2 million. These unfavorable variances were partially offset by lower FDIC deposit insurance of $5.3 million reflecting a lower level of high risk assets. Income tax expense amounted to $12.5 million for the quarter ended December 31, 2014, compared with $25.2 million for the same quarter of 2013. The decrease in income taxes was mainly due to the higher level of exempt income, higher deductible interest expense related to the issuance of the $450 million Senior Notes as compared to the non-deductible interest related to the TARP funds, and a lower income tax expense related to charge-offs of the covered portfolio as a result of the closing agreement with the PR Treasury Department. REPORTABLE SEGMENT RESULTS The Corporation’s reportable segments for managerial reporting purposes consist of Banco Popular de Puerto Rico and Banco Popular North America. A Corporate group has been defined to support the reportable segments. For managerial reporting purposes, the costs incurred by the Corporate group are not allocated to the reportable segments. For a description of the Corporation’s reportable segments, including additional financial information and the underlying management accounting process, refer to Note 45 to the consolidated financial statements. The Corporate group reported a net loss of $510.2 million for the year ended December 31, 2014, compared with net income of $309.1 million for the year ended December 31, 2013. The unfavorable variance at the Corporate group was due to the acceleration of the amortization during 2014 of the discount and deferred costs related to the TARP debt, which amounted to $414.1 million, coupled with the effect of the $412.8 million after tax gain recognized during 2013 as a result of EVERTEC’s public offerings and connected transactions. For details on the EVERTEC transactions refer to Note 34 “Related party transactions with affiliated company/joint venture” to the consolidated financial statements. 37 POPULAR, INC. 2014 ANNUAL REPORT Highlights on the earnings results for the reportable segments are discussed below: Banco Popular de Puerto Rico The Banco Popular de Puerto Rico reportable segment’s net income amounted to $274.3 million for the year ended December 31, 2014, compared with $173.6 million for the year that ended December 31, 2013. The principal contributed to the variance in the financial results included the following: factors • higher net interest income by $28.4 million, or 2% mainly impacted by lower interest expense from borrowings by $16.8 million, or lower interest cost by 191 basis points, mainly from the conversion into shares of common stock of $185 million in subordinated notes due to Popular, Inc. during the fourth quarter of 2013. Also, the cost of deposits decreased by $12.3 million or 8 basis points, due to lower levels and rates on IRA deposits and brokered CD’s. The decreases in interest expense were slightly offset by a $0.8 million decrease in interest income; • lower provision for loan losses by $327.7 million, or 53%, mostly due to the decrease in the provision for loan losses on the non-covered loan portfolio of $304.4, which was mainly due to the incremental provision of $318.0 million related to the bulk sales of non-performing loans during 2013. Excluding the impact of the 2013 bulk sales, the provision for loan losses declined by $9.7 million or 3% to $289.2 million, due to reserve releases from the annual review of the components of the allowance for loan losses; • higher non-interest income by $1.4 million, or less than 1% mainly due to: • favorable variance on sale of loans by $62.5 million due to the impact of the bulk sales of non-performing loans completed during 2013; and • higher trading account profits by $18.0 million due to inventory positions mark downs in 2013 (mostly Puerto Rico government obligations and closed-end funds) and a favorable variance in the realized and unrealized gains/losses on outstanding mortgage- backed securities. The positive impact in non-interest income detailed above was partially offset by: • lower mortgage banking activities by $40.8 million due to higher losses on closed derivative positions and unfavorable adjustments on mortgage servicing rights, offset by higher gains on sale of loans; value fair • higher FDIC loss share expense by $21.0 million due to higher amortization of the indemnification asset and lower mirror accounting on credit impairment losses and reimbursable expenses, offset by the positive adjustment of $12.5 million related to the amortization of the indemnification asset; • lower other operating income by $6.5 million due to income from equity investments and lower lower underwriting income from the broker dealer; • lower other service fees by $4.4 million due to a decline in the market value of assets under management, mainly Puerto Rico Government obligations and closed- end funds, which drive lower investment management fees and mutual funds administration fees. • lower operating expenses by $58.2 million, or 6%, mainly due to: • a decrease of $31.0 million in OREO expenses primarily related to the loss of $37.0 million recorded in 2013 on the bulk sale of commercial and single family real estate owned assets, which was partially offset by higher expenses; • a decrease of $17.3 million in personnel costs due to lower pension and post retirement expenses from changes to actuarial assumptions in pension obligations; • a decrease of $16.5 million in FDIC deposit insurance due to a lower level of high risk assets. The favorable variances in operating expenses were partially offset by higher other operating expenses by $10.1 million due to higher provision for unused commitments. • higher income tax expense by $314.9 million, mainly due to the $197.5 million benefit recognized in 2013 for the increase on the net deferred tax asset due to the change in the corporate tax rate in P.R. from 30% to 39%, as well as the tax benefits derived from the 2013 losses on the bulk sales of non-performing assets. The main factors that contributed to the variance in the financial results for the year ended December 31, 2013, when compared with 2012, included the following: • higher net interest income by $61.3 million, or 5% mainly impacted by lower interest expense from deposits by $28.3 million, or lower interest cost by 16 basis points, mainly from individual certificates of deposits, IRA’s and brokered CD’s related to renewal of maturities at lower prevailing rates and to lower volume of deposits. Also, the cost of borrowings decreased by $17.7 million mostly due to the cancellation of $350 million of repurchase agreements in June 2012 that carried a cost of 4.36% and replacing them with lower cost borrowings. In addition, contributing to the positive impact in net interest income was an increase of $26 million in interest from mortgage loans mostly from acquisitions during the first quarter of 2013, partially offset by the reversal during the third quarter of 2013 of $5.9 million in interest from reverse mortgages which had been accrued in excess of the amount insured by FHA. Also the year 2013 reflected an increase of $7.8 million in interest income from consumer loans mostly resulting from an acquisition of $225 million made during the second quarter of 2012 and an increase in the auto loan business, partially offset by lower interest income from credit cards. These positive impacts were partially offset by a reduction of $19.4 million in interest securities income the due reinvestment of cash flows received from mortgage backed securities in lower yielding collateralized mortgage obligations as well as the acquisitions of lower yielding agency securities. Although yield in covered portfolio increased by 188 basis points, this was offset by lower balances, resulting in interest income of $300.7 million, relatively flat to 2012. The BPPR reportable segment had a net the year ended December 31, 2013, compared with 5.06% for 2012; interest margin of 5.32% for from investment to • higher provision for loan losses by $260.4 million, or 73%, mostly due to the increase in the provision for loan losses on the non-covered loan portfolio of $265.8 million, mainly related to the incremental provision of $148.8 million and $169.2 million recognized in the first and second quarters of 2013, respectively, related to the non-performing loans bulk sales. Excluding the impact of the sales, the provision for loan losses declined by $52.2 million or 19% to $229.4 million, due to positive trends in credit quality offset by the enhancements to the allowance for loan losses framework; • lower non-interest income by $119.5 million, or 30% mainly due to: • higher FDIC loss share expense by $25.8 million (refer to Table 2 for components of such variance); • lower other operating income by $20.0 million resulting from lower net earnings from the equity investments in PRLP 2011 Holdings, LLC by $4.0 million, and gains of $4.7 million and $2.5 million recognized during 2012 from the sale of a bank premise property and the wholesale indirect property and casualty business of Popular Insurance, respectively; • higher trading account losses by $18.0 million mostly related to higher losses on Puerto Rico government obligations and close-end funds and net realized losses on mortgage backed securities sold as compared to net gains reported for the same period in 2012; • a decrease of $13.0 million in mortgage banking activities mainly due to lower gain on sale of loans by $49.4 million, mainly for securitization transactions, partially offset by the related closed derivative positions of $32.6 million. Refer to Table 8 for details of Mortgage banking activities. 38 The negative impact in non-interest income detailed above was partially offset by a favorable variance in valuation adjustments on loans held-for-sale by $30.7 million, principally related to $27.3 million in valuation adjustments recorded during the second quarter of 2012 on commercial and construction loans held-for-sale as a result of updated appraisals and market indicators; • higher operating expenses by $15.3 million, or 2%, mainly due to: • an increase of $ 50.9 million in OREO expenses primarily related to the loss of $37.0 million on the bulk sale of commercial and single family real estate owned assets during the first quarter of 2013 and to fair value adjustments on commercial properties, mainly covered assets which are subject to 80% reimbursement from the FDIC; • an increase of $10.2 million in other operating taxes principally related to the gross receipts tax imposed on corporations in Puerto Rico during 2013; • higher professional fees by $9.5 million mostly due to higher legal, transaction processing and consulting fees; The unfavorable variances in operating expenses were partially offset by lower FDIC deposit insurance assessment by $25.5 million resulting from revisions in the deposit-insurance premium calculation, lower levels of high risk assets, and savings achieved from the internal reorganization of Popular Mortgage into BPPR during the fourth quarter of 2012; $25.2 million loss in early extinguishment of debt recorded during the second quarter of 2012 related to the cancellation of repurchase agreements; and $5.0 million in personnel costs mainly due to lower net periodic pension costs, medical insurance costs and postretirement health benefits; • higher income tax benefit by $216.7 million, mainly due to the $197.5 million benefit recognized during the second quarter of 2013 for the increase on the net deferred tax asset due to the change in the corporate tax rate in P.R. from 30% to 39% as compared with a tax benefit of $72.9 million recognized in 2012 resulting from the Closing Agreement with the P.R. Treasury related to the acquired in the the Westernbank FDIC-assisted transaction. The increase in income tax benefit was also driven by the loss on the bulk sales of non-performing assets during 2013. tax treatment of loans Banco Popular North America For the year ended December 31, 2014, the reportable segment of Banco Popular North America reported net income of $45.4 million, compared with $76.0 million for the year ended December 31, 2013. During the third quarter of 2014, BPNA refinanced approximately $638 million in long term structured 39 POPULAR, INC. 2014 ANNUAL REPORT of loss in a repos and replaced them with lower cost short-term repos of a similar amount. The fees associated with the refinancing of these repos were $39.7 million, which were recorded as expense during 2014. Also, BPNA sold or entered into agreements to sell $249 million in legacy and classified loans, resulting $11.1 million. Restructuring costs associated with BPNA’s reorganization were $26.7 million for the year 2014. Adjusted for these transactions, BPNA recorded a net income from continuing operations of $122.9 million, an increase of $46.9 million when compared to 2013. The principal factors that contributed to the variance in the financial results included the following: The principal factors that contributed to the variance in the financial results included the following: approximately • higher net interest income by $4.7 million, excluding the impact of the repo refinancing mentioned above, impacted by lower interest expense from deposits by $7.4 million, or a lower cost of 19 basis points, driven by the renewal of maturities from time deposits at lower prevailing rates, and lower interest expense from short term borrowings by $7.3 million, or a lower cost of 91 basis points, due to the repos refinancing mentioned above. This was partially offset by lower income from loans by $6.2 million and lower income from investment securities by $3.6 million, both due mainly to lower levels. The BPNA reportable segment’s net interest margin was 3.10% for 2014 and the adjusted net interest margin was 3.42%, compared with 3.20% for the same period in 2013; • favorable variance in the provision for loan losses by $7.7 million, which includes the previously mentioned impact of $12.8 million related to loan sales or loans transferred these to loans held-for-sale. Excluding the effect of transactions, the provision would have amounted to a release of $31.7 million, or $20.5 million higher release than in 2013. This reversal of provision was prompted by improved credit quality trends, the de-risking of the US portfolio and the effect of a $3.8 million reserve release as part of the annual review of the components of the ALLL models during the second quarter of 2014; • higher non-interest income by $28.1 million, or 77%, mostly due to an increase of $30.8 million in gains from sales of loans due to higher volume of sales of non- performing commercial loans during 2014. This was partially offset by a $2.8 million decrease on service charges on deposit accounts; and • lower operating expenses by $3.2 million, excluding $26.7 million in restructuring charges, due to lower personnel costs by $8.9 million, partially offset by increases of $2.7 million in professional fees and $2.1 million in other operating expenses. The main factors that contributed to the variance in the financial results for the year ended December 31, 2013, when compared with 2012, included the following: • higher net interest income by $5.6 million, or 3%, driven by lower interest expense by $13.4 million, largely due to a decrease of $14.5 million on interest expense from deposits due lower costs related to the renewal of maturities from time deposits at lower prevailing rates, as well as lower deposits volume. This was partially offset by lower interest income of $7.9 million, mainly investment securities by $4.3 million due to reinvestment of cash flows from prepayments and maturities in lower yielding investments due to the prevailing interest rate scenarios, and loans by $3.6 million due mainly to lower volumes and yields in the commercial and construction portfolios. • lower provision for loan losses by $51.3 million, or 128%, principally as a result of a reserve release reflecting improvements in credit quality and economic trends, and the effect of the enhancements to the allowance for loan losses methodology completed during the second quarter of 2013; • lower non-interest income by $0.9 million, or 2%, mostly due to a decrease in service charges on deposits by $4.5 million related to lower non-sufficient funds and checking fees; partially offset by higher gains on sale of loans by $2.0 million mainly and related construction loans; to indemnity reserves by $1.6 million; and an increase in gains on sale of securities by $1.3 million mainly due to the loss on the sale of non-agency collateralized mortgage obligations during the fourth quarter of 2012; and lower adjustments commercial to • lower operating expenses by $10.9 million, or 6%, mainly due to a decrease in other operating expenses by $7.8 million and $4.5 million in professional fees, both mainly related to legal settlements recognized during 2012. These favorable variances were partially offset by an increase in net occupancy expenses by $2.0 million due to an adjustment to the outstanding deferred rent liability. STATEMENT OF FINANCIAL CONDITION ANALYSIS Assets At December 31, 2014, the Corporation’s total assets were $33.1 billion, compared with $35.7 billion at December 31, 2013. Refer to the consolidated financial statements included in this 2014 Annual Report for the Corporation’s consolidated statements of financial condition at December 31, 2014 and December 31, 2013. Also, refer to the Statistical Summary 2010-2014 in this MD&A for condensed statements of financial condition for the past five years. Money market, trading and investment securities Money market investments amounted to $1.8 billion at December 31, 2014 compared with $858 million at the same date in 2013. The increase from the end of 2013 to 2014 was mainly due to an increase at BPPR of $1 billion in time deposits with the Federal Reserve Bank of New York. Trading account securities amounted to $139 million at compared with $340 million at December 31, 2014, December 31, 2013. The decrease in trading account securities was at the BPPR segment mainly due to a decrease in mortgage backed securities as loan originations during 2014 were lower compared to 2013. Refer to the Market / Interest Rate Risk section of this MD&A included in the Risk Management section for a table that provides a breakdown of the trading portfolio by security type. Investment securities available-for-sale and held-to-maturity amounted to $5.4 billion at December 31, 2014 and 2013. Table 11 provides a breakdown of the Corporation’s portfolio of investment securities available-for-sale (“AFS”) and held-to- maturity (“HTM”) on a combined basis at December 31, 2014 and 2013. Notes 9 and 10 to the consolidated financial statements provide additional information with respect to the Corporation’s investment securities AFS and HTM. Investment securities available-for-sale and held-to-maturity declined by $17 million. CMO’s from federal agencies and mortgage backed securities decreased by $509 million and $231 million, respectively, mainly at BPNA, while US Treasury securities increased by $672 million, mainly at BPPR. 40 2014 2013 $ 700,154 $ 28,482 1,724,973 1,629,205 163,285 1,910,127 904,362 2,622 12,806 180,258 2,418,924 1,135,641 4,116 38,670 Table 11 - AFS and HTM Securities (In millions) U.S. Treasury securities Obligations of U.S. government sponsored entities Obligations of Puerto Rico, States and political subdivisions Collateralized mortgage obligations Mortgage-backed securities Equity securities Other Total AFS and HTM investment securities $5,418,329 $5,435,296 Loans Refer to Table 12 for a breakdown of the Corporation’s loan portfolio, the principal category of earning assets. Loans covered under the FDIC loss sharing agreements are presented in a separate line item in Table 12. The risks on covered loans are significantly different as a result of the loss protection provided by the FDIC. The Corporation’s total loan portfolio amounted to $22.1 billion at December 31, 2014, compared to $24.7 billion at December 31, 2013. Excluding the reclassification of $1.8 billion in loans to discontinued operations, loan portfolio decreased by $854 million mainly in the covered loan portfolio due to the continuation of loan resolutions and the normal portfolio run-off and sales of non-performing loans held-in-portfolio mainly at BPNA. the total 41 POPULAR, INC. 2014 ANNUAL REPORT Table 12 - Loans Ending Balances (in thousands) Loans not covered under FDIC loss sharing agreements: Commercial Construction Legacy [1] Lease financing Mortgage Consumer 2014 2013 At December 31, 2012 2011 2010 $8,134,267 251,820 80,818 564,389 6,502,886 3,870,271 $10,037,184 206,084 211,135 543,761 6,681,476 3,932,226 $9,858,202 252,857 384,217 540,523 6,078,507 3,868,886 $9,973,327 239,939 648,409 548,706 5,518,460 3,673,755 $10,570,502 340,556 1,013,484 572,787 4,524,722 3,705,984 Total non-covered loans held-in-portfolio 19,404,451 21,611,866 20,983,192 20,602,596 20,728,035 Loans covered under FDIC loss sharing agreements: Commercial Construction Mortgage Consumer Loans covered under FDIC loss sharing agreements 1,614,781 70,336 822,986 34,559 2,542,662 1,812,804 190,127 934,373 47,123 2,984,427 2,244,647 361,396 1,076,730 73,199 3,755,972 2,512,742 546,826 1,172,954 116,181 4,348,703 2,767,181 640,492 1,259,459 169,750 4,836,882 Total loans held-in-portfolio 21,947,113 24,596,293 24,739,164 24,951,299 25,564,917 Loans held-for-sale: Commercial Construction Legacy [1] Mortgage Consumer Total loans held-for-sale Total loans 309 – 319 100,166 5,310 106,104 603 – – 109,823 – 110,426 16,047 78,140 2,080 258,201 – 354,468 25,730 236,045 468 100,850 – 363,093 60,528 412,744 – 420,666 – 893,938 $22,053,217 $24,706,719 $25,093,632 $25,314,392 $26,458,855 [1] The legacy portfolio is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years at the BPNA reportable segment. The explanations for loan portfolio variances discussed below exclude the impact of the covered loans. Loans held-in-portfolio Loans held-in-portfolio decreased by $2.2 billion from December 31, 2013. Most of the decrease was at the BPNA segment as a result of the sale of the California, Illinois and Central Florida regions, which included the sale of $1.8 billion in loans and the bulk sales or agreements to sell non- performing loans for a total of approximately $249 million, as well as other sales as part of the regular workout strategy. Refer to Note 4 to the consolidated financial statements for further details on the sales of BPNA’s discontinued operations during 2014. Commercial loans decreased $1.9 billion from December 31, 2013. Most of the decrease is attributed to the sale of the U.S. regions which included the sale of approximately $1.7 billion in commercial loans as well as the bulk sales of non-performing loans at BPNA, which included $178 million in commercial loans. Construction loans held-in-portfolio increased $46 million from December 31, 2013 to December 31, 2014, principally at the BPNA segment, which increased by $39 million. The BPNA legacy portfolio, which is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years at the BPNA reportable segment, declined $130 million, mostly due to the run-off status of this portfolio. The mortgage loans held-in-portfolio decreased $179 million. This was reflected mainly at BPNA and was mainly attributed to lower origination volumes as well as the impact of a bulk sale or agreements to sell non-performing mortgage loans amounting to approximately $72 million. The consumer loans held-in-portfolio decreased $62 million from December 31, 2013 to December 31, 2014. The decrease was mainly at BPNA by $134 million, due in part to the sale of the U.S. regions which included the sale of approximately $81 million in consumer loans, mainly home equity lines of credit and personal loans. This was partially offset by an increase of $47 million at BPPR, mainly in auto loans originations. Loans held-for-sale Loans held-for-sale declined by $4.3 million. The portfolio of mortgage loans held-for-sale decreased $10 million from December 31, 2013. The decrease was mainly at BPPR segment, which decreased by $23 million, mainly due to lower volume of originations for sale in the secondary market, which was offset by an increase in BPNA of $14 million, related to bulk sales of non-performing assets at BPNA to be completed in the first quarter of 2015. The decline in mortgage loans held-for-sale was offset by an increase in consumer loans held-for-sale of $5.3 million at BPNA. the carrying amount and accretable yield on the covered loans accounted for under ASC Subtopic 310-30. The outstanding accretable yield has been impacted by increases in cash flow expectations on the loan pools based on quarterly revisions of the portfolio. The increase in the accretable yield is recognized as interest income using the effective yield method over the estimated life in each applicable loan pool. 42 Covered loans Covered loans were initially recorded at fair value. Their carrying value approximated $2.5 billion at December 31, 2014, of which approximately 64% pertained to commercial loans, 3% to construction loans, 32% to mortgage loans and 1% to consumer loans. Note 11 to the consolidated financial statements presents the carrying amount of the covered loans broken down by major loan type categories and the activity in the carrying amount of loans accounted for pursuant to ASC Subtopic 310-30. A substantial amount of the covered loans, or approximately $2.4 billion of at December 31, 2014, was accounted for under ASC Subtopic 310-30. The reduction of $384 million from December 31, 2013 was principally the result of loan collections and resolutions, partially offset by the accretion on the loans, which increases their carrying value. Tables 13 and 14 provide the activity in carrying value their FDIC loss share asset As indicated in the Critical Accounting Policies / Estimates section of this MD&A, the Corporation recorded the FDIC loss share asset, measured separately from the covered loans, as part of the Westernbank FDIC-assisted transaction. Based on the accounting guidance in ASC Topic 805, at each reporting date subsequent to the initial recording of the indemnification asset, the Corporation measures the indemnification asset on the same basis as the covered loans and assesses its collectability. to be for The amount collected ultimately the indemnification asset is dependent upon the performance of the claims underlying covered assets, submitted to the FDIC and the Corporation’s compliance with the terms of the loss sharing agreements. Refer to Note 13 to the consolidated financial statements for additional information on the FDIC loss share agreements. the passage of time, Table 13 - Activity in the Carrying Amount of Covered Loans Accounted for Under ASC 310-30 (In thousands) Beginning balance Accretion Collections / charge-offs Ending balance Allowance for loan losses (ALLL) Ending balance, net of ALLL Table 14 - Activity in the Accretable Yield on Covered Loans Accounted for Under ASC 310-30 (In thousands) Beginning balance Accretion [1] Change in expected cash flows Ending balance [1] Positive to earnings, which is included in interest income. Years ended December 31, 2014 2013 $2,827,947 284,472 (668,247) $2,444,172 (78,846) $3,491,759 279,708 (943,520) $2,827,947 (93,915) $2,365,326 $2,734,032 Years ended December 31, 2014 2013 $1,309,205 (284,472) 246,604 $1,451,669 (279,708) 137,244 $1,271,337 $1,309,205 income, The loan discount accretion in 2014 and 2013, which is from recorded in interest accelerated cash expectations and loan resolutions, for some of which the Corporation had estimated significantly higher losses. These cash flows resulted in a faster recognition of the corresponding loan pool’s accretable yield. resulted principally Although the reduction in estimated loan losses increases the accretable yield to be recognized over the life of the loans, it also has the effect of lowering the realizable value of the loss share asset since the Corporation would receive lower FDIC payments under the loss share agreements. 43 POPULAR, INC. 2014 ANNUAL REPORT Table 15 sets forth the activity in the FDIC loss share asset for the years ended December 31, 2014, 2013 and 2012. Table 15 - Activity of Loss Share Asset (In thousands) Balance at beginning of year Amortization of loss share indemnification asset Reversal of accelerated amortization Credit impairment losses to be covered under loss sharing agreements Reimbursable expenses Decrease due to reciprocal accounting on amortization of contingent liability on unfunded commitments Payments from FDIC under loss sharing agreements Other adjustments attributable to FDIC loss sharing agreements Balance at end of period Balance due to the FDIC for recoveries on covered assets Net balance of indemnity asset and amounts due from the FDIC Table 16 - Activity in the Remaining FDIC Loss Share Asset Discount (In thousands) Balance at beginning of period [1] Amortization of negative discount [2] Impact of lower projected losses Balance at end of period Years ended December 31, 2013 2014 2012 $ 948,608 (189,959) 12,492 32,038 58,117 $1,399,098 (161,635) – 60,454 50,985 $1,915,128 (129,676) – 58,187 30,771 – (269,397) (193) (473) (396,223) (3,598) (969) (462,016) (12,327) 591,706 948,608 1,399,098 (49,252) (39,194) (16,763) $ 542,454 $ 909,414 $1,382,335 Years ended December 31, 2013 2012 2014 $ 103,691 (189,959) 139,363 $ 141,800 (161,635) 123,526 $ 117,916 (129,676) 153,560 $ 53,095 $ 103,691 $ 141,800 Positive balance represents negative discount (debit to assets), while a negative balance represents a discount (credit to assets). [1] [2] Amortization results in a negative impact to non-interest income, while a positive balance results in a positive impact to non-interest income, particularly FDIC loss share income / expense. During the year ended December 31, 2014, the Corporation revised its analysis of expected cash flow which resulted in a net decrease in estimated credit losses, which was driven mainly by commercial loan pools. The lowered loss estimates requires the Corporation to amortize the loss share asset to its currently lower expected collectible balance, thus resulting in negative accretion. Due to the shorter life of the indemnity asset compared with the expected life of the covered loans, this negative accretion temporarily offsets the benefit of higher cash flows accounted through the accretable yield on the loans. Other real estate owned Other real estate owned represents real estate property received in satisfaction of debt. At December 31, 2014, OREO decreased to $266 million from $304 million at December 31, 2013. Refer to Table 17 for the activity in other real estate owned. The amounts included as “covered other real estate” are subject to the FDIC loss sharing agreements. 44 Total $ 303,508 (42,366) 158,851 (147,907) (6,320) Table 17 - Other Real Estate Owned Activity (In thousands) Balance at beginning of period Write-downs in value Additions Sales Other adjustments Ending balance (In thousands) Balance at beginning of period Write-downs in value Additions Sales Other adjustments Ending balance (In thousands) Balance at beginning of period Write-downs in value Additions Sales Other adjustments Ending balance For the year ended December 31, 2014 Non-covered OREO Commercial/ Construction Non-covered OREO Mortgage Covered OREO Commercial/ Construction Covered OREO Mortgage $ 48,649 (7,112) 16,200 (20,042) 1,288 $ 38,983 $ 86,852 (3,628) 65,300 (49,618) (2,389) $ 96,517 $120,215 (26,657) 55,582 (59,219) (4,527) $ 85,394 $ 47,792 (4,969) 21,769 (19,028) (692) $ 44,872 $ 265,766 For the year ended December 31, 2013 Non-covered OREO Commercial/ Construction Non-covered OREO Mortgage Covered OREO Commercial/ Construction Covered OREO Mortgage $ 135,862 (11,377) 32,175 (108,254) 243 $ 48,649 $ 130,982 (9,525) 82,985 (118,596) 1,006 $ 86,852 $ 99,398 (18,857) 87,800 (48,447) 321 $120,215 For the year ended December 31, 2012 Non-covered OREO Commercial/ Construction Non-covered OREO Mortgage Covered OREO Commercial/ Construction Covered OREO Mortgage $ 90,230 (13,727) 110,947 (51,422) (166) $135,862 $ 82,267 (10,823) 108,312 (46,091) (2,683) $130,982 $ 77,776 (7,466) 60,920 (32,022) 190 $ 99,398 $ 39,660 (4,102) 30,037 (17,720) (83) Total $ 405,902 (43,861) 232,997 (293,017) 1,487 $ 47,792 $ 303,508 $ 31,359 (767) 23,195 (13,122) (1,005) Total $ 281,632 (32,783) 303,374 (142,657) (3,664) $ 39,660 $ 405,902 Other assets Table 18 provides a breakdown of the principal categories that comprise the caption of “Other assets” in the consolidated statements of financial condition at December 31, 2014 and 2013. Table 18 - Other Assets (In thousands) Net deferred tax assets (net of valuation allowance) Investments under the equity method Bank-owned life insurance program Prepaid FDIC insurance assessment Prepaid taxes Other prepaid expenses Derivative assets Trades receivables from brokers and counterparties Others Total other assets 2014 $812,819 225,625 – 360 198,120 83,719 25,362 66,949 233,489 2013 Change $761,768 197,006 228,805 383 91,504 67,108 34,710 71,680 234,594 $51,051 28,619 (228,805) (23) 106,616 16,611 (9,348) (4,731) (1,105) $1,646,443 $1,687,558 $(41,115) 45 POPULAR, INC. 2014 ANNUAL REPORT The decrease in other assets from December 31, 2013 to December 31, 2014 was principally due to BPNA’s surrendering of its bank owned life insurance contracts, which had a balance of $231.2 million as of the transaction date. BPNA received approximately $231.4 million in satisfaction of its surrender request. This was partially offset by increases of $106.6 million in prepaid taxes, $51.1 million in deferred taxes, and $28.6 the equity method. The million from investments under increase in prepaid taxes includes a payment of $45 million made during the second quarter of 2014 in connection with the Closing Agreement signed with the PR Department of Treasury and $25.7 million of unamortized corporate personal property tax and municipal tax paid during the second quarter of 2014. The increase in investments under the equity method was due mainly to a $24.1 million increase from the investment in BHD León, which in part was due to the merger transaction in which BHD acquired the net assets of Centro Financiero León. As a result of this transaction, the Corporation recognized a net gain of $14.2 million during the first quarter of 2014. The increase in net deferred tax assets (net of valuation allowance) was due in part to the deferred tax asset associated with the additional minimum pension liability recorded as of December 31, 2014, which increased as a result of changes to the mortality table and the impact of using a lower discount rate. Refer to Notes 19 and 34 for additional information on the Corporation’s investments under the equity method. Deposits and Borrowings The composition of the Corporation’s financing to total assets at December 31, 2014 and December 31, 2013 is included in Table 19. Table 19 - Financing to Total Assets (In millions) Non-interest bearing deposits Interest-bearing core deposits Other interest-bearing deposits Fed funds purchased and repurchase agreements Other short-term borrowings Notes payable Other liabilities Liabilities from discontinued operations Stockholders’ equity Deposits Table 20 - Deposits Ending Balances December 31, December 31, % increase (decrease) % of total assets 2013 from 2013 to 2014 2014 $ 5,784 14,775 4,249 1,272 21 1,712 1,012 5 4,267 2013 $ 5,923 16,026 4,762 1,659 401 1,585 767 – 4,626 (2.3)% (7.8) (10.8) (23.3) (94.8) 8.0 31.9 – (7.8) 2014 17.5% 16.6% 44.6 12.8 3.8 0.1 5.2 3.1 – 12.9 44.8 13.3 4.6 1.1 4.4 2.2 – 13.0 (In thousands) Demand deposits [1] Savings, NOW and money market deposits (non-brokered) Savings, NOW and money market deposits (brokered) Time deposits (non-brokered) Time deposits (brokered CDs) Total deposits [1] Includes interest and non-interest bearing demand deposits. 2014 $ 6,606,060 10,320,782 406,248 5,960,401 1,514,044 $24,807,535 2013 $ 6,590,963 11,255,309 553,521 6,478,103 1,833,249 $26,711,145 2012 $ 6,442,739 11,190,335 456,830 6,541,660 2,369,049 $27,000,613 2011 $ 6,256,530 10,762,869 212,688 7,552,434 3,157,606 $27,942,127 2010 $ 5,501,430 10,371,580 – 8,594,759 2,294,431 $26,762,200 At December 31, 2014, the Corporation’s total deposits amounted to $24.8 billion, compared to $26.7 billion at December 31, 2013. The decrease in total deposits from the end of 2013 to December 31, 2014 was mainly due to the deposits sold as part of the sale of the California, Illinois and Central Florida regions, which had aggregate deposits of $2.0 billion at the time of the sales. Refer to Table 20 for a breakdown of the Corporation’s deposits at December 31, 2014 and December 31, 2013, and to Note 4 to the consolidated financial statements for detailed information on the sales of BPNA’s discontinued operations. 31, 2014, Borrowings The Corporation’s borrowings amounted to $3.0 billion at December billion at December 31, 2013. The decrease in borrowings was mostly due to lower balances of repurchase agreements and advances from the Federal Home Loan Bank of New York, as part of the Corporation’s funding strategies. compared with $3.6 On July 2, 2014, the Corporation completed the repayment of TARP funds to the U.S. Treasury through the repurchase of trust capital securities issued to the U.S. $935 million of Treasury under the TARP Capital Purchase Program. At the time of the transaction, the debt had a carrying amount of $521 million, net of a discount of $414 million. The Corporation funded the repurchase through a combination of available cash and approximately $400 million from the proceeds of the issuance of its $450 million aggregate principal amount of 7% Senior Notes due on 2019 which settled on July 1, 2014. Refer to the Off-Balance Sheet Arrangements and Other Commitments section in this MD&A for additional information on the Corporation’s contractual obligations at December 31, 2014. Other liabilities The Corporation’s other liabilities amounted to $1 billion at December 31, 2014, compared with $767 million at December 31, 2013. The increase in other liabilities of $245 million was mostly due to an increase of approximately $139 million in the minimum pension liability due to adjustments to the mortality table and the impact of using a lower discount rate, and an increase of $34 million in the GNMA loans repurchase option liability due to lower repurchase activity during the fourth quarter of 2014. Stockholders’ Equity Stockholders’ equity totaled $4.3 billion at December 31, 2014, compared with $4.6 billion at December 31, 2013. The decrease Table 21 - Capital Adequacy Data 46 was principally due to the net loss of $313.5 million recorded for the year and an increase of $41.1 million in accumulated other comprehensive loss. The increase in accumulated other comprehensive loss was due mainly to the additional pension liability of $100.9 million due to adjustments to the mortality table and the impact of using a lower discount rate, which was partially offset by higher unrealized gains on securities available for sale of $56.8 million. On July 23, 2014, the Corporation completed the repurchase of the outstanding warrant initially issued to the U.S. Treasury under the TARP Capital Purchase Program in 2008 for a repurchase price of $3.0 million. Refer to the consolidated statements of financial condition and of stockholders’ equity for information on the composition of stockholders’ equity. Also, refer to Note 29 for a detail of the accumulated other comprehensive income (loss), an integral component of stockholders’ equity. capital 21 presents the Corporation’s REGULATORY CAPITAL adequacy Table information for the years 2010 through 2014. Note 28 to the consolidated financial statements presents further information on the Corporation’s regulatory capital requirements, including the regulatory capital ratios of its depository institutions, BPPR and BPNA. The Corporation continues to exceed the well- capitalized guidelines under the federal banking regulations. (Dollars in thousands) Risk-based capital: Tier 1 capital Supplementary (Tier 2) capital Total capital Risk-weighted assets: Balance sheet items Off-balance sheet items Total risk-weighted assets Adjusted average quarterly assets Ratios: Tier 1 capital (minimum required - 4.00%) Total capital (minimum required - 8.00%) Leverage ratio [1] Average equity to assets Average tangible equity to assets Average equity to loans 2014 2013 At December 31, 2012 2011 2010 $ 3,849,891 272,347 $ 4,464,742 296,813 $ 4,058,242 298,906 $ 3,899,593 312,477 $ 3,733,776 328,522 $ 4,122,238 $ 4,761,555 $ 4,357,148 $ 4,212,070 $ 4,062,298 $19,485,230 1,748,672 $21,409,548 1,909,126 $21,175,833 2,215,739 $21,775,369 2,638,954 $22,621,779 3,099,186 $21,233,902 $23,318,674 $23,391,572 $24,414,323 $25,720,965 $32,250,173 $34,746,137 $35,226,183 $35,783,749 $38,490,597 18.13% 19.41 11.94 12.95 11.45 19.17 19.15% 20.42 12.85 11.52 9.78 16.88 17.35% 18.63 11.52 10.60 8.82 15.47 15.97% 17.25 10.90 9.81 8.10 14.57 14.52% 15.79 9.70 8.49 6.77 12.62 [1] All banks are required to have minimum Tier 1 leverage ratio of 3% or 4% of adjusted quarterly average assets, depending on the bank’s classification. Under the Federal Reserve Board’s risk-based capital guidelines for bank holding companies and member banks in effect as of December 31, 2014, to meet minimum adequately- capitalized regulatory requirements, an institution had to maintain a Tier 1 capital ratio of 4% and a total capital ratio of 8%. A “well-capitalized” institution must generally maintained 47 POPULAR, INC. 2014 ANNUAL REPORT are The rules capital risk-based capital ratios 200 basis points higher than the minimum guidelines. further supplemented by a Tier 1 leverage ratio, defined as Tier 1 capital divided by adjusted quarterly average total assets, after certain holding companies had to maintain a minimum Tier 1 leverage ratio of 5%. The Corporation’s ratios presented in Table 21 show that the Corporation was “well capitalized” for regulatory purposes, the highest classification, for all years presented. BPPR and BPNA were also well-capitalized for all years presented. adjustments. capitalized” “Well bank The ratios regulatory capital reduction in the from December 31, 2013 to the same date in 2014 was mainly the result of the reduction in total capital resulting from the repurchase on July 2, 2014 of $935 million of capital securities held by the U.S. Treasury in connection with the TARP Capital Purchase Program. This unfavorable impact to the regulatory capital ratios was in part off-set by a reduction in risk-weighted assets, mostly driven by the U.S. regional sales. rules in effect risk-based capital In accordance with the Federal Reserve Board guidance as of under general December 31, 2014, the trust preferred securities represent restricted core capital elements and qualify as Tier 1 capital, subject to certain quantitative limits. The aggregate amount of restricted core capital elements that may had been included in the Corporation’s Tier 1 capital under the risk-based capital rules in effect as of December 31, 2014 could not have exceeded 25% of the sum of all core capital elements (including cumulative perpetual preferred stock and trust preferred securities). Amounts of restricted core capital elements in excess of this limit generally may have been included in Tier 2 capital, subject to further limitations. At December 31, 2014 and 2013, the Corporation’s restricted core capital elements did not exceed the 25% limitation. Non-GAAP financial measures The tangible common equity ratio and tangible book value per common share, which are presented in the table that follows, are non-GAAP measures. Management and many stock analysts use the tangible common equity ratio and tangible book value per common share in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, the purchase accounting method of accounting for mergers and acquisitions. Neither tangible common equity nor tangible assets or related measures should be considered in isolation or as a substitute for stockholders’ equity, total assets or any other measure calculated in accordance with generally accepted in the United States of America accounting principles (“GAAP”). Moreover, the manner in which the Corporation calculates its tangible common equity, tangible assets and any other related measures may differ from that of other companies reporting measures with similar names. typically stemming from the use of Table 22 provides a reconciliation of total stockholders’ equity to tangible common equity and total assets to tangible assets at December 31, 2014 and 2013. Table 22 - Reconciliation Tangible Common Equity and Assets (In thousands, except share or per share information) Total stockholders’ equity Less: Preferred stock Less: Goodwill Less: Other intangibles At December 31, 2014 2013 $ 4,267,382 (50,160) (465,676) (37,595) $ 4,626,150 (50,160) (647,757) (45,132) Total tangible common equity $ 3,713,951 $ 3,883,101 Total assets Less: Goodwill Less: Other intangibles Total tangible assets Tangible common equity to tangible assets at end of period Common shares outstanding at end $ 33,096,695 (465,676) (37,595) $ 35,749,333 (647,757) (45,132) $ 32,593,424 $ 35,056,444 11.39% 11.08% of period 103,476,847 103,397,699 Tangible book value per common share $ 35.89 $ 37.56 The Tier 1 common equity to risk-weighted assets ratio is another non-GAAP measure. Ratios calculated based upon Tier 1 common equity have become a focus of regulators and investors, and management believes ratios based on Tier 1 common equity assist investors in analyzing the Corporation’s capital position. Because Tier 1 common equity is not formally defined by GAAP or, unlike Tier 1 capital, codified in the federal banking regulations currently in effect for the Corporation as of December 31, 2014, this measure is considered to be a non- GAAP financial measure. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. To mitigate these limitations, the in place to calculate these Corporation has procedures regulatory using measures components. Although these non-GAAP financial measures are frequently used by stakeholders in the evaluation of a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP. Table 23 reconciles total common stockholders’ equity (GAAP) to Tier 1 common equity as defined by the Federal Reserve Board, FDIC and other bank regulatory agencies (non-GAAP). appropriate GAAP the Corporation’s the or Table 23 - Reconciliation Tier 1 Common Equity (In thousands) Common stockholders’ equity Less: Unrealized losses (gains) on available-for-sale securities, net of tax [1] Less: Disallowed deferred tax assets [2] Less: Disallowed goodwill and other intangible assets, net of deferred tax liability Less: Aggregate adjusted carrying value of non-financial equity investments Add: Adjustment of pension and postretirement benefit plans and unrealized gains (losses) on cash flow hedges, net of tax [3] Total Tier 1 common equity Tier 1 common equity to risk-weighted assets 48 At December 31, 2014 $4,217,222 (8,465) (592,065) (447,770) (1,298) 2013 $4,575,990 48,344 (626,570) (643,185) (1,442) 205,505 104,302 $3,373,129 $3,457,439 15.89% 14.83% [1] In accordance with regulatory risk-based capital guidelines, Tier 1 capital excludes net unrealized gains (losses) on available-for-sale debt securities and net unrealized gains on available-for-sale equity securities with readily determinable fair values. In arriving at Tier 1 capital, institutions are required to deduct net unrealized losses on available-for-sale equity securities with readily determinable fair values, net of tax. [2] Approximately $162 million of the Corporation’s $813 million of net deferred tax assets included as “Other assets” in the consolidated statement of condition at December 31, 2014 ($167 million and $762 million, respectively, at December 31, 2013), were included without limitation in regulatory capital pursuant to the risk-based capital guidelines, while approximately $592 million of such assets at December 31, 2014 ($627 million at December 31, 2013) exceeded the limitation imposed by these guidelines and, as “disallowed deferred tax assets”, were deducted in arriving at Tier 1 capital. The remaining $59 million of the Corporation’s other net deferred tax components at December 31, 2014 (($32) million at December 31, 2013) represented primarily the following items (a) the deferred tax effects of unrealized gains and losses on available-for-sale debt securities, which are permitted to be excluded prior to deriving the amount of net deferred tax assets subject to limitation under the guidelines; (b) the deferred tax asset corresponding to the pension liability adjustment recorded as part of accumulated other comprehensive income; and (c) the deferred tax liability associated with goodwill and other intangibles. [3] The Federal Reserve Board has granted interim capital relief for the impact of pension liability adjustment. Basel III Capital Requirements In July 2013, the Board of Governors of the Federal Reserve System (the “Board”), the Office of the Comptroller of the Currency (the “OCC”) and the Federal Deposit Insurance Corporation (the “FDIC”) and together with the Board and the OCC (the “Agencies”) approved the Basel III Capital Rules to establish a revised comprehensive regulatory capital framework for all U.S. banking organizations. On July 9, 2013, the Basel III Capital Rules were approved by the Office of the Comptroller of the Currency (“OCC”) and (as interim final rules) by the Federal Deposit Insurance Corporation (“FDIC”) (together with the Board, the “Agencies”). the revise substantially The Basel III Capital Rules generally implement the Basel Committee on Banking Supervision’s (the “Basel Committee”) December 2010 final capital framework referred to as “Basel III” for strengthening international capital standards. The Basel III Capital Rules risk-based capital requirements applicable to bank holding companies and their depository institution subsidiaries, including Popular, BPPR and BPNA, as compared to the prior U.S. general risk-based capital rules. The Basel III Capital Rules revise the definitions and the components of regulatory capital, as well as address other issues affecting the numerator in banking institutions’ regulatory capital ratios. The Basel III Capital Rules also address asset risk weights and other matters affecting the denominator in banking institutions’ regulatory capital ratios and replace the prior general risk-weighting approach, which was derived from the Basel Committee’s 1988 “Basel I” capital accords, with a more risk- sensitive approach based, in part, on the “standardized approach” in the Basel Committee’s 2004 “Basel II” capital accords. In addition, the Basel III Capital Rules implement certain provisions of Dodd-Frank Act, including the requirements of Section 939A to remove references to credit ratings from the federal agencies’ rules. The Basel III Capital Rules became effective for Popular, BPPR and BPNA on January 1, 2015, subject to phase-in periods for certain of their components and other provisions. the Basel requirements; (iii) mandate Among other matters, III Capital Rules: (i) introduce a new capital measure called “Common Equity Tier 1” (“CET1”) and related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting that most certain revised deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expand the scope of the deductions from and adjustments to capital as compared to prior regulations. Under the Basel III Capital Rules, for most banking organizations, including the Corporation, the most common form of Additional Tier 1 capital is non-cumulative perpetual preferred stock and the most common form of Tier 2 capital is subordinated notes and a portion of the allocation for loan and lease losses, in each case, subject to the Basel III Capital Rules’ specific requirements. Pursuant to the Basel III Capital Rules, the minimum capital ratios that became effective on January 1, 2015 are as follows: • 4.5% CET1 to risk-weighted assets; • 6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets; 49 POPULAR, INC. 2014 ANNUAL REPORT • 8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and • 4% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”). The Basel III Capital Rules also introduce a new 2.5% “capital conservation buffer”, composed entirely of CET1, on top of the three minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. Thus, when fully phased-in on January 1, 2019, Popular, BPPR and BPNA will be required to maintain such an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk- weighted assets of at least 8.5%, and (iii) Total capital to risk- weighted assets of at least 10.5%. The Basel the requirement III Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for that mortgage servicing rights, example, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1. In addition (as noted above), under the prior general risk- based capital rules, the effects of AOCI items included in shareholders’ equity (for example, mark-to-market adjustments to the value of securities held in the available for sale portfolio) under U.S. GAAP are reversed for the purposes of determining regulatory capital ratios. Pursuant to the Basel III Capital Rules, the effects of certain AOCI items are not excluded; however, non-advanced approach banking organizations, including Popular, BPPR and BPNA, may make a one-time permanent election to continue to exclude these items. This election must be made concurrently with the first filing of certain of the Popular’s, BPPR’s and BPNA’s periodic regulatory reports in the beginning of 2015. Popular, BPPR and BPNA expect to make this election in order to avoid significant variations in the level rate of capital depending upon the impact of fluctuations on the fair value of their securities portfolio. The Basel III Capital Rules also preclude certain hybrid securities, such as trust preferred securities, from inclusion in bank holding companies’ Tier 1 capital, subject to phase-out in the case of bank holding companies that had $15 billion or more in total consolidated assets as of December 31, 2009. The Corporation’s Tier 1 capital level at December 31, 2014, included $ 427 million of trust preferred securities that are interest subject to the phase-out provisions of the Basel III Capital Rules. The Corporation would be allowed to include only 25 percent of such trust preferred securities in Tier 1 capital as of January 1, 2015 and 0 percent as of January 1, 2016, and thereafter. Trust preferred securities no longer included in Popular’s Tier 1 capital may nonetheless be included as a component of Tier 2 capital on a permanent basis without phase-out and irrespective of whether such securities otherwise meet the revised definition of Tier 2 capital set forth in the Basel III Capital Rules. Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2015 and will be phased-in over a 4-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). The implementation of the capital conservation buffer will begin on January 1, 2016 at the 0.625% level and increase by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019. to Section 38 of With respect to BPPR and BPNA, the Basel III Capital Rules revise the “prompt corrective action” (“PCA”) regulations the Federal Deposit adopted pursuant Insurance Act, by: (i) introducing a CET1 ratio requirement at each PCA category (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum Tier 1 capital ratio for well- capitalized status being 8% (as compared to the prior 6%); and (iii) eliminating the prior provision that provides that a bank with a composite supervisory rating of 1 may have a 3% leverage ratio and still be adequately capitalized. The Basel III Capital Rules do not change the total risk-based capital requirement for any PCA category. Failure to meet capital guidelines could subject the Corporation and its depository institution subsidiaries to a variety of enforcement remedies, including the termination of deposit insurance by the FDIC and to certain restrictions on our business. The Basel III Capital Rules prescribe a new standardized approach for risk weightings that expand the risk-weighting categories from the prior four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, depending on the nature of the assets, and resulting in higher risk weights for a variety of asset classes. The Corporation has evaluated the impact of the Basel III Capital Rules on our regulatory capital ratios and estimates a reduction of approximately 126 basis points to our Basel I Tier 1 Common risk-based capital ratio based on our December 31, 2014 balance sheet composition, assuming a full phase-in of the Basel III Capital Rules, and an increase of approximately 58 basis points assuming a transitional phase-in considering the applicable criteria for non-advanced banking organizations in effect as of January 1, 2015. The following table presents a preliminary estimate of the Corporation’s regulatory capital ratios and risk-weighted assets on a fully-phased in basis and on a transitional basis under the methodologies set forth in the Basel III Capital Rules based on our current understanding of those Rules and subject to certain assumptions. We believe that Popular, BPPR and BPNA will be able to meet the required well-capitalized capital ratios on a Basel III basis. Table 24 - Estimated Regulatory Capital Ratios Under Basel III Rules 50 (Dollars in thousands) Tier 1 common equity (Basel I) Adjustment related to capital components Estimated Tier 1 common equity under Basel III rules without AOCI Additional Tier 1 equity (Basel I) Adjustment related to capital components Estimated additional Tier 1 equity under Basel III rules Tier 2 capital (Basel I) Adjustment related to capital components Estimated Tier 2 capital under Basel III rules Total capital (Basel I) Adjustment related to capital components Estimated total capital under Basel III rules Risk-weighted assets under Basel I rules Adjustment related to RWA components Estimated risk-weighted assets under Basel III rules Estimated ratios: Tier 1 capital Tier 1 common equity Total capital Leverage Transitional phase-in December 31, 2014 Fully phase-in December 31, 2014 $ 3,373,129 369,067 [a] $ 3,742,196 $ $ $ $ 476,762 (388,667)[b] 88,095 272,347 336,987 [b] 609,334 $ 4,122,238 317,387 $ 4,439,625 $21,233,902 $ 3,373,129 22,445 $ 3,395,574 $ $ $ $ 476,762 (426,602)[b] 50,160 272,347 449,713 [b] 722,060 $ 4,122,238 45,556 $ 4,167,794 $21,233,902 1,483,298 [c] 1,975,471 [c] $22,717,200 $23,209,373 16.86% 16.47 19.54 11.76 14.85% 14.63 17.96 10.67 [a] Primarily relates to the favorable impact of the phase-in of deductions related items subject to the 10 and 15 percent common equity Tier 1 capital deduction thresholds, principally the impact to the Corporation of disallowed deferred tax assets. [b] Under Basel III, only 25% of the outstanding balance of trust preferred securities under the transition provision is allowed as additional Tier 1 capital as of January 1, 2015, with the remaining balance included in Tier 2 capital. Under a fully phase-in approach, 100 percent of the trust preferred securities is treated as Tier 2 capital. [c] The main differences between the Corporation’s risk-weighted assets as calculated under Basel I compared with Basel III include mainly risk-weighting for non- performing loans, unfunded commitments and high volatility commercial real estate loans. the financial needs of OFF-BALANCE SHEET ARRANGEMENTS AND OTHER COMMITMENTS In the ordinary course of business, the Corporation engages in financial transactions that are not recorded on the balance sheet, or may be recorded on the balance sheet in amounts that are different than the full contract or notional amount of the transaction. As a provider of financial services, the Corporation routinely enters into commitments with off-balance sheet risk to meet customers. These commitments may include loan commitments and standby letters of credit. These commitments are subject to the same credit policies and approval process used for on-balance sheet instruments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position. Other types of off-balance sheet arrangements that the Corporation enters in the ordinary course of business include derivatives, operating leases and provision of guarantees, indemnifications, and representation and warranties. its Contractual Obligations and Commercial Commitments The Corporation has various financial obligations, including contractual obligations and commercial commitments, which require future cash payments on debt and lease agreements. Also, in the normal course of business, the Corporation enters into contractual arrangements whereby it commits to future from third parties. purchases of products or Obligations that are legally binding agreements, whereby the Corporation agrees to purchase products or services with a specific minimum quantity defined at a fixed, minimum or variable price over a specified period of time, are defined as purchase obligations. services Purchase obligations legal and binding include major contractual obligations outstanding at the end of 2014, primarily for services, equipment and real estate construction projects. Services include software licensing and maintenance, facilities maintenance, supplies purchasing, and other goods or services used in the operation of the business. Generally, these least annually, contracts are renewable or cancelable at 51 POPULAR, INC. 2014 ANNUAL REPORT although in some cases the Corporation has committed to contracts that may extend for several years to secure favorable pricing concessions. As previously indicated, the Corporation also enters into derivative contracts under which it is required either to receive or pay cash, depending on changes in interest rates. These contracts are carried at fair value on the consolidated value condition with the financial statements of representing the net present value of the expected future cash fair receipts and payments based on market rates of interest as of the statement of condition date. The fair value of the contract changes daily as interest rates change. The Corporation may also be required to post additional collateral on margin calls on the derivatives and repurchase transactions. At December 31, 2014, the aggregate contractual cash obligations, including purchase obligations and borrowings, by maturities, are presented in Table 25. Table 25 - Contractual Obligations (In millions) Certificates of deposits Federal funds purchased and repurchase agreements Other short-term borrowings Long-term debt Purchase obligations Annual rental commitments under operating leases Capital leases Total contractual cash obligations Under the Corporation’s repurchase agreements, Popular is required to deposit cash or qualifying securities to meet margin requirements. To the extent the value of securities previously pledged as collateral declines because of changes in the Corporation will be required to deposit interest rates, additional cash or securities to meet its margin requirements, thereby adversely affecting its liquidity. that At December 31, 2014, the Corporation’s liability on its pension, restoration and postretirement benefit plans amounted to $285 million, compared with $130 million at December 31, 2013. The Corporation’s expected contributions to the pension and benefit restoration plans are minimal, while the expected contributions to the postretirement benefit plan to fund current benefit payment requirements are estimated at $5.8 million for 2015. Obligations to these plans are based on current and projected obligations of the plans, performance of the plan assets, if applicable, and any participant contributions. Refer to Note 37 to the consolidated financial statements for further information on these plans. Management believes that the effect of the pension and postretirement plans on liquidity is not significant to the Corporation’s overall financial condition. The BPPR’s benefit restoration plans are frozen with regards to all future benefit accruals. non-contributory pension defined and At December 31, 2014, the liability for uncertain tax positions was $7.9 million, compared with $9.8 million as of the end of 2013. This liability represents an estimate of tax Less than 1 year $5,011 1,168 21 328 120 56 1 $6,705 Payments Due by Period 3 to 5 years 1 to 3 years After 5 years $1,531 104 – 332 50 50 2 $2,069 $ 860 – – 567 19 35 3 $1,484 $ 72 – – 465 6 115 14 $672 Total $ 7,474 1,272 21 1,692 195 256 20 $10,930 positions that the Corporation has taken in its tax returns which may ultimately not be sustained upon examination by the tax authorities. The ultimate amount and timing of any future cash settlements cannot be predicted with reasonable limitations, the liability for certainty. Under the statute of uncertain tax positions expires as follows: 2015 - $2.2 million, 2016 - $0.8 million, 2017 - $0.8 million, 2018 - $1.1 million, and 2019 - $1.1 million, additionally $1.9 million not subject to the statute of Corporation anticipates a reduction in the total amount of unrecognized tax benefits within the next 12 months, which could amount to approximately $6.7 million. limitation. As a result of examinations, The Corporation also utilizes lending-related financial instruments in the normal course of business to accommodate the financial needs of its customers. The Corporation’s exposure to credit losses in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit and commercial letters of credit is represented by the contractual notional amount of these instruments. The Corporation uses credit procedures and and conditional policies obligations as it does in extending loans to customers. Since many of the commitments may expire without being drawn upon, the total contractual amounts are not representative of the Corporation’s actual future credit exposure or liquidity requirements for these commitments. in making those commitments The following table presents the contractual amounts related to the Corporation’s off-balance sheet lending and other activities at December 31, 2014: Table 26 - Off-Balance Sheet Lending and Other Activities 52 (In millions) Commitments to extend credit Commercial letters of credit Standby letters of credit Commitments to originate mortgage loans Unfunded investment obligations Total Guarantees Associated with Loans Sold / Serviced At December 31, 2014, the Corporation serviced $2.1 billion in residential mortgage loans subject to lifetime credit recourse provisions, principally loans associated with FNMA and FHLMC residential mortgage loan securitization programs, compared with $2.5 billion at December 31, 2013. The Corporation has not sold any mortgage loans subject to credit recourse since 2010. In the event of any customer default, pursuant to the credit recourse provided, the Corporation is required to repurchase the loan or reimburse the third party investor for the incurred loss. The maximum potential amount of future payments that the Corporation would be required to make under the recourse arrangements in the event of nonperformance by the borrowers is equivalent to the total outstanding balance of the residential mortgage if serviced with recourse applicable. In the event of nonperformance by the borrower, the Corporation has rights to the underlying collateral securing the mortgage loan. The Corporation suffers losses on these loans when the proceeds from a foreclosure sale of the property underlying a defaulted mortgage loan are less than the outstanding principal balance of the loan plus any uncollected interest advanced and the costs of holding and disposing the related property. and interest, loans In the case of Puerto Rico, most claims are settled by repurchases of delinquent loans, the majority of which are greater than 90 days past due. The average time period to prepare an initial response to a repurchase request is from 30 to 120 days from the initial written notice depending on the type of the repurchase request. Failure by the Corporation to respond to a request for repurchase on a timely basis could result in a deterioration of the seller/servicer relationship and In certain instances, the seller/servicer’s overall standing. to ensure collateral additional could require investors Amount of Commitment - Expiration Period 2015 $6,418 3 43 21 – $6,485 2016 - 2017 2018 - 2019 2020 - thereafter $490 – 3 5 9 $507 $174 – – – – $174 $53 – – – – $53 Total $7,135 3 46 26 9 $7,219 compliance with the servicer’s repurchase obligation or cancel the seller/servicer license and exercise their rights to transfer the servicing to an eligible seller/servicer. The following table presents the delinquency status of the residential mortgage loans serviced by the Corporation that are subject to lifetime credit recourse provisions at December 31, 2014 and December 31, 2013. Table 27 - Delinquency of Residential Mortgage Loans Subject to Lifetime Credit Recourse (In thousands) Total portfolio Days past due: 30 days and over 90 days and over As a percentage of total portfolio: 30 days past due or more 90 days past due or more 2014 2013 $2,138,705 $2,524,155 $ 302,992 $ 129,590 $ 347,046 $ 138,018 14.17 % 6.06 % 13.75 % 5.47 % During the year ended December 31, 2014, the Corporation repurchased approximately $89 million of unpaid principal balance in mortgage loans subject to the credit recourse provisions (December 31, 2013 - $126 million). There are no particular loan characteristics, such as loan vintages, loan type, loan-to-value ratio, or other criteria, that denote any specific trend or a concentration of repurchases in any particular segment. Based on historical repurchase experience, the loan delinquency status is the main factor which causes the repurchase request. The current economic situation has forced the investors to take a closer review at loan performance and recourse triggers, loan repurchases. thus causing an elevated level of 53 POPULAR, INC. 2014 ANNUAL REPORT At December 31, 2014, there were 5 outstanding unresolved claims related to the recourse portfolio with a principal balance outstanding of $589 thousand, compared with 5 and $769 thousand, respectively, at December 31, 2013. The outstanding unresolved claims at December 31, 2014 and 2013 pertained to FNMA. 31, 2014, At December liability established to cover the estimated credit loss exposure related to loans sold or serviced with credit recourse amounted to $59 million, compared with $41 million at December 31, 2013. the Corporation’s The table presents following in the Corporation’s liability of estimated losses from these credit recourses agreements, included in the consolidated statements of financial condition for the years ended December 31, 2014 and 2013. changes the Table 28 - Changes in Liability of Estimated Losses from Credit Recourse Agreements (In thousands) Balance as of beginning of period Provision for recourse liability Net charge-offs / terminations Balance as of end of period December 31, 2014 2013 $ 41,463 41,312 (23,337) $ 51,673 21,793 (32,003) $ 59,438 $ 41,463 The provision for credit recourse liability increased $19.5 million for the year ended December 31, 2014, when compared to 2013. The increase in the provision was due in part to certain enhancements in the estimated losses for certain credit recourse at BPPR. sold” relevant The estimated losses to be absorbed under the credit recourse arrangements are recorded as a liability when the loans are sold and are updated by accruing or reversing expense (expense) (categorized in the line item “adjustments to indemnity reserves on loans consolidated in the statements of operations) throughout the life of the loan, as necessary, when additional information becomes available. The methodology used to estimate the recourse liability is a function of the recourse arrangements given and considers a variety of factors, which include actual defaults and historical loss experience, foreclosure rate, estimated future defaults and the probability that a loan would be delinquent. Statistical methods are used to estimate the recourse liability. Expected loss rates are applied to different loan segmentations. The expected loss, which represents the amount expected to be lost on a given loan, considers the probability of default and loss the probability that a loan in good standing would become 90 days delinquent within the twelve-month period. following Regression analysis quantifies the relationship between the default event and loan-specific characteristics, including credit scores, loan-to-value ratios and loan aging, among others. severity. The probability of default represents of the the loans characteristics When the Corporation sells or securitizes mortgage loans, it generally makes customary representations and warranties regarding sold. The Corporation’s mortgage operations in the Puerto Rico group conforming mortgage loans into pools which are exchanged for FNMA and GNMA mortgage-backed securities, which are generally sold to private investors, or are sold directly to FNMA or other private investors for cash. As required under the government agency programs, quality review procedures are performed by the Corporation to ensure that asset guideline qualifications are met. To the extent the loans do not meet specified characteristics, the Corporation may be required to repurchase such loans or indemnify for losses and bear any loss related to the loans. Repurchases under subsequent representation and warranty arrangements in which the Corporation’s Puerto Rico banking subsidiaries were obligated to repurchase the loans amounted to $2.2 million in unpaid principal balance with losses amounting to $1.7 million for the year ended December 31, 2014 ($4.7 million and $1.0 million, respectively, at December 31, 2013). A substantial amount of these loans reinstate to performing status or have mortgage insurance, and thus the ultimate losses on the loans are not deemed significant. regional operations. the Corporation agreed to provide, subject As discussed on Note 4 - Discontinued Operations, on November 8, 2014, the Corporation completed the sale of the In connection with this California transaction, to certain limitations, customary indemnification to the purchaser, including with respect to certain pre-closing liabilities and violations of representations and warranties. The Corporation also agreed to indemnify the purchaser for up to 1.5% of credit losses on transferred loans for a period of two years after the the closing. Pursuant Corporation’s maximum exposure is approximately $16.0 million. The Corporation recognized a reserve of approximately $2.2 million, representing its best estimate of the loss that would be incurred in connection with this indemnification. This reserve is included within the liabilities from discontinued operations. indemnification provision, to this During the quarter ended June 30, 2013, the Corporation established a reserve for certain specific representation and warranties made in connection with BPPR’s sale of non- performing mortgage loans. The purchaser’s sole remedy under the indemnity clause is to seek monetary damages from BPPR, for a maximum of $16.3 million. BPPR recognized a reserve of approximately $3.0 million, representing its best estimate of the loss incurred in connection with this indemnification. BPPR’s obligations under this clause end one year after the closing except to any claim asserted prior to such termination date. At December 31, 2014 the Corporation has a reserve balance of $2.8 million to cover claims received from the purchaser, which are currently being evaluated. that would be During the quarter ended March 31, 2013, the Corporation established a reserve for certain specific representation and warranties made in connection with BPPR’s sale of commercial and construction loans, and commercial and single family real estate owned. The purchaser’s sole remedy under the indemnity clause is to seek monetary damages from BPPR, for a maximum of $18.0 million. BPPR is not required to repurchase any of the assets. BPPR recognized a reserve of approximately $10.7 million, representing its best estimate of the loss that would be incurred in connection with this indemnification. During the quarter ended March 31, 2014, the Corporation released $2.0 million based on an evaluation of claims received under this clause. At December 31, 2014 the Corporation has a reserve balance of $7.4 million to cover claims received from the purchaser, which are currently being evaluated. In addition, at December 31, 2014, the Corporation has reserves for customary representations and warranties related to loans sold by its U.S. subsidiary E-LOAN prior to 2009. Loans had been sold to investors on a servicing released basis subject to certain representations and warranties. Although the risk of loss or default was generally assumed by the investors, the Corporation made certain representations relating to borrower creditworthiness, loan documentation and collateral, which if in requiring the Corporation to not correct, may result repurchase the loans or indemnify investors for any related losses associated to these loans. At December 31, 2014 and December 31, 2013, the Corporation’s reserve for estimated losses from such representation and warranty arrangements amounted to $ 5 million and $ 7 million, respectively. E-LOAN is no longer originating and selling loans since the subsidiary ceased these activities in 2008 and most of the outstanding agreements with major counterparties were settled during 2010 and 2011. recourse, Servicing agreements relating to the mortgage-backed securities programs of FNMA and GNMA, and to mortgage loans sold or serviced to certain other investors, including FHLMC, require the Corporation to advance funds to make scheduled payments of principal, interest, taxes and insurance, if such payments have not been received from the borrowers. At December 31, 2014, the Corporation serviced $15.6 billion in mortgage loans for third-parties, including the loans serviced with credit compared with $16.3 billion at December 31, 2013. The Corporation generally recovers funds advanced pursuant to these arrangements from the mortgage owner, from liquidation proceeds when the mortgage loan is foreclosed or, in the case of FHA/VA loans, under the applicable FHA and VA insurance and guarantees programs. However, in the meantime, the Corporation must absorb the cost of the funds it advances during the time the advance is outstanding. The Corporation must also bear the costs of attempting to collect on delinquent and defaulted mortgage loans. In addition, if a defaulted loan is not cured, the mortgage loan would be canceled as part of the foreclosure proceedings and 54 to that loan servicing such mortgage loan. At December 31, 2014, the Corporation would not receive any future servicing income with respect the outstanding balance of funds advanced by the Corporation agreements was under approximately $36 million, compared with $29 million at December 31, 2013. To the extent the mortgage loans underlying the Corporation’s servicing portfolio experience increased delinquencies, the Corporation would be required to dedicate additional cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts. guarantees Inc. Holding Company (“PIHC”) fully and Popular, unconditionally certain borrowing obligations issued by certain of its wholly-owned consolidated subsidiaries amounting to $ 0.2 billion at December 31, 2014 (December 31, 2013 - $ 0.2 billion). In addition, at December 31, 2014 and December 31, 2013, PIHC fully and unconditionally guaranteed on a subordinated basis $ 0.4 billion and $ 1.4 billion, respectively, of capital securities (trust preferred securities) issued by wholly-owned issuing trust entities to the extent set forth in the applicable guarantee agreement. Refer to Note 26 to the consolidated financial statements for further information on the trust preferred securities. The Corporation is a defendant legal proceedings arising in the ordinary course of business as described in Note 31 to the consolidated financial statements. in a number of RISK MANAGEMENT Managing risk is an essential component of the Corporation’s business. Risk identification and monitoring are key elements in overall risk management. The following principal risks, which have been incorporated into the Corporation’s risk management program, include: • Credit Risk - Potential for default or loss resulting from an obligor’s failure to meet the terms of any contract with the Corporation or any of its subsidiaries, or failure otherwise to perform as agreed. Credit risk arises from all activities where success depends on counterparty, issuer, or borrower performance. • Interest Rate Risk (“IRR”) - Interest rate risk is the risk to earnings or capital arising from changes in interest rates. Interest rate risk arises from differences between the timing of rate changes and the timing of cash flows (repricing risk); from changing rate relationships among and yield curves different borrowing activities (basis risk); from changing rate relationships across the spectrum of maturities (yield curve risk); and from interest related options embedded in bank products (options risk). affecting bank lending • Market Risk - Potential for loss resulting from changes in in the liabilities its subsidiaries’ portfolios. market prices of Corporation’s or in any of assets or the 55 POPULAR, INC. 2014 ANNUAL REPORT Market prices may change as a result of changes in rates, credit and liquidity for the product or general economic conditions. • Liquidity Risk - Potential for loss resulting from the Corporation or its subsidiaries not being able to meet their financial obligations when they come due. This could be a result of market conditions, the ability of the Corporation to liquidate assets or manage or diversify various funding sources. This risk also encompasses the possibility that an instrument cannot be closed out or sold at its economic value, which might be a result of stress in the market or in a specific security type given its credit, volume and maturity. • Operational Risk - This risk is the possibility that inadequate or failed systems and internal controls or influences procedures, human error, fraud or external such as disasters, can cause losses. • Compliance Risk and Legal Risk - Potential for loss resulting from violations of or non-conformance with laws, rules, regulations, prescribed practices, existing contracts or ethical standards. • Strategic Risk - Potential for loss arising from adverse implementation of business decisions or business decisions. Also, it incorporates how management analyzes strategic external direction of the Corporation. improper impact factors that the • Reputational Risk - Potential for loss arising from negative public opinion. The Corporation’s Board of Directors (the “Board”) has established a Risk Management Committee (“RMC”) to undertake the responsibilities of overseeing and approving the Corporation’s Risk Management Program, as well as the Corporation’s Capital Plan. The Capital Plan is a plan to maintain sufficient regulatory capital at the Corporation, BPPR and BPNA, which considers current and future regulatory capital requirements, expected future profitability and credit trends and, at least, two macroeconomic scenarios, including a base and stress scenario. The RMC, as an oversight body, monitors and approves the overall business strategies, and corporate policies to identify, measure, monitor and control risks while maintaining the effectiveness and efficiency of the business and operational processes. As an approval body for the Corporation, the RMC reviews and approves relevant risk management policies and critical processes. Also, it periodically reports to the Board about its activities. the implementation of The Board and RMC have delegated to the Corporation’s management the risk management processes. This implementation is split into two separate but coordinated efforts that include (i) business and / or operational units who identify, manage and control the risks resulting from their activities, and (ii) a Risk Management Group (“RMG”). In general, the RMG is mandated with responsibilities such as assessing and reporting to the Corporation’s management and RMC the risk positions of the Corporation; developing and implementing mechanisms, policies and procedures to identify, implementing measurement measure mechanisms risk monitoring; developing and implementing the necessary information and reporting mechanisms; and management monitoring and testing the adequacy of the Corporation’s policies, strategies and guidelines. and infrastructure and monitor to achieve effective risks; efforts throughout three reporting divisions: The RMG is responsible for the overall coordination of risk the Corporation and is management composed of (i) Credit Risk Management, (ii) Compliance Management, and (iii) Financial and Operational Risk Management. The latter includes an Enterprise Risk Management function that facilitates, among other aspects, the identification, coordination, and management of multiple and cross-enterprise risks. Additionally, the Internal Auditing Division provides an independent assessment of the Corporation’s internal control structure and related systems and processes. Moreover, management oversight of the Corporation’s risk- taking and risk management activities is conducted through management committees: • CRESCO (Credit Strategy Committee) - Manages the Corporation’s overall credit exposure and approves credit policies, standards and guidelines that define, quantify, committee, and monitor risk. Through this management reviews asset quality ratios, trends and forecasts, problem loans, establishes the provision for loan losses and assesses the methodology and adequacy of the allowance for loan losses on a quarterly basis. credit • ALCO (Asset the policies and approves / Liability Management Committee) - Oversees and processes designed to ensure sound market risk and balance sheet strategies, including the interest rate, liquidity, investment and trading policies. The ALCO monitors the capital position and plan for the Corporation and approves all capital management strategies, including capital market transactions and capital distributions. The ALCO also monitors forecasted results and their impact on capital, liquidity, and net interest margin of the Corporation. • ORCO (Operational Risk Committee) - Monitors operational risk management activities to ensure the development and consistent application of operational risk policies, processes and procedures that measure, limit and manage the Corporation’s operational risks while maintaining the effectiveness and efficiency of the operating and businesses’ processes. In addition, responsible for Market / Interest Rate Risk The financial results and capital levels of the Corporation are constantly exposed to market, interest rate and liquidity risks. The ALCO and the Corporate Finance Group are responsible for planning and executing the Corporation’s market, interest rate risk, funding activities and strategy, and for implementing the policies and procedures approved by the RMC and the the Financial and Operational Risk ALCO. Management Division is the independent monitoring and reporting of adherence with established policies, controls liquidity and market risk. The ALCO surrounding interest, generally meets on a weekly basis and reviews the Corporation’s current and forecasted asset and liability levels as well as desired pricing financial management and interest rate and risk topics. Also, on a monthly basis the ALCO reviews various interest rate risk sensitivity metrics, ratios and portfolio information, including but not the Corporation’s liquidity positions, projected sources and uses of funds, interest rate risk positions and economic conditions. strengthening limited to, and other enhancing strategies relevant and and Market risk refers to the risk of a reduction in the Corporation’s capital due to changes in the market valuation of its assets and/or liabilities. Investment Most of the assets subject to market valuation risk are securities in the investment portfolio classified available for sale. Refer to Notes 9 and 10 for further information on the investment portfolio. classified as available for sale amounted to $5.3 billion as of December 31, 2014. Other assets subject to market risk include loans held- for-sale, which amounted to $106 million, the mortgage servicing rights (“MSRs”) which amounted to $149 million and securities classified as “trading” which amounted to $139 million, as of December 31, 2014. securities Liabilities subject to market risk include the FDIC clawback obligation, which amounted to $ 129 million at December 31, 2014. The Corporation’s market risk is independently measured and reported by and Operational Risk Management Division and is reviewed by the Risk Management Committee of the Board. the Financial Management believes that market risk is not a material source of risk at the Corporation. A significant portion of the Corporation’s financial activities is concentrated in Puerto Rico, which has been going through a challenging economic cycle. Refer to the Geographic and Government Risk section of this MD&A for some highlights on the current status of the Puerto Rico economy. Interest Rate Risk The Corporation’s net interest income is subject to various categories of interest rate risk, including repricing, basis, yield rate risk, curve and option risks. In managing interest 56 management may alter the mix of floating and fixed rate assets and liabilities, change pricing schedules, adjust maturities through sales and purchases of investment securities, and enter into derivative contracts, among other alternatives. Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate rate risk position given line of business forecasts, management objectives, market and policy constraints. expectations Management utilizes various tools to assess IRR, including simulation modeling, static gap analysis, and Economic Value of Equity (EVE). The three methodologies complement each other and are used jointly in the evaluation of the Corporation’s IRR. Simulation modeling is prepared for a five year period, which in conjunction with the EVE analysis, provides Management a better view of long term IRR. Net interest income simulation analysis performed by legal entity and on a consolidated basis is a tool used by the Corporation in estimating the potential change in net interest income resulting from hypothetical changes in interest rates. Sensitivity analysis is calculated using a simulation model which incorporates actual balance sheet figures detailed by maturity and interest yields or costs. It also incorporates assumptions on balance sheet growth and expected changes in its composition, estimated prepayments in accordance with projected interest rates, pricing and maturity expectations on new volumes and other non-interest related data. is a dynamic process, emphasizing future performance under diverse economic conditions. It Management assesses interest rate risk by comparing various net interest income simulations under different interest rate scenarios that differ in direction of interest rate changes, the degree of change over time, the speed of change and the projected shape of the yield curve. For example, the types of rate scenarios processed during the year included economic most likely scenarios, flat rates, yield curve twists, + 200 and + 400 basis points parallel ramps and + 200 basis points parallel shocks. Management also performs analyses to isolate and measure basis and prepayment risk exposures. The asset and liability management group performs validation procedures on various assumptions used as part of the sensitivity analysis as well as validations of results on a monthly basis. In addition, the model and processes used to assess IRR are subject to third-party validations according to the guidelines established in the Model Governance and Validation policy. Due to the importance of critical assumptions in measuring market risk, the risk models incorporate third- party developed data such as prepayment speeds on mortgage loans and mortgage-backed the Corporation’s securities, estimates on the duration of assumptions critical for 57 POPULAR, INC. 2014 ANNUAL REPORT rate scenarios. These interest deposits and interest rate simulations exclude the impact on loans accounted pursuant to ASC Subtopic 310-30, whose yields are based on management’s current expectation of future cash flows. the rate points during scenarios twelve-month period considered in these market The Corporation processes net interest income simulations under interest rate scenarios in which the yield curve is assumed to rise and decline gradually by the same amount. The risk rising simulations reflect gradual parallel changes of 200 and 400 basis ending December 31, 2015. Under a 200 basis points rising rate scenario, 2015 projected net interest income increases by $60 million, while under a 400 basis points rising rate scenario, 2015 projected net interest income increases by $106 million. These scenarios were compared against the Corporation’s flat or unchanged interest rates forecast scenario. Simulation analyses are based on many assumptions, including relative levels of market interest rates, interest rate spreads, loan prepayments and deposit decay. Thus, they should not be relied upon as the estimates do not indicative of actual results. Further, contemplate actions that management could take to respond to changes in interest rates. By their nature, these forward-looking computations are only estimates and may be different from what may actually occur in the future. Static gap analysis measures the volume of assets and liabilities maturing or repricing at a future point in time. Static gap reports stratify all of the Corporation’s assets, liabilities and off-balance sheet positions according to the instrument’s maturity, repricing characteristics and optionality, assuming no typically include new business. The repricing volumes adjustments for anticipated future asset prepayments and for differences in sensitivity to market rates. The volume of assets and liabilities repricing during future periods, particularly within one year, is used as one short-term indicator of IRR. Depending on the duration and repricing characteristics, changes in interest rates could either increase or decrease the level of net interest income. For any given period, the pricing structure of the assets and liabilities is generally matched when an equal amount of such assets and liabilities mature or reprice in that period. Any mismatch of interest earning assets and interest bearing liabilities is known as a gap position. A positive gap denotes asset sensitivity, which means that an increase in interest rates could have a positive effect on net interest income, while a decrease in interest rates could have a negative effect on net income. As shown in Table 29, at December 31, 2014, the Corporation’s one-year cumulative positive gap was $5.3 billion, or 17.8% of total earning assets. This compares with $3.7 billion or 11.8%, respectively, at December 31, 2013. The change in the one-year cumulative gap short-term position was borrowings that resulted mainly from cash inflows and lower volume of assets and higher level of capital from operations. These static measurements do not reflect the results of any projected activity and are best used as early indicators of incorporate interest rate exposures. They do not potential possible the could be actions Corporation’s IRR, nor do they capture the basis risks that might be included within the cumulative gap, given possible changes in the spreads between asset rates and the rates used to fund them. influenced by a lower taken to manage level of interest that 58 Table 29 - Interest Rate Sensitivity (Dollars in thousands) 0-30 days After three months but within six months After six months but within nine months After nine months but within one year After one year but within two years Within 31 - 90 days After two years Non-interest bearing funds Total At December 31, 2014 By repricing dates Assets: Money market investments Investment and trading securities Loans Other assets Total Liabilities and stockholders’ equity: Savings, NOW and money market and other interest bearing demand deposits Certificates of deposit Federal funds purchased and assets sold under agreements to repurchase Other short-term borrowings Notes payable Non-interest bearing deposits Other non-interest bearing liabilities Stockholders’ equity $1,820,582 $ 804 $ 1,000 $ – $ – $ – $ – $ – $ 1,822,386 374,768 7,093,074 – 727,505 721,795 – 452,759 780,179 – 9,288,424 1,450,104 1,233,938 194,845 741,789 – 936,634 181,994 683,650 – 543,905 2,117,210 – $ 3,242,986 9,915,520 – – – 3,502,330 5,718,762 22,053,217 3,502,330 865,644 2,661,115 13,158,506 3,502,330 33,096,695 114,943 1,669,190 288,171 924,837 497,404 1,293,293 477,412 771,928 358,708 614,295 1,368,617 1,028,179 8,444,087 1,172,723 – – 11,549,342 7,474,445 490,442 21,200 59 – 219,891 – 119 – 166,058 – 10,205 – 247,093 – 300,205 – – – – – – – – – 31,135 – 18,300 – – – 117,038 – 250,933 – – – 1,132,007 – – – – 5,783,748 1,271,657 21,200 1,711,828 5,783,748 – – – – 1,017,093 4,267,382 1,017,093 4,267,382 Total $ 2,295,834 $1,433,018 $ 1,966,960 $1,796,638 $1,022,438 $ 2,764,767 $ 10,748,817 $ 11,068,223 $ 33,096,695 Interest rate sensitive gap Cumulative interest rate sensitive gap Cumulative interest rate sensitive gap to earning assets 6,992,590 17,086 (733,022) (860,004) (156,794) (103,652) 2,409,689 (7,565,893) 6,992,590 7,009,676 6,276,654 5,416,650 5,259,856 5,156,204 7,565,893 23.63% 23.69% 21.21% 18.30% 17.77% 17.42% 25.57% – – – – – The Corporation estimates the sensitivity of economic value of equity (“EVE”) to changes in interest rates. EVE is equal to the estimated present value of the Corporation’s assets minus the estimated present value of the liabilities. This sensitivity analysis is a useful tool to measure long-term IRR because it captures the impact of up or down rate changes in expected cash flows, including principal and interest, from all future periods. EVE sensitivity calculated using interest rate shock scenarios is estimated on a quarterly basis. The shock scenarios consist of a +/- 200 and 400 basis points parallel shocks. Management has defined limits for the increases / decreases in EVE sensitivity resulting from the shock scenarios. The Corporation maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in net interest income or market value that are caused by interest rate volatility. The market value of these derivatives is subject to interest risk adjustments which could have a positive or negative effect in the Corporation’s earnings. rate fluctuations and counterparty credit The Corporation’s loan and investment portfolios are subject to prepayment risk, which results from the ability of a third- party to repay debt obligations prior to maturity. Prepayment risk also could have a significant impact on the duration of collateralized mortgage mortgage-backed obligations, lower prepayments could extend) the weighted average life of these portfolios. Table 30, which presents the maturity distribution of earning prepayment assumptions. securities since prepayments could shorten (or consideration assets, takes into and 59 POPULAR, INC. 2014 ANNUAL REPORT Table 30 - Maturity Distribution of Earning Assets As of December 31, 2014 Maturities After one year through five years Fixed interest rates Variable interest rates One year or less After five years Fixed interest rates Variable interest rates Total $ 1,822,386 1,851,748 – $2,414,585 $ – 28,817 – $1,231,631 $ – 27,453 $ 1,822,386 5,554,234 2,973,185 129,373 202,945 2,009,048 818,880 6,133,431 1,220,220 1,552,149 21,914 347,918 1,400,188 1,435,107 4,757,276 452,795 1,970,539 64,122 – 251,933 363,246 2,649,840 391,464 882,950 33,797 15,287 71,060 3,551,732 4,554,826 363,169 835,277 2,468 – 143,351 434,086 8,214,100 251,674 566,150 3,875,580 6,603,051 1,415,182 115,014 19,510,555 2,542,662 (In thousands) Money market securities Investment and trading securities Loans: Commercial Construction Lease financing Consumer Mortgage Total non-covered loans Covered loans under FDIC loss sharing agreements Total earning assets $11,027,785 $7,624,656 $3,070,121 $6,149,626 $1,557,649 $29,429,837 Note: Equity securities available-for-sale and other investment securities, including Federal Reserve Bank stock and Federal Home Loan Bank stock held by the Corporation, are not included in this table. Loans held-for-sale have been allocated according to the expected sale date. loans Covered loans The acquired in the Westernbank FDIC-assisted transaction were initially recorded at estimated fair values. As expressed in the Critical Accounting Policies / Estimates section of this MD&A, most of the covered loans have an accretable yield. The accretable yield includes the future interest expected to be collected over the remaining life of the acquired loans and the purchase premium or discount. The remaining life includes the effects of estimated prepayments and expected credit losses. For covered loans accounted for under ASC Subtopic 310-30, the Corporation is required to periodically evaluate its estimate of cash flows expected to be collected. These evaluations, performed quarterly, require the continued usage of key assumptions and estimates. Management must apply judgment to develop its estimates of cash flows for those covered loans given the impact of home price and property value changes, changes in interest rates and loss severities and prepayment speeds. Decreases in the expected cash flows by pool will generally result in a charge to the provision for credit losses resulting in an increase to the allowance for loan losses, while increases in the expected cash flows of a pool will generally result in an increase in interest income over the remaining life of the loan, or pool of loans. Trading The Corporation engages in trading activities in the ordinary course of business at its subsidiaries, Banco Popular de Puerto Rico (“BPPR”) and Popular Securities. Popular Securities’ trading activities consist primarily of market-making activities to meet expected customers’ needs related to its retail brokerage business and purchases and sales of U.S. Government and government sponsored securities with the objective of realizing gains from expected short-term price movements. BPPR’s trading activities consist primarily of holding U.S. Government sponsored mortgage-backed securities classified as “trading” and hedging the related market risk with “TBA” (to-be- announced) market transactions. The objective is to derive spread income from the portfolio and not to benefit from short- In addition, BPPR uses forward term market movements. contracts or TBAs to hedge its securitization pipeline. Risks related to variations in interest rates and market volatility are hedged with TBAs that have characteristics similar to that of the forecasted security and its conversion timeline. At December 31, 2014, relating to BPPR’s mortgage the Corporation held trading securities with a fair value of $139 million, representing approximately 0.4% of the Corporation’s total assets, compared with $340 million and 1.0% at December 31, 2013. As shown in Table 31, the trading portfolio consists principally of mortgage- backed securities activities described above, which at December 31, 2014 were investment grade securities. As of December 31, 2014, the trading portfolio also included $9.9 million in Puerto Rico government obligations and shares of Closed-end funds that invest primarily in Puerto Rico government obligations (December 31, 2013 - fair $11.1 million). Trading instruments are recognized at value, with changes resulting from fluctuations in market prices, interest rates or exchange rates reported in current period earnings. The Corporation recognized a net trading account gain of $4.4 million for the year ended December 31, 2014, compared with a loss of $13.5 million for 2013. Table 31 Table 31 - Trading Portfolio provides December 31, 2014 and December 31, 2013. composition of the the trading portfolio at 60 (Dollars in thousands) Mortgage-backed securities Collateralized mortgage obligations Puerto Rico government obligations Interest-only strips Other Total [1] Not on a taxable equivalent basis. Amount $110,692 1,636 7,954 769 17,476 $138,527 December 31, 2014 Weighted Average Yield [1] Amount December 31, 2013 Weighted Average Yield [1] 6.19% 5.01 5.23 12.11 3.26 5.78% $312,751 1,849 7,586 915 16,642 $339,743 4.90% 4.75 5.15 12.01 3.14 4.84% The Corporation’s trading activities are limited by internal policies. For each of the two subsidiaries, the market risk assumed under trading activities is measured by the 5-day net value-at-risk (“VAR”), with a confidence level of 99%. The VAR measures the maximum estimated loss that may occur over a 5- day holding period, given a 99% probability. The Corporation’s trading portfolio had a 5-day VAR of approximately $1.1 million for the last week in December 2014. There are numerous assumptions and estimates associated with VAR modeling, and actual results could differ from these assumptions and estimates. Backtesting is performed to compare actual results against maximum estimated losses, in order to evaluate model and assumptions accuracy. In the opinion of management, the size and composition of the trading portfolio does not represent a significant source of market risk for the Corporation. Derivatives Derivatives are used by the Corporation as part of its overall interest rate risk management strategy to minimize significant unexpected fluctuations in earnings and cash flows that are caused by fluctuations in interest rates. Derivative instruments that the Corporation may use include, among others, interest rate swaps, caps, floors, indexed options, and forward contracts. The Corporation does not use highly leveraged derivative instruments in its interest rate risk management strategy. The Corporation enters into interest rate swaps, interest rate caps and foreign exchange contracts for the benefit of commercial customers. Credit risk embedded in these transactions is reduced by requiring appropriate collateral from counterparties and entering into netting agreements whenever possible. All outstanding derivatives are recognized in the Corporation’s consolidated statement of condition at their fair value. Refer to Note 33 to the consolidated financial statements for further information on the Corporation’s involvement in derivative instruments and hedging activities. The Corporation’s derivative activities are entered primarily to offset the impact of market volatility on the economic value of assets or liabilities. The net effect on the market value of potential changes in interest rates of derivatives and other financial instruments is analyzed. The effectiveness of these hedges is monitored to ascertain that the Corporation is reducing market risk as expected. Derivative transactions are generally executed with instruments with a high correlation to the hedged asset or liability. The underlying index or instrument of the derivatives used by the Corporation is selected based on its similarity to the asset or liability being hedged. As a result of interest rate fluctuations, fixed and variable interest rate hedged assets and liabilities will appreciate or depreciate in fair value. The effect of this unrealized appreciation or depreciation is expected to be substantially offset by the Corporation’s gains or losses on the derivative that are linked to these hedged assets and instruments liabilities. Management will assess if circumstances warrant liquidating or replacing the derivatives position in the hypothetical event that high correlation is reduced. Based on at the Corporation’s derivative December 31, 2014, it is not anticipated that such a scenario would have a material impact on the Corporation’s financial condition or results of operations. instruments outstanding Certain derivative contracts also present credit risk and liquidity risk because the counterparties may not comply with the terms of the contract, or the collateral obtained might be illiquid or become so. The Corporation controls credit risk limits and monitoring procedures, and through approvals, through master netting and collateral agreements whenever possible. Further, as applicable under the terms of the master agreements, the Corporation may obtain collateral, where appropriate, to reduce credit risk. The credit risk attributed to the counterparty’s nonperformance risk is incorporated in the fair value of the derivatives. Additionally, as required by the fair the value measurements guidance, value fair the of 61 POPULAR, INC. 2014 ANNUAL REPORT Corporation’s own credit standing is considered in the fair value of the derivative liabilities. During the year ended December 31, 2014, inclusion of the credit risk in the fair value of the derivatives resulted in a net gain of $1.1 million (2013 - net gain of $1.5 million; 2012 - net gain of $2.9 million), which consisted of a loss of $0.1 million (2013 - gain of $ 0.5 million; 2012 - loss of $ 0.5 million) resulting from the Corporation’s credit standing adjustment and a gain of $1.2 million (2013 - gain of $1 million; 2012 - gain of $3.4 million) from the assessment of the counterparties’ credit risk. At December 31, 2014, the Corporation had $15 million (2013 - $ 19 million) recognized for the right to reclaim cash collateral posted. On the other hand, the Corporation did not have any obligation to return cash collateral received at December 31, 2014 and 2013. The Corporation performs appropriate due diligence and that condition of monitors represent a significant volume of credit exposure. Additionally, the Corporation has exposure limits to prevent any undue funding exposure. counterparties financial the Cash Flow Hedges The Corporation manages the variability of cash payments due to interest rate fluctuations by the effective use of derivatives designated as cash flow hedges and that are linked to specified hedged assets and liabilities. The cash flow hedges relate to forward contracts or “to be announced” (“TBA”) mortgage- backed securities that are sold and bought for future settlement to hedge mortgage-backed securities and loans prior to securitization. The seller agrees to deliver on a specified future date a specified instrument at a specified price or yield. These securities are hedging a forecasted transaction and are designated for cash flow hedge accounting. The notional amount of derivatives designated as cash flow hedges at December 31, 2014 amounted to $93 million, while it did not have any derivative that qualified to be accounted for as cash flow hedges outstanding at December 31, 2013. Refer to Note 33 to the consolidated financial statements for information on these derivative quantitative additional contracts. Fair Value Hedges The Corporation did not have any derivatives designated as fair value hedges during the years ended December 31, 2014 and 2013. Trading and Non-Hedging Derivative Activities The Corporation enters into derivative positions based on from price differentials market expectations or to benefit to between financial economically hedge a related asset or liability. The Corporation also enters into various derivatives to provide these types of derivative free-standing derivatives are carried at fair value with changes in fair value and markets mostly customers. These instruments products to recorded as part of the results of operations for the period. Following is a description of the most significant of the Corporation’s derivative activities that are not designated for to Note 33 to the consolidated hedge accounting. Refer financial statements for additional quantitative and qualitative information on these derivative instruments. At December 31, 2014, the Corporation had outstanding $ 238 million (2013 - $ 283 million) in notional amount of interest rate swap agreements with a net negative fair value of $1 million (2013 - net negative fair value of $2 million), which were not designated as accounting hedges. These swaps were entered in the Corporation’s capacity as an intermediary on behalf of its customers and their offsetting swap position. of interest increase increase For the year ended December 31, 2014, the impact of the rate swaps not designated as mark-to-market of in earnings of a net accounting hedges was approximately $ 1.2 million, recorded in the other operating income category of the consolidated statement of operations, compared with an earnings approximately $ 1.0 million and $ 3.0 million, in 2013 and in 2012 respectively. At December 31, 2014, the Corporation did not have any forward contracts outstanding, while on December 31, 2013 it have $ 282 million in notional amount of forward contracts outstanding with a net negative fair value of $ 696 thousand not designated as accounting hedges. These forward contracts are considered derivatives fair value. Subsequent changes in the value of these forward contracts are recorded in the consolidated statement of operations. For the year ended December 31, 2014, the impact of the mark-to- market of the forward contracts not designated as accounting hedges was a reduction to non-interest income of $ 10.9 million (2013 - gain of $ 9.0 million; 2012 - loss of $ 8.0 million), which was included in the category of mortgage banking activities in the consolidated statement of operations. recorded at and are to its linked to these indexes Furthermore, the Corporation has over-the-counter option contracts which are utilized in order to limit the Corporation’s exposure on customer deposits whose returns are tied to the S&P 500 or to certain other equity securities or commodity indexes. The Corporation offers certificates of deposit with returns retail customers, principally in connection with individual retirement accounts (IRAs), and certificates of deposit. At December 31, 2014, these deposits amounted to $ 83 million (2013 - $ 83 million), or less than 1% (2013 - less than 1%) of the Corporation’s total is deposits. guaranteed by the Corporation and insured by the FDIC to the maximum extent permitted by law. The instruments pay a return based on the increase of these indexes, as applicable, during the term of the instrument. Accordingly, this product gives customers the opportunity to invest in a product that protects the principal invested but allows the customer the potential to earn a return based on the performance of the indexes. the customer’s principal In these certificates, is indexes applicable The risk of issuing certificates of deposit with returns tied to the economically hedged by the Corporation. BPPR and BPNA purchase indexed options from financial institutions with strong credit standings, whose return is designed to match the return payable on the certificates of deposit issued by these banking subsidiaries. By hedging the risk in this manner, the effective cost of these deposits is fixed. The contracts have a maturity and an index equal to the terms of they are economically hedging. the pool of retail deposits that The purchased option contracts are initially accounted for at cost (i.e., amount of premium paid) and recorded as a derivative asset. The derivative asset is marked-to-market on a quarterly basis with changes in fair value charged to earnings. The deposits are hybrid instruments containing embedded options that must be bifurcated in accordance with the derivatives and hedging activities guidance. The initial value of the embedded option (component of the deposit contract that pays a return based on changes in the applicable indexes) is bifurcated from the related certificate of deposit and is initially recorded as a derivative liability and a corresponding discount on the certificate of deposit is recorded. Subsequently, the discount on the deposit is accreted and included as part of interest expense while the bifurcated option is marked-to- market with changes in fair value charged to earnings. The purchased indexed options are used to economically hedge the bifurcated embedded option. These option contracts do not qualify for hedge accounting, and therefore, cannot be designated as accounting hedges. At December 31, 2014, the notional indexed options on deposits approximated $ 87 million (2013 - $ 86 million) with a fair value of $ 17 million (asset) (2013 - $ 20 million) while the embedded options had a notional value of $ 83 million (2013 - $ 83 million) with a fair value of $ 13 million (liability) (2013 - $ 16 million). amount of the Refer to Note 33 to the consolidated financial statements for a description of other non-hedging derivative activities utilized by the Corporation during 2014 and 2013. Foreign Exchange in BHD León in the The Corporation holds an interest Dominican Republic, which is an investment accounted for under the equity method. The Corporation’s carrying value of the equity interest in BHD approximated $108 million at December 31, 2014. This business is conducted in the country’s foreign currency. The resulting foreign currency translation adjustment, from operations for which the functional currency is other than the U.S. dollar, is reported in accumulated other comprehensive loss in the consolidated statements of condition, except for highly-inflationary environments in which the effects would be included in the consolidated statements of operations. At December 31, 2014, the Corporation had approximately $33 million in an unfavorable foreign currency translation 62 adjustment as part of accumulated other comprehensive loss, compared with an unfavorable adjustment of $36 million at December 31, 2013 and $31 million at December 31, 2012. Additionally, during 2013, the Corporation sold its investment in Tarjetas y Transacciones en Red Tranred, C.A. (formerly EVERTEC DE VENEZUELA, C.A.) which was written-down during 2011 as the Corporation determined to wind-down those operations. Liquidity The objective of effective liquidity management is to ensure that the Corporation has sufficient liquidity to meet all of its financial obligations, finance expected future growth and maintain a reasonable safety margin for cash commitments under both normal and stressed market conditions. The Board is responsible for establishing the Corporation’s tolerance for liquidity risk, including approving relevant risk limits and policies. The Board has delegated the monitoring of these risks to the RMC and the ALCO. The management of liquidity risk, on a long-term and day-to-day basis, is the responsibility of the Corporate Treasury Division. The Corporation’s Corporate Treasurer is responsible for implementing the policies and procedures approved by the Board and for monitoring the Corporation’s liquidity position on an ongoing basis. Also, the corporate wide Corporate Treasury Division coordinates liquidity management and activities with the reportable segments, oversees policy breaches and manages the escalation process. The Financial and Operational Risk the independent Management Division is monitoring and reporting of adherence with established policies. responsible for strategies An institution’s liquidity may be pressured if, for example, its credit rating is downgraded, it experiences a sudden and unexpected substantial cash outflow, or some other event causes counterparties to avoid exposure to the institution. Factors that the Corporation does not control, such as the economic outlook, adverse ratings of its principal markets and regulatory changes, could also affect its ability to obtain funding. Liquidity is managed by the Corporation at the level of the holding companies that own the banking and non-banking subsidiaries. It is also managed at the level of the banking and non-banking subsidiaries. The Corporation has adopted policies and limits to monitor more effectively the Corporation’s the banking subsidiaries. liquidity position and that of Additionally, contingency funding plans are used to model various stress events of different magnitudes and affecting different time horizons that assist management in evaluating the size of the liquidity buffers needed if those stress events occur. However, such models may not predict accurately how the market and customers might react to every event, and are dependent on many assumptions. 63 POPULAR, INC. 2014 ANNUAL REPORT total Deposits, borrowing arrangements. funds for the Corporation, assets including customer deposits, brokered deposits and public funds deposits, continue to be the most significant source of funding 75% of the at December 31, 2014 and Corporation’s December 31, 2013. The ratio of total ending loans to deposits was 89% at December 31, 2014, compared to 93% at December 31, 2013. In addition to traditional deposits, the At Corporation maintains December 31, 2014, these borrowings consisted primarily of $ 1.2 billion in assets sold under agreement to repurchase, $ 822 million in advances with the FHLB, $440 million in junior subordinated deferrable interest debentures related to trust preferred securities and $450 million in term notes issued to partially fund the repayment of TARP funds. A detailed description of the Corporation’s borrowings, including their is included in Notes 22 to 24 to the consolidated terms, financial statements. Also, the consolidated statements of cash flows in the accompanying consolidated financial statements provide information on the Corporation’s cash inflows and outflows. On April 22, 2014, the Corporation’s U.S. bank subsidiary (“PCB”) declared a $250 million cash dividend to the Bank Holding Company (“BHC”), $100 million of which was contributed by the BHC to BPPR. On July 2, 2014, the Corporation completed the repayment of TARP funds to the U.S. Treasury through the repurchase of $935 million of trust capital securities issued to the U.S. Treasury under the TARP Capital Purchase Program. The Corporation funded the repurchase through a combination of available cash and approximately $400 million from the proceeds of the issuance of its $450 million aggregate principal amount of 7% Senior Notes due on 2019 which settled on July 1, 2014. On July 23, 2014, the Corporation also completed the repurchase of the outstanding warrant initially issued to the U.S. Treasury under the TARP Capital Purchase Program in 2008. The warrant represented the right to purchase 2,093,284 shares of the Corporation’s common stock at an exercise price of $67 per share with an original term of 10 years. The Corporation and the U.S. Treasury agreed upon a repurchase price of $3.0 million for the warrant. With the completion of this transaction, the Corporation completed its exit from the TARP Capital Purchase Program. The following sections provide further information on the Corporation’s major funding activities and needs, as well as the risks involved in these activities. A detailed description of the Corporation’s borrowings credit, is included in Notes 22 to 24 to the including its terms, consolidated consolidated financial statements of cash flows in the accompanying consolidated financial statements provide information on the Corporation’s cash inflows and outflows. statements. Also, and available lines of the Banking Subsidiaries Primary sources of funding for the Corporation’s banking subsidiaries (BPPR and BPNA), or “the banking subsidiaries,” include retail and commercial deposits, brokered deposits, unpledged investment securities, and, to a lesser extent, loan sales. the Corporation maintains borrowing facilities with the FHLB and at the discount window of the Fed, and has a considerable amount of collateral pledged that can be used to quickly raise funds under these facilities. In addition, and repayment repurchases, The principal uses of funds for the banking subsidiaries include loan originations, investment portfolio purchases, loan outstanding purchases obligations (including deposits), and operational expenses. Also, the banking subsidiaries assume liquidity risk related to collateral posting requirements for certain activities mainly in connection with contractual commitments, recourse provisions, servicing advances, derivatives, credit card licensing agreements and support to several mutual funds administered by BPPR. of Note 48 to the consolidated financial statements provides a consolidating statement of cash flows which includes the Corporation’s banking subsidiaries as part of the “All other subsidiaries and eliminations” column. The banking subsidiaries maintain sufficient funding capacity to address large increases in funding requirements such as deposit outflows. This capacity is comprised mainly of available liquidity derived from secured funding sources, as well as on-balance sheet liquidity in the form of cash balances maintained at the Fed and unused secured lines held at the Fed in addition to liquid unpledged securities. The and FHLB, Corporation has established liquidity guidelines that require the banking subsidiaries to have sufficient liquidity to cover all short-term borrowings and a portion of deposits. recognized credit The Corporation’s ability to compete successfully in the marketplace for deposits, excluding brokered deposits, depends on various factors, including pricing, service, convenience and financial stability as reflected by operating results, credit ratings and (by nationally importantly, FDIC deposit insurance. Although a downgrade in the credit ratings of the Corporation’s banking subsidiaries may impact their ability to raise retail and commercial deposits or the rate that it is required to pay on such deposits, management does not believe that the impact should be material. Deposits at all of the Corporation’s banking subsidiaries are federally insured (subject to FDIC limits) and this is expected to mitigate the potential effect of a downgrade in the credit ratings. agencies), rating Deposits are a key source of funding as they tend to be less volatile than institutional borrowings and their cost is less sensitive to changes in market rates. Refer to Table 20 for a breakdown of deposits by major types. Core deposits are generated from a large base of consumer, corporate and institutional customers. Core deposits include all non-interest bearing deposits, savings deposits and certificates of deposit under $100,000, excluding brokered deposits with denominations under $100,000. Core deposits have historically provided the Corporation with a sizable source of relatively stable and low-cost funds. Core deposits totaled $20.6 billion, or 83% of total deposits, at December 31, 2014, compared with $21.9 billion, or 82% of total deposits, at December 31, 2013. Core deposits financed 69% of the Corporation’s earning assets at December 31, 2014, compared with 70% at December 31, 2013. Certificates of deposit with denominations of $100,000 and over at December 31, 2014 totaled $3.3 billion, or 13% of total deposits (December 31, 2013 - $3.2 billion, or 12% of total deposits). Their distribution by maturity at December 31, 2014 is presented in the table that follows: 64 Table 32 - Distribution by Maturity of Certificate of Deposits of $100,000 and Over (In thousands) 3 months or less 3 to 6 months 6 to 12 months Over 12 months Total $1,614,664 426,954 595,150 626,497 $3,263,265 Average deposits, including brokered deposits, for the year ended December 31, 2014 represented 82% of average earning assets, compared with 85% for the years ended December 31, 2013 and 2012. Table 33 summarizes average deposits for the past five years. Table 33 - Average Total Deposits (In thousands) Non-interest bearing demand deposits Savings accounts NOW, money market and other interest bearing demand accounts Certificates of deposit: Under $100,000 $100,000 and over Certificates of deposit Other time deposits Total interest bearing deposits Total average deposits 2014 For the years ended December 31, 2011 2012 2013 2010 $ 5,533,649 $ 5,728,228 $ 5,356,649 $ 5,058,424 $ 4,732,132 6,733,195 6,792,137 6,571,133 6,320,825 5,970,000 4,824,402 5,738,189 5,555,203 5,204,235 4,981,332 3,708,622 3,107,735 6,816,357 739,752 4,817,831 2,995,175 7,813,006 700,815 5,276,389 3,375,846 8,652,235 768,713 5,966,089 4,026,042 9,992,131 927,776 6,099,741 4,073,047 10,172,788 794,245 19,113,706 21,044,147 21,547,284 22,444,967 21,918,365 $24,647,355 $26,772,375 $26,903,933 $27,503,391 $26,650,497 31, 2014 6% of approximately At December the Corporation’s assets were financed by brokered deposits, as compared to 7% at December 31, 2013. The Corporation had $ 1.9 billion in brokered deposits at December 31, 2014 and $2.4 billion in December 31, 2013. In the event that any of the Corporation’s banking subsidiaries’ regulatory capital ratios fall below those required by a well-capitalized institution or are subject to capital restrictions by the regulators, that banking subsidiary faces the risk of not being able to raise or maintain brokered deposits and faces limitations on the rate paid on deposits, which may hinder the Corporation’s ability to effectively compete in its retail markets and could affect its deposit raising efforts. To the extent that the banking subsidiaries are unable to obtain sufficient liquidity through core deposits, the Corporation may meet its liquidity needs through short-term borrowings by pledging securities for borrowings under repurchase agreements, by pledging additional loans and securities through the available secured lending facilities, or by selling liquid assets. These measures are subject to availability of collateral. The Corporation’s banking subsidiaries have the ability to borrow funds from the FHLB. At December 31, 2014 and December 31, 2013, the banking subsidiaries had credit facilities authorized with the FHLB aggregating to $3.7 billion and $3.0 billion, respectively, based on assets pledged with the FHLB at those dates. Outstanding borrowings under these credit facilities totaled $ 822 million at December 31, 2014 and $1.2 billion at December 31, 2013. Such advances are collateralized by loans held-in-portfolio, do not have restrictive covenants features. At December 31, 2014 and December 31, 2013 the credit facilities authorized with the FHLB were collateralized by $ 4.5 billion in loans held-in-portfolio. Refer to Notes 23 and 24 to the consolidated financial statements for additional information on the terms of FHLB advances outstanding. and do not have any callable At December 31, 2014 and December 31, 2013, the Corporation’s borrowing capacity at the Fed’s Discount Window amounted to approximately $2.1 billion and $3.4 billion, respectively, which remained unused as of both dates. This facility is a collateralized source of credit that is highly 65 POPULAR, INC. 2014 ANNUAL REPORT reliable even under difficult market conditions. The amount available under this borrowing facility is dependent upon the balance of performing loans, securities pledged as collateral and the haircuts assigned to such collateral. At December 31, 2014 and December 31, 2013, this credit facility with the Fed was collateralized by $ 4.1 billion and $4.5 billion, respectively, in loans held-in-portfolio. On October 20, 2014, the Memorandum of Understanding (the “FRB-NY MOU”) entered into on July 20, 2011 among Popular, Inc., BPPR, the Federal Reserve Bank of New York (the “FRB-NY”) and the Office of the Commissioner of Financial Institutions of Puerto Rico was terminated. The FRB-NY MOU provided, among other things, for the Corporation to take steps to improve its credit risk management practices and asset quality, and for the Corporation to develop strategic plans to improve earnings and to develop capital plans. The FRB-NY MOU also required the Corporation to obtain approval from the applicable FRB-NY MOU counterparties prior to, among other things, declaring or paying dividends, purchasing or redeeming any shares of its stock, consummating acquisitions or mergers, or making any distributions on its trust preferred securities or subordinated debentures. On January 9, 2015, another Memorandum of Understanding entered into among BPNA, the FRB-NY and the New York State Department of Financial Services (the “NYSDFS”), effective on July 25, 2011, was also terminated. This Memorandum of Understanding provided that BPNA could not declare dividends without the approval of the FRB-NY and the NYSDFS. As disclosed in Note 4- Discontinued Operations, during 2014, the Corporation completed the sale of its California, Central Florida and Illinois operations. The sale of these regions resulted in a net gain of $33.8 million, after customary transaction costs. The sales resulted in a transfer of a net liability position. Accordingly, BPNA had to fund this difference with its available liquidity sources and made payments to the purchasers upon the closing of the transactions amounting to approximately $206.0 million, inclusive of certain agreed upon costs. The Corporation recorded a non-cash goodwill impairment charge of $186.5 million, related to the goodwill asset allocated to these regions. This non-cash charge had no impact on the Corporation’s tangible capital or regulatory capital ratios. In connection with the restructuring of its U.S. mainland operations, the Corporation is taking steps to restructure its balance sheet and funding strategies. As part of the strategy, during the third quarter of 2014, the Corporation sold approximately $94.2 million in securities available for sale and refinanced approximately $638 million in long term structured repos in the U.S. with a yield of 4.41% and replaced them with lower cost short term repos of a similar amount. During 2014, the Corporation recognized approximately $39.8 million related to the fees associated with the refinancing of these repos. the At December 31, 2014, management believes that banking subsidiaries had sufficient current and projected liquidity sources to meet their anticipated cash flow obligations, as well as special needs and off-balance sheet commitments, in the ordinary course of business and have sufficient liquidity resources to address a stress event. Although the banking subsidiaries have historically been able to replace maturing deposits and advances if desired, no assurance can be given that they would be able to replace those funds in the future if the Corporation’s financial condition or general market conditions were to deteriorate. The Corporation’s financial flexibility will be severely constrained if its banking subsidiaries are unable to maintain access to funding or if adequate financing is not available to accommodate future financing needs at acceptable interest rates. The banking subsidiaries also are required to to meet margin cash or qualifying deposit requirements. To the extent the value of securities previously pledged as collateral declines because of market changes, the Corporation will be required to deposit additional cash or securities to meet its margin requirements, thereby adversely affecting its liquidity. Finally, is required to rely more heavily on more expensive funding sources to meet its future growth, revenues may not increase proportionately to cover costs. In this case, profitability would be adversely affected. securities that if management Westernbank FDIC-assisted Transaction and Impact on Liquidity The effects of the loss sharing agreements on cash flows and operating results will depend primarily on the ability of the borrowers whose loans are covered by the loss sharing agreements to make payments over time and our ability to receive reimbursements for losses from the FDIC. As the loss sharing agreements are in effect for a period of ten years for one-to-four for commercial, construction and consumer loans (with periods commencing on April 30, 2010), changing economic conditions will likely impact future charge-offs and the resulting reimbursements from the FDIC. Management believes that any recapture of interest income and recognition of cash flows from the borrowers or received from the FDIC on the claims filed may be recognized unevenly over this period, as management exhausts its collection efforts under the Corporation’s normal practices. family loans and five years the timing of BPPR’s liquidity may also be impacted by the loan payment performance and timing of claims made and receipt of reimbursements under the FDIC loss sharing agreements. Please refer to the Legal Proceedings section of Note 31 to the consolidated financial statements and to Part II, Item 1A- Risk factors herein for a discussion of the settlement of a contractual dispute between BPPR and the FDIC which has impacted the timing of share agreements. the payment of claims under the loss Bank Holding Companies The principal sources of funding for the holding companies include cash on hand, investment securities, dividends received to from banking and non-banking subsidiaries regulatory limits and authorizations) asset sales, credit facilities available from affiliate banking subsidiaries and proceeds from potential securities offerings. (subject The principal use of these funds include the repayment of debt, and interest payments to holders of senior debt and junior subordinated deferrable interest (related to trust preferred securities) and capitalizing its banking subsidiaries. During the year ended December 31, 2014, PIHC received $ 4.7 million in dividends from EVERTEC’s parent company. PIHC also received $10.1 million in dividends from its investment in BHD. On April 22, 2014, the Corporation’s U.S. bank subsidiary (“PCB”) declared a $250 million cash dividend to the Bank Holding Company (“BHC”), $100 million of which was contributed by the BHC to the Puerto Rico banking subsidiary (“BPPR”). As mentioned above, on July 2, 2014, the Corporation completed the repayment of TARP funds to the U.S. Treasury through the repurchase of $935 million of trust capital securities, which was partially funded with $400 million from the issuance of $450 million aggregate principal amount of 7% Senior Notes due on 2019 which settled on July 1, 2014. On July 23, 2014, the Corporation also completed the repurchase of the outstanding warrant initially issued to the U.S. Treasury under the TARP Capital Purchase Program in 2008, for a purchase price of $3.0 million. With the completion of this transaction, the Corporation completed its exit from the TARP Capital Purchase Program. In connection with the repayment of TARP on July 2, 2014, the Corporation accelerated the related amortization of the discount and deferred costs amounting to $414.1 million during the second quarter of 2014, which is reflected as part of interest expense in the consolidated statement of operations. Another use of liquidity at the parent holding company is the payment of dividends on preferred stock. At the end of 2010, the Corporation resumed paying dividends on its Series A and B preferred stock. The preferred stock dividends amounted to $3.7 million for the year ended December 31, 2014. The preferred stock dividends paid were financed by issuing new shares of common stock to the participants of the Corporation’s qualified employee savings plans. The Corporation anticipates that any future preferred stock dividend payments would continue to be financed with the issuance of new common stock in connection with its qualified employee savings plans. The Corporation is not paying dividends to holders of its common stock. The BHC’s have in the past borrowed in the money markets and in the corporate debt market primarily to finance their non- the banking subsidiaries, however, cash needs of the 66 Corporation’s non-banking subsidiaries other than to repay indebtedness and interest are now minimal. These sources of funding have become more costly due to the reductions in the Corporation’s credit ratings. The Corporation’s principal credit ratings are below “investment grade” which affects the Corporation’s ability to raise funds in the capital markets. The Corporation has an automatic shelf registration statement filed and effective with the Securities and Exchange Commission, which permits the Corporation to issue an unspecified amount of debt or equity securities. Note 48 to the consolidated financial statements provides a statement of condition, of operations and of cash flows for the two BHC’s. The loans held-in-portfolio in such financial statements associated with intercompany transactions. is principally The outstanding balance of notes payable at the BHC’s amounted to $890 million at December 31, 2014 and to $972 million on December 31, 2013. The repayment of the BHC’s obligations represents a potential cash need which is expected to be met with a combination of internal liquidity resources stemming mainly from future dividend receipts and new borrowings. The contractual maturities of the BHC’s notes payable at December 31, 2014 are presented in Table 34. Table 34 - Distribution of BHC’s Notes Payable by Contractual Maturity Year 2015 2016 2017 2018 2019 Later years Total (In thousands) $ – – – – 450,000 439,800 $889,800 As indicated previously, issue new registered debt in the capital markets during the year ended December 31, 2014. the BHC did not The BHCs liquidity position continues to be adequate with investments and other sources of sufficient cash on hand, liquidity which are expected to be enough to meet all BHCs obligations during the foreseeable future. sources of funding for Non-banking subsidiaries The principal the non-banking subsidiaries include internally generated cash flows from operations, loan sales, repurchase agreements, and borrowed funds from their direct parent companies or the holding companies. The principal uses of funds for the non-banking subsidiaries include repayment of maturing debt, operational expenses and payment of dividends to the BHCs. The liquidity needs of the non-banking subsidiaries are minimal since most 67 POPULAR, INC. 2014 ANNUAL REPORT of them are funded internally from operating cash flows or from intercompany borrowings from their holding companies, BPPR or BPNA. investment Other Funding Sources and Capital The investment securities portfolio provides an additional source of liquidity, which may be realized through either securities sales or repurchase agreements. The Corporation’s investment securities portfolio consists primarily of liquid U.S. government sponsored U.S. agency securities, securities, government sponsored mortgage-backed securities, and collateralized mortgage obligations that can be used to raise funds in the repo markets. At December 31, 2014, the investment and trading securities portfolios, as shown in Table 30, totaled $5.6 billion, of which $1.9 billion, or 33%, had maturities of one year or less. Mortgage-related investments in Table 30 are presented based on expected maturities, which may differ from contractual maturities, since they could be subject to prepayments. The availability of the repurchase agreement would be subject to having sufficient unpledged collateral available at the time the transactions are to be consummated, in addition to overall liquidity and risk appetite of the various counterparties. The Corporation’s unpledged investment and trading securities, excluding other investment securities, amounted to $ 2.7 billion at December 31, 2014 and $2.5 billion at December 31, 2013. A substantial portion of these securities could be used to raise financing quickly in the U.S. money markets or from secured lending sources. Additional liquidity may be provided through loan maturities, prepayments and sales. The loan portfolio can also be used to obtain funding in the capital markets. In particular, mortgage loans and some types of consumer loans, have secondary markets which the Corporation could use. The maturity distribution of the total loan portfolio at December 31, 2014 is presented in Table 30. As of that date, $7.4 billion, or 33% of the loan portfolio was expected to mature within one year, compared with $8.5 billion, or 34% of the loan portfolio in the previous year. The contractual maturities of loans have been adjusted to include prepayments based on historical data and prepayment trends. leverage Risks to Liquidity Total lines of credit outstanding are not necessarily a measure of the total credit available on a continuing basis. Some of these lines could be subject to collateral requirements, standards of creditworthiness, regulatory requirements, among other factors. Derivatives, such as those embedded in long-term repurchase transactions or interest rate swaps, and off-balance sheet exposures, such as recourse, performance bonds or credit card arrangements, are subject to collateral the collateral requirements may increase, thereby reducing the balance of unpledged securities. requirements. As their fair value increases, ratios other and for The importance of the Puerto Rico market the Corporation is an additional risk factor that could affect its financing activities. In the case of a deterioration in economic conditions in Puerto Rico, the credit quality of the Corporation could be affected and result in higher credit costs. The Puerto Rico economy continues to face various challenges, including significant pressures in some sectors of the residential real estate market. Refer to the Geographic and Government Risk section of this MD&A for some highlights on the current status of the Puerto Rico economy. Factors that the Corporation does not control, such as the economic outlook and credit ratings of its principal markets and regulatory changes, could also affect its ability to obtain funding. In order to prepare for the possibility of such scenario, management has raising financing under stress scenarios when important sources of funds temporarily fully are unavailable. These plans call for using alternate funding mechanisms, such as the pledging of certain asset classes and accessing secured credit lines and loan facilities put in place with the FHLB and the Fed. adopted contingency plans are usually available that for The credit ratings of Popular’s debt obligations are a relevant factor for liquidity because they impact the Corporation’s ability to borrow in the capital markets, its cost and access to funding sources. Credit ratings are based on the financial strength, credit quality and concentrations in the loan portfolio, the level and volatility of earnings, capital adequacy, the quality of management, the liquidity of the balance sheet, the availability of a significant base of core retail and commercial deposits, and the Corporation’s ability to access a broad array of wholesale funding sources, among other factors. The Corporation’s banking subsidiaries have historically not used unsecured capital market borrowings to finance its operations, and therefore are less sensitive to the level and changes in the Corporation’s overall credit ratings. At the BHCs, the volume of capital market borrowings has declined substantially, as the non-banking lending businesses that it had historically funded have been shut down and the need to raise unsecured senior debt has been substantially reduced. Obligations Subject to Rating Triggers or Collateral Requirements The Corporation’s banking subsidiaries currently do not use borrowings that are rated by the major rating agencies, as these banking subsidiaries are funded primarily with deposits and secured borrowings. The banking subsidiaries had $19 million in deposits at December 31, 2014 that are subject to rating triggers. Some of the Corporation’s derivative instruments include financial covenants tied to the bank’s well-capitalized status and certain formal regulatory actions. These agreements could require exposure collateralization, early termination or both. The fair value of derivative instruments in a liability position subject to financial covenants approximated $9 million at December 31, 2014, with the Corporation providing collateral totaling $15 million to cover the net liability position with counterparties on these derivative instruments. this MD&A, In addition, certain mortgage servicing and custodial agreements that BPPR has with third parties include rating covenants. In the event of a credit rating downgrade, the third parties have the right to require the institution to engage a substitute cash custodian for escrow deposits and/or increase levels securing the recourse obligations. Also, as collateral the discussed in the Guarantees section of to Corporation services residential mortgage loans subject credit recourse provisions. Certain contractual agreements require the Corporation to post collateral to secure such recourse obligations if the institution’s required credit ratings are not maintained. Collateral pledged by the Corporation to secure recourse obligations amounted to approximately $92 million at December 31, 2014. The Corporation could be required to post additional collateral under the agreements. Management expects that it would be able to meet additional collateral requirements if and when needed. The requirements to post collateral under certain agreements or the loss of escrow deposits could reduce the Corporation’s liquidity resources and impact its operating results. Credit Risk Management and Loan Quality Credit risk occurs any time funds are advanced, committed, invested or otherwise exposed. Credit risk arises primarily from the Corporation’s lending activities, as well as from other on- balance sheet and off-balance sheet credit instruments. Credit risk management is based on analyzing the creditworthiness of the borrower or counterparty, the adequacy of underlying collateral given current events and conditions, and the existence and strength of any guarantor support. Business activities that expose the Corporation to credit risk are managed within the Board’s established limits that consider factors, such as maintaining a prudent balance of risk-taking across diversified risk types and business units (compliance with regulatory such as concentrations controlling the exposure to lower credit quality assets, and limiting growth in, and overall exposure to, any product or risk segment where the Corporation does not have sufficient experience and a proven ability to predict credit losses. and loan-to-value considering guidance, ratios), factors The significant changes in the economic conditions and the resulting changes in the borrower’s profile over the past several years requires the Corporation to continue to focus on the identification, monitoring and managing of its credit risk. The risk by maintaining sound Corporation manages underwriting standards, monitoring and evaluating loan portfolio quality, its trends and collectability, and assessing reserves and loan concentrations. Also, credit risk is mitigated by implementing and monitoring lending policies and collateral credit 68 requirements, and instituting credit review procedures to ensure appropriate actions to comply with laws and regulations. The Corporation’s credit policies require prompt identification and quantification of asset quality deterioration or potential loss in order to ensure the adequacy of the allowance for loan losses. Included in these policies, primarily determined by the amount, type of loan and risk characteristics of the credit facility, are various approval levels and lending limit constraints, ranging from the branch or department level to those that are more the Corporation centralized. When considered necessary, requires and extensions credit support commitments, which is generally in the form of real estate and personal property, cash on deposit and other highly liquid instruments. collateral to that in the detail The Corporation’s Credit Strategy Committee (“CRESCO”) is management’s top policy-making body with respect to credit- related matters and credit strategies. CRESCO reviews the activities of each subsidiary, it deems appropriate, to ensure a proactive and coordinated management of credit granting, credit exposures and credit procedures. CRESCO’s principal functions include reviewing the adequacy of the allowance for loan losses and periodically approving appropriate provisions, monitoring compliance with charge-off policy, establishing portfolio diversification, yield and quality standards, establishing credit exposure reporting standards, monitoring asset quality, and approving credit policies and amendments thereto for the subsidiaries and/or business lines, including special lending approval authorities when and if the allowance adequacy is appropriate. The analysis of presented to the Risk Management Committee of the Board of Directors review, consideration and ratification on a quarterly basis. for independent of The Corporation also has a Corporate Credit Risk Management Division (“CCRMD”). CCRMD is a centralized unit, the lending function. The CCRMD’s functions include identifying, measuring and controlling credit risk independently from the business units, evaluating the credit risk rating system and reviewing the adequacy of the allowance for loan losses in accordance with GAAP and regulatory standards. CCRMD also ensures that the subsidiaries comply with the credit policies and applicable regulations, and the CCRMD monitors credit underwriting standards. Also, performs ongoing monitoring of including specific borrowers and/or potential areas of concern for strengthened its geographic quantitative measurement continued improvements to the credit risk management processes. regions. The CCRMD has capabilities, part of the portfolio, The Corporation has a Loan Review Department within the CCRMD, which performs annual credit process reviews of several small and middle markets, construction, asset-based and corporate banking lending groups in BPPR. This group evaluates the credit risk profile of each originating unit along with each unit’s credit administration effectiveness, including 69 POPULAR, INC. 2014 ANNUAL REPORT the assessment of the risk rating representative of the current credit quality of the loans, and the evaluation of collateral documentation. The monitoring performed by this group contributes to assess compliance with credit policies and underwriting standards, determine the current level of credit risk, evaluate the effectiveness of the credit management process and identify control deficiencies that may arise in the credit-granting process. Based on its findings, the Corporate Loan Review Department recommends corrective actions, if necessary, that help in maintaining a sound credit process. In the case of the portfolios of commercial and construction loans in the U.S. mainland operations, credit process reviews are performed by an outside contractor. The CCRMD participates in defining the review plan with the outside loan review firm and actively participates in the discussions of the results of the loan reviews with the business units. The CCRMD may periodically review the work performed by the outside loan review firm. CCRMD reports the results of the credit process reviews the Corporation’s Board of Directors. the Risk Management Committee to of and The Corporation also created during the first quarter of 2012 the Commercial Credit Administration Group, which includes the Special Loans Division, the Commercial Credit Loss-Sharing Agreement the Operations Division Administration Group. This unit focuses on maximizing the value of the Corporation’s special loans and other real estate owned of the commercial portfolio, as well as the FDIC covered loans portfolio. The continued expansion of the workout resources demonstrates the Corporation’s commitment on proactively identifying problem loans in order to reduce the level of non-performing assets. At December 31, 2014, the Corporation’s credit exposure was centered in its $22.1 billion total loan portfolio, which represented 75% of assets. The portfolio composition for the last five years is presented in Table 12. earning its The Corporation issues certain credit-related off-balance sheet financial instruments including commitments to extend credit, standby letters of credit and commercial letters of credit to meet the financing needs of its customers. For these financial instruments, the contract amount represents the credit risk the counterparty to perform in associated with failure of accordance with the terms and conditions of the contract and the decline in value of the underlying collateral. The credit risk associated with these financial instruments varies depending on the counterparty’s creditworthiness and the value of any collateral held. Refer to Note 31 to the consolidated financial statements and to the Contractual Obligations and Commercial Commitments section of this MD&A for the Corporation’s involvement in these credit-related activities. At December 31, 2014, reserve of approximately $13 million for potential associated with unfunded loan commitments commercial and consumer lines of credit (2013 - $7 million). the Corporation maintained a losses related to The Corporation is also exposed to credit risk by using derivative instruments but manages the level of risk by only dealing with counterparties of good credit standing, entering into master netting agreements whenever possible and, when appropriate, obtaining collateral. Refer to Note 33 to the consolidated financial statements for further information on the Corporation’s in derivative instruments and hedging activities, and the Derivatives sub-section included under Risk Management in this MD&A. involvement The Corporation may also encounter risk of default in relation to its investment securities portfolio. Refer to Notes 9 the investment securities and 10 for the composition of available-for-sale investment securities portfolio held by the Corporation at December 31, 2014 are mostly Obligations of U.S. Government sponsored entities, collateralized mortgage obligations, mortgage-backed securities and Obligations of Puerto Rico, States and political subdivisions. held-to-maturity. The and The Corporation’s credit risk exposure is spread among individual consumers, small and medium businesses, as well as corporate borrowers engaged in a wide variety of industries. Only 168 of these commercial lending relationships have an aggregate exposure of $10 million or more. At December 31, facilities to 2014, highly leveraged transactions and credit finance real estate ventures or business acquisitions amounted to $156 million, and there are no loans to less developed countries. to concentrations of credit risk by the nature of its lending limits. The Corporation exposure limits its The Corporation has a significant portfolio of commercial loans, mostly secured by commercial real estate properties. Due to their nature, these loans entail a higher credit risk than consumer and residential mortgage loans, since they are larger in size, may have less collateral coverage, higher concentrated risk in a single borrower and are generally more sensitive to economic downturns. General and numerous other factors continue to create volatility in collateral values and have increased the possibility that additional losses may have to be recognized with respect to the Corporation’s current nonperforming assets. Furthermore, given the current slowdown in the real estate market, particularly in Puerto Rico, the properties securing these loans may be difficult to dispose of, if foreclosed. conditions economic Historically, the levels of real estate prices in Puerto Rico were more stable than in other U.S. markets. Nevertheless, the current economic environment has accelerated the devaluation of properties when compared with the previous periods. Also, additional economic weakness, the effect of the downgrade of Puerto Rico’s general obligation debt to non-investment grade, among others, could further pressure property values. Further declines in property values could impact the credit quality of the loan portfolios in Puerto Rico as the value of the collateral underlying the loans is the primary source of repayment in the event of foreclosure. Lower real estate values could increase the 70 provision for loan losses, loan delinquencies, foreclosures and the cost of repossessing and disposing of real estate collateral. the divesture of Over the past several years, the Corporation has focused in de-risking its loan portfolios by reducing its exposure in asset classes with historically high loss content. During the second half of 2014, its regional operations in California, Illinois, and Central Florida, as well as the sale of certain non-performing and legacy assets were completed, as part of the US operations reorganization. Furthermore, the Corporation has significantly curtailed the production of non- traditional mortgages as it ceased originating non-conventional mortgage loans in its U.S. mainland operations. of Labor and Human Resources), the number of persons employed in Puerto Rico during fiscal year 2013 (ended June 30, 2013) averaged 1,029,019, a decrease of 0.6% compared to the previous fiscal year; and the unemployment rate averaged 14.0%. For fiscal year 2014 (ended June 30, 2014), the number of persons employed in Puerto Rico averaged 1,006,646, a decrease of 2.2% compared to the previous fiscal year; and the unemployment rate averaged 14.3%. During the first three months of fiscal year 2015 (July 1, 2014 through September 30, 2014), total employment averaged 974,800, a 3.3% reduction with respect to the same period of the prior year, and the unemployment rate averaged 14.7%. Management continues to refine the Corporation’s credit standards to meet the changing economic environment. The Corporation has strengthened its underwriting criteria, as well as enhanced its line management, collection strategies and problem loan management process. The commercial lending and administration groups continue strengthening critical areas to manage more effectively the current scenario, focusing strategies on critical steps in the origination and portfolio management processes to ensure the quality of incoming loans as well as to detect and manage potential problem loans early. The also tightened the underwriting standards across all business lines and reduced its exposure in areas that are more likely to be impacted under the current economic conditions. group has consumer lending Geographic and government risk Popular is exposed to geographical and government risk. A significant portion of our financial activities and credit exposure is concentrated in Puerto Rico, which entered into a recession in the second quarter of 2006. Puerto Rico’s gross national product contracted in real terms in every year between fiscal year 2007 and fiscal year 2011 (inclusive), and grew by 0.9% (revised figures) and 0.3% (preliminary) in fiscal years 2012 and 2013. According to the Puerto Rico Planning Board, is for fiscal years 2014 and 2015, gross national product projected to increase by only 0.1% and 0.2%. However, the monthly economic indicators for fiscal year 2014 indicate that the final GNP figures may be lower than the last projection presented by the Puerto Rico Planning Board. The latest Government Development Bank for Puerto Rico (“GDB”) Economic Activity Index, which is a coincident indicator of ongoing economic activity, reflected a 1.4% year-over-year reduction for December 2014, after showing a 2.1% year-over- year reduction for November 2014. This persistent contraction or minimal growth has had an adverse effect on employment. A reduction in total employment began in the fourth quarter of fiscal year 2007 (ending June 30, 2007) and has continued consistently through fiscal year 2014 (ending June 30, 2014) due to the current recession and contractionary fiscal adjustment measures. According to the Household Survey (conducted by the Puerto Rico Department In February 2014, the three principal rating agencies (Moody’s, S&P and Fitch) lowered their ratings on the General Obligation bonds of the Commonwealth of Puerto Rico and the bonds of several other Commonwealth instrumentalities to non-investment grade ratings. In connection with their rating actions, the rating agencies noted various factors, including high levels of public debt, the lack of a clear economic growth catalyst, recurring fiscal budget deficits, the financial condition of the public sector employee pension plans and, more recently, liquidity concerns regarding the Commonwealth and the GDB and their ability to access the capital markets. On June 28, 2014, Governor Alejandro García Padilla signed into law the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (the “Recovery Act”) which provides a framework for certain public corporations, including the Puerto Rico Electric Power Authority (“PREPA”), the Puerto Rico Aqueduct and Sewer Authority and the Puerto Rico Highways and Transportation Authority, their debt obligations in order to ensure that the services they provide to the public are not interrupted. On July 1, 2014, Moody’s, as a the enactment of the Recovery Act, again consequence of downgraded the majority of the Puerto Rico central government and public instrumentalities’ obligations, expressing its concern for all of Puerto Rico’s municipal debt based on the deteriorating fiscal situation on the Island and the possibility that application of the Commonwealth’s ability to access the capital markets. the new law may further to restructure limit In July 2014, certain holders of PREPA bonds and an investment manager, on behalf of funds which hold PREPA bonds, filed separate lawsuits in the United States District Court for the District of Puerto Rico (the “District Court”) seeking a declaratory judgment that the Recovery Act violates several provisions of the United States Constitution. The District Court consolidated the actions. On February 10, 2015, the District Court entered judgment that the Recovery Act is preempted by the federal Bankruptcy Code and is therefore void pursuant to the Supremacy Clause of the United States Constitution. The District Court permanently enjoined the Commonwealth officers from enforcing the Recovery Act. The Commonwealth has filed a notice of appeal and has indicated that it will continue to defend vigorously the constitutionality of the Recovery Act. 71 POPULAR, INC. 2014 ANNUAL REPORT On February 10, 2015, the Governor announced a proposal for a new tax code that would replace the current 7% sales and use tax with a 16% value-added tax, while significantly lowering income taxes. The proposal seeks to create a fair and effective system by primarily taxing consumption, rather than productivity, and to increase tax revenues to the government by reducing tax evasion. While legislation for the new tax code has been filed, it is too early to determine what changes will be made during the legislative process and what effect this proposal, if enacted into law, will have on economic activity. On February 12, 2015, S&P further downgraded the debt rating of the Commonwealth general obligation bonds and of various public instrumentalities. S&P stated that, in their view, Puerto Rico’s current economic and financial trajectory is now more susceptible to adverse financial, economic and market conditions that could ultimately impair the Commonwealth’s ability to fund services and its debt commitments. S&P also cited implementation risk with respect to the value-added tax and expressed concern that, while higher taxes could improve the budget balance, there could be potential negative economic implications. On February 19, 2015, Moody’s also downgraded its debt ratings for the Commonwealth general obligation bonds and of various public instrumentalities, citing similar concerns the Puerto Rico as S&P. The portfolio of obligations of Government is comprised of securities with specific sources of income or revenues identified for repayments. The Corporation performs periodic credit quality reviews on these issuers. The lingering effects of the prolonged recession are still reflected in limited loan demand, an increase in the rate of foreclosures and delinquencies on mortgage loans granted in Puerto Rico. If global or local economic conditions worsen or Table 35 - Direct Exposure to the Puerto Rico Government (In thousands) Central Government Government Development Bank (GDB) Public Corporations: Puerto Rico Aqueduct and Sewer Authority Puerto Rico Electric Power Authority Puerto Rico Highways and Transportation Authority Other Municipalities Total Direct Government Exposure the Government is unable to access the capital markets and manage its fiscal problems in an orderly manner, those adverse effects could continue or worsen. Any reduction in consumer spending as a result of these issues may also adversely impact our non-interest revenues. $ to 1.0 billion, amounted At December 31, 2014, the Corporation’s direct exposure to the Puerto Rico government and its instrumentalities and of which municipalities approximately $ 811 million is outstanding. Of the amount outstanding, $ 689 million consists of loans and $ 122 million are securities. Of this amount, $ 336 million represents obligations from the Government of Puerto Rico and public corporations that are either collateralized loans or obligations that have a specific source of income or revenues identified for their repayment. Some of these obligations consist of senior and subordinated loans to public corporations that obtain revenues from rates charged for services or products, such as public utilities. Public of independence from the central Government and many receive appropriations or other payments from it. The remaining $ 475 million represents obligations from various municipalities in Puerto Rico for which, in most cases, the good faith, credit and unlimited taxing power of the applicable municipality has been pledged to their repayment. These municipalities are required by law to levy special property taxes in such amounts as shall be required for the payment of all of its general obligation bonds and loans. These loans have seniority to the payment of operating cost and expenses of the municipality. Table 35 has a summary of the Corporation’s direct exposure to the Puerto Rico Government. corporations have degrees varying Investment Portfolio $ 53,935 7,008 502 17 4 – 60,515 Loans $ – 100,000 100,000 74,993 – – 414,052 Total Outstanding Total Exposure $ 53,935 107,008 $ 184,207 107,008 100,502 75,010 4 – 474,567 131,192 75,017 4 1,500 518,160 $121,981 $689,045 $811,026 $1,017,088 In addition, at December 31, 2014, the Corporation had $370 million in indirect exposure to loans or securities that are payable by non-governmental entities, but which carry a government guarantee to cover any shortfall in collateral in the event of borrower default. These included $289 million in residential mortgage loans that are guaranteed by the Puerto Rico Housing Finance Authority. These mortgage loans are secured by the underlying properties and the guarantees serve to cover shortfalls in collateral in the event of a borrower default. Also, the Corporation had $49 million in Puerto Rico pass- through housing bonds backed by FNMA, GNMA or residential loans CMO’s, and $32 million of industrial development notes. On October 10, 2014, GDB entered into a note purchase, revolving credit and term loan agreement with a syndicate of 72 banks and other financial institutions providing for the issuance of up to $900 million of GDB short-term senior notes, guaranteed by the Commonwealth of Puerto Rico, the proceeds of which will be used to fund the purchase of an equal amount of tax and revenue anticipation notes of the Commonwealth. The Commonwealth’s tax and revenue anticipation notes, which also serve as collateral for the GDB notes, provide intra- year financing to the central Government to address timing differences between expected disbursements and receipts of taxes and revenues for fiscal year 2015. The GDB notes and the related Commonwealth’s tax and revenue anticipation notes mature on June 30, 2015. BPPR participated in this credit facility with an aggregate commitment of $100 million in the term loan and revolving credit facilities. represented exposure As further detailed in Notes 9 and 10 to the consolidated financial statements, a substantial portion of the Corporation’s securities investment to the U.S. Government in the form of U.S. Government sponsored entities, as well as agency mortgage-backed and U.S. Treasury securities. In addition, $804 million of residential mortgages loans were insured or and $118 million in commercial guaranteed by the U.S. Government or its agencies at December 31, 2014. The Corporation does not have any exposure to European sovereign debt. Non-Performing Assets Non-performing assets include primarily past-due loans that are no longer accruing interest, renegotiated loans, and real estate property acquired through foreclosure. A summary, including certain credit quality metrics, is presented in Table 36. The Corporation’s non-accruing and charge-off policies by major categories of loan portfolios are as follows: and construction loans • Commercial and construction loans - recognition of interest income on commercial is discontinued when the loans are 90 days or more in arrears on payments of principal or interest or when other factors indicate that the collection of principal and interest is doubtful. The impaired portions of secured loans past due as to principal and interest is charged-off not later than 365 days past due. However, in the case of collateral dependent loans individually evaluated for impairment, the excess of the recorded investment over the fair value of the collateral (portion deemed uncollectible) is generally promptly charged-off, but in any event, not later than the quarter following the quarter in which such excess was first recognized. Commercial unsecured loans are charged-off no later than 180 days past due. Overdrafts are generally charged-off no later than 60 days past their due date. • Lease financing - recognition of interest income for lease financing is ceased when loans are 90 days or more in arrears. Leases are charged-off when they are 120 days in arrears. • Mortgage loans - recognition of interest income on mortgage loans is generally discontinued when loans are 90 days or more in arrears on payments of principal or interest. The impaired portion of a mortgage loan is charged-off when the loan is 180 days past due. The Corporation discontinues interest income on residential mortgage loans insured by the Federal Housing Administration (“FHA”) or guaranteed by the U.S. Department of Veterans Affairs (“VA”) when 18 months delinquent as to principal or interest. The principal repayment on these loans is insured. the recognition of • Consumer loans - recognition of interest income on closed-end consumer loans and home-equity lines of credit is discontinued when the loans are 90 days or more in arrears on payments of principal or interest. Income is generally recognized on open-end consumer loans, except for home equity lines of credit, until the loans are charged-off. Closed-end consumer loans are charged-off when they are 120 days in arrears. Open-end consumer loans are charged-off when they are 180 days in arrears. Overdrafts in excess of 60 days are generally charged-off no later than 60 days past their due date. • Troubled debt restructurings (“TDRs”) - loans classified as TDRs are typically in non-accrual status at the time of the modification. The TDR loan continues in non-accrual status until the borrower has demonstrated a willingness and ability to make the restructured loan payments (generally at least six months of sustained performance after the modification (or one year for loans providing for quarterly or semi-annual payments)) and management has concluded that it is probable that the borrower would not be in payment default in the foreseeable future. • Covered loans acquired in the Westernbank FDIC-assisted transaction, except for revolving lines of credit, are accounted for by the Corporation in accordance with ASC the Subtopic 310-30. Under ASC Subtopic 310-30, acquired loans were aggregated into pools based on similar characteristics. Each loan pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. The covered loans, which are accounted for under ASC Subtopic 310-30 by the Corporation, are not considered non-performing and will continue to have an accretable yield as long as there is a reasonable expectation about the timing and amount of cash flows expected to be collected. Also, loans charged- off against the non-accretable difference established in purchase accounting are not reported as charge-offs. Charge-offs will be recorded only to the extent that losses exceed the purchase accounting estimates. Because of the application of ASC Subtopic 310-30 to the Westernbank acquired loans and the loss protection provided 73 POPULAR, INC. 2014 ANNUAL REPORT by the FDIC which limits the risks on the covered loans, the Corporation has determined to provide certain quality metrics in this MD&A that exclude such covered loans to facilitate the comparison between loan portfolios and across periods. Given the significant amount of covered loans that are past due but still accruing due to the accounting under ASC Subtopic 310- 30, the Corporation believes the inclusion of these loans in certain asset quality ratios in the numerator or denominator (or both) would result in a significant distortion to these ratios. In addition, because charge-offs related to the acquired loans are recorded against the non-accretable balance, the net charge-off ratio including the acquired loans is lower for portfolios that have significant amounts of covered loans. The inclusion of these loans in the asset quality ratios could result in a lack of comparability across periods, and could negatively impact comparability with other portfolios that were not impacted by acquisition accounting. The Corporation believes that the presentation of asset quality measures, excluding covered loans and and denominator, provides a better perspective into underlying trends related to the quality of its loan portfolio. from both the numerator amounts related Total non-performing non-covered assets were $785 million increasing by $50 million, or 7%, at December 31, 2014, compared with December 31, 2013, and decreasing by $1.0 billion, or 56%, compared with December 31, 2012. Non- covered non-performing loans held-in-portfolio stand at $630 million, increasing by $33 million, or 5%, from December 31, 2013. The ratio of non-performing loans to loans held-in- portfolio, excluding covered loans, increased to 3.25% at December 31, 2014 from 2.77% at December 31, 2013. The increase was largely reflective of higher commercial inflows related to the $75 million public sector borrower, offset by the return to accrual status of a $51 million addition during the first quarter of 2014. At December 31, 2014, non-performing loans secured by real estate held-in-portfolio, excluding covered loans, amounted to $482 million in the Puerto Rico operations and $35 million in the U.S. mainland operations. These figures compare to $388 million in the Puerto Rico operations and $141 million in the U.S. mainland operations at December 31, 2013. In addition to the non-performing at December 31, 2014, there were $146 million of non-covered in performing management’s opinion, are currently subject to potential future classification as non-performing and are considered impaired, compared with $103 million at December 31, 2013. loans, mostly commercial in Table included loans, loans that 36, Table 36 - Non-Performing Assets (Dollars in thousands) Non-accrual loans: Commercial Construction Legacy [1] Leasing Mortgage Consumer Total non-performing loans held-in-portfolio, excluding covered loans Non-performing loans held-for-sale [2] Other real estate owned (“OREO”), excluding covered OREO Total non-performing assets, excluding covered assets Covered loans and OREO [3] Total non-performing assets 74 At December 31, 2014 2013 2012 2011 2010 $260,225 13,812 1,545 3,102 304,913 46,886 630,483 18,899 135,500 $279,053 23,771 15,050 3,495 232,681 43,898 597,948 1,092 135,501 $ 665,289 43,350 40,741 4,865 630,130 40,758 1,425,133 96,320 266,844 $ 830,092 96,286 75,660 5,642 686,502 43,668 1,737,850 262,302 172,497 $ 665,463 132,897 165,484 5,674 542,033 60,302 1,571,853 671,757 161,496 $784,882 148,099 $734,541 197,388 $1,788,297 213,483 $2,172,649 201,348 $2,405,106 100,718 $932,981 $931,929 $2,001,780 $2,373,997 $2,505,824 Accruing loans past-due 90 days or more [4] [5] $447,990 $418,028 $ 388,712 $ 316,614 $ 338,359 Excluding covered loans: [6] Non-performing loans to loans held-in-portfolio Including covered loans: Non-performing loans to loans held-in-portfolio Interest lost 3.25% 2.77% 6.79% 8.44% 7.58% 2.95 $ 23,413 2.55 $ 29,766 $ 6.06 86,442 7.33 $ 103,390 $ 6.32 75,684 [1] The legacy portfolio is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years at the BPNA reportable segment. [2] Non-performing loans held-for-sale consist of $14.0 million in mortgage loans, $309 thousand in commercial loans and $4.5 million in consumer loans at December 31, 2014 (December 31, 2013 - $603 thousand in commercial loans and $489 thousand in mortgage loans). [3] The amount consists of $18 million in non-performing covered loans accounted for under ASC Subtopic 310-20 and $130 million in covered OREO at December 31, 2014 (December 31, 2013 - $29 million and $168 million, respectively). It excludes covered loans accounted for under ASC Subtopic 310-30 as they are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analyses. [5] [4] The carrying value of covered loans accounted for under ASC Subtopic 310-30 that are contractually 90 days or more past due was $0.5 billion at December 31, 2014 (December 31, 2013 - $0.7 billion). This amount is excluded from the above table as the covered loans’ accretable yield interest recognition is independent from the underlying contractual loan delinquency status. It is the Corporation’s policy to report delinquent residential mortgage loans insured by FHA or guaranteed by the VA as accruing loans past due 90 days or more as opposed to non-performing since the principal repayment is insured. These balances include $125 million and $115 million, respectively, of residential mortgage loans insured by FHA or guaranteed by the VA that are no longer accruing interest as of December 31, 2014 and December 31, 2013. Furthermore, the Corporation has approximately $66 million in reverse mortgage loans which are guaranteed by FHA, but which are currently not accruing interest. Due to the guaranteed nature of the loans, it is the Corporation’s policy to exclude these balances from non-performing assets (December 31, 2013 - $50 million). [6] These asset quality ratios have been adjusted to remove the impact of covered loans. Appropriate adjustments to the numerator and denominator have been reflected in the calculation of these ratios. Management believes the inclusion of acquired loans in certain asset quality ratios that include non-performing assets, past due loans or net charge-offs in the numerator and denominator results in distortions of these ratios and they may not be comparable to other periods presented or to other portfolios that were not impacted by purchase accounting. 75 POPULAR, INC. 2014 ANNUAL REPORT Another key measure used to evaluate and monitor the Corporation’s asset quality is loan delinquencies. Loans delinquent 30 days or more and delinquencies, as a percentage of their related portfolio category at December 31, 2014 and 2013, are presented below. Table 37 - Loan Delinquencies (Dollars in millions) Loans delinquent 30 days or more 2014 2013 $2,524 $2,635 Total delinquencies as a percentage of total loans: Commercial Construction Legacy Lease financing Mortgage Consumer Covered loans Loans held-for-sale Total 3.91% 3.52% 6.80 5.45 1.97 19.99 4.27 27.02 20.11 12.66 12.42 2.31 17.72 4.11 29.13 1.41 11.45% 10.66% Accruing loans past due 90 days or more are composed primarily of credit cards, residential mortgage loans insured by FHA / VA, and delinquent mortgage loans included in the Corporation’s financial statements pursuant to GNMA’s buy- back option program. Servicers of loans underlying GNMA mortgage-backed securities must report as their own assets the defaulted loans that they have the option to purchase, even when they elect not to exercise that option. Also, accruing loans past due 90 days or more include residential conventional loans purchased from other financial institutions that, although delinquent, the Corporation has received timely payment from in some instances, have partial the sellers / servicers, and, guarantees under recourse agreements. Refer to Table 40 for a summary of the activity in the allowance for loan losses and selected loan losses statistics for the past 5 years. Table 38 - Activity in Non-Performing Loans Held-in-Portfolio (Excluding Consumer and Covered Loans) (Dollars in thousands) Beginning balance Plus: New non-performing loans Advances on existing non-performing loans Less: Non-performing loans transferred to OREO Non-performing loans charged-off Loans returned to accrual status / loan collections Loans transferred to held-for-sale Non-performing loans transferred from (to) discontinued operations Non-performing mortgage loans reclassified to non-performing consumer loans Ending balance NPLs For the year ended December 31, 2014 Popular, Inc. BPNA BPPR $ 410,594 $139,961 $ 550,555 643,216 – 56,230 1,257 699,446 1,257 (21,290) (89,138) (369,275) – – (6,756) (2,915) (22,207) (62,774) (96,180) (228) – (24,205) (111,345) (432,049) (96,180) (228) (6,756) $ 567,351 $ 13,144 $ 580,495 Table 39 - Activity in Non-Performing Loans Held-in-Portfolio (Excluding Consumer and Covered Loans) 76 (Dollars in thousands) Beginning balance Plus: New non-performing loans Advances on existing non-performing loans Loans transferred from held-for-sale Other Less: Non-performing loans transferred to OREO Non-performing loans charged-off Loans returned to accrual status / loan collections Loans transferred to held-for-sale Non-performing loans sold Other Ending balance NPLs For the year ended December 31, 2013 Popular, Inc. BPNA BPPR $1,156,229 $ 223,281 $1,379,510 578,463 – 14,942 – (62,537) (139,191) (354,985) (14,968) (767,359) – 95,575 1,685 400 4,310 (7,430) (67,490) (102,103) (3,958) – (4,309) 674,038 1,685 15,342 4,310 (69,967) (206,681) (457,088) (18,926) (767,359) (4,309) $ 410,594 $ 139,961 $ 550,555 77 POPULAR, INC. 2014 ANNUAL REPORT Table 40 - Allowance for Loan Losses and Selected Loan Losses Statistics (Dollars in thousands) Balance at the beginning of year Provision for loan losses - Continuing operations Provision for loan losses (reversal of provision) - Discontinued operations Non-covered loans [4] 2014 Covered loans Total [4] Non-covered loans [4] 2013 Covered loans Total [4] Non-covered loans [4] 2012 Covered loans Total [4] $ 538,463 $102,092 $ 640,555 $ 621,701 $108,906 $ 730,607 $ 690,363 $124,945 $ 815,308 223,999 46,135 270,134 536,710 69,396 606,106 322,240 74,839 397,079 (6,764) – (6,764) (3,543) – (3,543) 11,862 – 11,862 755,698 148,227 903,925 1,154,868 178,302 1,333,170 1,024,465 199,784 1,224,249 Charged-offs: Commercial Construction Legacy [1] Leasing Mortgage Consumer Discontinued operations Recoveries: Commercial Construction Legacy [1] Leasing Mortgage Consumer Discontinued operations Net loans charged-offs (recoveries): Commercial Construction Legacy [1] Leasing Mortgage Consumer Discontinued operations 87,030 1,722 8,071 6,028 48,906 138,348 4,452 294,557 46,543 5,468 17,141 2,067 3,710 29,528 9,997 34,741 36,223 – – 9,156 (2,589) – 77,531 1,835 8,537 – – 714 291 – 121,771 37,945 8,071 6,028 58,062 135,759 4,452 372,088 48,378 14,005 17,141 2,067 4,424 29,819 9,997 138,383 6,757 17,423 6,034 59,573 135,238 38,957 402,365 43,598 15,399 21,320 2,528 4,034 41,674 20,052 114,454 11,377 125,831 148,605 40,487 (3,746) (9,070) 3,961 45,196 108,820 (5,545) 32,906 27,686 – – 8,442 (2,880) – 180,103 66,154 73,393 23,940 (9,070) 3,961 53,638 105,940 (5,545) 246,257 94,785 (8,642) (3,897) 3,506 55,539 93,564 18,905 253,760 Net write-downs [3] Net write-downs related to loans transferred to discontinued operations (35,674) (20,202) – – (35,674) (362,645) (20,202) – 28,423 39,729 – – 10,679 3,952 – 82,783 816 5,621 – – 65 71 – 6,573 27,607 34,108 – – 10,614 3,881 – 76,210 – – 166,806 46,486 17,423 6,034 70,252 139,190 38,957 485,148 44,414 21,020 21,320 2,528 4,099 41,745 20,052 209,935 3,936 31,113 4,680 75,994 156,694 57,140 539,492 51,285 7,411 16,260 3,737 4,054 35,022 18,993 46,290 30,556 – – 5,909 8,225 – 90,980 31 61 – – – 10 – 256,225 34,492 31,113 4,680 81,903 164,919 57,140 630,472 51,316 7,472 16,260 3,737 4,054 35,032 18,993 155,178 136,762 102 136,864 122,392 25,466 (3,897) 3,506 66,153 97,445 18,905 329,970 (362,645) – 158,650 (3,475) 14,853 943 71,940 121,672 38,147 402,730 (34) – 46,259 30,495 – – 5,909 8,215 – 90,878 – – 204,909 27,020 14,853 943 77,849 129,887 38,147 493,608 (34) – Balance at end of year $ 519,719 $ 82,073 $ 601,792 $ 538,463 $102,092 $ 640,555 $ 621,701 $108,906 $ 730,607 Loans held-in-portfolio: Outstanding at year end Average Ratios: Allowance for loan losses to loans held-in- portfolio Recoveries to charge-offs Net charge-offs to average loans held-in- portfolio Allowance for loans losses to net charge-offs Provision for loan losses to: Net charge-offs [2] Average loans held-in-portfolio Allowance to non performing loans held- in-portfolio $19,404,451 19,990,182 $21,947,113 $21,611,866 21,354,143 22,760,961 $24,596,293 $20,983,192 20,477,264 24,581,862 $24,739,164 24,527,602 2.68% 38.86 0.90 2.89x 1.17 1.05% 82.43 2.74% 33.82 2.49% 36.93 1.08 2.44x 1.19 2.12x 1.04 1.13% 0.85 2.50% 2.60% 31.99 2.96% 25.35 1.34 1.94x 1.97 1.54x 0.86 2.45% 0.83 1.63% 92.82 90.05 103.78 43.62 2.95% 21.71 2.01 1.48x 0.83 1.67% 48.72 [1] The legacy portfolio is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years at the BPNA segment. [2] Excluding the provision for loans losses and net write-down related to loans sold or reclassified to held-for-sale. [3] Net write-downs are related to loans sold or transferred to held-for-sale. [4] Current and prior periods provision for loan losses and net-charge offs presented in this table has been retrospectively adjusted for the impact of the discontinued operations for comparative purposes. Loans (ending and average) balances and credit quality ratios for prior periods included in this table has not been retrospectively adjusted for the impact of the discontinued operations. 78 Total [4] $ 1,261,204 864,661 147,219 2,273,084 300,959 303,085 150,260 10,517 99,835 246,531 138,169 1,249,356 23,947 915 15,768 4,058 5,056 37,247 9,713 96,704 277,012 302,170 134,492 6,459 94,779 209,284 128,456 1,152,652 (327,207) Table 40 (continued) - Allowance for Loan Losses and Selected Loan Losses Statistics (Dollars in thousands) Non-covered loans [4] 2011 Covered loans Total [4] Non-covered loans [4] 2010 Covered loans Balance at the beginning of year Provision for loan losses - Continuing operations Provision for loan losses - Discontinued operations $ 793,225 395,937 34,148 $ – $ 145,635 – 793,225 541,572 34,148 $ 1,261,204 864,661 147,219 $– – – Commercial Construction Legacy [1] Leasing Mortgage Consumer Discontinued operations Recoveries: Commercial Construction Legacy [1] Leasing Mortgage Consumer Discontinued operations Net loans charged-offs (recoveries): Commercial Construction Legacy [1] Leasing Mortgage Consumer Discontinued operations Net write-downs [3] Balance at end of year Loans held-in-portfolio: Outstanding at year end Average Ratios: Allowance for loan losses to loans held-in-portfolio Recoveries to charge-offs Net charge-offs to average loans held-in-portfolio Allowance for loans losses to net charge-offs Provision for loan losses to: Net charge-offs [2] Average loans held-in-portfolio Allowance to non performing loans held-in-portfolio 1,223,310 145,635 1,368,945 2,273,084 257,027 18,921 71,466 6,527 45,785 189,864 81,915 671,505 41,836 9,924 21,313 3,083 3,974 40,243 17,084 137,457 215,191 8,997 50,153 3,444 41,811 149,621 64,831 534,048 1,101 13,774 4,353 – – 826 3,253 – 22,206 – 1,500 – – 15 1 – 1,516 13,774 2,853 – – 811 3,252 – 20,690 270,801 23,274 71,466 6,527 46,611 193,117 81,915 693,711 41,836 11,424 21,313 3,083 3,989 40,244 17,084 138,973 228,965 11,850 50,153 3,444 42,622 152,873 64,831 554,738 300,959 303,085 150,260 10,517 99,835 246,531 138,169 1,249,356 23,947 915 15,768 4,058 5,056 37,247 9,713 96,704 277,012 302,170 134,492 6,459 94,779 209,284 128,456 1,152,652 – 1,101 (327,207) – – – – – – – – – – – – – – – – – – – – – – – – – – $ 690,363 $124,945 $ 815,308 $ 793,225 $– $ 793,225 $20,602,596 20,496,966 $24,951,299 25,110,328 $20,728,035 22,376,612 $25,564,917 25,741,544 3.35% 20.47 2.61 1.29x 0.81 2.10% 39.73 3.27% 20.03 2.21 1.47x 1.04 2.29% 44.76 3.83% 7.74 5.15 0.69x 0.88 4.52% 50.46 3.10% 7.74 4.48 0.69x 0.88 3.93% 49.64 [1] The legacy portfolio is comprised of commercial loans, construction loans and lease financing related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years at the BPNA segment. [2] Excluding the provision for loans losses and net write-down related to loans sold or reclassified to held-for-sale. [3] Net write-downs are related to loans sold or transferred to held-for-sale. [4] Current and prior periods provision for loan losses and net-charge offs presented in this table has been retrospectively adjusted for the impact of the discontinued operations for comparative purposes. Loans (ending and average) balances and credit quality ratios for prior periods included in this table has not been retrospectively adjusted for the impact of the discontinued operations. 79 POPULAR, INC. 2014 ANNUAL REPORT The following table presents net charge-offs to average loans held-in-portfolio (“HIP”) ratio by loan category for the years ended December 31, 2014, 2013 and 2012: Table 41 - Net Charge-Offs (Recoveries) to Average Loans HIP (Non-covered loans) Commercial Construction Lease financing Legacy Mortgage Consumer Total 2014 2013 2012 0.40% 1.11% 1.94% (3.13) (2.22) 0.65 0.73 (0.99) (7.01) 0.85 0.69 2.50 2.81 (0.77) 0.18 3.12 1.27 3.36 0.90% 1.19% 1.97% Note: The above table excludes the net write-downs related to the asset sales during the first and second quarters of 2013, and the third and fourth quarters of 2014. The Corporation’s net charge-offs to average non-covered loans held-in-portfolio ratio was 0.90% for the year ended December 31, 2014, down from 1.19% and 1.97% for the same periods in 2013 and 2012, respectively. Net charge-offs, excluding covered loans, for the year ended December 31, 2014, decreased by $73.7 million and $222.6 million, compared to the years ended December 31, 2013 and 2012. The decline is mostly driven by credit quality improvements, as well as the result of strategic loans sales executed by the Corporation over the past years to reduce high risk assets and improve the risk profile of its portfolios. Write-downs associated with the sale of certain classified and legacy loan portfolios in the US operations during the second half of 2014 amounted to $35.7 million. and residential Write-downs mortgage non-performing loans bulk sales completed during the first half of 2013 amounted to $163.1 million and $199.5 million, respectively, in the BPPR operations. related to the commercial The Corporation’s credit quality trends were generally stable during 2014 with the US region exhibiting significant improvements and the Puerto Rico region remaining stable. The BPNA segment continued to reflect strong performance led by further the improved risk profile of strengthened by the sale of certain non-performing and legacy assets. Notwithstanding, Puerto Rico’s fiscal and economic conditions continued to present a challenging operating environment. loan portfolios, its The discussions in the sections that follow assess credit quality performance for 2014 for each of the Corporation’s non- covered loan portfolios. commercial Commercial loans Non-covered non-performing loans held-in- portfolio were $260 million at December 31, 2014, compared with $279 million at December 31, 2013, and $665 million at December 31, 2012. The decrease of $19 million, or 7%, from December 31, 2013 was principally attributed to improvements in the BPNA segment. The percentage of non-performing commercial loans held-in-portfolio to commercial loans held- in-portfolio increased to 3.20% at December 31, 2014 from 2.78% at December 31, 2013, primarily due to the reduction in loan balance from the sale of the regional operations in the US. The percentage of non-performing commercial loans held-in- portfolio to commercial loans held-in-portfolio was 6.75% at December 31, 2012. Commercial non-covered non-performing loans held-in- portfolio at the BPPR segment increased by $72 million from December 31, 2013, mainly driven by a single $75 million public sector borrower. Commercial non-performing loans held-in-portfolio at the BPNA segment decreased by $91 million from December 31, 2013, reflective of sustained improvements in credit performance and loan resolutions. The loans included in the regional operations sale, as well as the bulk sales of certain commercial loans completed in the second half of the year, were mostly loans in accruing status. Tables 42 and 43 present the changes in the non-performing ended commercial December 31, 2014 and 2013 for the BPPR (excluding covered loans) and BPNA segments. loans held-in-portfolio for the years 80 Table 42 - Activity in Non-Performing Commercial Loans Held-In-Portfolio (Excluding Covered Loans) (In thousands) Beginning Balance - NPLs Plus: New non-performing loans Advances on existing non-performing loans Less: Non-performing loans transferred to OREO Non-performing loans charged-off Loans returned to accrual status / loan collections Loans transferred to held-for-sale Non-performing loans transferred from (to) discontinued operations Ending balance - NPLs For the year ended December 31, 2014 Popular, Inc. BPPR BPNA $ 186,097 $ 92,956 $ 279,053 252,292 – 30,668 957 (12,581) (52,232) (115,666) – – – (13,963) (35,953) (72,216) (134) 282,960 957 (12,581) (66,195) (151,619) (72,216) (134) $ 257,910 $ 2,315 $ 260,225 Table 43 - Activity in Non-Performing Commercial Loans Held-in-Portfolio (Excluding Covered Loans) (In thousands) Beginning Balance - NPLs Plus: New non-performing loans Advances on existing non-performing loans Loans transferred from held-for-sale Other Less: Non-performing loans transferred to OREO Non-performing loans charged-off Loans returned to accrual status / loan collections Loans transferred to held-for-sale Non-performing loans sold Ending balance - NPLs For the year ended December 31, 2014, inflows of commercial non-performing loans held-in-portfolio at the BPPR segment amounted to $252 million, an increase of $73 million, or 41%, when compared to inflows for the same period in 2013. This increase was impacted by two large additions during 2014, including the aforementioned $75 million public sector borrower and a $52 million single borrower which returned to accrual status during the fourth quarter of 2014. Inflows of the commercial non-performing loans held-in-portfolio at For the year ended December 31, 2013 Popular, Inc. BPPR BPNA $ 522,733 $142,556 $ 665,289 179,377 – 790 – (17,000) (100,682) (69,853) – (329,268) 56,677 1,535 – 4,310 (3,631) (39,702) (64,831) (3,958) – 236,054 1,535 790 4,310 (20,631) (140,384) (134,684) (3,958) (329,268) $ 186,097 $ 92,956 $ 279,053 BPNA segment amounted to $32 million, a decrease of $27 million, or 46%, compared to inflows for 2013. The reduction was driven by improvements in the underlying quality of the loan portfolio. Table 44 provides information on commercial non- performing loans and net charge-offs for the years ended December 31, 2014, December 31, 2013, and December 31, 2012 for the BPPR (excluding the Westernbank covered loan portfolio) and BPNA segments. 81 POPULAR, INC. 2014 ANNUAL REPORT Table 44 - Non-Performing Commercial Loans and Net Charge-offs (Excluding Covered Loans) BPPR BPNA Popular, Inc. December 31, 2014 December 31, 2013 December 31, 2012 December 31, 2014 December 31, 2013 December 31, 2012 December 31, 2014 December 31, 2013 December 31, 2012 (Dollars in thousands) Non-performing commercial loans $257,910 $186,097 $522,733 $ 2,315 $92,956 $142,556 $260,225 $279,053 $665,289 Non-performing commercial loans to commercial loans HIP (Dollars in thousands) Commercial loan net charge-offs (recoveries) 4.05% 2.88% 8.30% 0.13% 2.60% 4.00% 3.20% 2.78% 6.75% BPPR BPNA Popular, Inc. December 31, 2014 For the year ended December 31, 2013 December 31, 2012 December 31, 2014 For the year ended December 31, 2013 December 31, 2012 December 31, 2014 For the year ended December 31, 2013 December 31, 2012 $ 39,382 $ 85,601 $144,640 $(4,574) $23,368 $ 44,653 $ 34,808 $108,969 $189,293 Commercial loan net charge-offs (recoveries) to average commercial loans HIP 0.62% 1.37% 2.30% (0.20)% 0.65% 1.29% 0.40% 1.11% 1.94% There are two commercial loan relationships greater than $10 million in non-accrual status with an outstanding aggregate balance of $88 million at December 31, 2014, compared with one loan relationship with an outstanding aggregate balance of $15 million at December 31, 2013. commercial 31, 2014, Commercial loan net charge-offs, excluding net charge-offs for covered loans, amounted to $34.8 million for the year ended December compared to $109.0 million in December 31, 2013 and $189.3 million in December 31, 2012. for the year ended The decline of $74.2 million, or 68%, December 31, 2014 when compared with the year ended December 31, 2013 primarily reflects improvements in credit quality and successful actions taken by the Corporation to address problem loans. Commercial loans net charge-offs to average non-covered loans held-in-portfolio decreased to 0.40% for the year ended December 31, 2014 from 1.11% for the year ended December 31, 2013 and 1.94% for the year ended December 31, 2012. Commercial loan net charge-offs in the BPPR segment amounted to $39.4 million for the year ended December 31, 2014, compared to $85.6 million in December 31, 2013 and $144.6 million in December 31, 2012. The decline of $46.2 million for the year ended December 31, 2014 when compared with the year ended December 31, 2013, was mainly reflective of the improved risk profile of the portfolio after the bulk sales completed in 2013. Commercial loans annualized net charge- offs to average non-covered loans held-in-portfolio decreased to 0.62% for the year ended December 31, 2014 from 1.37% for the year ended December 31, 2013 and 2.30% for the year ended December 31, 2012. For the year ended December 31, the charge-offs associated with collateral dependent 2014, impaired commercial loans amounted to approximately $30.0 million at the BPPR segment. Commercial loan net charge-offs (recoveries) in the BPNA segment amounted to recoveries of $4.6 million for the year ended December 31, 2014, compared to $23.4 million in charge-offs in December 31, 2013 and $44.7 million in December 31, 2012. The decline of $27.9 million for the year ended December 31, 2014 when compared with the same period in 2013 was primarily due to improved credit quality and lower level of non-performing loans. Commercial loans net charge-offs to average non-covered loans held-in-portfolio decreased to (0.20%) for the year ended December 31, 2014 from 0.65% for the year ended December 31, 2013, and 1.29% for the year ended December 31, 2012 due to recovery activity. For the year ended December 31, 2014, there were no charge-offs associated with collateral dependent impaired loans from continuing operations at the BPNA commercial segment. The Corporation’s commercial loan portfolio secured by real estate (“CRE”), excluding covered loans, amounted to $4.7 billion at December 31, 2014, of which $1.7 billion was secured with owner occupied properties, compared with $6.4 billion and $2.3 billion, respectively, at December 31, 2013. CRE non- performing loans, excluding covered loans, amounted to $129 million at December 31, 2014, compared with $221 million at December 31, 2013. The CRE non-performing loans ratios for the BPPR and BPNA segments were 3.60% and 0.07%, respectively, at December 31, 2014, compared with 3.80% and 3.10%, respectively, at December 31, 2013. 82 Construction loans Non-covered non-performing construction loans held-in- portfolio amounted to $14 million at December 31, 2014, compared to $24 million at December 31, 2013, and $43 million at December 31, 2012. The decrease of $10 million, or 42%, from December 31, 2013 was mainly driven by declines of $4 million and $6 million in the BPPR and BPNA segments, respectively, principally driven by loan collections and minimal inflows of new construction non-performing loans. Stable credit trends in the construction portfolio were the result of de- risking strategies executed by the Corporation over the past several years to downsize its construction loan portfolio. The ratio of non-performing construction loans to construction loans held-in-portfolio, excluding covered loans, decreased to 5.48% at December 31, 2014 from 11.53% at December 31, 2013, and 17.14% at December 31, 2012. Tables 45 and 46 present changes in non-performing the years ended construction loans held-in-portfolio for December 31, 2014 and 2013 for the BPPR (excluding covered loans) and BPNA segments. Table 45 - Activity in Non-Performing Construction Loans Held-In-Portfolio (Excluding Covered Loans) (In thousands) Beginning Balance - NPLs Plus: New non-performing loans Less: Non-performing loans charged-off Loans returned to accrual status / loan collections Ending balance - NPLs For the year ended December 31, 2014 Popular, Inc. BPPR BPNA $ 18,108 $ 5,663 $ 23,771 9,485 – 9,485 (1,687) (12,094) – (5,663) (1,687) (17,757) $ 13,812 $ – $ 13,812 Table 46 - Activity in Non-Performing Construction Loans Held-in-Portfolio (Excluding Covered Loans) (In thousands) Beginning Balance - NPLs Plus: New non-performing loans Loans transferred from held-for-sale Less: Non-performing loans transferred to OREO Non-performing loans charged-off Loans returned to accrual status / loan collections Non-performing loans sold Ending balance - NPLs For the year ended December 31, 2013 Popular, Inc. BPPR BPNA $ 37,390 $5,960 $ 43,350 2,000 14,152 (775) (6,210) (24,965) (3,484) – – – – (297) – 2,000 14,152 (775) (6,210) (25,262) (3,484) $ 18,108 $5,663 $ 23,771 For inflows of the year ended December 31, 2014, construction non-performing loans held-in-portfolio at the BPPR segment amounted to $9 million, an increase of $7 million when compared to additions for the year ended December 31, 2013, principally related to one single borrower. There were no additions of construction non-performing loans held-in-portfolio at the BPNA segment during 2014. There are no construction loan relationships greater than $10 million in non-performing status at December 31, 2014 and December 31, 2013. offs (recoveries) to average non-covered loans held-in-portfolio resulted in (2.22%) for the year ended December 31, 2014 compared to (3.13%) for the year ended December 31, 2013 and (0.77%) for the year ended December 31, 2012. For the year ended December 31, 2014, the charge-offs associated with collateral dependent impaired construction loans amounted to $2.3 million in the BPPR segment and none in the BPNA segment. Management identified construction loans considered impaired and charged-off specific reserves based on the value of the collateral. Construction loan net charge-offs (recoveries), excluding net charge-offs for covered loans, amounted to recoveries of $3.7 million for the year ended December 31, 2014, compared to recoveries of $8.6 million in December 31, 2013 and $1.9 million in December 31, 2012. Construction loans net charge- Table 47 provides information on construction non- performing loans and net charge-offs for the BPPR and BPNA (excluding the covered loan portfolio) segments for the years ended December 31, 2014, December 31, 2013, and December 31, 2012. 