CONTENTS
ÍNDICE
Year in Review ............................................................ 1
25-Year Historical Financial Summary .............. 4
Management & Board of Directors ....................... 6
Resumen del Año ...................................................... 7
Resumen Financiero Histórico - 25 Años ....... 10
Gerencia y Junta de Directores .......................... 12
Popular, Inc. (NASDAQ:BPOP) is a full-service financial provider
based in Puerto Rico, with operations in Puerto Rico, the Virgin
Islands and the United States. In Puerto Rico, Popular is the leading
banking institution, by both assets and deposits, and ranks among
the largest 50 banks in the U.S. by assets.
Popular, Inc. (NASDAQ:BPOP) es un proveedor de servicios
financieros con sede en Puerto Rico y operaciones en Puerto Rico,
Islas Vírgenes y Estados Unidos. En Puerto Rico es la institución
bancaria líder, tanto en activos como en depósitos, y se encuentra
entre los 50 bancos más grandes de Estados Unidos por total de
activos.
CORPORATE INFORMATION
Independent Registered Public Accounting Firm:
PricewaterhouseCoopers LLP
INFORMACIÓN CORPORATIVA
Firma registrada de Contabilidad Pública Independiente:
PricewaterhouseCoopers LLP
The company’s Form 10-K, proxy statement and any other financial
information is available on http://www.popular.com/en/investor-
relations/annual-reports/
El Formulario 10-K, el proxy y otra información financiera están
disponibles en http://www.popular.com/accionistas/informe-anual/
ANNUAL MEETING
The 2017 Annual Stockholders’ Meeting of Popular, Inc. will be
held on Wednesday, April 26, at 9:00 a.m. at the penthouse of the
Popular Center Building, San Juan, Puerto Rico.
REUNIÓN ANUAL
La Reunión Anual de Accionistas 2017 de Popular, Inc., se llevará
a cabo el miércoles, 26 de abril, a las 9:00 a.m. en el piso PH de
Popular Center, San Juan, Puerto Rico.
POPULAR, INC.
YEAR IN REVIEW
Richard L. Carrión
Chairman of the Board and Chief Executive Officer, Popular, Inc.
“I am honored
by our clients’
trust and support.
We will continue
working to earn
their business
every day, in
each interaction.”
1
Our achievements in 2016 reflect the actions we have taken in recent years to strengthen our balance sheet, improve our risk profile, drive business growth and manage our capital. I am pleased to report that we produced solid core financial results, improved credit quality and delivered strong business performance, which positions us for more active capital management in 2017. We continued to strengthen our capital position, closing the year with a Common Equity Tier 1 ratio of 16.5%. As a result of this strength and of the consistent progress we have made in recent years, in January of 2017 our Board of Directors approved an increase in the quarterly common stock dividend from $0.15 to $0.25 and a $75 million common stock repurchase program. While fully aware of the challenging environment in Puerto Rico, we will pursue additional opportunities to actively manage our capital and return capital to our shareholders as appropriate. We reported net income of $217 million for the year, compared with $895 million in 2015. Net income in 2015 included the benefit of the partial recapture of our deferred tax asset related to our operations in the United States. The figure for 2016 includes, among other significant items, the effects of two adverse arbitration awards related to claims made by us under the commercial loss-share agreement with the FDIC, as receiver for Westernbank, which resulted in an expense of $131 million, net of tax. Although we were clearly disappointed with the result of these arbitrations, we believe today, as we did when we decided to pursue these claims, that asserting our rights under the commercial loss-share agreement with the FDIC was in the best interest of our shareholders. Despite these recent setbacks, the 2010 Westernbank transaction, in which we acquired approximately $9 billion in assets, has proven to be of great financial and strategic importance to Popular. After adjusting for the impact of the adverse decisions, among other items, adjusted net income for 2016 totaled $358 million, compared to an adjusted net income of $375 million in the previous year, as our business in the United States did not benefit from the low income tax rate and credit recoveries experienced in 2015. Credit quality improved significantly during 2016. We reduced non-performing assets from $843 million or 2.4% of assets in 2015 to $774 million or 2.0% of assets in 2016. Net charge-offs were 22 basis points lower than in the previous year, for a ratio of 0.76% of loans in 2016, and inflows into non-performing loans declined by 23%. While credit metrics in our U.S. business continued to be strong, the year over year improvement was led by our Puerto Rico business, despite POPULAR, INC. YEAR IN REVIEW
2
challenging economic and fiscal conditions on the Island. These positive results are the product of strong risk management efforts including, among others, resolutions, restructurings, sales of non-performing assets and improved credit underwriting standards over the last several years. Our stock price closed 2016 at $43.82, 55% higher than 2015. This performance compares favorably against the KBW NASDAQ Bank Index and our peer banks in the United States, which increased 26% and 39% in 2015, respectively. In addition to reflecting our positive financial results, the price of BPOP shares appeared to be positively impacted by the enactment of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), a law to address Puerto Rico’s fiscal and economic situation. The price also benefitted from a broad increase in the price of bank stocks following the November U.S. presidential elections, due to expectations of a reduction in corporate taxes, a roll back of regulations affecting the sector and higher spending in infrastructure, among others.During 2016, we continued to solidify our leading market position in Puerto Rico. Total deposits increased by 10%, driven in part by an increase in government deposits. Loans remained fairly flat when compared to 2015. Despite a contracting credit market on the Island, our lending businesses remained active throughout the year, and production roughly offset normal portfolio runoff. The strength of our franchise in Puerto Rico lies in our customer base, which in 2016 reached close to 1.7 million clients or 65% of the banked population on the Island. This, combined with the variety and quality of the products and services we offer our retail and commercial customers, has driven our performance in recent years and presents substantial opportunities to continue growing our business in Puerto Rico. While we always seek to attract new clients, we are keenly focused on retaining and deepening our relationship with current customers. We are enhancing our analytical capabilities to gain a deeper understanding of our customers’ needs, behaviors and preferences to serve our diverse client base in a more individualized manner. We are also leveraging technology to enhance customer experience. Approximately 700,000 of our retail clients actively use our online platform, and 75% of these use mobile devices. In December 2016, close to 40% of deposit transactions in Puerto Rico were processed through ATMs and mobile devices. Our bank in the mainland United States, Popular Community Bank, had another strong year, achieving an increase of 17% in its loan portfolio. We also continued the transformation of our retail network in the United States. We opened two branches and relocated six additional ones to expand or improve our footprint. As a result of these efforts, branch deposits grew by 12%. We also made headway in the migration of transactions to digital channels, increasing digital deposits to 35% in 2016. We continued to invest in those areas we deem critical for our present and future performance, mainly risk management, technology and our people. We have a solid risk management infrastructure. However, complex and ever-evolving regulatory requirements demand significant investment. We made progress in the implementation of our technology strategy, including the streamlining and modernization of core banking systems and the development of digital channels. We also enhanced our cybersecurity program to protect Popular’s information assets and our customers’ information. To this end, we implemented additional controls and established a continuous monitoring process. Despite the progress we have made on this front, the constant evolution of cyber risks will undoubtedly continue to require considerable attention and resources in the future. We intensified our efforts to attract, develop and retain talent, revamping the recruitment process, renovating trainings, and supporting internal mobility. We promoted employee wellness initiatives, including those designed to improve the health and financial well-being of our people, and emphasized the Corporation’s Diversity and Inclusion Program. Following our deeply ingrained tradition of community involvement, Fundación Banco Popular in Puerto Rico and the Popular Community Bank Foundation in the United States, together, donated over $3 million to more than 100 non-profit organizations, impacting over 20,000 individuals. Our employees are the backbone of our efforts, donating funds as well as their time to support groups backed by the Corporation. We also increased corporate donations and expanded programs in areas such as financial education and entrepreneurship. As we look ahead, Puerto Rico’s fiscal condition and economic environment remains our biggest challenge. The situation, which had become increasingly complicated in recent years, came to a head during 2016 when it became evident that the government would be unable to meet its debt obligations. This past 2016 HIGHLIGHTS
ADJUSTED NET INCOME
$358 M
ORGANIC LOAN
GROWTH IN US
17%
REDUCTION IN
NON-PERFORMING
ASSETS
$69 M
ROBUST CAPITAL METRICS
16.5%
Common Equity Tier I
100%
80%
60%
40%
20$
0%
-20%
-40%
-60%
BPOP STOCK PRICE CHANGE VS. PEERS 2015-2016
PR Peers 86%
BPOP 55%
US Peers 39%
KBW Nasdaq
Bank 26%
5
1
-
c
e
D
6
1
-
n
a
J
6
1
-
b
e
F
6
1
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r
a
M
6
1
-
r
p
A
6
1
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y
a
M
6
1
-
n
u
J
6
1
-
l
u
J
6
1
-
g
u
A
6
1
-
p
e
S
6
1
-
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c
O
6
1
-
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o
N
6
1
-
c
e
D
Richard L. Carrión
Chairman of the Board and Chief Executive Officer, Popular, Inc.
3
June, on the day before the local government defaulted on its general obligation debt, the federal government, through PROMESA, established the Fiscal Oversight and Management Board for Puerto Rico and a framework for an orderly debt restructuring. The Fiscal Oversight and Management Board, which is composed of seven members, was constituted in late August and is working with the new administration to develop a five-year fiscal plan for Puerto Rico. The Board has also extended a stay on litigation by Puerto Rico creditors through May 1st, 2017.The implementation of PROMESA will undoubtedly have important implications for Puerto Rico’s future. Since we are in uncharted territory, it is difficult to predict all of its ramifications. Given current budgetary imbalances, there will likely be a reduction of government spending which, in the short term, could negatively impact economic activity on the Island. However, we also see some near term opportunities to offset potential government cuts stemming from improved business and consumer confidence, energy infrastructure development and the payment of balances owed to suppliers by the Puerto Rico government. We are hopeful that, in time, Puerto Rico will benefit from a more manageable debt load, balanced government budgets and a revitalized economy. As the largest financial institution on the Island, we will continue to seek to be a source of information, support and advice, particularly on matters related to economic growth, which is the most critical element in the long run. Throughout Popular’s 123-year history, we have persevered through a number of challenges on the Island, and have always emerged stronger. This time will not be different. Our accomplishments in 2016 were made possible by the guidance of our Board of Directors, the leadership of our senior management team and the hard work of our 7,800 colleagues. Their dedication is a constant source of pride and inspiration.I am honored by our clients’ trust and support. We will continue working to earn their business every day, in each interaction.Finally, I am grateful for our shareholders’ confidence in our organization. We look forward to building on these achievements to deliver another year of solid performance. 25 YEAR HISTORICAL FINANCIAL SUMMARY
(Dollars in millions, except per share data)
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Selected Financial Information
Net Income (Loss)
$
85.1
$
109.4
$
124.7
$
146.4
$
185.2
$ 209.6
$
232.3
$
257.6
$
276.1
$ 304.5
$
351.9
$ 470.9
$ 489.9
$
540.7
$
357.7
$
(64.5)
$ (1,243.9)
$ (573.9)
$
137.4
$
151.3
$
245.3
$
599.3
$
(313.5)
$
895.3
$
216.7
Assets
Gross Loans
Deposits
Stockholders’ Equity
Market Capitalization
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
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
36,506.9
35,748.8
33,086.8
35,761.7
38,661.6
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
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
23,129.2
23,435.4
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
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
27,209.7
30,496.2
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
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
5,105.3
5,198.0
$
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
$ 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
$ 2,936.6
$ 4,548.1
Return on Average Assets (ROAA)
Return on Average Common Equity (ROACE)
0.89%
12.72%
1.02%
13.80%
1.02%
1.04%
1.14%
1.14%
1.14%
1.08%
13.80%
14.22%
16.17%
15.83%
15.41%
15.45%
1.04%
15.00%
1.09%
1.11%
14.84%
16.29%
1.36%
1.23%
19.30%
17.60%
1.17%
17.12%
0.74%
9.73%
-0.14%
-3.04%
-1.57%
-2.08%
-44.47%
-32.95%
0.36%
4.37%
0.40%
4.01%
0.68%
6.37%
1.65%
14.43%
-0.89%
-7.04%
2.54%
19.16%
0.58%
4.07%
Per Common Share1
Net Income (Loss) - Basic
Net Income (Loss) - Diluted
Dividends (Declared)
Book Value
Market Price
Assets by Geographical Area
Puerto Rico
United States
Caribbean and Latin America
$
3.49
$
4.18
$
4.59
$
5.24
$
6.69
$
7.51
$
8.26
$
9.19
$
9.85
$
10.87
$
13.05
$
17.36
$
17.95
$
19.78
$
12.41
$
(2.73)
$
(45.51)
$
2.39
$
(0.62)
$
1.44
$
2.36
$
5.80
$
(3.08)
$
8.66
$
2.06
3.49
1.00
28.79
37.81
4.18
1.20
31.86
39.38
4.59
1.25
34.35
35.16
5.24
1.54
39.52
48.44
6.69
1.83
43.98
84.38
7.51
2.00
51.83
8.26
2.50
59.32
123.75
170.00
9.19
3.00
57.54
139.69
9.85
3.20
69.62
131.56
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)
1.44
2.35
5.78
(3.08)
—
—
—
—
36.67
31.40
37.71
13.90
39.35
20.79
44.26
28.73
—
40.76
34.05
8.65
0.30
48.79
28.34
2.06
0.60
49.60
43.82
87%
10%
3%
79%
16%
5%
76%
20%
4%
75%
21%
4%
74%
22%
4%
74%
23%
3%
71%
25%
4%
71%
25%
4%
72%
26%
2%
68%
30%
2%
66%
32%
2%
62%
36%
2%
55%
43%
2%
53%
45%
2%
52%
45%
3%
59%
38%
3%
64%
33%
3%
65%
32%
3%
74%
23%
3%
74%
23%
3%
73%
24%
3%
72%
25%
3%
80%
17%
3%
75%
22%
3%
75%
23%
2%
Total
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
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 Processed3
162
3
30
195
41
26
9
165
8
32
205
58
26
8
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
198
8
89
295
128
51
48
10
8
11
2
76
271
92
297
111
319
134
348
153
383
183
455
258
553
211
3
6
234
8
11
220
253
28.6
170.4
33.2
171.8
262
8
26
296
43.0
174.5
281
8
38
327
9
53
391
17
71
327
389
479
56.6
175.0
78.0
173.7
111.2
171.9
421
59
94
574
130.5
170.9
199
8
91
298
137
102
47
12
10
13
2
4
327
625
442
68
99
609
159.4
171.0
199
8
95
302
136
132
61
12
11
21
3
2
4
382
684
478
37
109
624
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
326
282
289
286
276
270
224
232
192
8
128
328
183
114
43
18
15
30
9
2
1
1
5
212
158
134
194
8
136
338
4
49
17
14
33
12
2
1
1
1
5
191
8
142
341
52
15
11
32
12
2
1
1
1
7
196
8
147
351
51
12
24
32
13
2
1
1
1
9
179
8
139
2
9
12
22
32
7
1
1
1
1
9
173
8
101
185
8
96
183
9
94
10
36
6
1
1
1
10
37
4
4
1
1
1
10
33
6
1
1
1
9
61
175
9
92
10
37
4
5
1
1
1
171
9
90
9
38
3
6
1
1
1
168
9
47
9
25
3
6
1
1
1
173
9
50
9
24
3
6
2
1
1
171
9
51
231
9
17
2
5
2
1
1
421
749
351
689
292
633
280
631
97
55
58
423
343
344
344
59
335
59
329
46
270
46
278
37
268
568
59
163
790
583
61
181
825
605
65
192
862
615
69
187
871
605
74
176
855
571
77
136
784
624
17
138
779
613
20
135
768
597
20
134
751
599
22
132
753
602
21
83
706
622
21
87
730
635
20
101
756
199.5
160.2
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
465.0
523.5
Employees (full-time equivalent)
7,024
7,533
7,606
7,815
7,996
8,854
10,549
11,501
10,651
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
7,810
7,828
4
Selected Financial Information
Assets
Gross Loans
Deposits
Stockholders’ Equity
Market Capitalization
Per Common Share1
Net Income (Loss) - Basic
Net Income (Loss) - Diluted
Dividends (Declared)
Book Value
Market Price
Puerto Rico
United States
Assets by Geographical Area
Caribbean and Latin America
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.
Electronic Delivery System
E-LOAN
EVERTEC
Subtotal
Total
ATMs Owned
Puerto Rico
Virgin Islands
United States
Total
Transactions (in millions)
Electronic Transactions2
Items Processed3
162
3
30
195
41
26
9
165
8
32
205
58
26
8
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
76
271
92
297
111
319
134
348
153
383
183
455
258
553
211
3
6
234
8
11
281
8
38
327
9
53
391
17
71
220
253
327
389
479
262
8
26
296
43.0
174.5
199
8
95
302
136
132
61
12
11
21
3
2
4
382
684
478
37
109
624
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
198
8
89
295
128
51
48
10
8
11
2
421
59
94
574
130.5
170.9
199
8
91
298
137
102
47
12
10
13
2
4
327
625
442
68
99
609
159.4
171.0
(Dollars in millions, except per share data)
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Net Income (Loss)
$
85.1
$
109.4
$
124.7
$
146.4
$
185.2
$ 209.6
$
232.3
$
257.6
$
276.1
$ 304.5
$
351.9
$ 470.9
$ 489.9
$
540.7
$
357.7
$
(64.5)
$ (1,243.9)
$ (573.9)
$
137.4
$
151.3
$
245.3
$
599.3
$
(313.5)
$
895.3
$
216.7
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
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
36,506.9
35,748.8
33,086.8
35,761.7
38,661.6
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
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
23,129.2
23,435.4
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
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
27,209.7
30,496.2
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
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
5,105.3
5,198.0
$
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
$ 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
$ 2,936.6
$ 4,548.1
Return on Average Assets (ROAA)
Return on Average Common Equity (ROACE)
0.89%
12.72%
1.02%
13.80%
1.02%
1.04%
13.80%
14.22%
1.14%
16.17%
1.14%
1.14%
1.08%
15.83%
15.41%
15.45%
1.04%
15.00%
1.09%
1.11%
14.84%
16.29%
1.36%
1.23%
19.30%
17.60%
1.17%
17.12%
0.74%
9.73%
-0.14%
-3.04%
-1.57%
-2.08%
-44.47%
-32.95%
0.36%
4.37%
0.40%
4.01%
0.68%
6.37%
1.65%
14.43%
-0.89%
-7.04%
2.54%
19.16%
0.58%
4.07%
$
3.49
$
4.18
$
4.59
$
5.24
$
6.69
$
7.51
$
8.26
$
9.19
$
9.85
$
10.87
$
13.05
$
17.36
$
17.95
$
19.78
$
12.41
$
(2.73)
$
(45.51)
$
2.39
$
(0.62)
$
1.44
$
2.36
$
5.80
$
(3.08)
$
8.66
$
2.06
3.49
1.00
28.79
37.81
4.18
1.20
31.86
39.38
4.59
1.25
34.35
35.16
5.24
1.54
39.52
48.44
6.69
1.83
43.98
84.38
7.51
2.00
51.83
8.26
2.50
59.32
123.75
170.00
9.19
3.00
57.54
139.69
9.85
3.20
69.62
131.56
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)
1.44
2.35
5.78
(3.08)
—
—
—
—
—
36.67
31.40
37.71
13.90
39.35
20.79
44.26
28.73
40.76
34.05
8.65
0.30
48.79
28.34
2.06
0.60
49.60
43.82
87%
10%
3%
79%
16%
5%
76%
20%
4%
75%
21%
4%
74%
22%
4%
74%
23%
3%
71%
25%
4%
71%
25%
4%
72%
26%
2%
68%
30%
2%
66%
32%
2%
62%
36%
2%
55%
43%
2%
53%
45%
2%
52%
45%
3%
59%
38%
3%
64%
33%
3%
65%
32%
3%
74%
23%
3%
74%
23%
3%
73%
24%
3%
72%
25%
3%
80%
17%
3%
75%
22%
3%
75%
23%
2%
Total
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
192
8
128
328
183
114
43
18
15
30
9
2
1
1
5
193
8
97
298
181
129
43
18
11
32
8
2
1
1
5
431
729
557
57
129
743
194
8
136
338
191
8
142
341
196
8
147
351
179
8
139
173
8
101
185
8
96
183
9
94
175
9
92
171
9
90
168
9
47
173
9
50
326
282
289
286
276
270
224
232
212
158
134
4
49
17
14
33
12
2
1
1
1
5
52
15
11
32
12
2
1
1
1
7
51
12
24
32
13
2
1
1
1
9
2
9
12
22
32
7
1
1
1
1
9
97
10
33
6
1
1
1
9
61
10
36
6
1
1
1
10
37
4
4
1
1
1
10
37
4
5
1
1
1
9
38
3
6
1
1
1
9
25
3
6
1
1
1
9
24
3
6
2
1
1
171
9
51
231
9
17
2
5
2
1
1
421
749
351
689
292
633
280
631
423
343
344
344
55
58
59
335
59
329
46
270
46
278
37
268
568
59
163
790
583
61
181
825
605
65
192
862
615
69
187
871
605
74
176
855
571
77
136
784
624
17
138
779
613
20
135
768
597
20
134
751
599
22
132
753
602
21
83
706
622
21
87
730
635
20
101
756
Employees (full-time equivalent)
7,024
7,533
7,606
7,815
7,996
8,854
10,549
11,501
10,651
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
7,810
7,828
28.6
170.4
33.2
171.8
56.6
175.0
78.0
173.7
111.2
171.9
199.5
160.2
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
465.0
523.5
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 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.
5
POPULAR, INC. MANAGEMENT & BOARD OF DIRECTORS
SENIOR MANAGEMENT TEAM
RICHARD L. CARRIÓN
Chairman of the Board
& Chief Executive Officer
Popular, Inc.
MANUEL A. CHINEA
Executive Vice President
Popular, Inc.
Chief Operating Officer
Popular Community Bank
GILBERTO MONZÓN
Executive Vice President
Individual Credit Group
Banco Popular de Puerto Rico
ELI S. SEPÚLVEDA
Executive Vice President
Commercial Credit Group
Banco Popular de Puerto Rico
BOARD OF DIRECTORS
RICHARD L. CARRIÓN
Chairman of the Board
& Chief Executive Officer
Popular, Inc.
JOHN W. DIERCKSEN
Principal
Greycrest, LLC
IGNACIO ALVAREZ
President & Chief Operating Officer
Popular, Inc. and Banco Popular
de Puerto Rico
President
Popular Community Bank
JAVIER D. FERRER
Executive Vice President,
Chief Legal Officer &
Corporate Secretary
General Counsel &
Corporate Matters Group
Popular, Inc.
EDUARDO J. NEGRÓN
Executive Vice President
Administration Group
Popular, Inc.
LIDIO V. SORIANO
Executive Vice President
& Chief Risk Officer
Corporate Risk
Management Group
Popular, Inc.
CAMILLE BURCKHART
Executive Vice President
& Chief Information
and Digital Officer
Innovation, Technology
& Operations Group
Popular, Inc.
JUAN O. GUERRERO
Executive Vice President
Financial and Insurance
Services Group
Banco Popular de Puerto Rico
NÉSTOR O. RIVERA
Executive Vice President
Retail Banking Group
Banco Popular de Puerto Rico
CARLOS J. VÁZQUEZ
Executive Vice President
& Chief Financial Officer
Popular, Inc.
JOAQUÍN E. BACARDÍ, III
Private Investor
ALEJANDRO M. BALLESTER
President
Ballester Hermanos, Inc.
MARÍA LUISA FERRÉ
President & Chief
Executive Officer
Grupo Ferré Rangel
DAVID E. GOEL
Managing General Partner
Matrix Capital Management
Company, LP
C. KIM GOODWIN
Private Investor
WILLIAM J. TEUBER JR.
Private Investor
CARLOS A. UNANUE
President
Goya de Puerto Rico
6
POPULAR, INC.
RESUMEN DEL AÑO
Richard L. Carrión
Presidente de la Junta de Directores y Principal Oficial Ejecutivo,
Popular, Inc.
“Me siento honrado
por la confianza
y el apoyo de
nuestros clientes.
Continuaremos
trabajando para
ganarnos su negocio,
día tras día, en cada
interacción”.
7
Nuestros logros en el 2016 reflejan las acciones tomadas en años recientes para fortalecer nuestra posición financiera, mejorar nuestro perfil de crédito, crecer el negocio y manejar nuestro capital. Me complace informar que generamos resultados financieros básicos sólidos, mejoramos la calidad de crédito y logramos un fuerte desempeño en nuestros negocios, lo que nos posiciona para un manejo más activo de nuestro capital en el 2017.Continuamos fortaleciendo nuestra posición de capital, terminando el año con una relación de capital básico (Common Equity Tier 1) de 16.5%. Como resultado de esta solidez y del progreso logrado en años recientes, en enero de 2017 nuestra Junta de Directores aprobó un aumento en el dividendo trimestral de $0.15 a $0.25 por acción común y un programa de recompra de acciones de $75 millones. Tomando en cuenta el ambiente desafiante en Puerto Rico, perseguiremos oportunidades adicionales para manejar activamente nuestro capital y devolver capital a nuestros accionistas según sea apropiado.Informamos un ingreso neto de $217 millones para el año, comparado con $895 millones en el 2015. El ingreso neto de 2015 incluyó el beneficio de un reverso parcial de la reserva de nuestro activo de contribuciones diferidas relacionado con nuestras operaciones de Estados Unidos. La cifra para el 2016 incluye, entre otras partidas significativas, el impacto de dos decisiones adversas relacionadas a reclamaciones hechas por nosotros al FDIC como síndico de Westernbank bajo el acuerdo de participación de pérdidas en préstamos comerciales, que resultaron en un gasto de $131 millones, neto de contribuciones.Aunque claramente decepcionados con el resultado de estos procesos de arbitraje, creemos hoy, al igual que cuando decidimos perseguir estas reclamaciones, que hacer valer nuestros derechos bajo el acuerdo de participación de pérdidas en préstamos comerciales con el FDIC era en el mejor interés de nuestros accionistas. A pesar de estos contratiempos recientes, la transacción de Westernbank en el 2010, en la cual adquirimos aproximadamente $9,000 millones en activos, ha probado ser de gran importancia financiera y estratégica para Popular.Luego de ajustar para excluir el impacto de estas decisiones adversas, entre otras partidas, el ingreso neto ajustado para el 2016 alcanzó $358 millones, comparado con un ingreso neto ajustado de $375 millones en el año anterior, debido a que nuestro negocio en los Estados Unidos no se benefició de una baja tasa contributiva y de recobros de préstamos que tuvo en el 2015.La calidad de crédito mejoró sustancialmente en el 2016. Los activos no acumulativos se redujeron de $843 millones o 2.4% de los activos a $774 millones o 2.0% de los activos en el 2016. Las pérdidas netas en préstamos estuvieron 22 puntos base por debajo del año anterior, para una proporción de 0.76% del total de préstamos, y la cantidad de préstamos que se convirtieron en no acumulativos se redujo en un 23%. Aunque las métricas de crédito en nuestro negocio en los Estados POPULAR, INC. RESUMEN DEL AÑO
8
Unidos se mantuvieron fuertes, la mejoría de un año al otro se debió a nuestro negocio en Puerto Rico, a pesar de las condiciones económicas y fiscales en la isla. Estos resultados positivos son el producto de esfuerzos de manejo de riesgo que incluyen, entre otras estrategias, resoluciones, reestructuraciones, ventas de activos no productivos y mejores criterios de suscripción de crédito durante los últimos años.El precio de nuestra acción cerró el 2016 en $43.82, un 55% más alto que en el 2015. Este desempeño compara favorablemente con el Índice Bancario KBW NASDAQ y con nuestro grupo de bancos pares en los Estados Unidos, que, en el 2016, aumentaron un 26% y un 39%, respectivamente. Además de reflejar nuestros resultados financieros positivos, el precio de las acciones de BPOP pareció impactarse positivamente de la promulgación de la Ley para la Supervisión, Administración y Estabilidad Económica de Puerto Rico (PROMESA, por sus siglas en inglés), una ley para atender la situación fiscal y económica de Puerto Rico. El precio se benefició, además, por un aumento en el precio de las acciones de muchos bancos tras las elecciones presidenciales de los Estados Unidos en noviembre, debido a expectativas de una disminución en la tasa contributiva de las corporaciones, una reducción de las regulaciones que afectan al sector y mayor inversión en infraestructura, entre otras.Durante el 2016, continuamos fortaleciendo nuestra posición de liderazgo en Puerto Rico. Los depósitos totales aumentaron 10%, impulsados en gran parte por los depósitos del gobierno. Los préstamos permanecieron prácticamente al mismo nivel del año anterior. A pesar de un mercado de crédito en contracción, nuestros negocios de préstamos se mantuvieron activos durante el año, y la originación de nuevos préstamos prácticamente contrarrestó los repagos normales de la cartera.La fortaleza de nuestra franquicia en Puerto Rico reside en nuestra base de clientes, que en el 2016 alcanzó 1.7 millones, o un 65% de la población de la isla que utiliza servicios bancarios. Esto, combinado con la variedad y calidad de los productos y servicios que ofrecemos a individuos y a negocios, ha impulsado nuestro desempeño en años recientes y presenta oportunidades considerables para continuar creciendo nuestro negocio en Puerto Rico. Aunque siempre buscamos atraer nuevos clientes, estamos enfocados en retener y profundizar nuestra relación con clientes existentes. Estamos robusteciendo nuestras capacidades analíticas para obtener un mejor entendimiento de las necesidades, comportamientos y preferencias de nuestros clientes para poder servirlos de una forma más individualizada. Además, estamos aprovechando la tecnología para mejorar la experiencia de los clientes. Aproximadamente 700 mil de nuestros clientes de banca personal utilizan activamente nuestra plataforma en línea, y un 75% de estos utiliza dispositivos móviles. En diciembre de 2016, aproximadamente 40% de las transacciones de depósito en Puerto Rico se procesaron a través de cajeros automáticos y dispositivos móviles.Nuestro banco en los Estados Unidos continentales, Popular Community Bank, tuvo otro año fuerte, alcanzando un crecimiento de 17% en su cartera de préstamos. También continuamos la transformación de nuestra red de distribución, abriendo dos sucursales nuevas y relocalizando otras seis para expandir nuestro alcance. Como resultado de estos esfuerzos, los depósitos en sucursales aumentaron un 12%. También avanzamos en la migración de transacciones a canales digitales, aumentando la proporción de depósitos digitales a 35% en el 2016.Continuamos invirtiendo en aquellas áreas que consideramos críticas para nuestro desempeño actual y futuro, principalmente manejo de riesgo, tecnología y nuestra gente. Contamos con una sólida infraestructura de manejo de riesgo. Sin embargo, requisitos reglamentarios complejos y en constante evolución exigen una inversión significativa. Adelantamos la ejecución de nuestra estrategia de tecnología, incluyendo la simplificación y modernización de nuestros sistemas bancarios principales y el desarrollo de canales digitales. También, robustecimos nuestro programa de seguridad cibernética para proteger los activos de información de Popular y la información financiera de nuestros clientes. A estos fines, implantamos controles adicionales y establecimos un proceso de monitoreo continuo. A pesar de lo logrado en este frente, la evolución constante de los riesgos cibernéticos sin duda continuará requiriendo atención y recursos considerables en el futuro. Intensificamos nuestros esfuerzos para atraer, desarrollar y retener talento, mejorando nuestros procesos de reclutamiento, renovando nuestros adiestramientos y apoyando la movilidad interna. Fomentamos iniciativas de bienestar para nuestros empleados, incluyendo aquellas que promueven la salud física y financiera de nuestra gente, y enfatizamos el Programa de Diversidad e Inclusión de la Corporación.Siguiendo nuestra larga y profunda tradición de participación en la comunidad, Fundación Banco Popular en Puerto Rico y Popular Community Bank Foundation en los Estados Unidos, juntas, donaron sobre $3 millones a más de 100 organizaciones sin fines de lucro, impactando a más de 20,000 personas. Nuestros empleados son los pilares de estos esfuerzos, donando dinero, así como su tiempo, a los grupos a los cuales la Corporación apoya. Además, aumentamos los donativos corporativos y nuestros programas en áreas como educación financiera y la promoción del espíritu empresarial. PUNTOS PRINCIPALES DEL 2016
INGRESO NETO AJUSTADO
CAMBIO DEL PRECIO DE LA ACCIÓN DE POPULAR COMPARADO CON LOS PARES 2015-2016
$358 M
CRECIMIENTO ORGÁNICO
DE LA CARTERA DE
PRÉSTAMOS EN EE.UU.