83 POPULAR, INC. 2014 ANNUAL REPORT Table 47 - Non-Performing Construction Loans and Net Charge-offs (Excluding Covered Loans) BPPR BPNA Popular, Inc. December 31, 2014 December 31, 2013 December 31, 2012 December 31, 2014 December 31, 2013 December 31, 2012 December 31, 2014 December 31, 2013 December 31, 2012 (Dollars in thousands) Non-performing construction loans $13,812 $18,108 $37,390 $– $5,663 $5,960 $13,812 $23,771 $43,350 Non-performing construction loans to construction loans HIP (Dollars in thousands) Construction loan net (recoveries) charge- offs Construction loan net (recoveries) charge- offs to average construction loans HIP 8.67% 11.24% 17.61% –% 12.61% 14.68% 5.48% 11.53% 17.14% BPPR BPNA Popular, Inc. December 31, 2014 For the year ended December 31, 2013 December 31, 2012 December 31, 2014 For the year ended December 31, 2013 December 31, 2012 December 31, 2014 For the year ended December 31, 2013 December 31, 2012 $ (3,509) $ (8,642) $ (2,283) $ (237) $– $ 400 $ (3,746) $ (8,642) $ (1,883) (2.42)% (3.57)% (1.19)% (0.99)% –% 0.77% (2.22)% (3.13)% (0.77)% Legacy loans The legacy portfolio is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years at the BPNA segment. Legacy non-performing loans held-in-portfolio amounted to $2 million at December 31, 2014, compared with $15 million at December 31, 2013, and $41 million at December 31, 2012. The decrease of $13.5 million, or 90%, from December 31, 2013 was primarily driven by lower inflows to non-performing loans, loan resolutions and portfolio run-off. The percentage of non- performing legacy loans held-in-portfolio to legacy loans held- in-portfolio decreased to 1.91% at December 31, 2014 from 7.13% at December 31, 2013, and 10.60% at December 31, 2012. For the year ended December 31, 2014, additions to legacy loans in non-performing status amounted to $6 million, a decrease of $10 million, or 62%, when compared with the year ended December 31, 2013. Tables 48 and 49 present the changes in non-performing legacy loans held in-portfolio for the years ended December 31, 2014 and December 31, 2013. Table 48 - Activity in Non-Performing Legacy Loans Held-In-Portfolio (Excluding Covered Loans) (In thousands) Beginning Balance - NPLs Plus: New non-performing loans Advances on existing non-performing loans Less: Non-performing loans transferred to OREO Non-performing loans charged-off Loans returned to accrual status / loan collections Loans transferred to held-for-sale Non-performing loans from (to) discontinued operations Ending balance - NPLs For the year ended December 31, 2014 Popular, Inc. BPPR BPNA $– $15,050 $15,050 – – – – – – – 6,004 300 (189) (6,237) (8,610) (4,679) (94) 6,004 300 (189) (6,237) (8,610) (4,679) (94) $– $ 1,545 $ 1,545 Table 49 - Activity in non-Performing Legacy Loans Held-in-Portfolio (Excluding Covered Loans) 84 (In thousands) Beginning Balance - NPLs Plus: New non-performing loans Advances on existing non-performing loans Loans transferred from held-for-sale Less: Non-performing loans charged-off Loans returned to accrual status / loan collections Other Ending balance - NPLs For the year ended December 31, 2013 Popular, Inc. BPPR BPNA $– $ 40,741 $ 40,741 – – – – – – 16,645 150 400 (19,426) (19,151) (4,309) 16,645 150 400 (19,426) (19,151) (4,309) $– $ 15,050 $ 15,050 In the loans held-in-portfolio, there was no legacy loan relationship greater than $10 million in non-accrual status at December 31, 2014 and December 31, 2013. Legacy loan net charge-offs (recoveries) amounted to recoveries of $9.7 million for the year ended December 31, 2014, compared to recoveries of $2.6 million in December 31, 2013 and net charge-offs of $16.3 million in December 31, 2012. Legacy loan net charge-offs (recoveries) to average non- covered loans held-in-portfolio decreased to (7.01%) for the year ended December 31, 2014 from (0.99%) for the year ended December 31, 2013 and 3.12% for the year ended December 31, 2012. For the year ended December 31, 2014, there were no charge-offs associated with collateral dependent legacy loans from continuing operations. Continued improvements in credit performance was mainly driven lower level of problem loans, loan resolutions, and the continued run-off of the portfolio. Table 50 provides information on legacy non-performing loans and net charge-offs. Table 50 - Non-Performing Legacy Loans and Net Charge-offs (Dollars in thousands) Non-performing legacy loans Non-performing legacy loans to legacy loans HIP (Dollars in thousands) BPNA December 31, 2014 December 31, 2013 December 31, 2012 $ 1,545 1.91% $15,050 7.13% $40,741 10.60% BPNA For the year ended December 31, 2014 December 31, 2013 December 31, 2012 Legacy loan net (recoveries) charge-offs Legacy loan net (recoveries) charge-offs to average legacy loans HIP $(9,742) (7.01)% $ (2,583) (0.99)% $16,338 3.12% Mortgage loans Non-covered non-performing mortgage loans held-in-portfolio were $305 million at December 31, 2014, compared to $233 million at December 31, 2013, and $630 million at December 31, 2012. The increase of $72 million from December 31, 2013 was mainly driven by an increase of $89 million in the BPPR segment, in part offset by a decrease of $17 million in the BPNA segment. The decrease in the BPNA segment was mainly due to the sale of certain mortgage non- performing loans, as part of the US operations reorganization. The percentage of non-performing mortgage loans held-in- portfolio to mortgage loans held-in-portfolio increased to 4.69% at December 31, 2014 from 3.48% at December 31, 2013. This ratio was 10.37% at December 31, 2012. Tables 51 and 52 present changes in non-performing mortgage ended December 31, 2014 and 2013 for the BPPR (excluding covered loans) and BPNA segments. loans held-in-portfolio years the for 85 POPULAR, INC. 2014 ANNUAL REPORT Table 51 - Activity in Non-Performing Mortgage Loans Held-in-Portfolio (Excluding Covered Loans) (In thousands) Beginning Balance - NPLs Plus: New non-performing loans Less: Non-performing loans transferred to OREO Non-performing loans charged-off Loans returned to accrual status / loan collections Loans transferred to held-for-sale Non-performing mortgage loans reclassified to non-performing consumer loans Ending balance - NPLs For the year ended December 31, 2014 Popular, Inc. BPPR BPNA $ 206,389 $ 26,292 $ 232,681 381,439 19,558 400,997 (8,709) (35,219) (241,515) – (6,756) (2,726) (2,007) (12,548) (19,285) – (11,435) (37,226) (254,063) (19,285) (6,756) $ 295,629 $ 9,284 $ 304,913 Table 52 - Activity in Non-Performing Mortgage Loans Held-in-Portfolio (Excluding Covered Loans) (In thousands) Beginning Balance - NPLs Plus: New non-performing loans Less: Non-performing loans transferred to OREO Non-performing loans charged-off Loans returned to accrual status / loan collections Loans transferred to held-for-sale Non-performing loans sold Ending balance - NPLs For the year ended December 31, 2014, inflows of mortgage non-performing loans held-in-portfolio at the BPPR segment amounted to $381 million, a decrease of $16 million, or 4%, when compared to inflows for the same period in 2013. Inflows of mortgage non-performing loans held-in-portfolio at the BPNA segment amounted to $20 million, a decrease of $3 million, or 12%, compared to inflows for 2013. to 31, 2014, Mortgage loan net charge-offs, excluding net charge-offs for covered loans, amounted to $45.2 million for the year ended December $55.5 million in compared December 31, 2013 and $71.9 million in December 31, 2012. The decrease of $10.3 million for the year ended December 31, 2014, when compared with the same period in 2013 was mainly related to reductions in the BPNA segment. Mortgage loan net charge-offs to average mortgage non-covered loans held-in- portfolio was 0.69% in December 31, 2014, compared to 0.85% for the year ended December 31, 2013, and 1.27% for the year ended December 31, 2012. Mortgage loan net charge-offs at the BPPR segment, excluding covered loans, remained stable at $44.0 million, or For the year ended December 31, 2013 Popular, Inc. BPPR BPNA $ 596,106 $ 34,024 $ 630,130 397,086 22,253 419,339 (44,762) (32,299) (260,167) (14,968) (434,607) (3,799) (8,362) (17,824) – – (48,561) (40,661) (277,991) (14,968) (434,607) $ 206,389 $ 26,292 $ 232,681 average non-covered 0.82% of loans held-in-portfolio, compared to $47.7 million, or 0.89% of average loans in the same period in 2013. For the year ended December 31, 2014, charge-offs individually evaluated for impairment amounted to $9.1 million in the BPPR segment. associated with mortgage loans Mortgage loan net charge-offs at the BPNA segment amounted to $1.2 million for the year ended December 31, 2014, a decrease of $6.6 million when compared with the same period in 2013, mainly reflective of credit quality improvements the US economic environment. and the stabilization of Mortgage loan net charge-offs to average mortgage non-covered loans held-in-portfolio decreased to 0.10% for the year ended December 31, 2014 from 0.64% for ended December 31, 2013. year the Table 53 provides information on mortgage non-performing loans and net charge-offs for the BPPR and BPNA (excluding the covered loan portfolio) segments for the years ended December 31, 2014, 2013, and 2012. Table 53 - Non-Performing Mortgage Loans and Net Charge-offs (Excluding Covered Loans) 86 (Dollars in thousands) Non-performing mortgage loans Non-performing mortgage loans to mortgage loans HIP (Dollars in thousands) Mortgage loan net charge-offs Mortgage loan net charge-offs to average mortgage loans HIP BPPR BPNA Popular, Inc. December 31, 2014 December 31, 2013 December 31, 2012 December 31, 2014 December 31, 2013 December 31, 2012 December 31, 2014 December 31, 2013 December 31, 2012 $295,629 $206,389 $596,106 $ 9,284 $26,292 $ 34,024 $304,913 $232,681 $630,130 5.42% 3.82% 12.05% 0.88% 2.05% 3.01% 4.69% 3.48% 10.37% BPPR BPNA Popular, Inc. December 31, 2014 For the year ended December 31, 2013 December 31, 2012 December 31, 2014 For the year ended December 31, 2013 December 31, 2012 December 31, 2014 For the year ended December 31, 2013 December 31, 2012 $44,000 $47,736 $56,777 $1,196 $7,803 $15,163 $45,196 $55,539 $71,940 0.82% 0.89% 1.21% 0.10% 0.64% 1.52% 0.69% 0.85% 1.27% Consumer loans Non-covered non-performing consumer loans held-in-portfolio were $47 million at December 31, 2014, compared to $44 million at December 31, 2013, and $41 million at December 31, 2012. Consumer non-covered non-performing loans held-in-portfolio increased slightly by $3 million when compared to December 31, 2013, primarily as a result of an increase of $8 million in the BPPR segment, mainly related to personal and auto loans. For the year ended December 31, 2014, inflows of consumer non-performing loans held-in-portfolio at the BPPR segment amounted to $97 million, an increase of $9 million, or 10%, when compared to inflows for the same period of 2013. Inflows of consumer non-performing loans held-in-portfolio at the BPNA segment amounted to $20 million, a decrease of $7 million, or 26% compared to inflows for 2013. The Corporation’s consumer loan net charge-offs, excluding covered loans, amounted to $109.6 million for the year ended to 31, 2014, December $97.0 million in compared December 31, 2013 and $126.1 million in December 31, 2012. The increase of $12.6 million in consumer net charge-offs for the year ended December 31, 2014, when compared with the same period in 2013, was driven by an increase of $21.1 million in the BPPR segment, reflective of certain deterioration in credit quality trends. In addition, 2013 net charge-offs include an $8.9 million recovery associated with an opportunistic sale of a portfolio of previously charged-off credit cards and personal loans in the BPPR segment. Consumer loan net charge-offs to average consumer non-covered loans held-in-portfolio was 2.81% for the year ended December 31, 2014, compared with 2.50% for December 31, 2013 and 3.36% for December 31, 2012. Table 54 provides information on consumer non-performing loans and net charge-offs by segments. Table 54 - Non-Performing Consumer Loans and Net Charge-offs (Excluding Covered Loans) BPPR BPNA Popular, Inc. December 31, 2014 December 31, 2013 December 31, 2012 December 31, 2014 December 31, 2013 December 31, 2012 December 31, 2014 December 31, 2013 December 31, 2012 (Dollars in thousands) Non-performing consumer loans $40,930 $33,166 $30,888 $5,956 $10,732 $9,870 $46,886 $43,898 $40,758 Non-performing consumer loans to consumer loans HIP 1.21% 1.00% 0.96% 1.24% 1.74% 1.56% 1.21% 1.63% 1.05% 87 POPULAR, INC. 2014 ANNUAL REPORT BPPR BPNA Popular, Inc. (Dollars in thousands) Consumer loan net charge-offs Consumer loan net charge-offs to average consumer loans HIP December 31, 2014 For the year ended December 31, 2013 December 31, 2012 December 31, 2014 For the year ended December 31, 2013 December 31, 2012 December 31, 2014 For the year ended December 31, 2013 December 31, 2012 $96,655 $75,560 $90,095 $12,971 $21,411 $36,004 $109,626 $96,971 $126,099 2.86% 2.32% 2.93% 2.50% 3.43% 5.38% 2.81% 2.50% 3.36% Combined net charge-offs for E-LOAN’s home equity lines of credit and closed-end second mortgages amounted to approximately $3.8 million, or 1.58% of those particular average loan portfolios, for the year ended December 31, 2014, compared with $10.8 million, or 3.78%, for the year ended December 31, 2013. With the downsizing of E-LOAN, this subsidiary ceased originating these types of loans in 2008. Home equity lending includes both home equity loans and lines of credit. This type of lending, which is secured by a first or second mortgage on the borrower’s residence, allows customers to borrow against the equity in their home. Real estate market values at the time the loan or line is granted directly affect the amount of credit extended and, in addition, changes in these values impact the severity of losses. E-LOAN’s portfolio of home equity lines of credit and closed-end second mortgages outstanding at December 31, 2014 totaled $220 million with a related allowance for loan losses of $6 million, representing 2.53% of that particular portfolio. E-LOAN’s portfolio of home equity lines of credit and closed-end second mortgages outstanding at December 31, 2013 totaled $259 million with a related allowance for loan losses of $11 million, representing 4.05% of that particular portfolio. At December 31, 2014, home equity lines of credit and closed-end second mortgages in which E-LOAN holds both the first and second lien amounted to $47 thousand and $233 thousand, respectively, representing 0.01% and 0.05%, respectively, of the consumer loan portfolio of the BPNA segment. At December 31, 2014, 47% are paying the minimum amount due on the home equity lines of credit. At December 31, 2014, the majority of the closed-end second mortgages in which E-LOAN holds the first lien mortgage were in performing status. Other real estate Other real estate represents real estate property acquired the Corporation’s continuous through foreclosure, part of efforts to aggressively resolve non-performing loans. Other real estate not covered under loss sharing agreements with the FDIC remained flat at $136 million, when compared to December 31, 2013. Other real estate covered under loss sharing agreements with the FDIC, repossessed commercial real estate properties, amounted to $130 million at principally comprised of December 31, 2014, compared with $168 million at the same date in 2013. Generally, 80% of the write-downs taken on these properties based on appraisals or losses on the sale are covered under the loss sharing agreements. the appraisal During 2014, the Corporation transferred $159 million of loans to other real estate, sold $ 148 million of foreclosed properties and recorded write-downs and other adjustments of approximately $ 49 million. Updated appraisals or third-party opinions of value (“BPOs”) are obtained to adjust the values of the other real estate assets. Commencing in 2011, for a commercial or construction other real estate property with a book value greater than $1 million is updated annually and if lower than $1 million it is updated at least every two years. For residential other real estate property, the Corporation requests third-party BPOs or appraisals generally on an annual basis. Appraisals may be adjusted due to age, collateral inspections and property profiles or due to general marked conditions. The adjustments applied are based upon internal information like other appraisals for the type of properties and loss severity information that can provide historical trends in the real estate market, and may change from time to time based on market conditions. For commercial and construction other real estate properties at the BPPR segment, depending on the type of property and/or the age of the appraisal, downward adjustments currently may range between 20% to 50%, including estimated cost to sell. For commercial and construction properties at the BPNA segment, the most typically applied collateral discount rate currently ranges from 10% to 40%, including cost to sell. This discount was determined based on an analysis of other real estate owned and loan sale transactions during the past two years, comparing net proceeds received by the lender relative to the most recent appraised value of the properties. However, additional haircuts can be applied depending upon the age of appraisal, the region and the condition of the property or project. Currently, in the case of the BPPR segment, appraisals of residential properties were subject to downward adjustments of up to approximately 17%, including cost to sell of 5%. In the case of the U.S. mainland residential properties, the downward adjustment approximated up to 10%, including cost to sell of 10%. 88 million, or 17%, from December 31, 2013. TDRs in accruing status increased by $56 million from December 31, 2013, due to sustained borrower performance. Troubled debt restructurings The following tables present the loans classified as TDRs according to their accruing status at December 31, 2014, 2013 and 2012. The Corporation’s TDR loans, excluding covered loans) totaled $1.1 billion at December 31, 2014, an increase of $157 Table 55 - TDRs Non-Covered Loans 2014 (In thousands) Commercial Construction Mortgage Leases Consumer Total Table 56 - TDRs Non-Covered Loans 2013 (In thousands) Commercial Construction Legacy Mortgage Leases Consumer Total Table 57 - TDRs Non-Covered Loans 2012 (In thousands) Commercial Construction Legacy Mortgage Leases Consumer Total December 31, 2014 Accruing Non-Accruing Total $153,380 453 556,346 775 107,530 $818,484 $150,069 5,488 116,465 2,248 14,848 $289,118 $ 303,449 5,941 672,811 3,023 122,378 $1,107,602 December 31, 2013 Accruing Non-Accruing Total $109,462 425 – 535,357 270 116,719 $762,233 $ 80,140 10,865 949 82,786 2,623 10,741 $188,104 $189,602 11,290 949 618,143 2,893 127,460 $950,337 December 31, 2012 Accruing Non-Accruing $105,648 2,969 – 405,063 1,726 125,955 $641,361 $208,119 10,310 5,978 273,042 3,155 8,981 $509,585 Total $ 313,767 13,279 5,978 678,105 4,881 134,936 $1,150,946 The following tables present the covered loans classified as TDRs according to their accruing status at December 31, 2014, 2013 and 2012. Table 58 - TDRs Covered Loans 2014 (In thousands) Commercial Construction Mortgage Consumer Total December 31, 2014 Accruing Non-Accruing $1,689 – 3,629 26 $5,344 $3,257 2,419 3,990 5 $9,671 Total $ 4,946 2,419 7,619 31 $15,015 89 POPULAR, INC. 2014 ANNUAL REPORT Table 59 - TDRs Covered Loans 2013 (In thousands) Commercial Construction Mortgage Consumer Total Table 60 - TDRs Covered Loans 2012 (In thousands) Commercial Construction Mortgage Consumer Total At December 31, 2014, the Corporation’s commercial loan TDRs, excluding covered loans, for the BPPR and BPNA segments amounted to $303 million and $250 thousand, respectively, of which $150 million and none, respectively, were in non- performing status. This compares with $172 million and $18 million, respectively, of which $63 million and $17 million were in non-performing status at December 31, 2013. The outstanding commitments for these commercial loan TDRs amounted to $5 million in the BPPR segment and no commitments outstanding in the BPNA segment at December 31, 2014. Commercial loans that have been modified as part of loss mitigation efforts were evaluated individually for impairment, resulting in a specific reserve of $65 million for the BPPR segment and none for the BPNA segment at December 31, 2014, compared with $13 million and none, respectively, at December 31, 2013. At December 31, 2014, the Corporation’s construction loan TDRs, excluding covered loans, for the BPPR and the BPNA segments amounted to $6 million and none, respectively, of which $5 million and none, respectively, which were in non- performing status. This compares with $6 million each, of which $5 million and $6 million were in non-performing status at December 31, 2013. The outstanding commitments for these construction loan TDRs amounted to $1 million in the BPPR segment and no commitments outstanding in the BPNA segment at December 31, 2014. These construction loan TDRs were individually evaluated for impairment resulting in a specific reserve of $363 thousand for the BPPR and none for the BPNA segments at December 31, 2014, compared with $177 thousand and none, respectively, at December 31, 2013. At December 31, 2014, the Corporation’s had no legacy loans modifications, compared with $949 thousand at December 31, 2013. These at December 31, 2013. There were no commitments outstanding in non-performing loans were status December 31, 2013 Accruing Non-Accruing Total $7,389 – 146 221 $7,756 $10,017 3,464 189 22 $13,692 $17,406 3,464 335 243 $21,448 December 31, 2012 Accruing Non-Accruing $46,142 – 149 517 $ 4,071 7,435 220 106 $ 46,808 $11,832 Total $50,213 7,435 369 623 $ 58,640 for these legacy loan TDRs at December 31, 2014. The legacy loan TDRs were evaluated for impairment requiring no specific reserves at December 31, 2014 and December 31, 2013. At December 31, 2014, the mortgage loan TDRs for the BPPR and BPNA segments amounted to $669 million (including $290 million guaranteed by U.S. sponsored entities) and $4 million, respectively, of which $115 million and $987 thousand, respectively, were in non-performing status. This compares with $565 million (including $240 million guaranteed by U.S. sponsored entities) and $53 million, respectively, of which $73 million and $10 million were in non-performing status at December 31, 2013. These mortgage loan TDRs were evaluated for impairment resulting in a specific allowance for loan losses of $46 million and $273 thousand for the BPPR and BPNA segments, respectively, at December 31, 2014, compared to $38 million and $18 million, respectively, at December 31, 2013. At December 31, 2014, the consumer loan TDRs for the BPPR and BPNA segments amounted to $120 million and $2 million, respectively, of which $15 million and $35 thousand, respectively, were in non-performing status, compared with $125 million and $2 million, respectively, of which $10 million and $587 thousand, respectively, were in non-performing status at December 31, 2013. These consumer loan TDRs were evaluated for impairment resulting in a specific allowance for loan losses of $28 million and $365 thousand for the BPPR and BPNA segments, respectively, at December 31, 2014, compared with $30 million and $280 thousand, at December 31, 2013. respectively, Refer to Note 12 to the consolidated financial statements for additional information on modifications considered troubled debt and quantitative data about troubled debt restructurings performed in the past twelve months. restructurings, qualitative including certain 90 for losses) reserve inherent The Corporation’s assessment of the allowance for loan losses is determined in accordance with accounting guidance, specifically guidance of loss contingencies in ASC Subtopic and loan 450-20 (general impairment guidance in ASC Section 310-10-35 (loans individually assessed for impairment). Decreases in expected cash flows after the acquisition date for loans (pools) accounted for under ASC Subtopic 310-30 are recognized by recording an allowance for loan losses in the current period. For purposes of loans accounted for under ASC Subtopic 310-20 and new loans originated as a result of the Corporation’s assessment of the allowance for loan losses is determined in accordance with the accounting guidance of loss contingencies in ASC Subtopic 450-20 (general reserve for losses) and loan impairment guidance in ASC inherent evaluated for Section 310-10-35 for / impairment. Refer Estimates section of the Corporation’s allowance for loan losses methodology. individually to the Critical Accounting Policies this MD&A for a description of loan commitments assumed, loans The following tables set forth information concerning the composition of the Corporation’s allowance for loan losses (“ALLL”) at December 31, 2014, December 31, 2013 and December 31, 2012 by loan category and by whether the allowance and related provisions were calculated individually pursuant to the requirements for specific impairment or through a general valuation allowance. Allowance for Loan Losses Non-Covered Loan Portfolio The allowance for loan losses, which represents management’s estimate of credit losses inherent in the loan portfolio, is maintained at a sufficient level to provide for estimated credit losses on individually evaluated loans as well as estimated credit losses inherent in the remainder of the loan portfolio. The Corporation’s management evaluates the adequacy of the allowance for In this evaluation, management considers current economic conditions and the resulting impact on Popular Inc.’s loan portfolio, the composition of and risk loan type characteristics, historical loss experience, results of periodic credit reviews of individual loans, regulatory requirements and loan impairment measurement, among other factors. loan losses on a quarterly basis. the portfolio by The Corporation must rely on estimates and exercise judgment regarding matters where the ultimate outcome is unknown, such as economic developments affecting specific customers, industries or markets. Other factors that can affect management’s estimates are the years of historical data when estimating losses, changes in underwriting standards, financial accounting standards and loan impairment measurements, among others. Changes in the financial condition of individual borrowers, in economic conditions, in historical loss experience and in the condition of the various markets in which collateral may be sold may all affect the required level of the allowance for loan losses. Consequently, the business financial condition, liquidity, capital and results of operations could also be affected. Table 61 - Composition of the Allowance for Loan Losses (Dollars in thousands) Commercial Construction Legacy [3] Leasing Mortgage Consumer Total [2] December 31, 2014 Specific ALLL Impaired loans [1] Specific ALLL to impaired loans [1] General ALLL Loans held-in-portfolio, excluding impaired $ 64,736 $ 357,161 $ 363 $ 13,268 $ $ 18.13% 2.74% – – –% $ 770 $ 3,023 $ 46,111 $ 435,824 $ 28,161 $ 117,732 25.47% 10.58% 77,211 23.92% $ 140,254 $ $ $ 140,141 927,008 15.12% 379,578 $ 146,501 $ 6,307 $ 2,944 $ 6,361 $ loans [1] $7,777,106 $238,552 $80,818 $561,366 $6,067,062 $3,752,539 $18,477,443 General ALLL to loans held-in-portfolio, excluding impaired loans [1] Total ALLL Total non-covered loans held-in- portfolio [1] 1.88% 2.64% 3.64% 1.13% 1.27% 3.74% 2.05% $ 211,237 $ 6,670 $ 2,944 $ 7,131 $ 123,322 $ 168,415 $ 519,719 $8,134,267 $251,820 $80,818 $564,389 $6,502,886 $3,870,271 $19,404,451 ALLL to loans held-in-portfolio [1] 2.60% 2.65% 3.64% 1.26% 1.90% 4.35% 2.68% [1] Excludes covered loans acquired on the Westernbank FDIC-assisted transaction. [2] Excludes covered loans acquired on the Westernbank FDIC-assisted transaction. At December 31, 2014, the general allowance on the covered loans amounted to $82.1 million while the specific reserve amounted to $5 thousand. [3] The legacy portfolio is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years at the BPNA reportable segment. 91 POPULAR, INC. 2014 ANNUAL REPORT Table 62 - Composition of the Allowance for Loan Losses December 31, 2013 (Dollars in thousands) Commercial Construction Legacy [3] Leasing Mortgage Consumer Total [2] Specific ALLL Impaired loans [1] Specific ALLL to impaired loans [1] General ALLL Loans held-in-portfolio, excluding impaired loans [1] General ALLL to loans held-in-portfolio, excluding impaired loans [1] Total ALLL Total non-covered loans held-in- portfolio [1] $ $ $ 16,409 297,516 $ 177 $ 22,486 $ - $ 6,045 $ 1,053 $ 2,893 $ 55,667 $ 452,073 $ 30,200 $ 127,703 5.52% 0.79% –% 36.40% 12.31% 23.65% 158,573 $ 5,165 $ 13,704 $ 9,569 $ 101,262 $ 146,684 $ $ $ 103,506 908,716 11.39% 434,957 $ 9,739,669 $183,598 $205,090 $540,868 $6,229,403 $3,804,523 $20,703,151 1.63% 2.81% 6.68% 1.77% 1.63% 3.86% 2.10% $ 174,982 $ 5,342 $ 13,704 $ 10,622 $ 156,929 $ 176,884 $ 538,463 $10,037,185 $206,084 $211,135 $543,761 $6,681,476 $3,932,226 $21,611,867 ALLL to loans held-in-portfolio [1] 1.74% 2.59% 6.49% 1.95% 2.35% 4.50% 2.49% [1] Excludes covered loans acquired on the Westernbank FDIC-assisted transaction. [2] Excludes covered loans acquired on the Westernbank FDIC-assisted transaction. At December 31, 2013, the general allowance on the covered loans amounted to $101.8 million while the specific reserve amounted to $0.3 million. [3] The legacy portfolio is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years at the BPNA reportable segment. Table 63 - Composition of the Allowance for Loan Losses December 31, 2012 (Dollars in thousands) Commercial Construction Legacy [3] Leasing Mortgage Consumer Total [2] Specific ALLL Impaired loans [1] Specific ALLL to impaired loans [1] General ALLL Loans held-in-portfolio, excluding impaired loans [1] General ALLL to loans held-in-portfolio, excluding impaired loans [1] Total ALLL Total non-covered loans held-in- portfolio [1] $ 17,348 $ 527,664 $ 120 $ 41,809 $ – $ 18,744 $ 1,066 $ 4,881 $ 74,667 $ 611,230 $ 17,886 $ 133,377 $ 111,087 $ 1,337,705 3.29% 0.29% –% 21.84% $ 280,334 $ 7,309 $ 33,102 $ 1,828 $ 12.22% 74,708 13.41% 8.30% $ 113,333 $ 510,614 $9,330,538 $211,048 $365,473 $535,642 $5,467,277 $3,735,509 $19,645,487 3.00% 3.46% 9.06% 0.34% 1.37% 3.03% 2.60% $ 297,682 $ 7,429 $ 33,102 $ 2,894 $ 149,375 $ 131,219 $ 621,701 $9,858,202 $252,857 $384,217 $540,523 $6,078,507 $3,868,886 $20,983,192 ALLL to loans held-in-portfolio [1] 3.02% 2.94% 8.62% 0.54% 2.46% 3.39% 2.96% [1] Excludes covered loans acquired on the Westernbank FDIC-assisted transaction. [2] Excludes covered loans acquired on the Westernbank FDIC-assisted transaction. At December 31, 2012, the general allowance on the covered loans amounted to $100 million while the specific reserve amounted to $9 million. [3] The legacy portfolio is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years at the BPNA reportable segment. Table 64 details the breakdown of the allowance for loan losses by loan categories. The breakdown is made for analytical purposes, and it is not necessarily indicative of the categories in which future loan losses may occur. 92 Table 64 - Allocation of the Allowance for Loan Losses 2014 2013 At December 31, 2012 2011 2010 % of loans in each category to total loans ALLL % of loans in each category to total loans ALLL % of loans in each category to total loans ALLL % of loans in each category to total loans ALLL % of loans in each category to total loans 41.9% $175.0 5.3 1.3 13.7 0.4 10.6 2.9 156.9 33.5 176.9 20.0 46.4% $297.7 7.4 1.0 33.1 1.0 2.9 2.5 149.4 30.9 131.2 18.2 47.0% $369.4 8.5 1.2 46.2 1.8 4.7 2.6 102.3 29.0 159.3 18.4 48.4% $399.8 39.8 1.2 76.4 3.1 7.2 2.7 70.9 26.8 199.1 17.8 51.0% 1.6 4.9 2.8 21.8 17.9 100.0% $538.4 100.0% $621.7 100.0% $690.4 100.0% $793.2 100.0% (Dollars in millions) Commercial Construction Legacy Leasing Mortgage Consumer Total[1] ALLL $211.2 6.7 3.0 7.1 123.3 168.4 $519.7 [1] Note: For purposes of this table the term loans refers to loans held-in-portfolio excluding covered loans and held-for-sale. At December 31, 2014, the allowance for loan losses, excluding covered loans, decreased by approximately $19 million when compared with the same date in the previous year, mainly driven by a reserve release of $81 million in the BPNA segment, offset in part by higher reserve in the BPPR segment of $62 million. The general and specific reserves related to the non-covered loans totaled $380 million and $140 million, respectively, compared with $435 million and $104 million, respectively, as of December 31, 2013. The ratio of the allowance for loan losses to loans held-in-portfolio was 2.68% of non-covered loans held-in-portfolio at December 31, 2014, compared with 2.49% at December 31, 2013. The ratio of the allowance to non-performing loans held-in-portfolio was 82.43% at December 31, 2014, compared with 90.05% at December 31, 2013. At December 31, 2014, the allowance for loan losses for non-covered loans at the BPPR segment totaled $489 million, or 3.07% of non-covered loans held-in-portfolio, compared with $427 million, or 2.69% of non-covered loans held-in-portfolio, at December 31, 2013. The increase in the allowance was mostly driven by: (1) qualitative factors adjustments accounting for prevailing macroeconomic conditions in Puerto Rico and the public sector utilities exposures, the effect of risk ratings of certain large in the internal downgrades corporate and public sector relationships, and (3) higher specific reserves. These increases were partially offset by a $14.9 million reserve release as part of the annual review of the components of the ALLL models. The ratio of the allowance to non-performing 80.00% at December 31, 2014, compared with 95.42% at December 31, 2013. loans held-in-portfolio was (2) The allowance for loan losses at the BPNA segment totaled $31 million, or 0.88% of loans held-in-portfolio, compared with $112 million, or 1.95% of at December 31, 2013. The decrease was mainly prompted by continued improvements in credit quality trends, $20 million loans held-in-portfolio, reduction related to the sale of the regional operations, $35 million related to the sale or transfer to loans held-for-sale of certain classified and legacy loans during the second half of 2014, and a $3.8 million reserve release as part of the annual review of the components of the ALLL models during the second quarter of 2014. The ratio of the allowance to non- performing 160.13% at December 31, 2014, compared with 74.12% at December 31, 2013. held-in-portfolio was loans The allowance for loan losses for commercial loans held-in- portfolio, excluding covered loans, amounted to $211 million, or 2.60% of that portfolio, at December 31, 2014, compared with $175 million, or 1.74%, at December 31, 2013, and $298 million, or 3.02%, at December 31, 2012. The allowance for loan losses for the commercial loan portfolio in the BPPR segment, excluding the allowance for covered loans, totaled $202 million, or 3.16% of non-covered commercial loans held- in-portfolio, at December 31, 2014, compared with $128 million, or 1.98%, at December 31, 2013. The increase in the allowance was mainly prompted by challenging economic conditions that persist in Puerto Rico, as mentioned above. At the BPNA segment, the loan portfolio totaled $10 million, or 0.55% of commercial loans held-in-portfolio, at December 31, 2014, commercial compared with $47 million, or 1.31%, at December 31, 2013. This decrease in the allowance for loan losses in the BPNA segment results from continued improvements in credit quality, the sale of its regional operations, the sale of certain classified and legacy loans, and a reserve release as part of the annual review of the components of the ALLL models, as previously mentioned. The ratio of allowance to non-performing loans held-in-portfolio in the commercial loan category was 81.18% at December 31, 2014, compared with 62.71% at December 31, 2013 and 44.74% at December 31, 2012. the allowance for loan losses of The allowance for loan losses for construction loans held-in- portfolio, excluding covered loans, amounted to $7 million, or 93 POPULAR, INC. 2014 ANNUAL REPORT 2.65% of that portfolio, at December 31, 2014, compared with $5 million, or 2.59%, at December 31, 2013, and $7 million, or 2.94%, at December 31, 2012. The allowance for loan losses corresponding to the construction loan portfolio for the BPPR segment, excluding the allowance for covered loans, totaled $5 million, or 3.44% of non-covered construction loans held-in- portfolio, at December 31, 2014, compared with $5 million, or 3.16%, at December 31, 2013. At the BPNA segment, the allowance for loan losses of the construction loan portfolio totaled $1 million, or 1.28% of construction loans held-in- portfolio, at December 31, 2014, compared with $247 thousand, or 0.55%, at December 31, 2013. The ratio of allowance to non-performing loans held-in portfolio in the construction loan category was 48.29% at December 31, 2014, compared with 22.47% at December 31, 2013 and 17.14% at December 31, 2012. Stable allowance levels in the construction portfolio result from the de-risking strategies executed by the Corporation over the past several years to downsize its construction loan portfolio. and $33 million, or 8.62%, The allowance for loan losses for the legacy loans held-in- portfolio amounted to $3 million, or 3.64% of that portfolio, at December 31, 2014, compared with $14 million, or 6.49%, at December 31, 2013, at December 31, 2012. The decrease in the allowance for loan losses was primarily driven by improved credit performance, lower loan balances and lower non-performing loans. The ratio of allowance to non-performing loans held-in portfolio in the legacy loan category was 190.55% at December 31, 2014, compared with 91.06% at December 31, 2013 and 81.25% at December 31, 2012. The allowance for loan losses for mortgage loans held-in- portfolio, excluding covered loans, amounted to $123 million, or 1.90% of that portfolio, at December 31, 2014, compared with $157 million, or 2.35%, at December 31, 2013, and $149 million, or 2.46%, at December 31, 2012. The allowance for loan losses corresponding to the mortgage loan portfolio at the BPPR segment totaled $121 million, or 2.22% of mortgage loans held-in-portfolio, excluding covered loans, at December 31, 2014 compared with $130 million, or 2.41%, respectively, at December 31, 2013. The decrease in the allowance arises from a factors adjustment as a result of the lower environmental annual review of the components of the ALLL model during the second quarter of 2014. At the BPNA segment, the allowance for loan losses corresponding to the mortgage loan portfolio totaled $2 million, or 0.23% of mortgage loans held-in- portfolio, at December 31, 2014, compared with $27 million, or 2.08%, at December 31, 2013. The decrease in the allowance was mainly driven by the sale of certain classified loans, including mortgage TDRs and non-performing loans. The allowance for BPNA’s non-conventional mortgage loan portfolio amounted to $2 million, or 0.61% of that particular loan portfolio, compared with $23 million, or 5.57%, at December 31, 2013. The Corporation is no longer originating non-conventional mortgage loans at BPNA. loan losses for The allowance for loan losses for the consumer portfolio, excluding covered loans, amounted to $168 million, or 4.35% of that portfolio, at December 31, 2014, compared to $177 million, or 4.50%, at December 31, 2013, and $131 million, or 3.39%, at December 31, 2012. The allowance for loan losses of the non-covered consumer loan portfolio in the BPPR segment remained stable at $154 million, or 4.55% of that portfolio, at December 31, 2014, compared with $153 million, or 4.60%, at December 31, 2013. At the BPNA segment, the allowance for loan losses of the consumer loan portfolio totaled $14 million, or 2.98% of consumer loans, at December 31, 2014, compared with $24 million, or 3.95%, at December 31, 2013. The decrease in the allowance for loan losses for the consumer loan portfolio was principally driven by the sale of certain classified consumer loans. The following table presents the Corporation’s recorded investment in non-covered loans that were considered impaired and the related valuation allowance at December 31, 2014, 2013, and 2012. Table 65 - Impaired Loans (Non-Covered Loans) and the Related Valuation Allowance (In millions) Impaired loans: Valuation allowance No valuation allowance required Total impaired loans 2014 2013 2012 Recorded Investment [1] Valuation Allowance [2] Recorded Investment [1] Valuation Allowance [2] Recorded Investment [1] Valuation Allowance [2] $831.5 95.5 $927.0 $140.1 – $140.1 $642.6 266.1 $908.7 $103.5 – $103.5 $ 897.6 440.1 $1,337.7 $111.1 – $111.1 [1] Excludes covered loans acquired on the Westernbank FDIC-assisted transaction. [2] Excludes the specific reserve related to covered loans acquired on the Westernbank FDIC-assisted transaction which amounted to $5 thousand at December 31, 2014 (2013 - $0.3 million; 2012 - $9 million). 94 With respect to the $96 million portfolio of the non-covered impaired loans for which no allowance for loan losses was required at December 31, 2014, management followed the guidance for specific impairment of a loan. When a loan is impaired, the measurement of the impairment may be based on: (1) the present value of the expected future cash flows of the impaired loan discounted at the loan’s original effective interest rate; (2) the observable market price of the impaired loan; or (3) the fair value of the collateral, if the loan is collateral dependent. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. Impaired loans with no valuation allowance were mostly collateral dependent loans for which management charged-off specific reserves based on the fair value of the collateral less estimated costs to sell. Average non-covered impaired loans for the years ended December 31, 2014 and December 31, 2013 were $932 million and $1.1 billion, respectively. The Corporation recognized interest income on non-covered impaired loans of $35.1 million and $39.0 million for the years ended December 31, 2014 and December 31, 2013, respectively. The following tables set forth the activity in the specific reserves for non-covered impaired loans for the years ended December 31, 2014 and 2013. Table 66 - Activity in Specific ALLL for the Year Ended December 31, 2014 (In thousands) Commercial Construction Mortgage Legacy Consumer Leasing Total Beginning balance Provision for impaired loans (reversal of provision) - Continuing operations Reversal of provision for impaired loans - Discontinued operations Net charge-offs Specific allowance for loan losses at December 31, $ 16,409 $ 177 $55,667 $– $ 30,200 $1,053 $103,506 78,340 2,444 (276) – (30,013) – (2,258) – (9,280) – – – 13,800 (273) 94,035 (70) (15,769) – (10) (70) (57,330) 2014 $ 64,736 $ 363 $46,111 $– $ 28,161 $ 770 $140,141 Table 67 - Activity in Specific ALLL for the Year Ended December 31, 2013 (In thousands) Commercial Construction Mortgage Legacy Consumer Leasing Total Beginning balance Provision for impaired loans (reversal of provision) Net charge-offs Net write-downs $ 17,348 176,104 (115,741) (61,302) $ 120 4,776 (3,880) (839) $ 74,667 70,336 (13,668) (75,668) $ – 1,248 (1,248) – $17,886 19,089 (6,775) – $1,066 (13) – – $ 111,087 271,540 (141,312) (137,809) Specific allowance for loan losses at December 31, 2013 $ 16,409 $ 177 $ 55,667 $ – $30,200 $1,053 $ 103,506 individually evaluated impaired loans For the year ended December 31, 2014, total net charge-offs for amounted to approximately $57.3 million, of which $56.8 million pertained to the BPPR segment and $505 thousand to the BPNA segment. Most of these net charge-offs were related to the commercial loan portfolio. The Corporation requests updated appraisal reports from pre-approved appraisers for loans that are considered impaired, and individually analyzes them following the Corporation’s reappraisal policy. This policy requires updated appraisals for loans secured by real estate (including construction loans) either annually or every two years depending on the total exposure of the the borrower. As a general procedure, the Corporation internally reviews appraisals as part of underwriting and approval process and also for credits considered impaired. Generally, the specialized appraisal review unit of the Corporation’s Credit Risk Management Division following certain materiality internally reviews appraisals benchmarks. In addition to evaluating the reasonability of the appraisal reports, these reviews monitor that appraisals are performed following the Uniform Standards of Professional Appraisal Practice (“USPAP”). and/or appraisals like other Appraisals may be adjusted due to age or general market conditions. The adjustments applied are based upon internal information, severity information that can provide historical trends in the real estate market. Specifically, in commercial and construction impaired loans for the BPPR segment, and depending on the type of property and/or the age of the appraisal, downward adjustments currently range from 25% to 45% (including costs to sell). At December 31, 2014, the weighted average discount rate for the BPPR segment was 27%. loss For commercial and construction loans at segment, downward adjustments to the the BPNA collateral value 95 POPULAR, INC. 2014 ANNUAL REPORT location and condition of currently range from 10% to 40% depending on the age of the appraisals and the type, the property. This discount used was determined based on a study of other real estate owned and loan sale transactions during the past two years, comparing net proceeds received by the bank relative the properties. However, additional haircuts can be applied the region and the depending upon the age of appraisal, condition of the project. Factors are based on appraisal changes and/or trends in loss severities. Discount rates discussed above include costs to sell and may change from time to time based on market conditions. appraised value the most recent to of For mortgage loans secured by residential real estate properties, a current assessment of value is made not later than the contractual due date. Any outstanding 180 days past the collateral balance in excess of the estimated value of property, less estimated costs to sell, is charged-off. For this purpose, the Corporation requests third-party Broker Price Opinion of Value “BPOs” of the subject collateral property at least annually. In the case of the mortgage loan portfolio for the BPPR segment, BPOs of the subject collateral properties are currently of up to approximately 30%, including cost to sell of 5%. In the case of the U.S. mortgage loan portfolio, a 10% haircut is taken, which includes costs to sell. to downward adjustment subject Discount rates discussed above include costs to sell and may change from time to time based on market conditions. The table that follows presents the approximate amount and percentage of non-covered impaired loans for which the Corporation relied on appraisals dated more than one year old for purposes of impairment requirements at December 31, 2014. Table 68 - Non-Covered Impaired Loans With Appraisals Dated 1 Year Or Older December 31, 2014 Total Impaired Loans - Held-in-portfolio (HIP) Outstanding Principal Balance Impaired Loans with Appraisals Over One-Year Old [1] $303,128 10,693 12% 79 (In thousands) Commercial Construction [1] Based on outstanding balance of total impaired loans. Count 140 6 Table 69 - Non-Covered Impaired Loans With Appraisals Dated 1 Year Or Older December 31, 2013 (In thousands) Commercial Construction Legacy [1] Based on outstanding balance of total impaired loans. Total Impaired Loans - Held-in-portfolio (HIP) Count Outstanding Principal Balance Impaired Loans with Appraisals Over One-Year Old [1] 174 9 4 $248,154 20,162 6,045 18% 27 – The percentage of the Corporation’s impaired construction loans that were relied upon “as developed” and “as is” for the periods ended December 31, 2014 and 2013 are presented in the tables below. Table 70 - Impaired Construction Loans Relied Upon “As is” or “As Developed” (In thousands) Count Amount in $ As a % of total construction impaired loans HIP Count Amount in $ “As is” December 31, 2014 “As developed” As a % of total construction impaired loans HIP Average % of completion Loans held-in-portfolio 7 $7,653 58% 2 $5,616 42% 87% 96 Table 71 - Impaired Construction Loans Relied Upon “As is” or “As Developed” (In thousands) Count Amount in $ As a % of total construction impaired loans HIP Count Amount in $ “As is” December 31, 2013 “As developed” As a % of total construction impaired loans HIP Average % of completion Loans held-in-portfolio 12 $18,835 77% 2 $5,703 23% 90% At December 31, 2014, the Corporation accounted for $6 million impaired construction loans under the “as developed” value. This approach is used since the current plan is that the project will be completed and it reflects the best strategy to reduce potential the project. The costs to complete the project and the related increase in debt are considered an integral part of the individual reserve determination. losses based on the prospects of Costs to complete are deducted from the subject “as developed” collateral value on impaired construction loans. calculated following the are Impairment determinations collateral dependent method, comparing the outstanding principal balance of the respective impaired construction loan against the expected realizable value of the subject collateral. Realizable values of subject collaterals have been defined as the “as developed” appraised value less costs to complete, costs to sell and discount factors. Costs to complete represent an estimate of the amount of money to be disbursed to complete a particular phase of a construction project. Costs to sell have been determined as a percentage of the subject collateral value, to cover related collateral disposition costs (e.g. legal and commission fees). As discussed previously, discount factors may be applied to the appraised amounts due to age or general market conditions. Allowance for loan losses - Covered loan portfolio The Corporation’s allowance for loan losses for the covered loan portfolio acquired in the Westernbank FDIC-assisted transaction amounted to $82 million at December 31, 2014. This allowance covers the estimated credit loss exposure related to: (i) acquired loans accounted for under ASC Subtopic 310-30, which required an allowance for loan losses of $79 million at December 31, 2014, compared with $94 million at December 31, 2013; and (ii) acquired loans accounted for under ASC Subtopic 310-20, which required an allowance for loan losses of $3 million at December 31, 2014 and $8 million at December 31, 2013. Decreases in expected cash flows after the acquisition date for loans (pools) accounted for under ASC Subtopic 310-30 are recognized by recording an allowance for loan losses in the current period. For purposes of loans accounted for under ASC Subtopic 310-20 and new loans originated as a result of loan commitments assumed, the allowance for loan losses is determined in accordance with the accounting guidance of loss contingencies in ASC Subtopic 450- the Corporation’s assessment of 20 (general reserve for inherent losses) and loan impairment guidance in ASC Section 310-10-35 for loans individually evaluated for impairment. Concurrently, the Corporation records an increase in the FDIC loss share asset for the expected reimbursement from the FDIC under the loss sharing agreements. is for as well overseeing responsible Enterprise Risk and Operational Risk Management The Financial and Operational Risk Management Division (the “FORM Division”) the implementation of the Enterprise Risk Management (ERM) as developing and overseeing the framework, implementation of risk programs and reporting that facilitate a broad integrated view of risks. The FORM Division also leads the ongoing development of a strong risk management culture and the framework that support effective risk governance. For the Corporate Compliance new products and initiatives, Division has put to ensure that an in place processes appropriate standard readiness assessment is performed before launching a new product or initiative. Similar procedures are followed with the Treasury Division for transactions involving the purchase and sale of assets. itself Operational risk can manifest in various ways, including errors, fraud, cyber attacks, business interruptions, inappropriate behavior of employees, and failure to perform in a timely manner, among others. These events can potentially result in financial losses and other damages to the Corporation, including reputational harm. The successful management of to a diversified operational financial services company like Popular because of the nature, volume and complexity of its various businesses. risk is particularly important senior To monitor and control operational risk and mitigate related losses, the Corporation maintains a system of comprehensive policies and controls. The Corporation’s Operational Risk Committee (ORCO), which is composed of level representatives from the business lines and corporate functions, provides executive oversight to facilitate consistency of effective policies, best practices, controls and monitoring tools for managing and assessing all types of operational risks across the Corporation. The FORM Division, within the Corporation’s Risk Management Group, serves as ORCO’s operating arm and is responsible for establishing baseline processes to measure, monitor, limit and manage operational risk. In addition, the Auditing Division provides oversight about policy compliance and ensures adequate attention is paid to correct the identified issues. 97 POPULAR, INC. 2014 ANNUAL REPORT segment Operational risks fall into two major categories: business specific and corporate-wide affecting all business lines. The primary responsibility for the day-to-day management of business specific risks relies on business unit managers. Accordingly, business unit managers are responsible for ensuring that appropriate risk containment measures, including corporate-wide or business specific policies and procedures, controls and monitoring tools, are in place to minimize risk occurrence and loss exposures. Examples of these data personnel management reconciliation processes, transaction processing monitoring and analysis and contingency plans for systems interruptions. To manage corporate-wide risks, specialized functions, such as Legal, Information Security, Business Continuity, and Finance and Compliance, among others, assist the business units in the development and implementation of risk management practices specific to the needs of the individual businesses. practices, include Operational risk management plays a different role in each category. For business specific risks, the FORM Division works with the segments to ensure consistency in policies, processes, and assessments. With respect to corporate-wide risks, such as information security, business continuity, legal and compliance, the risks are assessed and a consolidated corporate view is developed and communicated to the business level. Procedures exist that are designed to ensure that policies relating to conduct, ethics, and business practices are followed. We internal controls, data continually monitor the system of processing and processes procedures to manage operational risk at appropriate, cost- effective levels. An additional level of review is applied to current and potential regulation and its impact on business processes, to ensure that appropriate controls are put in place corporate-wide systems, and to address regulation requirements. Today’s threats to customer information and information systems are complex, more wide spread, continually emerging, and increasing at a rapid pace. The Corporation continuously monitors these threats and, to date, we have not experienced any material losses as a result of cyber attacks. ADOPTION OF NEW ACCOUNTING STANDARDS AND ISSUED BUT NOT YET EFFECTIVE ACCOUNTING STANDARDS Refer to Note 3, “New Accounting Pronouncements” to the consolidated financial statements. prepares its Consolidated Adjusted results of operations - Non-GAAP financial measure Financial The Corporation Statements using accounting principles generally accepted in the U.S. (“U.S. GAAP”), the (“reported basis”). These financial statements appear on pages 109 to 113. In addition to analyzing the Corporation’s results on a reported basis, management monitors the performance of the Corporation on an “adjusted basis” and excludes the impact of certain transactions on the the results of results Corporation presents a discussion of excluding the impact of these events to arrive at the “adjusted the “adjusted results” results”. Management believes that provide meaningful underlying about performance of the Corporation’s ongoing operations. The “adjusted results” are a Non-GAAP financial measure. Refer to Tables 72-74, for a reconciliation of the reported results to the “adjusted results” for the years ended December 31, 2014 and 2013. its operations. Throughout this MD&A, its financial information the 98 Table 72 - Adjusted Consolidated Statement of Operations for the Year Ended December 31, 2014 (Non-GAAP) 2nd QTR Year ended 31-Dec-14 3rd QTR 4th QTR TARP repayment discount amortization and Income Tax adjustments [2] $(414,068) – – Actual Results (US GAAP) $ 945,072 223,999 46,135 674,938 (414,068) 383,902 30,615 (870) 4,358 40,591 (40,629) (103,024) 71,572 386,515 418,679 86,707 56,918 532 282,055 40,307 49,611 26,725 232,150 1,193,684 – – – – – – – – – – – – – – – – – – – BPNA Reorganization [3] $ – – – – – – – – – – – – – – – – BPNA Reorganization [3] $(20,663) 11,950 – (32,613) – – – – – – – – – – – – – – – – 4,574 – 4,574 – – – – 8,290 – 8,290 Income Tax Adjustments [4] Indemnification Assets Adjustment [5] $ – – – – – – – – – – – – – – – – – – – – – – – $ – – – – – – – – – – 12,492 – 12,492 – – – – – – – – – – BPNA Reorganization [3] $(18,591) 878 – (19,469) – – – – 1,684 – – – 1,684 – – – 532 – – – 13,861 – 14,393 Other Adjustments $ – – – – – – – – – – – – – 2,974[6] 1,895[7] – – – – – – – 4,869 Adjusted Results (Non-GAAP) $1,398,394 211,171 46,135 1,141,088 383,902 30,615 (870) 4,358 38,907 (40,629) (115,516) 71,572 372,339 415,705 84,812 56,918 – 282,055 40,307 49,611 – 232,150 1,161,558 (132,231) 58,279 (414,068) (15,393) (4,574) – (40,903) – – 20,048 12,492 2,498 (32,178) – (4,869) – 351,869 51,126 $ (190,510) $(398,675) $ (4,574) $(40,903) $(20,048) $ 9,994 $(32,178) $(4,869) $ 300,743 (122,980) – $ (313,490) $(398,675) (193,363) $(197,937) 20,949 $(19,954) – $(20,048) – $ 9,994 6,534 $(25,644) – $(4,869) 42,900 $ 343,643 (In thousands) Net interest income Provision for loan losses - non- covered loans Provision for loan losses - covered loans [1] Net interest income after provision for loan losses Service charges on deposit accounts and other service fees Mortgage banking activities Net loss and valuation adjustments on investments securities Trading account profit Net gain (loss) on sale of loans, including valuation adjustments on loans held-for- sale Adjustments (expense) to indemnity reserves on loans sold FDIC loss share expense Other non-interest income Total non-interest income Personnel costs Net occupancy expenses Other taxes Loss on early extinguishment of debt Professional fees FDIC deposit insurance OREO expense Restructuring costs Other operating expenses Total operating expenses (Loss) income from continuing operations before income tax Income tax expense (benefit) (Loss) income from continuing operations (Loss) income from discontinued operations, net of tax [8] Net (loss) income [1] Covered loans represent loans acquired in the Westernbank FDIC-assisted transaction that are covered under FDIC loss sharing agreements. [2] Income tax adjustments include a benefit of approximately $23.4 million related to a Closing Agreement with the PR Department of Treasury, completed during the second quarter of 2014 and the negative impact of the deferred tax asset valuation allowance of approximately $8.0 million recorded at the Holding Company, due to the difference in the tax treatment of the interest expense related to the TARP funds and the newly issued $450 million senior notes. Includes the aggregated impact of $39.8 million refinancing fees of structured repos, net loss of $11.1 million in bulk loan sales and $26.7 million in restructuring incurred in connection with the reorganization of PCB. [3] [4] On July 1, 2014, the Government of Puerto Rico approved an amendment to the Internal Revenue Code, which, among things, changed the income tax rate for capital gains from 15% to 20%. As a result, the Corporation recognized an income tax expense of $20.0 million, mainly related to the deferred tax liability associated with the portfolio acquired from Westernbank. [5] The FDIC indemnity assets amortization included a positive adjustment of $12.5 million to reverse the impact of accelerated amortization expense recorded in prior periods. [6] Represents the impact of the compensation package granted upon separation of an officer of the Corporation equal to approximately $3.0 million. [7] Represents the net loss on the early cancellation of a lease at BPNA of $1.9 million. [8] Adjustments included within loss from discontinued operations include approximately $186.5 million of goodwill impairment charge, $33.8 million in the net gain on the sale of the U.S. regional operations and approximately $13.7 million in transaction costs, which include severance payment expenses, legal and other professional services, among others incurred in connection with the agreements to sell the U.S. regional operations 99 POPULAR, INC. 2014 ANNUAL REPORT Table 73 - Adjusted Consolidated Statement of Operations for the Year Ended December 31, 2013 (Non-GAAP) Year ended 31-Dec-13 1st QTR Actual Results (US GAAP) Impact of Sale of NPAs [2] Impact of Sale of NPLs 2nd QTR Impact of EVERTEC’s IPO 3rd QTR Impact of EVERTEC’s SPO 4th QTR Impact of EVERTEC’s SPO Income Tax Adjustment [3] $1,344,574 $ – $ – $ 1,502 $ 536,710 148,823 169,248 69,396 – – – – loan losses 738,468 (148,823) (169,248) 1,502 (In thousands) Net interest income Provision for loan losses - non- covered loans Provision for loan losses - covered loans [1] Net interest income after provision for Service charges on deposit accounts and other service fees Mortgage banking activities Net gain and valuation adjustments on investments securities Trading account loss Net (loss) gain on sale of loans, including valuation adjustments on loans held-for-sale Adjustments (expense) to indemnity reserves on loans sold FDIC loss share expense Other non-interest income Total non-interest income Personnel costs Net occupancy expenses Other taxes Loss on early extinguishment of debt Professional fees FDIC deposit insurance OREO expense Other operating expenses Total operating expenses Income (loss) before income tax Income tax (benefit) expense Income (loss) from continuing 392,221 71,657 7,966 (13,483) – – – – – – – – – – 5,856 – (52,708) (61,387) (3,865) – (10,700) – – (72,087) – – – 5 – 37,046 – 37,051 (3,047) – – (6,912) – – 162,091 167,947 – – – – – – – – – – – 856 – – – 856 (37,054) (82,051) 504,465 791,013 428,697 86,651 58,028 3,388 278,127 56,728 79,658 230,713 1,221,990 307,491 (251,327) – – – – – – – – – – – – – – – – – – – – $ $ – – – – – – – – – – – – – – – – – – – – 175,867 175,867 – – 92,358 92,358 – – – 250 – – – 250 – – – – – – – – Adjusted Results (Non-GAAP) $1,343,072 218,639 69,396 1,055,037 392,221 71,657 2,110 (13,483) 12,544 (23,307) (82,051) 74,149 433,840 428,697 86,651 58,028 3,388 277,016 56,728 42,612 230,713 1,183,833 305,044 89,361 (257,961) (77,388) (176,160) (68,987) 168,593 11,988 – (218,035) 175,617 7,789 92,358 3,945 operations $ 558,818 $(180,573) $(107,173) $156,605 $ 218,035 $167,828 $88,413 $ 215,683 Income (loss) from discontinued operations, net of tax 40,509 – – – – – – 40,509 Net income (loss) $ 599,327 $(180,573) $(107,173) $156,605 $ 218,035 $167,828 $88,413 $ 256,192 [1] Covered loans represent loans acquired in the Westernbank FDIC-assisted transaction that are covered under FDIC loss sharing agreements. [2] Net (loss) gain on sale of loans for the first quarter includes $8.8 million of negative valuation adjustments on loans held for sale which were transferred to held-in- portfolio subsequent to the sale. [3] Represents the net benefit of $215.6 million for the increase on the net deferred tax asset from the change of the corporate tax rate from 30% to 39% which includes the adjustment for the results of the first quarter of 2013, $7.9 million resulting from the adjustment in tax rate for distributions from EVERTEC from 15% to 4%, offset by an adjustment of $5.5 million on the deferred tax liability related to the covered loans portfolio. Table 74 - Adjusted Consolidated Statement of Operations (Non-GAAP) - Comparative (In thousands) Net interest income Provision for loan losses - non-covered loans Provision for loan losses - covered loans [1] Net interest income after provision for loan losses Service charges on deposit accounts and other service fees Mortgage banking activities Net loss and valuation adjustments on investments securities Trading account profit Net gain on sale of loans, including valuation adjustments on loans held-for-sale Adjustments (expense) to indemnity reserves on loans sold FDIC loss share expense Other non-interest income Total non-interest income Personnel costs Net occupancy expenses Other taxes Loss on early extinguishment of debt Professional fees FDIC deposit insurance OREO expense Other operating expenses Total operating expenses Income from continuing operations before income tax Income tax expense (benefit) Income from continuing operations Income from discontinued operations, net of tax Net income (loss) 100 Adjusted Results (Non-GAAP) 2013 2014 Variance $1,398,394 211,171 46,135 $1,343,072 218,639 69,396 $ 55,322 (7,468) (23,261) 1,141,088 1,055,037 86,051 383,902 30,615 (870) 4,358 38,907 (40,629) (115,516) 71,572 372,339 415,705 84,812 56,918 – 282,055 40,307 49,611 232,150 392,221 71,657 2,110 (13,483) 12,544 (23,307) (82,051) 74,149 (8,319) (41,042) (2,980) 17,841 26,363 (17,322) (33,465) (2,577) 433,840 (61,501) 428,697 86,651 58,028 3,388 277,016 56,728 42,612 230,713 (12,992) (1,839) (1,110) (3,388) 5,039 (16,421) 6,999 1,437 1,161,558 1,183,833 (22,275) 351,869 51,126 305,044 89,361 46,825 (38,235) $ 300,743 $ 215,683 $ 85,060 $ 42,900 $ 40,509 $ 2,391 $ 343,643 $ 256,192 $ 87,451 101 POPULAR, INC. 2014 ANNUAL REPORT Statistical Summary 2010-2014 Statements of Financial Condition (In thousands) Assets: Cash and due from banks Money market investments: Federal funds sold and securities purchased under agreements to resell Time deposits with other banks Total money market investments Trading account securities, at fair value Investment securities available-for-sale, at fair value Investment securities held-to-maturity, at amortized cost Other investment securities, at lower of cost or realizable value Loans held-for-sale, at lower of cost or fair value Loans held-in-portfolio: Loans not covered under loss sharing agreements with the FDIC Loans covered under loss sharing agreements with the FDIC Less - Unearned income Allowance for loan losses Total loans held-in-portfolio, net FDIC loss share asset Premises and equipment, net Other real estate not covered under loss sharing agreements with the FDIC Other real estate covered under loss sharing agreements with the FDIC Accrued income receivable Mortgage servicing assets, at fair value Other assets Goodwill Other intangible assets Total assets Liabilities and Stockholders’ Equity Liabilities: Deposits: Non-interest bearing Interest bearing Total deposits Assets sold under agreements to repurchase Other short-term borrowings Notes payable Other liabilities Liabilities from discontinued operations Total liabilities Stockholders’ equity: Preferred stock Common stock Surplus Retained earnings (accumulated deficit) Treasury stock - at cost Accumulated other comprehensive loss, net of tax Total stockholders’ equity Total liabilities and stockholders’ equity 2014 2013 2012 2011 2010 At December 31, $ 381,095 $ 423,211 $ 439,363 $ 535,282 $ 452,373 151,134 1,671,252 1,822,386 138,527 5,315,159 103,170 161,906 106,104 181,020 677,433 858,453 339,743 5,294,800 140,496 181,752 110,426 246,977 838,603 1,085,580 314,525 5,084,201 142,817 185,443 354,468 327,668 1,048,506 1,376,174 436,331 5,009,823 125,383 179,880 363,093 181,961 797,334 979,295 546,713 5,236,852 122,354 163,513 893,938 19,498,286 2,542,662 93,835 601,792 21,704,010 2,984,427 92,144 640,555 21,080,005 3,755,972 96,813 730,607 20,703,192 4,348,703 100,596 815,308 20,834,276 4,836,882 106,241 793,225 21,345,321 23,955,738 24,008,557 24,135,991 24,771,692 542,454 494,581 948,608 519,516 1,399,098 535,793 1,915,128 538,486 2,410,219 545,453 135,500 130,266 121,818 148,694 1,646,443 465,676 37,595 135,501 168,007 131,536 161,099 1,687,558 647,757 45,132 266,844 139,058 125,728 154,430 1,569,578 647,757 54,295 172,497 109,135 125,209 151,323 1,462,393 648,350 63,954 161,496 57,565 150,658 166,907 1,449,887 647,387 58,696 $33,096,695 $35,749,333 $36,507,535 $37,348,432 $38,814,998 $ 5,783,748 19,023,787 $ 5,922,682 20,788,463 $ 5,794,629 21,205,984 $ 5,655,474 22,286,653 $ 4,939,321 21,822,879 24,807,535 26,711,145 27,000,613 27,942,127 26,762,200 1,271,657 21,200 1,711,828 1,012,029 5,064 1,659,292 401,200 1,584,754 766,792 – 2,016,752 636,200 1,777,721 966,249 – 2,141,097 296,200 1,856,372 1,193,883 – 2,412,550 364,222 4,170,183 1,305,312 – 28,829,313 31,123,183 32,397,535 33,429,679 35,014,467 50,160 1,036 4,196,458 253,717 (4,117) (229,872) 50,160 1,034 4,170,152 594,430 (881) (188,745) 50,160 1,032 4,150,294 11,826 (444) (102,868) 50,160 1,026 4,123,898 (212,726) (1,057) (42,548) 50,160 1,023 4,103,211 (347,328) (574) (5,961) 4,267,382 4,626,150 4,110,000 3,918,753 3,800,531 $33,096,695 $35,749,333 $36,507,535 $37,348,432 $38,814,998 102 2010 $1,517,852 5,384 238,682 27,918 1,789,836 622,246 1,167,590 911,564 – 256,026 16,153 3,992 33,017 Statistical Summary 2010-2014 Statements of Operations (In thousands) Interest income: Loans Money market investments Investment securities Trading account securities Total interest income Less - Interest expense Net interest income Provision for loan losses - non-covered loans Provision for loan losses - covered loans Net interest income after provision for loan losses Mortgage banking activities Net (loss) gain and valuation adjustments on investment securities Trading account profit (loss) Net gain (loss) on sale of loans, including valuation adjustments on loans held-for- sale Adjustments (expense) to indemnity reserves FDIC loss share (expense) income Fair value change in equity appreciation instrument Gain on sale of processing and technology business Other non-interest income Total non-interest income Operating expenses: Personnel costs All other operating expenses Total operating expenses (Loss) income from continuing operations, before income tax Income tax expense (benefit) (Loss) income from continuing operations (Loss) income from discontinued operations, net of income tax 2014 $1,478,750 4,224 132,631 17,938 1,633,543 688,471 945,072 223,999 46,135 674,938 30,615 (870) 4,358 For the years ended December 31, 2012 2011 2013 $1,481,096 3,464 141,807 21,573 1,647,940 303,366 1,344,574 536,710 69,396 738,468 71,657 7,966 (13,483) $1,449,227 3,703 168,632 22,824 1,644,386 362,759 1,281,627 322,234 74,839 884,554 84,771 (1,707) 4,478 $1,561,377 3,596 205,828 35,607 1,806,408 484,860 1,321,548 395,853 145,635 780,060 (4,505) 10,844 48,098 40,591 (52,708) (29,414) 4,054 5,101 (40,629) (103,024) – – 455,474 386,515 418,679 775,005 1,193,684 (37,054) (82,051) – – 896,686 791,013 428,697 793,293 1,221,990 (21,198) (56,211) (33,068) 66,791 (72,013) (25,751) – 8,323 42,555 – 530,770 511,489 434,333 780,656 1,214,989 – 503,305 603,842 421,915 721,945 1,143,860 240,042 114,927 640,802 635,551 1,279,407 483,747 777,479 1,261,226 274,207 108,230 (132,231) 58,279 307,491 (251,327) 181,054 (26,403) $ (190,510) $ 558,818 $ 207,457 $ 125,115 $ 165,977 (122,980) 40,509 37,818 26,210 (28,576) Net (Loss) Income $ (313,490) $ 599,327 $ 245,275 $ 151,325 $ 137,401 Net (Loss) Income Applicable to Common Stock $ (317,213) $ 595,604 $ 241,552 $ 147,602 $ (54,576) 103 POPULAR, INC. 2014 ANNUAL REPORT Statistical Summary 2010-2014 Average Balance Sheet and Summary of Net Interest Income On a Taxable Equivalent Basis* (Dollars in thousands) Assets Interest earning assets: Money market investments U.S. Treasury securities Obligations of U.S. Government sponsored 2014 2013 2012 Average Balance Interest Average Rate Average Balance Interest Average Rate Average Balance Interest Average Rate $ 1,305,326 $ 264,393 4,224 4,730 0.32% $ 1,036,495 $ 1.79 37,429 3,464 1,505 0.33% $ 1,051,373 $ 4.02 34,757 3,704 1,418 0.35% 4.08 entities 2,006,170 31,913 1.59 1,273,766 28,926 2.27 1,038,829 34,881 3.36 Obligations of Puerto Rico, States and political subdivisions Collateralized mortgage obligations and mortgage-backed securities Other Total investment securities Trading account securities Non-covered loans Covered loans 188,125 13,450 7.15 172,403 12,295 7.13 152,697 9,850 6.45 3,231,806 195,139 5,885,633 339,563 101,650 10,265 162,008 20,914 19,595,972 2,770,779 1,239,469 293,610 3.15 5.26 2.75 6.16 6.33 10.60 6.85 3,758,610 245,980 5,488,188 416,538 106,377 12,765 161,868 26,026 19,572,159 3,227,719 1,218,349 300,745 22,799,878 1,519,094 2.83 5.19 2.95 6.25 6.22 9.32 6.66 3,752,954 247,717 5,226,954 445,881 121,494 14,451 182,094 25,909 18,736,207 4,050,338 1,168,091 301,441 22,786,545 1,469,532 3.24 5.83 3.48 5.81 6.23 7.44 6.45 Total loans (net of unearned income) 22,366,751 1,533,079 Total interest earning assets/Interest income $29,897,273 $1,720,225 5.75% $29,741,099 $1,710,452 5.75% $ 29,510,753 $1,681,239 5.70% Total non-interest earning assets 3,758,897 Total assets from continuing operations $33,656,170 4,362,183 $34,103,282 4,486,835 $ 33,997,588 Total assets from discontinued operations Total assets Liabilities and Stockholders’ Equity Interest bearing liabilities: Savings, NOW, money market and other interest bearing demand accounts Time deposits Short-term borrowings Notes payable Total interest bearing liabilities/Interest 1,525,687 $35,181,857 – – 2,163,711 – – 2,266,443 – – $36,266,993 $ 36,264,031 $11,557,597 $ 7,556,109 1,886,662 1,627,541 30,187 74,900 67,376 516,008 0.26% $11,243,095 $ 0.99 3.57 31.70 7,956,922 2,571,875 1,719,985 31,080 93,777 38,430 140,079 0.28% $ 10,834,812 $ 1.18 1.49 8.14 8,835,308 2,563,970 1,850,514 40,069 127,696 46,802 148,192 0.37% 1.45 1.83 8.01 expense 22,627,909 688,471 3.04 23,491,877 303,366 1.29 24,084,604 362,759 1.51 Total non-interest bearing liabilities 6,409,810 Total liabilities from continuing operations Total liabilities from discontinued operations Total liabilities Stockholders’ equity 29,037,719 1,588,386 30,626,105 4,555,752 Total liabilities and stockholders’ equity $35,181,857 Net interest income on a taxable equivalent – – 6,390,174 29,882,051 2,208,593 32,090,644 4,176,349 $36,266,993 – – 6,130,890 30,215,494 2,204,885 32,420,379 3,843,652 $ 36,264,031 – – basis Cost of funding earning assets Net interest margin $1,031,754 $1,407,086 $1,318,480 2.30% 3.45% 1.02% 4.73% 1.23% 4.47% Effect of the taxable equivalent adjustment Net interest income per books 86,682 $ 945,072 62,512 $1,344,574 36,853 $1,281,627 * Shows the effect of the tax exempt status of some loans and investments on their yield, using the applicable statutory income tax rates. The computation considers the interest expense disallowance required by the Puerto Rico Internal Revenue Code. This adjustment is shown in order to compare the yields of the tax exempt and taxable assets on a taxable basis. Note: Average loan balances include the average balance of non-accruing loans. No interest income is recognized for these loans in accordance with the Corporation’s policy. 104 Statistical Summary 2010-2014 Average Balance Sheet and Summary of Net Interest Income On a Taxable Equivalent Basis (Dollars in thousands) Assets Interest earning assets: Money market investments U.S. Treasury securities Obligations of U.S. Government sponsored entities Obligations of Puerto Rico, States and political subdivisions Collateralized mortgage obligations and mortgage-backed securities Other Total investment securities Trading account securities Non-covered loans Covered loans Total loans (net of unearned income) Average Balance 2011 Interest Average Rate Average Balance 2010 Interest Average Rate $ 1,152,014 $ 3,597 0.31% $ 1,539,046 $ 5,384 0.35% 50,971 1,180,680 139,847 3,896,743 226,033 5,494,274 667,277 1,502 49,781 8,972 148,884 15,213 224,352 38,850 18,543,619 4,613,361 1,168,446 412,678 23,156,980 1,581,124 2.95 4.22 6.42 3.82 6.73 4.08 5.82 6.30 8.95 6.83 80,740 1,473,227 228,291 4,340,545 176,766 6,299,569 493,628 1,527 54,748 11,171 160,632 11,048 239,126 32,333 19,595,062 3,364,932 1,218,988 303,096 22,959,994 1,522,084 1.89 3.72 4.89 3.70 6.25 3.80 6.55 6.22 9.01 6.63 Total interest earning assets/Interest income $30,470,545 $1,847,923 6.06% $31,292,237 $1,798,927 5.75% Total non-interest earning assets Total assets from continuing operations Total assets from discontinued operations Total assets Liabilities and Stockholders’ Equity Interest bearing liabilities: Savings, NOW, money market and other interest bearing demand accounts Time deposits Short-term borrowings Notes payable Note issued to the FDIC Total interest bearing liabilities/Interest expense Total non-interest bearing liabilities Total liabilities from continuing operations Total liabilities from discontinued operations Total liabilities Stockholders’ equity Total liabilities and stockholders’ equity 4,958,125 $35,428,670 2,637,598 $38,066,268 $10,204,438 $ 10,233,566 2,628,511 1,834,915 1,381,981 26,283,411 5,728,630 32,012,041 2,321,391 34,333,432 3,732,836 $38,066,268 4,037,238 $35,329,475 – – 3,049,491 – – $38,378,966 61,004 187,838 55,255 148,603 32,161 484,861 0.60% $ 9,578,557 $ 1.84 2.10 8.10 2.33 10,117,636 2,396,645 2,293,878 2,753,490 1.84 27,140,206 82,048 237,708 60,268 183,701 58,521 622,246 0.86% 2.35 2.51 8.01 2.13 2.29 – – 5,447,916 32,588,122 2,531,677 35,119,799 3,259,167 $38,378,966 – – Net interest income on a taxable equivalent basis $1,363,062 $1,176,681 Cost of funding earning assets Net interest margin Effect of the taxable equivalent adjustment Net interest income per books 1.59% 4.47% 1.99% 3.76% 41,515 $1,321,547 9,092 $1,167,589 * Shows the effect of the tax exempt status of loans and investments on their yield, using the applicable statutory income tax rates. The computation considers the interest expense disallowance required by the Puerto Rico Internal Revenue Code. This adjustment is shown in order to compare the yield of the tax exempt and taxable assets on a taxable basis. Note: Average loan balances include the average balance of non-accruing loans. No interest income is recognized for these loans in accordance with the Corporation’s policy. 105 POPULAR, INC. 2014 ANNUAL REPORT Statistical Summary 2013-2014 Quarterly Financial Data (In thousands, except per common share information) Fourth Quarter Third Quarter Second Quarter First Quarter Fourth Quarter Third Quarter Second Quarter First Quarter 2014 2013 [1] Summary of Operations Interest income Interest expense Net interest income Provision for loan losses - non-covered loans Provision for loan losses - covered loans Mortgage banking activities Net gain (loss) and valuation adjustments on investment securities Trading account profit (loss) Gain (loss) on sale of loans, including valuation adjustments on loans held-for- sale Adjustments (expense) to indemnity reserves on loans sold FDIC loss share (expense) income Other non-interest income Operating expenses Income (loss) from continuing operations before income tax Income tax expense (benefit) $391,935 65,074 $401,199 74,778 $ 421,450 480,831 $418,959 67,788 $424,525 70,018 $405,918 74,906 $ 412,689 78,278 $ 404,808 80,164 326,861 326,421 (59,381) 351,171 354,507 331,012 334,411 324,644 51,637 (3,646) 8,747 68,166 12,463 14,402 893 586 (1,763) 740 50,074 11,604 3,788 – 1,055 54,122 25,714 3,678 – 1,977 49,927 8,907 14,387 48,715 17,433 18,892 228,975 25,500 18,081 209,093 17,556 20,297 2,110 (1,547) – (6,607) 5,856 (4,345) – (984) 10,946 15,593 9,659 4,393 3,346 2,374 4,291 (62,719) (13,348) (18,693) 114,233 330,006 (9,480) (4,864) 109,702 310,640 (7,454) (55,261) 111,002 275,439 (10,347) (24,206) 120,537 277,599 (6,892) (37,164) 211,036 304,609 (2,387) (14,866) 289,303 308,292 (11,632) (3,755) 280,222 293,864 (16,143) (26,266) 116,125 315,225 52,228 12,472 59,482 26,667 (333,709) (4,124) 89,768 23,264 176,340 25,162 243,281 17,768 74,790 (237,380) (186,920) (56,877) Income (loss) from continuing operations $ 39,756 $ 32,815 $(329,585) $ 66,504 $151,178 $225,513 $ 312,170 $(130,043) Income (loss) from discontinued operations, net of tax Net income (loss) Net income (loss) applicable to common 9,086 $ 48,842 29,758 $ 62,573 (181,729) 19,905 $(511,314) $ 86,409 11,853 $163,031 3,622 $229,135 15,298 $ 327,468 9,736 $(120,307) stock $ 47,911 $ 61,643 $(512,245) $ 85,478 $162,100 $228,204 $ 326,537 $(121,237) Net income (loss) per common share - basic: Net income (loss) per common share - diluted: Selected Average Balances (In millions) Total assets Loans Interest earning assets Deposits Interest-bearing liabilities Selected Ratios Return on assets Return on equity $ $ 0.47 0.46 $ $ 0.60 0.60 $ $ (4.98) $ 0.83 (4.98) $ 0.83 $ $ 1.58 1.57 $ $ 2.22 2.22 $ $ 3.18 3.17 $ $ (1.18) (1.18) $ 33,309 22,044 29,265 24,629 21,977 $ 35,024 22,263 29,764 24,656 22,776 $ 36,236 22,563 30,402 24,775 22,933 $ 36,196 22,604 30,169 24,559 22,834 $ 33,773 22,625 29,664 24,559 22,876 $ 34,195 22,710 29,523 24,382 23,390 $ 34,678 23,068 30,011 24,742 23,833 $ 34,334 22,798 29,769 24,638 23,881 0.58% 4.41 0.71% 5.75 -5.66% -43.04 0.97% 7.39 1.79% 14.59 2.51% 21.64 3.60% 32.77 -1.34% -12.58 Per share data has been adjusted to retroactively reflect the 1-for-10 reverse stock split effected on May 29, 2012. [1] Note: Because each reporting period stands on its own the sum of the net income (loss) per common share for the quarters may not equal to the net income (loss) per common share for the year. 106 Report of Management on Internal Control Over Financial Reporting The management of Popular, Inc. (the Corporation) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a - 15(f) and 15d - 15(f) under the Securities Exchange Act of 1934 and for our assessment of internal control over financial reporting. The Corporation’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America, and includes controls over the preparation of financial statements in accordance with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C) to comply with the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA). The Corporation’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Corporation; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Corporation are being made only in accordance with authorizations of management and directors of the Corporation; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Corporation’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The management of Popular, Inc. has assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2014. In making this assessment, management used the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment, management concluded that the Corporation maintained effective internal control over financial reporting as of December 31, 2014 based on the criteria referred to above. The Corporation’s independent registered public accounting firm, PricewaterhouseCoopers, LLP, has audited the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2014, as stated in their report dated March 2, 2015 which appears herein. Richard L. Carrión Chairman of the Board and Chief Executive Officer Carlos J. Vázquez Executive Vice President and Chief Financial Officer 107 POPULAR, INC. 2014 ANNUAL REPORT Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Popular, Inc. In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements of operations, comprehensive (loss) income, changes in stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Popular, Inc. and its subsidiaries at December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Corporation’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Corporation’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. internal control over financial reporting, A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management’s assessment and our audit of Popular, Inc.’s internal control over financial reporting also included controls over the preparation of financial statements in accordance with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C) to comply with the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA). A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 108 Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. PRICEWATERHOUSECOOPERS LLP San Juan, Puerto Rico March 2, 2015 CERTIFIED PUBLIC ACCOUNTANTS (OF PUERTO RICO) License No. LLP-216 Expires Dec. 1, 2016 Stamp E139737 of the P.R. Society of Certified Public Accountants has been affixed to the file copy of this report 109 POPULAR, INC. 2014 ANNUAL REPORT POPULAR, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, 2014 December 31, 2013 (In thousands, except share information) Assets: Cash and due from banks Money market investments: Federal funds sold Securities purchased under agreements to resell Time deposits with other banks Total money market investments Trading account securities, at fair value: Pledged securities with creditors’ right to repledge Other trading securities Investment securities available-for-sale, at fair value: Pledged securities with creditors’ right to repledge Other investment securities available-for-sale Investment securities held-to-maturity, at amortized cost (fair value 2014 - $94,199; 2013 - $120,688) Other investment securities, at lower of cost or realizable value (realizable value 2014 - $165,024; 2013 - $184,526) Loans held-for-sale, at lower of cost or fair value Loans held-in-portfolio: Loans not covered under loss sharing agreements with the FDIC Loans covered under loss sharing agreements with the FDIC Less – Unearned income Allowance for loan losses Total loans held-in-portfolio, net FDIC loss share asset Premises and equipment, net Other real estate not covered under loss sharing agreements with the FDIC Other real estate covered under loss sharing agreements with the FDIC Accrued income receivable Mortgage servicing assets, at fair value Other assets Goodwill Other intangible assets Total assets Liabilities and Stockholders’ Equity Liabilities: Deposits: Non-interest bearing Interest bearing Total deposits Federal funds purchased and assets sold under agreements to repurchase Other short-term borrowings Notes payable Other liabilities Liabilities from discontinued operations (Refer to Note 4) Total liabilities Commitments and contingencies (Refer to Note 31) Stockholders’ equity: Preferred stock, 30,000,000 shares authorized; 2,006,391 shares issued and outstanding Common stock, $0.01 par value; 170,000,000 shares authorized; 103,614,553 shares issued (2013 – 103,435,967) and 103,476,847 shares outstanding (2013 – 103,397,699) Surplus Retained earnings Treasury stock – at cost, 137,706 shares (2013 – 38,268) Accumulated other comprehensive loss, net of tax Total stockholders’ equity Total liabilities and stockholders’ equity The accompanying notes are an integral part of these consolidated financial statements. $ 381,095 $ 423,211 – 151,134 1,671,252 1,822,386 80,945 57,582 1,020,529 4,294,630 103,170 161,906 106,104 19,498,286 2,542,662 93,835 601,792 21,345,321 542,454 494,581 135,500 130,266 121,818 148,694 1,646,443 465,676 37,595 5,055 175,965 677,433 858,453 308,978 30,765 1,286,839 4,007,961 140,496 181,752 110,426 21,704,010 2,984,427 92,144 640,555 23,955,738 948,608 519,516 135,501 168,007 131,536 161,099 1,687,558 647,757 45,132 $33,096,695 $35,749,333 $5,783,748 19,023,787 24,807,535 1,271,657 21,200 1,711,828 1,012,029 5,064 $5,922,682 20,788,463 26,711,145 1,659,292 401,200 1,584,754 766,792 – 28,829,313 31,123,183 50,160 50,160 1,036 4,196,458 253,717 (4,117) (229,872) 4,267,382 1,034 4,170,152 594,430 (881) (188,745) 4,626,150 $33,096,695 $35,749,333 POPULAR, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share information) Interest income: Loans Money market investments Investment securities Trading account securities Total interest income Interest expense: Deposits Short-term borrowings Long-term debt Total interest expense Net interest income Provision for loan losses - non-covered loans Provision for loan losses - covered loans Net interest income after provision for loan losses Service charges on deposit accounts Other service fees (Refer to Note 40) Mortgage banking activities (Refer to Note 14) Net (loss) gain and valuation adjustments on investment securities Trading account profit (loss) Net gain (loss) on sale of loans, including valuation adjustments on loans held-for-sale Adjustments (expense) to indemnity reserves on loans sold FDIC loss share (expense) income (Refer to Note 41) Other operating income Total non-interest income Operating expenses: Personnel costs Net occupancy expenses Equipment expenses Other taxes Professional fees Communications Business promotion FDIC deposit insurance Loss on early extinguishment of debt Other real estate owned (OREO) expenses Other operating expenses Amortization of intangibles Restructuring costs (Refer to Note 5) Total operating expenses (Loss) income from continuing operations before income tax Income tax expense (benefit) (Loss) income from continuing operations (Loss) income from discontinued operations, net of tax (Refer to Note 4) Net (Loss) Income Net (Loss) Income Applicable to Common Stock Net (Loss) Income per Common Share – Basic Net (loss) income from continuing operations Net (loss) income from discontinued operations Net (Loss) Income per Common Share - Basic Net (Loss) Income per Common Share - Diluted Net (loss) income from continuing operations Net (loss) income from discontinued operations Net (Loss) Income per Common Share - Diluted The accompanying notes are an integral part of these consolidated financial statements. 110 Years ended December 31, 2014 2013 2012 $1,478,750 4,224 132,631 17,938 $1,481,096 3,464 141,807 21,573 $1,449,227 3,703 168,632 22,824 1,633,543 1,647,940 1,644,386 105,087 67,376 516,008 688,471 945,072 223,999 46,135 674,938 158,637 225,265 30,615 (870) 4,358 40,591 (40,629) (103,024) 71,572 386,515 418,679 86,707 48,917 56,918 282,055 25,684 54,016 40,307 532 49,611 95,373 8,160 26,725 124,857 38,430 140,079 303,366 1,344,574 536,710 69,396 167,765 46,802 148,192 362,759 1,281,627 322,234 74,839 738,468 162,870 229,351 71,657 7,966 (13,483) (52,708) (37,054) (82,051) 504,465 791,013 428,697 86,651 46,028 58,028 278,127 25,385 59,453 56,728 3,388 79,658 91,876 7,971 – 884,554 171,226 232,515 84,771 (1,707) 4,478 (29,414) (21,198) (56,211) 127,029 511,489 434,333 84,687 43,618 49,844 271,008 25,687 60,784 82,065 25,196 28,823 100,783 8,161 – 1,193,684 1,221,990 1,214,989 (132,231) 58,279 (190,510) (122,980) 307,491 (251,327) 558,818 40,509 181,054 (26,403) 207,457 37,818 $ (313,490) $ 599,327 $ 245,275 $ (317,213) $ 595,604 $ 241,552 (1.88) (1.20) $ (3.08) $ (1.88) (1.20) $ (3.08) $ 5.41 0.39 5.80 5.39 0.39 5.78 $ $ 1.99 0.37 2.36 1.98 0.37 2.35 111 POPULAR, INC. 2014 ANNUAL REPORT POPULAR, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (In thousands) Net (loss) income Other comprehensive loss before tax: Foreign currency translation adjustment Reclassification adjustment for losses included in net income Adjustment of pension and postretirement benefit plans Amortization of net losses Amortization of prior service cost Unrealized holding gains (losses) on investments arising during the period Reclassification adjustment for (gains) losses included in net income Unrealized net (losses) gains on cash flow hedges Reclassification adjustment for net losses (gains) included in net income Other comprehensive loss before tax Income tax benefit (expense) Total other comprehensive loss, net of tax Comprehensive (loss) income, net of tax Tax effect allocated to each component of other comprehensive (loss) income: (In thousands) Adjustment of pension and postretirement benefit plans Amortization of net losses Amortization of prior service cost Unrealized holding gains (losses) on investments arising during the period Reclassification adjustment for (gains) losses included in net income Unrealized net (losses) gains on cash flow hedges Reclassification adjustment for net (gains) losses included in net income Income tax benefit (expense) The accompanying notes are an integral part of these consolidated financial statements. Years ended December 31, 2013 2014 2012 $(313,490) $ 599,327 $245,275 (4,451) 7,718 (160,679) (8,505) 3,800 57,401 870 (6,613) 6,091 (104,368) 63,241 (41,127) (4,822) – 174,578 24,674 – (221,043) (2,110) 2,286 (1,839) (28,276) (57,601) (85,877) (2,448) – (39,978) 25,159 (200) (59,484) 1,707 (13,509) 14,119 (74,634) 14,314 (60,320) $(354,617) $ 513,450 $184,955 Years ended December 31, 2013 2014 2012 $62,664 3,317 (1,482) (1,414) (48) 2,579 (2,375) $63,241 $(70,306) (7,402) – 19,924 317 (850) 716 $(57,601) $12,279 (7,108) 60 9,280 (13) 4,052 (4,236) $14,314 POPULAR, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY 112 (In thousands) Balance at December 31, 2011 Net income Issuance of stock Dividends declared: Preferred stock Common stock purchases Common stock reissuance Other comprehensive loss, net of tax Transfer to statutory reserve Balance at December 31, 2012 Net income Issuance of stock Dividends declared: Preferred stock Common stock purchases Common stock reissuance Other comprehensive loss, net of tax Transfer to statutory reserve Balance at December 31, 2013 Net loss Issuance of stock Tax windfall benefit on vesting of restricted stock Repurchase of TARP-related warrants Dividends declared: Preferred stock Common stock purchases Common stock reissuance Other comprehensive loss, net of tax Transfer to statutory reserve Balance at December 31, 2014 Common stock [1] Preferred stock Surplus [1] $1,026 $50,160 $4,123,898 6 9,396 (Accumulated deficit) Retained earnings $(212,726) 245,275 Accumulated other comprehensive loss Treasury stock $(1,057) $ (42,548) (3,723) (450) 1,063 17,000 (17,000) (60,320) Total $3,918,753 245,275 9,402 (3,723) (450) 1,063 (60,320) – $1,032 $50,160 $4,150,294 $ 11,826 $ (444) $(102,868) $4,110,000 2 6,858 599,327 (3,723) (470) 33 (85,877) 13,000 (13,000) 599,327 6,860 (3,723) (470) 33 (85,877) – $1,034 $50,160 $4,170,152 $ 594,430 $ (881) $(188,745) $4,626,150 2 5,392 414 (3,000) (313,490) (3,723) 23,500 (23,500) (313,490) 5,394 414 (3,000) (3,723) (3,272) 36 (41,127) – (3,272) 36 (41,127) $1,036 $50,160 $4,196,458 $ 253,717 $(4,117) $(229,872) $4,267,382 Disclosure of changes in number of shares: [1] Preferred Stock: Balance at beginning and end of year Common Stock: Balance at beginning of year Issuance of stock Balance at end of year Treasury stock Common Stock – Outstanding The accompanying notes are an integral part of these consolidated financial statements. Year ended December 31, 2013 2012 2014 2,006,391 2,006,391 2,006,391 103,435,967 178,586 103,614,553 (137,706) 103,476,847 103,193,303 242,664 103,435,967 (38,268) 103,397,699 102,634,640 558,663 103,193,303 (23,497) 103,169,806 113 POPULAR, INC. 2014 ANNUAL REPORT POPULAR, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Cash flows from operating activities: Net (loss) income Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses Goodwill impairment losses Amortization of intangibles Depreciation and amortization of premises and equipment Net accretion of discounts and amortization of premiums and deferred fees Fair value adjustments on mortgage servicing rights FDIC loss share expense Amortization of prepaid FDIC assessment Adjustments (expense) to indemnity reserves on loans sold Earnings from investments under the equity method Deferred income tax expense (benefit) (Gain) loss on: Disposition of premises and equipment Sale and valuation adjustments of investment securities Sale of loans, including valuation adjustments on loans held-for-sale and mortgage banking activities Sale of stock in equity method investee Sale of other assets Sale of foreclosed assets, including write-downs Disposal of discontinued business Proceeds from calls, paydowns, maturities and redemptions of investment securities: Acquisitions of loans held-for-sale Proceeds from sale of loans held-for-sale Net originations on loans held-for-sale Net (increase) decrease in: Trading securities Accrued income receivable Other assets Net increase (decrease) in: Interest payable Pension and other postretirement benefits obligation Other liabilities Total adjustments Net cash provided by operating activities Cash flows from investing activities: Net (increase) decrease in money market investments Purchases of investment securities: Available-for-sale Held-to-maturity Other Available-for-sale Held-to-maturity Other Available-for-sale Other Proceeds from sale of investment securities: Net repayments on loans Proceeds from sale of loans Acquisition of loan portfolios Net payments from FDIC under loss sharing agreements Cash paid related to business acquisitions Return of capital from equity method investments Proceeds from sale of stock in equity method investee Net cash disbursed from disposal of discontinued business Mortgage servicing rights purchased Acquisition of premises and equipment Proceeds from sale of: Premises and equipment Other productive assets Foreclosed assets Net cash provided by investing activities Cash flows from financing activities: Net increase (decrease) in: Payments of notes payable Proceeds from issuance of notes payable Proceeds from issuance of common stock Dividends paid Repurchase of TARP - related warrants Net payments for repurchase of common stock Net cash used in financing activities Net decrease in cash and due from banks Cash and due from banks at beginning of period Cash and due from banks at end of period Deposits Federal funds purchased and assets sold under agreements to repurchase Other short-term borrowings Year ended December 31, 2014 2013 2012 $ (313,490) $ 599,327 $ 245,275 263,369 186,511 9,434 47,137 278,576 24,683 103,024 – 40,629 (39,578) 43,512 (1,716) 870 (88,724) – – 28,005 (38,355) (308,600) 123,375 (753,312) 1,105,374 9,719 132,500 (707) (10,171) 30,937 1,186,492 873,002 602,563 – 9,883 48,162 (79,004) 11,403 82,051 – 37,054 (42,873) (288,754) (3,392) (2,110) 22,411 (416,113) – 50,740 – (390,018) 218,379 (1,049,474) 1,430,835 (5,809) 2,827 (2,466) 10,635 (26,952) 219,978 819,305 408,941 – 10,072 46,736 (37,899) 17,406 56,211 32,778 21,198 (73,478) (135,491) (8,619) 1,707 (48,765) – (2,545) (4,511) – (417,108) 325,014 (1,233,240) 1,387,910 (519) (19,390) (9,164) (40,241) 1,848 278,851 524,126 (963,933) 227,127 290,594 (2,001,940) (1,000) (110,010) (2,257,976) (250) (178,093) (1,843,922) (25,792) (212,419) 1,722,650 39,962 92,752 310,210 37,104 775,900 355,145 (389,067) 256,498 (6,330) – – (205,895) – (51,046) 14,337 – 150,115 25,452 109,015 (387,635) (380,000) (1,059,290) 781,905 5,394 (3,723) (3,000) (3,236) (940,570) (42,116) 423,211 1,823,474 4,632 181,784 5,438 – 680,819 333,021 (1,592,603) 396,223 – 491 481,377 – (45) (38,573) 10,090 – 226,063 302,999 (323,404) (357,460) (235,000) (332,031) 106,739 6,860 (3,723) – (437) (1,138,456) (16,152) 439,363 1,636,723 9,751 206,856 52,058 – 629,006 68,396 (1,357,628) 462,016 – 151,196 – – (2,231) (54,899) 19,841 1,026 206,070 236,642 (969,596) (124,345) 340,000 (214,898) 106,923 9,402 (3,723) – (450) (856,687) (95,919) 535,282 $ 381,095 $ 423,211 $ 439,363 The accompanying notes are an integral part of these consolidated financial statements. The Consolidated Statement of Cash Flows for the periods ended December 31, 2014, 2013 and 2012 include the cash flows from operating, investing and finance activities associated with discontinued operations. Notes to Consolidated Financial Statements Note 1 - Nature of Operations and Basis of Presentation Note 2 - Summary of Significant Accounting Policies Note 3 - New Accounting Pronouncements Note 4 - Discontinued Operations Note 5 - Restructuring Plan Note 6 - Restrictions on Cash and Due from Banks and Certain Securities Note 7 - Securities Purchased under Agreements to Resell Note 8 - Pledged Assets Note 9 - Investment Securities Available-For-Sale Note 10 - Investment Securities Held-to-Maturity Note 11 - Loans Note 12 - Allowance for Loan Losses Note 13 - FDIC Loss Share Asset and True-Up Payment Obligation Note 14 - Mortgage Banking Activities Note 15 - Transfers of Financial Assets and Servicing Assets Note 16 - Premises and Equipment Note 17 - Other Real Estate Owned Note 18 - Other Assets Note 19 - Investment in Equity Investees Note 20 - Goodwill and Other Intangible Assets Note 21 - Deposits Note 22 - Federal Funds Purchased and Assets Sold Under Agreements to Repurchase Note 23 - Other Short-Term Borrowings Note 24 - Notes Payable Note 25 - Offsetting of Financial Assets and Liabilities Note 26 - Trust Preferred Securities Note 27 - Stockholders’ Equity Note 28 - Regulatory Capital Requirements Note 29 - Other Comprehensive Loss Note 30 - Guarantees Note 31 - Commitments and Contingencies Note 32 - Non-consolidated Variable Interest Entities Note 33 - Derivative Instruments and Hedging Activities Note 34 - Related Party Transactions Note 35 - Fair Value Measurement Note 36 - Fair Value of Financial Instruments Note 37 - Employee Benefits Note 38 - Net (Loss) Income per Common Share Note 39 - Rental Expense and Commitments Note 40 - Other Service Fees Note 41 - FDIC Loss Share (Expense) Income Note 42 - Stock-Based Compensation Note 43 - Income Taxes Note 44 - Supplemental Disclosure on the Consolidated Statements of Cash Flows Note 45 - Segment Reporting Note 46 - Subsequent Events Note 47 - Popular, Inc. (Holding company only) Financial Information Note 48 - Condensed Consolidating Financial Information of Guarantor and Issuers of Registered Guaranteed Securities 114 115 115 127 131 132 132 133 133 134 138 140 149 172 174 174 178 178 179 179 180 183 184 185 186 187 188 190 191 193 194 197 201 204 207 211 219 224 231 232 232 232 233 235 239 239 243 243 247 115 POPULAR, INC. 2014 ANNUAL REPORT Inc. (the “Corporation”) Note 1 – Nature of operations and basis of presentation Nature of Operations 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 United States and the Caribbean. In Puerto Rico, the Corporation provides commercial including and retail banking services, mortgage loan originations, through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as investment banking, broker-dealer, auto and equipment leasing and financing, and insurance services through specialized subsidiaries. In the U.S. mainland, the Corporation operates Banco Popular North America including its wholly-owned subsidiary E- (“BPNA”), LOAN. BPNA focuses efforts and resources on the core community banking business. BPNA operates branches in New York, New Jersey and South Florida. E-LOAN markets deposit accounts under its name for the benefit of BPNA. Refer to Note 4 for discussion of the sales of the Illinois, Central Florida regional operations during the year ended December 31, 2014. The BPNA branches operate under the name of Popular Community Bank. Note 45 to the consolidated financial statements presents information about the Corporation’s business segments. and California a On April 30, 2010, BPPR entered into a purchase and assumption agreement with the Federal Deposit Insurance Corporation (the “FDIC”) to acquire certain assets and assume certain deposits and liabilities of Westernbank Puerto Rico (“Westernbank”), bank Puerto Rico headquartered in Mayaguez, Puerto Rico (the “Westernbank FDIC-assisted transaction”). Westernbank was a wholly-owned commercial bank subsidiary of W Holding Company, Inc. and operated in Puerto Rico. Refer to Note 13 – FDIC loss share assets and true-up payment obligation, to these consolidated financial statements for detailed information on this business combination. state-chartered Basis of Presentation Certain reclassifications have been made to the 2012 and 2013 consolidated financial statements and notes to the financial statements to conform with the 2014 presentation. As discussed in Note 4, current and prior periods presented in the consolidated statement of operations as well as the related note disclosures covering income and expense amounts have been retrospectively adjusted for the impact of the discontinued consolidated operations statement of financial condition and related note disclosure for prior periods do not reflect the reclassification of BPNA’s assets and liabilities to discontinued operations. comparative purposes. The for During the year ended December 31, 2014, the Corporation recorded an out-of-period adjustment to correct an error in the amortization expense of the FDIC indemnification asset recorded during the years 2012 and 2013. The FDIC indemnity asset amortization for the year ended December 31, 2014, included a benefit of approximately $12.5 million to reverse the impact of accelerated amortization expense recorded during prior periods. This amount will be recognized as expense over the remaining portion of the Loss Sharing Agreement that expires in the quarter ending June 30, 2015. After evaluating the quantitative and qualitative aspects of the error and the out- to the Corporation’s financial results, of-period adjustment management has determined that the misstatement and the out- of-period adjustment are not material to the 2012, 2013 and 2014 financial statements, respectively. Note 2 – Summary of significant accounting policies The accounting and financial reporting policies of Popular, Inc. and its conform with accounting principles generally accepted in the United States of America and with prevailing practices within the financial services industry. “Corporation”) subsidiaries (the The following is a description of the most significant of these policies: Principles of consolidation The consolidated financial statements include the accounts of Popular, Inc. and its subsidiaries. Intercompany accounts and In transactions have been eliminated in consolidation. accordance with the consolidation guidance for variable interest entities, the Corporation would also consolidate any variable interest entities (“VIEs”) for which it has a controlling financial interest; and therefore, it is the primary beneficiary. Assets held in a fiduciary capacity are not assets of the Corporation and, accordingly, are not included in the consolidated statements of financial condition. in other recorded operating Unconsolidated investments, in which there is at least 20% ownership, are generally accounted for by the equity method which the Corporation exercises significant influence, with earnings income. These investments are included in other assets and the Corporation’s proportionate share of income or loss is included in other operating income. Those investments in which there is less than 20% ownership, are generally carried under the cost method of accounting, unless significant influence is exercised. Under the cost method, the Corporation recognizes income when dividends are accounted for by the equity method unless the investor’s the limited partner may have interest virtually no influence over partnership operating and financial policies. received. Limited partnerships is so “minor” that are Statutory business trusts that are wholly-owned by the Corporation and are issuers of trust preferred securities are not consolidated in the Corporation’s consolidated financial statements. On May 29, 2012, the Corporation effected a 1-for-10 reverse split of its common stock. All share and per share information in the consolidated financial statements and accompanying notes have been adjusted to retroactively reflect the 1-for-10 reverse stock split. Discontinued Operations Components of the Corporation that will be disposed of by sale, where the Corporation does not have a significant continuing involvement in the operations after the disposal, are accounted for as discontinued operations. The results of operations of the discontinued operations exclude allocations of corporate overhead. Refer to Note 4 - Discontinued Operations, for additional information on the discontinued operations. liabilities control. Also, in the acquiree at Business combinations Business combinations are accounted for under the acquisition method. Under this method, assets acquired, liabilities assumed and any noncontrolling interest the acquisition date are measured at their fair values as of the acquisition date. The acquisition date is the date the acquirer obtains arising from assets or noncontractual contingencies are measured at their acquisition date at fair value only if it is more likely than not that they meet the definition of an asset or liability. Adjustments subsequently made to the provisional amounts recorded on the acquisition date as a result of new information obtained about facts and circumstances that existed as of the acquisition date but were known to the Corporation after acquisition will be made retroactively during a measurement period not to exceed one year. Furthermore, acquisition-related restructuring costs that do not meet certain criteria of exit or disposal activities are expensed as incurred. Transaction costs are expensed as incurred. Changes in income tax valuation allowances for acquired deferred tax assets are recognized in earnings subsequent to the measurement period as an adjustment to income tax expense. Contingent consideration classified as an asset or a liability is remeasured to fair value at each reporting date until the contingency is resolved. The changes in fair value of the contingent consideration are recognized in earnings unless the arrangement is a hedging instrument for which changes are initially recognized in other comprehensive income. There were no significant business combinations during 2014, 2013 or 2012. Deconsolidation of a subsidiary The Corporation accounts the deconsolidation of a for subsidiary when it ceases to have a controlling financial interest 116 in the subsidiary. Accordingly, it recognizes a gain or loss in results of operations measured as the difference between the sum of the fair value of the consideration received, the fair value of any retained non-controlling investment in the former subsidiary and the carrying amount of any non-controlling interest in the former subsidiary, as compared with the carrying amount of the former subsidiary’s assets and liabilities. requires management 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 and America 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. to make estimates Reclassifications Certain reclassifications have been made to the 2013 and 2012 consolidated financial statements to conform with the 2014 presentation. Such reclassifications did not have an effect on previously reported statement of operations and of cash flows. Fair value measurements The Corporation determines the fair values of its financial instruments based on the fair value framework established in the guidance for Fair Value Measurements in ASC Subtopic 820-10, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The standard describes three levels of inputs that may be used to measure fair value which are (1) quoted market prices for active markets, (2) observable market-based inputs or unobservable inputs that are corroborated by market data, and (3) unobservable inputs that are not corroborated by market data. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. liabilities identical assets or in The guidance in ASC Subtopic 820-10 also addresses measuring fair value in situations where markets are inactive and transactions are not orderly. Transactions or quoted prices for assets and liabilities may not be determinative of fair value when transactions are not orderly, and thus, may require adjustments to estimate fair value. Price quotes based on transactions that are not orderly should be given little, if any, weight in measuring fair value. Price quotes based on transactions that are orderly shall be considered in determining fair value, and the weight given is based on facts and 117 POPULAR, INC. 2014 ANNUAL REPORT circumstances. If sufficient information is not available to determine if price quotes are based on orderly transactions, less weight should be given to the price quote relative to other transactions that are known to be orderly. Covered assets Assets subject to loss sharing agreements with the FDIC, including certain loans and other real estate properties, are labeled “covered” on the consolidated statements of financial condition and throughout the notes to the consolidated financial statements. Loans acquired in the Westernbank FDIC- assisted transaction, except for credit cards, are considered “covered loans” because the Corporation will be reimbursed for 80% of any future losses on these loans subject to the terms of the FDIC loss sharing agreements. Investment securities Investment securities are classified in four categories and accounted for as follows: and reported at • Debt securities that the Corporation has the intent and ability to hold to maturity are classified as securities held- to-maturity amortized cost. The Corporation may not sell or transfer held-to-maturity securities without calling into question its intent to hold other debt securities to maturity, unless a nonrecurring or unusual event that could not have been reasonably anticipated has occurred. An investment in debt securities is considered impaired if the fair value of the investment is less than its amortized cost. For other-than-temporary impairments the Corporation assesses if it has both the intent and the ability to hold the security for a period of time sufficient to allow for an anticipated recovery in its fair value to its amortized cost. For other-than-temporary impairment not related to a credit loss (defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis) for recognized in other a held-to-maturity security is comprehensive loss and amortized over the remaining life of the debt security. The amortized cost basis for a debt security is adjusted by the credit loss amount of other- than-temporary impairments. • Debt and equity securities classified as trading securities are reported at fair value, with unrealized gains and losses included in non-interest income. • Debt and equity securities (equity securities with readily available fair value) not classified as either securities held- to-maturity or trading securities, and which have a readily available fair value, are classified as securities available- for-sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of taxes, in accumulated other comprehensive income or loss. The specific identification method is used to determine realized gains and losses on securities available- for-sale, which are included in net gains or losses on sale and valuation adjustment of investment securities in the consolidated statements of operations. Declines in the value of debt and equity securities that are considered other-than-temporary reduce the value of the asset, and the estimated loss is recorded in non-interest income. For debt securities, the Corporation assesses whether (a) it has the intent to sell the debt security, or (b) it is more likely than not that it will be required to sell the debt security before its anticipated recovery. If either of these conditions is met, an other-than-temporary impairment on the security is recognized. In instances in which a determination is made that a credit loss (defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis) exists but the entity does not intend to sell the debt security and it is not more likely than not that the entity will be required to sell the debt security before the anticipated recovery of its remaining amortized cost basis (i.e., the amortized cost basis less any current-period credit loss), the impairment is separated into (a) the amount of the total impairment related to the credit loss, and (b) the amount of the total impairment related to all the total other-than- other temporary impairment is recognized in the statement of operations. The amount of the total factors is recognized in other comprehensive loss. The other-than- temporary impairment analyses for both debt and equity securities are performed on a quarterly basis. factors. The amount of related to the credit related to all other impairment loss • Investments in equity or other securities that do not have readily available fair values are classified as other investment securities in the consolidated statements of financial condition, and are subject to impairment testing, if applicable. These securities are stated at the lower of cost or realizable value. The source of this value varies according to the nature of the investment, and is primarily obtained by the Corporation from valuation analyses prepared by third-parties or from information derived from financial statements available for the corresponding venture capital and mutual funds. Stock that is owned by the Corporation to comply with regulatory requirements, such as Federal Reserve Bank and Federal Home Loan Bank (“FHLB”) stock, is included in this category, and their realizable value equals their cost. The amortization of premiums is deducted and the accretion of discounts is added to net interest income based on the interest method over the outstanding period of the related securities. The cost of securities sold is determined by specific identification. Net losses on sales of realized gains or investment securities and unrealized loss valuation adjustments considered other-than-temporary, if any, on securities available- for-sale, held-to-maturity and other investment securities are determined using the specific identification method and are reported separately of operations. Purchases and sales of securities are recognized on a trade date basis. consolidated statements in the Derivative financial instruments All derivatives are recognized on the statements of financial condition at fair value. The Corporation’s policy is not to offset the fair value amounts recognized for multiple derivative instruments executed with the same counterparty under a master netting arrangement nor to offset the fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from the same master netting arrangement as the derivative instruments. When the Corporation enters into a derivative contract, the derivative instrument is designated as either a fair value hedge, cash flow hedge or as a free-standing derivative instrument. For a fair value hedge, changes in the fair value of the derivative instrument and changes in the fair value of the hedged asset or liability or of an unrecognized firm commitment attributable to the hedged risk are recorded in current period earnings. For a cash flow hedge, changes in the fair value of the derivative instrument, to the extent that it is effective, are recorded net of taxes and subsequently reclassified to net income (loss) in the same period(s) that the hedged transaction impacts earnings. The immediately ineffective portion of cash flow hedges recognized in current earnings. For free-standing derivative instruments, changes in fair values are reported in current period earnings. in accumulated other comprehensive income is the includes documents relationship and strategy for undertaking Prior to entering a hedge transaction, the Corporation formally between hedging instruments and hedged items, as well as the risk management various hedge objective linking all derivative transactions. This process instruments that are designated as fair value or cash flow hedges to specific assets and liabilities on the statements of financial condition or to specific forecasted transactions or firm commitments along with a formal assessment, at both inception of the hedge and on an ongoing basis, as to the effectiveness of the derivative instrument in offsetting changes in fair values or cash flows of accounting is the hedged item. Hedge discontinued when the derivative instrument is not highly effective as a hedge, a derivative expires, is sold, terminated, when it is unlikely that a forecasted transaction will occur or when it is determined that is no longer appropriate. When hedge accounting is discontinued the derivative continues to be carried at fair value with changes in fair value included in earnings. For non-exchange traded contracts, fair value is based on dealer quotes, pricing models, discounted cash flow methodologies or 118 similar techniques for which the determination of fair may require significant management judgment or estimation. The fair value of derivative instruments considers the risk of non-performance by the counterparty or the Corporation, as applicable. The Corporation obtains or pledges collateral in connection the with its derivative activities when applicable under agreement. as are loans classified Loans Loans held-in-portfolio when management has the intent and ability to hold the loan for the foreseeable future, or until maturity or payoff. The foreseeable future is a management judgment which is determined based upon the type of loan, business strategies, current market conditions, balance sheet management and liquidity needs. Management’s view of the foreseeable future may change based on changes in these conditions. When a decision is made to sell or securitize a loan that was not originated or initially acquired with the intent to sell or securitize, the loan is reclassified from held-in-portfolio into held-for-sale. Due to changing market conditions or other strategic initiatives, management’s intent with respect to the disposition of the loan may change, and accordingly, loans previously classified as held-for-sale may be reclassified into held-in-portfolio. Loans transferred between loans held-for-sale and held-in-portfolio classifications are recorded at the lower of cost or fair value at the date of transfer. value upon Purchased loans accounted at fair are acquisition. Loans held-for-sale are stated at the lower of cost or fair value, cost being determined based on the outstanding loan balance less unearned income, and fair value determined, generally in the aggregate. Fair value is measured based on current market prices for similar loans, outstanding investor commitments, prices of recent sales or discounted cash flow analyses which utilize inputs and assumptions which are believed to be consistent with market participants’ views. The cost basis also includes consideration of deferred origination fees and costs, which are recognized in earnings at the time of sale. Upon reclassification to held-for-sale, credit related fair value adjustments are recorded as a reduction in the allowance for loan losses (“ALLL”). To the extent that the loan’s reduction in value has not already been provided for in the allowance for loan losses, an additional loan loss provision is recorded. Subsequent to reclassification to held-for-sale, the amount, by which cost exceeds fair value, if any, is accounted for as a valuation allowance with changes therein included in the determination of net income (loss) for the period in which the change occurs. Loans held-in-portfolio are reported at their outstanding principal balances net of any unearned income, charge-offs, unamortized deferred fees and costs on originated loans, and premiums or discounts on purchased loans. Fees collected and 119 POPULAR, INC. 2014 ANNUAL REPORT costs incurred in the origination of new loans are deferred and amortized using the interest method or a method which approximates the interest method over the term of the loan as an adjustment to interest yield. The past due status of a loan is determined in accordance with its contractual repayment terms. Furthermore, loans are reported as past due when either interest or principal remains unpaid for 30 days or more in accordance with its contractual repayment terms. interest impairment, income on commercial Non-accrual loans are those loans on which the accrual of interest is discontinued. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is charged against income and the loan is accounted for either on a cash- basis method or on the cost-recovery method. Loans designated as non-accruing are returned to accrual status when the Corporation expects repayment of the remaining contractual principal and interest. Recognition of in the case of a collateral dependent the excess of and construction loans is discontinued when the loans are 90 days or more in arrears on payments of principal or interest or when other factors indicate that the collection of principal and interest is doubtful. The impaired portion of secured loan past due as to principal and interest is charged-off not later than 365 days past loan due. However, individually evaluated for the recorded investment over the fair value of the collateral (portion deemed uncollectible) is generally promptly charged-off, but in any event, not later than the quarter following the quarter in which such excess was first recognized. Commercial unsecured loans are charged-off no later than 180 days past due. Recognition of interest income on mortgage loans is generally discontinued when loans are 90 days or more in arrears on payments of principal or interest. The impaired portion of a mortgage loan is charged-off when the loan is 180 days past due. The Corporation discontinues the recognition of interest on residential mortgage loans insured by the Federal Housing Administration (“FHA”) or guaranteed by the U.S. Department of Veterans Affairs (“VA”) when 18-months delinquent as to principal or interest. The principal repayment on these loans is insured. Recognition of interest income on closed-end consumer loans and home equity lines of credit is discontinued when the loans are 90 days or more in arrears on payments of principal or interest. Income is generally recognized on open-end consumer loans, except for home equity lines of credit, until the loans are charged-off. Recognition of interest income for lease financing is ceased when loans are 90 days or more in arrears. Closed-end consumer loans and leases are charged-off when they are 120 days in arrears. Open-end (revolving credit) consumer loans are in arrears. Commercial and charged-off when 180 days consumer overdrafts are generally charged-off no later than 60 days past their due date. non-accretable continue to have an accretable yield as long as there is a reasonable expectation about the timing and amount of cash flows expected to be collected. Also, loans charged-off against purchase the accounting are not reported as charge-offs. Charge-offs on loans accounted under ASC Subtopic 310-30 are recorded only to the extent exceed the non-accretable difference established with purchase accounting. established difference losses that in A loan classified as a troubled debt restructuring (“TDR”) is typically in non-accrual status at the time of the modification. The TDR loan continues in non-accrual status until the borrower has demonstrated a willingness and ability to make the restructured loan payments (at least six months of sustained performance after the modification (or one year for loans providing for quarterly or and management has concluded that it is probable that the borrower would not be in payment default in the foreseeable future. semi-annual payments)) Lease financing The Corporation leases passenger and commercial vehicles and equipment to individual and corporate customers. The finance method of accounting is used to recognize revenue on lease contracts that meet the criteria specified in the guidance for leases in ASC Topic 840. Aggregate rentals due over the term of the leases less unearned income are included in finance lease contracts receivable. Unearned income is amortized using a method which results in approximate level rates of return on the principal amounts outstanding. Finance lease origination fees and costs are deferred and amortized over the average life of the lease as an adjustment to the interest yield. Revenue for other leases is recognized as it becomes due under the terms of the agreement. Loans acquired in an FDIC-assisted transaction Loans acquired in a business acquisition are recorded at fair value at the acquisition date. Credit discounts are included in the determination of fair value; therefore, an allowance for loan losses is not recorded at the acquisition date. The Corporation applied the guidance of ASC Subtopic 310- 30 to all loans acquired in Westernbank FDIC-assisted transaction (including loans that do not meet scope of ASC Subtopic 310-30), except for credit cards and revolving lines of credit that were expressly scoped out from the application of this guidance since they continued to have revolving privileges after acquisition. Management used its judgment in evaluating impacting expected cash flows and probable loss factors assumptions, the loan portfolio, portfolio concentrations, distressed economic conditions, quality of underwriting standards of the acquired institution, reductions in collateral real estate values, among other considerations that could also impact the expected cash inflows on the loans. including the quality of Purchased impaired loans accounted for under ASC Subtopic 310-30 are not considered non-performing and Loans accounted for under ASC Subtopic 310-30 represent loans showing evidence of credit deterioration and that it is probable, at the date of acquisition, that the Corporation would not collect all contractually required principal and interest payments. Generally, acquired loans that meet the definition for nonaccrual status fall within the Corporation’s definition of impaired loans under ASC Subtopic 310-30. Also, based on the fair value determined for the acquired portfolio, acquired loans that did not meet the definition of nonaccrual status also resulted in the recognition of a significant discount attributable to credit quality. Accordingly, an election was made by the Corporation to apply the accretable yield method (expected cash flow model of ASC Subtopic 310-30), as a loan with credit instead of the standard loan deterioration and impairment, discount accretion guidance of ASC Subtopic 310-20, for the loans acquired in the Westernbank FDIC-assisted transaction. These loans are disclosed as a loan that was acquired with credit deterioration and impairment. Under ASC Subtopic 310-30, the covered loans acquired from the FDIC were aggregated into pools based on loans that had common risk characteristics. Each loan pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Characteristics considered in pooling loans in the FDIC-assisted transaction included loan type, interest rate type, accruing status, amortization type, rate the index and source type. Once the pools are defined, Corporation maintains the integrity of the pool of multiple loans accounted for as a single asset. the pool Under ASC Subtopic 310-30, the difference between the undiscounted cash flows expected at acquisition and the fair value in the loans, or the “accretable yield,” is recognized as interest income using the effective yield method over the estimated life of the loan if the timing and amount of the future is reasonably estimable. The non- cash flows of between the difference accretable difference contractually required principal and interest and the cash flows expected to be collected. Subsequent to the acquisition date, increases in cash flows over those expected at the acquisition date are recognized as interest income prospectively. Decreases in expected cash flows after the acquisition date are recognized by recording an allowance for loan losses. represents The fair value discount of lines of credit with revolving privileges that are accounted for pursuant to the guidance of ASC Subtopic 310-20 represents the difference between the contractually required loan payment receivable in excess of the initial investment in the loan. This discount is accreted into interest income over the life of the loan if the loan is in accruing status. Any cash flows collected in excess of the carrying amount of the loan are recognized in earnings at the time of collection. The carrying amount of lines of credit with revolving privileges, which are accounted pursuant to the guidance of ASC Subtopic 310-20, are subject to periodic review to determine the need for recognizing an allowance for loan losses. 120 losses inherent Allowance for loan losses The Corporation follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan losses to in the loan portfolio. This provide for methodology includes the consideration of factors such as current economic conditions, portfolio risk characteristics, prior loss experience and results of periodic credit reviews of loans. The provision for loan losses charged to individual current operations is based on this methodology. Loan losses are charged and recoveries are credited to the allowance for loan losses. The Corporation’s assessment of the allowance for loan losses is determined in accordance with the guidance of loss contingencies in ASC Subtopic 450-20 and loan impairment guidance in ASC Section 310-10-35. Also, the Corporation determines the allowance for loan losses on purchased impaired loans and purchased loans accounted for under ASC Subtopic 310-30 by analogy, by evaluating decreases in expected cash flows after the acquisition date. allowance The accounting guidance provides for the recognition of a loss loans. The for groups of homogeneous determination for general reserves of the allowance for loan losses includes the following principal factors: • Base net loss period for loss rates, which are based on the moving average of annualized net loss rates computed over a 3- year historical 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. As part of the annual review of the components of the ALLL models, as discussed in the following paragraphs and implemented as of June 30, 2014, the Corporation eliminated the use of caps in the recent for the consumer and mortgage portfolios, among other enhancements. For the period ended December 31, 2013, the recent loss trend adjustment caps for the consumer and mortgage portfolios were triggered in only one portfolio segment within the Puerto Rico consumer portfolio. Management assessed the the applicable cap through a review of impact of qualitative factors that specifically considered the drivers of loss trends and changes to the portfolio composition. The related effect of the aforementioned cap was immaterial for the overall level of the Allowance for Loan and Lease Losses for the Puerto Rico Consumer portfolio. loss trend adjustment recent 121 POPULAR, INC. 2014 ANNUAL REPORT For the period ended December 31, 2014, 50% (December 31, 2013 - 27%) of the ALLL for BPPR non- covered loan portfolios utilized the recent loss trend adjustment instead of the base loss. The effect of replacing the base loss with the recent loss trend adjustment was mainly concentrated in the commercial multi-family, commercial and industrial, personal and auto loan portfolios for 2014, and in the commercial multi-family, mortgage, and leasing portfolios for 2013. For the period ended December 31, 2014, 21% (December 31, 2013 - 29%) of the ALLL for BPNA loan portfolios utilized the recent loss trend adjustment instead of the base loss. The effect of replacing the base loss with the recent loss trend adjustment was mainly concentrated in the and industrial and legacy loan portfolios for 2014 and in the commercial multi-family, commercial real estate non- owner occupied and commercial and industrial portfolios for 2013. commercial multi-family, commercial • Environmental credit factors, which include 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 these losses. The Corporation reflects environmental an adjustment that, as appropriate, increases the historical loss rate applied to each group. Environmental factors provide updated perspective on credit and economic conditions. Regression analysis is used to select these indicators and quantify the effect on the general reserve of the allowance for loan losses. factors on each loan group as the effect of During the second quarter of 2014, management completed the annual review of the components of the ALLL models. As part of this review management updated core metrics and revised certain components related to the estimation process for evaluating the adequacy of the general reserve of the allowance for loan losses. These enhancements to the ALLL methodology, which are described in the paragraphs below, were implemented as of June 30, 2014 and resulted in a net decrease to the allowance for loan losses of $18.7 million for the non- covered portfolio and a net increase to the allowance for loan losses of $0.8 million for the covered portfolio. Management made the following principal enhancements to the methodology during the second quarter of 2014: • Annual review and recalibration of the environmental factors adjustment. The environmental factor adjustments are developed by performing regression analyses on selected credit each applicable loan segment. During the second quarter of 2014, the environmental factor models used to account and macroeconomic for and economic in current indicators changes credit for conditions were reviewed and recalibrated based on the latest applicable trends. Management also revised the application of environmental factors to the historical loss rates to consider last 12 month trends of the applicable credit and macroeconomic indicators applied as an incremental adjustment to account for emerging risks not necessarily considered in the historical loss rates. to enhancements environmental The combined effect of the aforementioned recalibration and factors the adjustment resulted in a decrease to the allowance for loan losses of $17 million at June 30, 2014, of which $14.1 million related to the non-covered BPPR segment and $3.7 million related to the BPNA segment, offset in part by a $0.8 million increase in the BPPR covered segment. loss • Increased the historical look-back period for determining the recent for consumer and trend adjustment mortgage loans. The Corporation increased the look-back period for assessing recent trends applicable to the determination of consumer and mortgage loan net charge- offs from 6 months to 12 months and eliminated the use of caps. Previously, the Corporation used a recent loss trend adjustment based on 6 months of net charge-offs up to a determined cap. Given the current overall consumer and mortgage credit quality improvements, management concluded that a 12-month look-back period for the recent loss trend adjustment aligns the Corporation’s allowance for loan losses methodology to current credit quality trends while limiting excessive pro-cyclicality given the thus, eliminating the aforementioned caps. look-back period analysis, longer The combined effect of the aforementioned enhancements to the recent loss trend adjustment resulted in a decrease to the allowance for loan losses of $1 million at June 30, 2014, of which $0.9 million related to the non-covered BPPR segment and $0.1 million related to the BPNA segment. According to the loan impairment accounting guidance in ASC Section 310-10-35, a loan is impaired when, based on current information and events, it is probable that the principal and/or interest are not going to be collected according to the original contractual the loan agreement. Current information and events include “environmental” factors, e.g. existing industry, geographical, economic and political factors. Probable means the future event or events which will confirm the loss or impairment of the loan is likely to occur. terms of The Corporation defines commercial and construction impaired loans as borrowers with total debt greater than or equal to $1 million with 90 days or more past due, as well as all loans whose terms have been modified in a trouble debt larger commercial and restructuring (“TDRs”). In addition, 122 for thus loans evaluated impairment impairment. Commercial smaller balance homogeneous construction loans ($1 million and over) that exhibit probable or observed credit weaknesses are subject to individual review and and the Corporation’s that originally met construction loans threshold for impairment identification in a prior period, but due to charge-offs or payments are currently below the $1 million threshold and are still 90 days past due, except for TDRs, are accounted for under the Corporation’s general reserve methodology. Although the accounting codification guidance for specific impairment of a loan excludes large groups of that are (e.g. mortgage and collectively evaluated for consumer loans), it specifically requires that loan modifications considered troubled debt restructurings (“TDRs”) be analyzed under its provisions. An allowance for loan impairment is recognized to the extent that the carrying value of an impaired loan exceeds the present value of the expected future cash flows discounted at the loan’s effective rate, the observable market price of the loan, if available, or the fair value of the collateral if the loan is collateral dependent. The fair value of the collateral is generally based on appraisals. Appraisals may be adjusted due to their age, and the type, location, and condition of the property or area or general market conditions to reflect the expected change in value between the effective date of the appraisal impairment measurement date. The Corporation requests updated appraisal reports from pre- approved appraisers for loans that are considered impaired following the Corporation’s reappraisals policy. This policy requires updated appraisals for loans secured by real estate (including construction loans) either annually or every two years depending on the total exposure of the borrower. As a general reviews the Corporation appraisals as part of the underwriting and approval process and also for credits considered impaired. procedure, internally and the Troubled debt restructurings A restructuring constitutes a TDR when the Corporation separately concludes that both of the following conditions exist: 1) the restructuring constitute a concession and 2) the debtor is experiencing financial difficulties. The concessions stem from an agreement between the creditor and the debtor or are imposed by law or a court. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. A concession has been granted when, as a result of the restructuring, the Corporation does not expect to collect all amounts due, the original contract rate. If the payment of principal is dependent on the value of collateral, the current value of the collateral is taken into consideration in determining the amount of principal to be collected; therefore, all factors that changed are including interest accrued at its debt involves a degree of considered to determine if a concession was granted, including the change in the fair value of the underlying collateral that may be used to repay the loan. Classification of loan judgment. modifications as TDRs Indicators that the debtor is experiencing financial difficulties which are considered include: (i) the borrower is currently in default on any of its debt or it is probable that the borrower in the would be in payment default on any of foreseeable future without the modification; (ii) the borrower has declared or is in the process of declaring bankruptcy; (iii) there is significant doubt as to whether the borrower will continue to be a going concern; (iv) the borrower has securities that have been delisted, are in the process of being delisted, or are under threat of being delisted from an exchange; (v) based on estimates the borrower’s current business capabilities, it is forecasted that the entity-specific cash flows will be insufficient to service the debt (both interest and principal) in accordance with the contractual through maturity; and terms of the borrower cannot (vi) absent obtain funds from sources other than the existing creditors at an effective interest rate equal to the current market interest rate a non-troubled debtor. The identification of TDRs is critical in the determination of the adequacy of the allowance for loan losses. Loans classified as TDRs may be excluded from TDR status if performance under the restructured terms exists for a reasonable period (at least twelve months of sustained performance) and the loan yields a market rate. the current modification, the existing agreement that only encompass and projections similar debt for for A loan may be restructured in a troubled debt restructuring into two (or more) loan agreements, for example, Note A and Note B. Note A represents the portion of the original loan principal amount that is expected to be fully collected along with contractual interest. Note B represents the portion of the original loan that may be considered uncollectible and charged- off, but the obligation is not forgiven to the borrower. Note A may be returned to accrual status provided all of the conditions for a TDR to be returned to accrual status are met. The modified loans are considered TDRs and thus, are evaluated under the framework of ASC Section 310-10-35 as long as the loans are not part of a pool of loans accounted for under ASC Subtopic 310-30. Refer to Note 12 to the consolidated financial statements for the additional Corporation’s determination of the allowance for loan losses. information on TDRs qualitative and Reserve for unfunded commitments The reserve for unfunded commitments is maintained at a level believed by management to be sufficient to absorb estimated probable losses related to unfunded credit facilities and is included in other liabilities in the consolidated statements of 123 POPULAR, INC. 2014 ANNUAL REPORT financial condition. The determination of the adequacy of the reserve is based upon an evaluation of the unfunded credit facilities. Net adjustments to the reserve for unfunded commitments are included in other operating expenses in the consolidated statements of operations. FDIC loss share indemnification asset and true-up payment obligation (contingent consideration) The FDIC loss initially recorded at fair value. Fair value was estimated using projected cash flows related to the loss sharing agreements. share indemnification asset was The FDIC loss share indemnification asset for loss share agreements is measured separately from the related covered assets as it is not contractually embedded in the assets and is not transferable with the assets should the assets be sold. are recognized in non-interest The FDIC loss share indemnification asset is recognized on the same basis as the assets subject to loss share protection. As such, for covered loans accounted pursuant to ASC Subtopic 310-30, decreases in expected reimbursements from the FDIC due to improvements in expected cash flows to be received from borrowers, income prospectively over the life of the FDIC loss sharing agreements. For covered loans accounted for under ASC Subtopic 310-20, as the loan discount recorded as of the acquisition date was accreted into income, a reduction of the related indemnification asset was recorded as a reduction in non-interest income. Increases in expected reimbursements from the FDIC are recognized in non-interest income in the same period that the allowance for credit losses for the related loans is recognized. asset The amortization or accretion due to discounting of the loss share sharing in reimbursements is included in non-interest income, particularly in the category of FDIC loss share income (expense). expected changes loss and The true-up payment obligation associated with the loss share agreements is accounted for at fair value in accordance with ASC Section 805-30-25-6 as it is considered contingent consideration. The true-up payment obligation is included as part of other liabilities in the consolidated statements of financial condition. Any changes in the carrying value of the obligation are included in the category of FDIC loss share income (expense) in the consolidated statements of operations. Refer to Note 13 for additional information on the FDIC loss share indemnification asset and true-up payment obligation. Transfers and servicing of financial assets The transfer of an entire financial asset, a group of entire financial assets, or a participating interest in an entire financial asset in which the Corporation surrenders control over the assets is accounted for as a sale if all of the following conditions set forth in ASC Topic 860 are met: (1) the assets must be isolated from creditors of the transferor, (2) the transferee must obtain the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the transferor cannot maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. When the Corporation transfers financial assets and the transfer fails any one of these criteria, the Corporation is prevented from derecognizing the transferred financial assets and the transaction is accounted for as a secured borrowing. For federal and Puerto Rico income tax purposes, the Corporation treats the transfers of loans which do not qualify as “true sales” under the applicable accounting guidance, as sales, recognizing a deferred tax asset or liability on the transaction. sold; For transfers of financial assets that satisfy the conditions to be accounted for as sales, the Corporation derecognizes all assets recognizes all assets obtained and liabilities incurred in consideration as proceeds of the sale, including servicing assets and servicing liabilities, if applicable; initially measures at fair value assets obtained and liabilities incurred in a sale; and recognizes in earnings any gain or loss on the sale. The guidance on transfer of financial assets requires a true sale analysis of the treatment of the transfer under state law as if the Corporation was a debtor under the bankruptcy code. A true sale legal analysis includes several legally relevant factors, such as the nature and level of recourse to the transferor, and the nature of retained interests in the loans sold. The analytical conclusion as to a true sale is never absolute and unconditional, but contains qualifications based on the inherent equitable powers of a bankruptcy court, as well as the unsettled state of the common law. Once the legal isolation test has been met, the factors concerning the nature and extent of other transferor’s control over the transferred assets are taken into account in order to determine whether derecognition of assets is warranted. The Corporation sells mortgage loans to the Government National Mortgage Association (“GNMA”) in the normal course of business and retains the servicing rights. The GNMA programs under which the loans are sold allow the Corporation to repurchase individual delinquent loans that meet certain criteria. At the Corporation’s option, and without GNMA’s prior authorization, the Corporation may repurchase the delinquent loan for an amount equal to 100% of the remaining principal the balance of unconditional ability to repurchase the delinquent loan, the Corporation is deemed to have regained effective control over the loan and recognizes the loan on its balance sheet as well as an offsetting liability, regardless of the Corporation’s intent to repurchase the loan. the Corporation has loan. Once the Servicing assets The Corporation periodically sells or securitizes loans while retaining the obligation to perform the servicing of such loans. In addition, the Corporation may purchase or assume the right to service the Corporation undertakes an obligation to service a loan, loans originated by others. Whenever All are the servicer separately recognized servicing assets management assesses whether a servicing asset or liability should be recognized. A servicing asset is recognized whenever the compensation for servicing is expected to more than for performing the adequately compensate servicing. Likewise, a servicing liability would be recognized in the event that servicing fees to be received are not expected to adequately compensate the Corporation for its expected cost. Mortgage servicing assets recorded at fair value are separately presented on the consolidated statements of financial condition. initially recognized at fair value. For subsequent measurement of servicing rights, the Corporation has elected the fair value method for mortgage loans servicing rights (“MSRs”) while all other servicing assets, particularly those related to Small Business Administration (“SBA”) commercial follow the amortization method. Under the fair value measurement method, MSRs are recorded at fair value each reporting period, and changes in fair value are reported in mortgage banking activities in the consolidated statement of operations. Under the amortization method, servicing assets are amortized in proportion to, and over the period of, estimated servicing income, and assessed for impairment based on fair value at each reporting period. Contractual servicing fees including ancillary income and late fees, as well as fair value if any, are reported in adjustments, and impairment mortgage banking activities in the consolidated statement of operations. Loan servicing fees, which are based on a percentage of the principal balances of the loans serviced, are credited to income as loan payments are collected. losses, loans, The fair value of servicing rights is estimated by using a cash flow valuation model which calculates the present value of estimated future net taking into consideration actual and expected loan prepayment rates, discount rates, servicing costs, and other economic factors, which are determined based on current market conditions. servicing cash flows, estimated fair For purposes of evaluating and measuring impairment of capitalized servicing assets that are accounted under the amortization method, the amount of impairment recognized, if any, is the amount by which the capitalized servicing assets per stratum exceed their value. Temporary impairment is recognized through a valuation allowance with changes included in results of operations for the period in which the change occurs. If it is later determined that all or a portion of the temporary impairment no longer exists for a particular stratum, the valuation allowance is reduced through a recovery in earnings. Any fair value in excess of the cost basis of the servicing asset for a given stratum is not recognized. Servicing rights subsequently accounted under the amortization method other-than-temporary impairment. When the recoverability of an impaired servicing asset accounted under the amortization method is determined to be remote, the valuation the unrecoverable portion of allowance is applied as a direct write-down to the carrying value of the servicing rights, precluding subsequent recoveries. reviewed also are for 124 Premises and equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed on a straight-line basis over the estimated useful life of each type of asset. Amortization of leasehold improvements is computed over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Costs of maintenance and repairs which do not improve or extend the life of the respective assets are expensed as incurred. Costs of renewals and betterments are capitalized. When assets are disposed of, their cost and related accumulated depreciation are removed from the accounts and any gain or loss is reflected in earnings as realized or incurred, respectively. incurred during The Corporation capitalizes interest cost incurred in the construction of significant real estate projects, which consist primarily of facilities for its own use or intended for lease. The amount of interest cost capitalized is to be an allocation of the the period required to interest cost substantially complete for interest capitalization purposes is to be based on a weighted average rate on the Corporation’s outstanding borrowings, unless there is a specific new borrowing associated with the asset. Interest cost capitalized for the years ended December 31, 2014, 2013 and 2012 was not significant. asset. The rate the The Corporation has operating lease arrangements primarily associated with the rental of premises to support its branch these network or arrangements rent escalations and renewal options. Rent expense on non- cancellable operating leases with scheduled rent increases are recognized on a straight-line basis over the lease term. for general office are non-cancellable space. Certain of for and provide Impairment of long-lived assets The Corporation evaluates for impairment its long-lived assets to be held and used, and long-lived assets to be disposed of, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Restructuring costs A liability for a cost associated with an exit or disposal activity is recognized and measured initially at its fair value in the period in which the liability is incurred. If future service is required for employees to receive the one-time termination benefit, the liability is initially measured at its fair value as of the termination date and recognized over the future service period. Other real estate Other real estate, received in satisfaction of a loan, is recorded at fair value less estimated costs of disposal. The amount by which the carrying amount of the loan exceeds the fair value less cost to sell is recorded as a charge against the allowance for to foreclosure, any losses in the loan losses. Subsequent 125 POPULAR, INC. 2014 ANNUAL REPORT the carrying value arising from periodic re-evaluations of properties, and any gains or losses on the sale of these properties are credited or charged to expense in the period incurred and are included as a component of other operating expenses. The cost of maintaining and operating such properties is expensed as incurred. Updated appraisals or third-party broker price opinions of value (“BPO”) are obtained to adjust the value of the other real estate assets. The frequency depends on the loan type and total credit exposure. The appraisal for a commercial or construction other real estate property with a book value greater than $1 million is updated annually and if lower than $1 million it is updated every two years. For residential mortgage properties, the Corporation requests third-party BPOs or appraisals, generally on an annual basis. Appraisals may be collateral inspections, property profiles, or general market conditions. The adjustments applied are based upon internal information such as other appraisals for the type of properties and/or loss severity information that can provide historical trends in the real estate market, and may change from time to time based on market conditions. adjusted due to age, Goodwill and other intangible assets Goodwill is recognized when the purchase price is higher than the fair value of net assets acquired in business combinations under the purchase method of accounting. Goodwill is not amortized, but is tested for impairment at least annually or more frequently if events or circumstances indicate possible impairment using a two-step process at each reporting unit level. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, the goodwill of the reporting unit is not considered impaired and the second step of the impairment test is unnecessary. If needed, the second step consists of comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. In determining the fair value of a reporting unit, the Corporation generally uses a combination of methods, which include market price multiples of comparable companies and the discounted cash flow analysis. Goodwill impairment losses are recorded as part of operating expenses in the consolidated statement of operations. Other intangible assets deemed to have an indefinite life are not amortized, but are tested for impairment using a one-step process which compares the fair value with the carrying amount of the asset. In determining that an intangible asset has an indefinite life, the Corporation considers expected cash inflows competitive, economic and other factors, which could limit the intangible asset’s useful life. contractual, and legal, regulatory, Other identifiable intangible assets with a finite useful life, mainly core deposits, are amortized using various methods over the periods benefited, which range from 4 to 10 years. These intangibles are evaluated periodically for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairments on intangible assets with a finite useful life are evaluated under the guidance for impairment or disposal of long-lived assets. Assets sold / purchased under agreements to repurchase / resell Repurchase and resell agreements are treated as collateralized financing transactions and are carried at the amounts at which the assets will be subsequently reacquired or resold as specified in the respective agreements. to agreements resell. However, It is the Corporation’s policy to take possession of securities purchased under the counterparties to such agreements maintain effective control over such securities, and accordingly those securities are not reflected in the Corporation’s consolidated statements of financial condition. The Corporation monitors the fair value of the underlying securities as compared to the related receivable, including accrued interest. It is the Corporation’s policy to maintain effective control over assets sold under agreements to repurchase; accordingly, such securities continue to be carried on the consolidated statements of financial condition. The Corporation may require counterparties to deposit return collateral pledged, when collateral or additional appropriate. stated at cost, Software less accumulated Capitalized software is amortization. Capitalized software includes purchased software and capitalizable application development costs associated with internally-developed software. Amortization, computed on a the straight-line method, estimated useful life of the software. Capitalized software is included in “Other assets” in the consolidated statement of financial condition. is charged to operations over Guarantees, including indirect guarantees of indebtedness of others The Corporation, as a guarantor, recognizes at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. Refer to Note 30 to the consolidated financial statements for further disclosures on guarantees. Treasury stock Treasury stock is recorded at cost and is carried as a reduction of stockholders’ equity in the consolidated statements of financial condition. At the date of retirement or subsequent reissue, the treasury stock account is reduced by the cost of such stock. At retirement, the excess of the cost of the treasury stock over its par value is recorded entirely to surplus. At reissuance, the difference between the consideration received upon issuance and the specific cost is charged or credited to surplus. the Corporation determined to wind-down those operations. Refer to the disclosure of accumulated other comprehensive loss included in the Note 29 for the outstanding balances of the foreign currency translation adjustments at December 31, 2014 and 2013. 126 Income Recognition - Insurance agency business Commissions and fees are recognized when related policies are effective. Additional premiums and rate adjustments are recorded as they occur. Contingent commissions are recorded on the accrual basis when the amount to be received is notified by the insurance company. Commission income from advance business is deferred. An allowance is created for expected adjustments to policy cancellations. to commissions earned relating is revenue banking Income Recognition - Investment banking revenues and commissions follows: Investment underwriting fees at the time the underwriting is completed and income is reasonably determinable; corporate finance advisory fees as earned, according to the terms of the specific contracts; and sales commissions on a trade-date basis. Commission income securities transactions are recorded on a trade-date basis. and expenses related to customers’ recorded as Foreign exchange Assets and liabilities denominated in foreign currencies are translated to U.S. dollars using prevailing rates of exchange at the end of the period. Revenues, expenses, gains and losses are translated using weighted average rates for the period. The from resulting operations for which the functional currency is other than the U.S. dollar is reported in accumulated other comprehensive loss, except for highly inflationary environments in which the effects are included in other operating expenses. translation adjustment foreign currency The Corporation holds interests in Centro Financiero BHD León, S.A. (“BHD León”) in the Dominican Republic. The business of BHD León is mainly conducted in their country’s foreign currency. The resulting foreign currency translation adjustment from these operations is reported in accumulated other comprehensive loss. During 2014, BHD León entered into a merger agreement with Grupo Financiero León, as part of this transaction BHD León issued additional stock which had a dilutive effect of Popular’s equity participation. Refer to note 18, Other Assets, for additional information. Therefore, a pro rata portion of accumulated translation adjustment component of the equity attributable to this equity method investment was recognized as a loss through earnings. the During 2013, the Corporation sold its investment in Tarjetas y Transacciones en Red Tranred, C.A. (formerly EVERTEC DE VENEZUELA, C.A.) which was written-down during 2011 as Income taxes The Corporation recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Corporation’s financial statements or tax returns. Deferred income are determined for differences between financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. The computation is based on enacted tax laws and rates applicable to periods in which the temporary differences are expected to be recovered or settled. and liabilities tax assets The guidance for income taxes requires a reduction of the carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not (defined as a likelihood of more than 50 percent) that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically by the Corporation based on the more likely than not realization threshold criterion. In the assessment for a valuation allowance, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, all sources of taxable income available to realize the including the future reversal of existing deferred tax asset, temporary differences, the future taxable income exclusive of taxable reversing temporary differences and carryforwards, In income in carryback years and tax-planning strategies. is given to making such assessments, evidence that can be objectively verified. significant weight The valuation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in the Corporation’s financial statements or tax returns and future profitability. The Corporation’s accounting for deferred tax consequences represents management’s best estimate of those future events. to by taxing challenge Such tax positions Positions taken in the Corporation’s tax returns may be subject authorities upon the examination. Uncertain tax positions are initially recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. Interest on income tax uncertainties is classified within income tax expense in the statement of operations; while the penalties, if any, are accounted for as other operating expenses. are both initially 127 POPULAR, INC. 2014 ANNUAL REPORT The Corporation accounts for the taxes collected from customers and remitted to governmental authorities on a net basis (excluded from revenues). Income tax expense or benefit for the year is allocated among continuing operations, discontinued operations, and other comprehensive income, as applicable. The amount allocated to continuing operations is the tax effect of the pretax income or loss from continuing operations that occurred during the year, plus or minus income tax effects of (a) changes in circumstances that cause a change in judgment about the realization of deferred tax assets in future years, (b) changes in tax laws or rates, (c) changes in tax status, and (d) tax-deductible dividends paid to shareholders, subject to certain exceptions. Employees’ retirement and other postretirement benefit plans Pension costs are computed on the basis of accepted actuarial methods and are charged to current operations. Net pension costs are based on various actuarial assumptions regarding future experience under the plan, which include costs for services rendered during the period, interest costs and return on plan assets, as well as deferral and amortization of certain items such as actuarial gains or losses. The funding policy is to contribute to the plan as necessary to provide for services to date and for those expected to be earned in the future. To the extent that these requirements are fully covered by assets in the plan, a contribution may not be made in a particular year. The cost of postretirement benefits, which is determined based on actuarial assumptions and estimates of the costs of providing these benefits in the future, is accrued during the years that the employee renders the required service. The guidance for compensation retirement benefits of ASC Topic 715 requires the recognition of the funded status of each defined pension benefit plan, retiree health care and other postretirement benefit plans on the statement of financial condition. Stock-based compensation The Corporation opted to use the fair value method of recording stock-based compensation as described in the guidance for employee share plans in ASC Subtopic 718-50. Comprehensive income (loss) Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances, except those resulting from investments by owners and distributions to owners. The presentation of comprehensive income (loss) is included in separate consolidated statements of comprehensive income (loss). Net income (loss) per common share Basic income (loss) per common share is computed by dividing income (loss) adjusted for preferred stock dividends, net including undeclared or unpaid dividends if cumulative, and charges or credits related to the extinguishment of preferred stock or induced conversions of preferred stock, by the weighted average number of common shares outstanding during the year. Diluted income per common share take into consideration the weighted average common shares adjusted for the effect of stock options, restricted stock and warrants on common stock, using the treasury stock method. Statement of cash flows For purposes of reporting cash flows, cash includes cash on hand and amounts due from banks. Note 3 - New accounting pronouncements FASB Accounting Standards Update 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items (“ASU 2015-01”) The FASB issued ASU 2015-01 in January 2015, which eliminates from GAAP the concept of extraordinary items. Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports the classification as an extraordinary item. If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. The entity is also required to disclose applicable income taxes and either present or disclose earnings- per-share data applicable to the extraordinary item. Eliminating the concept of extraordinary items will save time and reduce costs for preparers because they will not have to assess whether a particular event or transaction event is extraordinary. This will alleviate uncertainty for preparers, auditors, and regulators because auditors and regulators no longer will need to evaluate whether a preparer treated an unusual and/or infrequent item appropriately. The presentation and disclosure guidance for items that are unusual in nature and occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2015. The amendments may be applied prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided is applied from the beginning of the fiscal year of adoption. The Corporation does not anticipate that the adoption of this guidance will have a material effect on its consolidated statements of financial condition, results of operations or presentation and disclosures. FASB Accounting Standards Update 2014-17, Business Combination (Topic 805): Pushdown Accounting (“ASU 2014-17”) The FASB issued ASU 2014-17 in November 2014, which provides an acquired entity with an option to apply pushdown accounting to its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired the option to apply entity. An acquired entity may elect pushdown accounting in the reporting period in which the change-in-control event occurs. An acquired entity should determine whether to elect to apply pushdown accounting for each individual change-in-control event in which an acquirer obtains control of the acquired entity. If pushdown accounting is not applied in the reporting period in which the change-in- control event occurs, an acquired entity will have the option to elect to apply pushdown accounting in a subsequent reporting period to the acquired entity’s most recent change-in-control event. An election to apply pushdown accounting in a reporting period after the reporting period in which the change-in-control event occurred should be considered a change in accounting principle. If pushdown accounting is applied to an individual change-in-control event, the election is irrevocable. If an acquired entity elects the option to apply pushdown accounting in its separate financial statements, it should disclose information in the current reporting period that enables users of financial statements to evaluate the effect of pushdown accounting. The amendments in this ASU are effective on November 18, 2014. After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event. The provisions of this ASU did not had a material effect on the consolidated statements of financial condition or results of operations. FASB Accounting Standards Update 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is more Akin to Debt or to Equity (“ASU 2014-16”) The FASB issued ASU 2014-16 in November 2014, which intends to eliminate the use of different methods in practice and thereby reduce existing diversity under GAAP in the accounting for hybrid financial instruments issued in the form of a share. An entity should determine the nature of the host contract by considering the economic characteristics and risks of the entire hybrid financial instrument, including the embedded derivative feature that is being evaluated for separate accounting from the host contract. In evaluating the stated and implied substantive terms and features, the existence or omission of any single term or feature does not necessarily determine the economic characteristics and risks of the host contract. Although an 128 individual term or feature may weigh more heavily in the evaluation on the basis of facts and circumstances, an entity should use judgment based on an evaluation of all relevant terms and features. The amendment in this ASU does not change the current criteria in GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required. An entity will continue to evaluate whether the economic characteristics and risks of the embedded derivative feature are clearly and closely related to those of the host contract, among other relevant criteria. The amendments in the ASU are effective for annual periods, and interim periods within those annual periods, beginning in the first quarter of 2016. Early adoption is permitted. The effects of initially adopting the amendments of this ASU should be applied on a modified retrospective basis to existing hybrid financial instruments issued in the form of a share as of the beginning of the fiscal year for which the amendments are effective. Retrospective application is permitted to all relevant prior periods. The Corporation does not anticipate that the adoption of this guidance will have a material effect on its consolidated statements of financial condition or results of operations. FASB Accounting Standards Update 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability as a Going Concern (“ASU 2014-15”) The FASB issued ASU 2014-15 in August 2014, which provides guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide the related should reduce footnote disclosures. These diversity in the timing and content of footnote disclosures. amendments In connection with preparing financial statements for each annual and interim reporting period, an entity’s management there are conditions or events, should evaluate whether considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). When management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, management should consider whether its plans that are intended to mitigate those relevant conditions or events will alleviate the substantial doubt. The mitigating effect of management’s plans should be considered only to the extent the plans will be effectively that (1) it implemented and, if so, (2) it is probable that the plans will mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. is probable that 129 POPULAR, INC. 2014 ANNUAL REPORT The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Corporation does not anticipate that the adoption of this guidance will have a material effect on its consolidated statements of financial condition or results of operations. The Corporation does not anticipate that the adoption of this guidance will have a material effect on its consolidated statements of financial condition, results of operations or presentation and disclosures. FASB Accounting Standards Update 2014-14, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310- 40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure (“ASU 2014-14”) The FASB issued ASU 2014-14 in August 2014, which intends to resolve the diversity in practice related to how creditors classify government-guaranteed mortgage loans, including FHA or VA guaranteed loans, upon foreclosure. Some creditors reclassify those loans to real estate consistent with other foreclosed loans that do not have guarantees; others reclassify the loans to receivables. This ASU address the classification of certain foreclosed mortgage loans held by creditors that are either government programs. fully or partially guaranteed under The amendments of the ASU require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: 1- The loan has a government guarantee that is not separable from the loan before foreclosure. 2- At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim. 3- At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance expected to be recovered from the guarantor. The amendments in the ASU are effective for annual periods, and interim periods within those annual periods, beginning in the first quarter of 2015. The amendments of this ASU can be applied using either a prospective transition method or a modified retrospective transition method. For prospective transition, an entity should apply the amendments in this Update to foreclosures that occur after the date of adoption. For modified retrospective transition, an entity should apply the amendments in this Update by means of a cumulative-effect adjustment as of the annual period of adoption. Prior periods should not be adjusted. However, a reporting entity must apply the same method of transition as elected under ASU 2014-04. the beginning of FASB Accounting Standards Update 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financial Entity (“ASU 2014-13”) The FASB issued ASU 2014-13 in August 2014, which intends to clarify that when a reporting entity that consolidates a collateralized financing entity may elect to measure the financial assets and the financial liabilities of that collateralized financing entity using either the measurement alternative included in this Update or Topic 820 on fair value measurement. When the measurement alternative is not elected, the amendments of this Update clarify that the fair value of the financial assets and the fair value of the financial liabilities of the consolidated collateralized financing entity should be measured using the requirements of Topic 820 and any differences in the fair value of the financial assets and the fair value of the financial liabilities of that entity should be reflected in earnings and attributed to the reporting entity in the consolidated statement of income. When a reporting entity elects the measurement alternative included in this Update for a collateralized financing entity, the reporting entity should measure both the financial assets and the financial liabilities of that entity in its consolidated financial statements using the more observable of the fair value of the financial assets and the fair value of the financial liabilities. The amendments in the ASU are effective in the first quarter of 2016. Early adoption is permitted as of the beginning of an annual period. The amendments of this ASU can be applied using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the annual period of adoption. A reporting entity also may apply the amendments retrospectively to all relevant prior periods beginning with the annual period in which the amendments of ASU 2009-17 were initially adopted. The Corporation does not anticipate that the adoption of this guidance will have a material effect on its consolidated statements of financial condition or results of operations. FASB Accounting Standards Update 2014-12, Compensation - Stock Compensation (Topic 718): Accounting for Share- Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (“ASU 2014-12”) The FASB issued ASU 2014-12 in June 2014, which intends to resolve the diverse accounting treatment of awards with a performance target that could be achieved after an employee completes the requisite service period. That is, the employee would be eligible to vest in the award regardless of whether the employee is rendering service on the date the performance target is achieved. The Corporation does not anticipate that the adoption of this guidance will have a material effect on its consolidated statements of financial condition or results of operations. 130 The amendments of the ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. the Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent compensation cost attributable to the periods for which the requisite service has already been rendered. the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. If The amendments in the ASU are effective in the first quarter of 2016. Early adoption is permitted. The amendments of this ASU can be applied (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets outstanding at the beginning of the period of adoption and to all new or modified awards thereafter. The Corporation does not anticipate that the adoption of this guidance will have a material effect on its consolidated statements of financial condition or results of operations. FASB Accounting Standards Update 2014-11, Transfers and Servicing (Topic 860) Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (“ASU 2014-11”) The FASB issued ASU 2014-11 in June 2014, which requires two accounting changes. First, the amendments in this Update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. Second, repurchase financing arrangements, require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will in secured borrowing accounting for the repurchase agreement. the amendments result for The amendments in this Update require disclosures for certain transactions comprising (1) a transfer of a financial asset accounted for as a sale and (2) an agreement with the same transferee entered into in contemplation of the initial transfer that results in the transferor retaining substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. The accounting changes in this ASU are effective in the first quarter of 2015. Early adoption is prohibited. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. addressing FASB Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606); (“ASU 2014-09”) The FASB issued ASU 2014-09 in May 2014, which clarifies the principles for recognizing revenue and develop a common revenue standard that would (1) remove inconsistencies and weaknesses in revenue requirements, (2) provide a more robust framework for improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets, (4) provide more through useful improved disclosure simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. ASU 2014-09 amends the ASC Codification and creates a new Topic 606, Revenue from Contracts with Customers. financial statement and (5) information to users of requirements revenue issues, (3) The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services the consideration to which the entity expects to be entitled in exchange for those goods or services. in an amount to customers reflects that In addition, the new guidance 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. Qualitative quantitative contract with customers, information is significant judgments and changes in judgments, and assets recognized from the cost to obtain or fulfill a contract. required about and The amendments in this ASU are effective in the first quarter of 2017. Early adoption is not permitted. The Corporation is currently evaluating the impact that the adoption of this guidance will have on the presentation and disclosures in its consolidated financial statements. FASB Accounting Standards Update 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposal of Components of an Entity (“ASU 2014-08”) The FASB issued ASU 2014-08 in April 2014, which changes the criteria reporting discontinued operations while enhancing disclosures in this area. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results. Examples include a disposal of a major geographic area, a major line of business, or a major equity investment. for In addition, the new guidance requires expanded disclosures include more about discontinued operations that will 131 POPULAR, INC. 2014 ANNUAL REPORT information about the assets, liabilities, income, and expenses of discontinued operations. The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. This disclosure will provide information about the ongoing trends in the reporting organization’s results from continuing operations. The amendments in the ASU are effective in the first quarter of 2015. Early adoption is permitted. The Corporation does not anticipate that the adoption of this guidance will have a material effect on its consolidated statement of financial condition or result of operations, though will the Corporation reclassifies assets and liabilities to discontinued operations after the effective date of this pronouncement. require additional disclosures in the event that FASB Accounting Standards Update 2014-04, Receivables- Troubled Debt Restructuring by Creditors (SubTopic 310- 40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (“ASU 2014-04”) The FASB issued ASU 2014-04 in January 2014 which clarifies when a creditor should be considered to have received physical possession of a residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate property recognized. The amendments of this ASU clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: a) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure; or b) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The amendment of this guidance requires interim and annual disclosures of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU 2014-04 is effective for annual periods, and interim periods within those years, beginning after December 15, 2014. The amendments in this ASU can be elected using either a modified retrospective transition method or a prospective transition method. Early adoption is permitted. The Corporation does not anticipate that the adoption of this guidance will have a material effect on its consolidated statements of financial condition or results of operations. Note 4 - Discontinued operations On April 22, 2014, BPNA, the Corporation’s U.S. mainland banking subsidiary, entered into definitive agreements to sell its California, Illinois and Central Florida regional operations to three different buyers. During the quarter ended June 30, 2014, the Corporation recorded non-cash goodwill impairment charge of $186.5 million, related to the goodwill allocated, on a relative fair value basis, to these operations. However, this non-cash charge had no impact on the Corporation’s tangible capital or regulatory capital ratios. Refer to Note 20, for additional information on the goodwill impairment charge. On August 8, 2014, BPNA completed the sale of its Illinois regional operations. As part of the transaction, BPNA sold its 12 branches in the Chicago metropolitan area, including $562 million in loans, and $726 million in deposits, each as of July 31, 2014. The transaction resulted in a net gain of $24.6 million. On September 15, 2014, BPNA completed the sale of its Central Florida regional operations. As part of the transaction, BPNA sold its 9 branches in the Central Florida area, including $104 million in loans and $217 million in deposits, each as of August 31, 2014. The transaction resulted in a net gain of $1.2 million. On November 8, 2014, the Corporation completed the sale of the California regional operations. The Corporation sold 20 branches and transferred $1.1 billion in loans and $1.1 billion in deposits to Banc of California National Association, a wholly owned subsidiary of Banc of California, Inc. The transaction resulted in a net gain of $8.1 million, net of transaction costs. The Corporation agreed to provide, to certain limitations, customary indemnification to the purchaser, including with respect to certain pre-closing liabilities and violations of representations and warranties. The Corporation also agreed to indemnify the purchaser for up to 1.5% of credit losses on transferred loans for a period of two years after the the closing. Pursuant Corporation’s maximum exposure approximately $16 million. The Corporation recognized a reserve of approximately $2.2 million, representing its best estimate of the loss that would be incurred in connection with this indemnification. indemnification provision, to this subject is In connection with these transactions, the Corporation is relocating certain back office operations to Puerto Rico and New York. The Corporation incurred restructuring charges of $26.7 million during the year ended December 31, 2014. Additional restructuring charges amounting to approximately $22.0 million are expected to be incurred in the year 2015, comprised of $13.0 million in personnel related costs and $9.0 million in lease cancelations and other restructuring costs. Refer to Note 5, for restructuring charges incurred during the year ended December 31, 2014. “Assets / Liabilities are presented as The regional operations sold constituted a business, as defined in ASC 805-10-55. Accordingly, the decision to sell these businesses resulted in the discontinuance of each of these respective operations and classification as held-for-sale. For financial reporting purposes, the results of the discontinued operations from discontinued operations” in the consolidated statement of condition and “(Loss) income from discontinued operations, net of tax” in the consolidated statement of operations. As required by ASC 205-20, current and prior periods presented in the consolidated statement of operations as well as the related note disclosures covering income and expense amounts have been retrospectively adjusted for the impact of the discontinued operations consolidated statement of financial condition and related note disclosure for prior periods do not reflect the reclassification of these assets and liabilities to discontinued operations. comparative purposes. The for After the sale of these three regions, at December 31, 2014, there were no assets held within the discontinued operations. Liabilities within discontinued operations were $5.1 million, which includes the indemnity reserve of $2.2 million related to the California regional sale, as mentioned above, in addition to accruals for legal and professional fees. The following table provides the components of net income (loss) from the discontinued operations for the years ended December 31, 2014 and 2013. Years ended December 31, (In thousands) Net interest income Provision (reversal) for loan losses Net gain on sale of regions Other non-interest income Total non-interest income Operating expenses: Personnel costs Net occupancy expenses Professional fees Goodwill impairment charge Other operating expenses Total operating expenses Net (loss) income from discontinued 2014 $ 61,352 (6,764) 33,829 27,823 61,652 36,675 3,086 15,642 186,511 10,834 252,748 2013 $88,006 (3,543) – 19,556 19,556 33,170 12,680 11,153 – 13,593 70,596 operations $(122,980) $40,509 the California, Note 5 - Restructuring plan As discussed in Note 4, in connection with the sale of the operations of Illinois and Central Florida regions, the Corporation is relocating certain back office operations, previously conducted in these regions, to Puerto Rico and New York. The Corporation has undertaken a restructuring plan (the “PCB Restructuring Plan”) to eliminate and re-locate employment positions, terminate contracts and incur other costs associated with moving the operations to Puerto Rico and New York. The Corporation estimates that it 132 will incur restructuring charges of approximately $49 million, of which approximately $27 million were incurred during 2014 and $22 million are expected to be incurred in 2015, comprised of $13.0 million in personnel related costs and $9.0 million in lease cancellations and other restructuring costs. Full-time equivalent employees at the California, Illinois and Central Florida regions were 37 as of December 31, 2014, compared with 365 as of December 31, 2013. Some of the employees at these regions were transferred to the acquiring entities. The remaining employees at these regions are expected to be transferred to other areas of the Corporation’s U.S. mainland or Puerto Rico operations or depart by mid-2015. The following table details the expenses recorded by the Corporation that were associated with the PCB Restructuring Plan: (In thousands) Personnel costs Net occupancy expenses Equipment expenses Professional fees Other operating expenses Total restructuring costs Year ended December 31, 2014 $17,516 3,905 457 3,133 1,714 $26,725 The following table presents the activity in the reserve for the restructuring costs associated with the PCB Restructuring Plan: (In thousands) Balance at January 1, 2014 Charges expensed during the period Payments made during the period Balance as of December 31, 2014 $ – 14,785 (1,249) $13,536 Note 6 - Restrictions on cash and due from banks and certain securities The Corporation’s banking subsidiaries, BPPR and BPNA, are required by federal and state regulatory agencies to maintain average reserve balances with the Federal Reserve Bank of New York (the “Fed”) or other banks. Those required average reserve balances amounted to $1.0 billion at December 31, 2014 (December 31, 2013 - $992 million). Cash and due from banks, as well as other short-term, highly liquid securities, are used to cover the required average reserve balances. At December 31, 2014, the Corporation held $45 million in restricted assets in the form of funds deposited in money market accounts, trading account securities and investment securities available for sale (December 31, 2013 - $44 million). The amounts held in trading account securities and investment securities available for sale consist primarily of restricted assets held for the Corporation’s non-qualified retirement plans and fund deposits guaranteeing possible liens or encumbrances over the title of insured properties. 133 POPULAR, INC. 2014 ANNUAL REPORT Note 7 - Securities purchased under agreements to resell The securities purchased underlying the agreements to resell were delivered to, and are held by, the Corporation. The counterparties to such agreements maintain effective control over such securities. The Corporation is permitted by contract to repledge the securities, and has agreed to resell to the counterparties the same or substantially similar securities at the maturity of the agreements. The fair value of the collateral securities held by the Corporation on these transactions at December 31, was as follows: (In thousands) Repledged Not repledged Total 2014 2013 $145,866 33,258 $189,308 20,734 $179,124 $210,042 The repledged securities were used as underlying securities for repurchase agreement transactions. Note 8 - Pledged assets Certain securities and loans were pledged to secure public and trust deposits, assets sold under agreements to repurchase, other borrowings and credit facilities available, derivative positions, and loan servicing agreements. The classification and carrying amount of the Corporation’s pledged assets, in which the secured parties are not permitted to sell or repledge the collateral, were as follows: (In thousands) Investment securities available-for-sale, at fair value Investment securities held-to-maturity, at amortized cost Loans held-for-sale measured at lower of cost or fair value Loans held-in-portfolio covered under loss sharing agreements with the FDIC Loans held-in-portfolio not covered under loss sharing agreements with the FDIC Total pledged assets December 31, 2014 December 31, 2013 $ 1,700,820 60,515 – 480,441 8,820,204 $ 1,638,558 35,000 363 407,257 9,108,984 $11,061,980 $11,190,162 Pledged securities that the creditor has the right by custom to repledge are presented separately on the or contract consolidated statements of financial condition. At December 31, 2014, the Corporation had $ 0.7 billion in investment securities available-for-sale and $ 0.7 billion in loans to secure public funds (December 31, 2013 - $ 1.0 billion and $ 0.5 billion, respectively). served as collateral that At December the Corporation’s banking 31, 2014, subsidiaries had short-term and long-term credit facilities authorized with the Federal Home Loan Bank system (the “FHLB”) aggregating to $3.7 billion (December 31, 2013 - $3.0 billion). Refer to Note 23 to the consolidated financial statements for borrowings outstanding under these credit facilities. At December 31, 2014, the credit facilities authorized with the FHLB were collateralized by $ 4.5 billion in loans held- in-portfolio (December 31, 2013 - $ 4.5 billion). Also, at December 31, 2014, the Corporation’s banking subsidiaries had a borrowing capacity at the Federal Reserve (“Fed”) discount window of $2.1 billion, which remained unused as of such date (December 31, 2013 - $3.4 billion). The amount available under these credit facilities with the Fed is dependent upon the balance of loans and securities pledged as collateral. At December 31, 2014, the credit facilities with the Fed discount window were collateralized by $ 4.1 billion in loans held-in- portfolio (December 31, 2013 - $ 4.5 billion). These pledged assets are included in the above table and were not reclassified and separately reported in the consolidated statements of financial condition. In addition, at December 31, 2014, there were no trade receivables from brokers and counterparties pledged to secure repurchase agreements ($69 million as of December 31, 2013). Note 9 - Investment securities available-for-sale The following table presents the amortized cost, gross unrealized gains and losses, approximate fair value, weighted average yield and contractual maturities of investment securities available-for-sale at December 31, 2014 and 2013. 134 (In thousands) U.S. Treasury securities After 1 to 5 years Total U.S. Treasury securities Obligations of U.S. Government sponsored entities Within 1 year After 1 to 5 years After 5 to 10 years After 10 years Total obligations of U.S. Government sponsored entities Obligations of Puerto Rico, States and political subdivisions Within 1 year After 1 to 5 years After 5 to 10 years After 10 years Total obligations of Puerto Rico, States and political subdivisions Collateralized mortgage obligations - federal agencies After 1 to 5 years After 5 to 10 years After 10 years Total collateralized mortgage obligations - federal agencies Mortgage-backed securities After 1 to 5 years After 5 to 10 years After 10 years Total mortgage-backed securities Equity securities (without contractual maturity) Other After 1 to 5 years After 5 to 10 years Total other At December 31, 2014 Gross unrealized losses Gross unrealized gains Fair value Weighted average yield Amortized cost $ 698,003 $ 2,226 $ 698,003 2,226 75 75 $ 700,154 700,154 1.14% 1.14 42,140 1,603,245 67,373 23,000 1,735,758 2,765 1,024 22,552 48,823 75,164 3,687 25,202 1,905,763 1,934,652 27,339 147,182 676,567 851,088 1,351 9,277 1,957 11,234 380 1,168 58 – 1,606 17 38 2 40 97 87 985 13,109 14,181 1,597 7,314 45,047 53,958 1,271 10 62 72 – 9,936 2,271 184 42,520 1,594,477 65,160 22,816 12,391 1,724,973 – – 2,331 11,218 13,549 – – 38,803 38,803 – 1 683 684 – – – – 2,782 1,062 20,223 37,645 61,712 3,774 26,187 1,880,069 1,910,030 28,936 154,495 720,931 904,362 2,622 9,287 2,019 11,306 1.61 1.26 1.72 3.18 1.31 3.83 8.40 5.82 6.22 6.04 2.66 2.93 2.03 2.04 4.68 3.51 3.93 3.88 5.03 1.69 3.63 2.03 Total investment securities available-for-sale $5,307,250 $73,411 $65,502 $5,315,159 2.04% 135 POPULAR, INC. 2014 ANNUAL REPORT (In thousands) U.S. Treasury securities After 1 to 5 years Total U.S. Treasury securities Obligations of U.S. Government sponsored entities Within 1 year After 1 to 5 years After 5 to 10 years After 10 years Total obligations of U.S. Government sponsored entities Obligations of Puerto Rico, States and political subdivisions After 1 to 5 years After 5 to 10 years After 10 years Total obligations of Puerto Rico, States and political subdivisions Collateralized mortgage obligations - federal agencies After 1 to 5 years After 5 to 10 years After 10 years Total collateralized mortgage obligations - federal agencies Collateralized mortgage obligations - private label After 10 years Total collateralized mortgage obligations - private label Mortgage-backed securities Within 1 year After 1 to 5 years After 5 to 10 years After 10 years Total mortgage-backed securities Equity securities (without contractual maturity) Other After 1 to 5 years After 10 years Total other At December 31, 2013 Gross unrealized losses Gross unrealized gains Fair value Weighted average yield Amortized cost $ 26,474 $ 2,008 $ 26,474 2,008 – – $ 28,482 28,482 3.85% 3.85 25,021 1,087,453 528,611 23,000 1,664,085 6,228 23,147 48,803 78,178 5,131 31,613 2,438,021 2,474,765 509 509 419 15,921 62,373 1,007,733 1,086,446 3,178 9,638 2,604 12,242 39 1,678 100 – 1,817 45 – 29 74 101 921 18,532 19,554 4 4 24 833 3,058 50,807 54,722 1,109 – 69 69 – 12,715 21,742 2,240 36,697 85 1,978 9,812 11,875 – – 76,023 76,023 – – – – 1,214 4,313 5,527 171 141 – 141 25,060 1,076,416 506,969 20,760 1,629,205 6,188 21,169 39,020 66,377 5,232 32,534 2,380,530 2,418,296 513 513 443 16,754 64,217 1,054,227 1,135,641 4,116 9,497 2,673 12,170 1.85 1.26 1.52 3.12 1.38 4.64 6.33 5.84 5.89 1.79 2.98 2.05 2.06 3.78 3.78 3.14 4.50 4.12 3.93 3.95 4.06 1.68 3.61 2.09 Total investment securities available-for-sale $5,345,877 $79,357 $130,434 $5,294,800 2.30% The weighted average yield on investment securities available-for-sale is based on amortized cost; therefore, it does not give effect to changes in fair value. Securities not due on a single contractual maturity date, such as mortgage-backed securities and collateralized mortgage obligations, are classified in the period of final contractual maturity. The expected maturities of collateralized mortgage obligations, mortgage-backed securities and certain other securities may differ from their contractual maturities because they may be subject to prepayments or may be called by the issuer. 