17%
DISMINUCIÓN DE LOS ACTIVOS
NO ACUMULATIVOS
$69 M
NIVEL DE CAPITAL ROBUSTO
16.5%
Common Equity Tier I
100%
80%
60%
40%
20$
0%
-20%
-40%
-60%
Pares PR 86%
BPOP 55%
Pares EE.UU. 39%
Índice KBW 26%
5
1
-
c
d
i
6
1
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e
n
e
6
1
-
b
e
f
6
1
-
r
a
m
6
1
-
r
b
a
6
1
-
y
a
m
6
1
-
n
u
j
6
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-
l
u
j
6
1
-
o
g
a
6
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-
p
e
s
6
1
-
t
c
o
6
1
-
v
o
n
6
1
-
c
d
i
Richard L. Carrión
Presidente de la Junta de Directores y Principal Oficial Ejecutivo, Popular, Inc.
9
Mirando hacia el futuro, la condición fiscal y económica de Puerto Rico continúa siendo nuestro desafío principal. La situación, la cual se complicó en años recientes, llegó a un punto crítico en el 2016 cuando fue evidente que el gobierno no podría cumplir con sus obligaciones de deuda. En junio del año pasado, un día antes de que el gobierno local incumpliera con el pago de la deuda de sus obligaciones generales, el gobierno federal, a través de PROMESA, estableció la Junta de Supervisión Fiscal para Puerto Rico y un marco para una reestructuración ordenada de la deuda.La Junta de Supervisión Fiscal, compuesta de siete miembros, se constituyó en agosto y está trabajando junto a la nueva administración para desarrollar un plan fiscal de cinco años para Puerto Rico. La Junta además extendió la posposición de litigios de los acreedores de Puerto Rico hasta el 1ro de mayo de 2017. La implantación de PROMESA indudablemente tendrá implicaciones importantes para el futuro de Puerto Rico. Dado que nos encontramos en territorio desconocido, es difícil predecir todas sus ramificaciones. Tomando en cuenta el desequilibrio fiscal actual, probablemente habrá una reducción del gasto gubernamental que, en el corto plazo, podría afectar negativamente la actividad económica en la isla. Sin embargo, también vemos algunas oportunidades que pudiesen contrarrestar posibles recortes del gobierno, como una mejoría en la confianza de los individuos y empresas, el desarrollo de la infraestructura de energía y el pago de balances que el gobierno de Puerto Rico le adeuda a suplidores. Estamos esperanzados que, con el tiempo, Puerto Rico se beneficie de una carga de deuda más manejable, un presupuesto gubernamental balanceado y una economía revitalizada.Como la principal institución financiera en la isla, continuaremos buscando ser fuente de información, apoyo y consejo, particularmente en temas relacionados al crecimiento económico, que es el elemento más crítico a largo plazo. En los 123 años de Popular, hemos atravesado un sinnúmero de desafíos en la isla, y siempre emergemos más fuertes. Esta vez no será diferente.Nuestros logros en el 2016 fueron posibles gracias al consejo de nuestra Junta de Directores, al liderazgo de nuestro equipo gerencial y al trabajo de nuestros 7,800 compañeros. Su dedicación es una fuente constante de orgullo e inspiración.Me siento honrado por la confianza y el apoyo de nuestros clientes. Continuaremos trabajando para ganarnos su negocio, día tras día, en cada interacción.Finalmente, estoy agradecido por la confianza de los accionistas en nuestra organización. Estamos deseosos de construir sobre estos logros para alcanzar otro año de resultados sólidos. 25 AÑOS RESUMEN FINANCIERO HISTÓRICO
(Dólares en millones, excepto información por acción)
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Información Financiera Seleccionada
Ingreso neto (Pérdida neta)
$
85.1
$
109.4
$
124.7
$
146.4
$
185.2
$ 209.6
$
232.3
$
257.6
$
276.1
$ 304.5
$
351.9
$ 470.9
$ 489.9
$
540.7
$
357.7
$
(64.5)
$ (1,243.9)
$ (573.9)
$
137.4
$
151.3
$
245.3
$
599.3
$
(313.5)
$
895.3
$
216.7
Activos
Préstamos brutos
Depósitos
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
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
36,506.9
35,748.8
33,086.8
35,761.7
38,661.6
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
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
23,129.2
23,435.4
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
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
27,209.7
30,496.2
Capital de accionistas
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
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
5,105.3
5,198.0
Valor agregado en el mercado
$
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
$ 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
$ 2,936.6
$ 4,548.1
Rendimiento de activos promedio (ROAA)
Rendimiento de capital común promedio (ROACE)
0.89%
12.72%
1.02%
13.80%
1.02%
1.04%
13.80%
14.22%
1.14%
16.17%
1.14%
1.14%
1.08%
15.83%
15.41%
15.45%
1.04%
15.00%
1.09%
1.11%
14.84%
16.29%
1.36%
1.23%
19.30%
17.60%
1.17%
17.12%
0.74%
9.73%
-0.14%
-3.04%
-1.57%
-2.08%
-44.47%
-32.95%
0.36%
4.37%
0.40%
4.01%
0.68%
6.37%
1.65%
14.43%
-0.89%
-7.04%
2.54%
19.16%
0.58%
4.07%
Por Acción Común1
Ingreso neto (Pérdida neta) - Básico
$
3.49
$
4.18
$
4.59
$
5.24
$
6.69
$
7.51
$
8.26
$
9.19
$
9.85
$
10.87
$
13.05
$
17.36
$
17.95
$
19.78
$
12.41
$
(2.73)
$
(45.51)
$
2.39
$
(0.62)
$
1.44
$
2.36
$
5.80
$
(3.08)
$
8.66
$
2.06
3.49
1.00
28.79
37.81
4.18
1.20
31.86
39.38
4.59
1.25
34.35
35.16
5.24
1.54
39.52
48.44
6.69
1.83
43.98
84.38
7.51
2.00
51.83
8.26
2.50
59.32
123.75
170.00
9.19
3.00
57.54
139.69
9.85
3.20
69.62
131.56
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)
1.44
2.35
5.78
(3.08)
—
—
—
—
36.67
31.40
37.71
13.90
39.35
20.79
44.26
28.73
—
40.76
34.05
8.65
0.30
48.79
28.34
2.06
0.60
49.60
43.82
87%
10%
3%
79%
16%
5%
76%
20%
4%
75%
21%
4%
74%
22%
4%
74%
23%
3%
71%
25%
4%
71%
25%
4%
72%
26%
2%
68%
30%
2%
66%
32%
2%
62%
36%
2%
55%
43%
2%
53%
45%
2%
52%
45%
3%
59%
38%
3%
64%
33%
3%
65%
32%
3%
74%
23%
3%
74%
23%
3%
73%
24%
3%
72%
25%
3%
80%
17%
3%
75%
22%
3%
75%
23%
2%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
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
162
3
30
195
41
26
9
165
8
32
205
58
26
8
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
198
8
89
295
128
51
48
10
8
11
2
76
271
92
297
111
319
134
348
153
383
183
455
258
553
Sistema Electrónico de Distribución
Cajeros automáticos propios y administrados
Puerto Rico
Islas Vírgenes
Estados Unidos
Total
Transacciones (en millones)
Transacciones electrónicas2
Efectos procesados3
211
3
6
234
8
11
220
253
28.6
170.4
33.2
171.8
262
8
26
296
43.0
174.5
281
8
38
327
9
53
391
17
71
327
389
479
56.6
175.0
78.0
173.7
111.2
171.9
421
59
94
574
130.5
170.9
199
8
91
298
137
102
47
12
10
13
2
4
327
625
442
68
99
609
159.4
171.0
199
8
95
302
136
132
61
12
11
21
3
2
4
382
684
478
37
109
624
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
326
282
289
286
276
270
224
232
192
8
128
328
183
114
43
18
15
30
9
2
1
1
5
212
158
134
194
8
136
338
4
49
17
14
33
12
2
1
1
1
5
191
8
142
341
52
15
11
32
12
2
1
1
1
7
196
8
147
351
51
12
24
32
13
2
1
1
1
9
179
8
139
2
9
12
22
32
7
1
1
1
1
9
173
8
101
185
8
96
183
9
94
10
36
6
1
1
1
10
37
4
4
1
1
1
10
33
6
1
1
1
9
61
175
9
92
10
37
4
5
1
1
1
171
9
90
9
38
3
6
1
1
1
168
9
47
9
25
3
6
1
1
1
173
9
50
9
24
3
6
2
1
1
171
9
51
231
9
17
2
5
2
1
1
421
749
351
689
292
633
280
631
97
55
58
423
343
344
344
59
335
59
329
46
270
46
278
37
268
568
59
163
790
583
61
181
825
605
65
192
862
615
69
187
871
605
74
176
855
571
77
136
784
624
17
138
779
613
20
135
768
597
20
134
751
599
22
132
753
602
21
83
706
622
21
87
730
635
20
101
756
199.5
160.2
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
465.0
523.5
Empleados (equivalente a tiempo completo)
7,024
7,533
7,606
7,815
7,996
8,854
10,549
11,501
10,651
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
7,810
7,828
10
Información Financiera Seleccionada
Activos
Préstamos brutos
Depósitos
Por Acción Común1
Ingreso neto (Pérdida neta) - Diluido
Activos por Área Geográfica
Dividendos (Declarados)
Valor en los libros
Precio en el mercado
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
Puerto Rico
Islas Vírgenes
Estados Unidos
Total
Transacciones (en millones)
Transacciones electrónicas2
Efectos procesados3
Sistema Electrónico de Distribución
Cajeros automáticos propios y administrados
162
3
30
195
41
26
9
165
8
32
205
58
26
8
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
76
271
92
297
111
319
134
348
153
383
183
455
258
553
211
3
6
234
8
11
281
8
38
327
9
53
391
17
71
220
253
327
389
479
262
8
26
296
43.0
174.5
199
8
95
302
136
132
61
12
11
21
3
2
4
382
684
478
37
109
624
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
198
8
89
295
128
51
48
10
8
11
2
421
59
94
574
130.5
170.9
199
8
91
298
137
102
47
12
10
13
2
4
327
625
442
68
99
609
159.4
171.0
(Dólares en millones, excepto información por acción)
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Ingreso neto (Pérdida neta)
$
85.1
$
109.4
$
124.7
$
146.4
$
185.2
$ 209.6
$
232.3
$
257.6
$
276.1
$ 304.5
$
351.9
$ 470.9
$ 489.9
$
540.7
$
357.7
$
(64.5)
$ (1,243.9)
$ (573.9)
$
137.4
$
151.3
$
245.3
$
599.3
$
(313.5)
$
895.3
$
216.7
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
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
36,506.9
35,748.8
33,086.8
35,761.7
38,661.6
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
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
23,129.2
23,435.4
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
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
27,209.7
30,496.2
Capital de accionistas
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
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
5,105.3
5,198.0
Valor agregado en el mercado
$
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
$ 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
$ 2,936.6
$ 4,548.1
Rendimiento de activos promedio (ROAA)
Rendimiento de capital común promedio (ROACE)
0.89%
12.72%
1.02%
13.80%
1.02%
1.04%
13.80%
14.22%
1.14%
16.17%
1.14%
1.14%
1.08%
15.83%
15.41%
15.45%
1.04%
15.00%
1.09%
1.11%
14.84%
16.29%
1.36%
1.23%
19.30%
17.60%
1.17%
17.12%
0.74%
9.73%
-0.14%
-3.04%
-1.57%
-2.08%
-44.47%
-32.95%
0.36%
4.37%
0.40%
4.01%
0.68%
6.37%
1.65%
14.43%
-0.89%
-7.04%
2.54%
19.16%
0.58%
4.07%
Ingreso neto (Pérdida neta) - Básico
$
3.49
$
4.18
$
4.59
$
5.24
$
6.69
$
7.51
$
8.26
$
9.19
$
9.85
$
10.87
$
13.05
$
17.36
$
17.95
$
19.78
$
12.41
$
(2.73)
$
(45.51)
$
2.39
$
(0.62)
$
1.44
$
2.36
$
5.80
$
(3.08)
$
8.66
$
2.06
3.49
1.00
28.79
37.81
4.18
1.20
31.86
39.38
4.59
1.25
34.35
35.16
5.24
1.54
39.52
48.44
6.69
1.83
43.98
84.38
7.51
2.00
51.83
8.26
2.50
59.32
123.75
170.00
9.19
3.00
57.54
139.69
9.85
3.20
69.62
131.56
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)
1.44
2.35
5.78
(3.08)
—
—
—
—
36.67
31.40
37.71
13.90
39.35
20.79
44.26
28.73
—
40.76
34.05
8.65
0.30
48.79
28.34
2.06
0.60
49.60
43.82
87%
10%
3%
79%
16%
5%
76%
20%
4%
75%
21%
4%
74%
22%
4%
74%
23%
3%
71%
25%
4%
71%
25%
4%
72%
26%
2%
68%
30%
2%
66%
32%
2%
62%
36%
2%
55%
43%
2%
53%
45%
2%
52%
45%
3%
59%
38%
3%
64%
33%
3%
65%
32%
3%
74%
23%
3%
74%
23%
3%
73%
24%
3%
72%
25%
3%
80%
17%
3%
75%
22%
3%
75%
23%
2%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
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
194
8
136
338
212
4
49
17
14
33
12
2
1
1
1
5
191
8
142
341
196
8
147
351
158
134
52
15
11
32
12
2
1
1
1
7
51
12
24
32
13
2
1
1
1
9
421
749
351
689
292
633
280
631
2
9
12
22
32
7
1
1
1
1
9
97
10
33
6
1
1
1
9
61
179
8
139
173
8
101
185
8
96
183
9
94
175
9
92
171
9
90
168
9
47
173
9
50
326
282
289
286
276
270
224
232
10
36
6
1
1
1
10
37
4
4
1
1
1
10
37
4
5
1
1
1
9
38
3
6
1
1
1
9
25
3
6
1
1
1
9
24
3
6
2
1
1
423
343
344
344
55
58
59
335
59
329
46
270
46
278
37
268
568
59
163
790
583
61
181
825
605
65
192
862
615
69
187
871
605
74
176
855
571
77
136
784
624
17
138
779
613
20
135
768
597
20
134
751
599
22
132
753
602
21
83
706
622
21
87
730
635
20
101
756
171
9
51
231
9
17
2
5
2
1
1
Empleados (equivalente a tiempo completo)
7,024
7,533
7,606
7,815
7,996
8,854
10,549
11,501
10,651
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
7,810
7,828
28.6
170.4
33.2
171.8
56.6
175.0
78.0
173.7
111.2
171.9
199.5
160.2
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
465.0
523.5
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 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.
11
POPULAR, INC. GERENCIA Y JUNTA DE DIRECTORES
EQUIPO GERENCIAL EJECUTIVO
RICHARD L. CARRIÓN
Presidente de la
Junta de Directores y
Principal Oficial Ejecutivo
Popular, Inc.
MANUEL A. CHINEA
Vicepresidente Ejecutivo
Popular, Inc.
Principal Oficial de Operaciones
Popular Community Bank
GILBERTO MONZÓN
Vicepresidente Ejecutivo
Grupo de Crédito a Individuo
Banco Popular de Puerto Rico
ELI S. SEPÚLVEDA
Vicepresidente Ejecutivo
Grupo de Crédito Comercial
Banco Popular de Puerto Rico
IGNACIO ALVAREZ
Presidente y Principal Oficial
de Operaciones Popular, Inc.
y Banco Popular de Puerto Rico
Presidente
Popular Community Bank
JAVIER D. FERRER
Vicepresidente Ejecutivo,
Principal Oficial Legal y
Secretario Corporativo
Grupo de Consejería General
y Asuntos Corporativos
Popular, Inc.
EDUARDO J. NEGRÓN
Vicepresidente Ejecutivo
Grupo de Administración
Popular, Inc.
LIDIO V. SORIANO
Vicepresidente Ejecutivo y
Principal Oficial de Riesgo
Grupo Corporativo de
Manejo de Riesgo
Popular, Inc.
CAMILLE BURCKHART
Vicepresidenta Ejecutiva y
Principal Oficial de Informática
y Estrategia Digital
Grupo de Innovación,
Tecnología y Operaciones
Popular, Inc.
JUAN O. GUERRERO
Vicepresidente Ejecutivo
Grupo de Servicios
Financieros y Seguros
Banco Popular de Puerto Rico
NÉSTOR O. RIVERA
Vicepresidente Ejecutivo
Grupo de Banca Individual
Banco Popular de Puerto Rico
CARLOS J. VÁZQUEZ
Vicepresidente Ejecutivo y
Principal Oficial Financiero
Popular, Inc.
JUNTA DE DIRECTORES
RICHARD L. CARRIÓN
Presidente de la
Junta de Directores y
Principal Oficial Ejecutivo
Popular, Inc.
JOHN W. DIERCKSEN
Principal
Greycrest, LLC
JOAQUÍN E. BACARDÍ, III
Inversionista Privado
ALEJANDRO M. BALLESTER
Presidente
Ballester Hermanos, Inc.
MARÍA LUISA FERRÉ
Presidenta y Principal
Oficial Ejecutiva
Grupo Ferré Rangel
DAVID E. GOEL
Socio Gerente General
Matrix Capital Management
Company, LP
C. KIM GOODWIN
Inversionista Privada
WILLIAM J. TEUBER JR.
Inversionista Privado
CARLOS A. UNANUE
Presidente
Goya de Puerto Rico
12
Financial Review and
Supplementary Information
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Statistical Summaries
Financial Statements
Report of Management on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition as of December 31, 2016 and 2015
Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
2
74-78
79
80
82
83
84
85
86
87
POPULAR, INC. 2016 ANNUAL REPORT
1
Management’s Discussion and
Analysis of Financial Condition
and Results of Operations
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
Liabilities
Stockholders’ Equity
Regulatory Capital
Off-Balance Sheet Arrangements and Other Commitments
Contractual Obligations and Commercial Commitments
Risk Management
Risk Management Framework
Market / Interest Rate Risk
Liquidity
Credit Risk
Enterprise Risk and Operational Risk Management
Adoption of New Accounting Standards and Issued But Not Yet Effective Accounting Standards
Adjusted net income – Non-GAAP Financial Measure
Statistical Summaries
Statements of Financial Condition
Statements of Operations
Average Balance Sheet and Summary of Net Interest Income
Quarterly Financial Data
2
POPULAR, INC. 2016 ANNUAL REPORT
3
4
10
18
18
22
22
24
25
25
26
28
28
32
33
34
35
35
37
37
39
45
50
70
71
71
74
75
76
78
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
Popular,
(the “Corporation” or
subsidiaries
“Popular”). All accompanying tables, consolidated financial
statements, and corresponding notes included in this “Financial
Review and Supplementary Information - 2016 Annual Report”
(“the report”) should be considered an integral part of this
MD&A.
Inc’s
conditions,
(“Popular”,
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
the
statements may relate to Popular,
“Corporation”, “we”, “us”, “our”) financial condition, results of
operations, plans, objectives, future performance and business,
including, but not limited to, statements with respect to the
adequacy of the allowance for loan losses, delinquency trends,
market risk and the impact of interest rate changes, capital
market
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, and the effect of legal proceedings and new accounting
standards on the Corporation’s financial condition and results
of operations. All statements contained herein that are not
clearly historical in nature are forward-looking, and the words
“anticipate”,
“estimate”,
“continues”,
“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.
and liquidity,
“believe”,
adequacy
“expect”,
capital
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 in the geographic areas we
serve; the impact of the Commonwealth of Puerto Rico’s fiscal
crisis, and the measures taken and to be taken by the Puerto
Rico Government and the Federally-appointed oversight board,
on the economy, our customers and our business; the impact of
the actions to be taken to address Puerto Rico’s fiscal crisis on
the value of our portfolio of Puerto Rico government securities
and loans to governmental entities, and the possibility that
these actions may result in credit losses that are higher than
currently expected; 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; regulatory approvals that may be necessary to
undertake certain actions or consummate strategic transactions
such as acquisitions and dispositions; the relative strength or
weakness of the consumer and commercial credit sectors and of
the real estate markets in Puerto Rico and the other markets in
which borrowers are located; the performance of the stock and
bond markets; competition in the financial services industry;
additional FDIC assessments; and possible legislative, tax or
regulatory changes; a failure in or breach of our operational or
security systems or infrastructure, including that of EVERTEC,
Inc. our provider of core financial transaction processing and
information technology services, as a result of cyber attacks or
otherwise; and risks related to the Doral transaction, including
our ability to maintain customer
relationships and risks
associated with the limited amount of diligence able to be
conducted by a buyer in an FDIC transaction. Other possible
events or factors that could cause results or performance to
differ materially from those expressed in these forward-looking
statements include the following: negative economic conditions
the job market,
that adversely affect
consumer confidence and spending habits which may affect,
among other things, the level of non-performing assets, charge-
offs and provision expense; changes in interest rates and market
liquidity which may reduce interest margins, impact funding
sources and affect our ability to originate and distribute
financial products in the primary and secondary markets;
changes in market rates and prices which may adversely impact
the value of financial assets and liabilities; liabilities resulting
in
from litigation and regulatory investigations; changes
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.
the housing prices,
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
POPULAR, INC. 2016 ANNUAL REPORT
3
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 31, 2016,
the Corporation recorded approximately $31.3 million in
earnings from these investments on an aggregate basis. The
carrying amounts of these investments as of December 31, 2016
were $218.1 million. Refer to Note 18 to the consolidated
financial
the
for
Corporation’s investments under the equity method.
information of
statements
additional
Significant events
Completed sale of non-performing assets
During the year ended December 31, 2016, the Corporation
completed the sale of commercial and construction loans with a
carrying value of approximately $100 million and other real
estate owned (“OREO”) with a carrying value of $9 million
acquired in 2010 from the FDIC as receiver for Westernbank
(“Westernbank” or “WB”). The sale resulted in a net benefit
before taxes of approximately $8 million from the sale of the
loans and a loss of $5.1 million from the sale of OREOs.
Review board decisions related to the arbitration with the
FDIC
During the third and fourth quarters of 2016, the review board
hearing several of the arbitration claims submitted by BPPR
issued final arbitration decisions denying BPPR’s request for
reimbursement for shared loss claims that were subject to the
disputes between BPPR and the Federal Deposit Insurance
Corporation (“FDIC”), as receiver, under the commercial loss
share agreement entered into in connection with the WB FDIC-
assisted transaction. As a result, the Corporation recorded a
pre-tax charge of $171.8 million in connection with
unreimbursed losses considered in the arbitration proceedings,
the related adjustment to the true-up obligation owed to the
FDIC at the end of the loss-share agreements in 2020 and
recoveries previously incorporated in the net damages claimed
in the arbitration.
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.
ended December 31, 2016 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
(“U.S.”) mainland, and the U.S. and British Virgin Islands. In
Puerto Rico, the Corporation provides retail, mortgage and
commercial banking services through its principal banking
subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as
investment banking, broker-dealer, auto and equipment leasing
and financing, and insurance services through specialized
subsidiaries. The Corporation’s mortgage origination business is
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 franchise operates under the
brand name of Popular 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 42 to the consolidated financial
the Corporation’s
information about
statements presents
business segments.
The Corporation has several investments which it accounts
for under the equity method. These include the 16.05% interest
in EVERTEC, a 15.84% 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.
BHD León is a diversified financial
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
services
4
POPULAR, INC. 2016 ANNUAL REPORT
Table 1 - Selected Financial Data
(Dollars in thousands, except per common share data)
CONDENSED STATEMENTS OF OPERATIONS
2016
Years ended December 31,
2014
2013
2015
2012
Interest income
Interest expense
Net interest income
Provision for loan losses:
Non-covered loans
Covered loans
Non-interest income
Operating expenses
Income tax (benefit) expense
Income (loss) from continuing operations
Income (loss) from discontinued operations, net of tax
Net income (loss)
Net income (loss) applicable to common stock
PER COMMON SHARE DATA
Net income (loss):
Basic:
From continuing operations
From discontinued operations
Total
Diluted:
From continuing operations
From discontinued operations
Total
Dividends declared
Common equity per share
Market value per common share
Outstanding shares:
Average - basic
Average - assuming dilution
End of period
AVERAGE BALANCES
Net loans [1]
Earning assets
Total assets
Deposits
Borrowings
Total stockholders’ equity
PERIOD END BALANCE
Net loans [1]
Allowance for loan losses
Earning assets
Total assets
Deposits
Borrowings
Total stockholders’ equity
SELECTED RATIOS
$ 1,634,573 $ 1,603,014 $ 1,633,543 $ 1,647,940 $ 1,644,386
362,759
1,281,627
303,366
1,344,574
212,518
1,422,055
194,031
1,408,983
688,471
945,072
171,126
(1,110)
297,936
1,255,635
78,784
215,556
1,135
216,691 $
212,968 $
217,458
24,020
519,541
1,288,221
(495,172)
893,997
1,347
895,344 $
891,621 $
223,999
46,135
386,515
1,193,684
58,279
(190,510)
(122,980)
(313,490) $
(317,213) $
536,710
69,396
791,013
1,221,990
(251,327)
558,818
40,509
599,327 $
595,604 $
322,234
74,839
511,489
1,214,989
(26,403)
207,457
37,818
245,275
241,552
2.05 $
0.01
2.06 $
2.05 $
0.01
2.06 $
0.60 $
49.60
43.82
8.65 $
0.01
8.66 $
8.64 $
0.01
8.65 $
0.30 $
48.79
28.34
(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
1.99
0.37
2.36
1.98
0.37
2.35
–
39.35
20.79
103,275,264
103,377,283
103,790,932
102,967,186
103,124,309
103,618,976
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
$
$
$
$
$
$
$
$ 23,062,242 $ 23,045,308 $ 22,366,750 $ 22,799,878 $ 22,786,545
29,510,753
29,897,273
36,264,031
35,181,857
24,702,622
24,647,355
4,414,483
3,514,203
3,843,652
4,555,752
33,713,158
37,613,742
29,066,010
2,339,399
5,278,477
31,451,081
35,186,305
26,778,582
2,757,334
4,704,862
29,741,099
36,266,993
24,571,382
4,291,861
4,176,349
$ 23,435,446 $ 23,129,230 $ 22,053,217 $ 24,706,719 $ 25,093,632
730,607
31,906,198
36,506,911
27,000,613
4,430,049
4,110,000
540,651
34,861,193
38,661,609
30,496,224
2,055,477
5,197,957
601,792
29,594,365
33,086,771
24,807,535
2,994,761
4,267,382
640,555
31,521,963
35,748,752
26,711,145
3,644,665
4,626,150
537,111
31,717,124
35,761,733
27,209,723
2,425,853
5,105,324
Net interest margin (taxable equivalent basis) [2]
Return on average total assets
Return on average common stockholders’ equity
Tier I Capital to risk-adjusted assets
Total Capital to risk-adjusted assets
4.48%
0.58
4.07
16.48
19.48
4.74%
2.54
19.16
16.21
18.78
3.45%
(0.89)
(7.04)
18.13
19.41
4.73%
1.65
14.43
19.15
20.42
4.47%
0.68
6.37
17.35
18.63
Includes loans held-for-sale and covered loans.
[1]
[2] Net interest margin for the year ended December 31, 2014 includes 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. Refer additional information on
the Net Interest Income section of this MD&A and to the reconciliation in Table 6.
POPULAR, INC. 2016 ANNUAL REPORT
5
prepares
its Consolidated
Adjusted results of operations – Non-GAAP financial measure
Adjusted net income
The Corporation
Financial
Statements using accounting principles generally accepted in
the United States (“U.S. GAAP” or the “reported basis”). In
addition to analyzing the Corporation’s results on a reported
the
basis, management monitors Adjusted net
Corporation and excludes the impact of certain transactions on
the results of its operations. Management believes that Adjusted
the
net
income provides meaningful
ongoing
of
performance
underlying
operations. Adjusted net
income is a non-GAAP financial
measure. Refer to tables 46 to 48 for a reconciliation of net
income
ended
to Adjusted net
December 31, 2016, 2015 and 2014.
information about
the Corporation’s
income of
the years
income
for
Net interest income on a taxable equivalent basis
Net interest income, on a taxable equivalent basis, is presented
with its different components on Tables 5 and 6 for the years
ended December 31, 2016 as compared with the same periods
in 2015 and 2014, segregated by major categories of interest
earning assets and interest bearing liabilities.
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.
Non-GAAP financial measures used by the Corporation may
not be comparable to similarly named Non-GAAP financial
measures used by other companies.
Financial highlights for the year ended December 31, 2016
The Corporation’s net income for the year ended December 31,
2016 amounted to $216.7 million, compared to a net income of
$895.3 million and a net loss of $313.5 million, for 2015 and
2014, respectively. For the year 2016, the Corporation’s results
include the impact of two unfavorable arbitration review board
decisions in disputes with the FDIC, which resulted in a pre-tax
charge of $171.8 million related to unreimbursed losses
considered in the arbitrations, the related adjustment to the
6
POPULAR, INC. 2016 ANNUAL REPORT
true-up obligation owed to the FDIC at the end of the loss-
previously
2020
share
incorporated in the net damages claimed in the arbitration.
agreements
recoveries
and
in
securities;
Net income from continuing operations for the year ended
December 31, 2015 include $18.4 million in restructuring
charges related to the U.S. operations; the impact of $17.9
million of net expenses associated with the acquisition in 2015,
of certain assets and assumption of non-brokered deposits of
Doral Bank from the FDIC, as receiver (the “Doral Bank
Transaction”); an other-than-temporary impairment charge of
$14.4 million on the portfolio of Puerto Rico government
investment
FDIC
indemnification asset of $10.9 million; a fair value gain of
$4.4 million associated with a portfolio of mortgage servicing
rights (“MSRs”) acquired in connection with a backup servicing
agreement; losses on proposed bulk sales of loans acquired
from Westernbank of $15.2 million; a loss of $5.9 million from
a bulk sale of non-covered loans; a net loss of $4.4 million on a
bulk sale of covered OREOs completed during the year and a
partial reversal of the valuation allowance on its deferred tax
assets
approximately
$589.0 million.
from its U.S.
a write-down
operations
the
for
of
non-performing
Net loss from continuing operations for the year ended
December 31, 2014 was $190.5 million. 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
a
of
$39.8 million expense related to the refinancing of structured
repos and restructuring charges of $26.7 million. In addition,
during 2014 the Corporation recorded an income tax expense
of $20.0 million related to the change in the capital gains tax
rate in Puerto Rico 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.
$11.1 million,
totalling
assets
For the year 2014, the Corporation’s results reflected a net
loss from discontinued operations of $123.0 million, which
include 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.
Excluding the impact of the above mentioned transactions,
detailed in Tables 46 and 47, the Adjusted net income from
continuing operations for the year ended December 31, 2016
was $358.1 million, compared to $374.8 million for 2015 and
$300.7 million for 2014. Refer to Tables 46 through 48 for the
reconciliation to the Adjusted net income.
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 2016, 2015 and 2014.
Table 2 - Financial Information - Westernbank FDIC-Assisted Transaction
(In thousands)
Interest income on WB loans
FDIC loss share (expense) income :
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
Change in true-up payment obligation
Arbitration decision charge
Other
Total FDIC loss share (expense) income
Total (expenses) revenues
Provision (reversal) for loan losses
Total (expenses) revenues less provision (reversal) for loan losses
Years ended December 31,
2014
2015
2016
$ 175,207
$208,779
$ 293,610
(10,201)
–
(239)
8,433
(31,338)
(33,413)
(136,197)
(4,824)
(66,238)
–
15,658
73,205
(13,836)
9,559
–
1,714
(189,959)
12,492
32,038
58,117
(13,124)
(1,791)
–
(797)
(207,779)
20,062
(103,024)
(32,572)
228,841
190,586
(3,318)
54,113
46,135
$ (29,254) $174,728
$ 144,451
[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)
Loans
FDIC loss share asset
Interest income on Westernbank loans for the year 2016
amounted to $ 175 million versus $ 209 million in 2015,
for each year,
reflecting a yield of 8.99% versus 8.95%,
respectively. Interest income on this portfolio, due to its nature,
should continue to decline as scheduled payments are received
and workout arrangements are made.
The FDIC loss share reflected an expense of $ 208 million
for 2016, compared to an income of $ 20 million for 2015.
During 2016, the Corporation recorded a $136 million write-
down to the indemnification asset related to the arbitration
decision. Refer to the Non-Interest Income section of this
information on the FDIC loss share
MD&A for additional
(expense) income.
Years ended December 31,
2015
2016
2014
$1,949
191
$2,333
362
$2,771
748
Although an 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
amortization of the loss share asset.
The discussion that
results of operations
follows provides highlights of
for
the
Corporation’s
ended
December 31, 2016 compared to the results of operations of 2015.
It also provides some highlights with respect to the Corporation’s
financial condition, credit quality, capital and liquidity. Table 3
presents a five-year summary of the components of net income
(loss) as a percentage of average total assets.
year
the
POPULAR, INC. 2016 ANNUAL REPORT
7
Table 3 - Components of Net Income (Loss) as a Percentage of Average Total Assets
2016
2015
2014
2013
2012
Net interest income
Provision for loan losses
Mortgage banking activities
Net gain and valuation adjustments on investment securities
Other-than-temporary impairment losses 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 (loss) profit
FDIC loss share (expense) income
Other non-interest income
Total net interest income and non-interest income, net of provision for loan losses
Operating expenses
3.78% 4.00% 2.69% 3.71% 3.54%
(0.77)
(0.45)
0.09
0.15
–
–
–
–
0.12
0.02
(0.12)
(0.05)
0.01
–
(0.29)
(0.55)
1.29
1.22
(0.69)
0.23
–
(0.04)
–
(0.05)
(0.01)
0.06
1.29
(1.67)
0.21
0.02
–
(0.15)
(0.10)
(0.04)
(0.23)
2.47
(1.10)
0.23
–
–
(0.08)
(0.06)
0.01
(0.15)
1.46
4.12
(3.34)
0.78
0.20
0.58
–
4.79
(3.66)
1.13
(1.41)
2.54
–
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
0.58% 2.54% (0.89)% 1.65% 0.68%
Income (loss) from continuing operations before income tax
Income tax expense (benefit)
Income (loss) from continuing operations
(Loss) income from discontinued operations, net of tax
Net income (loss)
Net interest income from the continuing business for the
year ended December 31, 2016 was $1.4 billion, an increase of
$13.1 million when compared to 2015. On a taxable equivalent
basis, net interest income increased by $17.4 million. Net
interest margin decreased by 26 basis points to 4.22% in 2016,
compared to 4.48% in 2015 mainly due to the mix in the assets
composition. On a taxable equivalent basis, net interest margin
was 4.48% in 2016, compared to 4.74% in 2015. Refer to the
Net Interest Income section of
this MD&A for additional
information.
The Corporation’s total provision for loan losses (including
covered and non-covered loans) totaled $170.0 million for the
year ended December 31, 2016, compared with $241.5 million
for 2015 and $270.1 million for 2014. The decrease in the
provision was due to lower net charge-offs in Puerto Rico and
lower provision for the Westernbank portfolio, partially offset
by a higher provision in the U.S. due to portfolio growth and
higher net charge-offs. The provision for loan losses for the
non-covered loan portfolio totaled $171.1 million for the year
ended December 31, 2016, compared to $217.5 million for the
year ended December 31, 2015, a decrease of $46.4 million,
driven by the reclassification of certain loans from covered to
non-covered on July 1, 2015.
Non-performing assets, excluding covered loans and OREO,
at December 31, 2016 were $738 million, a decrease of
$64 million when compared with December 31, 2015. The
decrease was mainly in the non-performing loans (“NPLs”)
held-for-sale by $45 million, mostly related to the sale of the
Puerto Rico Electric Power Authority
loan
transferred to held-for-sale in the second quarter of 2015.
Non-performing loans held-in-portfolio at December 31, 2016
decreased by $44 million when compared against December 31,
(“PREPA”)
8
POPULAR, INC. 2016 ANNUAL REPORT
2015, mostly driven by lower mortgage and commercial NPLs
of $22 million and $18 million, respectively. These reductions
in part by higher OREOs of $25 million at
were offset
December 31, 2016 versus December 31, 2015.
Refer to the Provision for Loan Losses and Credit Risk
sections of this MD&A for information on the allowance for
debt
troubled
loan
restructurings, net charge-offs and credit quality metrics.
non-performing
losses,
assets,
Non-interest income for the year ended December 31, 2016
amounted to $297.9 million, a decrease of $221.6 million, when
compared with 2015. The decline reflects the impact of the
$136.2 million write-down to the FDIC indemnification asset
related to the FDIC arbitration decisions and an unfavorable
change in the related true-up payment obligation to the FDIC,
which reflects the impact of the arbitration decision as well as
other commercial loss share agreement adjustments. Mortgage
banking activities declined by $25.3 million during 2016, while
other-than-temporary
by
impairment
$14.2 million for 2016 mainly due to the $14.4 million charge
related to P.R. Government securities portfolios recorded in
2015.
declined
losses
Refer to the Non-Interest Income section of this MD&A for
additional information on the major variances of the different
categories of non-interest income.
Total operating expenses for the year 2016 amounted to
$1.3 billion, a decrease of $32.6 million. The decline was
principally due to lower OREO expenses of $38.4 million, due
to a $22.0 million loss on the bulk sale completed in 2015 and
lower BPNA restructuring charges by $18.4 million, partially
offset by higher personnel costs and professional fees. Refer to
the Operating Expenses section of this MD&A for additional
information.
Income tax expense amounted to $78.8 million for the year
ended December 31, 2016, compared with an income tax
benefit of $495.2 million for the previous year. The unfavorable
variance in income tax was primarily due to a tax benefit of
$589.0 million recorded during the year 2015 as a result of the
partial reversal of the valuation allowance on the Corporation’s
deferred tax asset from its U.S. operations. Refer to the Income
Taxes section in this MD&A and Note 40 to the consolidated
financial statements for additional information on income taxes.
At December 31, 2016, the Corporation’s total assets were
$38.7 billion, compared with $35.8 billion at December 31,
2015, an increase of $2.9 billion, or 8%. The increase is mainly
driven by an increase in the Corporation’s money market
investments
securities
available-for-sale by $2.1 billion driven by the increase in
liquidity resulting from higher deposits balances. The total loan
portfolio increased by $0.3 billion due mainly to growth at
BPNA, partially offset by lower mortgage loans originations at
BPPR and the run-off of the WB portfolio, including the bulk
sale of WB loans with a carrying value of approximately
$100 million. The balance of the FDIC indemnification asset
declined by $0.2 billion driven by the $136.2 million write-
down from the unfavorable FDIC arbitration decisions, as
mentioned above.
billion and investment
$0.7
of
was mainly due to a net decrease in repurchase agreements,
principally at BPPR.
Refer to Table 14 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.
Stockholders’ equity totaled $5.2 billion at December 31,
2016, compared with $5.1 billion at December 31, 2015. The
Corporation continues to be well-capitalized at December 31,
2016. The Common Equity Tier 1 Capital ratio at December 31,
2016 was 16.49%, compared to 16.21% at December 31, 2015.
In summary, during 2016, the Corporation improved credit
quality, delivered strong business performance in Puerto Rico,
improved the results of its operations in the United States, and
further solidified its capital position. The Corporation also
continued to benefit from its stake in EVERTEC and BHD Leo´ n,
the second largest bank in the Dominican Republic.
growth,
technology
Moving forward, the Corporation will continue to execute
initiatives along its strategic focus areas: asset acquisition and
and
business
organizational excellence. We will pursue opportunities to
grow selected businesses organically or through acquisitions,
leverage our technology to drive efficiencies and enhance our
customers’ experience and further strengthen our organization
to ensure strong, sustainable results in the future.
innovation,
and
Deposits amounted to $30.5 billion at December 31, 2016,
compared with $27.2 billion at December 31, 2015. Table 15
presents a breakdown of deposits by major categories. The
increase in deposits was mainly from the Puerto Rico public
sector and commercial deposits. The Corporation’s borrowings
amounted to $2.1 billion at December 31, 2016, compared with
$2.4 billion at December 31, 2015. The decrease in borrowings
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.
POPULAR, INC. 2016 ANNUAL REPORT
9
Table 4 - Common Stock Performance
Market Price
Low
High
Cash Dividends
Declared
per Share
Book Value
Per Share
$49.60
Dividend
Yield [1]
1.87%
Price/
Earnings
Ratio
21.27x
Market/Book
Ratio
88.35%
$44.70
39.74
31.34
28.80
$32.39
31.49
35.45
35.58
$34.14
34.64
34.18
31.50
$29.17
34.20
30.60
28.92
$20.90
18.74
21.20
23.00
$35.41
28.00
26.66
22.62
$26.96
27.19
28.86
30.52
$27.34
29.44
28.93
25.50
$24.07
26.25
26.88
21.70
$17.42
13.55
13.58
14.30
$0.15
0.15
0.15
0.15
$0.15
0.15
–
–
$
$
$
–
–
–
–
–
–
–
–
–
–
–
–
48.79
0.97
3.27
58.09
40.76
N.M.
(11.06)
83.54
44.26
N.M.
4.95
64.91
39.35
N.M.
8.85
52.83
2016
4th quarter
3rd quarter
2nd quarter
1st quarter
2015
4th quarter
3rd quarter
2nd quarter
1st quarter
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
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.
CRITICAL ACCOUNTING POLICIES / ESTIMATES
followed by the
The accounting and reporting policies
Corporation and its
subsidiaries conform with generally
accepted accounting principles in the United States of America
(“GAAP”) 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 and estimates.
Fair Value Measurement of Financial Instruments
The Corporation currently measures at fair value on a recurring
basis its trading assets, available-for-sale securities, derivatives,
10
POPULAR, INC. 2016 ANNUAL REPORT
and contingent
servicing rights
consideration.
mortgage
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
dependent and certain other 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.
its
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.
assets
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 in 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
to the valuation, as well as the contractual
characteristics of the instrument.
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
Corporation uses
rates,
interest
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,
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.
Refer to Note 32 to the consolidated financial statements for
information on the Corporation’s fair value measurement
disclosures required by the applicable accounting standard. At
December 31, 2016, approximately $ 8.3 billion, or 98%, 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 2. Level 2 classified instruments,
consisted primarily of U.S. Treasury securities, obligations of
U.S. Government sponsored entities, obligations of Puerto Rico,
States
subdivisions, most mortgage-backed
securities (“MBS”) and collateralized mortgage obligations
(“CMOs”), and derivative instruments.
and political
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 $ 16 million at December 31, 2016, of which $
6 million were Level 3 assets and $ 10 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 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 years ended December 31, 2016,
2015, and 2014. 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
for the valuation results. During the year ended
support
December 31, 2016, 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
the
market conditions,
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
the evaluated
correlations based on the characteristics of
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,
2016, 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.
its
Furthermore, management assesses the fair value of
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
POPULAR, INC. 2016 ANNUAL REPORT
11
analysis performed by the Corporation includes validation
pricing
review of market
procedures
methodology, assumption and level hierarchy changes, and
evaluation of distressed transactions.
changes,
and
Refer to Note 32 to the consolidated financial statements for
a description of the Corporation’s valuation methodologies used
for the assets and liabilities measured at fair value.
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, particularly
the Non-performing
a detailed
description of the Corporation’s non-accruing and charge-off
policies by major loan categories.
sub-section,
assets
for
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
For a detailed description of the principal factors used to
determine the general reserves of the allowance for loan losses
and for the principal enhancements Management made to its
methodology, refer to Note 11.
terms of
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. The
the
collateral dependent method is generally used for
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
12
POPULAR, INC. 2016 ANNUAL REPORT
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. 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. 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
to time based on
rates used may change
management’s estimates.
from time
For additional information on the Corporation’s policy of its
impaired loans, refer to Note 2. In addition, refer to the Credit
Risk section of this MD&A for 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
inherent
In developing its
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
A restructuring constitutes a TDR when the Corporation
separately concludes
the restructuring constitutes a
concession and the debtor is experiencing financial difficulties.
For information on the Corporation’s TDR policy, refer to Note
2.
that
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
identifiable assets and liabilities
method of accounting. All
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
FDIC-assisted transaction,
to certain provisions
specified in the agreements, an indemnification asset was
acquisition date. The
recorded at
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
and
The
these
loans
initial
valuation
related
of
indemnification asset required management to make subjective
judgments concerning estimates about how the acquired loans
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 agreement,
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
valuation of
the
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
cash flows
an accounting policy based on contractual
(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, the Corporation considered the two
allowable options as follows:
(cid:129) 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,
(cid:129) 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
the acquired loans in the Westernbank FDIC-assisted
all
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
POPULAR, INC. 2016 ANNUAL REPORT
13
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
real estate values, and material weaknesses
in collateral
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 billion or approximately 68% of the total discount, thus
indicating a significant amount of expected credit losses on the
acquired portfolios.
the
Pursuant
to ASC Section 310-20-15-5,
the Corporation
aggregated loans acquired in the FDIC-assisted transaction into
for purposes of
pools with common risk characteristics
and disclosure
recognition, measurement
applying
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
accruing status,
included loan type,
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
reasonably
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
cash flows of
estimable. The
is
non-accretable difference represents the difference between
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
14
POPULAR, INC. 2016 ANNUAL REPORT
initial
investment in the loan. 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.
is measured
The FDIC loss share indemnification asset
separately from the related covered assets as
is not
contractually embedded in the assets and is not transferable
with the assets should the assets be sold.
it
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
to ASC
asset. For covered loans accounted for pursuant
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
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
to ASC Subtopic 310-20 require the
accounted pursuant
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
loss
in the
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.
severities and prepayment
speeds. Decreases
These estimates are particularly sensitive to changes in loan
credit quality.
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 agreement.
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
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
future taxable
reversal of existing temporary differences,
reversing temporary differences and
income exclusive of
carryforwards,
and
taxable
tax-planning strategies.
in carryback years
income
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,
three major
this evaluation is composed of
components: US mainland operations, Puerto Rico banking
operations and Holding Company.
For the evaluation of the realization of the deferred tax asset
by taxing jurisdiction, refer to Note 40.
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 Corporation has made
tax payments 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
future
tax
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 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
the position. The Corporation’s estimate of
POPULAR, INC. 2016 ANNUAL REPORT
15
position is measured as the largest amount of benefit that is
than 50% likely of being realized upon ultimate
greater
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.
After consideration of the effect on U.S.
federal tax of
the total amount of
unrecognized U.S. state tax benefits,
unrecognized tax benefits, including U.S. and Puerto Rico that,
if recognized, would affect the Corporation’s effective tax rate,
was approximately $9.0 million at December 31, 2016 ($11.2
million at December 31, 2015). Refer to Note 40 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 within the next
12 months, which could amount to approximately $4.8 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
its approach in
matters. Although management believes
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,
adjustments,
appropriately recorded in the
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
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,
16
POPULAR, INC. 2016 ANNUAL REPORT
Under
applicable
standards,
the reporting unit
for each reporting unit
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 not considered
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
test date. The adjustments to
goodwill at
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, 2016, goodwill amounted to $627 million.
Note 19 to the consolidated financial statements provides the
assignment of goodwill by reportable segment.
a detailed description of
goodwill
impairment evaluation performed by the Corporation during
the third quarter of 2016, refer to Note 19.
annual
For
the
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 34 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, 2016 was $697.1 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
return,
inflation, credit spreads, equity risk premiums and
excess return expectations.
As part of
the review,
the Corporation’s independent
consulting actuaries performed an analysis of expected returns
based on the plan’s asset expected allocation for the year 2017
using the Willis Towers Watson US Expected Return Estimator.
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, 8.5% for large cap stocks, 8.8% for small
cap stocks, 9.0% for international stocks, 3.9% for aggregate
fixed-income securities and 4.4% for long government/credit at
January 1, 2017. A range of expected investment returns is
developed, and this range relies both on forecasts and on broad-
returns,
market
correlations, and volatilities for each asset class.
benchmarks
historical
expected
for
reviews,
As a consequence of
the Corporation
recent
decreased its expected return on plan assets for year 2017 to
6.5%. The expected rate of returns of 6.88% and 7.00% had
been used for 2016 and 2015, respectively. 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.
Pension expense for the Plans amounted to $6.8 million in
2016. The total pension expense included a benefit of
$40.6 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 2017 from 6.5 % to 6.25% would increase the
projected 2017 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. 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 32. Also, the compositions of the plan assets
are primarily in equity and debt securities, which have readily
determinable quoted market prices. The Corporation had
recorded a liability for
the underfunded pension benefit
obligation of $81.5 million at December 31, 2016.
The Corporation uses the spot rate yield curve from the
Willis Towers Watson RATE: Link (10/90) Model to discount
the expected projected cash flows of the plans. The Corporation
used an equivalent single weighted average discount rate of
4.02% for the Banco Popular de Puerto Rico Retirement Plan,
3.98% for the Tax Qualified Retirement Restoration Plan, 3.99%
for the Benefit Restoration Plan and 4.10% for the Retiree
Health Care Benefit Plan to determine the benefit obligations at
December 31, 2016.
A 50 basis point decrease to each of the rates in the
December 31, 2016 in the Willis Towers Watson RATE: Link
(10/90) Model as of the beginning of 2017 would increase the
projected 2017 expense for the Banco Popular de Puerto Rico
Retirement Plan by approximately $2 million. The change
would not affect the minimum required contribution to the
Plan.
The postretirement health care benefit plan was unfunded
(no assets were held by the plan) at December 31, 2016. The
Corporation had recorded a liability for the underfunded
postretirement benefit obligation of $162.4 million at
December 31, 2016 using an equivalent single discount rate of
4.10%. Assumed health care trend rates may have significant
POPULAR, INC. 2016 ANNUAL REPORT
17
to
consolidated
effects on the amounts reported for the health care plan. Note
financial
provides
the
34
information on the
the
assumed rates
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.
statements
considered by
STATEMENT OF OPERATIONS ANALYSIS
Net Interest Income
Net interest income is the difference between the revenue
generated from earning assets less the interest cost of funding
those assets. Several risk factors might influence net interest
income including the economic environment
in which we
operate, market driven events, changes in volumes, repricing
characteristics and the mix of assets and liabilities, as well as
strategic decisions made by the Corporation’s management. Net
interest income from the continuing business for the year ended
December 31, 2016 was $1,422 million compared to
$1,409 million in 2015. Net
income from the
continuing business, on a taxable equivalent basis, for the year
ended December 31, 2016 was $1,510 million compared to
$1,492 million in 2015.
interest
The average key index rates for the years 2014 through 2016
were as follows:
Prime rate
Fed funds rate
3-month LIBOR
3-month Treasury Bill
10-year Treasury
FNMA 30-year
2016
2015
2014
3.51% 3.26% 3.25%
0.13
0.39
0.32
0.74
0.04
0.31
2.13
1.84
2.92
2.57
0.08
0.23
0.05
2.53
3.41
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 collected and costs incurred in the origination of
loans are 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.
income for the period ended December 31, 2016
Interest
included a favorable impact, excluding the discount accretion
on covered loans accounted for under ASC Subtopic 310-30, of
$18.3 million, related to those items, compared to a favorable
impact of $16.7 million for the same period in 2015. The
$1.6 million increase from 2015 to 2016 resulted mainly from
the amortization of the discount from the Doral acquired loans.
the
the different
Corporation’s net interest income, on a taxable equivalent basis,
for the year ended December 31, 2016, as compared with the
Table 5 presents
components of
18
POPULAR, INC. 2016 ANNUAL REPORT
same period in 2015, segregated by major categories of interest
interest
earning assets and interest bearing liabilities. Net
margin decreased by 26 basis points to 4.22% in 2016,
compared to 4.48% in 2015 mainly due to the mix in the assets
composition. On a taxable equivalent basis, net interest margin
was 4.48% in 2016, compared to 4.74% in 2015. The decline in
the net interest margin was mainly attributed to a change in the
asset composition, due to the maturity of higher yielding assets,
such as WB and consumer loans in P.R., and investment in
securities and commercial loans at lower rates. On the liability
side higher funding costs related to both a higher volume of
public sector deposits in Puerto Rico and retail deposits in the
U.S. to finance the asset growth. Net interest income increased
by $13.1 million year over year. On a taxable equivalent basis,
net interest income increased by $17.4 million. The main
reasons for these variances were as follows:
(cid:129) Higher
trading
volume
from money market,
and
investment securities by $2.2 billion due to a higher
volume of deposits mainly in Puerto Rico. These assets
carry a lower yield when compared to loans, therefore
affecting the asset composition and lowering the yield on
earning assets;
(cid:129) Higher volume from commercial and construction loans
driven by loan growth in the U.S.; and
(cid:129) Higher income from leases resulting from a higher average
volume at the Puerto Rico auto and equipment leasing
and financing subsidiary.
These positive variances were partially offset by:
(cid:129) Lower volume from WB loans due to normal run-off,
partially offset by higher yield as a result of the recast
process and loan resolutions;
(cid:129) Lower volume from mortgage loans due to lower
origination activity in P.R. and accelerated run-off of the
mortgage portfolio in the U.S.; and
(cid:129) Higher interest expense on deposits driven by increases in
the volume of Puerto Rico deposits, mainly government
deposits, and higher deposit costs in the U.S. to fund loan
growth.
components of
Table 6 presents
the
the different
Corporation’s net interest income, on a taxable equivalent basis,
for the year ended December 31, 2015, as compared with the
same period in 2014, segregated by major categories of interest
earning assets and interest bearing liabilities. The acquisition of
Doral assets and liabilities at the end of February 2015 was the
most significant event impacting net interest income in 2015.
Net interest margin was 4.48% in 2015, compared to 3.16% in
2014. On a taxable equivalent basis, net interest margin 4.74%
in 2015, compared to 3.45% in 2014. For the year ended
December 31, 2014, the net interest income was impacted by
$414.1 million in interest expense charges related to the
repayment of TARP funds and $39.2 million interest expense
related to the refinancing of structured repos in the U.S. The
increases in net interest income and net interest margin were
mainly due to:
(cid:129) Lower volume by $438 million from WB loans which
carried a yield of 8.95% and 10.60% for the year ended
December 31, 2015 and 2014, respectively. This portfolio,
due to its nature, will continue to decline as scheduled
payments are received and workout arrangements are
made; and
(cid:129) Lower volume of
trading account securities due to
decreased securitization activity.
These negative variances were partially offset by:
(cid:129) Higher volume of earning assets by $1.6 billion mostly
related to the assets acquired in the Doral transaction, net
of the related liabilities assumed in the transaction and
increased volumes in Puerto Rico; and
(cid:129) Lower cost of borrowings due to the repayment of TARP
funds and the refinancing of U.S. structured repos during
2014, as described above. Also, lower cost of short term
borrowings due to maturities that were not substituted
due mainly to a higher volume of deposits, both interest
and non-interest bearing. Partially offsetting this favorable
variance is the issuance in 2014 of $450 million of senior
notes at 7%, which were used to partially fund the
repayment of TARP.
POPULAR, INC. 2016 ANNUAL REPORT
19
Table 5 - Analysis of Levels & Yields on a Taxable Equivalent Basis from Continuing Operations (Non-GAAP)
Average Volume
Average Yields / Costs
2016
2015 Variance
2016
2015
Variance
Years ended December 31,
(In millions)
$ 3,104
7,422
125
$ 2,382 $ 722
1,607
(84)
5,815
209
0.53% 0.30% 0.23% Money market investments
2.72
6.58
Investment securities
Trading securities
(0.08)
0.34
2.80
6.24
Interest
2015
2016
Variance
(In thousands)
Variance
Attributable to
Rate
Volume
$
16,428 $
201,955
8,243
7,243 $ 9,185
39,335
(4,821)
162,620
13,064
$ 7,205 $ 1,980
51,257
(11,922)
(5,498)
677
10,651
8,406
2,245
2.13
2.18
(0.05)
trading securities
226,626
182,927
43,699
(4,040)
47,739
Total money market, investment and
9,203
726
660
6,701
3,823
8,705
616
589
6,978
3,824
21,113
1,949
20,712
2,333
23,062
23,045
498
110
71
(277)
(1)
401
(384)
17
5.08
5.38
6.71
5.54
10.42
6.25
8.99
6.49
5.10
6.00
6.91
5.39
10.37
6.25
8.95
6.52
Loans:
Commercial
Construction
Leasing
Mortgage
Consumer
Sub-total loans
WB loans
(0.02)
(0.62)
(0.20)
0.15
0.05
–
0.04
467,208
39,079
44,283
371,451
398,411
444,307
36,939
40,749
376,308
396,411
22,901
2,140
3,534
(4,857)
2,000
1,320,432
175,207
1,294,714
208,779
25,718
(33,572)
(2,423)
(4,040)
(1,211)
10,321
196
2,843
12,088
25,324
6,180
4,745
(15,178)
1,804
22,875
(45,660)
(0.03)
Total loans
1,495,639
1,503,493
(7,854)
14,931
(22,785)
$33,713
$31,451 $2,262
5.11% 5.36% (0.25)% Total earning assets
$1,722,265 $1,686,420 $ 35,845
$ 10,891 $ 24,954
$ 7,020
7,528
7,910
$ 5,447 $1,573
501
(248)
7,027
8,158
22,458
20,632
1,826
763
1,576
1,028
1,729
(265)
(153)
24,797
23,389
1,408
6,608
2,308
6,147
1,915
461
393
0.39% 0.35% 0.04%
0.24
1.04
0.23
0.89
0.01
0.15
Interest bearing deposits:
NOW and money market [1]
Savings
Time deposits
$
27,548 $
18,002
82,027
19,061 $ 8,487
1,791
16,211
9,766
72,261
$ 4,116 $ 4,371
1,437
(468)
354
10,234
0.57
1.02
4.89
0.86
0.52
0.73
4.57
0.83
0.05
0.29
0.32
0.03
Total deposits
127,577
107,533
20,044
14,704
5,340
Short-term borrowings
Other medium and long-term debt
7,812
77,129
7,512
78,986
300
(1,857)
2,567
3,036
(2,267)
(4,893)
Total interest bearing liabilities
212,518
194,031
18,487
20,307
(1,820)
Demand deposits
Other sources of funds
$33,713
$31,451 $2,262
0.63% 0.62% 0.01% Total source of funds
212,518
194,031
18,487
20,307
(1,820)
4.48% 4.74% (0.26)%
taxable equivalent basis (Non-GAAP)
1,509,747
1,492,389
17,358
$ (9,416) $ 26,774
Net interest margin/ income on a
4.25% 4.53% (0.28)% Net interest spread
Taxable equivalent adjustment
87,692
83,406
4,286
4.22% 4.48% (0.26)%
non-taxable equivalent basis (GAAP)
$1,422,055 $1,408,983 $ 13,072
Net interest margin/ income
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]
Includes interest bearing demand deposits corresponding to certain government entities in Puerto Rico.