136 The following table presents the aggregate amortized cost investment securities available-for-sale at and fair value of December 31, 2014 by contractual maturity. (In thousands) Within 1 year After 1 to 5 years After 5 to 10 years After 10 years Total Equity securities Amortized cost Fair value $ 44,905 2,342,575 264,266 2,654,153 5,305,899 1,351 $ 45,302 2,337,690 268,084 2,661,461 5,312,537 2,622 Total investment securities available- for-sale $5,307,250 $5,315,159 During the year ended December 31, 2014, the Corporation sold U.S. agency securities, mortgage-backed securities and collateralized mortgage obligations with an approximate amortized cost of $311.1 million (2013 - equity securities with an approximate amortized cost of $3.3 million). The proceeds from these sales were $ 310.2 million (2013 - $ 5.4 million). Gross realized gains and losses on the sale of investment securities available-for-sale, for the years ended December 31, 2014, 2013 and 2012 were as follows: (In thousands) Gross realized gains Gross realized losses Net realized (losses) gains on sale of investment securities available- for-sale Years ended December 31, 2012 2013 2014 $ 4,461 (5,331) $2,110 – $ 65 (1,684) $ (870) $2,110 $(1,619) The following tables present the Corporation’s fair value and gross unrealized losses of investment securities available-for-sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2014, and 2013. (In thousands) Less than 12 months Gross unrealized losses Fair value At December 31, 2014 12 months or more Gross unrealized losses Fair value U.S. Treasury securities Obligations of U.S. Government sponsored entities Obligations of Puerto Rico, States and political subdivisions Collateralized mortgage obligations - federal agencies Mortgage-backed securities $ 49,465 888,325 14,419 539,658 457 $ 75 6,866 3,031 13,774 4 $ – 429,835 41,084 733,814 25,486 $ – 5,525 10,518 25,029 680 Total Fair value $ 49,465 1,318,160 55,503 1,273,472 25,943 Gross unrealized losses $ 75 12,391 13,549 38,803 684 Total investment securities available-for-sale in an unrealized loss position $1,492,324 $ 23,750 $1,230,219 $41,752 $2,722,543 $ 65,502 (In thousands) Obligations of U.S. Government sponsored entities Obligations of Puerto Rico, States and political subdivisions Collateralized mortgage obligations - federal agencies Mortgage-backed securities Equity securities Other Total investment securities available-for-sale in an unrealized Less than 12 months Gross unrealized losses Fair value $1,326,866 54,256 1,567,654 105,455 1,657 – $ 32,457 11,685 70,378 4,762 171 – At December 31, 2013 12 months or more Gross unrealized losses Fair value $ 69,257 8,330 96,676 7,225 – 9,497 $ 4,240 190 5,645 765 – 141 Total Fair value $1,396,123 62,586 1,664,330 112,680 1,657 9,497 Gross unrealized losses $ 36,697 11,875 76,023 5,527 171 141 loss position $3,055,888 $119,453 $ 190,985 $10,981 $3,246,873 $130,434 137 POPULAR, INC. 2014 ANNUAL REPORT As of December 31, 2014, the available-for-sale investment portfolio reflects gross unrealized losses of approximately $66 million, driven by U.S. Agency Collateralized Mortgage Obligations, obligations from the U.S. Government sponsored entities, and obligations of the Puerto Rico Government and its political subdivisions. As part of its analysis for all US Agencies’ securities, management considers the U.S. Agency guarantee. In February 2014, the three principal nationally recognized rating agencies (Moody’s Investor Services, Standard and Poor’s and Fitch Ratings) downgraded the general-obligation bonds of the Commonwealth and other obligations of Puerto Rico instrumentalities to non-investment grade categories, citing concerns about financial flexibility and a reduced capacity to borrow in the financial markets. In July 2014, the Puerto Rico general obligations were further downgraded by the rating agencies, after the Commonwealth enacted a law that allowed certain Puerto Rico public corporations to restructure their debt. On February 12, 2015, S&P further downgraded the debt rating of the Commonwealth general obligation bonds and of various public instrumentalities. S&P stated that, in their view, Puerto Rico’s current economic and financial trajectory is now more susceptible to adverse financial, economic and market conditions that could ultimately impair the Commonwealth’s ability to fund services and its debt commitments. S&P also cited implementation risk with respect to the value-added tax and expressed concern that, while higher taxes could improve the budget balance, there could be potential negative economic implications. On February 19, 2015, Moody’s also downgraded its debt ratings for the Commonwealth general obligation bonds and of various public instrumentalities, citing similar concerns as S&P. The portfolio of obligations of the Puerto Rico Government is comprised of securities with specific sources of income or revenues identified for repayments. The Corporation performs periodic credit quality reviews on these issuers. Management evaluates investment securities for other-than- temporary (“OTTI”) declines in fair value on a quarterly basis. Once a decline in value is determined to be other-than- temporary, the value of a debt security is reduced and a corresponding charge to earnings is recognized for anticipated credit losses. Also, for equity securities that are considered other-than-temporarily impaired, the excess of the security’s carrying value over its fair value at the evaluation date is accounted for as a loss in the results of operations. The OTTI analysis requires management to consider various factors, which include, but are not limited to: (1) the length of time and the extent to which fair value has been less than the amortized cost basis, (2) the financial condition of the issuer or issuers, (3) actual collateral attributes, (4) the payment structure of the debt security and the likelihood of the issuer being able to make payments, (5) any rating changes by a rating agency, (6) adverse conditions specifically related to the security, industry, or a geographic area, and (7) management’s intent to sell the debt security or whether it is more likely than not that the Corporation would be required to sell the debt security before a forecasted recovery occurs. At December 31, 2014, management performed its quarterly analysis of all debt securities in an unrealized loss position. Based on the analyses performed, management concluded that security was other-than-temporarily no individual debt impaired as of the Corporation did not have the intent to sell debt securities in an unrealized loss position and it is not more likely than not that the Corporation will have to sell the investment securities prior to recovery of their amortized cost basis. such date. At December 31, 2014, and (includes available-for-sale The following table states the name of issuers, and the aggregate amortized cost and fair value of the securities of such issuer held-to-maturity in which the aggregate amortized cost of such securities), securities equity. This exceeds information excludes securities backed by the full faith and credit of the U.S. Government. Investments in obligations issued by a state of the U.S. and its political subdivisions and agencies, which are payable and secured by the same source of revenue or taxing authority, other than the U.S. Government, are considered securities of a single issuer. stockholders’ 10% of 2014 2013 (In thousands) FNMA FHLB Freddie Mac Amortized cost $1,746,807 737,149 1,117,865 Fair value $1,736,987 732,894 1,112,485 Amortized cost $2,318,171 336,933 1,434,346 Fair value $2,266,610 326,220 1,418,216 138 Note 10 - Investment securities held-to-maturity The following tables present the amortized cost, gross unrealized gains and losses, approximate fair value, weighted average yield and contractual maturities of investment securities held-to-maturity at December 31, 2014 and 2013. (In thousands) Obligations of Puerto Rico, States and political subdivisions Within 1 year After 1 to 5 years After 5 to 10 years After 10 years Total obligations of Puerto Rico, States and political subdivisions Collateralized mortgage obligations - federal agencies After 5 to 10 years Total collateralized mortgage obligations - federal agencies Other Within 1 year After 1 to 5 years Total other At December 31, 2014 Amortized cost Gross unrealized gains Gross unrealized losses Fair value Weighted average yield $ 2,740 12,830 21,325 64,678 101,573 $ – – – 3,342 3,342 $ 8 764 6,003 5,543 $ 2,732 12,066 15,322 62,477 12,318 92,597 97 97 250 1,250 1,500 5 5 – – – – – – – – 102 102 250 1,250 1,500 5.84% 5.95 6.09 2.22 3.60 5.45 5.45 1.33 1.10 1.14 Total investment securities held-to-maturity $103,170 $3,347 $12,318 $94,199 3.57% (In thousands) Obligations of Puerto Rico, States and political subdivisions Within 1 year After 1 to 5 years After 5 to 10 years After 10 years Total obligations of Puerto Rico, States and political subdivisions Collateralized mortgage obligations - federal agencies After 10 years Total collateralized mortgage obligations - federal agencies Other Within 1 year After 1 to 5 years Total other Amortized cost $ 12,570 12,060 20,015 69,236 113,881 115 115 26,000 500 26,500 At December 31, 2013 Gross unrealized losses Gross unrealized gains Fair value $ – – – 257 257 7 7 – – – $ 12 984 5,251 13,179 19,426 $ 12,558 11,076 14,764 56,314 94,712 – – 645 1 646 122 122 25,355 499 25,854 Weighted average yield 2.06% 5.91 6.06 2.43 3.40 5.45 5.45 3.41 1.33 3.37 Total investment securities held-to-maturity $140,496 $264 $20,072 $120,688 3.40% 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. 139 POPULAR, INC. 2014 ANNUAL REPORT The following table presents the aggregate amortized cost and fair value of investments securities held-to-maturity at December 31, 2014 by contractual maturity. (In thousands) Within 1 year After 1 to 5 years After 5 to 10 years After 10 years Total investment securities held-to-maturity Amortized cost Fair value $ 2,982 13,316 15,424 62,477 $94,199 $ 2,990 14,080 21,422 64,678 $103,170 The following tables present the Corporation’s fair value and gross unrealized losses of investment securities held-to-maturity, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2014 and 2013: (In thousands) Obligations of Puerto Rico, States and political subdivisions Total investment securities held-to-maturity in an unrealized loss position At December 31, 2014 Less than 12 months 12 months or more Total Fair value $373 $373 Gross unrealized losses $2 $2 Fair value $45,969 $45,969 Gross unrealized losses $12,316 $12,316 Fair value $46,342 $46,342 Gross unrealized losses $12,318 $12,318 Less than 12 months At December 31, 2013 12 months or more Total Fair value (In thousands) $60,028 Obligations of Puerto Rico, States and political subdivisions 24,604 Other Total investment securities held-to-maturity in an unrealized loss position $84,632 Gross unrealized losses $12,180 646 $12,826 Fair value $13,044 – $13,044 Gross unrealized losses $7,246 – $7,246 Fair value $73,072 24,604 $97,676 Gross unrealized losses $19,426 646 $20,072 As indicated in Note 9 to these consolidated financial statements, management evaluates investment securities for OTTI declines in fair value on a quarterly basis. The “Obligations of Puerto Rico, States and political subdivisions” classified as held-to-maturity at December 31, issued by 2014 are primarily associated with securities municipalities of Puerto Rico and are generally not rated by a credit rating agency. This includes $61 million of securities issued by three municipalities of Puerto Rico that are payable from the real and personal property taxes collected within such municipalities. These bonds have seniority to the payment of operating cost and expenses of the municipality. The portfolio also includes approximately $41 million in securities for which central the underlying source of payment government, but in which it provides a guarantee in the event of default. In February 2014, the three principal nationally recognized rating agencies (Moody’s Investor Services, Standard and Poor’s and Fitch Ratings) downgraded the general- obligation bonds of the Commonwealth and other obligations of Puerto Rico instrumentalities to non-investment grade categories, citing concerns about financial flexibility and a reduced capacity to borrow in the financial markets. In July is not the 2014, the Puerto Rico general obligations were further downgraded by the rating agencies, after the Commonwealth enacted a law that allowed certain Puerto Rico public corporations to restructure their debt. On February 12, 2015, S&P further downgraded the debt rating of the Commonwealth general obligation bonds and of various public instrumentalities. S&P stated that, in their view, Puerto Rico’s current economic and financial trajectory is now more susceptible to adverse financial, economic and market conditions that could ultimately impair the Commonwealth’s ability to fund services and its debt commitments. S&P also cited implementation risk with respect to the value-added tax and expressed concern that, while higher taxes could improve the there could be potential negative economic budget balance, implications. On February 19, 2015, Moody’s also downgraded its debt ratings for the Commonwealth general obligation bonds and of various public instrumentalities, citing similar concerns as S&P. The Corporation performs periodic credit quality reviews on these issuers. The Corporation does not have the intent to sell securities held-to-maturity and it is not more likely than not that these investment securities prior to recovery of their amortized cost basis. the Corporation will have to sell on pools based aggregated Note 11 - Loans Covered loans acquired in the Westernbank FDIC-assisted transaction, except for lines of credit with revolving privileges, are accounted for by the Corporation in accordance with ASC Subtopic 310-30. Under ASC Subtopic 310-30, the acquired loans were similar into characteristics. Each loan pool is accounted for as a single asset rate and an aggregate with a single composite interest expectation of cash flows. The covered loans which are accounted for under ASC Subtopic 310-30 by the Corporation are not considered non-performing and will continue to have an accretable yield as long as there is a reasonable expectation about the timing and amount of cash flows expected to be collected. The Corporation measures additional losses for this portfolio when it is probable the Corporation will be unable to collect all cash flows expected at acquisition plus additional cash flows expected to be collected arising from changes in estimates after acquisition. Lines of credit with revolving privileges that were acquired as part of the Westernbank FDIC- assisted transaction are accounted for under the guidance of ASC Subtopic 310-20, which requires that any differences between the contractually required loan payment receivable in excess of the Corporation’s initial investment in the loans be (In thousands) Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Construction Mortgage Leasing Legacy [2] Consumer: Credit cards Home equity lines of credit Personal Auto Other Total loans held-in-portfolio [1] 140 accreted into interest income. Loans accounted for under ASC Subtopic 310-20 are placed in non-accrual status when past due in accordance with the Corporation’s non-accruing policy and any accretion of discount is discontinued. The risks on loans acquired in the FDIC-assisted transaction are significantly different from the risks on loans not covered under the FDIC loss sharing agreements because of the loss protection provided by the FDIC. Accordingly, the Corporation presents loans subject to the loss sharing agreements as “covered loans” in the information below and loans that are not subject to the FDIC loss sharing agreements as “non-covered loans”. The FDIC loss sharing agreements expires at the end of the quarter ending June 30, 2015 for commercial (including construction) and consumer loans, and at the end of the quarter ending June 30, 2020 for single-family residential mortgage loans, as explained in Note 13. For a summary of the accounting policy related to loans, interest recognition and allowance for loan losses refer to the summary of significant accounting policies included in Note 2 to these consolidated financial statements. The following table presents the composition of non-covered loans held-in-portfolio (“HIP”), net of unearned income, at December 31, 2014 and 2013. December 31, 2014 December 31, 2013 $ 487,280 2,526,146 1,667,267 3,453,574 251,820 6,502,886 564,389 80,818 1,155,229 366,162 1,375,452 767,369 206,059 $ 1,175,937 2,970,505 2,166,545 3,724,197 206,084 6,681,476 543,761 211,135 1,185,272 478,211 1,349,119 699,980 219,644 $19,404,451 $21,611,866 [1] Non-covered loans held-in-portfolio at December 31, 2014 are net of $94 million in unearned income and exclude $106 million in loans held-for-sale (December 31, 2013 - $92 million in unearned income and $110 million in loans held-for-sale). [2] The legacy portfolio is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years at the BPNA segment. 141 POPULAR, INC. 2014 ANNUAL REPORT The following table presents the composition of covered loans at December 31, 2014 and 2013. (In thousands) December 31, 2014 December 31, 2013 Commercial real estate Commercial and industrial Construction Mortgage Consumer Total loans held-in- portfolio $1,511,472 $1,710,229 103,309 70,336 822,986 34,559 102,575 190,127 934,373 47,123 $2,542,662 $2,984,427 The following table provides a breakdown of loans held-for- sale (“LHFS”) at December 31, 2014 and 2013 by main categories. (In thousands) December 31, 2014 December 31, 2013 Commercial Legacy Mortgage Consumer Total loans held-for- sale $ 309 319 100,166 5,310 $ 603 – 109,823 – $106,104 $110,426 During the year ended December 31, 2014, the Corporation recorded purchases (including repurchases) of mortgage loans amounting to $574 million (2013 - $1.9 billion). For 2013, this includes two bulk purchases of $761 million in mortgage loans to financial the Corporation recorded purchases of $92 million in consumer institutions in Puerto Rico. Additionally, loans during the year ended December 31, 2014 (December 31, 2013 - $42 million) and purchases of $24 million in commercial loans during the year ended December 31, 2014 (December 31, 2013 - $15 million). loans The Corporation performed whole-loan sales involving approximately $185 million of residential mortgage loans during the year ended December 31, 2014 (December 31, 2013 - $661 million). During the third quarter of 2014, BPNA sold approximately $115.7 million and reclassified to held-for-sale approximately $105.0 million in classified and legacy residential mortgage and commercial loans. The 2013 activity included $435 million from the bulk sale of non-performing mortgage loans, completed during the quarter ended June 30, 2013. Also, during the year ended December 31, 2014, the Corporation securitized approximately $675 million of into Government National Mortgage mortgage Association (“GNMA”) mortgage-backed securities and $225 million of mortgage loans into Federal National Mortgage Association (“FNMA”) mortgage-backed securities, compared to $920 million and $438 million, respectively, during the year ended December 31, 2013. The Corporation did not securitize mortgage loans into Federal Home Loan Mortgage Corporation (“FHLMC”) mortgage-backed securities during the year ended December 31, 2014 (December 31, 2013 - $33 million).The Corporation sold commercial and construction loans with a book value of approximately $260 million during the year ended December 31, 2014 (December 31, 2013 - $421 million). The sales activity for 2013 included $401 million from the bulk sale of non-performing commercial and construction loans completed during the quarter ended March 31, 2013. 142 Non-covered loans The following tables present non-covered loans held-in- portfolio by loan class that are in non-performing status or are accruing interest but are past due 90 days or more at December 31, 2014 and 2013. Accruing loans past due 90 days or more consist primarily of credit cards, FHA / VA, and other insured mortgage loans, and delinquent mortgage loans which are included in the Corporation’s financial statements pursuant to GNMA’s buy-back option program. Servicers of loans underlying GNMA mortgage-backed securities must report as their own assets the defaulted loans that they have the option (but not the obligation) to repurchase, even when they elect not to exercise that option. Accruing loans past due 90 days or more also include reverse mortgage loans in Puerto Rico which are guaranteed by FHA, but which are currently not accruing interest. Due to the guaranteed nature of the loans, it is the Corporation’s policy to exclude these balances from non- performing assets. In addition, accruing loans past due 90 days or more include residential conventional loans purchased from another financial the Corporation has received timely payment from the seller / servicer, and, in some instances, have partial guarantees under recourse agreements. However, residential conventional loans purchased from another financial institution, which are in the classified as non-performing process of mortgage loans. institution that, although delinquent, foreclosure, are (In thousands) Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Construction Mortgage [2] [3] Leasing Legacy Consumer: Credit cards Home equity lines of credit Personal Auto Other At December 31, 2014 Puerto Rico U.S. mainland Popular, Inc. Non-accrual loans Accruing loans past-due 90 days or more $ 2,199 $ 33,452 92,648 129,611 13,812 295,629 3,102 – – – 25,678 11,387 3,865 – – – 494 – 426,387 – – 20,368 21 10 – 682 Non-accrual loans $ – – 805 1,510 – 9,284 – 1,545 449 4,090 1,410 – 7 Accruing loans past-due 90 days or more Non-accrual loans Accruing loans past-due 90 days or more $– $ 2,199 $ – – – – – – – – – – – – 33,452 93,453 131,121 13,812 304,913 3,102 1,545 449 4,090 27,088 11,387 3,872 – – – 494 – 426,387 – – 20,368 21 10 – 682 Total [1] $611,383 $447,962 $19,100 $– $630,483 $447,962 [3] [1] For purposes of this table non-performing loans exclude $ 19 million in non-performing loans held-for-sale. [2] Non-covered loans of $59 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. It is the Corporation’s policy to report delinquent residential mortgage loans insured by FHA or guaranteed by the VA as accruing loans past due 90 days or more as opposed to non-performing since the principal repayment is insured. These balances include $125 million of residential mortgage loans in Puerto Rico insured by FHA or guaranteed by the VA that are no longer accruing interest as of December 31, 2014. Furthermore, the Corporation has approximately $66 million in reverse mortgage loans in Puerto Rico which are guaranteed by FHA, but which are currently not accruing interest. Due to the guaranteed nature of the loans, it is the Corporation’s policy to exclude these balances from non-performing assets. 143 POPULAR, INC. 2014 ANNUAL REPORT (In thousands) Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Construction Mortgage [2] [3] Leasing Legacy Consumer: Credit cards Home equity lines of credit Personal Auto Other At December 31, 2013 Puerto Rico U.S. mainland Popular, Inc. Non-accrual loans Accruing loans past-due 90 days or more $ 4,944 $ 41,959 83,441 55,753 18,108 206,389 3,495 – – – 17,054 10,562 5,550 – – – 556 – 395,645 – – 20,313 147 54 – 585 Non-accrual loans $ 20,894 42,413 23,507 6,142 5,663 26,292 – 15,050 486 8,632 1,591 2 21 Accruing loans past-due 90 days or more Non-accrual loans Accruing loans past-due 90 days or more $– $ 25,838 $ – – – – – – – – – – – – 84,372 106,948 61,895 23,771 232,681 3,495 15,050 486 8,632 18,645 10,564 5,571 – – – 556 – 395,645 – – 20,313 147 54 – 585 Total [1] $447,255 $417,300 $150,693 $– $597,948 $417,300 [3] [1] For purposes of this table non-performing loans exclude $ 1 million in non-performing loans held-for-sale. [2] Non-covered loans by $43 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. It is the Corporation’s policy to report delinquent residential mortgage loans insured by FHA or guaranteed by the VA as accruing loans past due 90 days or more as opposed to non-performing since the principal repayment is insured. These balances include $115 million of residential mortgage loans in Puerto Rico insured by FHA or guaranteed by the VA that are no longer accruing interest as of December 31, 2013. Furthermore, the Corporation has approximately $50 million in reverse mortgage loans in Puerto Rico which are guaranteed by FHA, but which are currently not accruing interest. Due to the guaranteed nature of the loans, it is the Corporation’s policy to exclude these balances from non-performing assets. The following tables present loans by past due status at December 31, 2014 and 2013 for non-covered loans held-in-portfolio (net of unearned income). (In thousands) Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Construction Mortgage Leasing Consumer: Credit cards Home equity lines of credit Personal Auto Other Total December 31, 2014 Puerto Rico Past due 60-89 days $ 69 121 7,709 5,269 – 167,219 1,246 9,290 159 6,646 8,397 209 $ 90 days or more 2,199 33,452 92,648 130,105 13,812 780,678 3,102 20,368 21 25,688 11,387 4,547 30-59 days $ 221 9,828 8,954 18,498 2,497 304,319 6,779 13,715 137 13,479 34,238 1,009 $ Total past due 2,489 43,401 109,311 153,872 16,309 1,252,216 11,127 43,373 317 45,813 54,022 5,765 $ Current 77,588 1,970,178 1,364,051 2,653,913 143,075 4,198,285 553,262 1,096,791 13,083 1,216,720 713,274 199,879 Non-covered loans HIP Puerto Rico $ 80,077 2,013,579 1,473,362 2,807,785 159,384 5,450,501 564,389 1,140,164 13,400 1,262,533 767,296 205,644 $413,674 $206,334 $1,118,007 $1,738,015 $14,200,099 $15,938,114 144 December 31, 2014 U.S. mainland Past due (In thousands) Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Construction Mortgage Legacy Consumer: Credit cards Home equity lines of credit Personal Auto Other 30-59 days 60-89 days 90 days or more Total past due $ 87 1,478 45 1,133 810 29,582 929 314 5,036 2,476 – 10 $ 376 – 3,631 123 – 8,646 1,931 246 1,025 893 – 4 $ – – 805 1,510 – 9,284 1,545 449 4,090 1,410 – 7 $ 463 1,478 4,481 2,766 810 47,512 4,405 1,009 10,151 4,779 – 21 $ Current 406,740 511,089 189,424 643,023 91,626 1,004,873 76,413 14,056 342,611 108,140 73 394 Loans HIP U.S. mainland $ 407,203 512,567 193,905 645,789 92,436 1,052,385 80,818 15,065 352,762 112,919 73 415 Total $ 41,900 $ 16,875 $ 19,100 $ 77,875 $ 3,388,462 $ 3,466,337 (In thousands) Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Construction Mortgage Leasing Legacy Consumer: Credit cards Home equity lines of credit Personal Auto Other December 31, 2014 Popular, Inc. Past due $ 30-59 days 308 11,306 8,999 19,631 3,307 333,901 6,779 929 14,029 5,173 15,955 34,238 1,019 $ 60-89 days 445 121 11,340 5,392 – 175,865 1,246 1,931 9,536 1,184 7,539 8,397 213 90 days or more $ 2,199 33,452 93,453 131,615 13,812 789,962 3,102 1,545 20,817 4,111 27,098 11,387 4,554 $ Total past due 2,952 44,879 113,792 156,638 17,119 1,299,728 11,127 4,405 44,382 10,468 50,592 54,022 5,786 $ Current 484,328 2,481,267 1,553,475 3,296,936 234,701 5,203,158 553,262 76,413 1,110,847 355,694 1,324,860 713,347 200,273 Non-covered loans HIP Popular, Inc. $ 487,280 2,526,146 1,667,267 3,453,574 251,820 6,502,886 564,389 80,818 1,155,229 366,162 1,375,452 767,369 206,059 Total $455,574 $223,209 $1,137,107 $1,815,890 $17,588,561 $19,404,451 145 POPULAR, INC. 2014 ANNUAL REPORT (In thousands) Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Construction Mortgage Leasing Consumer: Credit cards Home equity lines of credit Personal Auto Other December 31, 2013 Puerto Rico Past due 30-59 days $ 446 13,889 13,725 9,960 2,329 316,663 7,457 13,797 133 12,897 31,340 1,834 60-89 days $ – 349 8,318 4,463 – 154,882 1,607 9,991 53 6,794 9,361 859 90 days or more $ 4,944 41,959 83,441 56,309 18,108 645,444 3,495 20,313 147 17,108 10,562 6,135 Total past due $ 5,390 56,197 105,484 70,732 20,437 1,116,989 12,559 44,101 333 36,799 51,263 8,828 $ Current 77,013 1,808,021 1,501,019 2,841,734 140,734 4,283,690 531,202 1,125,520 14,845 1,177,085 648,228 209,636 Non-covered loans HIP Puerto Rico $ 82,403 1,864,218 1,606,503 2,912,466 161,171 5,400,679 543,761 1,169,621 15,178 1,213,884 699,491 218,464 Total $424,470 $196,677 $907,965 $1,529,112 $14,358,727 $15,887,839 (In thousands) Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Construction Mortgage Legacy Consumer: Credit cards Home equity lines of credit Personal Auto Other December 31, 2013 U.S. mainland Past due 30-59 days $ 3,621 4,255 657 2,331 – 30,713 9,079 60-89 days $ 1,675 – 8,452 2,019 – 9,630 2,098 285 2,794 3,196 11 43 200 2,198 826 – 50 90 days or more Total past due $ 20,894 42,413 23,507 6,142 5,663 26,292 15,050 486 8,632 1,591 2 21 $ 26,190 46,668 32,616 10,492 5,663 66,635 26,227 971 13,624 5,613 13 114 Loans HIP U.S. mainland $ 1,093,534 1,106,287 560,042 811,731 44,913 1,280,797 211,135 15,651 463,033 135,235 489 1,180 Current $ 1,067,344 1,059,619 527,426 801,239 39,250 1,214,162 184,908 14,680 449,409 129,622 476 1,066 Total $ 56,985 $ 27,148 $150,693 $ 234,826 $ 5,489,201 $ 5,724,027 146 December 31, 2013 Popular, Inc. Past due 30-59 days $ 4,067 18,144 14,382 12,291 2,329 347,376 7,457 9,079 14,082 2,927 16,093 31,351 1,877 60-89 days $ 1,675 349 16,770 6,482 – 164,512 1,607 2,098 10,191 2,251 7,620 9,361 909 90 days or more $ 25,838 84,372 106,948 62,451 23,771 671,736 3,495 15,050 20,799 8,779 18,699 10,564 6,156 $ Total past due 31,580 102,865 138,100 81,224 26,100 1,183,624 12,559 26,227 Current $ 1,144,357 2,867,640 2,028,445 3,642,973 179,984 5,497,852 531,202 184,908 Non-covered loans HIP Popular, Inc. $ 1,175,937 2,970,505 2,166,545 3,724,197 206,084 6,681,476 543,761 211,135 45,072 13,957 42,412 51,276 8,942 1,140,200 464,254 1,306,707 648,704 210,702 1,185,272 478,211 1,349,119 699,980 219,644 (In thousands) Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Construction Mortgage Leasing Legacy Consumer: Credit cards Home equity lines of credit Personal Auto Other Total $481,455 $223,825 $1,058,658 $1,763,938 $19,847,928 $21,611,866 The following table provides a breakdown of loans held-for-sale (“LHFS”) in non-performing status at December 31, 2014 and 2013 by main categories. (In thousands) Commercial Mortgage Consumer Total December 31, 2014 December 31, 2013 $ 309 14,041 4,549 $18,899 $ 603 489 – $1,092 The outstanding principal balance of non-covered loans accounted pursuant to ASC Subtopic 310-30, net of amounts charged off by the Corporation, amounted to $243 million at December 31, 2014 (December 31, 2013 - $197 million). At December 31, 2014, none of the acquired non-covered loans accounted under ASC Subtopic 310-30 were considered non- performing loans. Therefore, interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, was recognized on all acquired loans. Changes in the carrying amount and the accretable yield for the non-covered loans accounted pursuant to the ASC Subtopic 310-30, for the years ended December 31, 2014 and 2013 were as follows: Activity in the accretable yield - Non-covered loans ASC 310-30 (In thousands) Beginning balance Additions Accretion Change in expected cash flows Ending balance For the years ended December 31, 2014 December 31, 2013 $ 49,398 19,190 (10,074) 57,790 $116,304 $ – 60,805 (7,396) (4,011) $49,398 147 POPULAR, INC. 2014 ANNUAL REPORT Carrying amount of non-covered loans accounted for pursuant to ASC 310-30 (In thousands) Beginning balance Additions Accretion Collections and charge-offs Ending balance Allowance for loan losses ASC 310-30 non-covered loans Ending balance, net of allowance for loan losses For the years ended December 31, 2014 December 31, 2013 $173,659 58,799 10,074 (29,769) $212,763 (16,159) $196,604 $ – 195,283 7,396 (29,020) $173,659 (14,536) $159,123 The components of the net financing leases receivable at At December 31, 2014, future minimum lease payments are December 31, 2014 and 2013 were as follows: expected to be received as follows: (In thousands) Total minimum lease payments Estimated residual value of leased property Deferred origination costs, net of fees Less - Unearned financing income Net minimum lease payments Less - Allowance for loan losses Net minimum lease payments, net of allowance for loan losses 2014 2013 (In thousands) $497,895 149,079 8,727 89,552 566,149 7,184 $493,022 134,198 7,773 88,230 546,763 10,737 2015 2016 2017 2018 2019 and thereafter Total $558,965 $536,026 $127,901 112,768 99,531 83,518 74,177 $497,895 Covered loans The following table presents covered loans in non-performing status and accruing loans past-due 90 days or more by loan class at December 31, 2014 and 2013. (In thousands) Commercial real estate Commercial and industrial Construction Mortgage Consumer Total [1] December 31, 2014 December 31, 2013 Non-accrual loans Accruing loans past due 90 days or more Non-accrual loans Accruing loans past due 90 days or more $ 8,810 1,142 2,770 4,376 735 $17,833 $ – – – 28 – $28 $ 8,345 7,335 11,872 1,739 90 $29,381 $ – 456 – 69 112 $637 [1] Covered loans accounted for under ASC Subtopic 310-30 are excluded from the above table as they are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analyses. The following tables present loans by past due status at December 31, 2014 and 2013 for covered loans held-in-portfolio. The information considers covered loans accounted for under ASC Subtopic 310-20 and ASC Subtopic 310-30. 148 (In thousands) Commercial real estate Commercial and industrial Construction Mortgage Consumer Total covered loans (In thousands) Commercial real estate Commercial and industrial Construction Mortgage Consumer Total covered loans December 31, 2014 Past due 30-59 days $ 98,559 512 – 45,764 1,884 60-89 days $12,597 7 384 23,531 747 $146,719 $37,266 90 days or more $291,010 7,756 58,665 143,140 2,532 $503,103 Total past due $402,166 8,275 59,049 212,435 5,163 Current $1,109,306 95,034 11,287 610,551 29,396 Covered loans HIP $1,511,472 103,309 70,336 822,986 34,559 $687,088 $1,855,574 $2,542,662 December 31, 2013 Past due 30-59 days $ 42,898 1,584 399 50,222 2,588 60-89 days $ 8,745 349 – 23,384 1,328 $ 97,691 $33,806 90 days or more $374,301 16,318 178,007 165,030 4,200 $737,856 Total past due $425,944 18,251 178,406 238,636 8,116 Current $1,284,285 84,324 11,721 695,737 39,007 Covered loans HIP $1,710,229 102,575 190,127 934,373 47,123 $869,353 $2,115,074 $2,984,427 The carrying amount of the covered loans consisted of loans determined to be impaired at the time of acquisition, which are accounted for in accordance with ASC Subtopic 310-30 (“credit impaired loans”), and loans that were considered to be performing at the acquisition date, accounted for by analogy to ASC Subtopic 310-30 (“non-credit impaired loans”), as detailed in the following table. (In thousands) Commercial real estate Commercial and industrial Construction Mortgage Consumer Carrying amount Allowance for loan losses December 31, 2014 Carrying amount Non-credit impaired loans Credit impaired loans $1,392,482 57,059 32,836 764,148 25,617 2,272,142 (52,798) $ 90,202 2,197 32,409 45,829 1,393 172,030 (26,048) December 31, 2013 Carrying amount Non-credit impaired loans Credit impaired loans Total $1,482,684 59,256 65,245 809,977 27,010 $1,483,331 55,192 71,864 862,878 35,810 2,444,172 (78,846) 2,509,075 (57,594) $149,341 3,069 104,356 59,483 2,623 318,872 (36,321) Total $1,632,672 58,261 176,220 922,361 38,433 2,827,947 (93,915) Carrying amount, net of allowance $2,219,344 $145,982 $2,365,326 $2,451,481 $282,551 $2,734,032 The outstanding principal balance of covered loans accounted pursuant to ASC Subtopic 310-30, net of amounts charged off by the Corporation, amounted to $3.1 billion at December 31, 2014 (December 31, 2013 - $3.8 billion). At December 31, 2014, none of the acquired loans from the Westernbank FDIC-assisted transaction accounted for under ASC Subtopic 310-30 were considered non-performing loans. Therefore, interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, was recognized on all acquired loans. 149 POPULAR, INC. 2014 ANNUAL REPORT Changes in the carrying amount and the accretable yield for the covered loans accounted pursuant to the ASC Subtopic 310-30, for the years ended December 31, 2014 and 2013, were as follows: (In thousands) Beginning balance Accretion Change in expected cash flows Ending balance (In thousands) Beginning balance Accretion Collections and charge offs Activity in the accretable yield Covered loans ASC 310-30 For the years ended December 31, 2014 Credit impaired loans Non-credit impaired loans Total December 31, 2013 Credit impaired loans Non-credit impaired loans Total $1,297,725 (268,063) 236,090 $ 11,480 (16,409) 10,514 $1,309,205 (284,472) 246,604 $1,446,381 (268,005) 119,349 $ 5,288 (11,703) 17,895 $1,451,669 (279,708) 137,244 $1,265,752 $ 5,585 $1,271,337 $1,297,725 $ 11,480 $1,309,205 Carrying amount of loans accounted for pursuant to ASC 310-30 For the years ended December 31, 2014 Credit impaired loans Non-credit impaired loans Total December 31, 2013 Credit impaired loans Non-credit impaired loans Total $2,509,075 268,063 (504,996) $ 318,872 16,409 (163,251) $2,827,947 284,472 (668,247) $3,051,964 268,005 (810,894) $ 439,795 11,703 (132,626) $3,491,759 279,708 (943,520) Ending balance Allowance for loan losses ASC 310-30 covered loans $2,272,142 (52,798) $ 172,030 (26,048) $2,444,172 (78,846) $2,509,075 (57,594) $ 318,872 (36,321) $2,827,947 (93,915) Ending balance, net of ALLL $2,219,344 $ 145,982 $2,365,326 $2,451,481 $ 282,551 $2,734,032 that The Corporation accounts for lines of credit with revolving privileges under the accounting guidance of ASC Subtopic 310- 20, which requires any differences between the contractually required loans payment receivable in excess of the initial investment in the loans be accreted into interest income over the life of the loans, if the loan is accruing interest. Covered loans accounted for under ASC Subtopic 310-20 amounted to $0.1 billion at December 31, 2014 (December 31, 2013 - $0.2 billion). guidance in ASC Section 310-10-35. Also, the Corporation determines the allowance for loan losses on purchased impaired loans and purchased loans accounted for under ASC Subtopic 310-30 by analogy, by evaluating decreases in expected cash flows after the acquisition date. allowance The accounting guidance provides for the recognition of a loss loans. The for groups of homogeneous determination for general reserves of the allowance for loan losses includes the following principal factors: losses inherent Note 12 - Allowance for loan losses The Corporation follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan losses to in the loan portfolio. This provide for methodology includes the consideration of factors such as current economic conditions, portfolio risk characteristics, prior loss experience and results of periodic credit reviews of individual loans. The provision for loan losses charged to current operations is based on this methodology. Loan losses are charged and recoveries are credited to the allowance for loan losses. The Corporation’s assessment of the allowance for loan losses is determined in accordance with the guidance of loss contingencies in ASC Subtopic 450-20 and loan impairment • Base net loss rates, which are based on the moving average of annualized net loss rates computed over a 3- the commercial and year historical 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. loss period for • 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. As part of the annual review of the components of the ALLL models, as discussed in the following paragraphs and implemented as of June 30, loss trend adjustment 2014, the Corporation eliminated the use of caps in the recent for the consumer and mortgage portfolios, among other enhancements. For the period ended December 31, 2013, the recent loss trend adjustment caps for the consumer and mortgage portfolios were triggered in only one portfolio segment within the Puerto Rico consumer portfolio. Management assessed the the applicable cap through a review of impact of qualitative factors that specifically considered the drivers of loss trends and changes to the portfolio composition. The related effect of the aforementioned cap was immaterial for the overall level of the Allowance for Loan and Lease Losses for the Puerto Rico Consumer portfolio. recent For the period ended December 31, 2014, 50% (December 31, 2013, 27%) of the ALLL for BPPR non-covered loan portfolios utilized the recent loss trend adjustment instead of the base loss. The effect of replacing the base loss with the recent loss trend adjustment was mainly concentrated and in industrial, personal and auto loan portfolios for 2014, and in commercial multi-family, mortgage and leasing portfolios for 2013. commercial multi-family, commercial the For the period ended December 31, 2014, 21% (December 31, 2013, 29%) of the ALLL for BPNA loan portfolios utilized the recent loss trend adjustment instead of the base loss. The effect of replacing the base loss with the recent loss trend adjustment was mainly concentrated in the commercial multi-family, commercial and industrial and legacy loan portfolios for 2014 and in the commercial multi-family, commercial real estate non-owner occupied, commercial and industrial loan portfolios for 2013. • Environmental credit factors, which include 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 these losses. The Corporation reflects environmental an adjustment that, as appropriate, increases the historical loss rate applied to each group. Environmental factors provide updated perspective on credit and economic conditions. Regression analysis is used to select these indicators and quantify the effect on the general reserve of the allowance for loan losses. factors on each loan group as the effect of During the second quarter of 2014, management completed the annual review of the components of the ALLL models. As part of this review management updated core metrics and revised certain components related to the estimation process for evaluating the adequacy of the general reserve of the allowance for loan losses. These enhancements to the ALLL methodology, 150 which are described in the paragraphs below, were implemented as of June 30, 2014 and resulted in a net decrease to the allowance for loan losses of $18.7 million for the non- covered portfolio and a net increase to the allowance for loan losses of $0.8 million for the covered portfolio. Management made the following principal enhancements to the methodology during the second quarter of 2014: • Annual review and recalibration of for changes indicators and economic the environmental factors adjustment. The environmental factor adjustments are developed by performing regression analyses on selected credit each applicable loan segment. During the second quarter of 2014, the environmental factor models used to account for and macroeconomic conditions were reviewed and recalibrated based on the latest applicable trends. Management also revised the application of environmental factors to the historical loss rates to consider last 12 month trends of the applicable credit and macroeconomic indicators applied as an incremental adjustment to account for emerging risks not necessarily considered in the historical loss rates. in current credit to enhancements environmental The combined effect of the aforementioned recalibration and factors the adjustment resulted in a decrease to the allowance for loan losses of $17 million at June 30, 2014, of which $14.1 million related to the non-covered BPPR segment and $3.7 million related to the BPNA segment, offset in part by a $0.8 million increase in the BPPR covered segment. loss • Increased the historical look-back period for determining the recent for consumer and trend adjustment mortgage loans. The Corporation increased the look-back trends applicable to the period for assessing recent determination of consumer and mortgage loan net charge- offs from 6 months to 12 months and eliminated the use of caps. Previously, the Corporation used a recent loss trend adjustment based on 6 months of net charge-offs up to a determined cap. Given the current overall consumer and mortgage credit quality improvements, management concluded that a 12-month look-back period for the loss trend adjustment aligns the Corporation’s recent allowance for loan losses methodology to current credit quality trends while limiting excessive pro-cyclicality given the thus, eliminating the aforementioned caps. look-back period analysis, longer The combined effect of the aforementioned enhancements to the recent loss trend adjustment resulted in a decrease to the allowance for loan losses of $1 million at June 30, 2014, of which $0.9 million related to the non-covered BPPR segment and $0.1 million related to the BPNA segment. 151 POPULAR, INC. 2014 ANNUAL REPORT The following tables present the changes in the allowance for loan losses for the years ended December 31, 2014 and 2013. (In thousands) Allowance for credit losses: Beginning balance Provision (reversal of provision) Charge-offs Recoveries Ending balance (In thousands) Allowance for credit losses: Beginning balance Provision (reversal of provision) Charge-offs Recoveries Ending balance For the year ended December 31, 2014 Puerto Rico - Non-covered loans Commercial Construction Mortgage Leasing Consumer Total $128,150 112,821 (70,402) 31,020 $201,589 $ 5,095 (3,121) (1,722) 5,231 $130,330 34,530 (45,389) 1,389 $10,622 470 (6,028) 2,067 $ 152,578 98,149 (122,400) 25,745 $ 426,775 242,849 (245,941) 65,452 $ 5,483 $120,860 $ 7,131 $ 154,072 $ 489,135 For the year ended December 31, 2014 Puerto Rico - Covered loans Commercial Construction Mortgage Leasing Consumer Total $ 42,198 21,579 (34,741) 1,835 $ 30,871 $ 19,491 15,397 (36,223) 8,537 $ $ 36,006 13,384 (9,156) 714 $ 7,202 $ 40,948 $ – – – – – $ 4,397 (4,225) 2,589 291 $ 102,092 46,135 (77,531) 11,377 $ 3,052 $ 82,073 For the year ended December 31, 2014 U.S. Mainland - Continuing Operations (In thousands) Allowance for credit losses: Beginning balance Allowance transferred from discontinued operations Provision (reversal of provision) Charge-offs Recoveries Net write-down related to loans transferred to LHFS Ending balance Commercial Construction Mortgage Legacy Consumer Total $ 24,930 7,984 (2,979) (16,628) 15,523 (19,182) $ 9,648 $ 214 – 736 – 237 – $1,187 $ 26,599 – (15,410) (3,517) 2,321 (7,531) $11,335 – (8,611) (8,071) 17,141 (8,850) $ 19,205 – 7,414 (15,948) 3,783 (111) $ 82,283 7,984 (18,850) (44,164) 39,005 (35,674) $ 2,462 $ 2,944 $ 14,343 $ 30,584 For the year ended December 31, 2014 U.S. Mainland - Discontinued Operations (In thousands) Allowance for credit losses: Beginning balance Allowance transferred to continuing operations Provision (reversal of provision) Charge-offs Recoveries Net write-downs related to loans transferred to discontinued operations Ending balance Commercial Construction Mortgage Legacy Consumer Total $ 21,902 (7,984) (2,831) (2,995) 8,283 (16,375) $ – $ $ 33 – (226) – 220 (27) $ – $ – – – – – – – $ 2,369 – (1,812) (557) 1,400 $ 5,101 – (1,895) (900) 94 $ 29,405 (7,984) (6,764) (4,452) 9,997 (1,400) (2,400) (20,202) $ – $ – $ – For the year ended December 31, 2014 Popular, Inc. 152 (In thousands) Allowance for credit losses: Beginning balance Provision (reversal of provision) Charge-offs Recoveries Net write-down related to loans transferred to LHFS Net write-downs related to loans transferred to Commercial Construction Mortgage Legacy Leasing Consumer Total $ 217,180 128,590 (124,766) 56,661 (19,182) $ 24,833 12,786 (37,945) 14,225 – $192,935 $ 13,704 $10,622 $ 181,281 $ 640,555 263,370 470 (372,088) (6,028) 125,831 2,067 (35,674) – 99,443 (136,659) 29,913 (111) 32,504 (58,062) 4,424 (7,531) (10,423) (8,628) 18,541 (8,850) discontinued operations (16,375) (27) – (1,400) – (2,400) (20,202) Ending balance $ 242,108 $ 13,872 $164,270 $ 2,944 $ 7,131 $ 171,467 $ 601,792 For the year ended December 31, 2013 Puerto Rico - Non-covered loans (In thousands) Allowance for credit losses: Beginning balance Provision (reversal of provision) Charge-offs Recoveries Net write-downs related to loans sold Ending balance Commercial Construction Mortgage Leasing Consumer Total $ 217,615 157,433 (112,266) 26,665 (161,297) $ 128,150 $ 5,862 (7,563) (6,757) 15,399 (1,846) $ 5,095 $ 119,027 258,541 (49,418) 1,682 (199,502) $ 2,894 11,234 (6,034) 2,528 – $ 99,899 128,239 (113,616) 38,056 – $ 445,297 547,884 (288,091) 84,330 (362,645) $ 130,330 $10,622 $ 152,578 $ 426,775 (In thousands) Allowance for credit losses: Beginning balance Provision (reversal of provision) Charge-offs Recoveries Ending balance (In thousands) Allowance for credit losses: Beginning balance Provision (reversal of provision) Charge-offs Recoveries Ending balance (In thousands) Allowance for credit losses: Beginning balance Provision (reversal of provision) Charge-offs Recoveries Ending balance For the year ended December 31, 2013 Puerto Rico - Covered Loans Commercial Construction Mortgage Leasing Consumer Total $ 72,060 (2,255) (28,422) 815 $ 42,198 $ 9,946 43,653 (39,730) 5,622 $ 19,491 $ $ 20,914 25,706 (10,679) 65 $ 36,006 $ – – – – – $ 5,986 2,292 (3,952) 71 $108,906 69,396 (82,783) 6,573 $ 4,397 $102,092 For the year ended December 31, 2013 U.S. Mainland - Continuing Operations Commercial Construction Mortgage Legacy Consumer Total $ 37,554 (3,440) (26,116) 16,932 $ 24,930 $ 1,196 (982) – – $ 214 $ 30,348 4,054 (10,156) 2,353 $ 29,070 (21,632) (17,423) 21,320 $ 26,383 10,826 (21,622) 3,618 $124,551 (11,174) (75,317) 44,223 $ 26,599 $ 11,335 $ 19,205 $ 82,283 For the year ended December 31, 2013 U.S. Mainland - Discontinued Operations Commercial Construction Mortgage Legacy Consumer Total $ 42,513 (6,427) (29,954) 15,770 $ 21,902 $ $ 371 (338) – – 33 $ $ – – – – – $ 4,032 (349) (5,105) 3,791 $ 4,937 3,571 (3,898) 491 $ 51,853 (3,543) (38,957) 20,052 $ 2,369 $ 5,101 $ 29,405 153 POPULAR, INC. 2014 ANNUAL REPORT (In thousands) Allowance for credit losses: Beginning balance Provision (reversal of provision) Charge-offs Recoveries Net write-down related to loans sold For the year ended December 31, 2013 Popular, Inc. Commercial Construction Mortgage Legacy Leasing Consumer Total $ 369,742 145,311 (196,758) 60,182 (161,297) $ 17,375 34,770 (46,487) 21,021 (1,846) $ 170,289 288,301 (70,253) 4,100 (199,502) $ 33,102 (21,981) (22,528) 25,111 – $ 2,894 11,234 (6,034) 2,528 – $ 137,205 144,928 (143,088) 42,236 – $ 730,607 602,563 (485,148) 155,178 (362,645) Ending balance $ 217,180 $ 24,833 $ 192,935 $ 13,704 $10,622 $ 181,281 $ 640,555 The following table provides the activity in the allowance for loan losses related to covered loans accounted for pursuant to ASC Subtopic 310-30. (In thousands) Balance at beginning of period Provision for loan losses Net charge-offs Balance at end of period ASC 310-30 Covered loans For the years ended December 31, 2014 December 31, 2013 $ 93,915 48,559 (63,628) $ 78,846 $ 95,407 58,858 (60,350) $ 93,915 The following tables present information at December 31, 2014 and December 31, 2013 regarding loan ending balances and the allowance for loan losses by portfolio segment and whether such loans and the allowance pertains to loans individually or collectively evaluated for impairment. (In thousands) Allowance for credit losses: Specific ALLL non-covered loans General ALLL non-covered loans ALLL - non-covered loans Specific ALLL covered loans General ALLL covered loans ALLL - covered loans Total ALLL Loans held-in-portfolio: Impaired non-covered loans Non-covered loans held-in-portfolio excluding impaired loans Non-covered loans held-in-portfolio Impaired covered loans Covered loans held-in-portfolio excluding impaired loans Covered loans held-in-portfolio Total loans held-in-portfolio At December 31, 2014 Puerto Rico Commercial Construction Mortgage Leasing Consumer Total $ 64,736 136,853 201,589 5 30,866 30,871 $ 363 5,120 5,483 – 7,202 7,202 $ 45,838 75,022 120,860 – 40,948 40,948 $ 770 6,361 7,131 $ 27,796 126,276 154,072 – – – – 3,052 3,052 $ 232,460 $ 12,685 $ 161,808 $ 7,131 $ 157,124 $ 356,911 $ 13,268 $ 431,569 $ 3,023 $ 115,759 $ $ $ 139,503 349,632 489,135 5 82,068 82,073 571,208 920,530 6,017,892 6,374,803 4,487 1,610,294 1,614,781 146,116 159,384 2,419 67,917 70,336 5,018,932 561,366 3,273,278 15,017,584 5,450,501 564,389 3,389,037 15,938,114 – 822,986 822,986 – – – – 6,906 34,559 34,559 2,535,756 2,542,662 $7,989,584 $229,720 $6,273,487 $564,389 $3,423,596 $18,480,776 154 (In thousands) Allowance for credit losses: Specific ALLL General ALLL Total ALLL Loans held-in-portfolio: Impaired loans Loans held-in-portfolio, excluding impaired loans Total loans held-in-portfolio At December 31, 2014 U.S. Mainland Commercial Construction Mortgage Legacy Consumer Total $ $ – 9,648 9,648 $ 250 1,759,214 $1,759,464 $ – 1,187 $ 1,187 $ – 92,436 $92,436 $ $ 273 2,189 $ – 2,944 $ 365 13,978 2,462 $ 2,944 $ 14,343 $ $ 638 29,946 30,584 $ 4,255 1,048,130 $ – 80,818 $ 1,973 479,261 $ 6,478 3,459,859 $1,052,385 $80,818 $481,234 $3,466,337 At December 31, 2014 Popular, Inc. (In thousands) Commercial Construction Mortgage Legacy Leasing Consumer Total Allowance for credit losses: Specific ALLL non-covered loans General ALLL non-covered loans ALLL - non-covered loans Specific ALLL covered loans General ALLL covered loans ALLL - covered loans Total ALLL Loans held-in-portfolio: Impaired non-covered loans Non-covered loans held-in-portfolio excluding impaired loans Non-covered loans held-in-portfolio Impaired covered loans Covered loans held-in-portfolio excluding impaired loans Covered loans held-in-portfolio $ 64,736 146,501 211,237 5 30,866 30,871 $ 363 6,307 6,670 – 7,202 7,202 $ 46,111 77,211 123,322 – 40,948 40,948 $ – 2,944 2,944 $ 770 6,361 7,131 $ 28,161 140,254 168,415 – – – – – – – 3,052 3,052 $ 242,108 $ 13,872 $ 164,270 $ 2,944 $ 7,131 $ 171,467 $ 357,161 $ 13,268 $ 435,824 $ – $ 3,023 $ 117,732 $ $ $ 140,141 379,578 519,719 5 82,068 82,073 601,792 927,008 7,777,106 8,134,267 4,487 1,610,294 1,614,781 238,552 251,820 2,419 67,917 70,336 6,067,062 6,502,886 80,818 80,818 561,366 3,752,539 18,477,443 564,389 3,870,271 19,404,451 – 822,986 822,986 – – – – – – – 6,906 34,559 34,559 2,535,756 2,542,662 Total loans held-in-portfolio $9,749,048 $322,156 $7,325,872 $80,818 $564,389 $3,904,830 $21,947,113 155 POPULAR, INC. 2014 ANNUAL REPORT (In thousands) Allowance for credit losses: Specific ALLL non-covered loans General ALLL non-covered loans ALLL - non-covered loans Specific ALLL covered loans General ALLL covered loans ALLL - covered loans Total ALLL Loans held-in-portfolio: Impaired non-covered loans Non-covered loans held-in-portfolio excluding impaired loans Non-covered loans held-in-portfolio Impaired covered loans Covered loans held-in-portfolio excluding impaired loans Covered loans held-in-portfolio Total loans held-in-portfolio At December 31, 2013 Puerto Rico Commercial Construction Mortgage Leasing Consumer Total $ 16,409 111,741 128,150 153 42,045 42,198 $ 177 4,918 5,095 140 19,351 19,491 $ 38,034 92,296 $ 1,053 9,569 $ 130,330 10,622 – 36,006 36,006 – – – 29,920 122,658 152,578 – 4,397 4,397 $ 170,348 $ 24,586 $ 166,336 $ 10,622 $ 156,975 $ 245,380 $ 16,823 $ 399,347 $ 2,893 $ 125,342 $ $ $ 85,593 341,182 426,775 293 101,799 102,092 528,867 789,785 6,220,210 6,465,590 20,945 1,791,859 1,812,804 144,348 161,171 – 190,127 190,127 5,001,332 540,868 3,191,296 15,098,054 5,400,679 543,761 3,316,638 15,887,839 – 934,373 934,373 – – – – 20,945 47,123 47,123 2,963,482 2,984,427 $8,278,394 $351,298 $6,335,052 $543,761 $3,363,761 $18,872,266 At December 31, 2013 U.S. Mainland (In thousands) Allowance for credit losses: Specific ALLL General ALLL Total ALLL Loans held-in-portfolio: Impaired loans Loans held-in-portfolio, excluding impaired loans Total loans held-in-portfolio Commercial Construction Mortgage Legacy Consumer Total $ $ – 46,832 46,832 $ 52,136 3,519,459 $3,571,595 $ $ – 247 247 $ 5,663 39,250 $44,913 $ $ 17,633 8,966 $ – 13,704 $ 280 24,026 $ 17,913 93,775 26,599 $ 13,704 $ 24,306 $ 111,688 $ 52,726 1,228,071 $ 6,045 205,090 $ 2,361 613,227 $ 118,931 5,605,097 $1,280,797 $211,135 $615,588 $5,724,028 156 At December 31, 2013 Popular, Inc. (In thousands) Commercial Construction Mortgage Legacy Leasing Consumer Total Allowance for credit losses: Specific ALLL non-covered loans General ALLL non-covered loans ALLL - non-covered loans Specific ALLL covered loans General ALLL covered loans ALLL - covered loans Total ALLL Loans held-in-portfolio: Impaired non-covered loans Non-covered loans held-in-portfolio excluding impaired loans Non-covered loans held-in-portfolio Impaired covered loans Covered loans held-in-portfolio excluding impaired loans Covered loans held-in-portfolio $ $ $ 16,409 158,573 174,982 153 42,045 42,198 $ 177 5,165 5,342 140 19,351 19,491 $ 55,667 101,262 156,929 – 36,006 36,006 $ – 13,704 13,704 $ 1,053 9,569 10,622 $ 30,200 146,684 176,884 – – – – – – – 4,397 4,397 217,180 $ 24,833 $ 192,935 $ 13,704 $ 10,622 $ 181,281 297,516 $ 22,486 $ 452,073 $ 6,045 $ 2,893 $ 127,703 $ $ $ 103,506 434,957 538,463 293 101,799 102,092 640,555 908,716 9,739,669 10,037,185 20,945 1,791,859 1,812,804 183,598 206,084 – 190,127 190,127 6,229,403 205,090 540,868 3,804,523 20,703,151 6,681,476 211,135 543,761 3,932,226 21,611,867 – 934,373 934,373 – – – – – – – 20,945 47,123 47,123 2,963,482 2,984,427 Total loans held-in-portfolio $11,849,989 $396,211 $7,615,849 $211,135 $543,761 $3,979,349 $24,596,294 Impaired loans The following tables present loans individually evaluated for impairment at December 31, 2014 and December 31, 2013. December 31, 2014 Puerto Rico (In thousands) Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Construction Mortgage Leasing Consumer: Credit cards Personal Auto Other Covered loans Total Puerto Rico Impaired Loans – With an Allowance Unpaid principal balance Recorded investment Related allowance Impaired Loans With No Allowance Recorded investment Unpaid principal balance Impaired Loans - Total Unpaid principal balance Recorded investment Related allowance $ 50,324 $ 53,154 $ 5,182 $ 7,929 $ 7,929 $ 58,253 $ 61,083 $ 5,182 114,163 145,633 2,575 395,911 3,023 41,477 71,825 1,932 525 2,419 127,855 148,204 7,980 426,502 3,023 41,477 71,825 1,932 525 7,500 16,770 42,784 363 45,838 770 8,023 19,410 262 101 5 14,897 23,965 10,693 35,658 – – – – – 4,487 16,110 31,722 28,994 39,248 – – – – – 4,487 129,060 169,598 13,268 431,569 3,023 41,477 71,825 1,932 525 6,906 143,965 179,926 36,974 465,750 3,023 41,477 71,825 1,932 525 11,987 16,770 42,784 363 45,838 770 8,023 19,410 262 101 5 $829,807 $889,977 $139,508 $97,629 $128,490 $927,436 $1,018,467 $139,508 157 POPULAR, INC. 2014 ANNUAL REPORT December 31, 2014 U.S. mainland [1] Impaired Loans – With an Allowance Unpaid principal balance Recorded investment Related allowance $ – 3,049 1,095 3 $ – 3,443 1,095 3 $ – 273 362 3 $638 Impaired Loans With No Allowance Recorded investment $ 250 1,206 791 84 Unpaid principal balance $ 250 2,306 791 – Impaired Loans - Total Unpaid principal balance Recorded investment Related allowance $ 250 4,255 1,886 87 $ 250 5,749 1,886 3 $ – 273 362 3 $638 $2,331 $3,347 $6,478 $7,888 (In thousands) Commercial and industrial Mortgage Consumer: HELOCs Other Total U.S. mainland $4,147 $4,541 [1] Excludes impaired loans from discontinued operations. December 31, 2014 Popular, Inc. Impaired Loans – With an Allowance Unpaid principal balance Recorded investment Related allowance Impaired Loans With No Allowance Recorded investment Unpaid principal balance Impaired Loans - Total Unpaid principal balance Recorded investment Related allowance $ 50,324 $ 53,154 $ 5,182 $ 7,929 $ 7,929 $ 58,253 $ 61,083 $ 5,182 114,163 145,633 2,575 398,960 3,023 41,477 1,095 71,825 1,932 528 2,419 127,855 148,204 7,980 429,945 3,023 41,477 1,095 71,825 1,932 528 7,500 16,770 42,784 363 46,111 770 8,023 362 19,410 262 104 5 14,897 24,215 10,693 36,864 – – 791 – – 84 4,487 16,110 31,972 28,994 41,554 – – 791 – – – 4,487 129,060 169,848 13,268 435,824 3,023 41,477 1,886 71,825 1,932 612 6,906 143,965 180,176 36,974 471,499 3,023 41,477 1,886 71,825 1,932 528 11,987 16,770 42,784 363 46,111 770 8,023 362 19,410 262 104 5 $833,954 $894,518 $140,146 $99,960 $131,837 $933,914 $1,026,355 $140,146 (In thousands) Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Construction Mortgage Leasing Consumer: Credit cards HELOCs Personal Auto Other Covered loans Total Popular, Inc. 158 December 31, 2013 Puerto Rico Impaired Loans – With an Allowance Unpaid principal balance Recorded investment Related allowance Impaired Loans With No Allowance Recorded investment Unpaid principal balance Impaired Loans - Total Unpaid principal balance Recorded investment Related allowance $ – $ – $ – $ 3,405 $ 6,942 $ 3,405 $ 6,942 $ – 19,120 19,407 2,368 47,245 55,397 66,365 74,804 2,368 55,826 30,370 2,324 358,437 2,893 45,015 78,475 1,354 498 12,837 74,420 33,152 9,047 376,393 2,893 45,015 78,475 1,354 498 17,538 6,473 7,568 177 38,034 1,053 8,344 21,313 171 92 293 33,749 55,665 14,499 40,910 – – – – – 8,108 47,545 68,141 36,951 45,181 – – – – – 10,063 89,575 86,035 16,823 399,347 2,893 45,015 78,475 1,354 498 20,945 121,965 101,293 45,998 421,574 2,893 45,015 78,475 1,354 498 27,601 6,473 7,568 177 38,034 1,053 8,344 21,313 171 92 293 $607,149 $658,192 $85,886 $203,581 $270,220 $810,730 $928,412 $85,886 December 31, 2013 U.S. mainland Impaired Loans – With an Allowance Unpaid principal balance Recorded investment Related allowance Impaired Loans With No Allowance Recorded investment Unpaid principal balance Impaired Loans - Total Unpaid principal balance Recorded investment Related allowance $ – $ – $ – $ 7,668 $10,870 $ 7,668 $ 10,870 $ – – – – – 46,192 – – – 2,075 – – – – 50,570 – – – 2,075 – – – – 17,633 – – – 280 27,016 15,624 1,828 5,663 6,534 6,045 198 88 – 37,393 19,910 1,828 5,663 8,513 8,715 198 88 – 27,016 15,624 1,828 5,663 52,726 6,045 198 88 2,075 37,393 19,910 1,828 5,663 59,083 8,715 198 88 2,075 – – – – 17,633 – – – 280 (In thousands) Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Construction Mortgage Leasing Consumer: Credit cards Personal Auto Other Covered loans Total Puerto Rico (In thousands) Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Construction Mortgage Legacy Consumer: HELOCs Auto Other Total U.S. mainland $48,267 $52,645 $17,913 $70,664 $93,178 $118,931 $145,823 $17,913 159 POPULAR, INC. 2014 ANNUAL REPORT (In thousands) Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Construction Mortgage Legacy Leasing Consumer: Credit cards HELOCs Personal Auto Other Covered loans Total Popular, Inc. December 31, 2013 Popular, Inc. Impaired Loans – With an Allowance Unpaid principal balance Recorded investment Related allowance Impaired Loans With No Allowance Recorded investment Unpaid principal balance Impaired Loans - Total Unpaid principal balance Recorded investment Related allowance $ – $ – $ – $ 11,073 $ 17,812 $ 11,073 $ 17,812 $ – 19,120 19,407 2,368 74,261 92,790 93,381 112,197 2,368 55,826 30,370 2,324 404,629 – 2,893 45,015 – 78,475 1,354 2,573 12,837 74,420 33,152 9,047 426,963 – 2,893 45,015 – 78,475 1,354 2,573 17,538 6,473 7,568 177 55,667 – 1,053 8,344 – 21,313 171 372 293 49,373 57,493 20,162 47,444 6,045 – – 198 – 88 – 8,108 67,455 69,969 42,614 53,694 8,715 – – 198 – 88 – 10,063 105,199 87,863 22,486 452,073 6,045 2,893 45,015 198 78,475 1,442 2,573 20,945 141,875 103,121 51,661 480,657 8,715 2,893 45,015 198 78,475 1,442 2,573 27,601 6,473 7,568 177 55,667 – 1,053 8,344 – 21,313 171 372 293 $655,416 $710,837 $103,799 $274,245 $363,398 $929,661 $1,074,235 $103,799 The following tables present the average recorded investment and interest income recognized on impaired loans for the years ended December 31, 2014 and 2013. For the year ended December 31, 2014 (In thousands) Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Construction Mortgage Legacy Leasing Consumer: Credit cards HELOCs Personal Auto Other Covered loans Total Popular, Inc. [1] Excludes impaired loans from discontinued operations. Puerto Rico U.S. Mainland [1] Popular, Inc. Average recorded investment Interest income recognized Average recorded investment Interest income recognized Average recorded investment Interest income recognized $ 1,539 70,154 114,893 130,940 18,418 415,188 – 2,747 42,345 – 74,593 1,884 748 8,763 $ – 2,719 3,994 7,852 – 19,319 – – – – – – – 469 $ 2,657 9,264 5,778 955 1,133 33,686 2,920 – – 1,768 – 52 452 – $ – – – – – 1,187 – – – – – – – – $ 4,196 79,418 120,671 131,895 19,551 448,874 2,920 2,747 42,345 1,768 74,593 1,936 1,200 8,763 $ – 2,719 3,994 7,852 – 20,506 – – – – – – – 469 $882,212 $34,353 $58,665 $1,187 $940,877 $35,540 160 (In thousands) Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Construction Mortgage Legacy Leasing Consumer: Credit cards HELOCs Personal Auto Other Covered loans Total Popular, Inc. For the year ended December 31, 2013 Puerto Rico U.S. Mainland Popular, Inc. Average recorded investment Interest income recognized Average recorded investment Interest income recognized Average recorded investment Interest income recognized $ 8,356 58,773 125,091 102,408 31,491 461,534 – 3,822 40,044 – 82,687 1,003 417 42,791 $ 259 2,225 2,956 4,206 – 25,610 – – – – – – – 1,245 $ 7,493 36,688 19,024 2,328 5,821 53,137 12,957 – – 199 – 89 2,260 – $ 120 223 150 15 – 1,955 – – – – – – – – $ 15,849 95,461 144,115 104,736 37,312 514,671 12,957 3,822 40,044 199 82,687 1,092 2,677 42,791 $ 379 2,448 3,106 4,221 – 27,565 – – – – – – – 1,245 $958,417 $36,501 $139,996 $2,463 $1,098,413 $38,964 Modifications restructurings related to non-covered loan Troubled debt portfolios amounted to $ 1.1 billion at December 31, 2014 (December 31, 2013 - $ 1.0 billion). The amount of outstanding commitments to lend additional funds to debtors owing receivables whose terms have been modified in troubled debt restructurings amounted $5 million related to the commercial loan portfolio and $1 million related to the construction loan portfolio at December 31, 2014 (December 31, 2013 - $3 million and $0, respectively). A modification of a loan constitutes a troubled debt is experiencing a restructuring (“TDR”) when a borrower financial difficulty concession. and the modification constitutes real lines Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting evergreen revolving credit to long-term (“CRE”), which includes estate loans. Commercial multifamily, owner-occupied and non-owner occupied CRE, and construction loans modified in a TDR often involve reducing the interest rate for a limited period of time or the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with payment plan. Construction loans modified in a TDR may also involve extending the interest-only payment period. reductions similar risk, the or in Residential mortgage loans modified in a TDR are primarily comprised of loans where monthly payments are lowered to accommodate the borrowers’ financial needs for a period of time, normally five years to ten years. After the lowered monthly payment period ends, the borrower reverts back to paying principal and interest per the original terms with the maturity date adjusted accordingly. the to meet the Corporation also holds Home equity loans modifications are made infrequently and are not offered if the first mortgage. Home equity loans modifications are uniquely designed each borrower. Automobile loans modified in a TDR are primarily comprised of loans where the Corporation has lowered monthly payments by extending the term. Credit cards modified in a TDR are primarily comprised of loans where monthly payments are lowered to accommodate the borrowers’ financial needs for a period of time, normally up to 24 months. specific needs of As part of the its NPL reduction strategy and in order to construction and resolution of delinquent expedite commercial the Corporation loans, commencing in 2012, routinely enters into liquidation agreements with borrowers and guarantors through the regular legal process, bankruptcy procedures and in certain occasions, out of court transactions. These liquidation agreements, in general, contemplate the following conditions: (1) consent to judgment by the borrowers and guarantors; (2) acknowledgement by the borrower of the debt, its liquidity and maturity; and (3) acknowledgment of the interest rate is not default reduced and continues to accrue during the term of the agreement. At the end of the period, the borrower is obligated to remit all amounts due or be subject to the Corporation’s exercise of its foreclosure rights and further collection efforts. Likewise, the borrower’s failure to make stipulated payments will grant the Corporation the ability to exercise its foreclosure in payments. The contractual 161 POPULAR, INC. 2014 ANNUAL REPORT rights. This strategy tends to expedite the foreclosure process, resulting in a more effective and efficient collection process. Although in general, these liquidation agreements do not contemplate the forgiveness of principal or interest as debtor is required to cover all outstanding amounts when the agreement becomes due, it could be construed that the Corporation has granted a concession by temporarily accepting a payment from the contractual payment schedule that schedule. Accordingly, loans under these program agreements are considered TDRs. is different Loans modified in a TDR that are not accounted pursuant to ASC Subtopic 310-30 are typically already in non-accrual status at the time of the modification and partial charge-offs have in some cases already been taken against the outstanding loan balance. The TDR loan continues in non-accrual status until the borrower has demonstrated a willingness and ability to make the restructured loan payments (generally at least six months of sustained performance after the modification (or one year for loans providing for quarterly or semi-annual payments)) and the management has concluded that borrower would not be in payment default in the foreseeable future. is probable that it Loans modified in a TDR may have the financial effect to the Corporation of increasing the specific allowance for loan losses associated with the loan. Consumer and residential mortgage the Corporation’s loans modified under loss mitigation programs that are determined to be TDRs are individually evaluated for impairment based on an analysis of discounted cash flows. terms and which constitute TDRs, For consumer and mortgage loans that are modified with regard to payment the discounted cash flow value method is used as the impairment valuation is more appropriately calculated based on the ongoing cash flow from the individuals rather than the liquidation of the asset. The computations give consideration to probability of defaults and loss-given-foreclosure on the related estimated cash flows. Commercial and construction loans that have been modified as part of loss mitigation efforts are evaluated individually for impairment. The vast majority of the Corporation’s modified loans are measured for impairment using the commercial estimated fair value of the collateral, as these are normally considered as collateral dependent loans. The Corporation may also measure commercial loans at their estimated realizable values determined by discounting the expected future cash flows. Construction loans that have been modified are also accounted for as collateral dependent loans. The Corporation determines the fair value measurement dependent upon its exit strategy for the particular asset(s) acquired in foreclosure. The following tables present the non-covered and covered loans classified as TDRs according to their accruing status at December 31, 2014 and December 31, 2013. (In thousands) Commercial Construction Legacy Mortgage Leases Consumer Total [1] Excludes TDRs from discontinued operations. (In thousands) Commercial Construction Mortgage Consumer Total Popular, Inc. Non-Covered Loans December 31, 2014 [1] December 31, 2013 Accruing Non-Accruing Total Accruing Non-Accruing Total $153,380 453 – 556,346 775 107,530 $818,484 $150,069 5,488 – 116,465 2,248 14,848 $289,118 $303,449 5,941 – 672,811 3,023 122,378 $109,462 425 – 535,357 270 116,719 $80,140 10,865 949 82,786 2,623 10,741 $1,107,602 $762,233 $188,104 $189,602 11,290 949 618,143 2,893 127,460 $950,337 Popular, Inc. Covered Loans December 31, 2014 December 31, 2013 Accruing Non-Accruing Total Accruing Non-Accruing Total $1,689 – 3,629 26 $5,344 $3,257 2,419 3,990 5 $9,671 $4,946 2,419 7,619 31 $15,015 $7,389 – 146 221 $7,756 $10,017 3,464 189 22 $13,692 $17,406 3,464 335 243 $21,448 The following tables present the loan count by type of modification for those loans modified in a TDR during the years ended December 31, 2014 and 2013. Puerto Rico For the year ended December 31, 2014 162 Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Construction Mortgage Leasing Consumer: Credit cards Personal Auto Other Total Mortgage Consumer: HELOCs Total Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Construction Mortgage Leasing Consumer: Credit cards HELOCs Personal Auto Other Total Reduction in interest rate Extension of maturity date Combination of reduction in interest rate and extension of maturity date Other 5 25 37 – 52 – 1,070 955 – 103 2,247 8 12 43 4 61 15 – 71 13 – 227 – – – – 413 48 – – 5 – 466 – – – – 142 – 653 6 – 2 803 U.S. mainland For the year ended December 31, 2014 Reduction in interest rate Extension of maturity date – 5 5 – – – Combination of reduction in interest rate and extension of maturity date 18 – 18 Other – – – Popular, Inc. For the year ended December 31, 2014 Reduction in interest rate Extension of maturity date Combination of reduction in interest rate and extension of maturity date Other 5 25 37 – 52 – 1,070 5 955 – 103 2,252 8 12 43 4 61 15 – – 71 13 – 227 – – – – 431 48 – – – 5 – 484 – – – – 142 – 653 – 6 – 2 803 163 POPULAR, INC. 2014 ANNUAL REPORT Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Mortgage Leasing Consumer: Credit cards Personal Auto Other Total Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Mortgage Total Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Mortgage Leasing Consumer: Credit cards Personal Auto Other Total Puerto Rico For the year ended December 31, 2013 Reduction in interest rate Extension of maturity date Combination of reduction in interest rate and extension of maturity date 5 6 23 22 – 1,107 923 – 71 2,157 5 4 13 42 22 – 22 11 – 119 – – – 341 23 – – – – 364 Other – 45 10 17 – 989 6 – 4 1,071 U.S. mainland For the year ended December 31, 2013 Reduction in interest rate Extension of maturity date – – – 1 1 2 1 1 1 5 Combination of reduction in interest rate and extension of maturity date Other 4 1 – 26 31 Popular, Inc. For the year ended December 31, 2013 Reduction in interest rate Extension of maturity date Combination of reduction in interest rate and extension of maturity date 5 6 23 23 – 1,107 923 – 71 2,158 7 5 14 43 22 – 22 11 – 124 4 1 – 367 23 – – – – 395 – – – – – Other – 45 10 17 – 989 6 – 4 1,071 164 The following tables present by class, quantitative information related to loans modified as TDRs during the years ended December 31, 2014 and 2013. Puerto Rico For the year ended December 31, 2014 (Dollars in thousands) Loan count Pre-modification outstanding recorded investment Post-modification outstanding recorded investment Increase (decrease) in the allowance for loan losses as a result of modification Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Construction Mortgage Leasing Consumer: Credit cards Personal Auto Other Total 13 37 80 4 668 63 1,723 1,032 18 105 3,743 $ 17,565 48,403 130,818 11,358 98,771 1,628 14,207 17,814 278 325 $ 17,645 47,754 129,561 11,485 98,031 1,632 16,193 17,881 289 319 $341,167 $340,790 $ (865) 2,002 6,728 (570) 4,292 361 2,584 3,935 16 57 $18,540 U.S. mainland For the year ended December 31, 2014 (Dollars in thousands) Loan count Pre-modification outstanding recorded investment Post-modification outstanding recorded investment Increase (decrease) in the allowance for loan losses as a result of modification Mortgage Consumer: HELOCs Total Excludes TDRs from discontinued operations. 18 5 23 $2,342 251 $2,593 $2,603 250 $2,853 $364 67 $431 (Dollars in thousands) Loan count Pre-modification outstanding recorded investment Post-modification outstanding recorded investment Increase (decrease) in the allowance for loan losses as a result of modification Popular, Inc. For the year ended December 31, 2014 Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Construction Mortgage Leasing Consumer: Credit cards HELOCs Personal Auto Other Total Excludes TDRs from discontinued operations. 13 37 80 4 686 63 1,723 5 1,032 18 105 3,766 $ 17,565 48,403 130,818 11,358 101,113 1,628 14,207 251 17,814 278 325 $ 17,645 47,754 129,561 11,485 100,634 1,632 16,193 250 17,881 289 319 $343,760 $343,643 $ (865) 2,002 6,728 (570) 4,656 361 2,584 67 3,935 16 57 $18,971 165 POPULAR, INC. 2014 ANNUAL REPORT Puerto Rico For the year ended December 31, 2013 (Dollars in thousands) Loan count Pre-modification outstanding recorded investment Post-modification outstanding recorded investment Increase (decrease) in the allowance for loan losses as a result of modification Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Mortgage Leasing Consumer: Credit cards Personal Auto Other Total 10 55 46 422 45 2,096 951 11 75 3,711 $ 10,729 29,975 15,947 72,899 928 16,622 15,474 122 267 $ 9,194 25,629 14,855 76,839 900 19,810 15,507 199 264 $162,963 $163,197 $ (7) (1,047) (253) 8,869 271 2,380 3,864 15 36 $14,128 U.S. mainland For the year ended December 31, 2013 (Dollars in thousands) Loan count Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Mortgage Total 6 2 1 28 37 Pre-modification outstanding recorded investment Post-modification outstanding recorded investment Increase (decrease) in the allowance for loan losses as a result of modification $ 4,798 1,263 2,125 3,240 $11,426 $4,552 836 1,060 3,395 $9,843 $ (65) (144) (216) 1,099 $ 674 Popular, Inc. For the year ended December 31, 2013 (Dollars in thousands) Loan count Pre-modification outstanding recorded investment Post-modification outstanding recorded investment Increase (decrease) in the allowance for loan losses as a result of modification Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Mortgage Leasing Consumer: Credit cards Personal Auto Other Total 16 57 47 450 45 2,096 951 11 75 3,748 $ 15,527 31,238 18,072 76,139 928 16,622 15,474 122 267 $ 13,746 26,465 15,915 80,234 900 19,810 15,507 199 264 $174,389 $173,040 $ (72) (1,191) (469) 9,968 271 2,380 3,864 15 36 $14,802 During the years ended December 31, 2014 and 2013, six loans with an aggregate unpaid principal balance of $10.1 million and six loans of $165 million, respectively, were restructured into multiple notes (“Note A / B split”). The Corporation recorded $2.1 million charge-offs as part of those loan restructurings during the year ended December 31, 2014 (December 31, 2013 - $26.6 million). The restructuring of those loans was made after analyzing the borrowers’ capacity to repay the debt, collateral and ability to perform under the modified terms. The recorded investment on those commercial TDRs amounted to approximately $2.9 million at December 31, 2014 (December 31, 2013 - $130 million) with a related allowance for loan losses amounting to approximately $166 thousand (December 31, 2013 - $64 million). 166 The following tables present by class, TDRs that were subject to payment default and that had been modified as a TDR during the twelve months preceding the default date. Payment default is defined as a restructured loan becoming 90 days past due after being modified, foreclosed or charged-off, occurs recorded first. The whichever at December 31, 2014 is inclusive of all partial paydowns and charge-offs since the modification date. Loans modified as a TDR that were fully paid down, charged-off or foreclosed upon by period end are not reported. investment (Dollars In thousands) Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Construction Mortgage Leasing Consumer: Credit cards Personal Auto Total [1] Puerto Rico Defaulted during the year ended December 31, 2014 Loan count Recorded investment as of first default date 3 5 5 1 125 8 465 101 14 727 $ 433 1,191 609 952 22,819 72 4,176 1,331 255 $31,838 [1] Excludes loans for which the Corporation has entered into liquidation agreements with borrowers and guarantors and is accepting payments which differ from the contractual payment schedule. The Corporation considers these as defaulted loans and does not intent to return them to accrual status. (Dollars In thousands) Commercial real estate non-owner occupied Mortgage Total (Dollars In thousands) Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Construction Mortgage Leasing Consumer: Credit cards Personal Auto Total U.S. mainland Defaulted during the year ended December 31, 2014 Loan count Recorded investment as of first default date 1 1 2 $ 907 110 $1,017 Popular, Inc. Defaulted during the year ended December 31, 2014 Loan count Recorded investment as of first default date 4 5 5 1 126 8 465 101 14 729 $ 1,340 1,191 609 952 22,929 72 4,176 1,331 255 $32,855 167 POPULAR, INC. 2014 ANNUAL REPORT (Dollars In thousands) Commercial real estate owner occupied Commercial and industrial Mortgage Leasing Consumer: Credit cards Personal Auto Other Total [1] Puerto Rico Defaulted during the year ended December 31, 2013 Loan count Recorded investment as of first default date 5 6 208 18 623 134 6 2 1,002 $ 5,733 1,838 32,734 279 5,955 1,862 145 21 $48,567 [1] Exclude loans for which the Corporation has entered into liquidation agreements with borrowers and guarantors and is accepting payments which differ from the contractual payment schedule. The Corporation considers these as defaulted loans and does not intent to return them to accrual status. U.S. mainland Defaulted during the year ended December 31, 2013 (Dollars In thousands) Commercial real estate non-owner occupied Total Loan count Recorded investment as of first default date 3 3 $2,554 $2,554 (Dollars In thousands) Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Mortgage Leasing Consumer: Credit cards Personal Auto Other Total Popular, Inc. Defaulted during the year ended December 31, 2013 Loan count Recorded investment as of first default date 3 5 6 208 18 623 134 6 2 1,005 $ 2,554 5,733 1,838 32,734 279 5,955 1,862 145 21 $51,121 Commercial, consumer and mortgage loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. loans modified in a TDR If subsequently default, the Corporation evaluates the loan for possible further impairment. The allowance for loan losses may be increased or partial charge-offs may be taken to further write-down the carrying value of the loan. Credit Quality The Corporation has defined a dual risk rating system to assign a rating to all credit exposures, particularly for the commercial and construction loan portfolios. Risk ratings in the aggregate provide the Corporation’s management the asset quality profile for the loan portfolio. The dual risk rating system provides for the assignment of ratings at the obligor level based on the financial condition of the borrower, and at the credit facility level based on the collateral supporting the transaction. The Corporation’s consumer and mortgage loans are not subject to the dual risk rating system. Consumer and mortgage loans are classified substandard or loss based on their delinquency status. All other consumer and mortgage loans that are not classified as substandard or loss would be considered “unrated”. The Corporation’s obligor risk rating scales range from rating 1 (Excellent) to rating 14 (Loss). The obligor risk rating reflects the risk of payment default of a borrower in the ordinary course of business. Pass Credit Classifications: Pass (Scales 1 through 8) - Loans classified as pass have a well defined primary source of repayment very likely to be sufficient, with no apparent risk, strong 168 The Corporation periodically reviews loans classified as watch or worse, to evaluate if they are properly classified, and to determine impairment, if any. The frequency of these reviews will depend on the amount of the aggregate outstanding debt, and the risk rating classification of the obligor. In addition, during the renewal process of applicable credit facilities, the Corporation evaluates the corresponding loan grades. Loans classified as pass credits are excluded from the scope of the review process described above until: (a) they become past due; (b) management becomes aware of deterioration in the creditworthiness of the borrower; or (c) the customer In these contacts circumstances, the credit facilities are specifically evaluated to assign the appropriate risk rating classification. the Corporation for a modification. The Corporation has a Credit Process Review Group within the Corporate Credit Risk Management Division (“CCRMD”), which performs annual comprehensive credit process reviews several middle markets, construction, asset-based and of corporate banking lending groups in BPPR. This group evaluates the credit risk profile of each originating unit along with each unit’s credit administration effectiveness, including the assessment of the risk rating representative of the current credit quality of the loans, and the evaluation of collateral documentation. The monitoring performed by this group contributes to assess compliance with credit policies and underwriting standards, determine the current level of credit risk, evaluate the effectiveness of the credit management process and identify control deficiencies that may arise in the the Credit credit-granting process. Based on its findings, Process Review Group recommends corrective actions, if necessary, that help in maintaining a sound credit process. CCRMD has contracted an outside loan review firm to perform the credit process reviews for the portfolios of commercial and construction loans in the U.S. mainland operations. The CCRMD participates in defining the review plan with the outside loan review firm and actively participates in the discussions of the results of the loan reviews with the business units. The CCRMD may periodically review the work performed by the outside loan review firm. CCRMD reports the results of the credit process reviews to the Risk Management Committee of the Corporation’s Board of Directors. position, minimal financial risk, profitability, liquidity and capitalization better than industry standards. operating Watch (Scale 9) - Loans classified as watch have acceptable business credit, but borrower’s operations, cash flow or financial condition evidence more than levels of average supervision and attention from Loan Officers. requires average above risk, Special Mention (Scale 10) - Loans classified as special that deserve mention have potential weaknesses left uncorrected, management’s close attention. these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Corporation’s credit position at some future date. If Adversely Classified Classifications: Substandard (Scales 11 and 12) - Loans classified as substandard are deemed to be inadequately protected by the current net worth and payment capacity of the if any. Loans obligor or of the collateral pledged, classified as such have well-defined weaknesses that the debt. They are jeopardize the liquidation of characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. the weaknesses inherent Doubtful (Scale 13) - Loans classified as doubtful have all in those classified as substandard, with the additional characteristic that the weaknesses make the collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loss (Scale 14) - Uncollectible and of such little value that continuance as a bankable asset is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be effected in the future. Risk ratings scales 10 through 14 conform to regulatory ratings. The assignment of the obligor risk rating is based on relevant information about the ability of borrowers to service their debts such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. 169 POPULAR, INC. 2014 ANNUAL REPORT The following table presents the outstanding balance, net of unearned income, of non-covered loans held-in-portfolio based on the Corporation’s assignment of obligor risk ratings as defined at December 31, 2014 and 2013. (In thousands) Puerto Rico [1] Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Total Commercial Construction Mortgage Leasing Consumer: Credit cards HELOCs Personal Auto Other Total Consumer Total Puerto Rico U.S. mainland [2] Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Total Commercial Construction Mortgage Legacy Consumer: Credit cards HELOCs Personal Auto Other Total Consumer Total U.S. mainland Popular, Inc. Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Total Commercial Construction Mortgage Legacy Leasing Consumer: Credit cards HELOCs Personal Auto Other Total Consumer Total Popular, Inc. December 31, 2014 Special Mention Substandard Doubtful Loss Watch Sub-total Pass/ Unrated Total $ 2,306 $ 5,021 144,104 171,771 144,536 212,236 367,834 421,332 661,495 807,645 6,204 4,612 – – – – $ 3,186 169,900 306,014 272,880 751,980 16,908 218,680 3,102 – – – – – – – – – – – – $812,257 $667,699 21,070 8,186 8,380 11,348 2,130 51,114 $1,041,784 $ – – 3,595 849 4,444 – – – – – – – – – $4,444 $ – $ – – 255 255 – – – 10,513 $ 485,775 666,381 1,063,150 2,225,819 27,724 218,680 3,102 69,564 $ 1,527,804 806,981 1,744,635 4,148,984 131,660 5,231,821 561,287 80,077 2,013,579 1,473,362 2,807,785 6,374,803 159,384 5,450,501 564,389 1,140,164 – 13,400 7 1,262,533 77 767,296 40 205,644 1,735 1,859 3,389,037 $2,114 $2,528,298 $13,409,816 $15,938,114 1,119,094 5,207 1,254,076 755,908 201,779 3,336,064 21,070 8,193 8,457 11,388 3,865 52,973 $ $ $ $ 11,283 $ 6,818 8,745 4,707 2,548 22,818 – – 2,491 17,424 24,284 5,357 58,348 – – 7,902 – – – – – – – – – – – – $ 66,250 $ 25,309 $ 13,589 $ 11,839 152,849 189,195 149,243 236,520 370,382 426,689 684,313 865,993 6,204 4,612 – – 2,491 7,902 – – $ $ $ 13,653 13,446 4,672 7,988 39,759 – 23,100 9,204 – 2,457 571 – 7 3,035 75,098 16,839 183,346 310,686 280,868 791,739 16,908 241,780 9,204 3,102 – – – – – – – – – – – – – – – $ – $ – – – – – – – 31,754 $ 39,615 33,663 15,893 120,925 – 23,100 19,597 375,449 $ 472,952 160,242 629,896 1,638,539 92,436 1,029,285 61,221 407,203 512,567 193,905 645,789 1,759,464 92,436 1,052,385 80,818 15,065 – 352,762 1,632 112,919 835 73 – 415 – 2,467 481,234 $2,467 $ 169,124 $ 3,297,213 $ 3,466,337 15,065 348,673 111,513 73 408 475,732 – 4,089 1,406 – 7 5,502 – – 3,595 849 4,444 – – – – $ – $ – – 255 255 – – – – 42,267 $ 525,390 700,044 1,079,043 2,346,744 27,724 241,780 19,597 3,102 445,013 $ 2,000,756 967,223 2,374,531 5,787,523 224,096 6,261,106 61,221 561,287 487,280 2,526,146 1,667,267 3,453,574 8,134,267 251,820 6,502,886 80,818 564,389 – – – – – – – – – – – – $878,507 $693,008 21,070 10,643 8,951 11,348 2,137 54,149 $1,116,882 – – – – – – $4,444 1,155,229 – 366,162 1,639 1,375,452 912 767,369 40 206,059 1,735 3,870,271 4,326 $4,581 $2,697,422 $16,707,029 $19,404,451 1,134,159 353,880 1,365,589 755,981 202,187 3,811,796 21,070 12,282 9,863 11,388 3,872 58,475 The following table presents the weighted average obligor risk rating at December 31, 2014 for those classifications that 170 consider a range of rating scales. Weighted average obligor risk rating Puerto Rico: [1] Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Total Commercial Construction U.S. mainland: [2] Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Total Commercial Construction Legacy [1] Excludes covered loans acquired in the Westernbank FDIC-assisted transaction. [2] Excludes discontinued operations. (Scales 11 and 12) Substandard (Scales 1 through 8) Pass 11.69 11.20 11.28 11.48 11.33 11.82 Substandard 11.00 11.00 11.17 11.09 11.04 – 11.11 5.63 6.83 6.96 6.89 6.87 7.43 Pass 7.24 6.83 7.04 6.29 6.74 7.76 7.70 171 POPULAR, INC. 2014 ANNUAL REPORT (In thousands) Puerto Rico [1] Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Total Commercial Construction Mortgage Leasing Consumer: Credit cards HELOCs Personal Auto Other Total Consumer Total Puerto Rico U.S. mainland Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial $ Total Commercial Construction Mortgage Legacy Consumer: Credit cards HELOCs Personal Auto Other Total Consumer Total U.S. mainland Popular, Inc. Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Total Commercial Construction Mortgage Legacy Leasing Consumer: Credit cards HELOCs Personal Auto Other Total Consumer Total Popular, Inc. December 31, 2013 Special Mention Substandard Doubtful Watch Loss Sub-total Pass/ Unrated Total $ 2,477 $ 4,453 $ 230,847 231,705 727,647 1,192,676 6,895 – – 156,189 134,577 192,404 487,623 1,788 – – 2,343 115,435 305,565 214,531 637,874 25,722 169,239 3,495 – – – – – – 21,044 665 7,483 10,407 2,019 41,618 $1,199,571 $489,411 $ 877,948 – – – – – – 73,481 $ 11,459 $ 75,094 56,515 11,657 216,747 – – 14,948 29,442 15,845 11,822 68,568 – – 11,593 62,346 160,001 75,508 46,307 344,162 20,885 26,292 42,622 – – – – – – 486 3,317 1,005 – 20 4,828 $ 231,695 $ 80,161 $ 438,789 – – – – – – $ 75,958 $ 15,912 $ 305,941 288,220 739,304 1,409,423 6,895 – 14,948 – 185,631 150,422 204,226 556,191 1,788 – 11,593 – 64,689 275,436 381,073 260,838 982,036 46,607 195,531 42,622 3,495 – – – – – – 21,530 3,982 8,488 10,407 2,039 46,446 $1,431,266 $569,572 $1,316,737 – – – – – – $ – – – 68 68 2,250 – – – – – – – – $2,318 $ – $ 9,273 $ 73,130 $ 112 – 446 558 – – – 502,583 671,847 1,135,096 2,318,799 36,655 169,239 3,495 1,361,635 934,656 1,777,370 4,146,791 124,516 5,231,440 540,266 82,403 1,864,218 1,606,503 2,912,466 6,465,590 161,171 5,400,679 543,761 – 2,426 141 155 3,531 6,253 1,169,621 15,178 1,213,884 699,491 218,464 3,316,638 $ 6,811 $2,576,059 $13,311,780 $15,887,839 1,148,577 12,087 1,206,260 688,929 212,914 3,268,767 21,044 3,091 7,624 10,562 5,550 47,871 $ $ $ – – – – – – – – – – – – – – – $ – $ 147,286 $ – – – – – – – 264,537 147,868 69,786 629,477 20,885 26,292 69,163 946,248 $ 1,093,534 1,106,287 841,750 560,042 412,174 811,731 741,945 3,571,594 2,942,117 44,913 24,028 1,280,797 1,254,505 211,135 141,972 – 5,315 569 2 1 5,887 15,651 463,033 135,235 489 1,180 615,588 $ 5,887 $ 756,532 $ 4,967,495 $ 5,724,027 15,165 454,401 133,661 487 1,159 604,873 486 8,632 1,574 2 21 10,715 $ – – – 68 68 2,250 – – – – $ 156,559 $ 1,019,378 $ 1,175,937 2,970,505 2,166,545 3,724,197 10,037,184 206,084 6,681,476 211,135 543,761 2,203,385 1,346,830 2,519,315 7,088,908 148,544 6,485,945 141,972 540,266 767,120 819,715 1,204,882 2,948,276 57,540 195,531 69,163 3,495 112 – 446 558 – – – – – – – – – – $2,318 1,185,272 – 478,211 7,741 1,349,119 710 699,980 157 219,644 3,532 3,932,226 12,140 $12,698 $3,332,591 $18,279,275 $21,611,866 1,163,742 466,488 1,339,921 689,416 214,073 3,873,640 21,530 11,723 9,198 10,564 5,571 58,586 The following table presents the weighted average obligor risk rating at December 31, 2013 for those classifications that 172 consider a range of rating scales. Weighted average obligor risk rating Puerto Rico: [1] Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Total Commercial Construction U.S. mainland: Commercial multi-family Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Total Commercial Construction Legacy (Scales 11 and 12) Substandard (Scales 1 through 8) Pass 11.33 11.38 11.31 11.34 11.33 11.63 Substandard 11.34 11.27 11.31 11.09 11.27 11.27 11.24 5.31 6.73 6.89 6.63 6.71 7.86 Pass 7.08 6.89 7.04 6.53 6.89 7.64 7.72 [1] Excludes covered loans acquired in the Westernbank FDIC-assisted transaction. Note 13 – FDIC loss share asset and true-up payment obligation In connection with the Westernbank FDIC-assisted transaction, BPPR entered into loss share agreements with the FDIC with respect to the covered loans and other real estate owned. Pursuant to the terms of the loss share agreements, the FDIC’s obligation to reimburse BPPR for losses with respect to covered assets begins with the first dollar of loss incurred. The FDIC reimburses BPPR for 80% of losses with respect to covered assets, and BPPR reimburses the FDIC for 80% of recoveries with respect for which the FDIC paid 80% reimbursement under loss share agreements. The loss share to losses agreement applicable to single-family residential mortgage loans provides for FDIC loss and recoveries sharing for ten years expiring at the end of the quarter ending June 30, 2020. The loss share agreement applicable to commercial (including construction) and consumer loans provides for FDIC loss sharing for five years expiring at the end of the quarter ending June 30, 2015 and BPPR reimbursement to the FDIC for eight years expiring at the end of the quarter ending June 30, 2018, in each case, on the same terms and conditions as described above. The following table sets forth the activity in the FDIC loss share asset for the periods presented. (In thousands) Balance at beginning of year Amortization of loss share indemnification asset Reversal of accelerated amortization Credit impairment losses to be covered under loss sharing agreements Reimbursable expenses Decrease due to reciprocal accounting on amortization of contingent liability on unfunded commitments Payments from FDIC under loss sharing agreements Other adjustments attributable to FDIC loss sharing agreements Balance at end of period Balance due to the FDIC for recoveries on covered assets Net balance of indemnity asset and amounts due from the FDIC Years ended December 31, 2014 2013 2012 $ 948,608 (189,959) 12,492 32,038 58,117 $1,399,098 (161,635) – 60,454 50,985 $1,915,128 (129,676) – 58,187 30,771 – (269,397) (193) (473) (396,223) (3,598) (969) (462,016) (12,327) 591,706 948,608 1,399,098 (49,252) (39,194) (16,763) $ 542,454 $ 909,414 $1,382,335 173 POPULAR, INC. 2014 ANNUAL REPORT As discussed in Note 1, the FDIC indemnity asset amortization for the year ended December 31, 2014 included a benefit of approximately $12.5 million to reverse the impact of accelerated amortization expense recorded in prior periods. This amount will be recognized as expense over the remaining portion of the loss sharing agreement that expires in the quarter ending June 30, 2015. During 2014, the Corporation revised its analysis of expected cash flows which resulted in a net decrease in estimated credit losses, which was driven mainly by certain commercial loan pools. Though this will have a positive impact on the Corporation’s interest accretion in future periods, the carrying value of the indemnification asset was amortized to reflect lower levels of expected losses. This amortization is recognized over the shorter of the remaining life of the loan pools, which had an average life of approximately six years, or the indemnification asset, which expires at June 30, 2015, for commercial, construction and consumer loans and June 30, 2020 for single-family residential mortgage loans. The following table presents the weighted average life of the loan portfolios subject to the FDIC loss sharing agreement at December 31, 2014 and December 31, 2013. Commercial Consumer Construction Mortgage Weighted Average Life December 31, 2014 December 31, 2013 5.87 years 5.76 0.99 7.30 6.43 years 3.13 1.30 6.91 As part of the loss share agreement, BPPR agreed to make a true-up payment obligation (the “true-up payment”) to the FDIC on the date that is 45 days following the last day (the “true-up measurement date”) of the final shared loss month, or upon the final disposition of all covered assets under the loss sharing agreements in the event losses on the loss sharing agreements fail to reach expected levels. The estimated fair value of such true-up payment obligation is recorded as contingent consideration, which is included in the caption of other liabilities in the consolidated statements of financial condition. Under the loss sharing agreements, BPPR will pay to the FDIC 50% of the excess, if any, of: (i) 20% of the intrinsic loss estimate of $4.6 billion (or $925 million) (as determined by the FDIC) less (ii) the sum of: (A) 25% of the asset discount (per bid) (or ($1.1 billion)); plus (B) 25% of the cumulative shared-loss payments (defined as the aggregate of all of the payments made or payable to BPPR minus the aggregate of all of the payments made or payable to the FDIC); plus (C) the sum of the period servicing amounts for every consecutive twelve-month period prior to and ending on the true-up measurement date in respect of each of the loss sharing agreements during which the loss sharing provisions of the applicable loss sharing agreement is in effect (defined as the product of the simple average of the principal amount of shared loss loans and shared loss assets at the beginning and end of such period times 1%). The following table provides the fair value and the undiscounted amount of the true-up payment obligation at December 31, 2014 and 2013. (In thousands) December 31, 2014 December 31, 2013 Carrying amount (fair value) Undiscounted amount $129,304 $187,238 $127,513 $185,372 The loss share agreements contain specific terms and conditions regarding the management of the covered assets that BPPR must follow in order to receive reimbursement on losses from the FDIC. Under the loss share agreements, BPPR must: family shared-loss • manage and administer the covered assets and collect and effect charge-offs and recoveries with respect to such covered assets in a manner consistent with its usual and prudent business and banking practices and, with respect to single the procedures (including collection procedures) customarily employed by BPPR in servicing and administering mortgage loans its own account and the servicing procedures for established by FNMA or the Federal Home Loan Mortgage Corporation (“FHLMC”), as in effect from time to time, and in accordance with accepted mortgage servicing practices of prudent lending institutions; loans, • exercise its best judgment in managing, administering and collecting amounts on covered assets and effecting charge- offs with respect to the covered assets; • use reasonable commercially to maximize recoveries with respect to losses on single family shared- loss assets and best efforts to maximize collections with respect to commercial shared-loss assets; efforts • retain sufficient staff to perform the duties under the loss share agreements; • adopt and implement accounting, reporting, systems with respect record- to the keeping and similar commercial shared-loss assets; • comply with the terms of the modification guidelines approved by the FDIC or another federal agency for any single-family shared-loss loan; • provide notice with respect to proposed transactions pursuant to which a third party or affiliate will manage, administer or collect any commercial shared-loss assets; • file monthly and quarterly certificates with the FDIC and amount of charge-offs losses, specifying the recoveries; and • maintain books and records sufficient to ensure and document compliance with the terms of the loss share agreements. Refer to Note 31, Commitment and Contingencies, for additional information on the settlement of the arbitration proceedings with the FDIC regarding the commercial loss share agreement. 174 Note 14 – Mortgage banking activities Income from mortgage banking activities includes mortgage servicing fees earned in connection with administering residential mortgage loans and valuation adjustments on mortgage servicing rights. It also includes gain on sales and securitizations of residential mortgage loans and trading gains and losses on derivative the lower-of- Corporation’s securitization activities. In addition, cost-or-market valuation adjustments to residential mortgage loans held for sale, if any, are recorded as part of the mortgage banking activities. contracts used to hedge The following table presents the components of mortgage banking activities: (In thousands) Mortgage servicing fees, net of fair value adjustments: Mortgage servicing fees Mortgage servicing rights fair value adjustments Total mortgage servicing fees, net of fair value adjustments Net gain on sale of loans, including valuation on loans held for sale Trading account profit (loss): Unrealized (losses) gains on outstanding derivative positions Realized (losses) gains on closed derivative positions Total trading account (loss) profit Total mortgage banking activities Years ended December 31, 2014 2013 2012 $41,761 $45,465 $48,156 (24,683) (11,403) (17,406) 17,078 31,213 34,062 26,719 30,750 76,181 (726) (16,950) 746 10,130 304 (22,464) (17,676) 10,876 (22,160) $30,615 $71,657 $84,771 Note 15 – Transfers of financial assets and servicing assets The Corporation typically transfers conforming residential mortgage loans in conjunction with GNMA, FNMA and FHLMC securitization transactions whereby the loans are exchanged for cash or securities and servicing rights. The securities issued through these transactions are guaranteed by the corresponding agency and, as such, under seller/service agreements the Corporation is required to service the loans in and accordance with the standards. Substantially, all mortgage loans securitized by the Corporation in GNMA, FNMA and FHLMC securities have the fixed rates and represent conforming loans. As seller, servicing guidelines agencies’ Corporation has made certain representations and warranties with respect to the originally transferred loans and, in the past, has sold certain loans with credit recourse to a government- sponsored entity, namely FNMA. Refer to Note 30 to the consolidated financial statements for a description of such arrangements. No liabilities were incurred as a result of these securitizations during the years ended December 31, 2014 and 2013 because they arrangements. The did not Corporation recorded a net gain of $32.8 million and $37.3 million, respectively, during the years ended December 31, 2014 and 2013 related to the residential mortgage loan securitized. contain any credit recourse The following tables present the initial fair value of the assets obtained as proceeds from residential mortgage loans securitized during the years ended December 31, 2014 and 2013: (In thousands) Assets Trading account securities: Mortgage-backed securities - GNMA Mortgage-backed securities - FNMA Total trading account securities Mortgage servicing rights Total Proceeds obtained during the year ended December 31, 2014 Level 1 Level 2 Level 3 Initial fair value – – – – – $674,557 225,047 $899,604 – $899,604 – – – $11,560 $11,560 $674,557 225,047 $899,604 $11,560 $911,164 175 POPULAR, INC. 2014 ANNUAL REPORT (In thousands) Assets Trading account securities: Mortgage-backed securities - GNMA Mortgage-backed securities - FNMA Mortgage-backed securities - FHLMC Total trading account securities Mortgage servicing rights Total During the year ended December 31, 2014 the Corporation retained servicing rights on whole loan sales involving approximately $86 million in principal balance outstanding (2013 - $152 million), with net realized gains of approximately $3.2 million (2013 - $5.3 million). All loan sales performed during the year ended December 31, 2014 and 2013 were without credit recourse agreements. The Corporation recognizes as assets the rights to service loans for others, whether these rights are purchased or result from asset transfers such as sales and securitizations. These mortgage servicing rights (“MSR”) are measured at fair value. The Corporation uses a discounted cash flow model to estimate the fair value of MSRs. The discounted cash flow model incorporates assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, prepayment considerations. Prepayment speeds are adjusted for the Corporation’s loan characteristics and portfolio behavior. among other and late fees, The following table presents the changes in MSRs measured using the fair value method for the years ended December 31, 2014 and 2013. Residential MSRs (In thousands) Fair value at beginning of period Purchases Servicing from securitizations or asset transfers Changes due to payments on loans[1] Reduction due to loan repurchases Changes in fair value due to changes in valuation model inputs or assumptions Other disposals Fair value at end of period 2014 2013 $161,099 – $154,430 45 12,583 (15,887) (2,759) 19,262 (22,556) (3,871) (6,127) (215) 15,024 (1,235) $148,694 $161,099 [1] Represents the change due to collection / realization of expected cash flow over time. Proceeds obtained during the year ended December 31, 2013 Level 1 Level 2 Level 3 Initial fair value – – – – – – $919,980 438,236 33,378 $1,391,594 – – – – – $17,639 $919,980 438,236 33,378 $1,391,594 $17,639 $1,391,594 $17,639 $1,409,233 Residential mortgage loans serviced for others were $15.6 billion at December 31, 2014 (2013 - $16.3 billion). Net mortgage servicing fees, a component of mortgage banking activities in the consolidated statements of operations, include the changes from period to period in the fair value of the MSRs, including changes due to collection / realization of expected cash flows. Mortgage servicing fees, excluding fair for the year ended December 31, 2014 value adjustments, amounted to $41.8 million (2013 - $45.5 million; 2012 - $48.2 million). The banking subsidiaries receive servicing fees based on a percentage of the outstanding loan balance. At December 31, 2014, those weighted average mortgage servicing fees were 0.26% (2013 – 0.27%). Under these servicing agreements, the banking subsidiaries do not generally earn significant prepayment penalty fees on the underlying loans serviced. The section below includes information on assumptions used in the valuation model of the MSRs, originated and purchased. Key economic assumptions used in measuring the servicing rights derived from loans securitized or sold by the Corporation during the years ended December 31, 2014 and 2013 were as follows: Prepayment speed Weighted average life Discount rate (annual rate) Years ended December 31, 2014 December 31, 2013 6.1% 16.4 years 6.6% 15.2 years 10.8% 11.0% Key economic assumptions used to estimate the fair value of MSRs derived from sales and securitizations of mortgage loans performed by the banking subsidiaries and the sensitivity to immediate changes in those assumptions at December 31, 2014 and 2013 were as follows: Originated MSRs 176 (In thousands) Fair value of servicing rights Weighted average life Weighted average prepayment speed (annual rate) Impact on fair value of 10% adverse change Impact on fair value of 20% adverse change Weighted average discount rate (annual rate) Impact on fair value of 10% adverse change Impact on fair value of 20% adverse change December 31, 2014 2013 $ 110,534 11.7 years $ 115,753 12.5 years 8.6% (4,089) $ (7,995) $ 11.5% (4,492) $ (8,701) $ 8.0% (3,763) (7,459) 11.6% (4,930) (9,595) $ $ $ $ The banking subsidiaries also own servicing rights purchased from other financial institutions. The fair value of purchased MSRs, their related valuation assumptions and the sensitivity to immediate changes in those assumptions at December 31, 2014 and 2013 were as follows: Purchased MSRs (In thousands) Fair value of servicing rights Weighted average life Weighted average prepayment speed (annual rate) Impact on fair value of 10% adverse change Impact on fair value of 20% adverse change Weighted average discount rate (annual rate) Impact on fair value of 10% adverse change Impact on fair value of 20% adverse change The sensitivity analyses presented in the tables above for servicing rights are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10 and 20 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in the sensitivity tables included herein, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities. At December 31, 2014, the Corporation serviced $2.1 billion (2013 - $2.5 billion) in residential mortgage loans with credit recourse to the Corporation. Under the GNMA securitizations, the Corporation, as servicer, has the right to repurchase (but not the obligation), at its option and without GNMA’s prior authorization, any loan that is collateral for a GNMA guaranteed mortgage-backed security when certain delinquency criteria are met. At the time loans meet GNMA’s specified delinquency that individual December 31, 2014 2013 $ 38,160 11.0 years $ 45,346 10.9 years 9.1% (1,620) $ (2,924) $ 10.7% (1,603) $ (2,877) $ 9.2% (1,969) (3,478) 10.8% (2,073) (3,655) $ $ $ $ 31, criteria and are eligible for repurchase, the Corporation is deemed to have regained effective control over these loans if the Corporation was the pool issuer. At December 31, 2014, the Corporation had recorded $81 million in mortgage loans on its consolidated statements of financial condition related to this buy-back option program (2013 - $48 million). As long as the Corporation continues to service the loans that continue to be collateral in a GNMA guaranteed mortgage-backed security, the MSR is recognized by the Corporation. During the year ended repurchased the December approximately $145 million of mortgage loans under the GNMA buy-back option program (2013 - $209 million). The determination to repurchase these loans was based on the the transaction, which results in a economic benefits of reduction of the servicing costs for these severely delinquent loans, mostly related to principal and interest advances. Furthermore, due risk associated with the loans is minimal. The Corporation places these loans under its loss mitigation programs and once brought back to current status, these may be either retained in portfolio or re-sold in the secondary market. to their guaranteed nature, Corporation 2014, the 177 POPULAR, INC. 2014 ANNUAL REPORT The Corporation also has the rights to service a portfolio of Small Business Administration (“SBA”) commercial loans. The SBA servicing rights are measured at the lower of cost or fair value method. The following table presents the activity in the SBA servicing rights for the years ended December 31, 2014 and 2013. During 2014 and 2013, the Corporation did not execute any sale of SBA loans. (In thousands) Balance at beginning of year Amortization Balance at end of year Fair value at end of year 2014 2013 $ 440 (180) $ 695 (255) $ 260 $ 440 $1,016 $1,609 SBA loans serviced for others were $427 million at December 31, 2014 (2013 - $451 million). In 2014 weighted average servicing fees on the SBA serviced loans were approximately 1.00% (2013 - 1.02%). Key economic assumptions used to estimate the fair value of SBA loans and the sensitivity to immediate changes in those assumptions were as follows: SBA Loans (In thousands) Carrying amount of retained interests Fair value of retained interests Weighted average life Weighted average prepayment speed (annual rate) Impact on fair value of 10% adverse change Impact on fair value of 20% adverse change Weighted average discount rate (annual rate) Impact on fair value of 10% adverse change Impact on fair value of 20% adverse change Quantitative information about delinquencies, net credit losses, and components of securitized financial assets and other assets managed together with them by the Corporation, ended including its own loan portfolio, the years for 2014 2013 $ $ 260 1,016 2.8 years $ $ 440 1,609 3.0 years 7.9% (18) $ (38) $ 13.0% (28) $ (57) $ 7.2% (27) (56) 13.0% (46) (94) $ $ $ $ December 31, 2014 and 2013, are disclosed in the following tables. Loans securitized/sold represent loans in which the Corporation has continuing involvement in the form of credit recourse. (In thousands) Loans (owned and managed): Commercial Construction Legacy Lease financing Mortgage Consumer Covered loans Less: Loans securitized / sold Loans held-for-sale Loans held-in-portfolio 2014 Total principal amount of loans, net of unearned Principal amount 60 days or more past due Net credit losses (recoveries) $ 8,134,576 251,820 81,137 564,389 8,741,757 3,875,581 2,542,662 (2,138,705) (106,104) $21,947,113 $ 278,326 13,812 3,476 4,348 1,164,513 99,595 540,369 (183,876) (19,878) $1,900,685 $ 53,990 (3,746) (892) 3,961 54,041 109,737 66,154 (1,314) (35,674) $246,257 (In thousands) Loans (owned and managed): Commercial Construction Legacy Lease financing Mortgage Consumer Covered loans Less: Loans securitized / sold Loans held-for-sale Loans held-in-portfolio 178 2013 Total principal amount of loans, net of unearned Principal amount 60 days or more past due Net credit losses (recoveries) $10,037,787 206,084 211,135 543,761 9,315,454 3,932,226 2,984,427 (2,524,155) (110,426) $ 24,596,293 $ 305,488 23,771 17,148 5,102 1,033,419 95,329 771,662 (196,590) (1,184) $ 2,054,145 $270,266 (6,796) (2,583) 3,506 260,682 96,971 76,210 (5,641) (362,645) $ 329,970 Note 16 - Premises and equipment The premises and equipment are stated at cost less accumulated depreciation and amortization as follows: (In thousands) Land Buildings Equipment Leasehold improvements Less - Accumulated depreciation and amortization Subtotal Construction in progress Total premises and equipment, net Useful life in years 2014 2013 10-50 2-10 3-10 $115,176 $110,453 483,983 290,444 69,443 843,870 475,162 500,474 305,814 86,020 892,308 488,497 368,708 403,811 10,697 5,252 $494,581 $519,516 Depreciation and amortization of premises and equipment for the year 2014 was $47.1 million (2013 -$48.2 million; 2012 - $46.7 million), of which $23.8 million (2013 - $24.8 million; 2012 - $24.2 million) was charged to occupancy expense and $23.3 million (2013 - $23.4 million; 2012 - $22.5 million) was charged to equipment, communications and other operating expenses. Occupancy expense is net of rental income of $28.1 million (2013 - $26.6 million; 2012 - $22.9 million). Note 17 - Other real estate owned The following tables present the other real estate owned activity, for the years ended December 31, 2014, 2013 and 2012. (In thousands) Balance at beginning of period Write-downs in value Additions Sales Other adjustments Ending balance For the year ended December 31, 2014 Non-covered OREO Commercial/ Construction Non-covered OREO Mortgage Covered OREO Commercial/ Construction $ 48,649 (7,112) 16,200 (20,042) 1,288 $ 38,983 $ 86,852 (3,628) 65,300 (49,618) (2,389) $ 96,517 $120,215 (26,657) 55,582 (59,219) (4,527) $ 85,394 Covered OREO Mortgage $ 47,792 (4,969) 21,769 (19,028) (692) Total $ 303,508 (42,366) 158,851 (147,907) (6,320) $ 44,872 $ 265,766 179 POPULAR, INC. 2014 ANNUAL REPORT (In thousands) Balance at beginning of period Write-downs in value Additions Sales Other adjustments Ending balance (In thousands) Balance at beginning of period Write-downs in value Additions Sales Other adjustments Ending balance Non-covered OREO Commercial/Construction For the year ended December 31, 2013 Non-covered OREO Mortgage Covered OREO Commercial/ Construction $ 135,862 (11,377) 32,175 (108,254) 243 $ 48,649 $ 130,982 (9,525) 82,985 (118,596) 1,006 $ 86,852 $ 99,398 (18,857) 87,800 (48,447) 321 $120,215 Non-covered OREO Commercial/ Construction For the year ended December 31, 2012 Non-covered OREO Mortgage Covered OREO Commercial/ Construction $ 90,230 (13,727) 110,947 (51,422) (166) $135,862 $ 82,267 (10,823) 108,312 (46,091) (2,683) $130,982 $ 77,776 (7,466) 60,920 (32,022) 190 $ 99,398 Covered OREO Mortgage $ 39,660 (4,102) 30,037 (17,720) (83) Total $ 405,902 (43,861) 232,997 (293,017) 1,487 $ 47,792 $ 303,508 Covered OREO Mortgage $ 31,359 (767) 23,195 (13,122) (1,005) Total $ 281,632 (32,783) 303,374 (142,657) (3,664) $ 39,660 $ 405,902 caption of other Note 18 - Other assets The consolidated statements of financial condition consists of the following major categories: in the assets (In thousands) 2014 2013 Net deferred tax assets (net of valuation allowance) Investments under the equity method Bank-owned life insurance program Prepaid FDIC insurance assessment Prepaid taxes Other prepaid expenses Derivative assets Trades receivables from brokers and counterparties Others Total other assets $ 812,819 225,625 – 360 198,120 83,719 25,362 $ 761,768 197,006 228,805 383 91,504 67,108 34,710 66,949 233,489 71,680 234,594 $1,646,443 $1,687,558 On February 1, 2014, BHD, the Corporation’s equity method investee based in the Dominican Republic, completed a merger transaction in which it acquired the net assets of Centro Financiero León. Centro Financiero León was the holding company of Banco León, the fourth largest bank in terms of assets in the Dominican Republic. In connection with the transaction, BHD issued additional shares which diluted the Corporation’s equity participation from 19.99% to 15.79%. As a result of this transaction, the Corporation recognized a net gain of $14.2 million during the first quarter of 2014, due to BHD’s increase in net assets. The gain was partially offset by approximately $7.7 million resulting from the reclassification from other comprehensive income into earnings of the cumulative foreign currency translation adjustment due to the reduction in the Corporation’s ownership percentage. As of December 31, 2014, the Corporation had a 15.82% equity participation and continues to have significant influence over BHD León. Accordingly, this investment is accounted for under the equity method and is evaluated for impairment if events or circumstances the investment has occurred that is other than temporary. indicate that a decrease in value of On September 25, 2014, BPNA surrendered its bank owned life insurance contracts, which had a balance of $231.2 million at the time of the transaction. BPNA received approximately $231.4 million in satisfaction of its surrender request. The transaction resulted in a gain of $0.1 million. Prepaid taxes at December 31, 2014 include payments of $45 million in income taxes in connection with the Closing Agreement signed with the Puerto Rico Department of Treasury on June 30, 2014, and $25.7 million of unamortized corporate personal property tax and municipal tax paid during the second quarter of 2014. Note 19 - Investments in equity investees During the year ended December 31, 2014, the Corporation recorded pre-tax earnings of $39,6 million, from its equity investments, compared to $42.9 million for the year ended December 31, 2013. The carrying value of the Corporation’s equity method investments was $226 million and $197 million at December 31, 2014 and 2013, respectively. 180 The following table presents aggregated summarized financial information of the Corporation’s equity method investees: Years ended December 31, (in thousands) Operating results: Total revenues Total expenses Income tax (benefit) expense 2014 2013 2012 $715,966 343,100 43,993 $1,302,637 1,024,713 39,301 $796,185 570,450 (36,914) At December 31, (in thousands) Balance Sheet: Total assets Total liabilities 2014 2013 $7,421,225 $5,987,802 $5,182,478 $4,036,484 Net income $328,873 $ 238,623 $262,649 Summarized financial information for these investees may be presented on a lag, due to the unavailability of information for the investees, at the respective balance sheet dates. Note 20 - Goodwill and other intangible assets The changes in the carrying amount of goodwill for the years ended December 31, 2014, and 2013, allocated by reportable segments and corporate group, were as follows (refer to Note 45 for the definition of the Corporation’s reportable segments): (In thousands) Banco Popular de Puerto Rico Banco Popular North America Total Popular, Inc. (In thousands) Banco Popular de Puerto Rico Banco Popular North America Total Popular, Inc. 2014 Balance at January 1, 2014 Goodwill on acquisition Purchase accounting adjustments Goodwill written off related to discontinued operations $245,679 402,078 $647,757 $4,430 – $4,430 2013 $– – $– $ – (186,511) $(186,511) Balance at December 31, 2014 $250,109 215,567 $465,676 Other $– – $– Balance at January 1, 2013 Goodwill on acquisition Purchase accounting adjustments Other Balance at December 31, 2013 $245,679 402,078 $647,757 $– – $– $– – $– $– – $– $245,679 402,078 $647,757 The goodwill acquired during 2014 of $4.4 million was related to the acquisition of an insurance benefits business. Goodwill Impairment Test As discussed in Note 4, Discontinued Operations, on April 22, 2014, BPNA entered into definitive agreements to sell its regional operations in California, Illinois and Central Florida to three different buyers. In connection with the transactions, the Corporation is relocating certain back office operations to Puerto Rico and New York. During the second quarter of 2014, the assets and liabilities for those regions were reclassified as held-for-sale in accordance with ASC 360-10-45. As a result of the reclassification, and in accordance with ASC 350-20-40, BPNA allocated a proportionate share of the goodwill balance to the discontinued businesses on a relative fair value basis and performed an impairment test for the goodwill allocated to each of the discontinued operations as well as for retained business, each as a separate reporting unit. This allocation of goodwill and related impairment analysis resulted in an impairment charge of $186.5 million during the second quarter of 2014. The goodwill impairment charge is a non-cash charge that did not have an impact on the Corporation’s tangible capital or regulatory capital ratios. The goodwill impairment analysis of the retained portion of the BPNA operations resulted in no impairment as of June 30, 2014. for purpose of The methodology used to determine the relative value of the regions sold and the retained portion of the BPNA reporting unit the goodwill allocation among these reporting units takes into consideration the fair value estimates resulting from a combination of: (1) the average price to tangible book multiple based on a regression analysis of the projected return on equity for comparable companies, (2) the average price to revenue multiple based on a regression analysis of the projected revenue margin for comparable companies, and 181 POPULAR, INC. 2014 ANNUAL REPORT (3) the average price to earnings multiple based on comparable companies. After allocating the carrying amount of goodwill to the regions sold and the retained portion, the Corporation performed the goodwill impairment test of ASC 350-20 to each region sold and to the retained business reporting unit. The fair value of each region was based on the transaction price agreed with the buyers as part of the step 2 of the goodwill impairment analysis. This fair value was compared to the fair value of the assets and liabilities sold including any unrecognized intangible asset. The goodwill impairment analysis of the regions sold indicated that all the goodwill allocated to each region sold was the Corporation recorded an impaired, and accordingly, impairment charge of $186.5 million during the second quarter of 2014. The following table presents the gross amount of goodwill and accumulated impairment losses by reportable segments. (In thousands) Banco Popular de Puerto Rico Banco Popular North America Total Popular, Inc. (In thousands) Banco Popular de Puerto Rico Banco Popular North America Total Popular, Inc. December 31, 2014 Balance at January 1, 2014 (gross amounts) $245,679 566,489 $812,168 Accumulated impairment losses $ – 164,411 $164,411 Balance at January 1, 2014 (net amounts) Balance at December 31, 2014 (gross amounts) $245,679 402,078 $647,757 $250,109 379,978 $630,087 Accumulated impairment losses $ – 164,411 $164,411 Balance at December 31, 2014 (net amounts) $250,109 215,567 $465,676 December 31, 2013 Balance at January 1, 2013 (gross amounts) $245,679 566,489 $812,168 Accumulated impairment losses $ – 164,411 $164,411 Balance at January 1, 2013 (net amounts) Balance at December 31, 2013 (gross amounts) $245,679 402,078 $647,757 $245,679 566,489 $812,168 Accumulated impairment losses $ – 164,411 $164,411 Balance at December 31, 2013 (net amounts) $245,679 402,078 $647,757 The accumulated impairment losses in the BPNA reportable segment are associated with E-LOAN. At December 31, 2014 and 2013, the Corporation had $ 6 million of identifiable intangible assets, with indefinite useful lives, mostly associated with E-LOAN’s trademark. The following table reflects the components of other intangible assets subject to amortization: (In thousands) December 31, 2014 Core deposits Other customer relationships Total other intangible assets December 31, 2013 Core deposits Other customer relationships Other intangibles Total other intangible assets Gross Carrying Amount $50,679 19,452 $70,131 $77,885 17,555 135 $95,575 Accumulated Amortization $32,006 6,644 $38,650 $51,737 4,712 107 $56,556 Net Carrying Value $18,673 12,808 $31,481 $26,148 12,843 28 $39,019 During the year ended 2014 the Corporation acquired $1.9 million in other customer relationships intangible assets related to the purchase of the above mentioned insurance benefits business, which are to be amortized to operating expenses over a 5-year period. During the year ended 2013, the Corporation recognized $720 thousand of other customer relationship intangible assets associated with the purchase of a dwelling and flood insurance portfolio. Core deposits and other intangibles with gross amount of $27 million became fully amortized during 2014 and, as such, their gross amount and accumulated amortization were eliminated from the tabular disclosure presented in the preceding table. During the year ended December 31, 2014, the Corporation recognized $ 8.2 million in amortization expense related to other intangible assets with definite useful lives (2013 - $ 8.0 million; 2012 - $ 8.2 million). The following table presents the estimated amortization of the intangible assets with definite useful lives for each of the following periods: (In thousands) Year 2015 Year 2016 Year 2017 Year 2018 Year 2019 $7,607 7,322 4,574 4,481 4,285 Under applicable standards, the reporting unit for each reporting unit Results of the Goodwill Impairment Test The Corporation’s goodwill and other identifiable intangible assets having an indefinite useful life are tested for impairment at least annually and on a more frequent basis if events or circumstances indicate impairment could have taken place. Such events could include, among others, a significant adverse change in the business climate, an adverse action by a regulator, an unanticipated change in the competitive environment and a decision to change the operations or dispose of a reporting unit. goodwill accounting impairment analysis is a two-step test. The first step of the goodwill impairment test involves comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of is considered not impaired; however, if the carrying amount of the reporting unit exceeds its fair value, the second step must be performed. The second step involves calculating an implied fair value of goodwill for which the first step indicated possible impairment. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit, as determined in the first step, over the aggregate fair values of the individual assets, liabilities and identifiable intangibles (including any unrecognized intangible assets, such as unrecognized core deposits and trademark) as if the reporting unit was being acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The Corporation estimates the fair values of the assets and liabilities of a reporting unit, consistent with the requirements of the fair value measurements accounting standard, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of the assets and liabilities reflects market conditions, thus volatility in prices could have a material impact on the determination of the implied fair value of the reporting unit goodwill at test date. The adjustments to measure the assets, liabilities and intangibles at fair value are for the purpose of measuring the implied fair value of goodwill and such adjustments are not reflected in the consolidated the impairment 182 statement of financial condition. If the implied fair value of goodwill exceeds the goodwill assigned to the reporting unit, there is no impairment. If the goodwill assigned to a reporting the goodwill, an unit exceeds the implied fair value of impairment charge is recorded for the excess. An impairment loss recognized cannot exceed the amount of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted under applicable accounting standards. The Corporation performed the annual goodwill impairment evaluation for the entire organization during the third quarter of 2014 using July 31, 2014 as the annual evaluation date. The reporting units utilized for this evaluation were those that are one level below the business segments, which are the legal entities within the reportable segment. The Corporation assigns goodwill to the reporting units when carrying out a business combination. as well In determining the fair value of a reporting unit, the Corporation generally uses combination of methods, a including market price multiples of comparable companies and transactions, as discounted cash flow analysis. Management evaluates the particular circumstances of each reporting unit in order to determine the most appropriate valuation methodology. The Corporation evaluates the results obtained under each valuation methodology to identify and understand the key value drivers in order to ascertain that the results obtained are reasonable and appropriate under the circumstances. Elements considered include current market and economic conditions, developments in specific lines of business, and any particular features in the individual reporting units. The computations require management to make estimates and assumptions. Critical assumptions that are used as part of these evaluations include: • a selection of comparable publicly traded companies, based on nature of business, location and size; • a selection of comparable acquisition and capital raising transactions; • the discount rate applied to future earnings, based on an estimate of the cost of equity; • the potential future earnings of the reporting unit; and • the market growth and new business assumptions. For purposes of the market comparable approach, valuations were determined by calculating average price multiples of relevant value drivers from a group of companies that are comparable to the reporting unit being analyzed and applying those price multiples to the value drivers of the reporting unit. Multiples used are minority based multiples and thus, no control premium adjustment is made to the comparable companies market multiples. While the market price multiple is not an assumption, a presumption that it provides an indicator 183 POPULAR, INC. 2014 ANNUAL REPORT of the value of the reporting unit is inherent in the valuation. The determination of the market comparables also involves a degree of judgment. For purposes of the discounted cash flows financial projections presented to (“DCF”) approach, the valuation is based on estimated future cash flows. The financial projections used in the DCF valuation analysis for each reporting unit are based on the most recent (as of the the valuation date) / Liability Management Committee Corporation’s Asset (“ALCO”). The growth assumptions included in these projections are based on management’s expectations for each reporting unit’s financial prospects considering economic and industry conditions as well as particular plans of each entity (i.e. restructuring plans, de-leveraging, etc.). The cost of equity used to discount the cash flows was calculated using the Ibbotson Build-Up Method and ranged from 12.15% to 16.83% for the 2014 analysis. The Ibbotson Build-Up Method builds up a cost of equity starting with the rate of return of a “risk-free” asset (20-year U.S. Treasury note) and adds to it additional risk elements such as equity risk premium, size premium and industry risk premium. The resulting discount rates were analyzed in terms of reasonability given the current market conditions and adjustments were made when necessary. test. Accordingly, For BPNA reporting unit, the average estimated fair value calculated in Step 1, using all valuation methodologies exceeded BPNA’s equity value by approximately $205 million in the July 31, 2014 annual there is no indication of impairment of goodwill recorded in BPNA at July 31, 2014 and there is no need for a Step 2 analysis. BPNA failed Step 1 in the annual test as of July 31, 2013 requiring the completion of Step 2. The results of the Step 2 indicated that the implied fair value of goodwill exceeded the goodwill July 31, 2013 resulting in no goodwill carrying value at impairment. For the BPPR reporting unit, the average estimated fair value calculated in Step 1 using all valuation methodologies exceeded BPPR’s equity value by approximately $337 million in the July 31, 2014 annual test as compared with approximately $387 million at July 31, 2013. This result indicates there would be no indication of impairment on the goodwill recorded in BPPR at July 31, 2014. The goodwill balance of BPPR and BPNA, as legal entities, represented approximately 95% of the Corporation’s total goodwill balance as of the July 31, 2014 valuation date. the as part of Furthermore, analyses, management the aggregate fair values performed a reconciliation of determined for the reporting units to the market capitalization of Popular, the fair value results determined for the reporting units in the July 31, 2014 annual assessment were reasonable. Inc. concluding that The goodwill impairment evaluation process requires the Corporation to make estimates and assumptions with regard to the fair value of the reporting units. Actual values may differ significantly from these estimates. Such differences could result in future impairment of goodwill that would, in turn, negatively impact the Corporation’s results of operations and the reporting units where the goodwill in the is Corporation’s market capitalization could increase the risk of goodwill impairment in the future. recorded. Declines Management monitors events or changes in circumstances between annual tests to determine if these events or changes in circumstances would more likely than not reduce the fair value of a reporting unit below its carrying amount. At December 31, 2014 and 2013, other than goodwill, the Corporation had $ 6 million of identifiable intangible assets, with indefinite useful lives, mostly associated with E-LOAN’S trademark. The valuation of the E-LOAN trademark was performed using the “relief-from-royalty” valuation approach. The basis of the “relief-from-royalty” method is that, by virtue of having ownership of the trademark, the Corporation is relieved from having to pay a royalty, usually expressed as a percentage of revenue, for the use of trademark. The main attributes involved in the valuation of this intangible asset include the royalty rate, revenue projections that benefit from the use of this intangible, after-tax royalty savings derived from the ownership of the intangible, and the discount rate to apply to the projected benefits to arrive at the present value of this intangible. Since estimates are an integral part of this trademark impairment analysis, changes in these estimates could have a significant impact on the calculated fair value. There were no impairments recognized during the years ended December 31, 2014 and 2013 related to E-LOAN’s trademark. Note 21 - Deposits Total interest bearing deposits as of the end of the periods presented consisted of: (In thousands) Savings accounts NOW, money market and other December 31, 2014 2013 $6,737,370 $6,839,126 interest bearing demand deposits 4,811,972 5,637,985 Total savings, NOW, money market and other interest bearing demand deposits Certificates of deposit: Under $100,000 $100,000 and over Total certificates of deposit 11,549,342 12,477,111 4,211,180 3,263,265 7,474,445 5,101,711 3,209,641 8,311,352 Total interest bearing deposits $19,023,787 $20,788,463 184 The repurchase agreements outstanding at December 31, 2014 were collateralized by $ 1.0 billion in investment securities available for sale and $ 81 million in trading securities, compared with $ 1.3 billion in investment securities available for sale, $ 309 million in trading securities and $ 70 million in securities sold not yet delivered classified as other assets at December 31, 2013. It is the Corporation’s policy to maintain effective control over assets sold under agreements to repurchase; accordingly, such securities continue to be carried on the consolidated statement of financial condition. In addition, there were repurchase agreements outstanding collateralized by $ 146 million at December 31, 2014 and $ 189 million at December 31, 2013, in securities purchased underlying agreements to resell to which the Corporation has the right to repledge. It is the Corporation’s policy to take possession of securities purchased under agreements to resell. However, the counterparties to such agreements maintain effective control over such securities, and accordingly are not reflected in the Corporation’s consolidated statements of financial condition. A summary of certificates of deposit by maturity at December 31, 2014 follows: (In thousands) 2015 2016 2017 2018 2019 2020 and thereafter Total certificates of deposit $5,011,262 958,246 572,706 363,691 495,931 72,609 $7,474,445 At December 31, 2014, the Corporation had brokered deposits amounting to $ 1.9 billion (2013 - $ 2.4 billion). The aggregate amount of overdrafts in demand deposit accounts that were reclassified to loans was $9 million at December 31, 2014 (2013 - $10 million). Note 22 - Federal funds purchased and assets sold under agreements to repurchase The following table summarizes certain information on federal funds purchased and assets to repurchase at December 31, 2014 and 2013: sold under agreements (Dollars in thousands) Federal funds purchased Assets sold under agreements to 2014 2013 $ 100,000 $ – repurchase 1,171,657 1,659,292 Total federal funds purchased and assets sold under agreements to repurchase Maximum aggregate balance $1,271,657 $1,659,292 outstanding at any month-end $2,208,213 $2,269,565 Average monthly aggregate balance outstanding $1,732,199 $1,842,879 Weighted average interest rate: For the year At December 31 3.85% 0.62% 1.92% 2.07% 185 POPULAR, INC. 2014 ANNUAL REPORT The following table presents the liability associated with the repurchase transactions (including accrued interest), their maturities and weighted average interest rates. Also, it includes the the carrying value and approximate market value of collateral (including accrued interest) at December 31, 2014 and 2013. The information excludes repurchase agreement transactions which were collateralized with securities or other assets held-for-trading purposes or which have been obtained under agreements to resell. 2014 2013 Repurchase liability Carrying value of collateral Market value of collateral Repurchase liability weighted average interest rate Repurchase liability Carrying value of collateral Market value of collateral Repurchase liability weighted average interest rate $210,292 25,765 420,602 $ 220,229 $ 220,229 27,349 448,992 27,349 448,992 0.36% $ 0.34 0.44 64,109 $ – 156,092 67,721 $ – 177,031 67,721 – 177,031 0.23% – 4.89 (Dollars in thousands) Obligations of U.S. government sponsored entities Within 30 days After 30 to 90 days After 90 days Total obligations of U.S. government sponsored entities 656,659 696,570 696,570 0.41 220,201 244,752 244,752 3.53 Mortgage-backed securities Within 30 days After 90 days Total mortgage-backed securities Collateralized mortgage obligations Within 30 days After 30 to 90 days After 90 days Total collateralized mortgage obligations Total 3,227 166,226 169,453 15,277 55,427 71,448 3,612 183,782 3,612 183,782 187,394 187,394 19,087 59,472 78,683 19,087 59,472 78,683 0.40 1.25 1.23 0.27 0.56 0.60 23,998 240,313 264,311 235,306 103,754 322,881 26,591 286,166 26,591 286,166 312,757 312,757 267,120 114,643 370,197 267,120 114,643 370,197 0.46 3.61 3.32 0.39 0.44 4.24 142,152 157,242 157,242 0.55 661,941 751,960 751,960 2.28 $968,264 $1,041,206 $1,041,206 0.57% $1,146,453 $1,309,469 $1,309,469 2.76% Note 23 - Other short-term borrowings The following table presents a breakdown of other short-term borrowings at December 31, 2014 and 2013. (In thousands) 2014 2013 Advances with the FHLB paying interest at maturity, at fixed rate of 0.39% (2013 - 0.44%) Others Total other short-term borrowings $20,000 1,200 $400,000 1,200 $21,200 $401,200 The maximum aggregate balance outstanding at any month- end was approximately $ 801 million (2013 - $ 1,226 million). rate of other The weighted average interest short-term borrowings at December 31, 2014 was 0.36% (2013 – 0.38%). The average aggregate balance outstanding during the year was approximately $ 154 million (2013 - $729 million). The weighted average interest rate during the year was 0.44% (2013 – 0.41%). Note 24 presents additional information with respect to available credit facilities. Note 24 - Notes payable Notes payable outstanding at December 31, 2014 and 2013, consisted of the following: (In thousands) 2014 2013 Advances with the FHLB maturing from 2015 to 2021 paying interest at monthly fixed rates ranging from 0.45% to 4.19% ( 2013 - 0.27% to 4.19%) Unsecured senior debt securities maturing on 2019 paying interest semiannually at a fixed rate of 7.00% Term notes paying interest semiannually at fixed rate of 7.47% Term notes paying interest monthly at a floating rate of 3.00% over the 10- year U.S. Treasury note rate [1] Junior subordinated deferrable interest debentures (related to trust preferred securities) maturing from 2027 to 2034 with fixed interest rates ranging from 6.125% to 8.327% (Refer to Note 26) Junior subordinated deferrable interest debentures (related to trust preferred securities) ($936,000 less discount of $404,460 at December 31, 2013) with no stated maturity and a contractual fixed interest rate of 5.00% until, but excluding December 5, 2013 and 9.00% thereafter (Refer to Note 26) Others Total notes payable $802,198 $589,229 450,000 – – – 675 14 439,800 439,800 – 19,830 531,540 23,496 $1,711,828 $1,584,754 [1] The 10-year U.S. Treasury note key index rate at December 31, 2013 was 3.03%. During the quarter ended June 30, 2014, the Corporation received approval from the Federal Reserve System to repay the $935 million in TARP Capital Purchase Program funds. On 186 July 2, 2014, the Corporation completed the repayment of these funds, which were partially funded with $400 million from the proceeds of the issuance of its $450 million aggregate principal amount of 7% Senior Notes due on 2019, which settled on July 1, 2014. Accordingly, during the quarter ended June 30, 2014, the Corporation accelerated the related amortization of $414.1 million of discount and deferred costs, which is reflected as interest expense in the consolidated statement of operations. Refer to additional information on Note 26 - Trust Preferred Securities. The following table presents the aggregate amounts by contractual maturities of notes payable at December 31, 2014. Year 2015 2016 2017 2018 2019 Later years Total notes payable (In thousands) $328,917 250,966 82,983 106,934 463,270 478,758 $1,711,828 At December 31, 2014, the Corporation had borrowing facilities available with the FHLB whereby the Corporation could borrow up to $3.7 billion based on the assets pledged with the FHLB at that date (2013 - $3.0 billion). The FHLB advances at December 31, 2014 are collateralized with mortgage and commercial loans, and do not have restrictive covenants or callable features. The maximum borrowing capacity is dependent on certain computations as determined by the FHLB, which consider the amount and type of assets available for collateral. Also, the Corporation has a borrowing facility at the discount window of the Federal Reserve Bank of New York. At December 31, 2014, the borrowing capacity at the discount window approximated $2.1 billion (2013 - $3.4 billion), which remained unused at December 31, 2014 and 2013. The facility is a collateralized source of credit that is highly reliable even under difficult market conditions. 187 POPULAR, INC. 2014 ANNUAL REPORT Note 25 - Offsetting of financial assets and liabilities The following tables present the potential effect of rights of setoff associated with the Corporation’s recognized financial assets and liabilities at December 31, 2014 and December 31, 2013. As of December 31, 2014 Gross Amounts Offset in the Statement of Financial Position Net Amounts of Assets Presented in the Statement of Financial Position Gross Amounts Not Offset in the Statement of Financial Position Financial Instruments Securities Collateral Received Cash Collateral Received Net Amount $– – $– $ 25,361 $ 320 $ – 151,134 – 151,134 $ 176,495 $ 320 $ 151,134 $– – $– $25,041 – $25,041 As of December 31, 2014 Gross Amounts Offset in the Statement of Financial Position $– – $– Net Amounts of Liabilities Presented in the Statement of Financial Position $ 23,032 1,171,657 $1,194,689 As of December 31, 2013 Gross Amounts Offset in the Statement of Financial Position Net Amounts of Assets Presented in the Statement of Financial Position Gross Amounts Not Offset in the Statement of Financial Position Financial Instruments $ 320 – $ 320 Securities Collateral Pledged $ 8,781 1,171,657 $1,180,438 Cash Collateral Pledged Net Amount $– – $– $13,931 – $13,931 Gross Amounts Not Offset in the Statement of Financial Position Financial Instruments Securities Collateral Received Cash Collateral Received Net Amount $– – $– $ 34,793 $1,220 $ – 175,965 – 175,965 $ 210,758 $1,220 $ 175,965 $– – $– $33,573 – $33,573 (In thousands) Derivatives Reverse repurchase agreements Total Gross Amount of Recognized Assets $ 25,361 151,134 $ 176,495 (In thousands) Derivatives Repurchase agreements Total Gross Amount of Recognized Liabilities $ 23,032 1,171,657 $1,194,689 (In thousands) Derivatives Reverse repurchase agreements Total Gross Amount of Recognized Assets $ 34,793 175,965 $ 210,758 188 As of December 31, 2013 Gross Amounts Not Offset in the Statement of Financial Position Gross Amounts Offset in the Statement of Financial Position $– – $– Net Amounts of Liabilities Presented in the Statement of Financial Position $ 32,378 1,659,292 $1,691,670 Gross Amount of Recognized Liabilities $ 32,378 1,659,292 $1,691,670 Financial Instruments $1,220 – $1,220 Securities Collateral Pledged $ 14,003 1,659,292 $1,673,295 Cash Collateral Received Net Amount $– – $– $17,155 – $17,155 (In thousands) Derivatives Repurchase agreements Total The Corporation’s derivatives are subject to agreements which allow a right of set-off with each respective counterparty. the Corporation’s Repurchase Agreements and In addition, Reverse Repurchase Agreements have a right of set-off with the respective counterparty under the supplemental terms of the Master Repurchase Agreements. In an event of default each party has a right of set-off against the other party for amounts owed in the related agreement and any other amount or obligation owed in respect of any other agreement or transaction between them. Note 26 - Trust preferred securities At December 31, 2014 and December 31, 2013, statutory trusts established by the Corporation (BanPonce Trust I, Popular Capital Trust I, Popular North America Capital Trust I and Popular Capital Trust II) had issued trust preferred securities (also referred to as “capital securities”) to the public. The proceeds from such issuances, together with the proceeds of the related issuances of common securities of the trusts (the “common securities”), were used by the trusts to purchase junior subordinated deferrable interest debentures (the “junior subordinated debentures”) issued by the Corporation. In August 2009, the Corporation established the Popular Capital Trust III for the purpose of exchanging the shares of Series C preferred stock held by the U.S. Treasury at the time for trust preferred securities issued by this trust. In connection with this exchange, the trust used the Series C preferred stock, together with the proceeds of issuance and sale of common securities of the trust, to purchase junior subordinated debentures issued by the Corporation. As further explained below, the Popular Capital Trust III was dissolved following the repurchase of their capital securities on July 2, 2014. The sole assets of the trusts consisted of the junior subordinated debentures of the Corporation and the related accrued interest receivable. These trusts are not consolidated by the Corporation pursuant to accounting principles generally accepted in the United States of America. The junior subordinated debentures are included by the Corporation as notes payable in the consolidated statements of financial condition, while the common securities issued by the issuer trusts are included as other investment securities. The common securities of each trust are wholly-owned, or indirectly wholly-owned, by the Corporation. The following table presents financial data pertaining to the different trusts at December 31, 2014 and December 31, 2013. (Dollars in thousands) Issuer Capital securities Distribution rate Common securities Junior subordinated debentures aggregate liquidation amount Stated maturity date Reference notes As of December 31, 2014 Popular North America Capital Trust I Popular Capital Trust I BanPonce Trust I Popular Capital Trust Il $52,865 8.327% $ 1,637 $181,063 6.700% $ 5,601 $91,651 6.564% $ 2,835 $101,023 6.125% $ 3,125 $54,502 $186,664 February 2027 November 2033 [2],[4],[5] [1],[3],[6] $94,486 $104,148 September 2034 December 2034 [2],[4],[5] [1],[3],[5] 189 POPULAR, INC. 2014 ANNUAL REPORT (Dollars in thousands) Issuer Capital securities Distribution rate Common securities Junior subordinated debentures aggregate liquidation amount Stated maturity date Reference notes BanPonce Trust I Popular Capital Trust I As of December 31, 2013 Popular North America Capital Trust I Popular Capital Trust Il $52,865 $181,063 $91,651 $101,023 8.327% $1,637 6.700% $5,601 6.564% $2,835 6.125% $3,125 $54,502 $186,664 February 2027 November 2033 [2],[4],[5] [1],[3],[6] $94,486 $104,148 September 2034 December 2034 [2],[4],[5] [1],[3],[5] Popular Capital Trust III $935,000 5.000% until, but excluding December 5, 2013 and 9.000% thereafter $1,000 $936,000 Perpetual [2],[4],[7],[8] Statutory business trust that is wholly-owned by Popular North America and indirectly wholly-owned by the Corporation. Statutory business trust that is wholly-owned by the Corporation. [1] [2] [3] The obligations of PNA under the junior subordinated debentures and its guarantees of the capital securities under the trust are fully and unconditionally guaranteed on a subordinated basis by the Corporation to the extent set forth in the applicable guarantee agreement. [4] These capital securities are fully and unconditionally guaranteed on a subordinated basis by the Corporation to the extent set forth in the applicable guarantee agreement. [5] The Corporation has the right, subject to any required prior approval from the Federal Reserve, to redeem after certain dates or upon the occurrence of certain events mentioned below, the junior subordinated debentures at a redemption price equal to 100% of the principal amount, plus accrued and unpaid interest to the date of redemption. The maturity of the junior subordinated debentures may be shortened at the option of the Corporation prior to their stated maturity dates (i) on or after the stated optional redemption dates stipulated in the agreements, in whole at any time or in part from time to time, or (ii) in whole, but not in part, at any time within 90 days following the occurrence and during the continuation of a tax event, an investment company event or a capital treatment event as set forth in the indentures relating to the capital securities, in each case subject to regulatory approval. Same as [5] above, except that the investment company event does not apply for early redemption. [6] [7] The debentures are perpetual and may be redeemed by Popular at any time, subject to the consent of the Board of Governors of the Federal Reserve System. [8] Carrying value of junior subordinated debentures of $ 532 million at December 31, 2013 ($ 936 million aggregate liquidation amount, net of $ 404 million discount). During the quarter ended June 30, 2014, the Corporation received approval from the Federal Reserve System to repay the $935 million in TARP Capital Purchase Program funds. On July 2, 2014, the Corporation completed the repurchase of $935 million of Fixed Rate Popular Capital Trust III Capital Securities, $1,000 liquidation amount per security (the “trust capital securities”), of Popular Capital Trust III, held by the U.S. Treasury. On July 23, 2014, the Corporation exchanged $936 million of Fixed Rate Perpetual Junior Subordinated Debentures Series A (the “trust debentures”) held by Popular Capital Trust III for the trust capital securities and the common securities of Popular Capital Trust III, in the amount of $1 million, held by the Corporation. The trust debentures were then cancelled and the obligations of the Corporation under the related indenture were satisfied and discharged. On the same date, Popular Capital Trust III was dissolved. In connection with the repayment of TARP, the Corporation accelerated the related amortization of the discount and deferred costs amounting to $414.1 million during the second quarter of 2014, which was reflected as part of interest expense in the consolidated statement of operations. In accordance with the Federal Reserve Board guidance under Basel I, the trust preferred securities represent restricted core capital elements and currently qualify as Tier 1 capital, subject to certain quantitative limits. The aggregate amount of restricted core capital elements that may be included in the Tier 1 capital of a banking organization must not exceed 25% of the (including cumulative sum of all core capital elements perpetual preferred stock and trust preferred securities). Amounts of restricted core capital elements in excess of this limit generally may be included in Tier 2 capital, subject to further limitations. At December 31, 2014, the Corporation’s restricted core capital elements did not exceed the 25% limitation. Thus, all trust preferred securities were allowed as Tier I capital. At December 31, 2013, the Corporation’s restricted core capital elements also did not exceed the 25% limitation. In July 2013, the Board of Governors of the Federal Reserve System approved final rules (“Basel III Capital Rules”) to establish a new comprehensive regulatory capital framework for all U.S. banking organizations. The New Capital Rules generally implement the Basel Committee on Banking Supervision’s (the “Basel Committee”) December 2010 final capital framework referred to as “Basel III” for strengthening international capital standards and several changes to the U.S. regulatory capital regime required by the Dodd-Frank Wall Street Reform and Consumer Protection on Act (“Dodd-Frank”). The Basel III Capital Rules require that capital instruments such as trust 190 I capital preferred securities be phased-out of Tier 1 capital. The Corporation’s Tier level at December 31, 2014 included $ 427 million of trust preferred securities that are subject to the phase-out provisions of the Basel III Capital Rules. The Corporation would be allowed to include only 25% of such trust preferred securities in Tier I capital as of January 1, 2015 and 0% as of January 1, 2016 and thereafter. The Basel III Capital Rules also permanently grandfathers as Tier 2 capital such trust preferred securities. Note 27 - Stockholders’ equity The Corporation has 30,000,000 shares of authorized preferred stock that may be issued in one or more series, and the shares of each series shall have such rights and preferences as shall be fixed by the Board of Directors when authorizing the issuance of that particular series. The Corporation’s shares of preferred stock issued and outstanding at December 31, 2014 and 2013 consisted of: • 6.375% non-cumulative monthly income preferred stock, 2003 Series A, no par value, liquidation preference value of $25 per share. Holders on record of the 2003 Series A Preferred Stock are entitled to receive, when, as and if declared by the Board of Directors of the Corporation or an authorized committee thereof, out of funds legally available, non-cumulative cash dividends at the annual rate per share of 6.375% of their liquidation preference value, or $0.1328125 per share per month. These shares of preferred stock are perpetual, nonconvertible, have no preferential rights to purchase any securities of the Corporation and are redeemable solely at the option of the Corporation with the consent of the Board of Governors of the Federal Reserve System. The redemption price per share is $25.00. The shares of 2003 Series A Preferred Stock have no voting rights, except for certain rights in instances when the Corporation does not pay dividends for a defined period. These shares are not subject to any sinking fund requirement. Cash dividends declared and paid on the 2003 Series A Preferred Stock amounted to $ 1.4 million for the year ended December 31, 2014, 2013 and 2012. Outstanding shares of 2003 Series A Preferred Stock amounted to 885,726 at December 31, 2014, 2013 and 2012. • 8.25% non-cumulative monthly income preferred stock, 2008 Series B, no par value, liquidation preference value of $25 per share. The shares of 2008 Series B Preferred Stock were issued in May 2008. Holders of record of the 2008 Series B Preferred Stock are entitled to receive, when, as and if declared by the Board of Directors of the Corporation or an authorized committee thereof, out of funds legally available, non-cumulative cash dividends at the annual rate per share of 8.25% of their liquidation preferences, or $0.171875 per share per month. These shares of preferred stock are perpetual, nonconvertible, have no preferential rights to purchase any securities of the Corporation and are redeemable solely at the option of the Board of the Corporation with the consent of Governors of the Federal Reserve System beginning on May 28, 2013. The redemption price per share is $25.50 from May 28, 2013 through May 28, 2014, $25.25 from May 28, 2014 through May 28, 2015 and $25.00 from May 28, 2015 and thereafter. Cash dividends declared and paid on the 2008 Series B Preferred Stock amounted to $ 2.3 million for the year ended December 31, 2014, 2013 and 2012. Outstanding shares of 2008 Series B Preferred Stock amounted to 1,120,665 at December 31, 2014, 2013 and 2012. As part of the Series C Preferred Stock transaction with the U.S. Treasury effected on December 5, 2008, the Corporation issued to the U.S. Treasury a warrant to purchase 2,093,284 shares of the Corporation’s common stock at an exercise price of $67 per share. On July 23, 2014, the Corporation completed the repurchase of the outstanding warrant at a repurchase price of $3.0 million. With the completion of this transaction, the Corporation completed its exit from the TARP Capital Purchase Program. The Corporation’s common stock trades on the NASDAQ Stock Market LLC (the “NASDAQ”) under the symbol BPOP. The Corporation voluntarily delisted its 2003 Series A and 2008 Series B Preferred Stock from the NASDAQ effective October 8, 2009. On May 29, 2012, the Corporation effected a 1-for-10 reverse split of its common stock previously approved by the Corporation’s stockholders on April 27, 2012. Upon the effectiveness of the reverse split, each 10 shares of authorized and outstanding common stock were reclassified and combined into one new share of common stock. Popular, Inc.’s common stock began trading on a split-adjusted basis on May 30, 2012. All share and per share information in the consolidated statements and accompanying notes have been financial retroactively adjusted to reflect the 1-for-10 reverse stock split. In connection with the reverse stock split, the Corporation amended its Restated Certificate of Incorporation to reduce the its authorized common stock from number of shares of 1,700,000,000 to 170,000,000. The reverse stock split did not affect the par value of a share of the Corporation’s common stock. At the effective date of the reverse stock split, the stated capital attributable to common stock on the Corporation’s consolidated statement of financial condition was reduced by dividing the amount of the stated capital prior to the reverse stock split by 10, and the additional paid-in capital (surplus) was credited with the amount by which the stated capital was reduced. This was also reflected retroactively for prior periods presented in the financial statements. 191 POPULAR, INC. 2014 ANNUAL REPORT The Corporation’s common stock ranks junior to all series of preferred stock as to dividend rights and / or as to rights on liquidation, dissolution or winding up of the Corporation. Dividends on each series of preferred stocks are payable if declared. The Corporation’s ability to declare or pay dividends on, or purchase, redeem or otherwise acquire, its common stock is subject to certain restrictions in the event that the Corporation fails to pay or set aside full dividends on the preferred stock for the latest dividend period. The ability of the Corporation to pay dividends in the future is limited by regulatory requirements the Corporation’s agreements with the U.S. Treasury, legal availability of funds, recent and projected financial levels and liquidity of the Corporation, general business conditions and other factors deemed relevant by the Corporation’s Board of Directors. results, capital and approval, During the years ended December 31, 2014, 2013 and 2012 the Corporation did not declare dividends on its common stock. The Banking Act of the Commonwealth of Puerto Rico requires that a minimum of 10% of BPPR’s net income for the year be transferred to a statutory reserve account until such statutory reserve equals the total of paid-in capital on common and preferred stock. Any losses incurred by a bank must first be charged to retained earnings and then to the reserve fund. Amounts credited to the reserve fund may not be used to pay dividends without the Puerto Rico the prior consent of Commissioner of Financial Institutions. The failure to maintain sufficient statutory reserves would preclude BPPR from paying dividends. BPPR’s statutory reserve fund amounted to $ 469 million at December 31, 2014 (2013 - $ 445 million; 2012 - $ 432 million). During 2014, $ 24 million was transferred to the statutory reserve account (2013 - $ 13 million, 2012 - $ 17 million). BPPR was in compliance with the statutory reserve requirement in 2014, 2013 and 2012. Failure agencies. Note 28 - Regulatory capital requirements The Corporation and its banking subsidiaries are subject to various regulatory capital requirements imposed by the federal banking to meet minimum capital requirements can lead to certain mandatory and additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt the Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation’s assets, liabilities, and certain off-balance sheet items as calculated under US GAAP, corrective action, regulatory reporting requirements, and reporting standards. The Corporation’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting, and other factors. Rules adopted by the federal banking agencies, as applicable to the Corporation and its banking subsidiaries as of December 31, 2014, provide that a depository institution will be deemed to be well capitalized if it maintained a leverage ratio of at least 5%, a Tier 1 risk-based capital ratio of at least 6% and least 10%. Management has a total risk-based ratio of at determined that at December 31, 2014 and 2013, the Corporation exceeded all capital adequacy requirements to which it is subject. At December 31, 2014 and 2013, BPPR and BPNA were well-capitalized under the regulatory framework for prompt corrective action. At December 31, 2014, management believes that there were no conditions or events since the most recent notification from the Federal Reserve that could have changed the institution’s category. The Corporation has been designated by the Federal Reserve Board as a Financial Holding Company (“FHC”) and is eligible to engage in certain financial activities permitted under the Gramm-Leach-Bliley Act of 1999. The following tables present the Corporation’s risk-based capital and leverage ratios at December 31, 2014 and 2013. Actual Capital adequacy minimum requirement (Dollars in thousands) Amount Ratio Amount Ratio 2014 Total Capital (to Risk- Weighted Assets): Corporation BPPR BPNA Tier I Capital (to Risk- Weighted Assets): Corporation BPPR BPNA Tier I Capital (to Average Assets): Corporation BPPR BPNA $4,122,238 19.41% $1,698,712 1,399,664 2,973,500 17.00 271,952 1,216,065 35.77 $3,849,891 18.13% $ 849,356 699,832 2,749,051 15.71 135,976 1,182,899 34.80 2,749,051 10.63 $3,849,891 11.94% $ 967,505 1,290,007 775,566 1,034,089 177,376 236,502 1,182,899 20.01 8% 8 8 4% 4 4 3% 4 3 4 3 4 192 that subject require banking organizations In 2013, the Federal Reserve issued final Basel III capital rules to the standardized approach, such as the Corporation and its banking subsidiaries, to meet revised minimum regulatory capital ratios beginning January 1, 2015, and begin the transition period for the revised definitions of regulatory capital and the revised regulatory capital adjustments and deductions, as well as comply with the standardized approach for determining risk- weighted assets. Furthermore, the final Basel III capital rules require the phase out of non-qualifying Tier 1 capital instruments such as the trust preferred securities. At December 31, 2014, Corporation had $427 million in trust preferred securities outstanding. Beginning on January 1, 2015, approximately $320 million in principal amount of the trust preferred securities will no longer qualify for Tier 1 capital treatment, but instead will qualify for Tier 2 capital treatment. The Corporation anticipates that, by January 1, 2016, all $427 million of its outstanding trust preferred securities will lose Tier 1 capital treatment, and will be reclassified to Tier 2 capital. Beginning January 1, 2016, the Basel III final rules introduce a phase-in capital conservation buffer of 2.5% of risk-weighted assets that is effectively layered on top of the minimum capital risk-based ratios, which places restrictions on the amount of retained earnings that may be used for distributions or discretionary bonus payments as risk-based capital ratios approach their respective “adequately capitalized minimums.” (Dollars in thousands) Total Capital (to Risk- Weighted Assets): Corporation BPPR BPNA Tier I Capital (to Risk- Weighted Assets): Corporation BPPR BPNA Tier I Capital (to Average Assets): Corporation BPPR BPNA Actual Amount Ratio Capital adequacy minimum requirement Amount Ratio 2013 $4,761,555 20.42% $1,865,494 1,413,292 2,607,018 14.76 439,908 1,400,740 25.47 $4,464,742 19.15% $ 932,747 706,646 2,381,347 13.48 219,954 1,331,471 24.21 2,381,347 $4,464,742 12.85% $1,042,384 1,389,845 775,562 1,034,083 250,931 334,575 1,331,471 15.92 9.21 8% 8 8 4% 4 4 3% 4 3 4 3 4 The following table presents the minimum amounts and ratios for the Corporation’s banks to be categorized as well- capitalized under prompt corrective action. (Dollars in thousands) Amount Ratio Amount Ratio 2014 2013 Total Capital (to Risk- Weighted Assets): BPPR BPNA Tier I Capital (to Risk- Weighted Assets): BPPR BPNA Tier I Capital (to Average Assets): BPPR BPNA $1,749,580 339,939 10% $1,766,615 549,885 10 10% 10 $1,049,748 203,964 6% $1,059,969 329,931 6 $1,292,611 295,627 5% $1,292,604 418,219 5 6% 6 5% 5 The following table presents the capital requirements for a standardized approach banking organization under Basel III final rules. Minimum Capital Well-Capitalized 2016 Common Equity Tier 1 to Risk-Weighted Assets Tier 1 Capital to Risk-Weighted Assets Total Capital to Risk-Weighted Assets Leverage Ratio 4.5% 6.0 8.0 4.0 6.5% 8.0 10.0 5.0 5.125% 6.625 8.625 N/A 2017 5.750% 7.250 9.250 N/A 2018 6.375% 7.875 9.875 N/A 2019 7.000% 8.500 10.500 N/A Minimum Capital Plus Capital Conservation Buffer 193 POPULAR, INC. 2014 ANNUAL REPORT Note 29 - Other comprehensive loss The following table presents changes in accumulated other comprehensive loss by component for the years ended December 31, 2014, 2013 and 2012. Changes in Accumulated Other Comprehensive Loss by Component [1] (In thousands) Foreign currency translation Beginning Balance Other comprehensive gain (loss) before reclassifications Amounts reclassified from accumulated other comprehensive gain (loss) Net change Ending balance Adjustment of pension and postretirement benefit plans Beginning Balance Other comprehensive (loss) income before reclassifications Amounts reclassified from accumulated other comprehensive (loss) income for amortization of net losses Amounts reclassified from accumulated other comprehensive (loss) income for amortization of prior service cost Net change Ending balance Unrealized net holding gains (losses) on investments Beginning Balance Other comprehensive gain (loss) before reclassifications Amounts reclassified from accumulated other comprehensive income Net change Ending balance Unrealized net gains (losses) on cash flow hedges Beginning Balance Other comprehensive (loss) income before reclassifications Amounts reclassified from other accumulated other comprehensive (loss) income Net change Ending balance Total [1] All amounts presented are net of tax. Years ended December 31, 2012 2013 2014 $ (36,099) $ (31,277) $ (28,829) (4,451) (4,822) (2,448) 7,718 3,267 – – (4,822) (2,448) $ (32,832) $ (36,099) $ (31,277) $(104,302) $(225,846) $(216,058) (98,015) 104,272 (27,699) (5,188) 17,272 18,051 2,318 – (100,885) 121,544 (140) (9,788) $(205,187) $(104,302) $(225,846) $ (48,344) $ 154,568 $ 203,078 55,987 (201,119) (50,204) 822 (1,793) 1,694 56,809 (202,912) (48,510) 8,465 $ (48,344) $ 154,568 – $ (313) $ (739) $ $ (4,034) 1,436 (9,457) 3,716 (1,123) (318) 313 9,883 426 $ (318) $ – $ (313) $(229,872) $(188,745) $(102,868) The following table presents the amounts reclassified out of each component of accumulated other comprehensive loss for the years ended December 31, 2014, 2013, and 2012. 194 Reclassifications Out of Accumulated Other Comprehensive Loss Affected Line Item in the Consolidated Statements of Operations Years ended December 31, 2012 2013 2014 (In thousands) Foreign currency translation Cumulative translation adjustment reclassified into earnings Adjustment of pension and postretirement benefit plans Amortization of net losses Amortization of prior service cost Other operating income Total before tax Income tax (expense) benefit Total net of tax Personnel costs Personnel costs Total before tax Income tax benefit Total net of tax Unrealized holding gains on investments Realized gain (loss) on sale of securities Net gain (loss) on sale and valuation adjustments of investment securities Unrealized net losses on cash flow hedges Forward contracts Total before tax Income tax benefit (expense) Total net of tax Mortgage banking activities Total before tax Income tax benefit (expense) Total net of tax Total reclassification adjustments, net of tax $(7,718) $ – $ (7,718) – – – $(7,718) $ – $ – – – – $ 8,505 $(24,674) $(25,159) 200 (3,800) – 4,705 (24,674) (24,959) (1,835) 7,402 7,048 $ 2,870 $(17,272) $(17,911) $ (870) $ 2,110 $ (1,707) (870) 2,110 (1,707) 48 (317) 13 $ (822) $ 1,793 $ (1,694) $(6,091) $ 1,839 $(14,119) (6,091) 1,839 (14,119) 2,375 (716) 4,236 $(3,716) $ 1,123 $ (9,883) $(9,386) $(14,356) $(29,488) Note 30 - Guarantees The Corporation has obligations upon the occurrence of certain guarantees provided in certain events under contractual agreements as summarized below. financial If institutions, The Corporation issues financial standby letters of credit and has risk participation in standby letters of credit issued by in each case to guarantee the other financial performance of various customers to third parties. the customers failed to meet its financial or performance obligation to the third party under the terms of the contract, then, upon their request, the Corporation would be obligated to make the payment to the guaranteed party. At December 31, 2014, the Corporation recorded a liability of $0.4 million (December 31, 2013 - $0.4 million), which represents the unamortized balance of the obligations undertaken in issuing the guarantees under the standby letters of credit. In accordance with the provisions of ASC Topic 460, the Corporation recognizes at fair value the obligation at inception of the standby letters of credit. The fair value approximates the fee received from the customer for issuing such commitments. These fees are deferred and are recognized over the commitment period. The contracts amount in standby letters of credit outstanding at December 31, 2014 and 2013, shown in Note 31, represent the maximum potential future payments that the Corporation could be amount of required to make under the guarantees in the event of nonperformance by the customers. These standby letters of credit are used by the customers as a credit enhancement and typically expire without being drawn upon. The Corporation’s standby letters of credit are generally secured, and in the event of nonperformance by the customers, the Corporation has rights to the underlying collateral provided, which normally includes cash, marketable securities, real estate, receivables, and others. Management does not anticipate any material losses related to these instruments. Also, the Corporation securitized mortgage loans into guaranteed mortgage-backed securities subject to lifetime credit recourse on the loans that serve as collateral for the mortgage- backed securities. Also, from time to time, the Corporation may 195 POPULAR, INC. 2014 ANNUAL REPORT sell, in bulk sale transactions, residential mortgage loans and Small Business Administration (“SBA”) commercial loans subject to credit recourse or to certain representations and warranties from the Corporation to the purchaser. These representations and warranties may relate, for example, to borrower creditworthiness, loan documentation, collateral, prepayment and early payment defaults. The Corporation may be required to repurchase the loans under the credit recourse agreements or representation and warranties. the recourse arrangements At December 31, 2014, the Corporation serviced $2.1 billion (December 31, 2013 - $2.5 billion) in residential mortgage loans subject to credit recourse provisions, principally loans associated with FNMA and FHLMC residential mortgage loan securitization programs. In the event of any customer default, pursuant to the credit recourse provided, the Corporation is required to repurchase the loan or reimburse the third party investor for the incurred loss. The maximum potential amount of future payments that the Corporation would be required to make under in the event of nonperformance by the borrowers is equivalent to the total outstanding balance of the residential mortgage loans serviced with recourse and interest, if applicable. During 2014, the Corporation repurchased approximately $ 89 million of unpaid to the credit principal balance in mortgage loans subject recourse provisions (2013 - $ 126 million). In the event of nonperformance by the borrower, the Corporation has rights to the underlying collateral securing the mortgage loan. The Corporation suffers losses on these loans when the proceeds from a foreclosure sale of the property underlying a defaulted mortgage loan are less than the outstanding principal balance of the loan plus any uncollected interest advanced and the costs of holding and disposing the related property. At December 31, the 2014, estimated credit loss exposure related to loans sold or serviced with credit recourse amounted to $ 59 million (December 31, 2013 - $ 41 million). The following table shows the changes in the Corporation’s liability of estimated losses from these credit recourses agreements, included in the consolidated statements of financial condition during the years ended December 31, 2014 and 2013. the Corporation’s liability established to cover (In thousands) Balance as of beginning of period Provision for recourse liability Net charge-offs / terminations Balance as of end of period December 31, 2014 2013 $ 41,463 41,312 (23,337) $ 51,673 21,793 (32,003) $ 59,438 $ 41,463 The probable losses to be absorbed under the credit recourse arrangements are recorded as a liability when the loans are sold and are updated by accruing or reversing expense (categorized in the line item “adjustments (expense) to indemnity reserves on loans sold” in the consolidated statements of operations) loss and historical actual defaults throughout the life of the loan, as necessary, when additional relevant information becomes available. The methodology used to estimate the recourse liability is a function of the recourse arrangements given and considers a variety of factors, which include experience, foreclosure rate, estimated future defaults and the probability that a loan would be delinquent. Statistical methods are used to estimate the recourse liability. Expected loss rates are applied to different expected loss, which represents the amount expected to be lost on a given loan, considers the probability of default and loss severity. The probability of default represents the probability that a loan in good standing would become 90 days delinquent within the following twelve-month period. Regression analysis quantifies the relationship between the default event and loan-specific characteristics, including credit scores, loan-to-value ratios, and loan aging, among others. loan segmentations. The the loans characteristics When the Corporation sells or securitizes mortgage loans, it generally makes customary representations and warranties sold. The of regarding the Corporation’s mortgage operations in Puerto Rico group conforming mortgage loans into pools which are exchanged for FNMA and GNMA mortgage-backed securities, which are generally sold to private investors, or are sold directly to FNMA or other private investors for cash. As required under the government agency programs, quality review procedures are performed by the Corporation to ensure that asset guideline qualifications are met. To the extent the loans do not meet specified characteristics, the Corporation may be required to repurchase such loans or indemnify for losses and bear any subsequent loss related to the loans. Repurchases under BPPR’s representation and warranty arrangements in which the Corporation is obligated to repurchase the loans amounted to approximately $ 2.2 million in unpaid principal balance with losses amounting to $ 1.7 million for the year ended December 31, 2014 ($ 4.7 million and $1.0 million, respectively, during the year ended December 31, 2013). A substantial amount of these loans reinstate to performing status or have mortgage insurance, and thus the ultimate losses on the loans are not deemed significant. regional operations. the Corporation agreed to provide, subject As discussed on Note 4 - Discontinued Operations, on November 8, 2014, the Corporation completed the sale of the In connection with this California transaction, to certain limitations, customary indemnification to the purchaser, including with respect to certain pre-closing liabilities and violations of representations and warranties. The Corporation also agreed to indemnify the purchaser for up to 1.5% of credit losses on transferred loans for a period of two years after the closing. Pursuant the Corporation’s maximum exposure is approximately $16.0 million. The Corporation recognized a reserve of approximately $2.2 million, representing its best estimate of the loss that indemnification provision, to this would be incurred in connection with this indemnification. This reserve is included within the liabilities from discontinued operations. During the quarter ended June 30, 2013, the Corporation established a reserve for certain specific representation and warranties made in connection with BPPR’s sale of non- performing mortgage loans. The purchaser’s sole remedy under the indemnity clause is to seek monetary damages from BPPR, for a maximum of $16.3 million. BPPR recognized a reserve of approximately $3.0 million, representing its best estimate of the loss incurred in connection with this indemnification. BPPR’s obligations under this clause end one year after the closing except to any claim asserted prior to such termination date. At December 31, 2014, the Corporation has a reserve balance of $2.8 million to cover claims received from the purchaser, which are currently being evaluated. that would be During the quarter ended March 31, 2013, the Corporation established a reserve for certain specific representation and warranties made in connection with BPPR’s sale of commercial and construction loans, and commercial and single family real estate owned. The purchaser’s sole remedy under the indemnity clause is to seek monetary damages from BPPR, for a maximum of $18.0 million. BPPR is not required to repurchase any of the assets. BPPR recognized a reserve of approximately $10.7 million, representing its best estimate of the loss that would be incurred in connection with this indemnification. During the quarter ended March 31, 2014, the Corporation released $2.0 million based on an evaluation of claims received under this clause. At December 31, 2014, the Corporation has a reserve balance of $7.4 million to cover claims received from the purchaser, which are currently being evaluated. table in the Corporation’s liability for estimated losses associated with the indemnifications and representations and warranties related to loans sold by BPPR for during the years ended December 31, 2014 and 2013. following presents changes The the (In thousands) Balance as of beginning of period Additions for new sales Provision (reversal) for representation and warranties Net charge-offs Balance as of end of period 2014 2013 $19,277 – $ 7,587 13,747 (712) (2,606) (332) (1,725) $15,959 $19,277 In addition, at December 31, 2014, the Corporation has reserves for customary representation and warranties related to loans sold by its U.S. subsidiary E-LOAN prior to 2009. These loans had been sold to investors on a servicing released basis subject to certain representation and warranties. Although the risk of loss or default was generally assumed by the investors, the Corporation made certain representations relating to borrower creditworthiness, loan documentation and collateral, 196 for reserve estimated which if not correct, may result in requiring the Corporation to repurchase the loans or indemnify investors for any related losses associated to these loans. At December 31, 2014, the from such Corporation’s representation and warranty arrangements amounted to $ 5 million, which was included as part of other liabilities in the consolidated statement of financial condition (December 31, 2013 - $ 7 million). E-LOAN is no longer originating and selling loans since the subsidiary ceased these activities in 2008 and most of agreements with major counterparties were settled during 2010 and 2011. the outstanding losses Servicing agreements relating to the mortgage-backed securities programs of FNMA and GNMA, and to mortgage loans sold or serviced to certain other investors, including FHLMC, require the Corporation to advance funds to make scheduled payments of principal, interest, taxes and insurance, if such payments have not been received from the borrowers. At December 31, 2014, the Corporation serviced $15.6 billion in mortgage loans for third-parties, including the loans serviced with credit recourse (December 31, 2013 - $16.3 billion). The Corporation generally recovers funds advanced pursuant to these arrangements from the mortgage owner, from liquidation proceeds when the mortgage loan is foreclosed or, in the case of FHA/VA loans, under the applicable FHA and VA insurance and guarantees programs. However, the Corporation must absorb the cost of the funds it advances during the time the advance is outstanding. The Corporation must also bear the costs of attempting to collect on delinquent and defaulted mortgage loans. In addition, if a defaulted loan is not cured, the mortgage loan would be canceled as part of the foreclosure proceedings and the Corporation would not receive any future servicing income with respect to that loan. At December 31, 2014, the outstanding balance of funds advanced by the Corporation under such mortgage loan servicing agreements was approximately $36 million (December 31, 2013 - $29 million). To the extent the mortgage loans underlying the increased Corporation’s delinquencies, the Corporation would be required to dedicate additional cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts. in the meantime, experience servicing portfolio guarantees Inc. Holding Company (“PIHC”) fully and Popular, unconditionally certain borrowing obligations issued by certain of its wholly-owned consolidated subsidiaries amounting to $ 0.2 billion at December 31, 2014 (December 31, 2013 - $ 0.2 billion). In addition, at December 31, 2014 and December 31, 2013, PIHC fully and unconditionally guaranteed on a subordinated basis $ 0.4 billion and $ 1.4 billion, respectively, of capital securities (trust preferred securities) issued by wholly-owned issuing trust entities to the extent set forth in the applicable guarantee agreement. Refer to Note 26 to the consolidated financial statements for further information on the trust preferred securities. 197 POPULAR, INC. 2014 ANNUAL REPORT the financial needs of Note 31 - Commitments and contingencies Off-balance sheet risk The Corporation is a party to financial instruments with off- balance sheet credit risk in the normal course of business to meet its customers. These financial instruments include loan commitments, letters of credit, and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit and financial guarantees written is represented by the contractual notional amounts of those instruments. The Corporation uses the same credit policies in making these commitments and conditional obligations as it does for those reflected on the consolidated statements of financial condition. Financial instruments with off-balance sheet credit risk, whose contract amounts represent potential credit risk as of the end of the periods presented were as follows: (In thousands) December 31, 2014 December 31, 2013 Commitments to extend credit: Credit card lines Commercial lines of credit Other unused credit commitments Commercial letters of credit Standby letters of credit Commitments to originate or fund mortgage loans $4,450,284 $4,594,676 2,415,843 2,569,377 269,225 2,820 46,362 326,874 3,059 78,948 25,919 47,722 At December 31, 2014, the Corporation maintained a losses reserve of approximately $13 million for potential associated with unfunded loan commitments related to commercial and consumer lines of credit, as compared to $7 million at December 31, 2013. Other commitments At December 31, 2014, the Corporation also maintained other approximately $9 million, non-credit primarily for the acquisition of other investments, as compared to $10 million at December 31, 2013. commitments for and commercial real estate markets. The concentration of the Corporation’s operations in Puerto Rico exposes it to greater risk than other banking companies with a wider geographic base. Its asset and revenue composition by geographical area is presented in Note 45 to the consolidated financial statements. $ to 1.0 billion, amounted At December 31, 2014, the Corporation’s direct exposure to the Puerto Rico government and its instrumentalities and of which municipalities approximately $ 811 million is outstanding ($1.2 billion and $950 million at December 31, 2013). Of the amount outstanding, $ 689 million consists of loans and $ 122 million are securities ($789 million and $161 million at December 31, 2013). Of this amount, $ 336 million represents obligations from the Government of Puerto Rico and public corporations that are either collateralized loans or obligations that have a income or revenues identified for their specific source of repayment ($527 million at December 31, 2013). Some of these obligations consist of senior and subordinated loans to public corporations that obtain revenues from rates charged for such as public utilities. Public services or products, corporations have varying degrees of independence from the central Government and many receive appropriations or other payments from it. The remaining $ 475 million represents obligations from various municipalities in Puerto Rico for which, in most cases, the good faith, credit and unlimited taxing power of the applicable municipality has been pledged to their repayment ($423 million at December 31, 2013). These municipalities are required by law to levy special property taxes in such amounts as shall be required for the payment of all of its general obligation bonds and loans. These loans have seniority to the payment of operating cost and expenses of the municipality. In addition, at December 31, 2014, the Corporation had $370 million in indirect exposure to loans or securities that are payable by non-governmental entities, but which carry a government guarantee to cover any shortfall in collateral in the event of borrower default ($360 million at December 31, 2013). These included $289 million in residential mortgage loans that are guaranteed by the Puerto Rico Housing Finance Authority (December 31, 2013 - $274 million). These mortgage loans are secured by the underlying properties and the guarantees serve to cover shortfalls in collateral in the event of a borrower default. Also, the Corporation had $49 million in Puerto Rico pass-through housing bonds backed by FNMA, GNMA or industrial loans CMO’s, and $32 million of residential development notes ($52 million and $34 million at December 31, 2013). Business concentration Since the Corporation’s business activities are currently concentrated primarily in Puerto Rico, its results of operations and financial condition are dependent upon the general trends of the Puerto Rico economy and, in particular, the residential Other contingencies As indicated in Note 13 to the consolidated financial statements, as part of the loss sharing agreements related to the Westernbank FDIC-assisted transaction, the Corporation agreed to make a true-up payment to the FDIC on the date that is 45 days following the last day of the final shared loss month, or upon the final disposition of all covered assets under the loss sharing agreements in the event losses on the loss sharing agreements fail to reach expected levels. The fair value of the true-up payment obligation was estimated at $ 129 million at December 31, 2014 (December 31, 2013 - $ 128 million). litigation, Legal Proceedings The nature of Popular’s business ordinarily results in a certain number of claims, investigations, and legal and administrative cases and proceedings. When the Corporation determines it has meritorious defenses to the claims asserted, it vigorously defends itself. The Corporation will consider the settlement of cases (including cases where it has meritorious defenses) when, in management’s judgment, it is in the best interest of both the Corporation and its shareholders to do so. On at least a quarterly basis, Popular assesses its liabilities in connection with outstanding legal and contingencies proceedings utilizing the latest information available. For matters where it is probable that the Corporation will incur a material loss and the amount can be reasonably estimated, the Corporation establishes loss. Once established, the accrual is adjusted on at least a quarterly basis as appropriate to reflect any relevant developments. For matters where a material loss is not probable or the amount of the loss cannot be estimated, no accrual is established. an accrual the for In certain cases, exposure to loss exists in excess of the accrual to the extent such loss is reasonably possible, but not probable. Management believes and estimates that the aggregate range of reasonably possible losses (with respect to those matters where such limits may be determined, in excess of amounts accrued), for current legal proceedings ranges from $0 to approximately $39 million as of December 31, 2014. For certain other cases, management cannot reasonably estimate the possible loss at this time. Any estimate involves significant the proceedings judgment, given the varying stages of them are currently in (including the fact preliminary stages), the existence of multiple defendants in several of the current proceedings whose share of liability has yet to be determined, the numerous unresolved issues in many of the proceedings, and the inherent uncertainty of the various potential proceedings. Accordingly, such management’s estimate will change from time-to-time, and actual losses may be more or less than the current estimate. that many of outcomes of and available While the final outcome of legal proceedings is inherently uncertain, based on information currently available, advice of counsel, coverage, management insurance believes that the amount it has already accrued is adequate and any incremental liability arising from the Corporation’s legal proceedings will not have a material adverse effect on the Corporation’s consolidated financial position as a whole. However, in the event of unexpected future developments, it is if possible that the ultimate resolution of these matters, 198 unfavorable, may be material to the Corporation’s consolidated financial position in a particular period. Ongoing Class Action Litigation Banco Popular de Puerto Rico (“BPPR”) and Banco Popular North America (“BPNA”) are currently defendants in various class action lawsuits: On November 21, 2012, BPNA was served with a putative class action complaint captioned Josefina Valle, et al. v. Popular Community Bank, filed in the New York State Supreme Court (New York County). Plaintiffs, existing BPNA customers, allege among other things that BPNA has engaged in unfair and deceptive acts and trade practices in connection with the assessment of overdraft fees and payment processing on consumer deposit accounts. The complaint further alleges that BPNA improperly disclosed its consumer overdraft policies and, additionally, that the overdraft rates and fees assessed by BPNA violate New York’s usury laws. The complaint seeks unspecified damages, including punitive damages, interest, disbursements, and attorneys’ fees and costs. BPNA removed the case to federal court (S.D.N.Y.) and plaintiffs subsequently filed a motion to remand the action to state court, which the Court granted on August 6, 2013. A motion to dismiss was filed on September 9, 2013. On October 25, 2013, plaintiffs filed an amended complaint seeking to limit the putative class to New York account holders. A motion to dismiss the amended complaint was filed in February 2014. In August 2014, the Court entered an order granting in part BPNA’s motion to dismiss. The sole surviving claim relates to BPNA’s item processing policy. On September 10, 2014, plaintiffs filed a motion for leave to file a second amended complaint to correct certain deficiencies noted in the court’s decision and order. BPNA subsequently filed a motion in opposition to plaintiff’s motion for leave to amend and further sought to compel arbitration. The matter has been stayed pending a ruling on such motions. Between December 2013 and January 2014, BPPR, BPNA and Popular, Inc., along with two executive officers, were served with a putative class action complaint captioned Neysha Quiles et al. v. Banco Popular de Puerto Rico et al. Plaintiffs they and others, who have been essentially alleged that employed by the Defendants as “bank tellers” and other similarly titled positions, were generally paid only for scheduled work time, rather than time actually worked. The Complaint sought to maintain a collective action under the Fair Labor Standards Act (“FLSA”) on behalf of all individuals who were employed or were currently employed by the Defendants in Puerto Rico, the Virgin Islands, New York, New Jersey, Florida, California, and Illinois as hourly paid, non-exempt, bank tellers or other similarly titled positions at any time during the past three years and alleged the following claims under the FLSA against all Defendants: (i) failure to pay overtime premiums; and (ii) that the failure to pay was willful. 199 POPULAR, INC. 2014 ANNUAL REPORT Similar claims were brought under Puerto Rico law on behalf of all individuals who were employed or are currently employed by BPPR in Puerto Rico as hourly paid, non-exempt, bank tellers or other similarly titled positions at any time during the past three years. On January 31, 2014, the Popular defendants filed an answer to the complaint. On February 24, 2014, the parties reached an agreement to dismiss the complaint against BPNA and the named BPNA executive officer without prejudice. On January 9, 2015, plaintiffs submitted a motion for conditional class certification, which BPPR opposed. On February 18, 2015, the Court entered an order whereby it granted plaintiffs’ request for conditional certification of the FLSA action. seeks damages, complaint unspecified On May 5, 2014, a putative class action captioned Nora Fernandez, et al. v. UBS, et al. was filed in the United States District Court for the Southern District of New York on behalf of investors in 23 Puerto Rico closed-end investment companies against various UBS entities, BPPR and Popular Securities. UBS Financial Services Incorporated of Puerto Rico is the sponsor and co-sponsor of all 23 funds, while BPPR was co-sponsor, together with UBS, of nine (9) of those funds. The plaintiffs allege breach of fiduciary duties, aiding and abetting breach of fiduciary duty and breach of contract against all defendants. including The disgorgement of fees and attorneys’ fees. On May 30, 2014, plaintiffs voluntarily dismissed their class action in the SDNY and on that same date, they filed a virtually identical complaint in the US District Court for the District of Puerto Rico (USDC- PR) and requested that the case be consolidated with the matter of In re: UBS Financial Services Securities Litigation, a class action currently pending before the USDC-PR in which neither BPPR nor Popular Securities are parties. The UBS defendants filed an opposition to the consolidation request and moved to transfer the case back to the SDNY on the ground that the relevant agreements between the parties contain a choice of forum clause, with New York as the selected forum. The joined this motion. By order dated Popular defendants January 30, 2015, the court denied the plaintiffs’ motion to consolidate. The motion to transfer remains pending to date. On May 6, 2014, a putative class action captioned David Alvarez, et al. v. Banco Popular North America was filed in the Superior Court of the State of California for the County of Los Angeles. Plaintiffs generally assert that BPNA has engaged in purported violations of §2954.8(a) of the California Civil Code and §17200 et seq. of the California Business Professions Code, which allegedly require financial institutions that make loans secured by certain types of real property located within the state of California to pay interest to borrowers on impound account deposits at a statutory rate of not less than two percent (2%). Plaintiffs maintain that BPNA has not paid interest on such deposits and demand that BPNA be enjoined from engaging in further violations of these provisions and pay an unspecified amount of damages sufficient to repay the unpaid interest on these deposits. PHH Corporation, which acquired the loans at issue in this complaint, has tentatively agreed to indemnify and tender a defense on behalf of BPNA. The court recently entered an order staying all substantive activity, including any responsive pleading, until the initial conference scheduled for August 22, 2014. The parties have subsequently reached an agreement in principle. The settlement terms - which do not contemplate a payment by BPNA - are currently being negotiated. On October 7, 2014, BPNA was served with a putative class action complaint captioned Josefina Valle, et al. v. BPNA, filed in the United States District Court for the Southern District of New York. The complaint names the same plaintiffs who filed the above-described overdraft fee class action suit. Plaintiffs allege, among other things, that BPNA engages in unfair and deceptive acts and trade practices relative to the assessment of ATM fees on ATM transactions initialed at Allpoint branded ATMs. The complaint further alleges that BPNA is in violation of the Electronic Fund Transfer Act and Regulation E with respect to ATM fees. On December 2, 2014, BPNA filed a motion to compel arbitration, which plaintiffs opposed. On February 2, 2015, the court entered an opinion and order granting defendant’s motion to compel arbitration. On February 23, 2015, plaintiffs filed a notice of appeal with the United States Court of Appeals the Second Circuit demanding that the court reverse the district court’s ruling. for On October 3, 2014, BPNA received notice of a potential class action submitted by two former assistant branch managers. The purported action alleges various wage and hour violations arising from what they contend is an improper job classification under the FLSA and applicable state law equivalents. In December 2014, BPNA accepted plaintiffs’ offer to mediate this dispute, and mediation took place on February 19, 2015. As a result of the mediation, the parties entered into an agreement in principle to settle this claim. Under the terms of the agreement in principle, subject to certain customary conditions including court approval of a final settlement agreement in consideration for the full settlement and release of all defendants, defendant will pay the amount of $800,000. Other Matters The volatility in prices and declines in value that Puerto Rico municipal bonds and closed-end investment companies that invest primarily in Puerto Rico municipal bonds have experienced since August 2013 have led to regulatory inquiries, customer complaints and arbitrations for most broker-dealers in Puerto Rico, including Popular Securities LLC, a wholly owned subsidiary of the Corporation (“Popular Securities”). Popular Securities has received customer complaints and is named as a respondent (among other broker-dealers) in 39 arbitration proceedings with aggregate claimed damages of approximately $99 million, including one arbitration with claimed damages of $78 million in which two other Puerto Rico broker-dealers are co-defendants. The proceedings are in their early stages and it is the view of the Corporation that Popular Securities has meritorious defenses to the claims asserted. An adverse result in the matters described above could have a material and adverse effect on Popular Securities. in February 2014, Also, as previously disclosed, the Financial Industry Regulatory Authority (“FINRA”) notified Popular Securities that it was conducting an examination of broker-dealers in Puerto Rico, including Popular Securities, with respect to the sale of Puerto Rico municipal bonds and invest primarily in closed-end investment companies that Puerto Rico municipal bonds. In December 2014, FINRA and Popular Securities reached a definitive agreement, in the form of an Acceptance, Waiver and Consent (“AWC”) Letter, in connection with the latter’s purported violations of NASD Rules 3010(a) and (B) and FINRA Rule 2010. Without admitting or denying those allegations, Popular Securities agreed to the payment of a $125,000 fine. to the terms of Other Significant Proceedings As described under “Note 13 - FDIC loss share asset and true- up payment obligation”, in connection with the Westernbank FDIC-assisted transaction, on April 30, 2010, BPPR entered into loss share agreements with the FDIC with respect to the covered loans and other real estate owned that it acquired in the transaction. Pursuant the loss share agreements, the FDIC’s obligation to reimburse BPPR for losses with respect to covered assets begins with the first dollar of loss incurred. The FDIC reimburses BPPR for 80% of losses with respect to covered assets, and BPPR reimburses the FDIC for 80% of recoveries with respect to losses for which the FDIC paid 80% reimbursement under those loss share agreements. The and conditions regarding the management of the covered assets that BPPR must follow in order to receive reimbursement for losses from the FDIC. BPPR believes that it has complied with such terms and conditions. The loss share agreement applicable to the commercial late stage real-estate-collateral-dependent loans described below provides for loss sharing by the FDIC through the quarter ending June 30, 2015 and for reimbursement to the FDIC through the quarter ending June 30, 2018. contain specific agreements terms share loss For the quarters ended June 30, 2010 through March 31, for loss-share claims 2012, BPPR received reimbursement including charge-offs for certain submitted to the FDIC, commercial late stage real-estate-collateral-dependent loans and OREO calculated in accordance with BPPR’s charge-off policy for non-covered assets. When BPPR submitted its shared-loss claim in connection with the June 30, 2012 quarter, however, the FDIC refused to reimburse BPPR for a portion of the claim because of a difference related to the methodology for the computation of charge-offs for certain commercial late stage real-estate-collateral-dependent loans and OREO. In accordance 200 with the terms of the commercial loss share agreement, BPPR applied a methodology for charge-offs for late stage real-estate- collateral-dependent loans that conforms to its regulatory supervisory criteria and is calculated in accordance with BPPR’s charge-off policy for non-covered assets. The FDIC stated that it believed that BPPR should use a different methodology for those charge-offs. Notwithstanding the FDIC’s to reimburse BPPR for certain shared-loss claims, BPPR had continued to calculate for quarters subsequent to June 30, 2012 in accordance with its charge-off policy for non-covered assets. shared-loss refusal claims the commercial arbitration rules of BPPR’s loss share agreements with the FDIC specify that disputes can be submitted to arbitration before a review board under the American Arbitration Association. On July 31, 2013, BPPR filed a statement of claims with the American Arbitration Association requesting that the review board determine certain matters relating to the loss-share claims under its commercial loss share agreement with the FDIC, including that the review board award BPPR the amounts owed under its unpaid quarterly certificates. The statement of claim also included requests for reimbursement of certain valuation adjustments for discounts to appraised values, costs to sell troubled assets and other items. The review board was comprised of one arbitrator appointed by BPPR, one arbitrator appointed by the FDIC and a third arbitrator selected by agreement of those arbitrators. for settlement provides On October 17, 2014, BPPR and the FDIC settled all claims and counterclaims that had been submitted to the review an agreed valuation board. The methodology for reimbursement of charge-offs for late stage real- estate-collateral-dependent loans and resulting OREO. Although the terms of the settlement could delay the timing of reimbursement of certain loss-share claims from the FDIC, the settlement is not expected to have a material adverse impact on BPPR’s current estimate of expected reimbursable losses for the covered portfolio through the end of the commercial loss share agreement in the quarter ending June 30, 2015. As of December 31, 2014, BPPR had unreimbursed losses and expenses of $299.4 million under the commercial loss share agreement with the FDIC. On January 16, 2015, BPPR received reimbursement of $130.2 million from the FDIC covering claims filed prior to December 31, 2014. Taking into consideration this payment and claims submitted through that date, the total unreimbursed losses totaled $169.2 million, of which $30.1 million was submitted to the FDIC on January 30, 2015. BPPR continues to work on processing claims, including those which had previously not been reimbursed by the FDIC and expects to complete this process before the expiration of BPPR’s ability to submit claims under the commercial loss share agreement in the quarter ending June 30, 2015. After giving effect to the claim submitted on January 30, 2015, the amount of claims pending to be submitted for reimbursement to the FDIC amounted to $139.1 million. 