20
POPULAR, INC. 2016 ANNUAL REPORT
Table 6 - Analysis of Levels & Yields on a Taxable Equivalent Basis from Continuing Operations (Non-GAAP)
Average Volume
Average Yields / Costs
2015
2014 Variance
2015
2014
Variance
Years ended December 31,
(In millions)
$ 2,382
5,815
209
$ 1,305 $1,077
(71)
(131)
5,886
340
0.30% 0.32% (0.02)% Money market investments
2.80
6.24
Investment securities
Trading securities
0.05
0.08
2.75
6.16
2015
Interest
2014
Variance
(In thousands)
Variance
Attributable to
Rate
Volume
$
7,243 $
4,224 $
162,620
13,064
162,008
20,914
3,019
612
(7,850)
$
397 $
(3,358)
280
2,622
3,970
(8,130)
8,406
7,531
875
2.18
2.49
(0.31)
and trading securities
182,927
187,146
(4,219)
(2,681)
(1,538)
Total money market, investment
8,705
616
589
6,978
3,824
8,347
199
547
6,641
3,861
358
417
42
337
(37)
20,712
2,333
19,595
2,771
1,117
(438)
23,045
22,366
679
5.10
6.00
6.91
5.39
10.37
6.25
8.95
6.52
5.12
6.78
7.33
5.40
10.36
6.33
10.60
6.85
Loans:
Commercial
Construction
Leasing
Mortgage
Consumer
(0.02)
(0.78)
(0.42)
(0.01)
0.01
(0.08)
(1.65) WB loans
Sub-total loans
(0.33) Total loans
444,307
36,939
40,749
376,308
396,411
427,314
13,482
40,135
358,597
399,941
16,993
23,457
614
17,711
(3,530)
(1,290)
(1,718)
(2,340)
(472)
419
18,283
25,175
2,954
18,183
(3,949)
1,294,714
208,779
1,239,469
293,610
55,245
(84,831)
(5,401)
(36,727)
60,646
(48,104)
1,503,493
1,533,079
(29,586)
(42,128)
12,542
$31,451
$29,897 $1,554
5.36% 5.75% (0.39)% Total earning assets
$1,686,420 $1,720,225 $ (33,805)
$(44,809) $ 11,004
$ 5,447
7,027
8,158
$ 4,825 $ 622
294
602
6,733
7,556
20,632
19,114
1,518
1,028
–
1,729
1,887
267
1,360
23,389
22,628
(859)
(267)
369
761
6,147
1,915
5,534
1,735
613
180
0.52
0.73
–
4.57
0.83
Interest bearing deposits:
0.35% 0.32%
0.23
0.89
0.22
0.99
0.03%
0.01
(0.10) Time deposits
NOW and money market [1]
Savings
$
19,061 $
16,211
72,261
15,523 $
14,664
74,900
3,538
1,547
(2,639)
$ 1,608 $
856
(7,065)
0.55
(0.03) Total deposits
107,533
105,087
2,446
(4,601)
1,930
691
4,426
7,047
3.57
170.91
4.34
(2.84)
Short-term borrowings
(170.91) TARP funds
0.23 Other medium and long-term debt
7,512
–
78,986
67,376
456,974
59,034
(59,864)
(456,974)
19,952
(38,898)
–
710
(20,966)
(456,974)
19,242
3.04
(2.21) Total interest bearing liabilities
194,031
688,471
(494,440)
(42,789)
(451,651)
Non-interest bearing demand
deposits
Other sources of funds
$31,451
$29,897 $1,554
0.62% 2.30% (1.68)% Total source of funds
194,031
688,471
(494,440)
(42,789)
(451,651)
4.74% 3.45%
1.29%
Net interest margin/income on a
taxable equivalent basis
(Non-GAAP)
4.53% 2.71%
1.82% Net interest spread
1,492,389
1,031,754
460,635
$ (2,020) $ 462,655
Taxable equivalent adjustment
83,406
86,682
(3,276)
4.48% 3.16%
1.32%
Net interest margin/ income
non-taxable equivalent basis
(GAAP)
$1,408,983 $ 945,072 $ 463,911
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]
Includes interest bearing demand deposits corresponding to certain government entities in Puerto Rico.
POPULAR, INC. 2016 ANNUAL REPORT
21
Provision for Loan Losses
loan losses totaled
The Corporation’s total provision for
$170.0 million for
the year ended December 31, 2016,
compared with $241.5 million for 2015 and $270.1 million for
2014. The provision for loan losses for the non-covered loan
portfolio
ended
$171.1 million for
December 31, 2016, compared to $217.5 million for the year
ended December 31, 2015, a decrease of $46.4 million.
totaled
year
the
for
The provision for
the Puerto Rico
loan losses
non-covered portfolio amounted to $155.9 million for the year
ended December 31, 2016, compared to $216.8 million for the
year ended December 31, 2015. The decrease of $60.9 million
was mainly related to lower net charge-offs by $47.9 million
and lower provision related to Westernbank loans by
$32.3 million. Also, the results for the year 2016 include a
recovery of $7.1 million related to the sale of previously
charged-off credit cards and personal loans and a $5.4 million
positive impact related to the bulk sale of Westernbank loans.
These reductions were partially offset by a $9.4 million impact
related to the 2016 annual review of the components of the
allowance for loan losses. The review of the ALLL methodology
in 2015 resulted in a net decrease of $2.6 million for the BPPR
segment.
compared to $0.6 million for
The provision for loan losses for the U.S. operations
amounted to $15.3 million for the year ended December 31,
2016,
ended
December 31, 2015. Higher provision levels were the result of
portfolio growth and higher net charge-offs by $5.6 million
mostly driven by higher
charge-offs of
$3.6 million. The effect of the 2016 annual recalibration was
immaterial for BPNA, while the 2015 annual review resulted in
a net increase of $0.7 million.
consumer net
year
the
The covered portfolio reflected a reversal of provision of
$1.1 million for the year ended December 31, 2016, compared
to a provision of $24.0 million for same period of the previous
year. The decrease of $25.1 million was mainly due to the
reclassification to non-covered loans of the non-single family
loans that were previously covered by the commercial
loss
agreement with the FDIC in the second quarter of 2015. The
effect of the annual review of the components of the allowance
for loan losses methodology was immaterial for the covered
loans portfolio in 2016 and 2015.
The provision for loan losses for the non-covered loan
ended
portfolio
December 31, 2015, compared with $224.0 million for 2014.
$217.5 million for
totaled
year
the
for
The provision for
the Puerto Rico
loan losses
non-covered portfolio amounted to $216.8 million for the year
ended December 31, 2015, compared to $242.8 million for the
year ended December 31, 2014. The decrease of $26.0 million
was mainly related to the impacts of higher reserves for Puerto
Rico’s government
exposures, offset by a provision of
$30.1 million for Westernbank loans, classified as covered until
June 30, 2015, which includes a $15.2 million impairment on
22
POPULAR, INC. 2016 ANNUAL REPORT
loans the Corporation had sold or intended to sell and were
subject to the ongoing arbitration with the FDIC at that time.
The provision for 2015 also included a $5.8 million impact
related to commercial loans sold during the fourth quarter with
book value of $34 million. Additionally, the review of the ALLL
methodology resulted in a net decrease of $2.6 million for the
BPPR segment, compared to a reserve release of $14.9 million
in 2014. Net charge-offs increased by $30.7 million from the
previous year mostly driven by $31.1 million in commercial
charge-offs, most of which were specifically reserved in 2014.
The provision for loan losses for the U.S. operations
amounted to $0.6 million for the year ended December 31,
2015 compared to a provision reversal of $18.9 million for the
year ended December 31, 2014. Low provision levels were the
result of strong credit quality, low levels of net charge-offs
during 2015, and the de-risking of the U.S. loan portfolios. The
annual review of the ALLL methodology resulted in a net
increase of approximately $0.7 million during 2015, compared
to a $3.8 million reserve release in 2014. The provision for
2014 included $12.8 million associated with bulk sales of loans.
The provision for the covered portfolio was $24.0 million for
the year ended December 31, 2015, compared to $46.1 million
for the previous year. The decrease of $22.1 million was mainly
due to the reclassification to non-covered loans of
the
non-single family loans that were previously covered by the
commercial loss agreement with the FDIC in the second quarter
of 2015. The effect of the aforementioned enhancements to the
allowance for loan losses methodology was immaterial for the
covered loans portfolio in 2015 and 2014.
Refer to the Credit Risk section of this MD&A for a detailed
the
analysis of net
assets,
allowance for loan losses and selected loan losses statistics.
charge-offs, non-performing
Non-Interest Income
For the year ended December 31, 2016, non-interest income
decreased by $221.6 million when compared with the previous
year, principally due to:
(cid:129) Unfavorable variance
in FDIC loss-share
(expense)
income of $227.8 million, due to a $136.2 million write-
down to the
related to the
indemnification asset
arbitration decision, an unfavorable change in the true-up
payment obligation which includes
impact of
$17.8 million related to the arbitration decision as well as
other commercial loss share agreement adjustments. In
accounting on
addition,
there were
losses,
reimbursable expenses and credit
partially
the
lower
indemnification asset. Refer to Table 2 for a breakdown of
FDIC loss share (expense) income by major categories;
and
lower mirror
amortization
impairment
offset
the
by
of
(cid:129) Lower
income from mortgage banking activities by
$25.3 million mainly due to an unfavorable variance in
the valuation adjustment on mortgage servicing rights and
lower gains on securitization transactions. Refer to Note
13 for additional details on mortgage banking activities;
These negative variances were partially offset by the
following:
(cid:129) Lower
impairment
other-than-temporary
on
investment securities by $14.2 million due to the charge
recorded during the second quarter of 2015 on the
portfolio of Puerto Rico government investment securities
available-for-sale of $14.4 million;
losses
(cid:129) Favorable variance in trading account (loss) profit of
$3.9 million principally resulting from favorable fair value
adjustments of P.R. municipal bonds;
(cid:129) Higher net gain on sale of loans by $7.7 million as a result
of the gain on the sale of a non-accrual public sector loan
during the third quarter of 2016; and
(cid:129) Higher other operating income by $3.1 million principally
due to higher aggregated net earnings from investments
under
an
unfavorable variance in the fair value adjustments on a
agency
contingent
business.
equity method, partially offset by
consideration at
insurance
the
the
For the year ended December 31, 2015, non-interest income
increased by $133.0 million when compared with the previous
year, mainly due to:
(cid:129) Favorable variance in FDIC loss share (expense) income
of $123.1 million, principally due to lower amortization of
the indemnification asset, higher mirror accounting on
reimbursable expenses in part due to the impact of a
$22.0 million loss related to the commercial OREO bulk
sale completed during the second quarter of 2015 and a
positive variance in the true-up payment obligation,
partially offset by lower mirror accounting on credit
impairment losses;
(cid:129) Higher
income from mortgage banking activities by
$51.2 million due to higher servicing fees including those
from the portfolio acquired as part of the Doral Bank
Transaction during 2015, and a favorable variance in the
fair value adjustments on mortgage servicing rights that
includes a gain of $5.4 million related to the MSRs
assumed during 2015 under a pre-existing backup
servicing agreement,
in addition to lower realized net
losses on closed derivatives positions;
(cid:129) Lower provision for indemnity reserves by $22.0 million
due to lower reserves for loans sold with credit recourse at
BPPR; and
(cid:129) Higher other service fees by $10.8 million mainly due to
from the
higher
portfolio acquired from the Doral insurance agency.
insurance revenues,
including fees
These favorable variances were partially offset by the
following:
(cid:129) Unfavorable variance in other-than-temporary impairment
losses on investment securities of $14.4 million due to the
charge recorded during the second quarter of 2015 on the
portfolio of Puerto Rico government investment securities
available-for-sale;
(cid:129) Lower net gain on sale of loans by $40.0 million mainly
due to gains from individual commercial NPL sales
completed in 2014 at BPNA; and
(cid:129) Lower other operating
income by $13.0 million
principally due to lower aggregated net earnings from
investments under the equity method, partially offset by a
favorable variance in the fair value adjustments on a
contingent
agency
business.
consideration at
insurance
the
POPULAR, INC. 2016 ANNUAL REPORT
23
Operating Expenses
Table 7 provides a breakdown of operating expenses by major categories.
Table 7 - 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
Legal fees, excluding collections
Other professional fees
Total professional fees
Communications
Business promotion
FDIC deposit insurance
Loss on early extinguishment of debt
Other real estate owned (OREO) expenses
Other operating expenses:
Credit and debit card processing, volume, interchange and other
expenses
Operational losses
All other
Total other operating expenses
Goodwill and trademark impairment losses
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)
Operating expenses for the year ended December 31, 2016
decreased by $32.6 million, or 3%, when compared with the
previous year, driven primarily by:
(cid:129) Lower OREO by $38.4 million mainly due to the
$22.0 million loss on the bulk sale of covered OREOs
completed during the year 2015;
(cid:129) Lower other operating expenses by $5.0 million due to
lower property tax payments on covered assets at BPPR,
most of which was related to loss sharing expenses
reimbursable by the FDIC, partially offset by higher
operational losses at BPPR and BPNA; and
24
POPULAR, INC. 2016 ANNUAL REPORT
Years ended December 31,
2016
2015
2014
2013
2012
$ 308,135
73,684
51,284
54,373
$ 304,618
79,305
44,059
49,537
$ 281,252
59,138
32,416
45,873
$ 276,072
57,060
55,106
40,459
$ 279,590
51,320
64,325
39,098
487,476
477,519
418,679
428,697
434,333
85,653
62,225
42,304
14,607
205,466
42,393
60,577
323,043
23,897
53,014
24,512
–
47,119
20,796
35,995
33,656
90,447
3,801
12,144
–
86,888
60,110
39,797
23,098
191,895
26,122
67,870
308,985
25,146
52,076
27,626
–
85,568
22,854
20,663
51,558
95,075
–
11,019
18,412
86,707
48,917
56,918
26,257
173,814
28,305
53,679
282,055
25,684
54,016
40,307
532
49,611
21,588
18,543
55,242
95,373
–
8,160
26,725
86,651
46,028
58,028
32,727
174,921
15,557
54,922
278,127
25,385
59,453
56,728
3,388
79,658
19,901
17,954
54,021
91,876
–
7,971
–
84,687
43,618
49,844
41,029
169,927
12,821
47,231
271,008
25,687
60,784
82,065
25,196
28,823
18,789
23,681
58,313
100,783
–
8,161
–
$1,255,635
$1,288,221
$1,193,684
$1,221,990
$1,214,989
1.30%
3.34
7,828
4.81
$
1.36%
3.66
7,810
4.51
$
1.19%
3.39
7,752
4.54
$
1.18%
3.37
8,059
4.50
$
1.20%
3.35
8,072
4.49
$
(cid:129) A decrease in restructuring cost by $18.4 million in
connection with the reorganization of BPNA.
These positive variances were partially offset by:
(cid:129) Higher personnel cost by $10.0 million due to higher
pension, postretirement
insurance by
$7.2 million mainly driven by changes in actuarial
assumptions;
and medical
(cid:129) Higher professional fees by $14.1 million as a result of
higher legal fees by $16.3 million mainly related to the
FDIC arbitration proceedings and higher programming,
processing and other technology services, partially offset
by lower collections, appraisal and other credit related
fees; and
(cid:129) A goodwill
impairment charge of $3.8 million at the
securities subsidiary, recorded as part of the Corporation’s
annual goodwill impairment analysis.
Operating expenses for the year ended December 31, 2015
increased by $94.5 million, or 8%, when compared with the
previous year, driven primarily by:
(cid:129) Higher personnel cost by $58.8 million, mainly due to
higher salaries and incentive compensation associated
with the Doral Bank Transaction, higher share-based
compensation and higher pension expense related to
adjustments to the mortality table and discount rate used
for actuarial assumptions;
(cid:129) Higher professional fees by $26.9 million, due to higher
programming,
hosting
expenses including the impact of the business-to-business
sales tax in Puerto Rico and higher professional
fees
directly associated with the Doral Bank Transaction;
application
processing
and
(cid:129) An increase in OREO expense by $36.0 million due to the
loss on bulk sale of covered OREOs during 2015
mentioned above; and
(cid:129) Higher equipment expense by $11.2 million mainly due to
higher software maintenance expenses at BPPR.
These negative variances were partially offset by:
(cid:129) Lower other taxes by $17.1 million mainly due to
elimination of the Puerto Rico gross revenue tax and
lower municipal license tax;
(cid:129) A decrease in FDIC deposit insurance by $12.7 million,
mainly due to improvements in the risk profile of the
Corporation; and
(cid:129) Lower restructuring cost by $8.3 million in connection
with the reorganization of BPNA.
INCOME TAXES
Income tax expense amounted to $78.8 million for the year
ended December 31, 2016, compared with an income tax
benefit of $495.2 million for the previous year. The increase in
income tax expense was mainly driven by the recognition
during 2015 of a tax benefit of $589.0 million as a result of the
partial reversal of the valuation allowance on the Corporation’s
deferred tax asset from the U.S. operations.
for
ended
December 31, 2016 was 27%. The effective tax rate is impacted
by the composition and source of the taxable income.
the year
tax rate
effective
income
The
Refer to Note 40 to the consolidated financial statements for
a reconciliation of the statutory income tax rate to the effective
tax rate and additional information on income taxes.
Fourth Quarter Results
The Corporation recognized a net loss of $4.1 million for the
quarter ended December 31, 2016, compared with a net income
of $137.4 million for the same quarter of 2015. The results for
the fourth quarter of 2016 include an after-tax charge
amounting to $86.7 million, related to the unfavorable outcome
from the FDIC arbitration review board. During the fourth
quarter of 2015 the Corporation recorded a $44.1 million
partial reversal of the valuation allowance of a portion of the
deferred tax asset at the U.S. operations.
Net interest income for the fourth quarter of 2016 amounted
to $355.4 million, compared with $352.5 million for the fourth
quarter of 2015. The increase in net interest
income was
primarily due higher income from investment securities due to
higher average balances as the Corporation benefited from
increases in deposit balances, mainly in Puerto Rico, which
were deployed for the purchase of
investments. This was
partially offset by higher cost of deposits, due to higher average
balances as mentioned above.
The provision for loan losses amounted to $41.4 million for
the quarter
compared to
ended December 31, 2016,
$58.5 million for the fourth quarter of 2015. The decrease of
$17.1 million is mainly at BPPR due to the impairment
recorded in the fourth quarter of 2015 of $10.9 million for
Westernbank loans which the Corporation sold or had the
intent to sell and were subject to the arbitration with the FDIC,
at that time.
Non-interest (expense) income amounted to $(0.2) million
for the quarter ended December 31, 2016, compared with
$132.4 million for the same quarter in 2015. The unfavorable
variance was mainly on the FDIC loss share (expense) income
due to the $116.8 million charge related to the arbitration
decision denying BPPR’s claims under
sharing
agreement and $9.9 million additional adjustments related to
restructured commercial
loans. Also, mortgage banking
activities declined by $8.9 million due to lower gains on sales of
loans and the fair value adjustment of mortgage servicing
rights, partially offset by higher gains on closed derivative
positions.
the loss
Operating expenses totaled $320.9 million for the quarter
ended December 31, 2016, compared with $305.8 million for
the same quarter in the previous year. The increase is due
mainly to higher personnel costs by $3.2 million, mainly from
pension and post retirement and other personnel costs, higher
professional fees by $7.8 million, mainly from programming,
processing and other technology fees and higher legal fees and
higher OREO expenses by $3.7 million.
Income tax benefit amounted to $1.8 million for the quarter
ended December 31, 2016, compared with income tax benefit of
$16.8 million for the same quarter of 2015. The unfavorable
variance was mainly due
to the previously mentioned
$44.1 million partial reversal of the valuation allowance of a
portion of the deferred tax asset at the U.S. operations recorded
POPULAR, INC. 2016 ANNUAL REPORT
25
in the fourth quarter of 2015, which was partially offset by
lower taxable income at BPPR for 2016.
value adjustment on MSRs and lower gains from
securitization transactions;
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 42 to the
consolidated financial statements.
The Corporate group reported a net loss of $60.6 million for
the year ended December 31, 2016, compared with a net loss of
$71.9 million for the year ended December 31, 2015.
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
the year ended
income amounted to $230.1 million for
December 31, 2016, compared with $318.4 million for the year
ended December 31, 2015. The principal
that
contributed to the variance in the financial results included the
following:
factors
(cid:129) Lower net interest income by $6.8 million impacted by
lower interest income from loans by $35.9 million driven
by normal portfolio run-off of WB loans, partially offset
securities by
by higher
$21.9 million due to higher volume of investments. The
net interest margin in 2016 was 4.61% compared to 4.87%
in the prior year;
from investment
income
(cid:129) Lower provision for loans losses by $86.0 million due to
lower net charge-offs and lower provision for the WB
portfolio including losses on proposed bulk sales of loans
acquired from WB of $15.2 million recognized in 2015;
(cid:129) Lower non-interest income by $221.4 million mainly due
to:
(cid:129) Unfavorable
million
variance
write-down
in FDIC loss
share
(expense) income by $227.8 million due to a
$136.2
the
indemnification asset related to the arbitration
decision, an unfavorable change in the true-up
payment obligation, and lower mirror accounting
on reimbursable expenses and credit impairment
losses, partially offset by lower amortization of
the indemnification asset; and
to
(cid:129) Lower income from mortgage banking activities
by $25.4 million driven by an unfavorable fair
26
POPULAR, INC. 2016 ANNUAL REPORT
Partially offset by:
(cid:129) Lower other-than-temporary impairment losses
on investment securities by $14.2 million, which
is mostly driven by the charge recorded during
the second quarter of 2015 on the portfolio of
Puerto Rico government
investment securities
available-for-sale of $14.4 million;
(cid:129) Favorable variance in trading account (loss)
profit of $3.7 million principally resulting from
favorable
P.R.
municipal bonds;
adjustments
value
fair
of
(cid:129) Higher net gain on sale of loans by $7.5 million
as a result of the gain on the sale of a non-accrual
public sector loan during 2016; and
(cid:129) Higher other operating income by $4.8 million
due to higher aggregated net earnings from
investments under the equity method, partially
offset by an unfavorable variance in the fair value
adjustments on a contingent consideration at the
insurance agency business;
(cid:129) Lower operating expenses by $13.4 million, mainly due
to:
(cid:129) A decrease in OREO expense by $34.5 million
due to the $22.0 million loss on the bulk sale of
covered OREOs during 2015 and lower write-
downs on commercial properties, partially offset
by lower net gains on sales of commercial
properties;
Partially offset by:
(cid:129) Higher personnel cost by $8.7 million mainly due
to increases in headcount associated with the
Doral Bank Transaction, and higher pension,
postretirement benefits, and medical insurance;
and
(cid:129) An increase of $12.1 million in professional fees
mostly driven by higher legal fees mainly related
to the FDIC arbitration proceedings and higher
lower
fees, partially
technology
collections and appraisal fees;
offset
by
(cid:129) Lower income tax expense by $40.4 million mainly due to
lower taxable income and the reversal of reserves for
uncertain tax positions.
The Banco Popular de Puerto Rico reportable segment’s net
income amounted to $318.4 million for
the year ended
December 31, 2015, compared with $274.3 million for the year
ended December 31, 2014. The main factors that contributed to
the favorable variance of $44.1 million in the financial results
included the following:
(cid:129) Lower net
interest
income by $57.3 million mainly
impacted by lower interest income from loans from the
WB portfolio due to run-off and loan resolutions, partially
offset by higher income from mortgage loans driven by
the mortgage loans portfolio acquired as part of the Doral
Bank Transaction. The net interest margin in 2015 was
4.87% compared to 5.35% in the prior year;
(cid:129) Lower provision for loan losses by $48.4 million due to a
decrease in the provision on the non-covered loan
portfolio by $26.3 million due to the impact in 2014 of
higher reserves for Puerto Rico’s government exposures,
partially offset by losses on proposed bulk sales of loans
acquired from WB of $15.2 million and a loss of
$5.9 million from a bulk sale of non-covered loans during
2015, and to a decrease in the covered loan portfolio by
$22.1 million mainly due to the reclassification of
non-single family loans to the non-covered category
pursuant to the expiration of the commercial shared-loss
arrangement with the FDIC in the second quarter of 2015;
(cid:129) Higher non-interest income by $181.5 million mainly due
to:
accounting
(cid:129) Favorable variance in FDIC loss share (expense)
income of $123.1 million, principally due to
lower amortization of the indemnification asset,
higher mirror
on reimbursable
expenses
in part due to the impact of a
$22.0 million loss related to the commercial
OREO bulk sale completed during the second
quarter of 2015 and a positive variance in the
true-up payment obligation, partially offset by
lower mirror accounting on credit impairment
losses;
(cid:129) Higher income from mortgage banking activities
by $51.1 million due to higher servicing fees
including those from the portfolio acquired as
part of the Doral Bank Transaction during 2015,
and a favorable variance in the fair value
adjustments on MSRs that includes the impact of
the MSRs
a
pre-existing backup servicing
agreement of
$5.4 million, in addition to lower realized net
losses on closed derivatives positions;
assumed during 2015 under
(cid:129) Favorable variance on adjustments to indemnity
reserves by $24.1 million due to lower reserves
for loans sold with credit recourse; and
(cid:129) Higher other service fees by $11.0 million mainly
due to higher insurance revenues, including fees
from the portfolio acquired from the Doral
insurance agency;
Partially offset by:
(cid:129) Unfavorable variance in other-than-temporary
impairment losses on investment securities of
$14.4 million mainly due to the charge recorded
during the second quarter of 2015 on the
portfolio of Puerto Rico government investment
securities available-for-sale; and
(cid:129) Unfavorable variance in trading account (loss)
profit of $9.0 million principally due
to
adjustments of P.R.
unfavorable
municipal bonds and MBS.
fair value
(cid:129) Higher operating expenses by $90.4 million mainly due
to:
to
and
higher
salaries
(cid:129) Higher personnel costs by $52.7 million mainly
due
incentive
compensation associated with the Doral Bank
Transaction, higher share based compensation
and higher pension expense due to adjustments
to the mortality table and discount rate used for
actuarial assumptions;
(cid:129) Higher professional fees by $25.6 million due to
higher programming, application processing and
hosting expenses in part due to the impact of the
business-to-business sales tax in Puerto Rico and
higher professional fees associated with the Doral
Bank Transaction in 2015;
(cid:129) An increase in OREO expense by $29.1 million
due to the $22.0 million loss on the bulk sale of
covered OREOs completed during 2015, higher
write-downs on residential properties, and higher
holding costs on residential properties; and
(cid:129) Higher equipment expense by $12.5 million
software maintenance
mainly due to higher
expenses;
Partially offset by:
(cid:129) Lower other operating taxes by $15.0 million
mainly due to the elimination of the Puerto Rico
gross revenue tax and lower municipal license
tax; and
(cid:129) A decrease
insurance by
in FDIC deposit
$12.1 million mainly due to improvements in its
risk profile.
(cid:129) Higher income tax expense by $38.1 million
mainly due to higher taxable income, partially
offset by the $20.0 million income tax expense
recorded in 2014 for the increase in the income
tax rate for capital gains from 15% to 20%
associated with the WB portfolio.
POPULAR, INC. 2016 ANNUAL REPORT
27
Banco Popular North America
For the year ended December 31, 2016, the reportable
segment of Banco Popular North America reported net income
of $47.3 million, compared with $648.6 million for the year
ended December 31, 2015. In addition to the recognition
during 2015 of a tax benefit of $589.0 million as a result of the
partial reversal of the valuation allowance of a portion of its
deferred tax asset, the principal factors that contributed to the
variance in the financial results included the following:
(cid:129) Higher net interest income by $19.0 million mainly due to
higher interest
income from loans by $37.4 million
principally driven by higher volume from commercial
loans and higher volume and yield from consumer loans,
partially offset by higher interest expense from deposits by
$19.6 million driven by higher volume and cost of money
market deposits and time deposits. The BPNA reportable
segment’s net
interest margin was 3.64% for 2016
compared with 3.90% for the same period in 2015;
(cid:129) Unfavorable variance in the provision for loan losses by
$14.6 million driven by portfolio growth and higher net
charge-offs;
(cid:129) Lower non-interest income by $1.0 million;
(cid:129) Lower operating expenses by $13.0 million driven by
$18.4 million in restructuring cost recorded in 2015 in
connection with the reorganization of BPNA, lower OREO
expense by $4.0 million due to lower write-downs on
commercial properties, and a decrease in FDIC deposit
insurance by $2.4 million due to a lower assessment rate
by the FDIC, partially offset by higher personnel cost by
insurance claims,
$2.3 million due to higher medical
higher professional fees by $3.8 million mainly due to
loan servicing fees and technology fees, and higher other
operating expenses by $6.1 million related to higher
operational losses; and
(cid:129) Income taxes unfavorable variance of $617.4 million
mainly driven by the recognition during 2015 of a tax
benefit of $589.0 million, as discussed above.
For the year ended December 31, 2015, the reportable
segment of Banco Popular North America reported net income
of $648.6 million, compared with a net loss of $77.5 million for
the year ended December 31, 2014.