201 POPULAR, INC. 2014 ANNUAL REPORT loans the FDIC notified BPPR that Pending Disputes with the FDIC On November 25, 2014, it (a) would not reimburse BPPR under the commercial loss share agreement for a $66.6 million loss claim on eight related real estate that BPPR restructured and consolidated (collectively, the “Disputed Asset”), and (b) would no longer treat the Disputed Asset as a “Shared-Loss Asset” under the commercial loss share agreement. The FDIC alleged that BPPR’s restructure and modification of the underlying loans did not constitute a “Permitted Amendment” under the commercial loss share agreement, thereby causing the bank to breach Article III of the commercial loss share agreement. BPPR disagrees with the FDIC’s determinations relating to the Disputed Asset, and accordingly, on December 19, 2014, delivered to the FDIC a notice of dispute under the commercial loss share agreement. The commercial loss share agreement provides that certain disputes be submitted to arbitration before a review board, to include two party-appointed members, under the commercial arbitration rules of the American Arbitration Association. BPPR and the FDIC have agreed that, if they are not able to resolve their disputes through negotiation prior to March 13, 2015, they will name their respective party-appointed members of the review board on March 16, 2015. the Disputed Asset concerning To the extent we are not able to successfully resolve this matter through negotiation or the arbitration process described above, a write-off in the amount of approximately $53.3 million of the aforementioned pending claims would be recorded. In addition, in November and December 2014, BPPR proposed separate portfolio sales to the FDIC. The FDIC has refused to consent to either sale, stating that those sales did not represent best efforts to maximize collections on Shared-Loss Assets under the commercial loss share agreement. We dispute that characterization, and negotiations are continuing. given that we will receive reimbursement from the FDIC with respect to the foregoing items, which could require us to make a material adjustment to the value of our loss share asset and the related true up payment obligation to the FDIC and could have a material adverse effect on our financial results for the period in which such adjustment is taken. No assurance can be The loss share agreement applicable to single-family residential mortgage loans provides for FDIC loss sharing and BPPR reimbursement to the FDIC for ten years (ending on June 30, 2020), and the loss share agreement applicable to commercial and other assets provides for FDIC loss sharing and BPPR reimbursement to the FDIC for five years (ending on June 30, 2015), with additional recovery sharing for three years thereafter. As of December 31, 2014, the carrying value of of which covered approximately 64% pertained to commercial loans, 3% to construction loans, 32% to mortgage loans and 1% to consumer approximated billion, loans $2.5 loans. To the extent that estimated losses on covered loans are not realized before the expiration of the applicable loss share agreement, such losses would not be subject to reimbursement from the FDIC and, accordingly, would require us to make a material reduction in the value of our loss share asset and the related true up payment obligation to the FDIC and could have a material adverse effect on our financial results for the period in which such adjustment is taken. Note 32 - Non-consolidated variable interest entities The Corporation is involved with four statutory trusts which it established to issue trust preferred securities to the public. Also, it established Popular Capital Trust III for the purpose of exchanging Series C preferred stock shares held by the U.S. Treasury for trust preferred securities issued by this trust. These trusts are deemed to be variable interest entities (“VIEs”) since the equity investors at risk have no substantial decision- making rights. The Corporation does not hold any variable interest in the trusts, and therefore, cannot be the trusts’ primary beneficiary. Furthermore, the Corporation concluded that it did not hold a controlling financial interest in these trusts since the decisions of the trusts are predetermined through the trust documents and the guarantee of the trust preferred securities is irrelevant since in substance the sponsor is guaranteeing its own debt. Also, the Corporation is involved with various special purpose entities mainly in guaranteed mortgage securitization transactions, including GNMA, FNMA and FHLMC. These special purpose entities are deemed to be VIEs since they lack equity investments at risk. The Corporation’s continuing involvement in these guaranteed loan securitizations includes owning certain beneficial interests in the form of securities as well as the servicing rights retained. The Corporation is not required to provide additional financial support to any of the variable interest entities to which it has transferred the financial assets. The mortgage-backed securities, to the extent retained, are classified in the Corporation’s consolidated statements of financial condition as available-for-sale or trading securities. The Corporation concluded that, essentially, these entities (FNMA, GNMA, and FHLMC) control the design of their respective VIEs, dictate the quality and nature of the collateral, require the underlying insurance, set the servicing standards via the servicing guides and can change them at will, and can remove a primary servicer with cause, and without cause in the case of FNMA and FHLMC. Moreover, through their guarantee obligations, agencies (FNMA, GNMA, and FHLMC) have the obligation to absorb losses that could be potentially significant to the VIE. should be made ASU 2009-17 requires that an ongoing primary beneficiary assessment the Corporation is the primary beneficiary of any of the VIEs it is involved with. The conclusion on the assessment of these trusts and guaranteed mortgage securitization transactions has not to determine whether their initial changed since evaluation. The Corporation concluded that it is still not the primary beneficiary of these required to be VIEs, and therefore, statements at consolidated in the Corporation’s December 31, 2014. these VIEs are not financial The Corporation holds variable interests in these VIEs in the form of agency mortgage-backed securities and collateralized mortgage obligations, including those securities originated by the Corporation and those acquired from third parties. Additionally, the Corporation holds agency mortgage-backed securities, agency collateralized mortgage obligations and private label collateralized mortgage obligations issued by third party VIEs in which it has no other form of continuing involvement. Refer to Note 35 to the consolidated financial statements for additional information on the debt securities outstanding at December 31, 2014 and 2013, which are classified as available-for-sale and trading securities in the Corporation’s consolidated statement of financial condition. In addition, the Corporation may retain the right to service the in those government-sponsored special transferred loans purpose entities (“SPEs”) and may also purchase the right to service loans in other government-sponsored SPEs that were transferred to those SPEs by a third-party. Pursuant to ASC the Corporation the servicing fees that Subtopic 810-10, receives for its servicing role are considered variable interests in the VIEs since the servicing fees are subordinated to the principal and interest first needs to be paid to the mortgage-backed securities’ investors and to the guaranty fees that need to be paid to the federal agencies. that The following table presents the carrying amount and classification of the assets related to the Corporation’s variable interests in non-consolidated VIEs and the maximum exposure to loss as a result of the Corporation’s involvement as servicer with non-consolidated VIEs at December 31, 2014 and 2013. (In thousands) Assets Servicing assets: Mortgage servicing rights Total servicing assets Other assets: Servicing advances Total other assets Total assets Maximum exposure to loss 2014 2013 $103,828 $113,437 $103,828 $113,437 $ 8,974 $ 1,416 $ 8,974 $ 1,416 $112,802 $114,853 $112,802 $114,853 The size of in which the the non-consolidated VIEs, Corporation has a variable interest in the form of servicing fees, measured as the total unpaid principal balance of the loans, amounted to $9.0 billion at December 31, 2014 ($9.2 billion at December 31, 2013). 202 Maximum exposure to loss represents the maximum loss, under a worst case scenario, that would be incurred by the Corporation, as servicer for the VIEs, assuming all loans serviced are delinquent and that the value of the Corporation’s interests and any associated collateral declines to zero, without any consideration of recovery. The Corporation determined that the maximum exposure to loss includes the fair value of the MSRs and the assumption that the servicing advances at December 31, 2014 and 2013 will not be recovered. The agency debt securities are not the maximum exposure to loss since they are guaranteed by the related agencies. included as part of In September of 2011, BPPR sold construction and commercial real estate loans with a fair value of $148 million, and most of which were non-performing, to a newly created joint venture, PRLP 2011 Holdings, LLC. The joint venture is majority owned by Caribbean Property Group (“CPG”), Goldman Sachs & Co. and East Rock Capital LLC. The joint venture was created for the limited purpose of acquiring the loans from BPPR; servicing the loans through a third-party servicer; ultimately working out, resolving and/or foreclosing the loans; and indirectly owning, operating, constructing, developing, leasing and selling any real properties acquired by foreclosure, the joint venture through deed in lieu of foreclosure, or by resolution of any loan. BPPR provided financing to the joint venture for the acquisition of the loans in an amount equal to the sum of 57% of the purchase price of the loans, or $84 million, and $2 million of closing costs, for a total acquisition loan of $86 million (the “acquisition loan”). The acquisition loan has a 5- year maturity and bears a variable interest at 30-day LIBOR plus 300 basis points and is secured by a pledge of all of the acquiring entity’s assets. In addition, BPPR provided the joint venture with a non-revolving advance facility (the “advance facility”) of $68.5 million to cover unfunded commitments and costs-to-complete related to certain construction projects, and a revolving working capital line (the “working capital line”) of $20 million to fund certain operating expenses of the joint venture. Cash proceeds received by the joint venture are first used to cover debt service payments for the acquisition loan, advance facility, and the working capital line described above which must be paid in full before proceeds can be used for other purposes. The distributable cash proceeds are determined based on a pro-rata basis in accordance with the respective equity ownership percentages. BPPR’s equity interest in the joint venture ranks pari-passu with those of other parties involved. As part of the transaction executed in September 2011, BPPR received $ 48 million in cash and a 24.9% equity interest in the joint venture. The Corporation is not required to provide any other financial support to the joint venture. BPPR accounted for this transaction as a true sale pursuant to ASC Subtopic 860-10 and thus recognized the cash received, its equity investment in the joint venture, and the acquisition 203 POPULAR, INC. 2014 ANNUAL REPORT loan provided to the joint venture and derecognized the loans sold. The Corporation has determined that PRLP 2011 Holdings, LLC is a VIE but it is not the primary beneficiary. All decisions are made by CPG (or an affiliate thereof) (the “Manager”), except for certain limited material decisions which would require the unanimous consent of all members. The Manager is authorized to execute and deliver on behalf of the joint venture any and all documents, contracts, certificates, agreements and instruments, and to take any action deemed necessary in the benefit of the joint venture. Also, the Manager delegates the day-to-day management and servicing of the loans to CPG Island Servicing, LLC, an affiliate of CPG, which contracted a sub-servicer, but has the responsibility to oversee such servicing responsibilities. The Corporation holds variable interests in this VIE in the form of the 24.9% equity interest and the financing provided to the joint venture. The equity interest is accounted for using the equity method of accounting pursuant to ASC Subtopic 323-10. The initial fair value of the Corporation’s equity interest in the joint venture was determined based on the fair value of the loans and real estate owned transferred to the joint venture of $148 million which represented the purchase price of the loans agreed by the parties and was an arm’s-length transaction between market participants in accordance with ASC Topic 820, reduced by the acquisition loan provided by BPPR to the joint venture, for a total net equity of $63 million. Accordingly, the 24.9% equity interest held by the Corporation was valued at $16 million. Thus, the fair value of the equity interest is considered a Level 2 fair value measurement since the inputs were based on observable market inputs. The following table presents the carrying amount and classification of the assets related to the Corporation’s variable interests in the non-consolidated VIE, PRLP 2011 Holdings, LLC and its maximum exposure to loss at December 31: (In thousands) Assets Loans held-in-portfolio: Acquisition loan Working capital line advances Advance facility advances Total loans held-in-portfolio Accrued interest receivable Other assets: 2014 2013 $ – 426 4,226 $ 3,233 390 16,024 $ 4,652 $19,647 $ 22 $ 65 Investment in PRLP 2011 Holdings LLC $23,650 $26,596 Total assets Deposits Total liabilities Total net assets Maximum exposure to loss $28,324 $46,308 $ (2,685) $ (3,621) $ (2,685) $ (3,621) $25,639 $42,687 $25,639 $42,687 The Corporation determined that the maximum exposure to loss under a worst case scenario at December 31, 2014 would be not recovering the carrying amount of the acquisition loan, the advances on the advance facility and working capital line, if any, and the equity interest held by the Corporation, net of the deposits. of status, commercial On March 25, 2013, BPPR completed a sale of assets with a book value of $509.0 million, of which $500.6 million were in non-performing and comprised construction loans, and commercial and single family real estate owned, with a combined unpaid principal balance on loans and appraised value of other real estate owned of approximately $987.0 million to a newly created joint venture, PR Asset Portfolio 2013-1 International, LLC. The joint venture is majority owned by Caribbean Property Group LLC (“CPG”) and certain affiliates of Perella Weinberg Partners’Asset Based Value Strategy. The joint venture was created for the limited purpose of acquiring the loans from BPPR; servicing the loans through a third-party servicer; ultimately working out, resolving and/or foreclosing the loans; and indirectly owning, operating, constructing, developing, leasing and selling any real properties acquired by the joint venture through deed in lieu of foreclosure, foreclosure, or by resolution of any loan. BPPR provided financing to the joint venture for the acquisition of the assets in an amount equal to the sum of 57% of the purchase price of the assets, and closing costs, for a total acquisition loan of $182.4 million (the “acquisition loan”). The acquisition loan has a 5-year maturity and bears a variable interest at 30-day LIBOR plus 300 basis points and is secured by a pledge of all of the acquiring entity’s assets. In addition, BPPR provided the joint venture with a non-revolving advance facility (the “advance facility”) of $35.0 million to cover unfunded commitments and costs-to-complete related to certain construction projects, and a revolving working capital line (the “working capital line”) of $30.0 million to fund certain operating expenses of the joint venture. Cash proceeds received by the joint venture are first used to cover debt service payments for the acquisition loan, advance facility, and the working capital line described above which must be paid in full before proceeds can be used for other purposes. The distributable cash proceeds are determined based on a pro-rata basis in accordance with the respective equity ownership percentages. BPPR’s equity interest in the joint venture ranks pari-passu with those of other parties involved. As part of the transaction executed in March 2013, BPPR received $92.3 million in cash and a 24.9% equity interest in the joint venture. The Corporation is not required to provide any other financial support to the joint venture. BPPR accounted for this transaction as a true sale pursuant to ASC Subtopic 860-10 and thus recognized the cash received, its equity investment in the joint venture, and the acquisition loan provided to the joint venture and derecognized the loans and real estate owned sold. The Corporation has determined that PR Asset Portfolio 2013-1 International, LLC is a VIE but the Corporation is not the primary beneficiary. All decisions are made by CPG (or an affiliate thereof) (the “Manager”), except for certain limited material decisions which would require the unanimous consent of all members. The Manager is authorized to execute and deliver on behalf of the joint venture any and all documents, contracts, certificates, agreements and instruments, and to take any action deemed necessary in the benefit of the joint venture. Also, the Manager delegates the day-to-day management and servicing of to PR Asset Portfolio Servicing the loans International, LLC, an affiliate of CPG. The initial fair value of the Corporation’s equity interest in the joint venture was determined based on the fair value of the loans and real estate owned transferred to the joint venture of $306 million which represented the purchase price of the loans agreed by the parties and was an arm’s-length transaction between market participants in accordance with ASC Topic 820, reduced by the acquisition loan provided by BPPR to the for a total net equity of $124 million. joint venture, Accordingly, the 24.9% equity interest held by the Corporation was valued at $31 million. Thus, the fair value of the equity interest is considered a Level 2 fair value measurement since the inputs were based on observable market inputs. The Corporation holds variable interests in this VIE in the form of the 24.9% equity interest (the “Investment in PR Asset Portfolio 2013-1 International, LLC”) and the financing provided to the joint venture. The equity interest is accounted for under the equity method of accounting pursuant to ASC Subtopic 323-10. The following table presents the carrying amount and classification of related to the the assets and liabilities Corporation’s variable interests in the non-consolidated VIE, PR Asset Portfolio 2013-1 International, LLC, and its maximum exposure to loss at December 31, 2014 and December 31, 2013. (In thousands) Assets Loans held-in-portfolio: Acquisition loan Advances under the working capital line Advances under the advance facility Total loans held-in-portfolio Accrued interest receivable Other assets: Investment in PR Asset Portfolio 2013-1 International, LLC Total assets Deposits Total liabilities Total net assets Maximum exposure to loss December 31, 2014 December 31, 2013 $ 97,193 $157,660 990 12,460 $110,643 $ 314 $ 31,374 $142,331 $ (12,960) $ (12,960) $129,371 $129,371 1,196 1,427 $160,283 $ 436 $ 30,478 $191,197 $ (20,808) $ (20,808) $170,389 $170,389 204 The Corporation determined that the maximum exposure to loss under a worst case scenario at December 31, 2014 would be not recovering the carrying amount of the acquisition loan, the advances on the advance facility and working capital line, if any, and the equity interest held by the Corporation, net of deposits. Note 33 - Derivative instruments and hedging activities The use of derivatives the incorporated as part of is Corporation’s overall interest rate risk management strategy to minimize significant unplanned fluctuations in earnings and cash flows that are caused by interest rate volatility. The Corporation’s goal is to manage interest rate sensitivity by modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities so that the net interest income is not materially affected by movements in interest rates. The Corporation uses derivatives in its trading activities to facilitate customer transactions, and as a means of risk management. As a result of interest rate fluctuations, hedged fixed and variable interest rate assets and liabilities will appreciate or depreciate in fair value. The effect of this unrealized appreciation or depreciation is expected to be substantially offset by the Corporation’s gains or losses on the derivative instruments that are linked to these hedged assets and liabilities. As a matter of policy, the Corporation does not use highly leveraged derivative instruments for interest rate risk management. the fair value of By using derivative instruments, the Corporation exposes itself to credit and market risk. If a counterparty fails to fulfill its performance obligations under a derivative contract, the Corporation’s credit risk will equal the derivative asset. Generally, when the fair value of a derivative contract is positive, this indicates that the counterparty owes risk for the the Corporation, Corporation. To manage the risk, the Corporation deals with counterparties of good credit standing, enters into master netting agreements whenever possible and, when appropriate, obtains collateral. On the other hand, when the fair value of a derivative contract the Corporation owes the counterparty and, therefore, the fair value of derivatives liabilities incorporates nonperformance risk or the risk that the obligation will not be fulfilled. thus creating a repayment is negative, level of credit as to the risk The credit attributed required by the counterparty’s nonperformance risk is incorporated in the fair value of the derivatives. Additionally, fair value measurements guidance, the fair value of the Corporation’s own credit standing is considered in the fair value of the derivative liabilities. During the year ended December 31, 2014, inclusion of the credit risk in the fair value of the derivatives resulted in loss of $0.1 million (2013 - gain of $ 0.5 million; 2012 - loss of $ 0.5 million) standing from the Corporation’s adjustment and a gain of $1.2 million (2013 - gain of $1.0 million; 2012 - gain of $3.4 million) from the assessment of the counterparties’ credit risk. credit 205 POPULAR, INC. 2014 ANNUAL REPORT Market risk is the adverse effect that a change in interest rates, currency exchange rates, or implied volatility rates might have on the value of a financial instrument. The Corporation manages the market risk associated with interest rates and, to a limited extent, with fluctuations in foreign currency exchange rates by establishing and monitoring limits for the types and degree of risk that may be undertaken. Pursuant to the Corporation’s accounting policy, the fair value of derivatives is not offset with the amounts for the right to reclaim cash collateral or the obligation to return cash collateral. At December 31, 2014, the amount recognized for to reclaim cash collateral under master netting the right agreements was $15 million and no amount was recognized for the obligation to return cash collateral (December 31, 2013 - $ 19 million and no amount, respectively). covenants tied to the Certain of the Corporation’s derivative instruments include financial corresponding banking subsidiary’s well-capitalized status and credit rating. These agreements could require exposure collateralization, early termination or both. The aggregate fair value of all derivative instruments with contingent features that were in a liability position at December 31, 2014 was $9 million (December 31, 2013 - $ 15 million). Based on the contractual obligations established on these derivative instruments, the Corporation has fully collateralized these positions by pledging collateral of $15 million at December 31, 2014 (December 31, 2013 - $ 19 million). Financial instruments designated as cash flow hedges or non-hedging derivatives outstanding at December 31, 2014 and December 31, 2013 were as follows: (In thousands) Derivatives designated as hedging instruments: Forward contracts Total derivatives designated as hedging instruments Derivatives not designated as hedging instruments: Forward contracts Forward contracts Interest rate swaps Foreign currency forward contracts Interest rate caps Indexed options on deposits Bifurcated embedded options Notional amount Derivative assets Derivative liabilities At December 31, 2013 2014 Statement of condition classification Fair value at December 31, 2013 2014 Statement of condition classification Fair value at December 31, 2013 2014 $ $ $ $ 92,850 $ 92,850 $ $ – – Other assets $ – – 237,576 745 96,046 86,712 83,244 $129,600 Trading account securities Other assets Other assets Other assets Other assets Other assets – 152,800 283,440 – 97,338 85,729 83,087 – – $ $ – Other liabilities – $ $ 551 551 $ $ – – – $ 83 Other liabilities $ – $ 20 – 8,418 16 320 16,608 – 658 Other liabilities 13,289 Other liabilities – Other liabilities 1,192 Other liabilities 19,571 – Interest – bearing deposits – 9,102 11 320 – 13,048 25 15,196 – 1,192 – 15,945 Total derivatives not designated as hedging instruments: $504,323 $831,994 Total derivative assets and liabilities $597,173 $831,994 $25,362 $34,793 $25,362 $34,793 $22,481 $32,378 $23,032 $32,378 206 Cash Flow Hedges The Corporation utilizes forward contracts to hedge the sale of mortgage-backed securities with duration terms over one month. Interest rate forwards are contracts for the delayed delivery of securities, which the seller agrees to deliver on a specified future date at a specified price or yield. These forward contracts are hedging a forecasted transaction and thus qualify for cash flow hedge accounting. Changes in the fair value of the derivatives are recorded in other comprehensive income (loss). The amount included in accumulated other comprehensive income (loss) corresponding to these forward contracts is expected to be reclassified to earnings in the next twelve months. These contracts have a maximum remaining maturity of 82 days at December 31, 2014. For cash flow hedges, net gains (losses) on derivative contracts that are reclassified from accumulated other comprehensive income (loss) to current period earnings are included in the line item in which the hedged item is recorded and during the period in which the forecasted transaction impacts earnings, as presented in the tables below. Amount of net gain (loss) recognized in OCI on derivatives (effective portion) $ (6,613) $ (6,613) (In thousands) Forward contracts Total Amount of net gain (loss) recognized in OCI on derivatives (effective portion) $ 2,286 $ 2,286 (In thousands) Forward contracts Total Amount of net gain (loss) recognized in OCI on derivatives (effective portion) $(13,509) $(13,509) (In thousands) Forward contracts Total Year ended December 31, 2014 Classification in the statement of operations of the net gain (loss) reclassified from AOCI into income (effective portion, ineffective portion, and amount excluded from effectiveness testing) Mortgage banking activities Amount of net gain (loss) reclassified from AOCI into income (effective portion) Amount of net gain (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing) $ (6,091) $ (6,091) $(109) $(109) Year ended December 31, 2013 Classification in the statement of operations of the net gain (loss) reclassified from AOCI into income (effective portion, ineffective portion, and amount excluded from effectiveness testing) Mortgage banking activities Amount of net gain (loss) reclassified from AOCI into income (effective portion) Amount of net gain (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing) $ 1,839 $ 1,839 $ 577 $ 577 Year ended December 31, 2012 Classification in the statement of operations of the net gain (loss) reclassified from AOCI into income (effective portion, ineffective portion, and amount excluded from effectiveness testing) Mortgage banking activities Amount of net gain (loss) reclassified from AOCI into income (effective portion) Amount of net gain (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing) $14,119 $14,119 $ (44) $ (44) Fair Value Hedges At December 31, 2014 and 2013, there were no derivatives designated as fair value hedges. 207 POPULAR, INC. 2014 ANNUAL REPORT Non-Hedging Activities For the year ended December 31, 2014, the Corporation recognized a loss of $ 8.5 million (2013 - gain of $ 11.1 million; 2012 - loss of $ 4.8 million) related to its non-hedging derivatives, as detailed in the table below. (In thousands) Forward contracts Interest rate swaps Foreign currency forward contracts Foreign currency forward contracts Indexed options on deposits Bifurcated embedded options Total Amount of Net Gain (Loss) Recognized in Income on Derivatives Classification of Net Gain (Loss) Recognized in Income on Derivatives Year ended December 31, 2014 Year ended December 31, 2013 Year ended December 31, 2012 Mortgage banking activities Other operating income Other operating income Interest expense Interest expense Interest expense $(10,876) 1,223 8 5 2,815 (1,666) $ (8,491) $ 9,039 965 18 (1) 5,296 (4,230) $11,087 $(8,046) 2,953 31 (5) 1,965 (1,735) $(4,837) Forward Contracts The Corporation has forward contracts to sell mortgage-backed securities, which are accounted for as trading derivatives. Changes in their fair value are recognized in mortgage banking activities. Interest Rates Swaps and Foreign Currency and Exchange Rate Commitments In addition to using derivative instruments as part of its interest rate risk management strategy, the Corporation also utilizes derivatives, such as interest rate swaps and foreign exchange forward contracts, in its capacity as an intermediary on behalf of its customers. The Corporation minimizes its market risk and credit risk by taking offsetting positions under the same terms and monitoring procedures. Market value changes on these swaps and other derivatives are recognized in earnings in the period of change. and conditions with credit approvals limit Interest Rate Caps and Floors The Corporation enters into interest rate caps and floors as an intermediary on behalf of its customers and simultaneously takes offsetting positions under the same terms and conditions, thus minimizing its market and credit risks. Index and Embedded Options The Corporation offers certain customers’ deposits whose return are tied to the performance of the Standard and Poor’s (“S&P 500”) stock market indexes, and other deposits whose returns are tied to other stock market indexes or other equity securities performance. The Corporation bifurcated the related options embedded within these customers’ deposits from the host contract in accordance with ASC Subtopic 815 - 15. In order to limit the Corporation’s exposure to changes in these indexes, index options which returns are tied to the same indexes from major broker dealer companies in the over the counter market. Accordingly, the the Corporation purchases embedded options and the related index options are marked-to- market through earnings. Note 34 - Related party transactions The Corporation grants loans to its directors, executive officers and certain related individuals or organizations in the ordinary course of business. The activity and balance of these loans were as follows: (In thousands) Balance at December 31, 2012 New loans Payments Other changes Balance at December 31, 2013 New loans Payments Other changes Executive Officers Directors $ 4,947 239 (301) 24,828 $29,713 1,163 (1,318) 4,529 $108,207 40,827 (51,720) (30,473) $ 66,841 74,327 (17,161) – Total $113,154 41,066 (52,021) (5,645) $ 96,554 75,490 (18,479) 4,529 Balance at December 31, 2014 $34,087 $124,007 $158,094 The amounts reported as “other changes” in the activity for 2013 include items such as changes in the status of those who are considered related parties and a reclassification of a loan acquired as part of the Westernbank acquisition with a carrying value of $25 million as a loan related to an executive officer instead of to a director. This loan was previously classified as related to a director because both a former director (who ceased being a director in 2013) and an executive officer were related parties of the borrower entity. 31, 2014, At December the Corporation’s banking subsidiaries held deposits from related parties, excluding Inc. (“EVERTEC”) amounting to $ 24 million EVERTEC, (2013 - $ 20 million). From time to time, the Corporation, in the ordinary course of business, obtains services from related parties or makes contributions to non-profit organizations that have some association with the Corporation. Management believes the terms of such arrangements are consistent with arrangements entered into with independent third parties. During 2014, in the ordinary the Corporation engaged, course of business, the legal services of a law firm in Puerto Rico, in which the Secretary of the Board of Directors of Popular, Inc. acted as senior counsel or as partner. The fees paid to this law firm for the year 2014 amounted to approximately $0.7 million (2013 - $1.1 million). During 2014, the Corporation also engaged, in the ordinary course of business, the legal services of a law firm in Puerto Rico, of which the Corporation’s Executive Vice President and Chief Legal Officer and Secretary of the Board of Directors was a member until September 2014. The fees paid to this law firm for fiscal year 2014 amounted to approximately $3.8 million, which include $0.6 million paid by the Corporation’s clients in connection with commercial loan transactions. In addition, this law firm leases office space in the Corporation’s headquarters building, which is owned by BPPR, and engages BPPR as custodian of its retirement plan. During to BPPR of law firm made lease payments 2014, approximately $0.7 million and paid BPPR approximately $0.1 million for its services as custodian. The rent and trustee fees paid by this law firm were at market rates. this For the year ended December 31, 2014, the Corporation made contributions of approximately $0.7 million to Banco Popular Foundations, which are not-for-profit corporations dedicated to philanthropic work (2013 - $0.7 million). In June 2006, family members of a director of the Corporation, obtained a $0.8 million mortgage loan from Popular Mortgage, Inc., secured by a residential property. The director was not a director of the Corporation at the time the loan was made. In March, 2012 the loan was restructured under the Corporation’s loss mitigation program. The balance due on the loan at December 31, 2014 was approximately $0.9 million. The brother-in-law of an Executive Vice President of the Corporation, became delinquent on a series of commercial loans granted to him by BPPR. The aggregate amount of principal owed on such loans as of December 31, 2014 was approximately $0.7 million. Certain of the loans are secured by real estate and BPPR commenced collection and foreclosure proceedings in February 2014. The Bank has charged-off an aggregate amount of approximately $0.4 million in connection with these loans. The book value of these loans at December 31, 2014 was of $0.3 million. The same brother-in law of the the Corporation, also has a Executive Vice President of participation in two entities, each of which has a real estate development loan with BPPR. The first loan is to an entity in which he owns a 50% equity interest. The loan is payable from the proceeds of the sale of residential units. The outstanding balance on the loan as of December 31, 2014 was approximately (In thousands) Equity investment in EVERTEC 208 $0.1 million. The second loan is to an entity in which this individual owns a 33% equity interest and which is secured with undeveloped land. The outstanding balance on the loan as of December 31, 2014 was $0.4 million. On April 10, 2014, BPPR sold two undeveloped parcels of land, which had been foreclosed by BPPR, for the aggregate price of $2.7 million to an entity controlled by a shareholder of the Corporation. On June 30, 2014, BPPR sold a parcel of land, which had been foreclosed by BPPR, to an entity controlled by this same shareholder of the Corporation for $5.3 million. These sales was made on terms and conditions similar to the sale to unaffiliated parties of other real estate assets that have been foreclosed by BPPR and are held for sale. On June 5, 2014, certain borrowers of BPPR sold five real estate properties to affiliates of this same shareholder of the Corporation, as part of a settlement agreement that was executed by said borrowers with BPPR. As part of this settlement, BPPR received payments amounting to $16.7 million from the borrowers and guarantors of the loans that were settled. The settlement of these loans was made on terms and conditions similar to the settlement of other non-performing BPPR in previously transactions where only unaffiliated parties were involved. settled loans by The Corporation has had loan transactions with the Corporation’s directors and officers, and with their associates, and proposes to continue such transactions in the ordinary course of its business, on substantially the same terms, including interest rates and collateral, as those prevailing for comparable loan transactions with third parties, except as disclosed above. Except as discussed above, the extensions of credit have not involved and do not currently involve more than normal risks of collection or present other unfavorable features. in EVERTEC, various processing Related party transactions with EVERTEC, as an affiliate Inc. The Corporation has an investment (“EVERTEC”), which provides and information technology services to the Corporation and its subsidiaries and gives BPPR access to the ATH network owned and operated by EVERTEC. As of December 31, 2014, the Corporation’s stake in EVERTEC was 14.96%. The Corporation continues influence over EVERTEC. Accordingly, the investment in EVERTEC is accounted for under the equity method and is evaluated for impairment if events or circumstances indicate that a decrease in value of the investment has occurred that is other than temporary. to have significant The Corporation received $4.7 million in dividend distributions during the year ended December 31, 2014 from its investments in EVERTEC’s holding company (December 31, 2013 - $4.4 million). The Corporation’s equity in EVERTEC is presented in the table which follows and is included as part of “other assets” in the consolidated statement of financial condition. December 31, 2014 December 31, 2013 $25,146 $19,931 209 POPULAR, INC. 2014 ANNUAL REPORT The Corporation had the following financial condition balances outstanding with EVERTEC at December 31, 2014 and December 31, 2013. Items that represent Corporation are presented with parenthesis. liabilities to the (In thousands) Accounts receivable (Other assets) Deposits Accounts payable (Other liabilities) Net total December 31, 2014 December 31, 2013 $ 5,065 (15,481) (15,511) $(25,927) $ 8,634 (14,289) (15,862) $(21,517) The Corporation’s proportionate share of income or loss from EVERTEC is included in other operating income in the consolidated statements of operations. The following table presents the Corporation’s proportionate share of EVERTEC’s income (loss) and changes in stockholders’ equity for the years ended December 31, 2014, 2013 and 2012. (In thousands) Share of income (loss) from investment in EVERTEC Share of other changes in EVERTEC’s stockholders’ equity Share of EVERTEC’s changes in equity recognized in income Years ended December 31, 2012 2013 2014 $10,536 381 $ (3,762) $38,461 (187) 18,965 $10,917 $15,203 $38,274 The following tables present the impact of transactions and service payments between the Corporation and EVERTEC (as an affiliate) and their impact on the results of operations for the years ended December 31, 2014, 2013 and 2012. Items that represent expenses to the Corporation are presented with parenthesis. (In thousands) Years ended December 31, 2013 2012 2014 Category Interest income on loan to EVERTEC Interest income on investment securities issued by EVERTEC Interest expense on deposits ATH and credit cards interchange income from services to EVERTEC $ $ – – (67) 26,646 $ 2,490 1,269 (128) 25,571 Debt prepayment penalty paid by EVERTEC Consulting fee paid by EVERTEC Rental income charged to EVERTEC Processing fees on services provided by EVERTEC Other services provided to EVERTEC – – 6,874 (154,839) 1,012 5,856 9,854 6,560 (155,521) 843 3,373 3,850 (267) 25,188 Interest income Interest income Interest expense Other service fees Net gain (loss) and valuation adjustments on investment securities Other operating income Net occupancy Professional fees 751 Other operating expenses – – 6,647 (150,677) Total $(120,374) $(103,206) $(111,135) EVERTEC has a letter of credit issued by BPPR, for an amount of $3.6 million at December 31, 2014 (2013 - $3.6 million). The Corporation also agreed to maintain outstanding this letter of credit for a 5-year period which expires on September 30, 2015. EVERTEC and the Corporation entered into a Reimbursement Agreements, in which EVERTEC will reimburse the Corporation for any losses incurred by the Corporation in connection with the performance bonds and the letter of credit. Possible losses resulting from these agreements are considered insignificant. PRLP 2011 Holdings, LLC indicated in Note 32 to the consolidated financial As statements, the Corporation holds a 24.9% equity interest in PRLP 2011 Holdings, LLC and currently provides certain financing to the joint venture as well as holds certain deposits from the entity. The Corporation’s equity in PRLP 2011 Holdings, LLC is presented in the table which follows and is included as part of “other assets” in the consolidated statements of financial condition. (In thousands) Equity investment in PRLP 2011 Holdings, LLC December 31, 2014 December 31, 2013 $23,650 $26,596 The Corporation had the following financial condition balances outstanding with PRLP 2011 Holdings, LLC at December 31, 210 2014 and December 31, 2013. (In thousands) Loans Accrued interest receivable Deposits (non-interest bearing) Net total December 31, 2014 December 31, 2013 $ 4,652 22 (2,685) $ 1,989 $19,647 65 (3,621) $16,091 The Corporation’s proportionate share of income or loss from PRLP 2011 Holdings, LLC is included in other operating income in the consolidated statements of operations. The following table presents the Corporation’s proportionate share of income (loss) from PRLP 2011 Holdings, LLC for the years ended December 31, 2014, 2013 and 2012. (In thousands) Share of (loss) income from the equity investment in PRLP 2011 Holdings, LLC Years ended December 31, 2012 2013 2014 $(2,947) $3,347 $7,128 The following table presents transactions between the Corporation and PRLP 2011 Holdings, LLC and their impact on the Corporation’s results of operations for the years ended December 31, 2014, 2013 and 2012. (In thousands) Years ended December 31, 2013 2014 2012 Category Interest income on loan to PRLP 2011 Holdings, LLC $425 $1,162 $2,688 Interest income PR Asset Portfolio 2013-1 International, LLC As indicated in Note 32 to the consolidated financial statements, effective March 2013 the Corporation holds a 24.9% equity 2013-1 International, LLC and currently provides certain financing to the joint venture as well as holds certain deposits from the entity. in PR Asset Portfolio interest The Corporation’s equity in PR Asset Portfolio 2013-1 International, LLC is presented in the table which follows and is included as part of “other assets” in the consolidated statements of financial condition. (In thousands) December 31, 2014 December 31, 2013 Equity investment in PR Asset Portfolio 2013-1 International, LLC $31,374 $30,478 The Corporation had the following financial condition balances 2013-1 outstanding with PR Asset Portfolio International, LLC, at December 31, 2014 and December 31, 2013. (In thousands) Loans Accrued interest receivable Deposits Net total December 31, 2014 December 31, 2013 $110,643 $160,283 314 (12,960) $ 97,997 436 (20,808) $139,911 • Level 2 - Quoted prices other than those included in Level 1 that are observable either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or that can be corroborated by observable market data for substantially the full term of the financial instrument. • Level 3 - Inputs are unobservable and significant to the fair value measurement. Unobservable inputs reflect the Corporation’s own assumptions about assumptions that market participants would use in pricing the asset or liability. The Corporation maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. Fair value is based upon quoted market prices when available. If listed prices or quotes are not available, the Corporation employs internally- developed models that primarily use market-based inputs including yield curves, interest rates, volatilities, and credit curves, among others. Valuation adjustments are limited to those necessary to ensure that the financial instrument’s fair value is adequately representative of the price that would be received or paid in the marketplace. These adjustments include amounts the counterparty Corporation’s credit standing, constraints on liquidity and unobservable parameters that are applied consistently. quality, reflect credit that The estimated fair value may be subjective in nature and may involve uncertainties and matters of significant judgment for certain financial instruments. Changes in the underlying assumptions used in calculating fair value could significantly affect the results. 211 POPULAR, INC. 2014 ANNUAL REPORT The Corporation’s proportionate share of income or loss from PR Asset Portfolio 2013-1 International, LLC is included in other operating income in the consolidated statements of operations. The following table presents the Corporation’s proportionate share of income (loss) from PR Asset Portfolio 2013-1 International, LLC for years ended December 31, 2014 and 2013. (In thousands) Share of income from the equity investment in PR Asset Portfolio 2013-1 International, LLC Years ended December 31, 2014 2013 $745 $(1,979) The following table presents transactions between the Corporation and PR Asset Portfolio 2013-1 International, LLC and their impact on the Corporation’s results of operations for the years ended December 31, 2014 and 2013. (In thousands) 2014 2013 Category Years ended December 31, Interest income on loan to PR Asset Portfolio 2013-1 International, LLC Servicing fee paid by PR Asset Portfolio 2013-1 International, LLC $4,340 $2,966 Interest income 70 150 Other service fees Total $4,410 $3,116 Note 35 - Fair value measurement ASC Subtopic 820 - 10 “Fair Value Measurements and Disclosures” establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value to increase consistency and into three levels comparability in fair value measurements and disclosures. The hierarchy is broken down into three levels based on the reliability of inputs as follows: in order • Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date. Valuation on these instruments does not necessitate a significant degree of judgment since valuations are based on quoted prices that are readily available in an active market. Fair Value on a Recurring and Nonrecurring Basis The following fair value hierarchy tables present information about the Corporation’s assets and liabilities measured at fair value on a recurring basis at December 31, 2014 and 2013 and on a nonrecurring basis in periods subsequent to initial recognition for the years ended December 31, 2014, 2013, and 2012: At December 31, 2014 212 (In thousands) RECURRING FAIR VALUE MEASUREMENTS Assets Investment securities available-for-sale: U.S. Treasury securities Obligations of U.S. Government sponsored entities Obligations of Puerto Rico, States and political subdivisions Collateralized mortgage obligations - federal agencies Mortgage-backed securities Equity securities Other Total investment securities available-for-sale Trading account securities, excluding derivatives: Obligations of Puerto Rico, States and political subdivisions Collateralized mortgage obligations Mortgage-backed securities - federal agencies Other Total trading account securities Mortgage servicing rights Derivatives Total assets measured at fair value on a recurring basis Liabilities Derivatives Contingent consideration Total liabilities measured at fair value on a recurring basis Level 1 Level 2 Level 3 Total $ – – – – – 323 – $323 $ – – – – $ – $ – – $323 $ – – $ – $ $ $ $ 700,154 1,724,973 61,712 1,910,030 903,037 2,299 11,306 $5,313,511 $ 7,954 261 104,463 16,682 – – – – 1,325 – – $ 700,154 1,724,973 61,712 1,910,030 904,362 2,622 11,306 1,325 $5,315,159 – 1,375 6,229 1,563 $ 7,954 1,636 110,692 18,245 $ 129,360 $ 9,167 $ 138,527 $ – 25,362 $ 148,694 – $ 148,694 25,362 $5,468,233 $ 159,186 $5,627,742 $ (23,032) $ – – (133,634) $ (23,032) (133,634) $ (23,032) $(133,634) $ (156,666) 213 POPULAR, INC. 2014 ANNUAL REPORT At December 31, 2013 (In thousands) RECURRING FAIR VALUE MEASUREMENTS Assets Investment securities available-for-sale: U.S. Treasury securities Obligations of U.S. Government sponsored entities Obligations of Puerto Rico, States and political subdivisions Collateralized mortgage obligations - federal agencies Collateralized mortgage obligations - private label Mortgage-backed securities Equity securities Other Total investment securities available-for-sale Trading account securities, excluding derivatives: Obligations of Puerto Rico, States and political subdivisions Collateralized mortgage obligations Mortgage-backed securities - federal agencies Other Total trading account securities Mortgage servicing rights Derivatives Total assets measured at fair value on a recurring basis Liabilities Derivatives Contingent consideration Total liabilities measured at fair value on a recurring basis Level 1 Level 2 Level 3 Total $ – – – – – – 412 – $412 $ – – – – $ – $ – – $412 $ – – $ – $ $ $ $ 28,482 1,629,205 66,377 2,418,296 513 1,129,118 3,704 12,170 $5,287,865 $ 7,586 426 302,952 15,545 – – – – – 6,523 – – $ 28,482 1,629,205 66,377 2,418,296 513 1,135,641 4,116 12,170 6,523 $5,294,800 – 1,423 9,799 1,929 $ 7,586 1,849 312,751 17,474 $ 326,509 $ 13,151 $ 339,660 $ – 34,793 $ 161,099 – $ 161,099 34,793 $5,649,167 $ 180,773 $5,830,352 $ (32,378) $ – – (128,299) $ (32,378) (128,299) $ (32,378) $(128,299) $ (160,677) (In thousands) Level 1 Level 2 Level 3 Total Year ended December 31, 2014 NONRECURRING FAIR VALUE MEASUREMENTS Assets Loans [1] Loans held-for-sale [2] Other real estate owned [3] Other foreclosed assets [3] Total assets measured at fair value on a nonrecurring basis $ – – 6,610 – $ 71,750 21,609 86,520 1,368 $ 71,750 21,609 93,130 1,368 $ Write-downs (15,405) (38) (42,366) (1,622) $6,610 $181,247 $187,857 $ (59,431) $– – – – $– [1] Relates mostly to certain impaired collateral dependent loans. The impairment was measured based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations, in accordance with the provisions of ASC Section 310-10-35. Costs to sell are excluded from the reported fair value amount. [2] Relates to lower of cost or fair value adjustments on loans held-for-sale and loans transferred from loans held-in-portfolio to loans held-for-sale. Costs to sell are excluded from the reported fair value amount. [3] Represents the fair value of foreclosed real estate and other collateral owned that were written down to their fair value. Costs to sell are excluded from the reported fair value amount. 214 (In thousands) Level 1 Level 2 Level 3 Total Year ended December 31, 2013 NONRECURRING FAIR VALUE MEASUREMENTS Assets Loans [1] Loans held-for-sale [2] Other real estate owned [3] Other foreclosed assets [3] Total assets measured at fair value on a nonrecurring basis $ – – 2,849 – $ 25,673 – 84,732 638 $ 25,673 – 87,581 638 $ Write-downs (21,348) (364,820) (43,861) (617) $2,849 $111,043 $113,892 $ (430,646) $– – – – $– [1] Relates mostly to certain impaired collateral dependent loans. The impairment was measured based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations, in accordance with the provisions of ASC Section 310-10-35. Costs to sell are excluded from the reported fair value amount. [2] Relates to lower of cost or fair value adjustments on loans held-for-sale and loans transferred from loans held-in-portfolio to loans held-for-sale. Costs to sell are excluded from the reported fair value amount. [3] Represents the fair value of foreclosed real estate and other collateral owned that were written down to their fair value. Costs to sell are excluded from the reported fair value amount. (In thousands) Level 1 Level 2 Level 3 Total Year ended December 31, 2012 NONRECURRING FAIR VALUE MEASUREMENTS Assets Loans [1] Loans held-for-sale [2] Other real estate owned [3] Other foreclosed assets [3] Long-lived assets held-for-sale [4] Total assets measured at fair value on a nonrecurring basis $– – – – – $– $ 10,445 93,429 111,425 128 – $ 10,445 93,429 111,425 128 – $ Write-downs (23,972) (43,937) (32,783) (360) (123) $215,427 $215,427 $ (101,175) $– – – – – $– [1] Relates mostly to certain impaired collateral dependent loans. The impairment was measured based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations, in accordance with the provisions of ASC Section 310-10-35. Costs to sell are excluded from the reported fair value amount. [2] Relates to lower of cost or fair value adjustments on loans held-for-sale and loans transferred from loans held-in-portfolio to loans held-for-sale. Costs to sell are excluded from the reported fair value amount. [3] Represents the fair value of foreclosed real estate and other collateral owned that were written down to their fair value. Costs to sell are excluded from the reported fair value amount. [4] Represents the fair value of long-lived assets held-for-sale that were written down to their fair value. 215 POPULAR, INC. 2014 ANNUAL REPORT The following tables present the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the years ended December 31, 2014, 2013, and 2012. Year ended December 31, 2014 MBS classified as investment securities available- for-sale $ 6,523 (31) (249) – (4,350) (568) $ 1,325 CMOs classified as trading account securities $1,423 (11) – 270 – (307) $1,375 Other securities classified as trading account securities $1,929 (366) – – – – $1,563 MBS classified as trading account securities $ 9,799 (165) – 805 (2,110) (2,100) $ 6,229 Mortgage servicing rights Total assets (24,773) – 12,583 – (215) $161,099 $180,773 (25,346) (249) 13,658 (6,460) (3,190) $148,694 $159,186 Contingent consideration $(128,299) (1,791) – (4,330) – 786 $(133,634) Total liabilities $(128,299) (1,791) – (4,330) – 786 $(133,634) $ – $ (7) $ (72) $ (144) $ (6,120) $ (6,343) $ (1,791) $ (1,791) Year ended December 31, 2013 MBS classified as investment securities available- for-sale $7,070 (7) (40) – – (500) $6,523 CMOs classified as trading account securities $2,499 (18) – 25 (802) (281) $1,423 Other securities classified as trading account securities $2,240 (311) – – – – $1,929 MBS classified as trading account securities $11,817 (39) – 859 (100) (2,738) $ 9,799 Mortgage servicing rights Total assets (11,403) – 19,307 – (1,235) $154,430 $178,056 (11,778) (40) 20,191 (902) (4,754) $161,099 $180,773 Contingent consideration $(112,002) (16,297) – – – – $(128,299) Total liabilities $(112,002) (16,297) – – – – $(128,299) $ – $ (4) $ 159 $ 14 $ 15,024 $ 15,193 $ (16,297) $ (16,297) Year ended December 31, 2012 MBS classified as investment securities available- for-sale $7,435 (6) 66 – – (425) – – $7,070 CMOs classified as trading account securities $2,808 30 – 608 (250) (697) – – $2,499 Other securities classified as trading account securities $ 4,036 (123) – 2,116 (1,834) (1,955) – – $ 2,240 MBS classified as trading account securities $21,777 680 – 6,499 (9,824) (2,104) 2,405 (7,616) $11,817 Mortgage servicing rights Total assets (17,406) – 20,726 (103) (110) – – $151,323 $187,379 (16,825) 66 29,949 (12,011) (5,291) 2,405 (7,616) $154,430 $178,056 Contingent consideration $ (99,762) (12,600) – – – 360 – – $(112,002) Total liabilities $ (99,762) (12,600) – – – 360 – – $(112,002) $ – $ 23 $ (165) $ (333) $ 8,130 $ 7,655 $ (13,347) $ (13,347) (In thousands) Balance at January 1, 2014 Gains (losses) included in earnings Gains (losses) included in OCI Additions Sales Settlements Balance at December 31, 2014 Changes in unrealized gains (losses) included in earnings relating to assets still held at December 31, 2014 (In thousands) Balance at January 1, 2013 Gains (losses) included in earnings Gains (losses) included in OCI Additions Sales Settlements Balance at December 31, 2013 Changes in unrealized gains (losses) included in earnings relating to assets still held at December 31, 2013 (In thousands) Balance at January 1, 2012 Gains (losses) included in earnings Gains (losses) included in OCI Additions Sales Settlements Transfers into Level 3 Transfers out of Level 3 Balance at December 31, 2012 Changes in unrealized gains (losses) included in earnings relating to assets still held at December 31, 2012 216 There were no transfers in and/or out of Level 1, Level 2, or Level 3 for financial instruments measured at fair value on a recurring basis during the year ended December 31, 2014 and 2013. There were no transfers in and/or out of Level 1 for financial instruments measured at fair value on a recurring basis during the year ended December 31, 2012. There were $ 2 million in transfers from Level 2 to Level 3 and $8 million in instruments transfers from Level 3 to Level 2 for financial measured at fair value on a recurring basis during the year ended December 31, 2012. The transfers from Level 2 to Level 3 of trading mortgage-backed securities were the result of a change in valuation technique to a matrix pricing model, based on indicative prices provided by brokers. The transfers from Level 3 to Level 2 of trading mortgage-backed securities resulted from observable market data becoming available for these securities. The Corporation’s policy is to recognize transfers as of the end of the reporting period. Gains and losses (realized and unrealized) included in earnings for the years ended December 31, 2014, 2013, and 2012 for Level 3 assets and liabilities included in the previous tables are reported in the consolidated statement of operations as follows: (In thousands) Interest income FDIC loss share (expense) income Mortgage banking activities Trading account (loss) profit Other operating income Total Total gains (losses) included in earnings (31) $ (1,791) (24,773) (542) – $(27,137) 2014 Changes in unrealized gains (losses) relating to assets still held at reporting date $ – (1,791) (6,120) (223) – $(8,134) 2013 2012 Total gains (losses) included in earnings (7) $ Changes in unrealized gains (losses) relating to assets still held at reporting date $ – Total gains (losses) included in earnings (6) $ Changes in unrealized gains (losses) relating to assets still held at reporting date $ – (15,994) (15,994) (13,178) (13,178) (11,403) 15,024 (17,406) 8,130 (368) (303) $(28,075) 169 (303) $ (1,104) 587 578 $(29,425) (475) (169) $ (5,692) The following table includes quantitative information about significant unobservable inputs used to derive the fair value of Level 3 instruments, excluding those instruments for which the unobservable inputs were not developed by the Corporation such as prices of prior transactions and/or unadjusted third-party pricing sources. (In thousands) CMO’s - trading Fair value at December 31, 2014 $ 1,375 Valuation technique Discounted cash flow model Other - trading $ 769 Discounted cash flow model Mortgage servicing rights $ 148,694 Discounted cash flow model Contingent consideration $(133,634) Discounted cash flow model Loans held-in-portfolio $ 71,090[1] External appraisal Other real estate owned $ 29,715[2] External appraisal Other foreclosed assets $ 1,354[3] External appraisal Unobservable inputs Weighted average life Yield Constant prepayment rate Weighted average life Yield Constant prepayment rate Prepayment speed Weighted average life Discount rate Credit loss rate on covered loans Risk premium component of discount rate Haircut applied on external appraisals Haircut applied on external appraisals Haircut applied on external appraisals Weighted average (range) 2.2 years (0.6 - 4.8 years) 4.0% (1.3% - 4.7%) 23.9% (19.5% - 27.9%) 5.5 years 12.1% 10.8% 8.7% (5.3% - 22.7%) 11.5 years (4.4 - 18.8 years) 11.3% (9.5% - 15.0%) 7.3% (0.0% - 100.0%) 5.0% 26.6% (20.0% - 30.0%) 12.5% (10.0% - 30.0%) 3.3% (1.0% - 6.0%) [1] Loans held-in-portfolio in which haircuts were not applied to external appraisals were excluded from this table. [2] Other real estate owned in which haircuts were not applied to external appraisals were excluded from this table. [3] Other foreclosed assets in which haircuts were not applied to external appraisals were excluded from this table. 217 POPULAR, INC. 2014 ANNUAL REPORT the constant prepayment The significant unobservable inputs used in the fair value measurement of the Corporation’s collateralized mortgage obligations and interest-only collateralized mortgage obligation (reported as “other”), which are classified in the “trading” category, are yield, constant prepayment rate, and weighted average life. Significant increases (decreases) in any of those inputs in isolation would result in significantly lower (higher) fair value measurement. Generally, a change in the assumption used for rate will generate a directionally opposite change in the weighted average life. For example, as the average life is reduced by a higher constant prepayment rate, a lower yield will be realized, and when there is a reduction in the constant prepayment rate, the average life of these collateralized mortgage obligations will extend, thus resulting in a higher yield. These particular financial are valued internally by the Corporation’s instruments investment banking and broker-dealer unit utilizing internal valuation techniques. The unobservable inputs incorporated into the internal discounted cash flow models used to derive the fair value of collateralized mortgage obligations and interest-only collateralized mortgage obligation (reported as “other”), which are classified in the “trading” category, are reviewed by the Corporation’s Corporate Treasury unit on a quarterly basis. In the case of Level 3 financial instruments which fair value is based on broker quotes, the Corporation’s Corporate Treasury unit reviews the inputs used by the broker- dealers for reasonableness utilizing information available from other published sources and validates that the fair value measurements were developed in accordance with ASC Topic 820. The Corporate Treasury unit also substantiates the inputs used by validating the prices with other broker-dealers, whenever possible. The significant unobservable inputs used in the fair value measurement of the Corporation’s mortgage servicing rights are constant prepayment rates and discount rates. Increases in interest rates may result in lower prepayments. Discount rates vary according to products and / or portfolios depending on the perceived risk. Increases in discount rates result in a lower fair value measurement. The Corporation’s Corporate Comptroller’s unit is responsible for determining the fair value of MSRs, which is based on discounted cash flow methods based on assumptions developed by an external service provider, except for prepayment speeds, which are adjusted internally for the local market based on historical experience. The Corporation’s Corporate Treasury unit validates the economic assumptions developed by the external service provider on a quarterly basis. In addition, an analytical review of prepayment speeds is performed quarterly by the Corporate Comptroller’s unit. Significant variances in prepayment speeds are investigated by the Corporate Treasury unit. The Corporation’s MSR Committee analyzes changes in fair value measurements of MSRs and approves the valuation assumptions at each reporting in valuation assumptions must also be period. Changes approved by the MSR Committee. The fair value of MSRs are compared with those of the external service provider on a quarterly basis in order to validate if the fair values are within to the materiality thresholds established by management monitor and investigate material deviations. Back-testing is performed to compare projected cash flows with actual historical data to ascertain the reasonability of the projected net cash flow results. Following is a description of the Corporation’s valuation methodologies used for assets and liabilities measured at fair value. The disclosure requirements exclude certain financial instruments and all non-financial instruments. Accordingly, the instruments aggregate fair value amounts of disclosed do not represent management’s estimate of the underlying value of the Corporation. the financial Trading Account Securities and Investment Securities Available-for-Sale • U.S. Treasury securities: The fair value of U.S. Treasury securities is based on yields that are interpolated from the constant maturity treasury curve. These securities are classified as Level 2. • Obligations of U.S. Government sponsored entities: The Obligations of U.S. Government sponsored entities include U.S. agency securities, which fair value is based on an active exchange market and on quoted market prices for similar securities. The U.S. agency securities are classified as Level 2. • Obligations and States of Puerto Rico, political subdivisions: Obligations of Puerto Rico, States and political subdivisions include municipal bonds. The bonds are segregated and the like characteristics divided into specific sectors. Market inputs used in the evaluation process include all or some of the following: trades, bid price or spread, two sided markets, quotes, benchmark curves including but not limited to Treasury benchmarks, LIBOR and swap curves, market data feeds such as those obtained from municipal market sources, discount and capital rates, and trustee reports. The municipal bonds are classified as Level 2. • Mortgage-backed securities: Certain agency mortgage- backed securities (“MBS”) are priced based on a bond’s theoretical value derived from similar bonds defined by credit quality and market fair value incorporates an option adjusted spread. The agency MBS are classified as Level 2. Other agency MBS such as GNMA Puerto Rico Serials are priced using an internally- prepared pricing matrix with quoted prices from local brokers dealers. These particular MBS are classified as Level 3. sector. Their • Collateralized mortgage obligations: Agency and private- label collateralized mortgage obligations (“CMOs”) are priced based on a bond’s theoretical value derived from similar bonds defined by credit quality and market sector and for which fair value incorporates an option adjusted spread. The option adjusted spread model includes prepayment and volatility assumptions, ratings (whole loans collateral) and spread adjustments. These CMOs are classified as Level 2. Other CMOs, due to their limited liquidity, are classified as Level 3 due to the insufficiency of inputs such as broker quotes, executed trades, credit information and cash flows. • Equity securities: Equity securities with quoted market prices obtained from an active exchange market are classified as Level 1. Other equity securities that do not trade in highly liquid markets are classified as Level 2. • Corporate securities and debentures from a not-for-profit organization (included as “other” in the “available-for- sale” category): Given that the quoted prices are for similar instruments, these securities are classified as Level 2. • Corporate securities, commercial paper, mutual funds, and other equity securities (included as “other” in the “trading account securities” category): Quoted prices for these security types are obtained from broker dealers. Given that the quoted prices are for similar instruments or do not trade in highly liquid markets, these securities are classified as Level 2. The in determining the prices of Puerto Rico tax-exempt mutual fund shares are net asset value, dividend yield and type of assets in the fund. All funds trade based on a relevant dividend the aforementioned variables. In addition, demand and supply also affect the price. Corporate securities that trade less frequently or are in distress are classified as Level 3. important variables consideration taking yield into incorporates assumptions Mortgage servicing rights Mortgage servicing rights (“MSRs”) do not trade in an active market with readily observable prices. MSRs are priced internally using a discounted cash flow model. The discounted cash flow model that market participants would use in estimating future net servicing income, characteristics, prepayments assumptions, discount rates, delinquency and foreclosure rates, late charges, other ancillary revenues, cost to service and other economic factors. Prepayment speeds are adjusted for the Corporation’s loan characteristics and portfolio behavior. Due to the unobservable nature of certain valuation inputs, the MSRs are classified as Level 3. including portfolio 218 Derivatives Interest rate swaps, interest rate caps and indexed options are traded in over-the-counter active markets. These derivatives are indexed to an observable interest rate benchmark, such as LIBOR or equity indexes, and are priced using an income approach based on present value and option pricing models using observable inputs. Other derivatives are liquid and have quoted prices, such as forward contracts or “to be announced securities” (“TBAs”). All of these derivatives are classified as Level 2. The non-performance risk is determined using internally-developed models that consider the collateral held, the remaining term, and the creditworthiness of the entity that bears the risk, and uses available public data or internally- developed data related to current spreads that denote their probability of default. Contingent consideration liability The fair value of the true-up payment obligation (contingent consideration) to the FDIC as it relates to the Westernbank FDIC-assisted transaction was estimated using projected cash flows related to the loss sharing agreements at the true-up measurement date. It took into consideration the intrinsic loss estimate, asset premium/discount, cumulative shared loss payments, and the cumulative servicing amount related to the loan portfolio. Refer to Note 13 to the consolidated financial statements for a description of the formula established in the loss share agreements for determining the true-up payment. On a quarterly basis, management evaluates and revises the estimated credit loss rates that are used to determine expected cash flows on the covered loan pools. The expected credit losses on the loan pools are used to determine the loss share cash flows expected to be paid to the FDIC when the true-up payment is due. The true-up payment obligation was discounted using a term rate consistent with the time remaining until the payment is due. The discount rate was an estimate of the sum of the risk- free benchmark rate for the term remaining before the true-up payment is due and a risk premium to account for the credit risk profile of BPPR. The risk premium was calculated based on a 12-month trailing average spread of the yields on corporate bonds with credit ratings similar to BPPR. Loans held-in-portfolio considered impaired under ASC Section 310-10-35 that are collateral dependent The impairment is measured based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations, in accordance with the provisions of ASC Section 310-10-35, and which could be subject to internal adjustments based on the age of the appraisal. Currently, the associated loans considered impaired are classified as Level 3. 219 POPULAR, INC. 2014 ANNUAL REPORT Loans measured at fair value pursuant to lower of cost or fair value adjustments Loans measured at fair value on a nonrecurring basis pursuant to lower of cost or fair value were priced based on secondary market prices and discounted cash flow models which incorporate internally-developed assumptions for prepayments and credit loss estimates. These loans are classified as Level 3. Other real estate owned and other foreclosed assets Other real estate owned includes real estate properties securing mortgage, consumer, and commercial loans. Other foreclosed assets include automobiles securing auto loans. The fair value of foreclosed assets may be determined using an external appraisal, broker price opinion, internal valuation or binding offer. The majority of these foreclosed assets are classified as Level 3 since they are subject to internal adjustments. Certain foreclosed assets which are measured based on binding offers are classified as Level 2. Note 36 – Fair value of financial instruments The fair value of financial instruments is the amount at which an asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on the type of financial instrument and relevant market information. Many of these estimates involve various assumptions and may vary significantly from amounts that could be realized in actual transactions. The information about the estimated fair values of financial instruments presented hereunder excludes all nonfinancial instruments and certain other specific items. For those financial instruments with no quoted market prices available, fair values have been estimated using present value calculations or other valuation techniques, as well as management’s best judgment with respect to current economic conditions, including discount rates, estimates of future cash flows, and prepayment assumptions. The fair values reflected herein have been determined based on the prevailing interest rate environment at December 31, 2014 and December 31, 2013, as applicable. In different interest rate environments, fair value estimates can differ significantly, especially for certain fixed rate financial In addition, the fair values presented do not attempt to estimate the value of the Corporation’s fee generating businesses and they do not anticipated future business activities, represent a going concern. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation. the Corporation’s value instruments. that as is, Following is a description of the Corporation’s valuation methodologies and inputs used to estimate the fair values for each class of financial assets and liabilities not measured at fair value, but for which the fair value is disclosed. The disclosure requirements exclude certain financial instruments and all non- estimate of financial instruments. Accordingly, the aggregate fair value amounts of the financial instruments disclosed do not represent management’s the Corporation. For a description of the valuation methodologies and inputs used to estimate the fair value for each class of financial assets and liabilities measured at fair value, refer to Note 35. the underlying value of Cash and due from banks Cash and due from banks include cash on hand, cash items in process of collection, and non-interest bearing deposits due from other financial institutions. The carrying amount of cash and due from banks is a reasonable estimate of its fair value. Cash and due from banks are classified as Level 1. Money market investments Investments in money market instruments include highly liquid instruments with an average maturity of three months or less. For this reason, they carry a low risk of changes in value as a result of changes in interest rates, and the carrying amount approximates their investments include securities purchased under agreements to resell, time deposits with other banks, and cash balances, including those held at the Federal Reserve. These money market investments are classified as Level 2, except for cash balances which generate interest, including those held at the Federal Reserve, which are classified as Level 1. fair value. Money market federal funds sold, Investment securities held-to-maturity • Obligations and States of Puerto Rico, political subdivisions: Municipal bonds include Puerto Rico public municipalities debt and bonds collateralized by second mortgages under the Home Purchase Stimulus Program. Puerto Rico public municipalities debt was valued internally based on benchmark treasury notes and a credit spread derived from comparable Puerto Rico government trades issuances. Puerto Rico public municipalities debt is classified as Level 3. Given that the fair value of municipal bonds collateralized by second mortgages was based on internal yield and prepayment speed assumptions, these municipal bonds are classified as Level 3. and recent • Agency collateralized mortgage obligation: The fair value of the agency collateralized mortgage obligation (“CMO”), which is guaranteed by GNMA, was based on internal yield and prepayment speed assumptions. This agency CMO is classified as Level 3. • Other: Other securities include foreign and corporate debt. Given that the fair value was based on quoted prices for similar instruments, foreign debt is classified as Level 2. The fair value of corporate debt, which is collateralized 220 by municipal bonds of Puerto Rico, was internally derived from benchmark treasury notes and a credit spread based on comparable Puerto Rico government trades, similar is securities, and/or recent classified as Level 3. issuances. Corporate debt Other investment securities • Federal Home Loan Bank capital stock: Federal Home Loan Bank (FHLB) capital stock represents an equity interest in the FHLB of New York. It does not have a readily determinable fair value because its ownership is restricted and it lacks a market. Since the excess stock is repurchased by the FHLB at its par value, the carrying amount of FHLB capital stock approximates fair value. Thus, these stocks are classified as Level 2. • Federal Reserve Bank capital stock: Federal Reserve Bank (FRB) capital stock represents an equity interest in the FRB of New York. It does not have a readily determinable fair value because its ownership is restricted and it lacks a market. Since the canceled stock is repurchased by the FRB for the amount of the cash subscription paid, the carrying amount of FRB capital stock approximates fair value. Thus, these stocks are classified as Level 2. • Trust preferred securities: These securities represent the equity-method investment in the common stock of these trusts. Book value is the same as fair value for these securities since the fair value of the junior subordinated debentures is the same amount as the fair value of the trust preferred securities issued to the public. The equity- method investment in the common stock of these trusts is classified as Level 2, except for that of Popular Capital Trust III (Troubled Asset Relief Program) which is classified as Level 3. Refer to Note 26 for additional information on these trust preferred securities. values, private • Other investments: Other investments include private equity method investments and Visa Class B common stock held by the Corporation. Since there are no observable market equity method investments are classified as Level 3. The Visa Class B common stock was priced by applying the quoted price of Visa Class A common stock, net of a liquidity adjustment, to the as converted number of Class A common shares since these Class B common shares are restricted and not convertible to Class A common shares until pending litigation is resolved. Thus, these stocks are classified as Level 3. date, that the outstanding unpaid principal balance is reduced by a monthly net loss rate, and that the remaining unpaid principal balance is received as a lump sum principal payment at the effective average maturity date. The remaining unpaid principal balance expected to be received, which is based on the prior 12-month cash payment experience of these loans and their expected collateral recovery, was discounted using the interest rate currently offered to clients for the origination of comparable loans. These loans were classified as Level 3. As of December 31, 2014, no loans were valued under this methodology. For loans held-for-sale originated with the intent to sell in the secondary market, its fair value was determined using similar characteristics of loans and secondary market prices assuming the conversion to mortgage-backed securities. Given internal assumptions based on loan level data, these loans are classified as Level 3. The fair value of certain other loans held-for-sale is based on bids received from potential buyers; binding offers; or external appraisals, net of internal adjustments and estimated costs to sell. Loans held-for-sale based on binding offers are classified as Level 2. Loans held-for-sale based on indicative offers and/or external appraisals are classified as Level 3. valuation methodology uses that the type such as segregated by Loans held-in-portfolio The fair values of the loans held-in-portfolio have been determined for groups of loans with similar characteristics. Loans were commercial, construction, residential mortgage, consumer, and credit cards. Each loan category was further segmented based on loan characteristics, including interest rate terms, credit quality and vintage. Generally, fair values were estimated based on an exit price by discounting expected cash flows for the segmented groups of loans using a discount rate that considers interest, credit and expected return by market participant under current market conditions. Additionally, prepayment, default and recovery assumptions have been applied in the mortgage loan portfolio valuations. Generally accepted accounting principles do not require a fair valuation of the lease financing portfolio, therefore it is included in the loans total at its carrying amount. Loans held-in-portfolio are classified as Level 3. FDIC loss share asset Fair value of the FDIC loss share asset was estimated using projected net losses related to the loss sharing agreements, which are expected to be reimbursed by the FDIC. The projected net the U.S. Government agency curve. The loss share asset is classified as Level 3. losses were discounted using Loans held-for-sale The fair value of certain impaired loans held-for-sale was based on a discounted cash flow model that assumes that no principal payments are received prior to the effective average maturity Deposits • Demand deposits: The fair value of demand deposits, which have no stated maturity, was calculated based on 221 POPULAR, INC. 2014 ANNUAL REPORT the amount payable on demand as of the respective dates. These demand deposits include non-interest bearing demand deposits, savings, NOW, and money market accounts. Thus, these deposits are classified as Level 2. • Time deposits: The fair value of time deposits was calculated based on the discounted value of contractual cash flows using interest rates being offered on time deposits with similar maturities. The non-performance risk was determined using internally-developed models that consider, where applicable, the collateral held, amounts insured, the remaining term, and the credit premium of the institution. For certain 5-year certificates of deposit in which customers may withdraw their money anytime with no penalties or charges, the fair value of these an early cancellation estimate based on historical experience. Time deposits are classified as Level 2. certificates of deposit incorporate Assets sold under agreements to repurchase • Securities to sold under agreements repurchase (structured and non-structured): Securities sold under agreements to repurchase with short-term maturities approximate fair value because of the short-term nature of those instruments. Resell and repurchase agreements with long-term maturities were valued using discounted cash flows based on the three-month LIBOR. In determining the non-performance credit risk valuation adjustment, the collateralization levels of these long-term securities sold under agreements to repurchase were considered. In the case of callable structured repurchase agreements, the callable feature is not considered when determining the fair value of those repurchase agreements, since there is a remote possibility, based on forward rates, the investor will call back these agreements before maturity since it is not expected that the interest rates would rise more than the specified interest rate of these agreements. repurchase Securities (structured and non-structured) are classified as Level 2. agreements under sold that to amount carrying Other short-term borrowings short-term borrowings of other The approximate fair value because of the short-term maturity of those instruments or because they carry interest rates which approximate market. Thus, these other short-term borrowings are classified as Level 2. Notes payable • FHLB advances: The fair value of FHLB advances was based on the discounted value of contractual cash flows term. In determining the non- over their contractual performance the collateralization levels of these advances were considered. These advances are classified as Level 2. risk valuation adjustment, credit • Medium-term notes: The fair value of publicly-traded medium-term notes was determined using recent trades of similar transactions. Publicly-traded medium-term notes are classified as Level 2. The fair value of non-publicly traded debt was based on remaining contractual cash outflows, discounted at a rate commensurate with the non-performance credit risk of the Corporation, which is subjective in nature. Non-publicly traded debt is classified as Level 3. • Junior interest subordinated debentures deferrable (related to trust preferred securities): The fair value of junior subordinated interest debentures was determined using recent trades of similar transactions. Thus, these junior subordinated deferrable interest debentures are classified as Level 2. • Junior interest subordinated debentures deferrable (Troubled Asset Relief Program): The fair value of junior subordinated deferrable interest debentures was based on the discounted value of contractual cash flows over their contractual term. The discount rate was based on the rate at which a similar security was priced in the open market. Thus, interest junior debentures are classified as Level 3. subordinated deferrable these • Others: The other category includes lease obligations. Generally accepted accounting principles do not require a fair valuation of capital lease obligations, therefore; it is included at its carrying amount. Capital lease obligations are classified as Level 3. capital Commitments to extend credit and letters of credit Commitments to extend credit were valued using the fees currently charged to enter into similar agreements. For those commitments where a future stream of fees is charged, the fair value was estimated by discounting the projected cash flows of fees on commitments. Since the fair value of commitments to extend credit varies depending on the undrawn amount of the credit facility, fees are subject to constant change, and cash flows are dependent on the creditworthiness of borrowers, commitments to extend credit are classified as Level 3. The fair value of letters of credit was based on fees currently charged on similar agreements. Given that the fair value of letters of credit constantly vary due to fees being subject to constant change and whether on the creditworthiness of the account parties, letters of credit are classified as Level 3. received depends fees the are 222 The following tables present the carrying or notional amounts, as applicable, and estimated fair values for financial instruments with their corresponding level in the fair value hierarchy. (In thousands) Financial Assets: Cash and due from banks Money market investments Trading account securities, excluding derivatives [1] Investment securities available-for-sale [1] Investment securities held-to-maturity: Obligations of Puerto Rico, States and political subdivisions Collateralized mortgage obligation-federal agency Other Total investment securities held-to-maturity Other investment securities: FHLB stock FRB stock Trust preferred securities Other investments Total other investment securities Loans held-for-sale Loans not covered under loss sharing agreement with the FDIC Loans covered under loss sharing agreements with the FDIC FDIC loss share asset Mortgage servicing rights Derivatives (In thousands) Financial Liabilities: Deposits: Demand deposits Time deposits Total deposits Assets sold under agreements to repurchase: Securities sold under agreements to repurchase Total assets sold under agreements to repurchase Other short-term borrowings [2] Notes payable: FHLB advances Unsecured senior debt securities Junior subordinated deferrable interest debentures (related to trust preferred securities) Junior subordinated deferrable interest debentures (Troubled Others Total notes payable Derivatives Contingent consideration (In thousands) Commitments to extend credit Letters of credit December 31, 2014 Carrying amount Level 1 Level 2 Level 3 Fair value $ 381,095 1,822,386 138,527 5,315,159 $ 381,095 1,671,477 – 323 $ – 150,909 129,360 5,313,511 $ $ $ $ $ $ $ $ 101,573 97 1,500 103,170 66,773 80,025 13,197 1,911 161,906 106,104 18,884,732 2,460,589 542,454 148,694 25,362 – – – – – – – – – – – – – – – – – 1,500 1,500 $ $ 66,773 80,025 12,197 – $ 158,995 27,074 $ – – – – 25,362 $ $ $ $ $ – – 9,167 1,325 92,597 102 – 92,699 – – 1,000 5,028 6,028 87,862 18,079,609 2,947,909 481,420 148,694 – $ 381,095 1,822,386 138,527 5,315,159 92,597 102 1,500 94,199 66,773 80,025 13,197 5,028 165,023 114,936 18,079,609 2,947,909 481,420 148,694 25,362 $ $ $ $ Carrying amount $17,333,090 7,474,445 $24,807,535 $ 1,271,657 $ 1,271,657 21,200 $ 802,198 450,000 439,800 19,830 $ 1,711,828 23,032 $ 133,634 $ Notional amount $ 7,135,352 49,182 December 31, 2014 Level 1 Level 2 Level 3 Fair value $– – $– $– $– $– – – – – $– $– $– $17,333,090 7,512,683 $24,845,773 $ $ – – – $17,333,090 7,512,683 $24,845,773 $ 1,269,398 $ 1,269,398 20,200 $ – $ – $ $ 1,000 $ 1,269,398 $ 1,269,398 21,200 $ 814,877 460,530 379,400 – – – 814,877 460,530 379,400 – $ 1,654,807 23,032 $ – $ 19,830 $ 19,830 $ – $133,634 19,830 $ 1,674,637 23,032 $ 133,634 $ Level 1 $– – $ Level 2 Level 3 $ 1,716 486 Fair value 1,716 $ 486 – – [1] Refer to Note 35 to the consolidated financial statements for the fair value by class of financial asset and its hierarchy level. [2] Refer to Note 23 to the consolidated financial statements for the composition of short-term borrowings. 223 POPULAR, INC. 2014 ANNUAL REPORT (In thousands) Financial Assets: Cash and due from banks Money market investments Trading account securities, excluding derivatives [1] Investment securities available-for-sale [1] Investment securities held-to-maturity: Obligations of Puerto Rico, States and political subdivisions Collateralized mortgage obligation-federal agency Other Total investment securities held-to-maturity Other investment securities: FHLB stock FRB stock Trust preferred securities Other investments Total other investment securities Loans held-for-sale Loans not covered under loss sharing agreement with the FDIC Loans covered under loss sharing agreements with the FDIC FDIC loss share asset Mortgage servicing rights Derivatives (In thousands) Financial Liabilities: Deposits: Demand deposits Time deposits Total deposits Assets sold under agreements to repurchase: Securities sold under agreements to repurchase Structured repurchase agreements Total assets sold under agreements to repurchase Other short-term borrowings [2] Notes payable: FHLB advances Medium-term notes Junior subordinated deferrable interest debentures (related to trust preferred securities) Junior subordinated deferrable interest debentures (Troubled Asset Relief Program) Others Total notes payable Derivatives Contingent consideration (In thousands) Commitments to extend credit Letters of credit $ $ $ $ 113,881 115 26,500 140,496 85,245 80,385 14,197 1,925 181,752 110,426 21,073,403 2,882,335 948,608 161,099 34,793 Carrying amount $18,399,793 8,311,352 $26,711,145 $ 1,021,102 638,190 $ 1,659,292 401,200 $ $ $ $ $ $ 589,229 689 439,800 531,540 23,496 $ 1,584,754 32,378 $ 128,299 $ December 31, 2013 Carrying amount Level 1 Level 2 Level 3 Fair value $ 423,211 858,453 339,660 5,294,800 $423,211 677,033 – 412 $ – 181,420 326,509 5,287,865 $ $ $ $ $ – – 13,151 6,523 $ 423,211 858,453 339,660 5,294,800 94,712 122 24,354 119,188 – – 1,000 4,699 5,699 109,405 19,070,337 3,404,128 837,131 161,099 – $ $ $ $ 94,712 122 25,854 120,688 85,245 80,385 14,197 4,699 184,526 112,560 19,070,337 3,404,128 837,131 161,099 34,793 $ $ $ $ $ $ $ $ – – – – – – – – – – – – – – – – – 1,500 1,500 85,245 80,385 13,197 – 178,827 3,155 – – – – 34,793 December 31, 2013 Level 1 Level 2 Level 3 Fair value – – – – – – – – 716 – $18,399,793 8,367,410 $26,767,203 $ 1,025,628 694,422 $ 1,720,050 401,200 $ 604,976 716 348,222 – – – – – – – – – – $18,399,793 8,367,410 $26,767,203 $ 1,025,628 694,422 $ 1,720,050 401,200 $ $ $ $ $ $ 604,976 – 348,222 – – 953,198 32,378 – $ $ $ – – – $ – $ $ – Notional amount $7,490,927 82,007 1,006,638 23,496 $ 1,030,850 – $ 128,299 $ 1,006,638 23,496 $ 1,984,048 32,378 $ 128,299 $ Level 1 Level 2 Level 3 Fair value $– – $– – $2,571 901 $2,571 901 [1] Refer to Note 35 to the consolidated financial statements for the fair value by class of financial asset and its hierarchy level. [2] Refer to Note 23 to the consolidated financial statements for the composition of short-term borrowings. Note 37 – Employee benefits Pension and benefit restoration plans Certain employees of BPPR are covered by non-contributory defined benefit pension plans. Pension benefits are based on age, years of credited service, and final average compensation. BPPR’s non-contributory, defined benefit retirement plan are currently closed to new hires and the accrual of benefits are frozen to all participants. The retirement plan’s benefit formula is based on a percentage of average final compensation and years of service as of the plan freeze date. Normal retirement age under the retirement plans is age 65 with 5 years of service. Pension costs are funded in accordance with minimum funding standards under the Employee Retirement Income Security Act of 1974 (“ERISA”). Benefits under the BPPR retirement plan are subject to the U.S. and PR Internal Revenue Code limits on compensation and benefits. Benefits under restoration plans restore benefits to selected employees that are limited under the retirement plan due to U.S. and PR Internal Revenue Code limits and a compensation definition that excludes amounts deferred pursuant to nonqualified arrangements. The freeze applied to the restoration plan as well. During 2013 the Corporation offered a Lump Sum Distribution to terminated vested participants whose deferred pension has a current value of up to $40 thousand. The acceptance of this offer was voluntary and relieved the Corporation of all future obligations related to the terminated vested participants who accepted the offer. Approximately 1,859 participants were eligible to elect the Lump Sum Distribution and 1,081 participants accepted the offer. funding policy is The Corporation’s to make annual contributions to the plans, when necessary, in amounts which fully provide for all benefits as they become due under the plans. The Corporation’s pension fund investment strategy is to in a prudent manner for the exclusive purpose of invest Equity Debt securities Cash and cash equivalents 224 providing benefits to participants. A well defined internal structure has been established to develop and implement a risk- controlled investment strategy that is targeted to produce a total return that, when combined with the bank’s contributions to the fund, will maintain the fund’s ability to meet all required benefit obligations. Risk is controlled through diversification of asset types, such as investments in domestic and international equities and fixed income. Equity investments include various types of stock and index funds. Also, this category includes Popular, Inc.’s common stock. Fixed income investments include U.S. Government securities and other U.S. agencies’ obligations, corporate bonds, mortgage loans, mortgage-backed securities and index funds, among others. A designated committee periodically reviews the performance of investments and assets allocation. The Trustee and the money managers are allowed to exercise limitations established by the pension plans’ investment policies. The plans forbid money managers to enter into derivative transactions, unless approved by the Trustee. the pension plans’ investment discretion, subject to The overall expected long-term rate-of-return-on-assets assumption reflects the average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the benefit obligation. The assumption has been determined by reflecting expectations regarding future rates of return for the plan assets, with consideration given to the distribution of the investments by asset class and historical rates of return for each individual asset class. This process is reevaluated at least on an annual basis and if market, actuarial and economic conditions change, adjustments to the rate of return may come into place. The plans’ target allocation based on market value for years 2014 and 2013, by asset category, is summarized in the table below. Minimum allotment Maximum allotment 0% 0% 0% 70% 100% 100% 225 POPULAR, INC. 2014 ANNUAL REPORT The following table presents the composition of the assets of the pension and benefit restoration plans. (In thousands) Obligations of the U.S. Government and its agencies Corporate bonds and debentures Equity securities Index fund - equity Foreign commingled trust fund Foreign equity fund Foreign index fund Commodity fund Mortgage-backed securities Private equity investments Cash and cash equivalents Accrued investment income Total assets 2014 2013 $210,549 50,708 241,458 27,888 9,998 79,666 29,643 13,480 12,913 546 18,834 1,557 $198,992 43,885 238,792 33,347 – 87,336 43,711 16,451 12,950 922 27,456 1,640 $697,240 $705,482 Until September 30, 2013 certain assets of the plans were maintained, for investment purposes only in a Master Trust (the “Master Trust”). Neither the pension or benefit restoration plan had any interest in the specific assets of the Master Trust, but maintained beneficial interests in such assets. The Master Trust was managed by the Trust Division of BPPR and by several investment managers. At December 31, 2012, the pension and restoration plans’ interest in the net assets of the Master Trust was 100%. At September 30, 2013 the Master Trust was dissolved and all the investments were allocated to the plans based on their relative interest on the net assets of the Master Trust. The following table sets forth by level, within the fair value hierarchy, the plans’ assets at fair value at December 31, 2014 and 2013. (In thousands) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total 2014 2013 Obligations of the U.S. Government and its agencies Corporate bonds and debentures Equity securities Index fund - equity Foreign commingled trust fund Foreign equity fund Foreign index fund Commodity fund Mortgage-backed securities Private equity investments Cash and cash equivalents Accrued investment income Total assets $ – – 241,458 27,888 – – – – – – 18,834 – $210,549 50,708 – – 9,998 79,666 29,643 13,480 12,913 – – – $ – – – – – – – – – 546 – 1,557 $210,549 50,708 241,458 27,888 9,998 79,666 29,643 13,480 12,913 546 18,834 1,557 $ – – 238,792 33,347 – – – – – – 27,456 – $198,992 43,885 – – – 87,336 43,711 16,451 12,950 – – – $ – – – – – – – – – 922 – 1,640 $198,992 43,885 238,792 33,347 – 87,336 43,711 16,451 12,950 922 27,456 1,640 $288,180 $406,957 $2,103 $697,240 $299,595 $403,325 $2,562 $705,482 The closing prices reported in the active markets in which the securities are traded are used to value the investments. Following is a description of the valuation methodologies used for investments measured at fair value: • Obligations of U.S. Government and its agencies - The fair value of Obligations of U.S. Government and agencies obligations is based on an active exchange market and is based on quoted market prices for similar securities. These securities are classified as Level 2. U.S. agency structured notes are priced based on a bond’s theoretical value from similar bonds defined by credit quality and market sector and for which the fair value incorporates an option adjusted spread in deriving their fair value. These securities are classified as Level 2. • Corporate bonds and debentures - Corporate bonds and debentures are valued at fair value at the closing price reported in the active market in which the bond is traded. These securities are classified as Level 2. 