In addition to the
recognition during 2015 of a tax benefit of $589.0 million as a
result of the partial reversal of the valuation allowance of a
portion of its deferred tax asset, the principal
factors that
contributed to the favorable variance of $726.1 million in the
financial results included the following:
(cid:129) Higher net interest income by $81.7 million mainly due to
higher interest income from loans associated with the
Doral Bank Transaction in 2015 and lower interest
expense from short-term borrowings as a result of the
28
POPULAR, INC. 2016 ANNUAL REPORT
aggregated impact of the $39.3 million interest expense
associated with the refinancing of $638 million in long-
term structured repos during 2014, partially offset by
lower income from investment securities due to lower
levels of MBS and CMOs. The BPNA reportable segment’s
net interest margin was 3.90% for 2015 compared with
2.74% for the same period in 2014;
(cid:129) Net
increase
in the provision for
loan losses of
$0.6 million during 2015, compared to a $18.9 million
reserve release in 2014 which is net of the $12.8 million
impact associated with bulk sales of loans;
(cid:129) Lower non-interest income by $41.7 million mostly due to
a decrease of $37.6 million in gains from sales of loans
mainly due to individual commercial NPL sales completed
in 2014, and an unfavorable variance in adjustments to
indemnity reserves;
(cid:129) Higher operating expenses by $2.6 million due to
$6.9 million in costs directly related to the Doral Bank
Transaction in 2015 and higher OREO expense by
$6.8 million, mostly due to higher losses on sales of
commercial OREO and write-downs on commercial
properties. These unfavorable variances were partially
offset by lower restructuring cost in connection with the
reorganization of BPNA by $8.3 million; and
(cid:129) Income taxes favorable variance of $583.8 million mainly
driven by the recognition during 2015 of a tax benefit of
$589.0 million, as discussed above.
STATEMENT OF FINANCIAL CONDITION ANALYSIS
Assets
At December 31, 2016, the Corporation’s total assets were
$38.7 billion, compared with $35.8 billion at December 31,
2015 due to an increase in investments as a result of deposit
growth. Refer to the consolidated financial statements included
in this 2016 Annual Report for the Corporation’s consolidated
statements of financial condition at December 31, 2016 and
2015. Also, refer to the Statistical Summary 2012-2016 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 $2.9 billion at
December 31, 2016 compared with $2.2 billion at the same date
in 2015. The increase was mainly at BPPR due to an increase in
cash balances from deposits, partially offset by the deployment
of
liquidity into investment securities and a decrease in
repurchase agreements.
31,
2016
Trading account securities amounted to $60 million at
December
at
compared with
December 31, 2015. The decrease was at the BPPR segment,
mainly mortgage-backed securities and Puerto Rico government
obligations. Refer to the Market / Interest Rate Risk section of
$72 million
this MD&A 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 $8.3 billion at December 31, 2016 compared with
$6.2 billion at 2015. The increase of $2.1 billion was mainly
due to purchases of MBS at both BPPR and BPNA and
purchases of U.S. Treasury securities at BPPR.
securities
(“HTM”)
Table 8 provides a breakdown of the Corporation’s portfolio
and
of
investment
held-to-maturity
at
on
December 31, 2016 and 2015. Also, Notes 8 and 9 to the
statements
consolidated
additional
provide
information with respect
to the Corporation’s investment
securities AFS and HTM.
available-for-sale
a
combined
financial
(“AFS”)
basis
Table 8 - Breakdown of Investment Securities Available-for-
Sale and Held-to-Maturity
(In thousands)
U.S. Treasury securities
Obligations of U.S. Government
December 31,
2016
December 31,
2015
$2,136,620
$1,183,328
sponsored entities
711,850
939,641
Obligations of Puerto Rico, States
and political subdivisions
Collateralized mortgage
obligations
Mortgage-backed securities
Equity securities
Others
Total investment securities AFS
118,798
121,176
1,221,600
4,105,332
2,122
11,585
1,560,923
2,344,196
2,398
12,233
and HTM
$8,307,907
$6,163,895
total
portfolio
Loans
to
loan
The Corporation’s
$23.4 billion at December 31, 2016, compared to $23.1 billion
at December 31, 2015. Refer to Table 9 for a breakdown of the
Corporation’s loan portfolio, the principal category of earning
assets. Also, refer to Note 10 for detailed information about the
Corporation’s loan portfolio composition and loan purchases
and sales.
amounted
Loans covered under the FDIC loss sharing agreements are
presented separately in Table 9. The risks on covered loans are
significantly different as a result of the loss protection provided
by the FDIC. As of December 31, 2016, the Corporation’s
covered loans portfolio amounted to $573 million, comprised
mainly of residential mortgage loans.
POPULAR, INC. 2016 ANNUAL REPORT
29
Table 9 - Loans Ending Balances
(in thousands)
Loans not covered under FDIC loss sharing agreements:
Commercial
Construction
Legacy[1]
Lease financing
Mortgage
Consumer
2016
2015
At December 31,
2014
2013
2012
$10,798,507
776,300
45,293
702,893
6,696,361
3,754,393
$10,099,163
681,106
64,436
627,650
7,036,081
3,837,679
$ 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
Total non-covered loans held-in-portfolio
22,773,747
22,346,115
19,404,451
21,611,866
20,983,192
Loans covered under FDIC loss sharing agreements:
Commercial
Construction
Mortgage
Consumer
Loans covered under FDIC loss sharing agreements
–
–
556,570
16,308
572,878
–
–
627,102
19,013
646,115
1,614,781
70,336
822,986
34,559
1,812,804
190,127
934,373
47,123
2,244,647
361,396
1,076,730
73,199
2,542,662
2,984,427
3,755,972
Total loans held-in-portfolio
23,346,625
22,992,230
21,947,113
24,596,293
24,739,164
Loans held-for-sale:
Commercial
Construction
Legacy [1]
Mortgage
Consumer
Total loans held-for-sale
Total loans
–
–
–
88,821
–
88,821
45,074
95
–
91,831
–
137,000
309
–
319
100,166
5,310
106,104
603
–
–
109,823
–
110,426
16,047
78,140
2,080
258,201
–
354,468
$23,435,446
$23,129,230
$22,053,217
$24,706,719
$25,093,632
[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.
Non-covered loans held-in-portfolio
Non-covered loans held-in-portfolio increased by $428 million
from December 31, 2015 mainly at BPNA by $830 million,
driven by growth in the commercial and construction loan
portfolios, partially offset by a decrease of $402 million at BPPR
due to lower originations of residential mortgages and the bulk
sale of WB loans with a carrying value of approximately
$100 million completed in the second quarter of 2016.
Covered loans
The covered loans portfolio amounted to $573 million at
December 31, 2016, compared to $646 million at December 31,
2015. The decrease of $73 million is due to loan resolutions
and the normal portfolio run-off. Refer to Table 9 for a
breakdown of the covered loans by major loan type categories.
Tables 10 and 11 provide the activity in the carrying amount
and outstanding discount on the Westernbank loans accounted
for under ASC 310-30. The outstanding accretable discount is
impacted by changes in cash flow expectations on the loan pool
based on quarterly revisions of the portfolio. An increase in the
accretable discount is recognized as interest income using the
effective yield method over the estimated life of each applicable
loan pool.
30
POPULAR, INC. 2016 ANNUAL REPORT
Table 10 - Activity in the Carrying Amount of Westernbank Loans Accounted for Under ASC 310-30
(In thousands)
Beginning balance
Accretion
Collections / loan sales / charge-offs [1]
Ending balance [2]
Allowance for loan losses (ALLL)
Ending balance, net of ALLL
Years ended December 31,
2016
2015
$1,974,501
169,748
(405,920)
$1,738,329
(68,877)
$2,444,172
202,966
(672,637)
$1,974,501
(63,563)
$1,669,452
$1,910,938
[1] For the year ended December 31, 2016, includes the impact of the bulk sale of loans during the second quarter with a carrying value of approximately $99 million.
[2] The carrying amount of loans acquired from Westernbank and accounted for under ASC 310-30 which remain subject to the loss sharing agreement with the FDIC
amounted to approximately $563 million as of December 31, 2016 (December 31, 2015 - $636 million).
Table 11 - Activity in the Accretable Yield on Westernbank 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,
2016
2015
$1,112,458
(169,748)
67,377
$1,271,337
(202,966)
44,087
$1,010,087
$1,112,458
Loans held-for-sale
Loans held-for-sale decreased by $48 million mainly due to the
sale of a non-accrual public sector loan with a carrying amount
of $40 million during the third quarter of 2016.
FDIC loss share asset
The FDIC loss share indemnification asset is recognized on the
same basis as the assets subject to the loss share protection
from the FDIC, except that the amortization / accretion terms
differ. Decreases in expected reimbursements from the FDIC
due to improvements in expected cash flows to be received
from borrowers, as compared with the initial estimates, are
recognized as a reduction to non-interest income prospectively
over the life of the loss share agreements. This is because the
indemnification asset balance is being reduced to the expected
reimbursement amount from the FDIC.
The decrease of $241 million in the FDIC loss-share asset
was mainly due to the $136.2 million write-down related to the
review board’s denial of BPPR’s claims in connection with
arbitration proceedings with the FDIC during the third and
fourth quarter of 2016 and to $99 million in net payments
received from the FDIC. Table 12 sets forth the activity in the
FDIC loss share asset for the years ended December 31, 2016,
2015 and 2014. Also, refer to Note 12 to the consolidated
financial statements for additional information on the FDIC loss
share agreements.
Table 12 - 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
Recoveries reimbursable to the FDIC
Net payments from FDIC under loss sharing agreements
Arbitration decision charge
Other adjustments attributable to FDIC loss sharing agreements
Balance at end of period
Years ended December 31,
2015
2014
2016
$ 310,221
(10,201)
–
(239)
8,433
(4,093)
(98,518)
(136,197)
(72)
$ 542,454
(66,238)
–
15,658
73,205
–
(247,976)
–
(6,882)
$ 909,414
(189,959)
12,492
32,038
58,117
–
(256,498)
–
(23,150)
$ 69,334
$ 310,221
$ 542,454
POPULAR, INC. 2016 ANNUAL REPORT
31
Table 13 sets forth the activity associated with the outstanding balance of the FDIC loss share asset amortization (or negative
discount).
Table 13 - Activity in the Remaining FDIC Loss Share Asset Discount
(In thousands)
Balance at beginning of period [1]
Amortization of negative discount [2]
Impact of changes in (higher) lower projected losses
Balance at end of period
Years ended December 31,
2014
2015
2016
$ 26,100
(10,201)
(11,087)
$ 53,095
(66,238)
39,243
$ 103,691
(189,959)
139,363
$ 4,812
$ 26,100
$ 53,095
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 (expense) income.
statements of financial condition at December 31, 2016 and
2015. Other assets decreased by $48 million from December 31,
2015 to December 31, 2016, due mostly to a decrease in the
deferred tax asset and trades receivable, partially offset by an
increase in guaranteed mortgage loan claims.
Goodwill
Goodwill increased by $1 million from December 31, 2015 to
December 31, 2016, due to a goodwill adjustment of $5 million
related to the Doral Bank Transaction recorded in the first
quarter of 2016, partially offset by goodwill
impairment of
approximately $4 million related to Popular Securities during
the third quarter of 2016. Refer to Note 19 to the consolidated
financial
the
Corporation’s goodwill.
information
statements
detailed
for
on
Liabilities
The Corporation’s
liabilities were $33.5 billion at
December 31, 2016 compared to $30.7 billion at December 31,
2015. Refer to the Corporation’s consolidated statements of
financial condition included in this Form 10-K.
total
Deposits and Borrowings
The composition of the Corporation’s financing to total assets at
December 31, 2016 and 2015 is included in Table 14.
The Corporation revises
its expected cash flows and
estimated credit losses on a quarterly basis. 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.
Premises and equipment
Premises and equipment
increased by $41 million from
December 31, 2015 to December 31, 2016, mainly in buildings
and construction in progress at BPPR and in leasehold
improvements and equipment at BPNA.
Other real estate owned
Other real estate owned represents real estate property received
in satisfaction of debt. At December 31, 2016, OREO increased
to $213 million from $192 million at December 31, 2015
mainly in residential properties at BPPR, partially offset by the
bulk sale of WB commercial OREOs with a book value of
$9 million during the second quarter of 2016. Refer to Note 16
to the consolidated financial statements for the activity in other
real estate owned. The amounts included as “covered other real
estate” are subject to the FDIC loss sharing agreement.
Other assets
Refer to Note 17 for a breakdown of the principal categories
that comprise the caption of “Other Assets” in the consolidated
32
POPULAR, INC. 2016 ANNUAL REPORT
Table 14 - 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
December 31, December 31, % increase (decrease) % of total assets
2015
from 2015 to 2016
2015
2016
2016
$ 6,980
18,776
4,740
480
1
1,575
912
–
5,198
$ 6,402
15,641
5,167
762
1
1,663
1,019
2
5,105
9.0%
20.0
(8.3)
(37.0)
–
(5.3)
(10.5)
(100.0)
1.8
18.0% 17.9%
48.6
12.3
1.2
–
4.1
2.4
–
13.4
43.7
14.4
2.1
–
4.7
2.9
–
14.3
Deposits
total deposits
At December 31, 2016,
amounted to $30.5 billion, compared to $27.2 billion at
December 31, 2015. The deposits increase of $3.3 billion was
driven primarily by increases at BPPR, whose deposits increased
by $2.4 billion largely due to increases in deposits from the
the Corporation’s
Puerto Rico public sector and commercial deposits. Deposits at
BPNA also increased by approximately $0.8 billion in personal
money market deposits and savings. During this period,
brokered CDs declined, mainly at BPPR. Refer to Table 15 for a
breakdown of the Corporation’s deposits at December 31, 2016
and 2015.
Table 15 - Deposits Ending Balances
(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.
Borrowings
The Corporation’s borrowings amounted to $2.1 billion at
December
billion at
December 31, 2015. The decrease in borrowings was mainly
due to a net decrease in repurchase agreements principally at
BPPR.
compared with $2.4
2016,
31,
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,
2016.
Other liabilities
The Corporation’s other liabilities amounted to $0.9 billion at
December 31, 2016, a decrease of $0.1 billion when compared
to December 31, 2015. The decrease in other liabilities was
primarily due to a reduction in the liability for GNMA loans
with a repurchase option due to higher repurchase activity
during the fourth quarter of 2016.
Refer to Note 40 to the consolidated financial statements,
which provides additional
to the
Corporation’s Income Taxes, and to Note 27, which provides
information with respect
2016
2015
2014
2013
2012
$ 9,053,897
13,327,298
405,487
7,486,717
222,825
$ 7,221,238
11,440,693
382,424
7,274,157
891,211
$ 6,606,060
10,320,782
406,248
5,960,401
1,514,044
$ 6,590,963
11,255,309
553,521
6,478,103
1,833,249
$ 6,442,739
11,190,335
456,830
6,541,660
2,369,049
$30,496,224
$27,209,723
$24,807,535
$26,711,145
$27,000,613
additional information with respect to Guarantees, including
the recourse liability.
Stockholders’ Equity
Stockholders’ equity totaled $5.2 billion at December 31, 2016,
compared with $5.1 billion at December 31, 2015. The increase
was principally due to net income of $217 million recorded for
the year, partially offset by common and preferred dividends
amounting to $62.3 million and $3.7 million, respectively, as
well as an increase of $63 million in accumulated other
comprehensive loss. The increase in accumulated other
comprehensive loss was due mainly to an increase of $59
million in unrealized losses in securities available-for-sale and
unfavorable translation adjustments during the year amounting
to $4 million mostly related to the investment in BHD León.
Refer to the consolidated statements of financial condition,
comprehensive income and of changes in stockholders’ equity
for information on the composition of stockholders’ equity.
Also, refer to Note 26 for a detail of the accumulated other
comprehensive loss, an integral component of stockholders’
equity.
POPULAR, INC. 2016 ANNUAL REPORT
33
REGULATORY CAPITAL
Popular, Inc. and the Banks, BPPR and BPNA are subject to
capital adequacy standards established by the Federal Reserve.
The current risk-based capital standards applicable to the
Corporation and the Banks are based on the final capital
framework of Basel III. The capital rules of Basel III which
became effective on January 1, 2015, introduced a new capital
measure called “Common Equity Tier 1” (“CET1”) and specify
that Tier 1 capital consist of CET1 and “Additional Tier 1
Capital” instruments meeting specified requirements. Prior to
Table 16 - Capital Adequacy Data
January 1, 2015, the risk-based capital standards applicable to
the Corporation and the Banks were based on Basel I. Table 16
presents the Corporation’s capital adequacy information for the
years 2012 through 2016 under
the regulatory guidance
applicable during those years. Note 25 to the consolidated
financial
information on the
including the
Corporation’s regulatory capital requirements,
regulatory capital ratios of its depository institutions, BPPR and
BPNA. The Corporation continues
to exceed the well-
capitalized guidelines under the federal banking regulations.
statements presents
further
(Dollars in thousands)
Risk-based capital:
Common Equity Tier 1 capital
Tier 1 capital
Supplementary (Tier 2) capital
Total capital
Total risk-weighted assets
Adjusted average quarterly assets
Ratios:
Common Equity Tier 1 capital
Tier 1 capital
Total capital
Leverage ratio
Average equity to assets
Average tangible equity to assets
Average equity to loans
2016
2015
At December 31,
2014
2013
2012
$ 4,121,208
$ 4,049,576
(A)
(A)
(A)
$ 4,121,208
748,007
$ 4,049,576
642,833
$ 3,849,891
272,347
$ 4,464,742
296,813
$ 4,058,242
298,906
$ 4,869,215
$ 4,692,409
$ 4,122,238
$ 4,761,555
$ 4,357,148
$25,001,334
$24,987,144
$21,233,902
$23,318,674
$23,391,572
$37,785,070
$34,253,625
$32,250,173
$34,746,137
$35,226,183
16.48%
16.48
19.48
10.91
14.03
12.45
22.89
16.21%
16.21
18.78
11.82
13.37
11.95
20.42
(A)
18.13%
19.41
11.94
12.95
11.45
19.17
(A)
19.15%
20.42
12.85
11.52
9.78
16.88
(A)
17.35%
18.63
11.52
10.60
8.82
15.47
(A) Common equity tier 1 capital measured was introduced by the Basel III Capital Rules which became effective on January 1, 2015. Common equity tier 1 capital is
not applicable under the previous Basel 1 capital rules that were applicable in the previous years.
The increase in the CET1 capital ratio, Tier 1 capital ratio
and total capital ratio on December 31, 2016 compared to
December 31, 2015 was mostly due to the year’s earnings,
partially offset by the complete phase out, effective on January
1, 2016, of the trust preferred securities under Basel III which
at December 31, 2015 allowed approximately $107 million to
be included in Tier 1 capital out of a total of $427 million
outstanding. The phased out trust preferred securities qualified
as Tier 2 capital and therefore continued to be included as part
of
the total capital ratio. The decrease in leverage ratio
compared to 2015 was mainly due to the increase in average
total assets driven by increases in investment balances.
To be considered “well-capitalized” an institution had to
maintain a total capital ratio of 10%, a Tier 1 capital ratio of 8%,
a CET1 capital ratio of 6.5% and a leverage ratio of 5%. The
the
Corporation’s ratios presented in Table 16 show that
Corporation was “well capitalized” for regulatory purposes, the
highest classification, under Basel III for 2016, 2015 and for all
other years presented under Basel I. BPPR and BPNA were also
well-capitalized for all years presented.
34
POPULAR, INC. 2016 ANNUAL REPORT
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%.
Table 17 reconciles
the Corporation’s
total common
stockholders’ equity to common equity Tier 1 capital.
Table 17 - Reconciliation Common Equity Tier 1 Capital
Table 18 - Reconciliation Tangible Common Equity and
Assets
(25,662)
(22,222)
Total tangible common equity
$ 4,475,453
$ 4,370,667
(In thousands)
At December 31,
2015
2016
Common stockholders’ equity
$5,147,797
$5,055,164
AOCI related adjustments due to opt-
out election
280,330
220,956
Goodwill, net of associated deferred
tax liability (DTL)
(554,614)
(564,323)
Intangible assets, net of associated
DTLs
Deferred tax assets and other
deductions
(726,643)
(639,999)
Common equity tier 1 capital
$4,121,208
$4,049,576
Common equity tier 1 capital to risk-
weighted assets
16.48%
16.21%
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 18 provides a reconciliation of total stockholders’
equity to tangible common equity and total assets to tangible
assets at December 31, 2016 and 2015.
(In thousands, except share or per
share information)
Total stockholders’ equity
Less: Preferred stock
Less: Goodwill
Less: Other intangibles
At December 31,
2016
2015
$ 5,197,957
(50,160)
(627,294)
(45,050)
$ 5,105,324
(50,160)
(626,388)
(58,109)
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
$ 38,661,609
(627,294)
(45,050)
$ 35,761,733
(626,388)
(58,109)
$ 37,989,265
$ 35,077,236
11.78%
12.46%
of period
103,790,932
103,618,976
Tangible book value per common
share
$
43.12
$
42.18
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
indemnifications, and
leases and provision of guarantees,
representation and warranties. Refer to Note 27 for a detailed
discussion related to the Corporation’s obligations under credit
recourse and representation and warranties arrangements.
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
purchases of products or
from third parties.
Obligations that are legally binding agreements, whereby the
Corporation agrees to purchase products or services with a
services
POPULAR, INC. 2016 ANNUAL REPORT
35
specific minimum quantity defined at a fixed, minimum or
variable price over a specified period of time, are defined as
purchase obligations.
legal
include major
Purchase obligations
and binding
contractual obligations outstanding at the end of 2016, 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 contracts
are renewable or cancelable at least annually, 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
Table 19 - 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
interest rates,
the Corporation will be required to deposit
additional cash or securities to meet its margin requirements,
thereby adversely affecting its liquidity.
that
At December 31, 2016, the Corporation’s liability on its
pension, restoration and postretirement benefit plans amounted
to approximately $244 million, compared with $299 million at
December 31, 2015. 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
$6.4 million for 2017. 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 34 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
financial
condition. The BPPR’s non-contributory defined pension and
benefit restoration plans are frozen with regards to all future
benefit accruals.
to the Corporation’s overall
significant
36
POPULAR, INC. 2016 ANNUAL REPORT
or pay cash, depending on changes in interest rates. These
fair value on the consolidated
contracts are carried at
statements of
value
condition with the
financial
representing the net present value of the expected future cash
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.
fair
At December 31, 2016,
the aggregate contractual cash
obligations, including purchase obligations and borrowings, by
maturities, are presented in Table 19.
Less than
1 year
Payments Due by Period
3 to 5
1 to 3
years
years
After 5
years
$3,947
479
1
154
112
34
1
$4,728
$2,001
–
–
746
58
59
3
$1,711
–
–
131
7
52
3
$2,867
$1,904
$ 51
–
–
526
–
126
11
$714
Total
$ 7,710
479
1
1,557
177
271
18
$10,213
At December 31, 2016,
the liability for uncertain tax
positions was $7.4 million, compared with $9.0 million as of
the end of 2015. This liability represents an estimate of tax
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: 2017 - $1.1 million,
2018 - $1.1 million, 2019 - $1.1 million, 2020 - $1.5 million,
and 2021 - $1.1 million. Additionally, $1.4 million is not
subject to the statute of limitations. As a result of examinations,
the Corporation anticipates a reduction in the total amount of
unrecognized tax benefits within the next 12 months, which
could amount
including
interests.
to approximately $4.8 million,
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
commitments
in making those
policies
and conditional
obligations as it does in extending loans to customers. Since
many of the commitments expire without being drawn upon or
a default occurring, the total contractual amounts are not
representative of
credit
the Corporation’s
exposure or liquidity requirements for these commitments.
future
actual
Table 20 - Off-Balance Sheet Lending and Other Activities
(In millions)
Commitments to extend credit
Commercial letters of credit
Standby letters of credit
Commitments to originate or fund mortgage loans
Total
RISK MANAGEMENT
Managing risk is an essential component of the Corporation’s
business. Risk identification and monitoring are key elements
in the overall
risk management. Popular has a strong
disciplined risk management culture where risk management is
a share responsibility by all employees.
Popular’s
risk management
Risk Management Framework
Popular’s risk management framework seeks to ensure that
there is an effective process in place to manage risk across the
framework
organization.
incorporates three interconnected dependencies: risk appetite,
stress testing, and capital planning. The stress testing process
incorporates key risks within the context of the Risk Appetite
Statement (RAS) defined in our Risk Management Policy. The
process analyzes and delineates how much risk Popular is
prepared to assume in pursuit of its business strategy and how
much capital Popular’s activities will consume in light of a
forward-looking assessment of the potential impact of adverse
economic conditions. The RAS includes risk tolerance, limits,
and types of risks the Corporation is willing to accept, as well
as processes to maintain compliance with those limits.
Principal Risk Types
(cid:129) 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.
(cid:129) Interest Rate Risk (“IRR”) - 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 different yield curves
The following table presents the contractual amounts related
lending and other
to the Corporation’s off-balance sheet
activities at December 31, 2016:
Amount of commitment - Expiration Period
Years 2022 -
Years 2020 -
Years 2018 -
thereafter
2021
2019
$742
1
26
1
$770
$83
–
3
–
$86
$52
–
–
–
$52
2017
$6,914
–
6
25
$6,945
Total
$7,791
1
35
26
$7,853
from changing rate
affecting bank lending and borrowing activities (basis
the
risk);
spectrum of maturities (yield curve risk); and from
interest
related options embedded in bank products
(options risk).
relationships
across
(cid:129) Market Risk - Potential for economic loss resulting from
changes in market prices of the assets or liabilities in the
Corporation’s or in any of its subsidiaries’ portfolios.
(cid:129) 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.
(cid:129) Operational Risk - Possibility that inadequate or failed
systems and internal controls or procedures, human error,
fraud or external influences such as disasters, can cause
losses. It includes the risk for those processes that have
been outsourced to third parties and the risk of the
inadequate use of models.
(cid:129) Compliance - Potential for loss resulting from violations
of or non-conformance with laws, rules, regulations,
prescribed practices.
activities,
(cid:129) Regulatory and Legal Risk - Risk of negative impact to
regulatory
earnings
business
relationships or reputation as a result of failure to comply
with or a failure to adapt
to current and changing
regulations, law, rules, regulatory expectations, existing
contracts or ethical standards.
capital,
or
POPULAR, INC. 2016 ANNUAL REPORT
37
(cid:129) 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
(cid:129) Reputational Risk - Potential for loss arising from negative
public opinion.
Risk Governance
(the “Board”) has
The Corporation’s Board of Directors
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
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. The Corporation’s Model
Validation and Loan Review group, which reports directly to
the RMC and administratively to the Chief Risk Officer, also
38
POPULAR, INC. 2016 ANNUAL REPORT
provides important risk management functions by validating
critical models used in the Corporation and by assessing the
adequacy of the Corporation’s lending risk function.
Additionally, the Internal Auditing Division provides an
independent assessment of the Corporation’s internal control
structure and related systems and processes. The Internal Audit
Division also provides an assessment of the effectiveness of the
Corporation’s risk management function.
Moreover, management oversight of the Corporation’s risk-
taking and risk management activities is conducted through
management committees:
(cid:129) CRESCO (Credit Strategy Committee) - Manages the
Corporation’s overall credit exposure and approves credit
policies, standards and guidelines that define, quantify,
committee,
risk. Through this
and monitor
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
(cid:129) 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.
(cid:129) 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.
(cid:129) Compliance
Committees
regulatory
compliance activities to ensure to compliance with legal
and regulatory requirements
and the Corporation’s
policies.
- Monitors
(cid:129) ERM (Enterprise Management Committee) - Monitors
Interest, Liquidity, Compliance, Regulatory,
Market,
Legal, Strategic, Operational
(including Information
Security & Cyber), and Reputational risks in the Risk
Appetite Statement (RAS) and within the Corporation’s
ERM framework.
There are other management committees such as the Fair
Lending, Section 23A & B, New Products, Fiduciary Risk, and
the BSA/Anti-Money Laundering Committees, among others,
which provide oversight of specific business risks.
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
to the Risk Management Committee, and enhancing and
strengthening controls
liquidity and
market risk. The ALCO generally meets on a weekly basis and
reviews the Corporation’s current and forecasted asset and
liability levels as well as desired pricing strategies and other
relevant financial management and interest rate and risk topics.
Also, on a monthly basis the ALCO reviews various interest rate
ratios and portfolio information,
risk sensitivity metrics,
the Corporation’s liquidity
including but not
positions, projected sources and uses of funds, interest rate risk
positions and economic conditions.
surrounding interest,
limited to,
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 as available-for-
sale. Refer to Notes 8 and 9 for further information on the
investment portfolio.
classified as
available-for-sale amounted to $8.2 billion as of December 31,
2016. Other assets subject
risk include loans
held-for-sale, which amounted to $89 million, mortgage
servicing rights (“MSRs”) which amounted to $197 million and
securities
to
as
$60 million, in each case as of December 31, 2016.
“trading,” which amounted
to market
securities
classified
Liabilities subject to market risk include the FDIC clawback
obligation, which amounted to $ 153 million at December 31,
2016.
Management believes that market risk is currently not a
material source of risk at the Corporation. A significant portion
the Corporation’s financial activities is concentrated in
of
Puerto Rico, which has been going through a fiscal and
economic crisis. Refer to the Geographic and Government Risk
section of this MD&A for highlights on the current status of
Puerto Rico’s fiscal and economic condition.
Interest Rate Risk (“IRR”)
The Corporation’s net interest income is subject to various
categories of interest rate risk, including repricing, basis, yield
curve and option risks.
rate risk,
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.
In managing interest
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,
and policy
management objectives, market
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.
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, and parallel
rate 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 independent 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-
such as
party developed data
prepayment speeds on mortgage loans and mortgage-backed
securities.
assumptions
critical
for
The Corporation processes net interest income simulations
under interest rate scenarios in which the yield curve is
assumed to rise and decline by the same amount. The rate
scenarios considered in these market risk simulations reflect
parallel changes of -200, +200 and +400 basis points during the
succeeding twelve-month period. Simulation analyses are based
including relative levels of market
on many assumptions,
interest rates,
loan prepayments and
they should not be relied upon as
deposit decay. Thus,
the estimates do not
indicative of actual results. Further,
contemplate actions that management could take to respond to
interest rate spreads,
POPULAR, INC. 2016 ANNUAL REPORT
39
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. The following table
presents the results of the simulations at December 31, 2016
and 2015, assuming a static balance sheet and a one-year time
horizon:
Table 21 - Net Interest Income Sensitivity (One Year Projection)
(Dollars in thousands)
+400 basis points
+200 basis points
-200 basis points
December 31, 2016
December 31, 2015
Amount Change Percent Change Amount Change Percent Change
$236,945
121,181
(35,314)
16.52%
8.45
(2.46)
$186,126
94,259
(345)
13.41%
6.79
(0.02)
interest
interest rates could have a positive effect on net
interest
income, while a decrease in interest rates could have a negative
income. As shown in Table 22, at
effect on net
December 31, 2016, the Corporation’s one-year cumulative
positive gap was $7.1 billion, or 20.4% of total earning assets.
This compares with $4.3 billion and 13.6%, respectively, at
December 31, 2015. The change in the one-year cumulative gap
position was influenced by an increase in long duration core
deposits invested in short-term money market investments.
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.
taken to manage
that
repricing volumes
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
new business. The
typically include
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
40
POPULAR, INC. 2016 ANNUAL REPORT
Table 22 - Interest Rate Sensitivity
(Dollars in thousands)
0-30 days
After three
months but
within six
months
Within 31 -
90 days
At December 31, 2016
By repricing dates
After nine
months but
within one
year
After one
year but
within two
years
After six
months but
within nine
months
After two
years
Non-interest
bearing
funds
Total
Assets:
Money market investments $2,889,217 $
Investment and trading
– $
1,000 $
– $
– $
– $
– $
– $ 2,890,217
securities
Loans
Other assets
Total
Liabilities and stockholders’
equity:
269,790
6,768,857
–
197,100
727,563
–
371,665
881,848
–
981,681
761,829
–
438,000
755,619
–
4,606,492
1,670,802
2,464,173 11,075,345
–
–
–
8,535,530
213 23,435,447
3,800,415
3,800,415
9,927,864
924,663
1,254,513
1,743,510
1,193,619
4,134,975 15,681,837
3,800,628 38,661,609
381,708
770,508
483,629
935,314
465,393
588,881
447,245
572,689
1,606,653 11,033,527
1,975,836
1,532,634
– 15,806,238
7,709,543
–
Savings, NOW and money
market and other interest
bearing demand deposits 1,388,083
1,333,681
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
171,898
207,769
99,759
–
–
–
–
1,200
3,815
–
13,302
–
17,381
–
29,018
–
32,561
–
210,463
–
1,268,311
–
–
–
479,426
1,200
1,574,851
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
6,980,443
6,980,443
911,951
5,197,957
911,951
5,197,957
Total
$2,898,677 $1,373,287 $1,536,083 $1,083,292 $1,052,495 $3,349,750 $14,277,674 $13,090,351 $38,661,609
Interest rate sensitive gap
Cumulative interest rate
7,029,187
(448,624)
(281,570)
660,218
141,124
785,225
1,404,163
(9,289,723)
sensitive gap
7,029,187
6,580,563
6,298,993
6,959,211
7,100,335
7,885,560
9,289,723
Cumulative interest rate
sensitive gap to earning
assets
20.16%
18.88%
18.07%
19.96%
20.37%
22.62%
26.65%
–
–
–
–
–
The Corporation estimates the sensitivity of economic value
of equity 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
risk
to interest
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 mortgage-
backed securities and collateralized mortgage obligations, since
prepayments could shorten (or lower prepayments could extend)
the weighted average life of these portfolios. Table 23, which
presents the maturity distribution of earning assets, takes into
consideration prepayment assumptions.
POPULAR, INC. 2016 ANNUAL REPORT
41
Table 23 - Maturity Distribution of Earning Assets
As of December 31, 2016
Maturities
After one year
through five years
Fixed
interest
rates
Variable
interest
rates
After five years
Fixed
interest
rates
Variable
interest
rates
Total
One year
or less
$ 2,890,217
2,089,620
–
$ 4,758,425
$
–
41,385
–
$1,445,955
$
–
30,205
$ 2,890,217
8,365,590
2,768,941
619,671
236,561
2,036,703
718,324
6,380,200
702,937
2,182,959
8,860
445,981
1,399,733
1,474,351
5,511,884
575,468
2,422,400
150,309
–
155,767
155,290
2,883,766
255,807
1,155,552
5,022
21,184
57,554
4,203,490
5,442,802
245,619
1,101,908
7,039
–
94,412
152,329
1,355,688
81,275
9,631,760
790,901
703,726
3,744,169
6,703,784
21,574,340
1,861,106
$12,062,974
$10,845,777
$3,180,958
$7,134,376
$1,467,168
$34,691,253
(In thousands)
Money market securities
Investment and trading securities
Loans:
Commercial
Construction
Lease financing
Consumer
Mortgage
Subtotal loans
Westernbank loans
Total earning assets
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,
require the continued usage of key
performed quarterly,
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 and Popular Securities. Popular Securities’
trading
activities consist primarily of market-making activities to meet
42
POPULAR, INC. 2016 ANNUAL REPORT
hedging
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
“TBA”
related market
(to-be-announced) market
transactions. The objective is to
derive spread income from the portfolio and not to benefit from
short-term market movements. In addition, BPPR uses forward
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.
risk with
the
At December 31, 2016,
the Corporation held trading
securities with a fair value of $60 million,
representing
approximately 0.2% of the Corporation’s total assets, compared
with $72 million and 0.2%, respectively, at December 31, 2015.
As shown in Table 24, the trading portfolio consists principally
of mortgage-backed securities relating to BPPR’s mortgage
activities described above, which at December 31, 2016 were
investment grade securities. As of December 31, 2016, the
trading portfolio also included $2.6 million in Puerto Rico
government obligations and shares of closed-end funds that
invest primarily in Puerto Rico government obligations
($6.0 million as of December 31, 2015). Trading instruments
are recognized at
fair 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 loss of $0.8 million for the
year ended December 31, 2016, compared to a loss of
$4.7 million for 2015. Table 24 provides the composition of the
trading portfolio at December 31, 2016 and December 31, 2015.
Table 24 - Trading Portfolio
(Dollars in thousands)
Mortgage-backed securities
Collateralized mortgage obligations
Puerto Rico government obligations
Interest-only strips
Other (includes related trading derivatives)
Total
[1] Not on a taxable equivalent basis.
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.
are numerous
The Corporation’s trading portfolio had a 5-day VAR of
approximately $0.4 million for the last week in December 31,
2016. There
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.
assumptions
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 may be used by the Corporation as part of its
interest rate risk management strategy to minimize
overall
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
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 30 to the consolidated financial statements
for further information on the Corporation’s involvement in
derivative instruments and hedging activities.
interest
in its
December 31, 2016
Weighted
Average Yield [1] Amount
December 31, 2015
Weighted
Average Yield [1]
Amount
$42,746
1,321
1,164
602
13,972
$59,805
4.85%
5.27
5.51
12.35
3.03
4.52%
$51,155
2,054
4,590
687
13,173
$71,659
5.22%
5.06
5.41
12.10
3.31
4.94%
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
liability. The underlying index or
the hedged asset 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
instruments
that are linked to these hedged assets and
liabilities. Management will assess if circumstances warrant
liquidating or
replacing the derivatives position in the
hypothetical event that high correlation is reduced. Based on
the Corporation’s derivative
at
December 31, 2016, 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
through approvals,
limits and monitoring procedures, and
through master netting and collateral agreements whenever
possible. Further, as applicable under the terms of the master
the Corporation may obtain collateral, where
agreements,
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
POPULAR, INC. 2016 ANNUAL REPORT
43
Corporation’s own credit standing is considered in the fair
the derivative liabilities. During the year ended
value of
December 31, 2016, inclusion of the credit risk in the fair value
of the derivatives resulted in a net loss of $0.5 million (2015 –
net loss of $0.5 million; 2014 – net gain of $1.1 million), which
consisted of a loss of $0.9 million (2015 – loss of $ 0.8 million;
2014 – loss of $ 0.1 million) resulting from the Corporation’s
credit standing adjustment and a gain of $0.4 million (2015 –
gain of $ 0.3 million; 2014 – gain of $1.2 million) from the
assessment of the counterparties’ credit risk. At December 31,
2016, the Corporation had $4 million (2015 – $ 10 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, 2016 and 2015.
The Corporation performs appropriate due diligence and
monitors
that
condition of
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 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, 2016 amounted
to $ 105 million (2015 - $ 110 million).
Refer to Note 30 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, 2016 and
2015.
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
recorded as part of the results of operations for the period.
and markets mostly
customers. These
instruments
products
to
44
POPULAR, INC. 2016 ANNUAL REPORT
Following is a description of the most significant of the
Corporation’s derivative activities that are not designated for
hedge accounting. Refer
to Note 30 to the consolidated
financial statements for additional quantitative and qualitative
information on these derivative instruments.
At December 31, 2016, the Corporation had outstanding
$113 million (2015 – $ 189 million) in notional amount of
interest rate swap agreements with a net negative fair value of
$0.1 million (2015 – net negative fair value of $0.4 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.
interest
For the year ended December 31, 2016, the impact of the
rate swaps not designated as
mark-to-market of
in earnings of
a net
accounting hedges was
approximately $ 0.3 million, recorded in the other operating
income category of the consolidated statement of operations,
approximately
compared with an earnings
in 2015 and in 2014
$0.3 million and $ 1.2 million,
respectively.
increase of
increase
amount of
At December 31, 2016, the Corporation had $0.7 million in
notional
forward contracts outstanding not
designated as accounting hedges with a positive fair value of
$9 thousand while on December 31, 2015, the Corporation did
not have any forward contracts outstanding not designated as
accounting hedges. For the year ended December 31, 2016, the
impact of the mark-to-market of the forward contracts not
reduction to
designated as
non-interest
loss of
$0.4 million; 2014 - loss of $ 10.9 million), which was included
in the
in the
category of mortgage banking activities
consolidated statement of operations.
income of $ 0.2 million (2015 -
accounting hedges was
a
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 linked
to these indexes to its retail customers, principally in connection
with individual retirement accounts (IRAs), and certificates of
deposit. At December 31, 2016, these deposits amounted to $
70 million (2015 - $ 86 million), or less than 1% (2015 – less than
1%) of the Corporation’s total deposits. In these certificates, the
customer’s principal is 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 risk of issuing certificates of deposit with returns tied to
economically hedged by the
the
Corporation. BPPR and BPNA purchase indexed options from
applicable
indexes
is
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
is
marked-to-market with changes in fair value charged to
earnings.
bifurcated
expense
option
while
the
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, 2016, the
notional
indexed options on deposits
approximated $73 million (2015 - $90 million) with a fair value
of $ 13 million (asset) (2015 - $13 million) while the embedded
options had a notional value of $70 million (2015 - $86 million)
with a fair value of $ 11 million (liability) (2015 - $10 million).
amount of
the
Refer to Note 30 to the consolidated financial statements for
a description of other non-hedging derivative activities utilized
by the Corporation during 2016 and 2015.
Foreign Exchange
The Corporation holds an interest
in BHD León in the
Dominican Republic, which is an investment accounted for
under the equity method. The Corporation’s carrying value of
the equity interest in BHD León approximated $126 million at
December 31, 2016. 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, 2016, the Corporation had approximately
$40 million in an unfavorable foreign currency translation
adjustment as part of accumulated other comprehensive loss,
compared with an unfavorable adjustment of $36 million at
December 31, 2015 and $33 million at December 31, 2014.
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 Treasury Division coordinates
corporate wide
liquidity management
and activities with the
reportable segments, oversees policy breaches and manages the
and Operational Risk
escalation process. The Financial
Management Division is
the independent
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.
During the year ended December 31, 2016, the Corporation
declared quarterly dividends on its common stock of $0.15 per
share, for a total of $62.2 million. On January 23, 2017, the
Corporation’s Board of Directors approved the following capital
increase the Company’s quarterly common stock
actions:
dividend from $0.15 per share to $0.25 per share; and common
stock repurchases of up to $75 million. The Company’s Board
of Directors approved a quarterly cash dividend of $0.25 per
share on its outstanding common stock. The dividend is
payable on April 3, 2017 to shareholders of record as of
POPULAR, INC. 2016 ANNUAL REPORT
45
March 17, 2017. Future quarterly dividends will be subject to
the Board of Directors’ approval at the customary times those
dividends are declared. Common stock repurchases will be
made under a repurchase plan that has been authorized by the
Company’s Board of Directors. Common stock repurchases may
be executed in the open market or in privately negotiated
the share
transactions. The timing and exact amount of
repurchases will be subject to various factors, including the
Company’s capital position, financial performance and market
conditions.
As discussed in Note 5 - Business Combinations, on
February 27, 2015 the Corporation acquired certain assets and
assumed all deposits (except brokered deposits) from Doral
Bank. This included approximately $1.5 billion in loans,
approximately $173 million in securities available for sale and
$2.2 billion in deposits.
Deposits,
borrowing
arrangements.
funds for the Corporation,
including customer deposits, brokered deposits
and public funds deposits, continue to be the most significant
funding 79% of the
source of
Corporation’s total assets at December 31, 2016 and 76% at
December 31, 2015. The ratio of total ending loans to deposits
was 77% at December 31, 2016, compared to 85% at
December 31, 2015. In addition to traditional deposits, the
Corporation maintains
At
December 31, 2016, these borrowings consisted primarily of
$479 million in assets sold under agreement to repurchase,
$673 million in advances with the FHLB, $439 million in junior
subordinated deferrable interest debentures
(net of debt
issuance
related to trust preferred securities and
$445 million in term notes (net of debt issuance cost) issued to
partially fund the repayment of TARP funds. A detailed
description of the Corporation’s borrowings, including their
terms, is included in Note 21 to the consolidated 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.
cost)
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
credit,
Corporation’s borrowings
including its terms, is included in Note 21 to the consolidated
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.
and available
lines of
Banking Subsidiaries
funding for the Corporation’s banking
Primary sources of
subsidiaries (BPPR and BPNA), or “the banking subsidiaries,”
include retail and commercial deposits, brokered deposits,
unpledged investment securities, mortgage loan securitization,
and, to a lesser extent, loan sales. In addition, the Corporation
the
maintains borrowing facilities with the FHLB and at
46
POPULAR, INC. 2016 ANNUAL REPORT
discount window of the Federal Reserve Board (the “Fed”), and
has a considerable amount of collateral pledged that can be
used to quickly raise funds under these facilities.
and
repayment
repurchases,
The principal uses of funds for the banking subsidiaries
include loan originations, investment portfolio purchases, loan
purchases
outstanding
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
During the year ended December 31, 2016, BPPR declared
cash dividends of $78.8 million, a portion of which was used by
the cash dividends on its
the payments of
Popular
outstanding common stock, as mentioned above.
for
Note 44 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
(by nationally
and
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 15 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
deposits with
denominations under $100,000. Core deposits have historically
provided the Corporation with a sizable source of relatively
$100,000,
excluding
brokered
stable and low-cost funds. Core deposits totaled $25.8 billion, or 84% of total deposits, at December 31, 2016, compared with
$22.0 billion, or 81% of total deposits, at December 31, 2015. Core deposits financed 76% of the Corporation’s earning assets at
December 31, 2016, compared with 69% at December 31, 2015.
Certificates of deposit with denominations of $100,000 and over at December 31, 2016 totaled $ 4.1 billion, or 14% of total
deposits (December 31, 2015 - $4.2 billion, or 15% of total deposits). Their distribution by maturity at December 31, 2016 is
presented in the table that follows:
Table 25 - 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
$1,524,204
411,954
549,248
1,653,180
$4,138,586
Average deposits, including brokered deposits, for the year ended December 31, 2016 represented 86% of average earning
assets, compared with 85% and 82% for the years ended December 31, 2015 and 2014, respectively. Table 26 summarizes average
deposits for the past five years.
Table 26 - Average Total Deposits
(In thousands)
2016
For the years ended December 31,
2013
2014
2015
2012
Non-interest bearing demand deposits
$ 6,607,639
$ 6,146,504
$ 5,533,649
$ 5,728,228
$ 5,356,649
Savings accounts
7,528,057
7,027,238
6,733,195
6,792,137
6,571,133
NOW, money market and other interest bearing demand accounts
7,024,810
5,446,933
4,824,402
5,738,189
5,555,203
Certificates of deposit:
Under $100,000
$100,000 and over
Certificates of deposit
Other time deposits
Total interest bearing deposits
Total average deposits
2,525,448
4,240,008
6,765,456
1,140,048
3,537,307
3,755,412
7,292,719
865,189
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
22,458,371
20,632,079
19,113,706
21,044,147
21,547,284
$29,066,010
$26,778,583
$24,647,355
$26,772,375
$26,903,933
31,
2016
2% of
approximately
At December
the
Corporation’s assets were financed by brokered deposits, as
compared to 4% at December 31, 2015. The Corporation had
$0.6 billion in brokered deposits at December 31, 2016 and
$1.3 billion in December 31, 2015. 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.
liquidity
through core
To the extent that the banking subsidiaries are unable to
obtain sufficient
the
Corporation may meet its liquidity needs through short-term
for borrowings under
borrowings by pledging securities
loans and
repurchase agreements, by pledging additional
securities through the available secured lending facilities, or by
selling liquid assets. These measures are subject to availability
of collateral.
deposits,
The Corporation’s banking subsidiaries have the ability to
borrow funds from the FHLB. At December 31, 2016 and
December 31, 2015, the banking subsidiaries had credit facilities
authorized with the FHLB aggregating to $3.8 billion and
$3.9 billion, respectively, based on assets pledged with the FHLB
POPULAR, INC. 2016 ANNUAL REPORT
47
at
those dates. Outstanding borrowings under these credit
facilities totaled $673 million at December 31, 2016 and
$762 million at December 31, 2015. Such advances are
collateralized by loans held-in-portfolio, do not have restrictive
covenants and do not have any callable features. At December 31,
2016 the credit
facilities authorized with the FHLB were
collateralized by $4.9 billion in loans held-in-portfolio, compared
with $4.7 billion at December 31, 2015. Refer to Note 21 to the
consolidated financial statements for additional information on
the terms of FHLB advances outstanding.
At December 31, 2016 and December 31, 2015,
the
Corporation’s borrowing capacity at
the Fed’s Discount
Window amounted to approximately $1.2 billion and
$1.3 billion, respectively, which remained unused as of both
dates. 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, 2016 and December 31, 2015, this
credit facility with the Fed was collateralized by $2.3 billion
and $2.5 billion, respectively, in loans held-in-portfolio.
At December 31, 2016, management believes that
the
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, 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
sources of
funding for
Bank Holding Companies
the bank holding
The principal
companies (the “BHC’s”), which are Popular, Inc. (holding
company only) (“PIHC”) and Popular North America, Inc.
(“PNA”),
securities,
dividends received from banking and non-banking subsidiaries
(subject to regulatory limits and authorizations) asset sales,
cash on hand,
investment
include
48
POPULAR, INC. 2016 ANNUAL REPORT
credit facilities available from affiliate banking subsidiaries and
proceeds from potential securities offerings.
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, 2016, PIHC received
$78.8 million in dividends from BPPR and $4.7 million in
dividends
from EVERTEC’s parent company. PIHC also
received $12.1 million in dividends from its investment in BHD
León, and $37.5 million in dividends from its non-banking
subsidiaries.
Another use of liquidity at the parent holding company is
the payment of dividends on its outstanding stock. During the
the Corporation declared
year ended December 31, 2016,
quarterly dividends on its outstanding common stock of $0.15
per share, for a total of $62.2 million. The dividends for the
Corporation’s Series A and Series B preferred stock amounted to
$3.7 million for the year ended December 31, 2016. As
mentioned above, on January 23, 2017, the Corporation’s Board
of Directors approved the following capital actions: an increase
in the Company’s quarterly common stock dividend to $0.25
per share for the second quarter of 2017; and common stock
repurchases of up to $75 million. The dividend is payable on
April 3, 2017 to shareholders of record as of March 17, 2017.
the cash needs of
The BHC’s have in the past borrowed in the money markets
and in the corporate debt market primarily to finance their
non-banking subsidiaries, however,
the
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 44 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 $884 million at December 31, 2016, compared
with $890 million at December 31, 2015. 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, 2016 are presented in Table 27.
Table 27 - Distribution of BHC’s Notes Payable by
Contractual Maturity
Year
2017
2018
2019
2020
2021
Later years
Total
(In thousands)
$
–
–
444,788
–
–
439,324
$884,112
As indicated previously,
issue new
registered debt in the capital markets during the year ended
December 31, 2016.
the BHC did not
The BHCs liquidity position continues to be adequate with
sufficient cash on hand,
investments and other sources of
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, capital injection
and borrowed funds from their direct parent companies or the
holding companies. The principal uses of
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 of them are funded internally from operating cash
flows or from intercompany borrowings from their holding
companies, BPPR or BPNA.
funds for
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, 2016,
the
investment and trading securities portfolios, as shown in Table
23, totaled $8.4 billion, of which $2.1 billion, or 25%, had
maturities of one year or less. Mortgage-related investments in
Table 23 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
the time the transactions are to be
collateral available at
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 $ 3.7 billion at December 31, 2016 and
$3.0 billion at December 31, 2015. 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,
2016 is presented in Table 23. As of that date, $7.1 billion, or
30% of the loan portfolio was expected to mature within one
year, compared with $7.1 billion, or 31% 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
and fiscal 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 and the ongoing fiscal crisis.
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
POPULAR, INC. 2016 ANNUAL REPORT
49
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, geographic concentration in Puerto Rico, the
liquidity of the balance sheet, the availability of a significant
base of
and the
Corporation’s ability to access a broad array of wholesale
funding sources, among other factors.
and commercial deposits,
retail
core
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 $14 million
in deposits at December 31, 2016 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 $0.8 million at
December 31, 2016, with the Corporation providing collateral
totaling $4 million to cover the net liability position with
counterparties on these derivative instruments.
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
collateral
levels securing the recourse obligations. Also, as
discussed in Note 27 to the consolidated financial statements,
the Corporation services residential mortgage loans subject to
recourse provisions. Certain contractual agreements
credit
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
amounted to approximately
$62 million at December 31, 2016. The Corporation could be
required to post additional collateral under the agreements.
Management expects that it would be able to meet additional
recourse obligations
50
POPULAR, INC. 2016 ANNUAL REPORT
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 requires
effective management of
Credit Risk
the
The
establishment of an appropriate credit risk culture. Credit risk
policies and the Corporation’s risk appetite are important
components to establish this culture. The Corporation has
clearly defined credit policies for the approval and management
of credit risk. Credit underwriting standards apply to all
lending activities. These set the minimum requirements in
assessing the ability of debtors and/or counterparties to meet
their contracted financial obligations for repayment, acceptable
forms of collateral and security and the frequency of credit
reviews.
The policies and standards are designed to achieve loan
portfolio outcomes that are consistent with Corporation’s risk
appetite. The Board of Directors, both directly or through the
Risk Management Committee,
the
Corporation’s risk appetite statement and the Corporation’s
credit risk tolerance limits. The CRESCO monitors credit risk
management activities both at the corporate level and across all
Popular
the
to
including
Corporation’s risk appetite and credit risk tolerance limits.
reviews and approves
subsidiaries,
adherence
the
The Corporation’s credit risk limits establish threshold and
performance metrics that the Corporation and each subsidiary
bank must adhere to in pursuit of its strategic objectives. Credit
risk tolerance are defined along three dimensions: (1) loss and
credit performance tolerances; (2) portfolio composition and
concentration tolerances; and (3) industry and name-level
tolerances.
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
instruments.
on-balance sheet and off-balance sheet credit
Credit
the
is
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.
risk management
on analyzing
based
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
credit
years requires the Corporation to continue to focus on the
identification, monitoring and managing of its credit risk. The
Corporation manages
risk by maintaining sound
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
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
functions include reviewing the adequacy of
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
the
allowance for loan losses and periodically approving appropriate
provisions, monitoring compliance with charge-off policy,
establishing portfolio diversification standards, 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
appropriate. The analysis of the allowance adequacy is presented
to the Risk Management Committee of the Board of Directors for
review, consideration and ratification on a quarterly basis.
construction,
The Corporation’s Corporate Loan Review and Model Risk
Monitoring (“CLR & MRM”) Division is an independent
function from the CCRMD. Through the Commercial Loan
Review Unit at
the Corporate Loan Review Department
(“CLRD”), CLR & MRM evaluates compliance with the Bank’s
Commercial Credit Norms and Procedures and the precision of
risk rating accuracy. The CLRD performs annual credit process
reviews of several commercial portfolios, including small and
middle market,
asset-based and corporate
banking lending groups in BPPR, as well as BPNA’s commercial
and construction portfolios. 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
collateral
of
loans,
documentation. The monitoring
by CLRD
contributes to assess compliance with credit policies and
underwriting standards, to determine the current level of credit
risk, to evaluate the effectiveness of the credit management
process and to identify control deficiencies that may arise in the
credit-origination and management processes. Based on its
findings, CLRD develops
to implement
if necessary, that help in maintaining a
corrective actions,
sound credit process and that credit risk is kept at an acceptable
level. The Loan Review Department reports the results of the
credit process reviews to the Risk Management Committee of
the Corporation’s Board of Directors.
credit
performed
recommendations
evaluation
and
and
the
The Corporation’s Commercial Credit Administration
Group includes the Special Loans Division, the Commercial
Credit Operations Division and the Loss-Sharing Agreement
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.
At December 31, 2016, the Corporation’s credit exposure
was centered in its $23.4 billion total loan portfolio, which
represented 67% of
assets. The portfolio
composition for the last five years is presented in Table 9.
earning
its
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 monitors
the CCRMD performs
credit underwriting standards. Also,
ongoing monitoring of the portfolio, including potential areas of
concern for specific borrowers and/or geographic regions.
the CCRMD has strengthened its
During the past years,
continued
quantitative measurement
improvements to the credit risk management processes.
capabilities, part of
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 28 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.
POPULAR, INC. 2016 ANNUAL REPORT
51
At December 31, 2016,
reserve of approximately $9 million for potential
associated with unfunded loan commitments
commercial and consumer lines of credit (2015 - $10 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 30 to the
consolidated financial statements for further information on the
in derivative instruments and
Corporation’s
hedging activities, and the Derivatives sub-section included
under Risk Management in this MD&A.
involvement
the investment
the composition of
The Corporation may also encounter risk of default in
relation to its investment securities portfolio. Refer to Notes 8
securities
and 9 for
available-for-sale
investment
securities portfolio held by the Corporation at December 31,
2016 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. Of
these commercial lending relationships, 295 have an aggregate
exposure of $10 million or more. At December 31, 2016, highly
leveraged transactions and credit facilities to finance real estate
ventures or business acquisitions amounted to $195 million
(2015 - $117 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. In addition, demographic trends is also impacting
the demand for housing and hence the devaluation of
few years, as the recession has
properties. Over the last
continued, outmigration has accelerated to leading lower
52
POPULAR, INC. 2016 ANNUAL REPORT
housing demand in Puerto Rico. 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 provision for loan
losses,
foreclosures and the cost of
repossessing and disposing of real estate collateral.
loan delinquencies,
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. In Puerto Rico, the
construction portfolio has been reduced significantly standing
at only $86 million in December 31, 2016. In the U.S., during
the second half of 2014, the divesture of 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 U.S. operations reorganization. Furthermore, the
Corporation has
significantly curtailed the production of
non-traditional mortgages as it ceased originating subprime
consumer loans and non-conventional mortgage loans in its
U.S. mainland operations. This shift in the risk profile of the
credit portfolios has strengthened the Corporation and its better
positioned to operate in Puerto Rico’s complex environment.
The Corporation continues to analyze and monitor the higher
risk segments of
and although deemed
appropriately sized and within the risk tolerance limits, remains
attentive to changes in trends.
its portfolios,
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
assets
and revenue
Geographic and Government Risk
The Corporation is exposed to geographic and government risk.
composition by
The Corporation’s
geographical area and by business segment reporting are
presented in Note 42 to the consolidated financial statements. A
significant portion of our
financial activities and credit
exposure is concentrated in the Commonwealth of Puerto Rico
(the “Commonwealth”), which is experiencing a severe
economic and fiscal crisis resulting from continuing economic
contraction, persistent and significant budget deficits, a high
debt burden, unfunded legacy obligations and lack of access to
the capital markets, among other factors.
obligations,
The Commonwealth’s deficits were historically covered with
loans from the Government Development
bond financings,
Bank for Puerto Rico (“GDB”) and other extraordinary
one-time revenue measures, as well as deferring the cost of
certain
The
legacy
Commonwealth’s structural
imbalance between revenue and
expenditure and unfunded legacy obligations, coupled with the
deterioration of GDB’s liquidity situation and Commonwealth’s
recent inability to access the capital markets, have recently
resulted in the government becoming unable to pay scheduled
debt payments while continuing to provide government
services.
pensions.
such
as
In response to this crisis, in June 2016 the U.S. Federal
Government enacted the Puerto Rico Oversight, Management
and Economic Stability Act (“PROMESA”), which, among other
things,
seven-member Federally-appointed
oversight board (the “Oversight Board”) with broad powers
over
its
the
instrumentalities.
the Commonwealth
establishes
finances
and
of
a
Recent Economic Performance
Puerto Rico entered into recession in the fourth quarter of fiscal
year 2006. Puerto Rico’s gross national product (GNP) has
thereafter contracted in real terms in every year between fiscal
year 2007 and fiscal year 2015 (inclusive), with the exception
of growth of 0.5% in fiscal year 2012 (likely as a result of the
large amount of governmental stimulus and deficit spending in
that fiscal year). According to Puerto Rico Planning Board
estimates released in October 2016, gross national product is
projected to further contract by 1.8% and 2.3% during fiscal
years 2016 and 2017, respectively. The latest GDB Economic
Activity Index, which is an indicator of general economic
activity and not a direct measurement of GNP, reflected a 1.4%
reduction in the average for fiscal year 2016, compared to the
prior fiscal year. During the first six months of fiscal year 2017
(July to December 2016), the Economic Activity Index reflected
a 1.9% average reduction compared to the corresponding figure
for fiscal year 2016.