226 The preceding valuation methods may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the plan believes its valuation methods are appropriate and consistent with other market participants, of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. the use The following table presents the change in Level 3 assets measured at fair value. (In thousands) Balance at beginning of year Actual return on plan assets: Change in unrealized (loss) gain relating to instruments still held at the reporting date Settlements Balance at end of year 2014 2013 $2,562 $2,848 (459) – (286) – $2,103 $2,562 There were no transfers in and/or out of Level 3 for financial instruments measured at fair value on a recurring basis during the years ended December 31, 2014 and 2013. There were no transfers in and/or out of Level 1 and Level 2 during the years ended December 31, 2014 and 2013. Information on the shares of common stock held by the pension and restoration plans is provided in the table that follows. Shares of Popular, Inc. common stock Fair value of shares of Popular, Inc. 2014 2013 274,572 274,572 common stock $9,349,177 $7,888,454 Dividends paid on shares of Popular, Inc. common stock held by the plan $ – $ – • Equity securities - Equity securities with quoted market prices obtained from an active exchange market and high liquidity are classified as Level 1. • Equity index funds - Equity with quoted market prices obtained from an active exchange market and high liquidity are classified as Level 1. • Foreign commingled trust collective investment funds that are valued at the net asset value (NAV) of shares held by the plan at year end. These securities are classified as Level 2. fund – are • Index funds – Fixed income, foreign equity, foreign index and commodity funds are valued at the net asset value (NAV) of shares held by the plan at year end. These securities are classified as Level 2. • Mortgage-backed securities - Certain agency mortgage and other asset backed securities (“MBS”) are priced based on a bond’s theoretical value from similar bonds defined by credit quality and market sector. Their fair value incorporates an option adjusted spread. The agency MBS are classified as Level 2. • Private equity investments - Private equity investments include an investment in a private equity fund. The fund value is recorded at its net asset value (NAV) which is affected by the changes in the fair market value of the investments held in the fund. This fund is classified as Level 3. • Cash and cash equivalents - The carrying amount of cash and cash equivalents is a reasonable estimate of the fair value since it is available on demand or due to their short- term maturity. • Accrued investment income - Given the short-term nature of these assets, their carrying amount approximates fair value. Since there is a lack of observable inputs related to instrument these are reported as Level 3. specific attributes, 227 POPULAR, INC. 2014 ANNUAL REPORT The following table sets forth the aggregate status of the plans and the amounts recognized in the consolidated financial statements at December 31, 2014 and 2013. (In thousands) Change in benefit obligation: Benefit obligation at beginning of year Interest cost Actuarial (gain) loss Benefits paid Benefit obligation at end of year Change in fair value of plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Benefits paid Fair value of plan assets at end of year Amounts recognized in accumulated other comprehensive loss: Net loss Accumulated other comprehensive loss (AOCL) Reconciliation of net assets (liabilities): Net liabilities at beginning of year Amount recognized in AOCL at beginning of year, pre-tax Amount prepaid at beginning of year Net periodic benefit income (cost) Contributions Amount prepaid at end of year Amount recognized in AOCL Net assets (liabilities) at end of year Pension plan Benefit restoration plans 2014 2013 2014 2013 $ 653,396 29,844 131,610 (37,035) $ 751,605 27,863 (76,997) (49,075) $ 36,096 1,659 6,238 (1,329) $40,051 1,493 (4,169) (1,279) $ 777,815 $ 653,396 $ 42,664 $36,096 $ 671,299 28,501 – (37,035) $ 625,519 94,855 – (49,075) $ 34,183 1,570 51 (1,329) $30,616 4,795 51 (1,279) $ 662,765 $ 671,299 $ 34,475 $34,183 $ 289,233 $ 147,677 $ 13,588 $ 6,928 $ 289,233 $ 147,677 $ 13,588 $ 6,928 $ 17,903 147,677 $(126,086) $(1,912) 6,928 297,765 $(9,434) 15,055 165,580 8,603 – 171,679 (6,099) – 5,016 332 51 174,183 (289,233) 165,580 (147,677) 5,399 (13,588) 5,621 (656) 51 5,016 (6,928) $(115,050) $ 17,903 $ (8,189) $ (1,912) The table below presents a breakdown of the plans’ assets and liabilities at December 31, 2014 and 2013. (In thousands) Non-current assets Current liabilities Non-current liabilities Pension plan 2014 2013 $ – – 115,050 $17,903 – – Benefit restoration plans 2014 $ – 173 8,016 2013 $ 504 51 2,365 The following table presents the funded status of the plans at year end December 31, 2014 and 2013. (In thousands) Benefit obligation at end of year Fair value of plan assets at end of year Funded status at year end Pension Plan Tax Qualified Restoration Plan 2014 2013 2014 $(777,815) $(653,396) 662,765 671,299 $(115,050) $ 17,903 $(39,768) 34,475 $ (5,293) 2013 $(33,679) 34,183 $ 504 Benefit Restoration Plan 2013 2014 $(2,896) — $(2,896) $(2,416) — $(2,416) 228 The following table presents the change in accumulated other comprehensive loss (“AOCL”), pre-tax, for the years ended December 31, 2014 and 2013. (In thousands) Pension plan Benefit restoration plans 2014 2013 2014 2013 Accumulated other comprehensive loss at beginning of year $147,677 $ 297,765 $ 6,928 $15,055 Increase (decrease) in AOCL: Recognized during the year: Amortization of actuarial losses Occurring during the year: Net actuarial (gains) losses Total (decrease) increase in AOCL Accumulated other comprehensive loss at end of year (8,074) (21,452) (431) (1,330) 149,630 (128,636) 141,556 (150,088) 7,091 6,660 (6,797) (8,127) $289,233 $ 147,677 $13,588 $ 6,928 The following table presents the amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic benefit cost during 2015. (In thousands) Net loss Pension plan Benefit restoration plans $17,859 $1,244 The following table presents information for plans with an accumulated benefit obligation in excess of plan assets. (In thousands) Projected benefit obligation Accumulated benefit obligation Fair value of plan assets Pension plan 2014 2013 $777,815 777,815 662,765 $– – – Benefit restoration plans 2014 $42,664 42,664 34,475 2013 $2,416 2,416 – The following table presents information for plans with an accumulated benefits obligation less than plan assets. (In thousands) Projected benefit obligation Accumulated benefit obligation Fair value of plan assets Pension plan 2013 2014 $– – – $653,396 653,396 671,299 Benefit restoration plans 2014 $– – – 2013 $33,680 33,680 34,183 The actuarial assumptions used to determine the benefit obligations at year end were as follows: Pension plan 2013 2014 Discount rate 3.90% 4.70% 3.90% The following table presents the actuarial assumptions used to determine the components of net periodic benefit cost. Benefit restoration plans 2014 2013 4.70% Discount rate Expected return on plan assets 4.70% 3.80% 4.40% 4.70% 3.80% 4.40% 7.25% 7.25% 7.60% 7.25% 7.25% 7.60% Pension plan 2013 2014 2012 Benefit restoration plans 2012 2013 2014 229 POPULAR, INC. 2014 ANNUAL REPORT The following table presents the components of net periodic benefit cost. Pension plan 2013 2012 2014 Benefit restoration plans 2012 2013 2014 $ 29,844 (46,521) 8,074 $ 27,863 (43,216) 21,452 $ 29,981 (39,240) 21,703 $ 1,659 (2,422) 431 $ 1,493 (2,167) 1,330 $ 1,572 (2,105) 1,294 $ (8,603) $ 6,099 $ 12,444 $ (332) $ 656 $ 761 Postretirement health care benefits In addition to providing pension benefits, BPPR provides certain health care benefits for certain retired employees. Regular employees of BPPR, hired before February 1, 2000, may become eligible for health care benefits, provided they reach retirement age while working for BPPR. The Corporation amended the postretirement health care benefits plan effective January 1, 2014 to increase the participant’s share of the plan cost. The postretirement health care benefit obligation as of December 31, 2013 reflects such amendments to the plan. (In thousands) Interest cost Expected return on plan assets Recognized net actuarial loss Net periodic benefit (credit) cost The Corporation expects to pay the following contributions to the benefit plans during 2015. (In thousands) Pension plan Benefit restoration plans 2015 $ – $173 Benefit payments projected to be made from the pension and benefit restoration plans are presented in the table below. (In thousands) Pension plan Benefit restoration plans 2015 2016 2017 2018 2019 2020 - 2024 $ 36,977 37,473 38,129 38,786 39,483 205,506 $ 1,763 1,914 2,058 2,161 2,304 12,126 The following table presents the status of the Corporation’s unfunded postretirement health care benefit plan and the related amounts recognized in the consolidated financial statements at December 31, 2014 and 2013. (In thousands) 2014 2013 230 The following table presents the changes in accumulated the (income), pre-tax, loss for comprehensive other postretirement health care benefit plan. (In thousands) Accumulated other comprehensive (income) 2014 2013 loss at beginning of year $ (6,324) $ 35,486 Change in benefit obligation: Benefit obligation at beginning of the year Service cost Interest cost Amendments Benefits paid Actuarial (gain) loss Benefit obligation end of year Amounts recognized in accumulated other comprehensive loss: Net prior service cost Net loss $ 145,732 1,457 6,846 — (5,688) 13,471 $ 183,611 2,257 6,848 (18,670) (7,066) $ (21,248) $ 161,818 145,732 Increase (decrease) in accumulated other comprehensive loss: Recognized during the year: Prior service credit Amortization of actuarial losses Occurring during the year: Prior service cost (credit) Net actuarial (gains) losses 3,800 — — (1,892) — (18,670) (21,248) 13,471 Total increase (decrease) in accumulated other comprehensive loss 17,271 (41,810) $(14,870) 25,817 $(18,670) 12,346 Accumulated other comprehensive (income) loss at end of year $10,947 $ (6,324) Accumulated other comprehensive (gain) loss $ 10,947 $ (6,324) Reconciliation of net liability: Net liability at beginning of year Amount recognized in accumulated other comprehensive loss at beginning of year, pre-tax Amount accrued at beginning of year Net periodic benefit cost Contributions Amount accrued at end of year Amount recognized in accumulated other comprehensive gain (loss) Net liability at end of year $(145,732) $(183,611) (6,324) 35,486 (152,056) (4,503) 5,688 (148,125) (10,997) 7,066 (150,871) (152,056) (10,947) 6,324 $(161,818) $(145,732) The table below presents a breakdown of the liability associated with the postretirement health care benefit plan. (In thousands) Current liabilities Non-current liabilities 2014 2013 $ 5,820 155,998 $ 6,199 139,532 The following table presents the funded status of postretirement health care December 31, 2014 and 2013. benefit plan at year the end (In thousands) Benefit obligation at end of year Fair value of plan assets at end of year Funded status at year end 2014 2013 $(161,818) $(145,732) — — (161,818) (145,732) The following table presents the amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic benefit cost for the postretirement health care benefit plan during 2015. (In thousands) Net prior service credit Net loss 2015 $(3,800) 996 $ The following table presents the components of net periodic postretirement health care benefit cost. (In thousands) Service cost Interest cost Amortization of prior service credit Recognized net actuarial loss (gain) 2014 2013 2012 $ 1,457 6,846 (3,800) — $ 2,257 6,848 — 1,892 $ 2,190 7,801 (200) 2,162 Net periodic benefit cost $ 4,503 $10,997 $11,953 The following tables present the discount rate and assumed health care cost trend rates used to determine the benefit obligation and the net periodic benefit the postretirement health care benefit plan. cost for To determine benefit obligation: Discount rate Initial health care cost trend rates Ultimate health care cost trend rate Year that the ultimate trend rate is reached 2014 2013 4.00% 4.80% 7.00% 7.50% 5.00% 5.00% 2019 2019 To determine net periodic benefit cost: Discount rate Initial health care cost trend rates: Medicare Advantage plans All other plans Ultimate health care cost trend rate Year that the ultimate trend rate is reached 2014 2013 2012 4.80% 3.80% 4.40% 7.50% 6.50% 25.00% 7.50 6.50 5.00% 5.00% 5.00% 2019 2016 2016 7.00 231 POPULAR, INC. 2014 ANNUAL REPORT Assumed health care trend rates generally have a significant effect on the amounts reported for a health care plan. The following table presents the effects of changes in the assumed health care cost trend rates. Benefit payments the postretirement health care benefit plan are presented in the following table. be made projected on to (In thousands) Effect on total service cost and interest cost components Effect on postretirement benefit obligation 1-percentage point increase 1-percentage point decrease $ 290 $8,449 $ (363) $(9,955) (In thousands) 2015 2016 2017 2018 2019 2020 - 2024 $ 5,820 5,998 6,290 6,565 6,844 37,668 The following the postretirement health care benefit plan with an accumulated benefit obligation in excess of plan assets. information presents table for (In thousands) Projected benefit obligation Accumulated benefit obligation Fair value of plan assets 2014 2013 $161,818 161,818 – $145,732 145,732 – The Corporation expects to contribute $5.8 million to the postretirement benefit plan in 2015 to fund current benefit payment requirements. Savings plans The Corporation also provides defined contribution savings plans pursuant the Puerto Rico to Section 1081.01(d) of Internal Revenue Code and Section 401(k) of the U.S. Internal Revenue Code, as applicable, for substantially all the employees of the Corporation. Investments in the plans are participant- directed, and employer matching contributions are determined based on the specific provisions of each plan. Employees are fully vested in the employer’s contribution after five years of service. Effective March 20, 2009, the savings plans were amended to suspend the employer matching contribution to the plan. This matching contribution was restored on April 2013. The cost of providing these benefits in the year ended December 31, 2014 was $5.0 million (2013 - $3.6 million). The plans held 1,820,318 (2013 – 1,939,089) shares of common stock of the Corporation with a market value of approximately $62.0 million at December 31, 2014 (2013 - $55.7 million). Note 38 – Net (loss) income per common share The following table sets forth the computation of net (loss) income per common share (“EPS”), basic and diluted, for the years ended December 31, 2014, 2013 and 2012: (In thousands, except per share information) Net (loss) income from continuing operations Net (loss) income from discontinued operations Preferred stock dividends Net (loss) income applicable to common stock Average common shares outstanding Average potential dilutive common shares Average common shares outstanding - assuming dilution Basic EPS from continuing operations Basic EPS from discontinued operations Total Basic EPS Diluted EPS from continuing operations Diluted EPS from discontinued operations Total Diluted EPS 2014 $(190,510) (122,980) (3,723) 2013 $558,818 40,509 (3,723) $(317,213) $595,604 2012 $207,457 37,818 (3,723) $241,552 102,848,792 – 102,693,685 367,790 102,429,755 223,855 102,848,792 103,061,475 102,653,610 $(1.88) $(1.20) $(3.08) $(1.88) $(1.20) $(3.08) $5.41 $0.39 $5.80 $5.39 $0.39 $5.78 $1.99 $0.37 $2.36 $1.98 $0.37 $2.35 from exercise, Potential common shares consist of common stock issuable under the assumed exercise of stock options and restricted stock awards using the treasury stock method. This method assumes that the potential common shares are issued and the proceeds in addition to the amount of compensation cost attributed to future services, are used to purchase common stock at the exercise date. The difference between the number of potential shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Warrants, stock options, and restricted stock awards that result in lower potential shares issued than shares purchased under the treasury stock method are not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect in earnings per common share. For the year ended December 31, 2014, there were 45,205 weighted average antidilutive stock options outstanding (2013 – 102,389; 2012 – 165,342). For the year ended December 31, 2014, the corporation has 628,009 unvested restricted stocks outstanding that were antidilutive. Note 39 – Rental expense and commitments At December 31, 2014, the Corporation was obligated under a number of non-cancelable leases for land, buildings, and equipment which require rentals as follows: Year 2015 2016 2017 2018 2019 Later years Minimum payments[1] (In thousands) $56,129 27,699 22,225 18,537 16,603 114,379 $255,572 [1] Minimum payments have not been reduced by minimum non-cancelable sublease rentals due in the future of $3.7 million at December 31, 2014. Total rental expense for all operating leases, except those with terms of a month or less that were not renewed, for the year ended December 31, 2014 was $35.0 million (2013 - $40.3 million; 2012 - $44.3 million), which is included in net occupancy, equipment and communication expenses, according to their nature. 232 Note 40 – Other service fees The following table presents the major categories of other service fees for the years ended December 31, 2014, 2013 and 2012. (In thousands) Debit card fees Insurance fees Credit card fees Sale and administration of investment products Trust fees Processing fees Other fees 2014 $43,146 54,158 67,639 27,711 18,209 – 14,402 2013 $41,912 52,309 65,727 35,272 17,285 – 16,846 2012 $43,528 51,363 61,071 37,766 16,353 6,330 16,104 Total other service fees $225,265 $229,351 $232,515 Note 41 – FDIC loss share expense The caption of FDIC loss share (expense) income in the consolidated statements of operations consists of the following major categories: (In thousands) Amortization of loss share indemnification asset Reversal of accelerated amortization in prior periods 80% mirror accounting on Years ended December 31, 2013 2012 2014 $(189,959) $(161,635) $(129,676) 12,492 – – credit impairment losses [1] 32,038 60,454 58,187 80% mirror accounting on reimbursable expenses 80% mirror accounting on recoveries on covered assets, including rental income on OREOs, subject to reimbursement to the FDIC 80% mirror accounting on amortization of contingent liability on unfunded commitments Change in true-up payment obligation Other 58,117 50,985 30,771 (13,124) (16,057) (2,979) – (473) (969) (1,791) (797) (15,993) 668 (13,178) 1,633 Total FDIC loss share expense $(103,024) $(82,051) $(56,211) [1] Reductions in expected cash flows for ASC 310-30 loans, which may impact the provision for loan losses, may consider reductions in both principal and interest cash flow expectations. The amount covered under the FDIC loss sharing agreements for interest not collected from borrowers is limited under the agreements (approximately 90 days); accordingly, these amounts are not subject fully to the 80% mirror accounting. 233 POPULAR, INC. 2014 ANNUAL REPORT As discussed in Note 1, the FDIC indemnity asset amortization for the year ended December 31, 2014 included a benefit of approximately $12.5 million to reverse the impact of accelerated amortization expense recorded in prior periods. This amount will be recognized as expense over the remaining portion of the Loss Sharing Agreement that expires in the quarter ending June 30, 2015. During 2014, the Corporation revised its analysis of expected cash flows which resulted in a net decrease in estimated credit losses, which was driven mainly by commercial loan pools. Though this will have a positive impact on the Corporation’s interest accretion in future periods, the carrying value of the indemnification asset was amortized to reflect lower levels of expected losses. This amortization is recognized over the shorter of the remaining life of the loan pools, which the had an average life of approximately six years, or indemnification asset, which expires at June 30, 2015, for commercial, construction and consumer loans and June 30, 2020 for single-family residential mortgage loans. Note 42 – Stock-based compensation The Corporation maintained a Stock Option Plan (the “Stock Option Plan”), which permitted the granting of incentive awards in the form of qualified stock options, incentive stock the options, non-statutory options stock or of Corporation. In April 2004, the Corporation’s shareholders adopted the Popular, Inc. 2004 Omnibus Incentive Plan (the “Incentive Plan”), which replaced and superseded the Stock Option Plan. The adoption of the Incentive Plan did not alter the original terms of the grants made under the Stock Option Plan prior to the adoption of the Incentive Plan. Stock Option Plan Employees and directors of the Corporation or any of its subsidiaries were eligible to participate in the Stock Option Plan. The Board of Directors or the Compensation Committee of the Board had the absolute discretion to determine the individuals that were eligible to participate in the Stock Option Plan. This plan provided for the issuance of Popular, Inc.’s common stock at a price equal to its fair market value at the grant date, subject to certain plan provisions. The shares are to be made available from authorized but unissued shares of common stock or treasury stock. The Corporation’s policy has been to use authorized but unissued shares of common stock to cover each grant. The maximum option term is ten years from the date of grant. Unless an option agreement provides otherwise, all options granted are 20% exercisable after the first year and an additional 20% is exercisable after each subsequent termination of to an acceleration clause at year, subject employment due to retirement. (Not in thousands) Exercise price per share $272.00 Weighted-average exercise price of options outstanding Weighted-average remaining life of options outstanding in years Options exercisable (fully vested) Weighted-average exercise price of options exercisable Options outstanding 44,797 $272.00 0.12 44,797 $272.00 There was no intrinsic value of options outstanding and exercisable at December 31, 2014, 2013 and 2012. 234 10 years of service. The restricted shares granted, consistent with the requirements of the Troubled Asset Relief Program (“TARP”) Interim Final Rule, vest in two years from grant date. The following table summarizes the restricted stock activity under the Incentive Plan for members of management. (Not in thousands) Non-vested at January 1, 2012 Granted Vested Forfeited Non-vested at December 31, 2012 Granted Vested Forfeited Non-vested at December 31, 2013 Granted Vested Forfeited Non-vested at December 31, 2014 Restricted stock 241,934 359,427 (96,353) (13,785) 491,223 229,131 (131,324) (3,783) 585,247 365,831 (311,078) (11,991) 628,009 Weighted-average grant date fair value $31.98 17.72 37.61 26.59 $20.59 28.20 31.23 24.63 $21.16 29.86 19.02 29.33 $27.13 During the year ended December 31, 2014, 365,831 shares of restricted stock (2013 - 229,131; 2012 - 359,427) were awarded to management under the Incentive Plan, from which 162,332 shares (2013 - 165,304; 2012 - 253,170) were awarded to management consistent with the requirements of the TARP Interim Final Rule. incentive awards, with a During the year ended December 31, 2014, the Corporation recognized $6.8 million of restricted stock expense related to management tax benefit of $1.1 million (2013 - $5.3 million, with a tax benefit of $1.7 million; 2012 - $4.3 million, with a tax benefit of $1.1 million). During the year ended December 31, 2014, the fair market value of the restricted stock vested was $5.8 million at grant date and $9.0 million at vesting date. This triggers a shortfall, net of windfalls, of $1.2 million of which $0.4 million was recorded as a windfall pool in additional paid in capital. No windfall pool was recorded for the remaining $0.8 million due to the valuation allowance of the deferred tax asset that was recorded as an additional income tax expense at the applicable income tax rate. No income tax expense was recorded for the U.S. employees due to the valuation allowance of the deferred tax asset. The total unrecognized compensation cost related to non-vested restricted stock awards to members of management at December 31, 2014 was $10.1 million and is expected to be recognized over a weighted-average period of 1.8 years. The following table summarizes the stock option activity and related information: Options outstanding Weighted-average exercise price (Not in thousands) Outstanding at January 1, 2012 Granted Exercised Forfeited Expired Outstanding at December 31, 2012 Granted Exercised Forfeited Expired Outstanding at December 31, 2013 Granted Exercised Forfeited Expired 206,946 – – – (45,960) 160,986 – – – (60,549) 100,437 – – – (55,640) Outstanding at December 31, 2014 44,797 $207.83 – – – 155.68 $222.71 – – – 171.42 $253.64 – – – 238.85 $272.00 There was no stock option expense recognized for the years ended December 31, 2014, 2013 and 2012. Incentive Plan The Incentive Plan permits the granting of incentive awards in the form of Annual Incentive Awards, Long-term Performance Unit Awards, Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Units or Performance Shares. Participants in the Incentive Plan are designated by the Compensation Committee of the Board of Directors (or its delegate as determined by the Board). Employees and directors of the Corporation and/or any of its subsidiaries are eligible to participate in the Incentive Plan. Under the Incentive Plan, the Corporation has issued restricted shares, which become vested based on the employees’ continued service with Popular. Unless otherwise stated in an agreement, the compensation cost associated with the shares of restricted stock is determined based on a two-prong vesting is vested ratably over five years schedule. The first part commencing at the date of grant and the second part is vested at termination of employment after attainment of 55 years of age and 10 years of service. The vesting schedule for restricted shares granted on 2014 was modified as follows, the first part ratably over four years commencing at the date of the grant and the second part is vested at termination of employment after attainment of 55 years of age and 10 years of service or 60 years of age and 5 years of service. The four year vesting part is accelerated at termination of employment after attaining 55 years of age and 10 years of service or 60 years of age and 5 years of service. The five-year vesting part is accelerated at termination of employment after attaining 55 years of age and 235 POPULAR, INC. 2014 ANNUAL REPORT The following table summarizes the restricted stock activity under the Incentive Plan for members of the Board of Directors: Restricted stock Weighted-average grant date fair value (Not in thousands) Nonvested at January 1, 2012 Granted Vested Forfeited Non-vested at December 31, 2012 Granted Vested Forfeited Non-vested at December 31, 2013 Granted Vested Forfeited – 41,174 (41,174) – – 20,930 (20,930) – – 23,135 (23,135) – Non-vested at December 31, 2014 – – $16.37 16.37 – – $29.43 29.43 – – $30.43 30.43 – – During the year ended December 31, 2014, the Corporation granted 23,135 shares of restricted stock to members of the Board of Directors of Popular, Inc., which became vested at grant date (2013 - 20,930; 2012 – 41,174). During this period, the Corporation recognized $0.5 million of restricted stock expense related to these restricted stock grants, with a tax benefit of $57 thousand (2013 - $0.5 million, with a tax benefit of $0.2 million; 2012 - $0.4 million, with a tax benefit of $0.1 million). The fair value at vesting date of the restricted stock vested during the year ended December 31, 2014 for directors was $0.7 million. Note 43 – Income taxes The components of income tax expense (benefit) for the years ended December 31, are summarized in the following table. (In thousands) 2014 2013 2012 Current income tax expense: Puerto Rico Federal and States Subtotal Deferred income tax expense (benefit): Puerto Rico Federal and States Valuation allowance-Initial recognition Adjustment for enacted changes in income tax laws Subtotal Total income tax expense (benefit) $7,814 6,953 14,767 $27,118 10,309 $108,090 998 37,427 109,088 12,569 2,861 8,034 20,048 43,512 (90,796) (491) (138,632) 3,141 – (197,467) – – (288,754) (135,491) $58,279 $(251,327) $(26,403) The reasons for the difference between the income tax expense (benefit) applicable to income before provision for income taxes and the amount computed by applying the statutory tax rate in Puerto Rico, were as follows: (In thousands) Computed income tax at statutory rates Benefit of net tax exempt interest income Effect of income subject to preferential tax rate [1] Deferred tax asset valuation allowance Non-deductible expenses [2] Difference in tax rates due to multiple jurisdictions Initial adjustment in deferred tax due to change in tax rate Unrecognized tax benefits Others Income tax expense (benefit) Amount $ (51,570) (55,862) (21,909) (4,281) 178,219 (14,178) 20,048 (3,601) 11,413 $ 58,279 2014 % of pre-tax income 39% 43 18 3 (135) 10 (16) 3 (9) 2013 Amount $ 135,720 (36,993) (137,793) (32,990) 32,115 (12,029) (197,467) (7,727) 5,837 % of pre-tax income 39% (11) (40) (9) 9 (3) (57) (2) 2 Amount $ 65,662 (25,540) (78,132) 166 23,093 (6,034) – (8,985) 3,367 2012 % of pre-tax income 30% (12) (36) – 11 (3) – (4) 2 (44)% $(251,327) (72)% $(26,403) (12)% [1] Includes the impact of the Closing Agreement with the P.R. Treasury signed in June 2012, the tax expense related to a gain on the sale of EVERTEC shares and income from investments in subsidiaries subject to preferential tax rates and the Closing Agreement with the P.R. Treasury signed in 2014. [2] For the year ended December 31, 2014, includes approximately $161.5 million of amortization of the discount and deferred cost associated with the TARP funds, which are not deductible. On July 1, 2014, the Government of Puerto Rico approved certain amendments to the Internal Revenue Code, which, among other things, changed the income tax rate for capital gains from 15% to 20%. As a result, the Corporation recognized an income tax expense of $20.0 million mainly related to the deferred tax liability associated with the portfolio acquired from Westernbank. During the second quarter of 2014 the Corporation entered into a Closing Agreement with the Puerto Rico Department of Treasury. The Agreement, among other matters, was related to the income tax treatment of certain charge-offs related to the loans acquired from Westernbank as part of the FDIC assisted transaction in the year 2010. As a result of the Agreement, the Corporation recorded a tax benefit of $23.4 million due to a 236 reflect Deferred income taxes tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Significant components of the Corporation’s deferred tax assets and liabilities at December 31 were as follows: the net (In thousands) Deferred tax assets: Tax credits available for carryforward Net operating loss and other carryforward available Postretirement and pension benefits Deferred loan origination fees Allowance for loan losses Deferred gains Accelerated depreciation Intercompany deferred gains Other temporary differences December 31, 2014 December 31, 2013 $ 12,056 $ 8,195 1,261,413 1,269,523 111,677 7,720 710,666 7,500 7,915 2,988 27,755 51,742 7,164 760,956 9,313 7,577 3,235 34,443 Total gross deferred tax assets 2,149,690 2,152,148 Deferred tax liabilities: Differences between the assigned values and the tax basis of assets and liabilities recognized in purchase business combinations FDIC-assisted transaction Unrealized net gain on trading and available-for-sale securities Other temporary differences Total gross deferred tax liabilities Valuation allowance Net deferred tax asset 37,804 81,335 20,817 18,093 37,938 79,381 3,822 13,387 158,049 1,212,748 134,528 1,257,977 $ 778,893 $ 759,643 reduction in the deferred tax liability associated with the Westernbank loan portfolio. Additionally, in connection with this Closing, the Corporation made an estimated tax payment of $45 million which will be used as a credit to offset future income tax liabilities. In addition, as further discussed below, during 2014 an initial valuation allowance on the deferred tax asset of the Holding approximately $8.0 million was recorded at Company, due to the difference in the tax treatment of the interest expense related to the TARP funds and the newly issued $450 million of senior notes, bearing interest at 7%. The results for the year ended December 31, 2013 reflect a tax benefit of $197.5 million, and a corresponding increase in the net deferred tax assets of the Puerto Rico operations as a result of the increase in the marginal tax rate from 30% to 39%. On June 30, 2013 the Governor of Puerto Rico signed Act Number 40 which includes several amendments to the Puerto Rico Internal Revenue Code. Among the most significant changes applicable to corporations was the increase in the marginal tax rate from 30% to 39% effective for taxable years beginning the Corporation recorded an income tax benefit of $146.4 million in connection with the loss generated on the Puerto Rico operations by the sales of non-performing assets that took place during the year 2013 and a tax expense of $23.7 million related to the gain realized on the sale of a portion of EVERTEC’s shares which was taxable at a preferential tax rate according to Act Number 73 of May 28, 2008, known as “Economic Incentives Act for the Development of Puerto Rico”. after December 31, 2012. In addition, The results for the year ended December 31, 2012 reflect a tax benefit of $72.9 million, related to the reduction of the deferred tax liability on the estimated gains for tax purposes related to the loans acquired from Westernbank (the “Acquired Loans”). In June 2012, the Puerto Rico Department of the Treasury (the “P.R. Treasury”) and the Corporation entered into a Closing Agreement (the “Closing Agreement”) to clarify the Acquired Loans are a capital asset and any gain that resulting from such loans will be taxed at the capital gain tax rate instead of the ordinary income tax rate, thus reducing the deferred tax liability on the estimated gain and recognizing an income tax benefit for accounting purposes. 237 POPULAR, INC. 2014 ANNUAL REPORT The net deferred tax asset shown in the table above at December 31, 2014 is reflected in the consolidated statements of financial condition as $813 million in net deferred tax assets (in the “other assets” caption) (2013 - $762 million in deferred tax asset in the “other assets” caption) and $34 million in deferred tax liabilities (in the “other liabilities” caption) (2013 - $2 million in deferred tax liabilities in the “other liabilities” caption), reflecting the aggregate deferred tax assets or liabilities of individual tax-paying subsidiaries of the Corporation. Included as part of the other carryforwards available are $47.2 million related to contributions to Banco Popular de Puerto Rico qualified pension plan and $57.8 million of other net operating loss carryforwards (“NOLs”) primarily related to the loss on sale of non-performing assets that have no expiration date since they were realize through a single member election. limited Additionally, the deferred tax asset related to the NOLs outstanding at December 31, 2014 expires as follows: company with partnership liability (In thousands) 2017 2018 2019 2021 2022 2023 2024 2027 2028 2029 2030 2031 2032 2033 $ 3,312 14,928 1 76 971 1,248 10,963 51,452 511,561 198,224 197,090 139,512 25,276 1,757 $1,156,371 A deferred tax asset should be reduced by a valuation allowance if based on the weight of all available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or the entire deferred tax asset will not be realized. The valuation allowance should be sufficient to reduce the deferred tax asset to the amount that is more likely than not to be realized. The determination of whether a deferred tax asset is realizable is based on weighting all available evidence, including both positive and negative evidence. The realization of deferred tax assets, including carryforwards and deductible temporary differences, depends upon the existence of sufficient taxable income of the same character during the carryback or carryforward period. The analysis considers all sources of taxable income available to realize the deferred tax asset, including the future reversal of existing taxable temporary differences, reversing future taxable income exclusive of temporary differences and carryforwards, taxable income in prior carryback years and tax-planning strategies. taxable income exclusive of the loan portfolios. However, The Corporations maintains a valuation allowance on its deferred tax asset for the U.S. operations, since in consideration of the requirement of ASC 740 management considered that it is more likely than not that all of this deferred tax asset will not be realized. For purposes of assessing the realization of the deferred tax assets in the U.S. mainland management evaluates and weights all available positive and negative evidence. The Corporation’s U.S. mainland operations are no longer in a cumulative loss position for the three-year period ended December 31, 2014 taking into account reversing temporary differences (“adjusted book income”). This represents positive evidence within management’s evaluation. The book income for the years 2013 and 2014 was significantly impacted by a reversal of the loan loss provision due to the improved credit quality of the U.S. mainland operations did not report taxable income for the years 2011, 2012 and 2013, although it did report taxable income for the year ended December 31, 2014. Future realization of the deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character within the carryforward period available under the tax law. The lack of a sustained level of taxable income together with the uncertainties regarding the estimate of future normalized level of profitability and cost savings related to the evidence within restructure management’s evaluation. This determination is updated each quarter and adjusted as any changes arise. After weighting of all positive and negative evidence management concluded, as of the reporting date, that it is more likely than not that the Corporation will not be able to realize any portion of the deferred tax assets related to the U.S. mainland operations, considering the criteria of ASC Topic 740. If the Corporation is able to meet its operating targets in the U.S. and the results of the reorganization yield the expected results, this would be considered positive evidence within management’s evaluation which could outweigh the negative evidence and result in the realization of a portion of the fully reserved deferred tax asset recorded at PCB. represents negative strong At December 31, 2014, the Corporation’s net deferred tax assets related to its Puerto Rico operations amounted to $812 million. The Corporation’s Puerto Rico Banking operation is not in a cumulative loss position and has sustained profitability for the three year period ended December 31, 2014, exclusive of the loss generated on the sales of non performing assets that took place in 2013 which is not a continuing condition of the operations. This is considered a strong piece of objectively verifiable positive evidence that out weights any negative evidence considered by management in the evaluation of the realization of the deferred tax asset. Based on this evidence and the management’s Corporation has concluded that it is more likely than not that such net deferred tax asset of the Puerto Rico Banking operations will be realized. estimate income, taxable future of 238 of in the financial statement the total amount of At December 31, 2014, interest recognized condition approximated $3.1 million (2013 - $3.6 million). The total interest expense recognized during 2014 was $540 thousand (2013 - $1.4 million). Management determined that, as of December 31, 2014 and 2013, there was no need to accrue for the payment of penalties. The Corporation’s policy is to report interest related to unrecognized tax benefits in income tax if any, are reported in other expense, while the penalties, operating of in the expenses operations. consolidated statements After consideration of the effect on U.S. federal tax of unrecognized U.S. state tax benefits, the total amount of unrecognized tax benefits, including U.S. and Puerto Rico that, if recognized, would affect the Corporation’s effective tax rate, was approximately $9.8 million at December 31, 2014 (2013 - $11.9 million). The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current tax year positions, expiration of open income tax returns due to the statute of limitations, changes in management’s judgment about the level of uncertainty, status of examinations, and the addition or elimination of uncertain tax positions. litigation and legislative activity, The Corporation and its subsidiaries file income tax returns in Puerto Rico, the U.S. federal jurisdiction, various U.S. states and political subdivisions, and foreign jurisdictions. As of December 31, 2014, the following years remain subject to examination: U.S. Federal jurisdiction – 2011 through 2014 and Puerto Rico – 2010 through 2014. The Corporation anticipates a reduction in the total amount of unrecognized tax benefits within the next 12 months, which could amount to approximately $6.7 million. The Holding Company operation is not in a cumulative loss position for the three year period ended December 31, 2014. However, after the payment of TARP, the interest expense that will be paid on the newly issued $450 million subordinated notes which partially funded the repayment of TARP funds in 2014, bearing interest at 7%, will be tax deductible contrary to the interest expense payable on the note issued to the U.S. Treasury under TARP. Based on this new fact pattern the Holding Company is expecting to have losses for income tax purposes exclusive of reversing temporary differences. Since as required by ASC 740 the historical information should be supplemented by all currently available information about future years, the expected losses in future years is considered by management a strong negative evidence that will suggest that income in future years will be insufficient to support the realization of all deferred tax asset. After weighting of all positive and negative evidence management concluded, as of the reporting date, that it is more likely than not that the Holding Company will not be able to realize any portion of the deferred tax assets, considering the criteria of ASC Topic 740. Accordingly, a valuation allowance on the deferred tax asset of $17.8 million was recorded during the year 2014. Under the Puerto Rico Internal Revenue Code, the Corporation and its subsidiaries are treated as separate taxable entities and are not entitled to file consolidated tax returns. The Code provides a dividends-received deduction of 100% on dividends received from “controlled” subsidiaries subject to taxation in Puerto Rico and 85% on dividends received from other taxable domestic corporations. The Corporation’s federal income tax provision for 2014 was $7.0 million (2013 – $4.4 million; 2012 – $4.4 million). The intercompany settlement of taxes paid is based on tax sharing agreements which generally allocate taxes to each entity based on a separate return basis. table unrecognized tax benefits. reconciliation following presents The of a (In millions) Balance at January 1, 2013 Additions for tax positions related to 2013 Additions for tax positions taken in prior years Reduction as a result of lapse of statute of limitations Balance at December 31, 2013 Additions for tax positions related to 2014 Reduction as a result of lapse of statute of limitations Reduction for tax positions of prior years Balance at December 31, 2014 $13.4 1.2 0.9 (5.7) $ 9.8 1.1 (2.5) (0.4) $ 8.0 239 POPULAR, INC. 2014 ANNUAL REPORT Note 44 – Supplemental disclosure on the consolidated statements of cash flows Additional disclosures on cash flow information and non-cash activities for the years ended December 31, 2014, 2013 and 2012 are listed in the following table: (In thousands) Income taxes paid Interest paid Non-cash activities: Loans transferred to other real estate Loans transferred to other property Total loans transferred to foreclosed assets Transfers from loans held-in-portfolio to loans held-for-sale Transfers from loans held-for-sale to loans held-in-portfolio Loans securitized into investment securities [1] Trades receivables from brokers and counterparties Trades payable to brokers and counterparties Recognition of mortgage servicing rights on securitizations or asset transfers Loans sold to a joint venture in exchange for an acquisition loan and an equity interest in the joint venture [1] Includes loans securitized into trading securities and subsequently sold before year end. 2014 2013 2012 $ 54,520 696,631 $ 51,047 318,342 $ 189,468 388,250 $ 154,358 38,958 $ 228,009 33,997 $ 294,993 25,685 193,316 2,161,669 41,293 899,604 66,949 2,000 12,583 262,006 448,143 27,016 1,391,594 71,680 3,576 19,262 320,678 141,378 10,325 1,330,743 137,542 3,581 18,495 – 194,514 – During the year ended December 31, 2014 BPNA completed the sale of its Illinois, Central Florida and California regional operations. As part of these transactions, BPNA made net cash disbursement of $206.0 million for consideration of the assets and liabilities sold, as follows: Banco Popular de Puerto Rico: Given that Banco Popular de Puerto Rico constitutes a significant portion of the Corporation’s results of operations and total assets at December 31, 2014, additional disclosures are provided for the business areas included in this reportable segment, as described below: (In thousands) Loans held-for-sale Premises and equipment, net Other assets Deposits Other liabilities Net liabilities sold December 31, 2014 $ 1,739,101 16,223 16,853 (2,009,816) (6,611) $ (244,250) structure consists of Note 45 – Segment reporting two corporate The Corporation’s reportable segments – Banco Popular de Puerto Rico and Banco Popular North America. These reportable segments pertain only to the continuing operations of Popular, Inc. As previously indicated in Note 4 to the consolidated financial statements, the regional operations in California, Illinois and Central Florida were classified as discontinued operations in the second quarter of 2014. Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. The segments were determined based on the organizational structure, which focuses primarily on the markets the segments serve, as well as on the products and services offered by the segments. • Commercial It banking represents includes aspects of the Corporation’s banking operations conducted at BPPR, which are targeted mainly to corporate, small and middle size the lending and businesses. depository businesses, as well as other finance and advisory services. BPPR allocates funds across business areas based on duration matched transfer pricing at market rates. This area also incorporates income related with the investment of excess funds, as well as a proportionate share of the investment function of BPPR. • Consumer and retail banking represents the branch banking operations of BPPR which focus on retail clients. It includes the consumer lending business operations of BPPR, as well as the lending operations of Popular Auto and Popular Mortgage. Popular Auto focuses on auto and lease focuses principally on residential mortgage loan originations. The consumer and retail banking area also incorporates income related with the investment of excess funds from the branch network, as well as a proportionate share of the investment function of BPPR. Popular Mortgage financing, while 240 December 31, 2014 Reportable Segments Corporate Eliminations Total Popular, Inc. (In thousands) Net interest income (expense) $ 1,446,590 $ (501,518) $ – $ 945,072 Provision (reversal of provision) for loan losses Non-interest income Amortization of intangibles Depreciation expense Loss on early extinguishment of debt Other operating expenses Income tax expense (benefit) 270,334 347,570 (200) 41,695 – (2,750) 8,160 45,679 532 – 648 – – – – 270,134 386,515 8,160 46,327 532 1,068,658 72,759 (2,752) 1,138,665 Net income (loss) $ 319,723 $ (510,234) $ 81,074 (22,796) 1 1 58,279 $ (190,510) Segment assets $32,869,630 $4,937,372 $(4,710,307) $33,096,695 (In thousands) Net interest income Provision for loan losses Non-interest income Amortization of intangibles Depreciation expense Other operating expenses Income tax (benefit) expense Net income Segment assets December 31, 2013 Banco Popular de Puerto Rico $ 1,260,537 616,883 281,894 7,162 38,282 943,444 (236,898) Banco Popular North America Intersegment Eliminations $ $ 192,265 (11,175) 36,252 809 6,839 153,207 2,795 – – – – – – – – $ 173,558 $ 76,042 $ $26,883,073 $8,724,784 $(24,609) (In thousands) Net interest income (expense) Provision for loan losses Non-interest income Amortization of intangibles Depreciation expense Loss on early extinguishment of debt Other operating expenses Income tax benefit December 31, 2013 Reportable Segments Corporate Eliminations Total Popular, Inc. $ 1,452,802 $ (108,228) $ 605,708 318,146 398 475,663 – – (2,796) $ 1,344,574 606,106 791,013 7,971 45,121 – 643 – 3,388 – – – 7,971 45,764 3,388 1,096,651 (234,103) 70,997 (17,082) (2,781) (142) 1,164,867 (251,327) Net income $ 249,600 $ 309,091 $ 127 $ 558,818 Segment assets $35,583,248 $5,495,498 $(5,329,413) $35,749,333 • Other financial services include the trust and asset management service units of BPPR, the brokerage and investment banking operations of Popular Securities, and the insurance agency and reinsurance businesses of Popular Insurance, Popular Insurance V.I., Popular Risk Services, and Popular Life Re. Most of the services that are provided by these subsidiaries generate profits based on fee income. Banco Popular North America: Banco Popular North America’s reportable segment consists of the banking operations of BPNA, E-LOAN, Popular Equipment Finance, Inc. and Popular Insurance Agency, U.S.A. BPNA operates through a retail branch network in the U.S. mainland under the name of Popular Community Bank, while E-LOAN supports BPNA’s deposit gathering through its online platform. All direct lending activities at E-LOAN were ceased during the fourth quarter of 2008. Popular Equipment Finance, Inc. also holds a running-off loan portfolio as this subsidiary ceased originating loans during 2009. Popular Insurance Agency, U.S.A. offers investment and insurance services across the BPNA branch network. The Corporate group consists primarily of the holding companies: Popular, Inc., Popular North America, Popular International Bank and certain of the Corporation’s investments accounted for under the equity method, including EVERTEC and Centro Financiero BHD, S.A. The Corporate group also includes the expenses of certain corporate areas that are to the organization: Finance, Risk identified as critical Management and Legal. are accounting policies of The segments the Transactions between reportable conducted at market eliminated for reporting consolidated results of operations. individual operating the Corporation. are primarily that are segments resulting in profits the those of rates, same as The tables that follow present the results of operations and total assets by reportable segments: December 31, 2014 (In thousands) Net interest income Provision (reversal of provision) for loan losses Non-interest income Amortization of intangibles Depreciation expense Loss on early extinguishment of debt Other operating expenses Income tax expense Net income Segment assets Banco Popular de Puerto Rico Banco Popular North America Intersegment Eliminations $ 1,288,889 $ 157,701 $ 289,184 283,251 7,351 39,062 – 884,289 77,973 (18,850) 64,319 809 6,617 532 184,369 3,101 $ 274,281 $ 45,442 $ – – – – – – – – – $27,384,169 $5,503,433 $(17,972) 241 POPULAR, INC. 2014 ANNUAL REPORT December 31, 2012 (In thousands) Net interest income Provision for loan losses Non-interest income Amortization of intangibles Depreciation expense Loss on early extinguishment of debt Other operating expenses Income tax expense Net income Segment assets Banco Popular de Puerto Rico $ 1,199,210 356,496 401,417 7,351 37,321 25,196 903,677 (20,245) Banco Popular North America Intersegment Eliminations $ $ 186,680 40,173 37,141 810 5,785 – 165,133 3,745 – – – – – – – – – $ 290,831 $ 8,175 $ $27,600,235 $8,651,790 $(31,792) (In thousands) Net interest income (expense) Provision for loan losses Non-interest income Amortization of intangibles Depreciation expense Loss on early extinguishment of debt Other operating expenses Income tax expense (benefit) December 31, 2012 Reportable Segments Corporate Eliminations Total Popular, Inc. $ 1,385,890 $ (104,750) $ 396,669 438,558 8,161 43,106 25,196 1,068,810 (16,500) 404 76,156 – 1,258 – 71,579 (9,945) 487 $ 1,281,627 397,073 511,489 8,161 44,364 – (3,225) – – – (3,121) 42 25,196 1,137,268 (26,403) Net income (loss) Segment assets $ 299,006 $ (91,890) $ 341 $ 207,457 $36,220,233 $5,308,327 $(5,021,025) $36,507,535 Additional disclosures with respect to the Banco Popular de Puerto Rico reportable segment are as follows: December 31, 2014 Banco Popular de Puerto Rico (In thousands) Commercial Banking Consumer and Retail Banking Other Financial Services Eliminations Total Banco Popular de Puerto Rico December 31, 2013 Banco Popular de Puerto Rico (In thousands) Commercial Banking Consumer and Retail Banking Other Financial Services Eliminations Total Banco Popular de Puerto Rico Net interest income $ Provision for loan losses Non-interest 493,836 $ 757,039 $ 9,662 $ – $ 1,260,537 180,228 436,655 – – 616,883 (expense) income (41,362) 224,080 99,243 (67) 281,894 Amortization of intangibles Depreciation expense Other operating expenses Income tax 4 6,837 321 16,083 20,981 1,218 – – 7,162 38,282 296,319 578,903 68,289 (67) 943,444 (benefit) expense (66,747) (182,471) 12,320 – (236,898) Net income $ 26,587 $ 120,214 $ 26,757 $ – $ 173,558 Segment assets $10,803,992 $18,083,293 $576,299 $(2,580,511) $26,883,073 December 31, 2012 Banco Popular de Puerto Rico (In thousands) Commercial Banking Consumer and Retail Banking Other Financial Services Eliminations Total Banco Popular de Puerto Rico Net interest income $ Provision for loan losses Non-interest income Amortization of intangibles Depreciation expense Loss on early extinguishment of debt Other operating expenses Income tax expense 424,467 $ 762,857 $ 11,882 $ 4 $ 1,199,210 149,597 206,899 – – 356,496 19,426 269,190 112,949 (148) 401,417 13 6,833 16,840 19,522 505 959 8,037 17,159 – – – – 7,351 37,321 25,196 279,358 (33,068) 555,797 (1,460) 68,670 14,281 (148) 2 903,677 (20,245) Net income $ 23,116 $ 227,297 $ 40,416 $ 2 $ 290,831 Net interest income $ Provision for loan losses Non-interest 521,957 $ 757,721 $ 9,207 $ 4 $ 1,288,889 Segment assets $12,770,793 $19,668,009 $632,676 $(5,471,243) $27,600,235 138,213 150,971 – – 289,184 (expense) income 3,534 181,117 98,794 (194) 283,251 Amortization of intangibles Depreciation expense Other operating expenses Income tax expense 4 6,836 511 16,407 21,551 1,104 – – 7,351 39,062 254,146 22,899 562,345 38,825 67,992 16,249 (194) – 884,289 77,973 Net income $ 93,822 $ 158,310 $ 22,145 $ 4 $ 274,281 Segment assets $10,267,633 $18,895,974 $591,955 $(2,371,393) $27,384,169 Additional disclosures with respect to the Banco Popular Geographic Information North America reportable segments are as follows: 242 (In thousands) Revenues:[1] Puerto Rico United States Other 2014 2013 2012 $1,024,416 223,264 83,907 $1,838,657 218,295 78,635 $1,492,796 202,177 98,143 Total consolidated revenues $1,331,587 $2,135,587 $1,793,116 [1] Total revenues include net interest income (expense), service charges on deposit accounts, other service fees, mortgage banking activities, net gain (loss) and valuation adjustments on investment securities, trading account (loss) profit, net (loss) gain on sale of loans and valuation adjustments on loans held-for-sale, adjustments to indemnity reserves on loans sold, FDIC loss share (expense) income and other operating income. Selected Balance Sheet Information (In thousands) Puerto Rico Total assets Loans Deposits United States Total assets Loans Deposits Other Total assets Loans Deposits [1] 2014 2013 2012 $26,276,561 17,704,170 20,365,445 $25,714,758 18,107,764 19,730,408 $26,582,248 18,484,977 19,984,830 $5,689,604 3,568,564 3,442,084 $1,130,530 780,483 1,000,006 $8,897,535 5,839,115 6,007,159 $1,137,040 759,840 973,578 $8,816,143 5,852,705 6,049,168 $1,109,144 755,950 966,615 [1] Represents deposits from BPPR operations located in the US and British Virgin Islands. December 31, 2014 Banco Popular North America Banco Popular North America E-LOAN Eliminations (In thousands) Net interest income Reversal of provision for loan losses Non-interest income Amortization of intangibles Depreciation expense Loss on early extinguishment of debt Other operating expenses Income tax expense $ 154,806 $ 2,895 $ (16,416) 61,982 (2,434) 2,337 809 6,617 532 181,452 3,101 – – – 2,917 – Net income $ 40,693 $ 4,749 $ Net income ( loss) $6,222,580 $255,757 $(974,904) $5,503,433 December 31, 2013 Banco Popular North America Banco Popular North America E-LOAN Eliminations (In thousands) Net interest income (Reversal of provision) provision for loan losses Non-interest income Amortization of intangibles Depreciation expense Other operating expenses Income tax expense $ 189,229 $ 3,036 $ (13,998) 35,833 809 6,839 150,767 4,012 2,823 419 – – 2,440 (1,217) Net income (loss) $ 76,633 $ (591) $ Segment assets $9,453,934 $315,712 $(1,044,862) $8,724,784 December 31, 2012 Banco Popular North America Banco Popular North America E-LOAN Eliminations (In thousands) Net interest income Provision for loan losses Non-interest income Amortization of intangibles Depreciation expense Other operating expenses Income tax expense $ 183,222 24,973 34,026 $ 3,458 $ 15,200 3,115 810 5,785 162,309 3,745 – – 2,824 – Net income (loss) $ 19,626 $ (11,451) $ Segment assets $9,378,779 $367,362 $(1,094,351) $8,651,790 Total Banco Popular North America $ 157,701 (18,850) 64,319 809 6,617 532 184,369 3,101 $ 45,442 – – – – – – – – – Total Banco Popular North America $ 192,265 (11,175) 36,252 809 6,839 153,207 2,795 $ 76,042 Total Banco Popular North America $ 186,680 40,173 37,141 810 5,785 165,133 3,745 $ 8,175 – – – – – – – – – – – – – – – – 243 POPULAR, INC. 2014 ANNUAL REPORT Note 46 – Subsequent events Subsequent events are events and transactions that occur after the balance sheet date but before the financial statements are issued. The effects of subsequent events and transactions are recognized in the financial statements when they provide additional evidence about conditions that existed at the balance sheet date. The Corporation has and evaluated events transactions occurring subsequent to December 31, 2014. On February 27, 2015, the Corporation’s Puerto Rico banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), in an alliance with co-bidders, including the Corporation’s U.S. mainland banking subsidiary, Banco Popular North America, doing business as Popular Community Bank (“PCB”), had acquired certain assets and all deposits (other than certain brokered deposits) of Doral Bank from the Federal Deposit Insurance Corporation (FDIC) as receiver. Under the FDIC’s bidding format, BPPR was the lead bidder and party to the purchase and assumption agreement with the FDIC covering all assets and deposits to be acquired by it and its alliance co-bidders. BPPR entered into back to back purchase and assumption agreements with the alliance co-bidders for the transferred assets and deposits. There is no loss-sharing arrangement with the FDIC on the acquired assets. The other co-bidders that formed part of the alliance led by BPPR are FirstBank Puerto Rico, San Juan, Puerto Rico; Centennial Bank, Conway, Arkansas; and an affiliate of J.C. Flowers III LP. In connection with the transaction, FirstBank acquired 10 Doral Bank branches in Puerto Rico with approximately $625 million in deposits and $325 million in residential loans from BPPR; Centennial Bank acquired five Doral Bank branches in Florida (all outside of PCB’s area of focus in the state) with approximately $466 million in deposits and $42 million in loans from BPPR; and an affiliate of J.C. Flowers III LP acquired approximately $316 million in commercial real estate loans in the United States from BPPR. BPPR has entered into customary transition service agreements with each of the alliance co-bidders. The transaction was completed based on December 31, 2014 balances and is subject to customary true-up and purchase accounting adjustments through the date of the close. The $1.8 billion in loans and $2.3 billion in deposits acquired by Popular in the transaction did not include any non-performing assets and do not enjoy a loss sharing agreement with the FDIC. Note 47 – Popular, Inc. (holding company only) financial information The following condensed financial information presents the financial position of Popular, Inc. Holding Company only at December 31, 2014 and 2013, and the results of its operations and cash flows for each of the three years in the period ended December 31, 2014. After taking into account the transfers to the unaffiliated assumed alliance approximately acquired approximately $1.8 billion in performing commercial and residential loans, including: co-bidders, BPPR and PCB together and deposits billion $2.3 in • BPPR assumed approximately $612 million in deposits associated with eight of the 18 Puerto Rico branches of Doral Bank and approximately $431 million from its online deposit platform, and approximately $848 million in performing Puerto Rico residential and commercial loans. BPPR purchased the loans at an aggregate discount of 4.71% or $40 million and paid an aggregate premium of 0.93% or $10 million for the deposits it assumed. • PCB assumed approximately $1.3 billion in deposits in three New York branches of Doral Bank, and acquired approximately $931 million in performing commercial loans primarily in the New York metropolitan area. PCB purchased the loans at an aggregate premium of 0.57% or $5 million and paid an aggregate premium of 1.99% or $ 25 million for the deposits it assumed. In addition, on February 27, 2015, the FDIC, as Receiver for Doral Bank, awarded BPPR the mortgage servicing rights for a loan portfolio of approximately $5 billion in unpaid principal balance, for a purchase price currently estimated at $48.6 million. The transfers of the mortgage servicing rights are subject to a number of specified closing conditions, including the consent of each of Ginnie Mae, Fannie Mae and Freddie Mac in a form acceptable to BPPR, and other customary closing conditions. The transfers are expected to close within the next 60 days, subject to the conditions described above. Condensed Statements of Condition (In thousands) ASSETS Cash and due from banks (includes $20,269 due from bank subsidiary (2013 - $10,411)) Money market investments Trading account securities Investment securities available-for-sale, at fair value Other investment securities, at lower of cost or realizable value (includes $8,725 in common securities from statutory trusts (2013 - $9,725)) [1] Investment in BPPR and subsidiaries, at equity Investment in Popular North America and subsidiaries, at equity Investment in other non-bank subsidiaries, at equity Advances to subsidiaries Loans to affiliates Other loans Less - Allowance for loan losses Premises and equipment Investment in equity method investees Other assets (includes $867 due from subsidiaries and affiliate (2013 - $1,085)) Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Notes payable Other liabilities (includes $4,583 due to subsidiaries and affiliate (2013 - $929)) Stockholders’ equity Total liabilities and stockholders’ equity [1] Refer to Note 26 to the consolidated financial statements for information on the statutory trusts. 244 December 31, 2014 2013 $ $ 20,448 19,747 1,640 231 10,595 18,721 1,353 204 9,850 3,389,529 1,221,670 267,667 53,769 – 1,717 41 2,512 47,837 20,845 10,850 3,127,745 1,511,335 217,486 519,500 – 1,592 304 2,135 41,248 25,947 $5,057,421 $5,488,407 $ 740,812 49,226 4,267,383 $ 822,351 39,906 4,626,150 $5,057,421 $5,488,407 245 POPULAR, INC. 2014 ANNUAL REPORT Condensed Statements of Operations (In thousands) Income: Dividends from subsidiaries Interest income (includes $1,829 due from subsidiaries and affiliates (2013 - $17,551; 2012 - $22,891)) Earnings from investments in equity method investees Other operating income Gain on sale and valuation adjustment of investment securities Trading account (loss) profit Total income Expenses: Interest expense (Reversal of provision) provision for loan losses Operating expenses (include expenses for services provided by subsidiaries and affiliate of $6,882 (2013 - $8,412; 2012 - $9,487)), net of reimbursement by subsidiaries for services provided by parent of $67,021 (2013 - $60,402; 2012 - $58,577) Total expenses (Loss) income before income taxes and equity in undistributed earnings of subsidiaries Income taxes (Loss) income before equity in undistributed earnings of subsidiaries Equity in undistributed earnings of subsidiaries (Loss) income from continuing operations Equity in undistributed (losses) earnings of discontinued operations Net (loss) income Comprehensive (loss) income, net of tax Years ended December 31, 2012 2013 2014 $ – 1,931 12,291 – – (40) $ 37,000 17,793 17,308 425,968 7,966 161 $ 5,000 23,038 40,505 1,461 – 214 14,182 506,196 70,218 492,657 (200) 101,245 398 95,898 404 1,633 700 494,090 102,343 (479,908) 5,580 (485,488) 294,978 (190,510) (122,980) 403,853 1,412 402,441 156,377 558,818 40,509 1,705 98,007 (27,789) 1,702 (29,491) 236,948 207,457 37,818 $(313,490) $599,327 $245,275 $(354,617) $513,450 $184,955 Condensed Statements of Cash Flows (In thousands) Cash flows from operating activities: Net (loss) income Adjustments to reconcile net (loss) income to net cash used in operating activities: Equity in undistributed earnings of subsidiaries and dividends from subsidiaries (Reversal of provision) provision for loan losses Net accretion of discounts and amortization of premiums and deferred fees Earnings from investments under the equity method Deferred income tax (benefit) expense (Gain) loss on: Sale and valuation adjustments of investment securities Sale of stock in equity method investee Net (increase) decrease in: Trading securities Other assets Net increase (decrease) in: Interest payable Other liabilities Total adjustments Net cash used in operating activities Cash flows from investing activities: Net (increase) decrease in money market investments Proceeds from calls, paydowns, maturities and redemptions of investment securities: Available-for-sale Other Proceeds from sale of investment securities: Available-for-sale Capital contribution to subsidiaries Net decrease (increase) in advances to subsidiaries and affiliates Net (originations) repayments on other loans Return of capital from equity method investments Proceeds from sale of stock in equity method investee Acquisition of premises and equipment Proceeds from sale of: Premises and equipment Net cash provided by investing activities Cash flows from financing activities: Payments of notes payable and subordinated notes Proceeds from issuance of notes payable Proceeds from issuance of common stock Dividends paid Repurchase of TARP-related warrants Net payments for repurchase of common stock Net cash (used in) provided by financing activities Net increase (decrease) in cash and due from banks Cash and due from banks at beginning of period Cash and due from banks at end of period 246 Year ended December 31, 2013 2012 2014 $(313,490) $ 599,327 $ 245,275 (171,998) (200) 404,461 (12,291) 8,203 (196,886) 398 30,467 (17,308) (10,937) (274,766) 404 29,058 (40,505) (14,109) – – (2,110) (416,113) (288) 4,736 7,066 (180) (94) 7,747 2,704 (5,507) – – (1,259) 9,351 – 2,581 239,509 (607,639) (289,245) (73,981) (8,312) (43,970) (1,026) (147) 23,665 – 1,000 35,000 – – – – (100,000) 465,731 (279) 210,000 – (1,075) 5,438 (272,500) (234,014) 269 – 481,377 (352) – (103,500) (36,400) 138 150,194 – (691) 48 33 73 574,399 15,104 33,479 (936,000) 450,000 5,394 (3,723) (3,000) (3,236) (490,565) 9,853 10,595 – – 6,860 (3,723) – (437) 2,700 9,492 1,103 – – 9,402 (3,723) – (450) 5,229 (5,262) 6,365 $ 20,448 $ 10,595 $ 1,103 Popular, Inc. (parent company only) received dividend distributions from its direct equity method investees amounting to $4.7 million for the year ended December 31, 2014 (2013 - $4 million). 247 POPULAR, INC. 2014 ANNUAL REPORT Notes payable include junior subordinated debentures issued by the Corporation that are associated to capital securities issued by the Popular Capital Trust I, Popular Capital Trust II and Popular Capital Trust III and medium-term notes. Refer to Note 26 for a description of significant provisions related to these junior subordinated debentures. The following table presents the aggregate amounts by contractual maturities of notes payable at December 31, 2014: Year 2015 2016 2017 2018 2019 Later years Total (In thousands) $ – – – – 450,000 290,812 $740,812 The following Note 48 – Condensed consolidating financial information of guarantor and issuers of registered guaranteed securities condensed financial information presents the financial position of Popular, Inc. Holding Company (“PIHC”) (parent only), Popular North the America, Corporation at December 31, 2014 and 2013, and the results of their operations and cash flows for periods ended December 31, 2014, 2013 and 2012. Inc. (“PNA”) and all other subsidiaries of consolidating PNA is an operating, wholly-owned subsidiary of PIHC and its wholly-owned subsidiaries: is the holding company of Equity One, Inc. and Banco Popular North America (“BPNA”), including Popular Equipment Finance, Inc., Popular Insurance Agency, U.S.A., and E-LOAN, Inc. BPNA’s wholly-owned subsidiaries PIHC fully and unconditionally guarantees all registered debt securities issued by PNA. Popular International Bank, Inc. (“PIBI”) is a wholly-owned subsidiary of PIHC and is the holding company of its wholly- owned subsidiaries Popular Insurance V.I., Inc. In July 2013, the Corporation completed the sale of Tarjetas y Transacciones en Red Tranred,C.A., which was a wholly owned subsidiary of subsidiary PIBI. Effective January 1, 2012, PNA, which was a wholly- owned subsidiary of PIBI prior to that date, became a direct wholly-owned internal of reorganization. Since the internal reorganization, PIBI is no longer a bank holding company and is no longer a potential issuer of securities. PIBI has no outstanding registered debt securities that would also be guaranteed by PIHC. the Corporation’s debt PIHC after an A potential source of income for PIHC consists of dividends from BPPR and BPNA. Under existing federal banking regulations any dividend from BPPR or BPNA to the PIHC could be made if the total of all dividends declared by each entity during the calendar year would not exceed the total of its net income for that year, as defined by the Federal Reserve Board, combined with its retained net income for the preceding two years, less any required transfers to surplus or to a fund for the retirement of any preferred stock. At December 31, 2014, BPPR could have declared a dividend of approximately $542 million (December 31, 2013 - $504 million). On October 20, the Memorandum of Understanding (the “FRB-NY 2014, MOU”) entered into on July 20, 2011 among Popular, Inc., BPPR, the Federal Reserve Bank of New York (the “FRB-NY”) and the Office of the Commissioner of Financial Institutions of Puerto Rico was terminated. The FRB-NY MOU provided, among other things, for the Corporation to take steps to improve its credit risk management practices and asset quality, and for the Corporation to develop strategic plans to improve earnings and to develop capital plans. The FRB-NY MOU also required the Corporation to obtain approval from the applicable FRB-NY MOU counterparties prior to, among other things, declaring or paying dividends, purchasing or redeeming any shares of its stock, consummating acquisitions or mergers, or making any distributions on its trust preferred securities or subordinated debentures. On January 9, 2015, another Memorandum of Understanding entered into among BPNA, the FRB-NY and the New York State Department of Financial Services (the “NYSDFS”), effective on July 25, 2011, was also terminated. This Memorandum of Understanding provided that BPNA could not declare dividends without the approval of the FRB-NY and the NYSDFS. 248 Condensed Consolidating Statement of Financial Condition (In thousands) Assets: Cash and due from banks Money market investments Trading account securities, at fair value Investment securities available-for-sale, at fair value Investment securities held-to-maturity, at amortized cost Other investment securities, at lower of cost or realizable value Investment in subsidiaries Loans held-for-sale, at lower of cost or fair value Loans held-in-portfolio: Loans not covered under loss sharing agreements with the FDIC Loans covered under loss sharing agreements with the FDIC Less - Unearned income Allowance for loan losses Total loans held-in-portfolio, net FDIC loss share asset Premises and equipment, net Other real estate not covered under loss sharing agreements with the FDIC Other real estate covered under loss sharing agreements with the FDIC Accrued income receivable Mortgage servicing assets, at fair value Other assets Goodwill Other intangible assets Total assets Liabilities and Stockholders’ Equity Liabilities: Deposits: Non-interest bearing Interest bearing Total deposits Federal funds purchased and assets sold under agreements to repurchase Other short-term borrowings Notes payable Other liabilities Liabilities from discontinued operations Total liabilities Stockholders’ equity: Preferred stock Common stock Surplus Retained earnings (accumulated deficit) Treasury stock, at cost Accumulated other comprehensive loss, net of tax Total stockholders’ equity Total liabilities and stockholders’ equity Popular Inc. Holding Co. PNA Holding Co. At December 31, 2014 All other subsidiaries and eliminations Elimination entries Popular, Inc. Consolidated $ $ 20,448 19,747 1,640 231 – 608 357 – – – $ 380,890 1,803,639 136,887 5,314,928 103,170 $ (20,851) (1,357) – – – $ 381,095 1,822,386 138,527 5,315,159 103,170 9,850 4,878,866 – 4,492 1,353,616 – 147,564 – 106,104 – (6,232,482) – 161,906 – 106,104 55,486 – – 41 55,445 – 2,512 90 – – – – – – – – 19,496,569 (53,769) 19,498,286 2,542,662 93,835 601,751 21,343,645 542,454 492,069 – – – (53,769) – – 2,542,662 93,835 601,792 21,345,321 542,454 494,581 135,410 – 135,500 – 75 – 67,962 – 555 $5,057,421 – 112 – 26,514 – – $ 1,385,699 130,266 121,657 148,694 1,570,094 465,677 37,040 $32,980,188 – (26) – (18,127) (1) – $ (6,326,613) 130,266 121,818 148,694 1,646,443 465,676 37,595 $33,096,695 $ $ – – – – – – $ 5,804,599 19,025,144 24,829,743 $ (20,851) (1,357) (22,208) $ 5,783,748 19,023,787 24,807,535 – – 740,812 49,226 – 790,038 – 8,169 148,988 6,872 – 164,029 50,160 1,036 4,187,931 262,244 (4,116) (229,872) 4,267,383 $5,057,421 – 2 4,269,208 (3,043,476) – (4,064) 1,221,670 $ 1,385,699 1,271,657 66,800 822,028 974,147 5,064 27,969,439 – 56,307 5,931,161 (747,702) (1) (229,016) 5,010,749 $32,980,188 – (53,769) – (18,216) – (94,193) 1,271,657 21,200 1,711,828 1,012,029 5,064 28,829,313 – (56,309) (10,191,842) 3,782,651 – 233,080 (6,232,420) $ (6,326,613) 50,160 1,036 4,196,458 253,717 (4,117) (229,872) 4,267,382 $33,096,695 249 POPULAR, INC. 2014 ANNUAL REPORT Condensed Consolidating Statement of Financial Condition (In thousands) Assets: Cash and due from banks Money market investments Trading account securities, at fair value Investment securities available-for-sale, at fair value Investment securities held-to-maturity, at amortized cost Other investment securities, at lower of cost or realizable value Investment in subsidiaries Loans held-for-sale, at lower of cost or fair value Loans held-in-portfolio: Loans not covered under loss sharing agreements with the FDIC Loans covered under loss sharing agreements with the FDIC Less - Unearned income Allowance for loan losses Total loans held-in-portfolio, net FDIC loss share asset Premises and equipment, net Other real estate not covered under loss sharing agreements with the FDIC Other real estate covered under loss sharing agreements with the FDIC Accrued income receivable Mortgage servicing assets, at fair value Other assets Goodwill Other intangible assets Total assets Liabilities and Stockholders’ Equity Liabilities: Deposits: Non-interest bearing Interest bearing Total deposits Assets sold under agreements to repurchase Other short-term borrowings Notes payable Other liabilities Total liabilities Stockholders’ equity: Preferred stock Common stock Surplus Retained earnings (accumulated deficit) Treasury stock, at cost Accumulated other comprehensive loss, net of tax Total stockholders’ equity Total liabilities and stockholders’ equity Popular, Inc. Holding Co. PNA Holding Co. Elimination entries Popular, Inc. Consolidated At December 31, 2013 All other subsidiaries and eliminations $ $ 10,595 18,721 1,353 204 – 616 4,804 – – – $ 422,967 839,732 338,390 5,294,596 140,496 $ (10,967) (4,804) – – – $ 423,211 858,453 339,743 5,294,800 140,496 10,850 4,856,566 – 4,492 1,670,809 – 166,410 – 110,426 – (6,527,375) – 181,752 – 110,426 521,092 – – 304 520,788 – 2,135 – – – – – – – – – 21,702,418 (519,500) 21,704,010 2,984,427 92,144 640,251 23,954,450 948,608 517,381 – – – (519,500) – – 2,984,427 92,144 640,555 23,955,738 948,608 519,516 135,501 – 135,501 – 64 – 66,577 – 554 $5,488,407 – 114 – 19,407 – – $ 1,700,242 168,007 131,368 161,099 1,642,760 647,757 44,578 $35,664,526 – (10) – (41,186) – – $ (7,103,842) 168,007 131,536 161,099 1,687,558 647,757 45,132 $35,749,333 $ $ – – – – $ 5,933,649 20,793,267 $ (10,967) (4,804) $ 5,922,682 20,788,463 – – – 822,351 39,906 862,257 – – – 149,663 39,245 188,908 50,160 1,034 4,161,625 602,957 (881) (188,745) 4,626,150 $5,488,407 – 2 4,479,208 (2,940,509) – (27,367) 1,511,334 $ 1,700,242 26,726,916 1,659,292 920,700 612,740 728,899 30,648,547 – 56,079 6,056,774 (907,972) – (188,902) 5,015,979 $35,664,526 (15,771) – (519,500) – (41,258) (576,529) 26,711,145 1,659,292 401,200 1,584,754 766,792 31,123,183 – (56,081) (10,527,455) 3,839,954 – 216,269 (6,527,313) $ (7,103,842) 50,160 1,034 4,170,152 594,430 (881) (188,745) 4,626,150 $35,749,333 Condensed Consolidating Statement of Operations (In thousands) Interest and dividend income: Loans Money market investments Investment securities Trading account securities Total interest and dividend income Interest expense: Deposits Short-term borrowings Long-term debt Total interest expense Net interest (expense) income Provision for loan losses - non-covered loans Provision for loan losses - covered loans Net interest (expense) income after provision for loan losses Service charges on deposit accounts Other service fees Mortgage banking activities Net loss and valuation adjustments on investment securities Trading account (loss) profit Net gain on sale of loans, including valuation adjustments on loans held-for-sale Adjustments (expense) to indemnity reserves on loans sold FDIC loss share expense Other operating income (loss) Total non-interest income (loss) Operating expenses: Personnel costs Net occupancy expenses Equipment expenses Other taxes Professional fees Communications Business promotion FDIC deposit insurance Loss on early extinguishment of debt Other real estate owned (OREO) expenses Other operating expenses Amortization of intangibles Restructuring costs Total operating expenses (Loss) income before income tax and equity in earnings of subsidiaries Income tax expense (Loss) income before equity in earnings of subsidiaries Equity in undistributed earnings of subsidiaries (Loss) Income from continuing operations Loss from discontinued operations, net of tax Equity in undistributed losses of discontinued operations Popular, Inc. Holding Co. PNA Holding Co. Year ended December 31, 2014 All other subsidiaries and eliminations Elimination entries $ 1,294 20 617 – 1,931 $ – 7 322 – 329 $1,478,658 4,219 131,692 17,938 1,632,507 $ – – 492,657 492,657 (490,726) (200) – (490,526) – – – – (40) – – – 12,291 12,251 39,457 3,952 3,764 1,019 14,963 496 1,731 – – 6 (63,755) – – 1,633 (479,908) 5,580 (485,488) 294,978 (190,510) – (122,980) – 405 10,826 11,231 (10,902) – – (10,902) – – – – – – – – (16) (16) – – – – 1,119 – – – – – 435 – – 1,554 (12,472) – (12,472) 32,484 20,012 – (122,980) 105,095 68,187 12,525 185,807 1,446,700 224,199 46,135 1,176,366 158,637 228,006 30,615 (870) 4,398 40,591 (40,629) (103,024) 59,306 377,030 379,222 82,755 45,153 55,899 266,202 25,188 52,285 40,307 532 49,605 161,216 8,160 26,725 1,193,249 360,147 52,698 307,449 – 307,449 (122,980) – (1,202) (22) – – (1,224) (8) (1,216) – (1,224) – – – – – (2,741) – – – – – – (9) (2,750) – – – – (229) – – – – – (2,523) – – (2,752) 2 1 1 (327,462) (327,461) – 245,960 250 Popular, Inc. Consolidated $1,478,750 4,224 132,631 17,938 1,633,543 105,087 67,376 516,008 688,471 945,072 223,999 46,135 674,938 158,637 225,265 30,615 (870) 4,358 40,591 (40,629) (103,024) 71,572 386,515 418,679 86,707 48,917 56,918 282,055 25,684 54,016 40,307 532 49,611 95,373 8,160 26,725 1,193,684 (132,231) 58,279 (190,510) – (190,510) (122,980) – Net (Loss) Income $(313,490) $(102,968) $ 184,469 $ (81,501) $ (313,490) Comprehensive (loss) income, net of tax $(354,617) $ (79,665) $ 144,355 $ (64,690) $ (354,617) 251 POPULAR, INC. 2014 ANNUAL REPORT Condensed Consolidating Statement of Operations (In thousands) Interest and dividend income: Dividend income from subsidiaries Loans Money market investments Investment securities Trading account securities Total interest and dividend income Interest expense: Deposits Short-term borrowings Long-term debt Total interest expense Net interest (expense) income Provision for loan losses - non-covered loans Provision for loan losses - covered loans Net interest (expense) income after provision for loan losses Service charges on deposit accounts Other service fees Mortgage banking activities Net gain and valuation adjustments on investment securities Trading account profit (loss) Net loss on sale of loans, including valuation adjustments on loans held-for-sale Adjustments (expense) to indemnity reserves on loans sold FDIC loss share expense Other operating income Total non-interest income Operating expenses: Personnel costs Net occupancy expenses Equipment expenses Other taxes Professional fees Communications Business promotion FDIC deposit insurance Loss on early extinguishment of debt Other real estate owned (OREO) expenses Other operating expenses Amortization of intangibles Total operating expenses Income (loss) before income tax and equity in earnings of subsidiaries Income tax expense (benefit) Income (loss) before equity in earnings of subsidiaries Equity in undistributed earnings of subsidiaries Income from continuing operations Income from discontinued operations, net of tax Equity in undistributed losses of discontinued operations Net Income Comprehensive income (loss), net of tax Year ended December 31, 2013 Popular, Inc. Holding Co. PNA Holding Co. All other subsidiaries and eliminations Elimination entries Popular, Inc. Consolidated $ 37,000 4,543 127 13,123 – 54,793 – – 101,245 101,245 (46,452) 398 – (46,850) – – – 7,966 161 – – – 443,276 451,403 31,086 3,685 4,084 413 13,099 421 1,838 – – – (53,926) – 700 403,853 1,412 402,441 156,377 558,818 – 40,509 $599,327 $513,450 $ – – 5 322 – 327 – 974 24,249 25,223 (24,896) – – (24,896) – – – – – – – – 4,012 4,012 – 2 – – 72 – – – 3,388 – 434 – 3,896 $ – 1,478,526 3,462 139,427 21,573 1,642,988 $ (37,000) (1,973) (130) (11,065) – (50,168) $ – 1,481,096 3,464 141,807 21,573 1,647,940 124,862 39,555 25,650 190,067 1,452,921 536,312 69,396 847,213 162,870 232,148 71,657 – (13,644) (52,708) (37,054) (82,051) 57,177 338,395 397,611 82,964 41,944 57,615 265,181 24,964 57,615 56,728 – 79,658 147,923 7,971 1,220,174 (5) (2,099) (11,065) (13,169) (36,999) – – (36,999) – (2,797) – – – – – – – (2,797) – – – – (225) – – – – – (2,555) – (2,780) 124,857 38,430 140,079 303,366 1,344,574 536,710 69,396 738,468 162,870 229,351 71,657 7,966 (13,483) (52,708) (37,054) (82,051) 504,465 791,013 428,697 86,651 46,028 58,028 278,127 25,385 59,453 56,728 3,388 79,658 91,876 7,971 1,221,990 (24,780) (1,710) (23,070) 54,417 31,347 – 40,509 $ 71,856 $ (5,897) (34,566) (250,887) 216,321 – 216,321 40,509 – $ 256,830 (37,016) (142) (36,874) (210,794) (247,668) – (81,018) $(328,686) 307,491 (251,327) 558,818 – 558,818 40,509 – $ 599,327 $ 173,754 $(167,857) $ 513,450 252 Condensed Consolidating Statement of Operations (In thousands) Interest and Dividend Income: Dividend income from subsidiaries Loans Money market investments Investment securities Trading account securities Total interest and dividend income Interest Expense: Deposits Short-term borrowings Long-term debt Total interest expense Net interest (expense) income Provision for loan losses - non-covered loans Provision for loan losses - covered loans Net interest (expense) income after provision for loan losses Service charges on deposit accounts Other service fees Mortgage banking activities Net gain and valuation adjustments on investment securities Trading account profit Net gain on sale of loans, including valuation adjustments on loans held-for-sale Adjustments (expense) to indemnity reserves on loans sold FDIC loss share (expense) income Other operating income (loss) Total non - interest income (loss) Operating Expenses: Personnel costs Net occupancy expenses Equipment expenses Other taxes Professional fees Communications Business promotion FDIC deposit insurance Loss on early extinguishment of debt Other real estate owned (OREO) expenses Other operating expenses Amortization of intangibles Total operating expenses Year ended December 31, 2012 Popular, Inc. Holding Co. PNA Holding Co. All other subsidiaries and eliminations Elimination entries Popular, Inc. Consolidated $ 5,000 6,733 14 16,291 – 28,038 – 6 95,892 95,898 (67,860) 404 – (68,264) – – – – 214 – – – 41,966 42,180 29,779 3,434 3,831 2,209 11,042 464 1,823 – – – (50,877) – 1,705 $ – – 25 322 – 347 – 151 32,183 32,334 (31,987) – – (31,987) – – – – – – – – 707 707 – 3 – – 42 – – – – – 441 – 486 $ $ – 1,445,886 3,707 163,179 22,824 1,635,596 167,790 50,055 31,765 249,610 1,385,986 321,830 74,839 989,317 171,226 235,739 84,771 (1,707) 4,264 (29,414) (21,198) (56,211) 84,356 471,826 404,554 81,250 39,787 47,635 260,680 25,223 58,961 82,065 25,196 28,823 153,584 8,161 1,215,919 (5,000) (3,392) (43) (11,160) – (19,595) (25) (3,410) (11,648) (15,083) (4,512) – – (4,512) – (3,224) – – – – – – – (3,224) – – – – (756) – – – – – (2,365) – (3,121) $ – 1,449,227 3,703 168,632 22,824 1,644,386 167,765 46,802 148,192 362,759 1,281,627 322,234 74,839 884,554 171,226 232,515 84,771 (1,707) 4,478 (29,414) (21,198) (56,211) 127,029 511,489 434,333 84,687 43,618 49,844 271,008 25,687 60,784 82,065 25,196 28,823 100,783 8,161 1,214,989 (Loss) income before income tax and equity in earnings of subsidiaries Income tax expense (benefit) (Loss) income before equity in earnings of subsidiaries Equity in undistributed earnings (losses) of subsidiaries Income (loss) from continuing operations Income from discontinued operations, net of tax Equity in undistributed earnings of discontinued operations Net income Comprehensive income, net of tax (27,789) 1,702 (29,491) 236,948 $207,457 – 37,818 245,275 $184,955 (31,766) – (31,766) (4,935) $(36,701) – 37,818 $ 1,117 $ (5,444) 245,224 (28,147) 273,371 – $ 273,371 37,818 – 311,189 (4,615) 42 (4,657) (232,013) $(236,670) – (75,636) (312,306) 181,054 (26,403) 207,457 0 $ 207,457 37,818 – 245,275 $ 248,507 $(243,063) $ 184,955 253 POPULAR, INC. 2014 ANNUAL REPORT Condensed Consolidating Statement of Cash Flows (In thousands) Cash flows from operating activities: Net (loss) income Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Equity in undistributed (earnings) losses of subsidiaries (Reversal of provision) provision for loan losses Goodwill impairment losses Amortization of intangibles Depreciation and amortization of premises and equipment Net accretion of discounts and amortization of premiums and deferred fees Fair value adjustments on mortgage servicing rights FDIC loss share expense Adjustments (expense) to indemnity reserves on loans sold Earnings from investments under the equity method Deferred income tax expense Loss (gain) on: Disposition of premises and equipment Sale and valuation adjustments of investment securities Sale of loans, including valuation adjustments on loans held for sale and mortgage banking activities Sale of foreclosed assets, including write-downs Disposal of discontinued business Acquisitions of loans held-for-sale Proceeds from sale of loans held-for-sale Net originations on loans held-for-sale Net (increase) decrease in: Trading securities Accrued income receivable Other assets Net increase (decrease) in: Interest payable Pension and other postretirement benefits obligations Other liabilities Total adjustments Net cash (used in) provided by operating activities Cash flows from investing activities: Net (increase) decrease in money market investments Purchases of investment securities: Available-for-sale Held-to-maturity Other Proceeds from calls, paydowns, maturities and redemptions of investment securities: Available-for-sale Held-to-maturity Other Proceeds from sale of investment securities: Available for sale Other Net repayments on loans Proceeds from sale of loans Acquisition of loan portfolios Net payments from FDIC under loss sharing agreements Cash paid related to business acquisitions Capital contribution to subsidiary Return of capital from wholly-owned subsidiaries Net cash disbursed from disposal of discontinued business Acquisition of premises and equipment Proceeds from sale of: Premises and equipment Foreclosed assets Net cash provided by investing activities Cash flows from financing activities: Net increase (decrease) in: Deposits Federal funds purchased and assets sold under agreements to repurchase Other short-term borrowings Payments of notes payable Proceeds from issuance of notes payable Proceeds from issuance of common stock Dividends paid Repurchase of TARP-related warrants Net payments for repurchase of common stock Return of capital to parent company Capital contribution from parent Net cash used in financing activities Net increase (decrease) in cash and due from banks Cash and due from banks at beginning of period Cash and due from banks at end of period Popular, Inc. Holding Co. PNA Holding Co. Year ended December 31, 2014 All other subsidiaries and eliminations Elimination entries Popular, Inc. Consolidated $(313,490) $(102,968) $184,469 $(81,501) $(313,490) (171,998) (200) – – 648 404,461 – – – (12,291) 8,203 1 – – – – – – – (288) (12) 4,099 7,066 – (180) 239,509 (73,981) 90,496 – – – – – – – – 16 – – – – – – – – – – 2 (7,124) 20 – (32,391) 51,019 (51,949) – 263,569 186,511 9,434 46,489 (125,885) 24,683 103,024 40,629 (27,303) 35,308 (1,717) 870 (88,724) 28,005 (38,355) (308,600) 123,375 (753,312) 1,105,662 9,712 158,585 (7,776) (10,171) 40,449 814,462 998,931 81,502 – – – – – – – – – 1 – – – – – – – – – 17 (23,060) (17) – 23,059 81,502 1 – 263,369 186,511 9,434 47,137 278,576 24,683 103,024 40,629 (39,578) 43,512 (1,716) 870 (88,724) 28,005 (38,355) (308,600) 123,375 (753,312) 1,105,374 9,719 132,500 (707) (10,171) 30,937 1,186,492 873,002 (1,026) 4,447 (963,907) (3,447) (963,933) – – – – – 1,000 – – 465,452 – – – – (100,000) 210,000 – (1,075) 48 – 574,399 – – – (936,000) 450,000 5,394 (3,723) (3,000) (3,236) – – (490,565) 9,853 10,595 $20,448 – – – – – – – – – – – – – – 250,000 – – – – 254,447 – – 8,169 (675) – – – – – (210,000) – (202,506) (8) 616 $608 (2,001,940) (1,000) (110,010) 1,722,650 39,962 91,752 310,210 37,104 776,179 355,145 (389,067) 256,498 (6,330) – – (205,895) (49,971) 14,289 150,115 25,784 115,453 (387,635) (853,900) (122,615) 331,905 – – – – (250,000) 100,000 (1,066,792) (42,077) 422,967 $380,890 – – – – – – (2,001,940) (1,000) (110,010) 1,722,650 39,962 92,752 – – (465,731) – – – – 100,000 (460,000) – – – – (829,178) (6,438) – 465,731 – – – – – – 460,000 (100,000) 819,293 (9,884) (10,967) $(20,851) 310,210 37,104 775,900 355,145 (389,067) 256,498 (6,330) – – (205,895) (51,046) 14,337 150,115 25,452 109,015 (387,635) (380,000) (1,059,290) 781,905 5,394 (3,723) (3,000) (3,236) – – (940,570) (42,116) 423,211 $381,095 The Condensed Consolidating Statements of Cash Flows include the cash flows from operating, investing and financing activities associated with discontinued operations. Condensed Consolidating Statement of Cash Flows (In thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash (used in) provided by operating activities: Equity in undistributed earnings of subsidiaries Provision for loan losses Amortization of intangibles Depreciation and amortization of premises and equipment Net accretion of discounts and amortization of premiums and deferred fees Fair value adjustments on mortgage servicing rights FDIC loss share expense Adjustments (expense) to indemnity reserves on loans sold Earnings from investments under the equity method Deferred income tax benefit Loss (gain) on: Disposition of premises and equipment Sale and valuation adjustments of investment securities Sale of loans, including valuation adjustments on loans held for sale and mortgage banking activities Sale of stock in equity method investee Sale of foreclosed assets, including write-downs Acquisitions of loans held-for-sale Proceeds from sale of loans held-for-sale Net originations on loans held-for-sale Net (increase) decrease in: Trading securities Accrued income receivable Other assets Net increase (decrease) in: Interest payable Pension and other postretirement benefits obligations Other liabilities Total adjustments Net cash (used in) provided by operating activities Cash flows from investing activities: Net (increase) decrease in money market investments Purchases of investment securities: Available-for-sale Held-to-maturity Other Proceeds from calls, paydowns, maturities and redemptions of investment securities: Available-for-sale Held-to-maturity Other Proceeds from sale of investment securities: Available for sale Net (originations) repayments on loans Proceeds from sale of loans Acquisition of loan portfolios Net payments from FDIC under loss sharing agreements Return of capital from equity method investments Proceeds from sale of sale of stock in equity method investee Capital contribution to subsidiary Mortgage servicing rights purchased Acquisition of premises and equipment Proceeds from sale of: Premises and equipment Foreclosed assets Net cash provided by investing activities Cash flows from financing activities: Net increase (decrease) in: Deposits Assets sold under agreements to repurchase Other short-term borrowings Payments of notes payable Proceeds from issuance of notes payable Proceeds from issuance of common stock Dividends paid to parent company Dividends paid Net payments for repurchase of common stock Capital contribution from parent Net cash provided by (used in) financing activities Net increase (decrease) in cash and due from banks Cash and due from banks at beginning of period Cash and due from banks at end of period 254 Popular, Inc. Consolidated Popular, Inc. Holding Co. PNA Holding Co. Year ended December 31, 2013 All other subsidiaries and eliminations Elimination entries $599,327 $71,856 $256,830 $(328,686) $599,327 (196,886) 398 – 641 30,467 – – – (17,308) (10,937) 49 (2,110) – (416,113) – – – – (94) 1,612 5,445 2,704 – (5,507) (607,639) (8,312) (94,926) – – 2 444 – – – (3,946) (1,710) (66) – – – – – – – – (2) (1,818) (506) – (2,370) (104,898) (33,042) – 602,165 9,883 47,519 (109,915) 11,403 82,051 37,054 (21,619) (275,965) (3,375) – 22,411 – 50,740 (390,018) 218,379 (1,049,474) 1,430,929 (7,104) (3,027) (4,663) 10,635 (17,179) 640,830 897,660 291,812 – – – – – – – – (142) – – – – – – – – – 602,563 9,883 48,162 (79,004) 11,403 82,051 37,054 (42,873) (288,754) (3,392) (2,110) 22,411 (416,113) 50,740 (390,018) 218,379 (1,049,474) – (315) 2,227 1,430,835 (5,809) 2,827 (1) – (1,896) 291,685 (37,001) (2,466) 10,635 (26,952) 219,978 819,305 (147) (3,937) 227,274 3,937 227,127 – – – 35,000 – – 5,438 (233,745) – – – – 481,377 (272,500) – (352) 33 – 15,104 – – – – – 6,860 – (3,723) (437) – 2,700 9,492 1,103 $10,595 – – – – – – – – – – – 491 – – – – 180 – (3,266) – – – (236,200) – – – – – 272,500 36,300 (8) 624 $616 (2,257,976) (250) (178,093) 1,788,474 4,632 181,784 – 625,364 333,021 (1,592,603) 396,223 – – – (45) (38,221) 9,877 226,063 (274,476) (310,417) (357,460) 54,200 (95,831) 106,739 – (37,000) – – – (639,769) (16,585) 439,552 $422,967 – – – – – – – 289,200 – – – – – 272,500 – – – – 565,637 (12,987) – (289,200) – – – 37,000 – – (272,500) (537,687) (9,051) (1,916) $(10,967) (2,257,976) (250) (178,093) 1,823,474 4,632 181,784 5,438 680,819 333,021 (1,592,603) 396,223 491 481,377 – (45) (38,573) 10,090 226,063 302,999 (323,404) (357,460) (235,000) (332,031) 106,739 6,860 – (3,723) (437) – (1,138,456) (16,152) 439,363 $423,211 The Condensed Consolidating Statements of Cash Flows include the cash flows from operating, investing and financing activities associated with discontinued operations. 255 POPULAR, INC. 2014 ANNUAL REPORT Condensed Consolidating Statement of Cash Flows (In thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash (used in) provided by operating activities: Equity in undistributed earnings of subsidiaries Provision for loan losses Amortization of intangibles Depreciation and amortization of premises and equipment Net accretion of discounts and amortization of premiums and deferred fees Fair value adjustments on mortgage servicing rights FDIC loss share expense Amortization of prepaid FDIC assessment Adjustments (expense) to indemnity reserves on loans sold Earnings from investments under the equity method Deferred income tax benefit Loss (gain) on: Disposition of premises and equipment Sale and valuation adjustments of investment securities Sale of loans, including valuation adjustments on loans held for sale and mortgage banking activities Sale of other assets Sale of foreclosed assets, including write-downs Acquisitions of loans held-for-sale Proceeds from sale of loans held-for-sale Net disbursements on loans held-for-sale Net (increase) decrease in: Trading securities Accrued income receivable Other assets Net increase (decrease) in: Interest payable Pension and other postretirement benefits obligations Other liabilities Total adjustments Net cash (used in) provided by operating activities Cash flows from investing activities: Net decrease (increase) in money market investments Purchases of investment securities: Available-for-sale Held-to-maturity Other Proceeds from calls, paydowns, maturities and redemptions of investment securities: Available-for-sale Held-to-maturity Other Proceeds from sale of investment securities: Available for sale Net (disbursements) repayments on loans Proceeds from sale of loans Acquisition of loan portfolios Net payments from FDIC under loss sharing agreements Return of capital from equity method investments Capital contribution to subsidiary Mortgage servicing rights purchased Acquisition of premises and equipment Proceeds from sale of: Premises and equipment Other productive assets Foreclosed assets Net cash provided by investing activities Cash flows from financing activities: Net increase (decrease) in: Deposits Assets sold under agreements to repurchase Other short-term borrowings Payments of notes payable Proceeds from issuance of notes payable Proceeds from issuance of common stock Dividends paid to parent company Dividends paid Payments for repurchase of common stock Capital contribution from parent Net cash provided by (used in) financing activities Net decrease in cash and due from banks Cash and due from banks at beginning of period Cash and due from banks at end of period Popular, Inc. Holding Co. PNA Holding Co. Year ended December 31, 2012 All other subsidiaries and eliminations Elimination entries Popular, Inc. Consolidated $ 245,275 $ 1,117 $ 311,189 $(312,306) $ 245,275 (274,766) 404 – 653 29,058 – – – – (40,505) (14,109) (32,883) – – 3 112 – – – – (706) – 2 – – – – – – – – – – – – – – – (1,259) (163) 8,859 – – 2,581 (289,245) (43,970) – – 313 (126) – (25) (33,312) (32,195) – 408,537 10,072 46,080 (66,582) 17,406 56,211 32,778 21,198 (32,267) (121,424) (8,621) 1,707 (48,765) (2,545) (4,511) (417,108) 325,014 (1,233,240) 1,389,169 (405) (11,972) (9,091) (40,241) (473) 310,927 622,116 307,649 – – – (487) – – – – – 42 – – – – – – – – – 49 (16,590) 53 – (235) 290,481 (21,825) – 408,941 10,072 46,736 (37,899) 17,406 56,211 32,778 21,198 (73,478) (135,491) (8,619) 1,707 (48,765) (2,545) (4,511) (417,108) 325,014 (1,233,240) 1,387,910 (519) (19,390) (9,164) (40,241) 1,848 278,851 524,126 23,665 (315) 290,990 (23,746) 290,594 – – – – – – – (36,262) – – – 150,194 (103,500) – (691) 73 – – 33,479 – – – – – 9,402 – (3,723) (450) – 5,229 (5,262) 6,365 1,103 $ – – – – – – – – – – – 1,002 – – – – – – 687 – – (30,500) (41,800) – – – – – 103,500 31,200 (308) 932 624 $ (1,843,922) (25,792) (212,419) 1,636,723 9,751 206,856 52,058 628,963 68,396 (1,357,628) 462,016 – – (2,231) (54,208) 19,768 1,026 206,070 86,417 (991,097) (148,405) 406,900 (173,098) 106,923 – (5,000) – – – (803,777) (95,244) 534,796 439,552 $ – – – – – – – 36,305 – – – – 103,500 – – – – – 116,059 (1,843,922) (25,792) (212,419) 1,636,723 9,751 206,856 52,058 629,006 68,396 (1,357,628) 462,016 151,196 – (2,231) (54,899) 19,841 1,026 206,070 236,642 21,501 24,060 (36,400) – – – 5,000 – – (103,500) (89,339) 4,895 (6,811) $(1,916) (969,596) (124,345) 340,000 (214,898) 106,923 9,402 – (3,723) (450) – (856,687) (95,919) 535,282 439,363 $ P.O. Box 362708 • San Juan, Puerto Rico 00936-2708

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