Fiscal and Liquidity Measures; Defaults in Debt Service
Payments
The Commonwealth’s challenges have resulted in a severe fiscal
and liquidity crisis, which has forced the government
to
implement extraordinary measures in order to continue to fund
its operational expenses and provide essential services to its
residents. Recent measures
government’s
structural budgetary imbalance have included (a) reforms to the
Commonwealth’s retirement systems, (b) the enactment of Act
No. 66-2014, as amended (“Act 66”), a fiscal emergency law
that, among other
freezes formula appropriations,
salaries and benefits under collective bargaining agreements
and (c) certain revenue raising measures, including an increase
in the sales and use tax (“SUT”) rate from 7% to 11.5% and the
to tackle
things,
the
implementation of a Commonwealth SUT of 4% with respect to
certain business-to-business services. The Administration of
Governor Ricardo Rosselló Nevares, sworn in January 2017,
has, among other measures, enacted legislation to extend
(x) until fiscal year 2021 certain of the provisions of Act 66 and
(y) for 10 years the temporary excise tax imposed by Act
No. 154-2010.
Recent measures to address the Commonwealth’s liquidity
crisis have included (i) requiring the two largest government
retirement systems to pre-fund the payment of retirement
benefits to participants and (ii) delaying the payment of third-
party payables, income tax refunds and amounts due to public
corporations. In addition, in April 2016 the Commonwealth
enacted the Puerto Rico Emergency Moratorium and
Rehabilitation Act (the “Moratorium Act”), pursuant to which
the Commonwealth and certain of
instrumentalities
suspended the payment of debt service on their respective debts
and retained certain revenues assigned to particular public
funding of
corporations,
operational expenses. The Moratorium Act also imposed
significant constraints on the operation of GDB,
including
stringent restrictions on the withdrawal of deposits from GDB
(including deposits of the Commonwealth’s municipalities).
redirecting the
same
the
for
its
required under
including HTA,
scheduled deposits
documentation,
Pursuant to Executive Orders issued under the Moratorium
Act, the following entities have not made payment of principal
and/or interest in full on certain of their respective bonds and
notes as of the date hereof: the Commonwealth, GDB, the
Puerto Rico Public Buildings Authority,
the Puerto Rico
Infrastructure Financing Authority (“PRIFA”) and the Puerto
Rico Highways and Transportation Authority (“HTA”) (with
respect to certain subordinated bonds). Certain other entities
the
have not made
governing
the
bond
Convention Center District Authority, PRIFA, the Employees
Retirement System, and the University of Puerto Rico. Debt
service on bonds issued by the Puerto Rico Public Finance
Corporation has also not been appropriated since fiscal year
2016. Consistent with the provisions of the Moratorium Act
and the executive orders issued thereunder,
the approved
budget for the Commonwealth for fiscal year 2017 does not
allocate funds
service on the
Commonwealth’s general obligation debt or any other debt
payable from Commonwealth appropriations. The Governor
has not taken action under the Moratorium Act with respect to
the Puerto Rico Sales Tax Financing Corporation (“COFINA’”)
and COFINA continues to make debt service payments when
due.
the payment of debt
for
On January 29, 2017, the Rosselló Administration enacted
Act No. 5-2017 (“Act 5”), also known as the “Financial
Emergency and Fiscal Responsibility Act”, to replace certain
provisions of the Moratorium Act. Among other things, Act 5
service
extended the Governor’s power
obligations until May 1, 2017 (subject to an additional three-
to suspend debt
POPULAR, INC. 2016 ANNUAL REPORT
53
month extension by executive order) by prioritizing the
service. Act 5
payment of essential
grandfathers
the
Moratorium Act and stipulates that the same shall continue in
full force and effect until amended, rescinded or superseded.
services over debt
executive
pursuant
orders
issued
to
it expects that
The Government has stated that certain of these emergency
liquidity measures are unsustainable and have significant
negative economic effects. Also,
the Commonwealth has
indicated that
these measures will not be
sufficient to address the Commonwealth’s liquidity needs and
it will need to implement additional extraordinary
that
measures to continue providing essential government services.
Absent such additional liquidity measures, the Commonwealth
has indicated it may experience significant bank cash shortfalls
as soon as May 1, 2017, triggered by the expiration of the
applicable moratorium period under Act 5 and the co-extensive
stay of litigation imposed under PROMESA (described below).
to
terms,
general
provide
PROMESA seeks
Enactment of PROMESA
In
the
Commonwealth with (i) fiscal and economic discipline through
the creation of the Oversight Board, (ii) relief from creditor
lawsuits through the enactment of a temporary stay on
litigation to enforce rights or remedies related to outstanding
liabilities of the Commonwealth and its instrumentalities and
municipalities
the
restructuring of the debt obligations of such entities. PROMESA
also includes other miscellaneous provisions, including relief
from certain wage and hour
laws and regulations and
provisions for identification and expedited permitting of critical
infrastructure projects.
two separate processes
and (iii)
for
the Oversight Board. Pursuant
On August 31, 2016, President Obama appointed the seven
voting members of
to
PROMESA, the Oversight Board shall remain in place until
market access is restored and balanced budgets, in accordance
with modified accrual accounting, are produced for at least four
consecutive years. During the first meeting of the Oversight
Board, held on September 30, 2016,
the Oversight Board
announced the designation of a number of entities as covered
entities under PROMESA, including the Commonwealth, all of
its public corporations and retirement systems, and all affiliates
and subsidiaries of the foregoing. While the Oversight Board
has the power to designate any of
the Commonwealth’s
municipalities as covered entities under PROMESA, it has not
done so as of the date hereof.
it means
The designation of an entity as a covered entity has various
implications under PROMESA. First,
the
Governor will have to submit such entity’s annual budgets and,
if the Oversight Board so requests,
its fiscal plans, to the
Oversight Board for its review and approval. Second, covered
territorial instrumentalities may not issue debt or guarantee,
exchange, modify, repurchase, redeem, or enter into similar
the prior
transactions with respect
to their debts without
that
54
POPULAR, INC. 2016 ANNUAL REPORT
approval of the Oversight Board. Third, pursuant to certain
contracting guidelines approved by the Oversight Board, prior
Oversight Board approval is required in connection with any
transaction undertaken by a covered entity that (i) is outside
the ordinary course of business or (ii) has a material financial
impact. Finally, covered entities could also potentially be
eligible to use the restructuring procedures provided by
PROMESA. The first, Title VI, is a largely out-of-court process
through which a government entity and its financial creditors
can agree on terms to restructure such entity’s debt. If a
supermajority of creditors of a certain category agree, that
agreement can bind all other creditors in such category. The
second, Title III, draws on the federal bankruptcy code and
provides a court-supervised process
for a comprehensive
restructuring led by the Oversight Board. Access to either of
these procedures is dependent on compliance with certain
requirements established in PROMESA, including the approval
of the Oversight Board.
The initial stay of
litigation imposed by PROMESA is
effective from July 1, 2016 to February 15, 2017, subject to
being extended under certain conditions. At the request of the
Rosselló Administration, the Oversight Board, in its January 28,
2017 meeting, extended the stay for an additional 75 days to
allow the new administration to submit its fiscal plan and
complete a voluntary restructuring process under Title VI. The
automatic stay imposed by PROMESA applies to covered
actions against all government instrumentalities in Puerto Rico,
even those that may not be immediately within the jurisdiction
and purview of the Oversight Board, such as municipalities.
Notwithstanding the stay on litigation provisions of PROMESA,
there are various lawsuits filed by creditors in the U.S. District
the District of Puerto Rico challenging the
Court
Commonwealth’s actions under
the Moratorium Act and
requesting that the court lift the stay under PROMESA.
for
(iii)
services,
structural
eliminates
Commonwealth’s Fiscal Plan
PROMESA requires the Commonwealth to submit a fiscal plan
to the Oversight Board that, among other things, (i) provides
for estimates of revenues and expenditures in conformance with
agreed accounting standards, (ii) ensures the funding of
essential
deficits,
(iv) provides adequate funding for public pension systems and
(v) provides for a debt burden that is sustainable. Furthermore,
the fiscal plan must respect the relative lawful priorities or
lawful liens under local law.
The Commonwealth
for
consideration of the Oversight Board on October 14, 2016 (the
“October Fiscal Plan”). The October Fiscal Plan relied in part
on the findings of the report prepared by a group of former
International Monetary Fund economists and commissioned by
the Commonwealth, commonly known as
the “Krueger
Report”, and the Fiscal and Economic Growth Plan prepared by
the Commonwealth in 2015 in response to the crisis, which
submitted
fiscal
plan
a
served as the base during fiscal year 2016 for unsuccessful debt
restructuring negotiations.
The October Fiscal Plan projected that, under current
policies, consolidated expenditures (including required pension
payments and debt service on tax-supported debt) would, in
the aggregate, exceed consolidated resources by approximately
$58.7 billion from fiscal year 2017 to fiscal year 2026. The
October Fiscal Plan further estimated that, assuming the
Commonwealth took the measures identified in the plan and
that such measures produced the projected economic and
financial results, in the absence of federal Affordable Care Act
funding for the Government’s health programs there would still
be a material cumulative financing gap during the ten-year
period before the payment of any debt service. On the other
hand, if the Commonwealth were to successfully implement the
measures identified in the October Fiscal Plan and if federal
healthcare
the
Commonwealth could have a cumulative primary surplus of
ten years
approximately $18.8 billion during the next
(excluding payment
approximately
$34.2 billion due during such period). The October Fiscal Plan
stated that without a substantial debt restructuring resulting in
a sustainable debt burden, Puerto Rico’s growth potential will
continue to be hindered by the fear of future defaults, lower
public and private investment and further outmigration.
of debt
is kept
funding
current
service
level,
the
of
at
The October Fiscal Plan did not contemplate a restructuring
of the debt of Puerto Rico’s municipalities. The Fiscal Plan
contemplated, however, as part of
its expense reduction
measures,
the gradual elimination of budgetary subsidies
provided to municipalities. Such subsidies constitute a material
portion of the operating revenues of certain municipalities. The
October Fiscal Plan is publicly available in the Oversight
Board’s website.
federal
In a meeting held on November 18, 2016, the Oversight
Board rejected the October Fiscal Plan and established a set of
guiding principles for the evaluation of the fiscal plan. Such
guiding principles include that the fiscal plan must assume no
additional
support beyond that which is already
established by law (including no extension of Affordable Care
Act funding). The Oversight Board also established January 31,
2017 as the target date for the certification of a fiscal plan and
requested the Administration to present a revised baseline
financing gap forecast
that, among other things, reflected
revised macroeconomic assumptions, pay-as-you-go funding for
pension benefits and the segregation of current employee
contributions to the pension systems. On December 20, 2016,
the Commonwealth issued revised baseline projections that,
indicated a cumulative
based on the revised assumptions,
financing gap of approximately $67.5 billion over the ten-year
projection period, an increase of approximately $8.8 billion
when compared to the October Fiscal Plan.
Furthermore, on January 18, 2017 the Oversight Board
targets and guidelines for
published a series of additional
Upon assuming power
certification of a fiscal plan and set fiscal year 2019 as the target
for a structurally balanced budget. The initiatives identified by
the Oversight Board, which included the elimination of
budgetary subsidies to municipalities and an approximately
10% reduction in pension and/or pension-related benefits,
would reduce the fiscal year 2019 primary balance before debt
service from approximately negative $3.7 billion to a surplus
before debt service of approximately $0.8 billion.
in January 2017,
the Rosselló
Administration requested an extension of
the deadline to
submit a fiscal plan. On January 28, 2017 the Oversight Board
granted the Administration until February 28, 2017 to submit a
new fiscal plan and set March 15, 2017 as the new deadline for
fiscal plan certification. On February 28, 2017, the Rosello´
administration submitted to their Oversight Board its draft
fiscal plan which, among other initiatives, calls for significant
reductions
for
municipalities and the University of Puerto Rico. The plan,
which relies on significant change in economic assumptions vis
a vis the baseline, projects a surplus before debt service of $11.6
billion in the aggregate during the ten year projection period
(against $35.1 billion in contractual debt service).
operational
expenses
subsides
and
in
Exposure of the Corporation
The credit quality of BPPR’s loan portfolio necessarily reflects,
among other things, the general economic conditions in Puerto
Rico and other adverse conditions affecting Puerto Rico
consumers and businesses. The effects of
the prolonged
recession are reflected in limited loan demand, an increase in
the rate of foreclosures and delinquencies on loans granted in
Puerto Rico. In addition, the measures taken to address the
fiscal crisis and those that may have to be taken in the near
future will likely affect many of our individual customers and
customers’ businesses, which could cause credit losses that
adversely affect us and may negatively affect consumer
confidence. Any reduction in consumer spending as a result of
these issues may also adversely impact our interest and
non-interest revenues. If global or local economic conditions
worsen or the Government of Puerto Rico is unable to manage
orderly
its
restructuring of its debt obligations while continuing to provide
essential services,
these adverse effects could continue or
worsen in ways that we are not able to predict.
consummating
including
crisis,
fiscal
an
amounted
$584 million,
At December 31, 2016, the Corporation’s direct exposure to
the Puerto Rico government and its instrumentalities and
municipalities
of which
to
approximately $529 million is outstanding ($669 million and
2015).
$578 million,
at December
respectively,
Deterioration of
the Commonwealth’s fiscal and economic
situation, including any negative ratings implications, could
the value of our Puerto Rico
further
the
government obligations, resulting in losses to us. Of
loans and
amount outstanding, $459 million consists of
adversely affect
31,
POPULAR, INC. 2016 ANNUAL REPORT
55
the
from various municipalities
$70 million are securities ($502 million and $76 million,
amount
at December 31, 2015). Of
respectively,
outstanding, $17 million represents obligations
from the
Commonwealth or its public corporations, each of which has
been designated as a covered entity under PROMESA.
Obligations
in Puerto Rico
constitute, however, the bulk of our direct exposure to Puerto
Rico government obligations ($76 million at December 31,
2015). The remaining $ 512 million are in most cases “general
obligations”, to which the applicable municipality has pledged
its good faith , credit and unlimited taxing power, or “special
obligations”, to which the applicable municipality has pledge
other revenues ($502 million at December 31, 2015). The
automatic stay on litigation imposed by PROMESA applies to
all municipal obligations to which we are a party (other than to
municipal obligations issued after the enactment of PROMESA).
Furthermore, although the PROMESA Oversight Board has not
designated any of the Commonwealth’s 78 municipalities as
covered entities under PROMESA, it may decide to do so in the
future. For a more detailed description of the Corporation’s
direct exposure to the Puerto Rico government and its
instrumentalities and municipalities, see note 28.
During the second quarter of 2016,
the Corporation
recognized an other-than-temporary impairment charge of
$209 thousand on an investment security available-for-sale
classified as obligations from the Puerto Rico government and
its political subdivisions. At June 30, 2016 this security was
rated Caa2 and CC by Moody’s and S&P, respectively. Puerto
Rico’s fiscal and economic situation, together with the events
described above,
the
unrealized losses on this security were other-than-temporary.
The Corporation determined that the entire balance of the
unrealized loss carried by this security was attributed to
estimated credit losses. Accordingly, the other-than-temporary
impairment was recognized in its entirety in the accompanying
consolidated statement of operations and no amount remained
recognized
other
accompanying
comprehensive income related to this specific security.
to conclude that
led management
statement
the
in
of
in collateral
In addition, at December 31, 2016, the Corporation had
$406 million in indirect exposure to loans or securities that are
payable by non-governmental entities, but which carry the
guarantee of a Puerto Rico governmental entity to cover any
shortfall
in the event of borrower default
($394 million at December 31, 2015). These included
$326 million in residential mortgage loans that are guaranteed
by the Puerto Rico Housing Finance Authority (“HFA”), an
entity that has been designated as a covered entity under
PROMESA (December 31, 2015 - $316 million). These
mortgage loans are secured by the underlying properties and
the “HFA” guarantee serves 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 second mortgages residential loans, and
56
POPULAR, INC. 2016 ANNUAL REPORT
approximately $31 million of commercial real estate notes
issued by government entities, but payable from rent paid by
third parties ($50 million and $28 million, respectively, at
December 31, 2015).
represented exposure
As further detailed in Notes 8 and 9 to the consolidated
financial statements, a substantial portion of the Corporation’s
to the U.S.
securities
investment
Government
in the form of U.S. Government sponsored
entities, as well as agency mortgage-backed and U.S. Treasury
securities. In addition, $849 million of residential mortgages
loans were insured or
and $99 million in commercial
guaranteed by the U.S. Government or
its agencies at
December 31, 2016. 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 28.
On June 30, 2015, the shared-loss arrangement under the
commercial loss share agreement with the FDIC related to the
loans acquired from Westernbank as part of the FDIC assisted
transaction in 2010 expired. Loans and OREO’s that remain
covered under
the single-family loss share
agreement continue to be presented as covered assets in the
accompanying tables and credit metrics as of December 31,
2016.
the terms of
Because of the application of ASC Subtopic 310-30 to the
Westernbank acquired loans and the loss protection provided
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. The
Corporation believes the inclusion of these loans in certain
asset quality ratios in the numerator or denominator (or both)
would result in a 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 the single-family loan portfolios
which includes 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
impacted by acquisition
other portfolios
accounting. The Corporation believes that the presentation of
asset quality measures, excluding covered loans and related
amounts from both the numerator and denominator, provides a
better perspective into underlying trends related to the quality
of its loan portfolio.
that were not
The Corporation continued to experience stable credit
trends despite challenging economic conditions in Puerto Rico.
The shift in the composition and the risk profile of the credit
portfolios over the last few years has better positioned the
Corporation to operate in the Island’s environment. The
Corporation continues to closely monitor changes in credit
quality trends and is focused on taking measures to minimize
risks. The U.S. operation continued to reflect positive results
with strong growth and favorable credit quality metrics.
Non-performing assets, excluding covered loans and OREO,
decreased by $64 million when compared with December 31,
2015, mainly attributed to a reduction in the non-performing
loans held-for-sale of $45 million, mostly related to the sale of
the Puerto Rico Electric Power Authority (“PREPA”) loan
transferred to held-for-sale in the second quarter of 2015.
Non-performing
by
$44 million from December 31, 2015, mostly driven by lower
mortgage
and commercial NPLs by $22 million and
$18 million, respectively. These reductions were in part offset
held-in-portfolio
decreased
loans
by higher OREOs by $25 million from December 31, 2015.
Table 28 presents the information of non-performing assets.
At December 31, 2016, non-performing loans secured by
real estate held-in-portfolio, excluding covered loans, amounted
to $467 million in the Puerto Rico operations and $21 million
in the U.S. operations. These figures compare to $504 million
in the Puerto Rico operations and $22 million in the U.S.
operations
In addition to the
non-performing loans included in Table 28 at December 31,
2016,
there were $169 million of non-covered performing
loans, which in management’s
loans, mostly commercial
opinion, are currently subject to potential future classification
as non-performing and are considered impaired, compared with
$160 million at December 31, 2015.
at December 31, 2015.
Table 28 - Non-Performing Assets
(Dollars in thousands)
BPPR
BPNA
Popular,
Inc.
BPPR
BPNA
Popular,
Inc.
BPPR
BPNA Popular, Inc.
December 31, 2016
December 31, 2015
December 31, 2014
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”),
$159,655 $ 3,693 $163,348 $177,902 $ 3,914 $181,816 $257,910 $ 2,315
–
1,545
–
9,284
5,956
13,812
–
3,102
295,629
40,930
3,550
3,649
3,009
351,471
58,304
–
–
3,062
318,194
51,597
–
3,337
3,062
329,907
58,261
3,550
–
3,009
337,933
52,440
–
3,649
–
13,538
5,864
–
3,337
–
11,713
6,664
$260,225
13,812
1,545
3,102
304,913
46,886
532,508
–
25,407
–
557,915
–
574,834
44,696
26,965
473
601,799
45,169
611,383
225
19,100
18,674
630,483
18,899
excluding covered OREO
177,412
3,033
180,445
151,439
3,792
155,231
119,144
16,356
135,500
Total non-performing assets, excluding
covered assets
Covered loans and OREO [3]
$709,920 $28,440 $738,360 $770,969 $31,230 $802,199 $730,752 $54,130
–
148,099
40,571
40,571
36,044
36,044
–
–
$784,882
148,099
Total non-performing assets
$745,964 $28,440 $774,404 $811,540 $31,230 $842,770 $878,851 $54,130
$932,981
Accruing loans past-due 90 days or
more [4] [5]
$426,652 $
– $426,652 $446,725 $
– $446,725 $447,990 $
–
$447,990
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
2.45%
2.69%
3.25%
2.41%
$ 29,385
2.63%
$ 27,644
2.95%
$ 23,413
[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] There were no non-performing loans held-for-sale as of December 31, 2016 (December 31, 2015 - $45 million in commercial loans and $95 thousand in
construction loans; December 31, 2014 - $14.0 million in mortgage loans, $309 thousand in commercial loans and $4.5 million in consumer loans).
[3] The amount consists of $4 million in non-performing loans accounted for under ASC Subtopic 310-20 and $32 million in covered OREO at December 31, 2016
(December 31, 2015 - $4 million and $37 million, respectively; December 31, 2014 - $18 million and $130 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.
POPULAR, INC. 2016 ANNUAL REPORT
57
[5]
[4] The carrying value of loans accounted for under ASC Subtopic 310-30 that are contractually 90 days or more past due was $282 million at December 31, 2016
(December 31, 2015 - $349 million; December 31, 2014 - $516 million). This amount is excluded from the above table as the 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 $181 million, $164 million and $125 million, respectively, of
residential mortgage loans insured by FHA or guaranteed by the VA that are no longer accruing interest as of December 31, 2016, 2015 and 2014. Furthermore,
the Corporation has approximately $68 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, 2015- $70 million;
December 31, 2014- $66 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.
Table 28 (continued) - Non-Performing Assets
(Dollars in thousands)
Non-accrual loans:
Commercial
Construction
Legacy [1]
Leasing
Mortgage
Consumer
December 31, 2013
December 31, 2012
BPPR
BPNA
$186,097
18,108
–
3,495
206,389
33,166
$ 92,956
5,663
15,050
–
26,292
10,732
Popular,
Inc.
$279,053
23,771
15,050
3,495
232,681
43,898
BPPR
BPNA
Popular,
Inc.
$ 522,733
37,390
–
4,865
596,106
30,888
$142,556
5,960
40,741
–
34,024
9,870
$ 665,289
43,350
40,741
4,865
630,130
40,758
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
447,255
489
105,206
150,693
603
30,295
597,948
1,092
135,501
1,191,982
94,186
215,872
233,151
2,134
50,972
1,425,133
96,320
266,844
Total non-performing assets, excluding covered assets
Covered loans and OREO [3]
$552,950
197,388
$181,591
–
$734,541
197,388
$1,502,040
213,483
$286,257
–
$1,788,297
213,483
Total non-performing assets
$750,338
$181,591
$931,929
$1,715,523
$286,257
$2,001,780
Accruing loans past-due 90 days or more [4] [5]
$418,028
$
–
$418,028
$ 388,712
$
–
$ 388,712
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
2.77%
2.55%
$ 29,766
6.79%
6.06%
$
86,442
[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 $603 thousand in commercial loans and $489 thousand in mortgage loans at December 31, 2013 (December 31,
2012 - $78 million in construction loans, $16 million in commercial loans, $2 million in legacy loans and $53 thousand in mortgage loans).
[3] The amount consists of $29 million in non-performing loans accounted for under ASC Subtopic 310-20 and $168 million in covered OREO at December 31, 2013
(December 31, 2012 - $74 million and $139 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.
[4] The carrying value of loans accounted for under ASC Subtopic 310-30 that are contractually 90 days or more past due was $751 million at December 31, 2013
(December 31, 2012 - $1 billion). This amount is excluded from the above table as the 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 $115 million and $86 million, respectively, of residential mortgage
loans insured by FHA or guaranteed by the VA that are no longer accruing interest as of December 31, 2013 and December 31, 2012.
[5]
[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.
58
POPULAR, INC. 2016 ANNUAL REPORT
financial
statements pursuant
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
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
the sellers / servicers, and,
in some instances, have partial
guarantees under recourse agreements.
(“CRE”),
The Corporation’s commercial loan portfolio secured by real
amounted to
excluding covered loans,
estate
$7.2 billion at December 31, 2016, of which $2.0 billion was
secured with owner occupied properties, compared with
$6.6 billion and $2.1 billion, respectively, at December 31,
2015. CRE non-performing loans, excluding covered loans,
amounted to $130 million at December 31, 2016, compared
with $142 million at December 31, 2015. The CRE
non-performing loans ratios for the BPPR and BPNA segments
were 2.83% and 0.07%, respectively, at December 31, 2016,
compared with 3.00% and 0.03%, respectively, at December 31,
2015.
Loan Delinquencies
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, 2016 and
2015, are presented below.
Table 29 - Loan Delinquencies
(Dollars in millions)
Loans delinquent 30 days or more
2016
2015
$2,013
$2,360
Total delinquencies as a percentage of total loans:
Commercial
Construction
Legacy
Leasing
Mortgage
Consumer
Covered loans
Loans held-for-sale
Total
4.23% 5.63%
0.21
9.97
1.57
18.82
4.47
19.26
0.52
2.09
8.49
1.99
20.00
4.46
20.76
33.64
8.59% 10.20%
31,
the
For
year
ended December
total
2016,
non-performing loan inflows, excluding consumer
loans,
decreased by $138 million, or 24%, when compared to the
inflows for the same year in 2015. Inflows of non-performing
the BPPR segment decreased by
loans held-in-portfolio at
$125 million, or 24%, compared to the inflows for the year
ended 2015, mostly related to lower commercial and mortgage
inflows by $76 million and $50 million, respectively. Inflows of
non-performing loans held-in-portfolio at the BPNA segment
decreased by $13 million, or 22%, from the same period in
2015, mostly driven by lower construction and mortgage
inflows of $9 million and $6 million, respectively.
Table 30 - 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
Reclassification from construction loans to commercial loans
Less:
Non-performing loans transferred to OREO
Non-performing loans charged-off
Loans returned to accrual status / loan collections
Reclassification from construction loans to commercial loans
Ending balance NPLs
For the year ended December 31,
2016
BPNA
Popular, Inc.
BPPR
$ 519,385
$ 21,101
$ 540,486
401,143
–
2,436
47,433
322
–
(50,940)
(89,536)
(302,203)
(2,436)
(1,188)
(3,260)
(45,665)
–
448,576
322
2,436
(52,128)
(92,796)
(347,868)
(2,436)
$ 477,849
$ 18,743
$ 496,592
POPULAR, INC. 2016 ANNUAL REPORT
59
Table 31 - 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
Reclassification from covered 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
Other transfers out of non-performing
Ending balance NPLs
For the year ended December 31,
2015
BPNA
Popular, Inc.
BPPR
$ 567,351
$ 13,144
$ 580,495
526,084
–
8,075
60,488
534
–
(36,794)
(159,249)
(319,741)
(44,996)
(21,345)
–
(766)
(3,991)
(42,103)
1,565
–
(7,770)
586,572
534
8,075
(37,560)
(163,240)
(361,844)
(43,431)
(21,345)
(7,770)
$ 519,385
$ 21,101
$ 540,486
Table 32 - 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
Reclassification from construction loans to commercial loans
Less:
Non-performing loans transferred to OREO
Non-performing loans charged-off
Loans returned to accrual status / loan collections
Ending balance - NPLs
For the year ended December 31,
2016
BPNA
Popular, Inc.
BPPR
$177,902
$ 3,914
$181,816
77,615
–
2,436
20,542
178
–
(6,700)
(41,011)
(50,587)
–
(811)
(20,130)
98,157
178
2,436
(6,700)
(41,822)
(70,717)
$159,655
$ 3,693
$163,348
Table 33 - 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
Reclassification from covered 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
Other transfers out of non-performing
Ending balance - NPLs
60
POPULAR, INC. 2016 ANNUAL REPORT
For the year ended December 31,
2015
BPPR
BPNA Popular, Inc.
$ 257,910
$ 2,315
$ 260,225
153,682
–
7,395
14,880
389
–
(6,342)
(118,601)
(49,801)
(44,996)
(21,345)
–
–
(1,286)
(4,141)
(473)
–
(7,770)
168,562
389
7,395
(6,342)
(119,887)
(53,942)
(45,469)
(21,345)
(7,770)
$ 177,902
$ 3,914
$ 181,816
Table 34 - 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 transferred to OREO
Non-performing loans charged-off
Loans returned to accrual status / loan collections
Reclassification from construction loans to commercial loans
Ending balance - NPLs
For the year ended December 31,
2016
BPPR
BPNA Popular, Inc.
$ 3,550
$
–
$ 3,550
1,543
671
2,214
(304)
(1,103)
(1,250)
(2,436)
–
–
(671)
–
(304)
(1,103)
(1,921)
(2,436)
$
–
$
–
$
–
Table 35 - Activity in Non-Performing Construction Loans Held-in-Portfolio (Excluding Covered Loans)
(In thousands)
Beginning Balance - NPLs
Plus:
New non-performing loans
Reclassification from covered loans
Less:
Non-performing loans transferred to OREO
Non-performing loans charged-off
Loans returned to accrual status / loan collections
Ending balance - NPLs
For the year ended December 31,
2015
BPPR
BPNA Popular, Inc.
$13,812
$
–
$ 13,812
486
112
9,522
–
(2,194)
(138)
(8,528)
–
–
(9,522)
10,008
112
(2,194)
(138)
(18,050)
$ 3,550
$
–
$ 3,550
Table 36 - 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
Ending balance - NPLs
For the year ended December 31,
2016
BPNA
Popular, Inc.
BPPR
$ 337,933
$ 13,538
$ 351,471
321,985
25,002
346,987
(43,936)
(47,422)
(250,366)
(1,144)
(2,160)
(23,523)
(45,080)
(49,582)
(273,889)
$ 318,194
$ 11,713
$ 329,907
POPULAR, INC. 2016 ANNUAL REPORT
61
Table 37 - Activity in Non-Performing Mortgage Loans Held-in-Portfolio (Excluding Covered Loans)
For the year ended December 31,
2015
BPNA
Popular, Inc.
BPPR
$ 295,629
$ 9,284
$ 304,913
371,916
568
31,113
–
403,029
568
(28,258)
(40,510)
(261,412)
–
(766)
(1,259)
(26,872)
2,038
(29,024)
(41,769)
(288,284)
2,038
$ 337,933
$ 13,538
$ 351,471
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. Refer to the Critical Accounting Policies / Estimates
section of this MD&A for a description of the Corporation’s
allowance for loans losses methodology.
Refer to Table 38 for a summary of the activity in the
allowance for loan losses and selected loan losses statistics for
the past 5 years.
(In thousands)
Beginning Balance - NPLs
Plus:
New non-performing loans
Reclassification from covered 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
Ending balance - NPLs
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
and risk
loan type
composition of
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
62
POPULAR, INC. 2016 ANNUAL REPORT
Table 38 - Allowance for Loan Losses and Selected Loan Losses Statistics
(Dollars in thousands)
Balance at the beginning of year
Provision for loan losses (reversal of
provision) - Continuing operations
Provision for loan losses (reversal of
Non-covered
loans
2016
Covered
loans
Total
Non-covered
loans
2015
Covered
loans
Total
Non-covered
loans [4]
2014
Covered
loans
Total [4]
$
502,935 $34,176 $
537,111 $
519,719 $ 82,073 $
601,792 $
538,463 $102,092 $
640,555
171,126
(1,110)
170,016
217,458
24,020
241,478
223,999
46,135
270,134
provision) - Discontinued operations
–
–
–
–
–
–
(6,764)
–
(6,764)
674,061
33,066
707,127
737,177
106,093
843,270
755,698
148,227
903,925
Charged-offs:
BPPR
Commercial
Construction
Leasing
Mortgage
Consumer
Total BPPR charged-offs
BPNA
Commercial
Legacy [1]
Mortgage
Consumer
Discontinued operations
Total BPNA charged-offs
Popular, Inc.
Commercial
Construction
Leasing
Legacy [1]
Mortgage
Consumer
Discontinued operations
Total charged-offs
Recoveries:
BPPR
Commercial
Construction
Leasing
Mortgage
Consumer
Total BPPR recoveries
BPNA
Commercial
Construction
Legacy [1]
Mortgage
Consumer
Discontinued operations
Total BPNA recoveries
Popular, Inc.
Commercial
Construction
Leasing
Legacy [1]
Mortgage
Consumer
Discontinued operations
Total recoveries
62,486
3,103
6,151
68,075
106,304
246,119
1,115
535
2,506
13,430
–
17,586
63,601
3,103
6,151
535
70,581
119,734
–
263,705
41,731
5,124
2,263
3,759
29,998
82,875
4,428
–
2,448
573
4,176
–
11,625
46,159
5,124
2,263
2,448
4,332
34,174
–
94,500
–
–
–
3,524
19
3,543
–
–
–
–
–
–
–
–
–
–
3,524
19
–
3,543
–
–
–
808
19
827
–
–
–
–
–
–
–
–
–
–
–
808
19
–
827
62,486
3,103
6,151
71,599
106,323
249,662
1,115
535
2,506
13,430
–
17,586
63,601
3,103
6,151
535
74,105
119,753
–
267,248
41,731
5,124
2,263
4,567
30,017
83,702
4,428
–
2,448
573
4,176
–
105,716
13,628
5,561
53,296
110,384
288,585
1,452
2,019
1,670
9,507
–
14,648
107,168
13,628
5,561
2,019
54,966
119,891
–
303,233
31,826
14,514
2,258
2,305
26,508
77,411
5,294
–
4,779
391
3,858
–
11,625
14,322
46,159
5,124
2,263
2,448
5,140
34,193
–
95,327
37,120
14,514
2,258
4,779
2,696
30,366
–
91,733
37,936
25,086
–
6,158
853
70,033
–
–
–
–
–
–
37,936
25,086
–
–
6,158
853
–
70,033
6,504
4,700
–
930
842
12,976
–
–
–
–
–
–
–
6,504
4,700
–
–
930
842
–
143,652
38,714
5,561
59,454
111,237
358,618
1,452
2,019
1,670
9,507
–
14,648
145,104
38,714
5,561
2,019
61,124
120,744
–
373,266
38,330
19,214
2,258
3,235
27,350
90,387
5,294
–
4,779
391
3,858
–
14,322
43,624
19,214
2,258
4,779
3,626
31,208
–
70,402
1,722
6,028
45,389
122,400
34,741
36,223
–
9,156
(2,589)
245,941
77,531
16,628
8,071
3,517
15,948
4,452
48,616
87,030
1,722
6,028
8,071
48,906
138,348
4,452
–
–
–
–
–
–
34,741
36,223
–
–
9,156
(2,589)
–
294,557
77,531
31,020
5,231
2,067
1,389
25,745
65,452
15,523
237
17,141
2,321
3,783
9,997
49,002
46,543
5,468
2,067
17,141
3,710
29,528
9,997
1,835
8,537
–
714
291
11,377
–
–
–
–
–
–
–
1,835
8,537
–
–
714
291
–
105,143
37,945
6,028
54,545
119,811
323,472
16,628
8,071
3,517
15,948
4,452
48,616
121,771
37,945
6,028
8,071
58,062
135,759
4,452
372,088
32,855
13,768
2,067
2,103
26,036
76,829
15,523
237
17,141
2,321
3,783
9,997
49,002
48,378
14,005
2,067
17,141
4,424
29,819
9,997
12,976
104,709
114,454
11,377
125,831
POPULAR, INC. 2016 ANNUAL REPORT
63
(Dollars in thousands)
Net loans charged-offs (recoveries):
BPPR
Commercial
Construction
Leasing
Mortgage
Consumer
Total BPPR net loans charged-offs
BPNA
Commercial
Construction
Legacy [1]
Mortgage
Consumer
Discontinued operations
Total BPNA net loans charged-offs
(recoveries)
Popular, Inc.
Commercial
Construction
Leasing
Legacy [1]
Mortgage
Consumer
Discontinued operations
Total net loans charged-offs
Net write-downs [2]
Balance transferred from covered to
non-covered loans
Net write-downs related to loans
transferred to discontinued operations
Balance at end of year
Specific ALLL
General ALLL
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 [3]
Average loans held-in-portfolio
Allowance to non-performing loans
held-in-portfolio
Non-covered
loans
2016
Covered
loans
Total
Non-covered
loans
2015
Covered
loans
Total
Non-covered
loans [4]
2014
Covered
loans
Total [4]
105,322
19,500
3,303
56,219
83,887
268,231
(3,842)
–
(2,760)
1,279
5,649
–
20,755
(2,021)
3,888
64,316
76,306
163,244
–
–
–
2,716
–
2,716
20,755
(2,021)
3,888
67,032
76,306
73,890
(886)
3,303
50,991
83,876
165,960
211,174
31,432
20,386
–
5,228
11
57,057
39,382
(3,509)
3,961
44,000
96,655
32,906
27,686
–
8,442
(2,880)
72,288
24,177
3,961
52,442
93,775
180,489
66,154
246,643
(3,313)
–
(1,913)
1,933
9,254
–
5,961
17,442
(2,021)
3,888
(1,913)
66,249
85,560
–
169,205
5,445
–
–
–
–
–
–
–
–
–
–
–
–
–
2,716
–
–
2,716
–
–
–
(3,313)
–
(1,913)
1,933
9,254
–
(3,842)
–
(2,760)
1,279
5,649
–
5,961
326
–
–
–
–
–
–
–
1,105
(237)
(9,070)
1,196
12,165
(5,545)
–
–
–
–
–
–
–
326
(386)
17,442
(2,021)
3,888
(1,913)
68,965
85,560
–
70,048
(886)
3,303
(2,760)
52,270
89,525
–
171,921
211,500
31,432
20,386
–
–
5,228
11
–
57,057
101,480
19,500
3,303
(2,760)
57,498
89,536
–
268,557
40,487
(3,746)
3,961
(9,070)
45,196
108,820
(5,545)
32,906
27,686
–
–
8,442
(2,880)
–
180,103
66,154
5,445
(35,779)
(1,823)
(37,602)
(35,674)
–
–
13,037
(13,037)
–
–
–
–
–
(20,202)
–
–
–
1,105
(237)
(9,070)
1,196
12,165
(5,545)
(386)
73,393
23,940
3,961
(9,070)
53,638
105,940
(5,545)
246,257
(35,674)
–
(20,202)
$
$
$
510,301 $30,350 $
540,651 $
502,935 $ 34,176 $
537,111 $
519,719 $ 82,073 $
601,792
111,377 $
– $
111,377 $
118,072 $
– $
118,072 $
140,141 $
5 $
140,146
398,924 $30,350 $
429,274 $
384,863 $ 34,176 $
419,039 $
379,578 $ 82,068 $
461,646
$22,773,747
22,373,143
$23,346,625 $22,346,115
21,497,403
22,980,546
$22,992,230 $19,404,451
19,990,182
22,925,237
$21,947,113
22,760,961
2.24%
35.84
0.76
3.02x
1.01
0.76%
2.32%
35.67
2.25%
30.25
2.34%
28.05
2.68%
38.86
0.75
0.98
1.17
0.90
3.14x
2.38x
2.00x
2.89x
0.99
0.74%
1.03
1.01%
0.90
1.05%
1.17
1.05%
2.74%
33.82
1.08
2.44x
1.04
1.13%
91.47
96.23
83.57
88.68
82.43
92.82
[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] Net write-downs are related to loans sold or transferred to held-for-sale.
[3] Excluding the provision for loans losses and net write-down related to loans sold or reclassified to held-for-sale.
[4]
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.
64
POPULAR, INC. 2016 ANNUAL REPORT
Table 38 (continued) - 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]
$
621,701
536,710
2013
Covered
loans
$108,906
69,396
Total [4]
Non-covered
loans [4]
$
730,607
606,106
$
690,363
322,240
2012
Covered
loans
$124,945
74,839
Total [4]
$
815,308
397,079
(3,543)
–
(3,543)
11,862
–
11,862
1,154,868
178,302
1,333,170
1,024,465
199,784
1,224,249
Charged-offs:
BPPR
Commercial
Construction
Leasing
Mortgage
Consumer
Total BPPR charged-offs
BPNA
Commercial
Construction
Legacy [1]
Mortgage
Consumer
Discontinued operations
Total BPNA charged-offs
Popular, Inc.
Commercial
Construction
Leasing
Legacy [1]
Mortgage
Consumer
Discontinued operations
Total charged-offs
Recoveries:
BPPR
Commercial
Construction
Leasing
Mortgage
Consumer
Total BPPR recoveries
BPNA
Commercial
Construction
Legacy [1]
Mortgage
Consumer
Discontinued operations
Total BPNA recoveries
Popular, Inc.
Recoveries:
Commercial
Construction
112,266
6,757
6,034
49,418
113,616
288,091
26,117
–
17,423
10,155
21,622
38,957
114,274
138,383
6,757
6,034
17,423
59,573
135,238
38,957
402,365
26,665
15,399
2,528
1,682
38,056
84,330
16,933
–
21,320
2,352
3,618
20,052
64,275
28,423
39,729
–
10,679
3,952
82,783
–
–
–
–
–
–
–
28,423
39,729
–
–
10,679
3,952
–
82,783
816
5,621
–
65
71
6,573
–
–
–
–
–
–
–
140,689
46,486
6,034
60,097
117,568
370,874
26,117
–
17,423
10,155
21,622
38,957
185,653
3,910
4,680
59,286
120,658
374,187
24,282
26
31,113
16,708
36,036
57,140
114,274
165,305
166,806
46,486
6,034
17,423
70,252
139,190
38,957
485,148
27,481
21,020
2,528
1,747
38,127
90,903
16,933
–
21,320
2,352
3,618
20,052
64,275
209,935
3,936
4,680
31,113
75,994
156,694
57,140
539,492
41,013
6,193
3,737
2,509
30,563
84,015
10,272
1,218
16,260
1,545
4,459
18,993
52,747
51,285
7,411
46,290
30,556
–
5,909
8,225
90,980
–
–
–
–
–
–
–
46,290
30,556
–
–
5,909
8,225
–
90,980
31
61
–
–
10
102
–
–
–
–
–
–
–
31
61
231,943
34,466
4,680
65,195
128,883
465,167
24,282
26
31,113
16,708
36,036
57,140
165,305
256,225
34,492
4,680
31,113
81,903
164,919
57,140
630,472
41,044
6,254
3,737
2,509
30,573
84,117
10,272
1,218
16,260
1,545
4,459
18,993
52,747
51,316
7,472
POPULAR, INC. 2016 ANNUAL REPORT
65
43,598
15,399
816
5,621
44,414
21,020
(Dollars in thousands)
Leasing
Legacy [1]
Mortgage
Consumer
Discontinued operations
Total recoveries
Net loans charged-offs (recoveries):
BPPR
Commercial
Construction
Leasing
Mortgage
Consumer
Total BPPR net loans charged-offs (recoveries)
BPNA
Commercial
Construction
Legacy [1]
Mortgage
Consumer
Discontinued operations
Total BPNA net loans charged-offs (recoveries)
Popular, Inc.
Commercial
Construction
Leasing
Legacy [1]
Mortgage
Consumer
Discontinued operations
Total net loans charged-offs (recovered)
Net write-downs [2]
Balance at end of year
Specific ALLL
General ALLL
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 [3]
Average loans held-in-portfolio
Allowance to non-performing loans
held-in-portfolio
Non-covered
loans [4]
2013
Covered
loans
Total [4]
Non-covered
loans [4]
2,528
21,320
4,034
41,674
20,052
148,605
85,601
(8,642)
3,506
47,736
75,560
203,761
9,184
–
(3,897)
7,803
18,004
18,905
49,999
94,785
(8,642)
3,506
(3,897)
55,539
93,564
18,905
253,760
(362,645)
538,463
–
–
65
71
–
6,573
27,607
34,108
–
10,614
3,881
76,210
–
–
–
–
–
–
–
27,607
34,108
–
–
10,614
3,881
–
76,210
–
$102,092
103,506
$
293
434,957
$101,799
$
$
$
2,528
21,320
4,099
41,745
20,052
155,178
113,208
25,466
3,506
58,350
79,441
279,971
9,184
–
(3,897)
7,803
18,004
18,905
49,999
122,392
25,466
3,506
(3,897)
66,153
97,445
18,905
329,970
(362,645)
640,555
103,799
536,756
$
$
$
$
$
$
3,737
16,260
4,054
35,022
18,993
136,762
144,640
(2,283)
943
56,777
90,095
290,172
14,010
(1,192)
14,853
15,163
31,577
38,147
112,558
158,650
(3,475)
943
14,853
71,940
121,672
38,147
402,730
(34)
621,701
2012
Covered
loans
–
–
–
10
–
102
46,259
30,495
–
5,909
8,215
90,878
–
–
–
–
–
–
–
46,259
30,495
–
–
5,909
8,215
–
90,878
–
$108,906
111,087
$ 8,505
510,614
$100,401
Total [4]
3,737
16,260
4,054
35,032
18,993
136,864
190,899
28,212
943
62,686
98,310
381,050
14,010
(1,192)
14,853
15,163
31,577
38,147
112,558
204,909
27,020
943
14,853
77,849
129,887
38,147
493,608
(34)
730,607
119,592
611,015
$
$
$
$21,611,866
21,354,143
$24,596,293
24,581,862
$20,983,192
20,477,264
$24,739,164
24,527,602
2.49%
36.93
1.19
2.12x
0.85
2.50%
90.05
2.60%
31.99
1.34
1.94x
0.86
2.45%
2.96%
23.35
1.97
1.54x
0.83
1.63%
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 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] Net write-downs are related to loans sold or transferred to held-for-sale.
[3] Excluding the provision for loans losses and net write-down related to loans sold or reclassified to held-for-sale.
[4]
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.
66
POPULAR, INC. 2016 ANNUAL REPORT
The following table presents net charge-offs to average loans held-in-portfolio (“HIP”) ratios by loan category for the years
ended December 31, 2016, 2015 and 2014:
Table 39 - Net Charge-Offs (Recoveries) to Average Loans HIP (Non-covered loans)
Commercial
Construction
Leasing
Legacy
Mortgage
Consumer
Total
December 31, 2016
December 31, 2015
December 31, 2014
BPPR BPNA Popular Inc.
BPPR BPNA Popular Inc.
BPPR BPNA Popular Inc.
0.28% (0.11)%
(1.98)
0.59
–
1.09
2.31
–
–
(3.67)
0.23
1.74
0.95% 0.12%
0.17%
(0.28)
0.59
(3.67)
0.98
2.23
0.76%
1.05
(0.76)
0.56
–
0.85
2.49
(0.16)%
–
–
(3.79)
0.13
1.21
1.24% 0.01%
0.74%
(0.14)
0.56
(3.79)
0.75
2.34
0.98%
0.62% (0.20)%
(2.42)
0.73
–
0.82
2.86
(0.99)
–
(7.01)
0.10
2.50
0.40%
(2.22)
0.73
(7.01)
0.69
2.81
1.14% (0.01)%
0.90%
Net charge-offs, excluding covered loans, for the year ended
December 31, 2016, decreased by $42.3 million, when
compared to the year ended December 31, 2015, and by $10.9
million, when compared to the year ended December 31, 2014.
Decrease from 2015 was mainly driven by the BPPR segment
with lower commercial net charge-offs of $53.1 million.
Table 40 - Composition of ALLL
December 31, 2016
(Dollars in thousands)
Commercial Construction Legacy [2] Leasing Mortgage
Consumer
Total [3]
Specific ALLL
Impaired loans [1]
Specific ALLL to impaired loans [1]
General ALLL
Loans held-in-portfolio, excluding impaired
$
$
$
42,375
338,422
12.52%
$
$
$
$
–
–
–%
–
–
–%
535
$
$ 1,817
44,610
$
$ 506,364
23,857
$
$ 109,454
29.44%
8.81%
21.80%
160,279
$ 9,525
$ 1,343
$ 7,127
$ 103,324
$ 117,326
$
$
$
111,377
956,057
11.65%
398,924
loans [1]
$10,460,085
$776,300
$45,293
$701,076
$6,189,997
$3,644,939
$21,817,690
General ALLL to loans held-in-portfolio,
excluding impaired loans [1]
Total ALLL
Total non-covered loans
held-in-portfolio [1]
1.53%
1.23%
2.97%
1.02%
1.67%
3.22%
1.83%
$
202,654
$ 9,525
$ 1,343
$ 7,662
$ 147,934
$ 141,183
$
510,301
$10,798,507
$776,300
$45,293
$702,893
$6,696,361
$3,754,393
$22,773,747
ALLL to loans held-in-portfolio [1]
1.88%
1.23%
2.97%
1.09%
2.21%
3.76%
2.24%
[1] Excludes covered loans acquired on the Westernbank FDIC-assisted transaction.
[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.
[3] Excludes covered loans acquired on the Westernbank FDIC-assisted transaction. At December 31, 2016, the general allowance on the covered loans amounted to
$30.4 million.
POPULAR, INC. 2016 ANNUAL REPORT
67
Table 41 - Composition of ALLL
December 31, 2015
(Dollars in thousands)
Commercial Construction Legacy [2] Leasing Mortgage
Consumer
Total [3]
Specific ALLL
Impaired loans [1]
Specific ALLL to impaired loans [1]
General ALLL
Loans held-in-portfolio, excluding impaired
$
$
$
49,243
337,133
$
264
$ 2,481
14.61%
10.64%
$
$
–
–
–%
$
573
$ 2,404
$
44,029
$ 471,932
$
23,963
$ 111,836
23.84%
9.33%
21.43%
147,590
$ 8,605
$ 2,687
$ 10,420
$
89,283
$ 126,278
$
$
$
118,072
925,786
12.75%
384,863
loans [1]
$ 9,762,030
$678,625
$64,436
$625,246
$6,564,149
$3,725,843
$21,420,329
General ALLL to loans held-in-portfolio,
excluding impaired loans [1]
Total ALLL
Total non-covered loans held-in-portfolio
1.51%
1.27%
4.17%
1.67%
1.36%
3.39%
1.80%
$
196,833
$ 8,869
$ 2,687
$ 10,993
$ 133,312
$ 150,241
$
502,935
[1]
$10,099,163
$681,106
$64,436
$627,650
$7,036,081
$3,837,679
$22,346,115
ALLL to loans held-in-portfolio [1]
1.95%
1.30%
4.17%
1.75%
1.89%
3.91%
2.25%
[1] Excludes covered loans acquired on the Westernbank FDIC-assisted transaction.
[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.
[3] Excludes covered loans acquired on the Westernbank FDIC-assisted transaction. At December 31, 2015, the general allowance on the covered loans amounted to
$34.2 million.
Table 42 - Composition of ALLL
December 31, 2014
(Dollars in thousands)
Commercial Construction Legacy [2] Leasing Mortgage
Consumer
Total [3]
Specific ALLL
Impaired loans [1]
Specific ALLL to impaired loans [1]
$
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%
23.92%
General ALLL
Loans held-in-portfolio, excluding impaired
$ 146,501
$ 6,307
$ 2,944
$ 6,361
$
77,211
$ 140,254
$
$
$
140,141
927,008
15.12%
379,578
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
1.88%
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
[1]
$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] 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.
[3] 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.
68
POPULAR, INC. 2016 ANNUAL REPORT
Table 43 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.
Table 43 - Allocation of the Allowance for Loan Losses
2016
2015
At December 31,
2014
2013
2012
% 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
47.4% $196.8
8.9
3.4
2.7
0.2
11.0
3.1
133.3
29.4
150.2
16.5
45.2% $211.2
6.7
3.0
3.0
0.3
7.1
2.8
123.3
31.5
168.4
17.2
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%
1.2
1.8
2.6
29.0
18.4
100.0% $502.9
100.0% $519.7
100.0% $538.4
100.0% $621.7
100.0%
(Dollars in millions)
Commercial
Construction
Legacy
Leasing
Mortgage
Consumer
Total [1]
ALLL
$202.7
9.5
1.3
7.7
147.9
141.2
$510.3
[1] Note: For purposes of this table the term loans refers to loans held-in-portfolio excluding covered loans and held-for-sale.
Non-covered loans portfolio
At December 31, 2016, the allowance for loan losses, increased
by $7 million when compared with December 31, 2015, mostly
driven by the $9 million reserve increase related to the annual
recalibration of the environmental factors adjustment during
the third quarter of 2016.
The allowance for
loans held-in-portfolio was
At December 31, 2016, the allowance for loan losses at the
BPPR segment remained relatively flat at $468 million, or
2.73% of non-covered loans held-in-portfolio, compared with
$470 million, or 2.67% of non-covered loans held-in-portfolio,
at December 31, 2015. The allowance for loan losses was
$489 million, or 3.07% of non-covered loans held-in-portfolio,
the allowance to
at December 31, 2014. The ratio of
non-performing
87.88% at
December 31, 2016, compared with 81.75% at December 31,
2015 and 80.00% at December 31, 2014.
loan losses at
the BPNA segment
increased to $42 million, or 0.75% of loans held-in-portfolio,
compared with $33 million, or 0.69% of loans held-in-portfolio,
at December 31, 2015, and $31 million, or 0.88% of loans
held-in-portfolio, at December 31, 2014, mainly driven by
portfolio growth. Credit
the BPNA segment
trends
continued strong with minimal non-performing loans and net
charge-offs. The effect of the recalibration was immaterial for
to
the BPNA segment. The
non-performing loans held-in-portfolio at the BPNA segment
was 166.56% at December 31, 2016, compared with 123.43% at
December 31, 2015 and 160.13% at December 31, 2014.
allowance
ratio
the
for
of
Covered loans portfolio
The Corporation’s allowance for loan losses for the covered
loan portfolio acquired in the Westernbank FDIC-assisted
transaction amounted to $30 million at December 31, 2016,
compared to $34 million at December 31, 2015. This allowance
covers the estimated credit loss exposure primarily related to
acquired loans accounted for under ASC Subtopic 310-30.
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 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
and loan
impairment guidance in ASC Section 310-10-35 for loans
individually evaluated for
the
Corporation records an increase in the FDIC loss share asset for
the expected reimbursement from the FDIC under the loss
sharing agreements.
impairment. Concurrently,
inherent
reserve
losses)
for
Troubled debt restructurings
The Corporation’s TDR loans, excluding covered loans,
increasing by
amounted to $1.2 billion at December 2016,
$95 million, or 8%, from December 31, 2015. TDRs in accruing
status increased by $106 million from December 31, 2015, due
to sustained borrower performance, while non-accruing TDRs
decreased by $11 million.
Refer to Note 11 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
POPULAR, INC. 2016 ANNUAL REPORT
69
The tables that follow present the approximate amount and
impaired loans for
percentage of non-covered commercial
which the Corporation relied on appraisals dated more than
one year old for purposes of
December 31, 2016 and December 31, 2015.
impairment requirements at
Table 44 - Non-Covered Impaired Loans With Appraisals Dated 1 Year Or Older
December 31, 2016
(In thousands)
Commercial
[1]
Based on outstanding balance of total impaired loans.
Total Impaired Loans – Held-in-portfolio (HIP)
Count
118
Outstanding Principal
Balance
$283,782
Impaired Loans with
Appraisals Over One-
Year Old [1]
8%
Table 45 - Non-Covered Impaired Loans With Appraisals Dated 1 Year Or Older
(In thousands)
Commercial
[1]
Based on outstanding balance of total impaired loans.
December 31, 2015
Total Impaired Loans – Held-in-portfolio (HIP)
Count
118
Outstanding Principal
Balance
Impaired Loans with
Appraisals Over One-
Year Old [1]
$281,478
29%
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)
framework,
as developing and overseeing the
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
operational
to a diversified
financial services company like Popular because of the nature,
volume and complexity of its various businesses.
risk is particularly important
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,
senior
70
POPULAR, INC. 2016 ANNUAL REPORT
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.
segment
Operational risks fall into two major categories: business
specific and corporate-wide affecting all business lines. The
the day-to-day management of
primary responsibility for
business specific risks relies on business unit managers.
Accordingly, business unit managers are responsible for
ensuring that appropriate risk containment measures, including
specific policies and
corporate-wide or business
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,
and
Outsourcing Risk Management, 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.
Business Continuity
Information
practices,
Security,
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 and outsourcing risk
management, 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 continually monitor the system of internal
controls, data processing systems, and corporate-wide processes
and 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
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 net income – Non-GAAP Financial Measure
The Corporation
Financial
Statements using accounting principles generally accepted in
the United States (“U.S. GAAP” or the “reported basis”). In
addition to analyzing the Corporation’s results on a reported
basis, management monitors Adjusted net
the
Corporation and excludes the impact of certain transactions on
the results of its operations. Management believes that adjusted
income provides meaningful
the
net
underlying
ongoing
performance
of
operations. Adjusted net
income is a non-GAAP financial
measure. Refer to the following tables for a reconciliation of net
ended
to adjusted net
income
December 31, 2016, 2015 and 2014.
information about
the Corporation’s
income of
income
years
the
for
Table 46 - Adjusted Net Income for the Year Ended December 31, 2016 (Non-GAAP)
(In thousands)
U.S. GAAP Net income
Non-GAAP Adjustments:
Impact of EVERTEC restatement [1]
Bulk sale of WB loans and OREO [2]
FDIC arbitration award [3]
Goodwill impairment charge [5]
Other FDIC - LSA adjustments [6]
Income from discontinued operations [7]
Adjusted net income (Non-GAAP)
Pre-tax
Income tax
effect
Impact on net
income
2,173
(891)
171,757
3,801
8,806
(2,015)
–
347 [4]
(41,108) [4]
–
(2,380) [4]
880
$216,691
2,173
(544)
130,649
3,801
6,426
(1,135)
$358,061
[1] Represents Popular Inc.‘s proportionate share of the cumulative impact of EVERTEC restatement and other corrective adjustments to its financial statements, as
disclosed in EVERTEC’s 2015 Annual Report on Form 10K.Due to the preferential tax rate on the income from EVERTEC, the tax effect of this transaction was
insignificant to the Corporation.
[2] Represents the impact of the bulk sale of Westernbank loans and OREO.
[3] Represents the arbitration decision denying BPPR’s request for reimbursement in certain shared loss claims.
[4] Gains and losses related to assets acquired from Westernbank as part of the FDIC assisted transaction are subject to the capital gains tax rate of 20%. Other items
related to the FDIC loss-sharing agreements are subject to the statutory tax rate of 39%.
[5] Represents goodwill impairment charge in the Corporation’s securities subsidiary. The securities subsidiary is a limited liability company with a partnership
election. Accordingly, its earnings flow through Popular, Inc., holding company, for income tax purposes. Since Popular, Inc. has a full valuation allowance on its
deferred tax assets, this results in an effective tax rate of 0%.
[6] Additional adjustments, including prior period recoveries, related to restructured commercial loans to reduce the indemnification asset to its expected realizable
value.
[7] Represents income from discontinued operations associated with the BPNA reorganization.
POPULAR, INC. 2016 ANNUAL REPORT
71
Table 47 - Adjusted Net Income for the Year Ended December 31, 2015 (Non-GAAP)
(In thousands)
U.S. GAAP Net income
Non-GAAP Adjustments:
BPNA reorganization [1]
Doral Transaction [2]
OTTI [3]
Reversal DTA - PNA [4]
Loss on bulk sale of covered OREOs [5]
Adjustment to FDIC indemnification asset [6]
MSR’s acquired [7]
Impairment of loans under proposed portfolio sale [8]
Bulk sale [9]
Adjusted net income (Non-GAAP)
Pre-tax
Income tax
effect
Impact on net
income
17,065
25,576
14,445
–
4,391
10,887
(4,378)
15,190
5,852
–
(7,690)
(2,486)
(589,030)
(1,712)
(2,177)
1,707
(5,924)
(2,282)
$ 895,344
17,065
17,886
11,959
(589,030)
2,679
8,710
(2,671)
9,266
3,570
$ 374,778
[2]
[1] Represents restructuring charges associated with the reorganization of BPNA. The impact of the partial reversal of the valuation allowance of the deferred tax asset
at BPNA corresponding to the income for the year 2015 was reflected in the effective tax rate, effectively reducing the income tax expense by the benefit of such
reversal.
Includes approximately $0.8 million of fees charged for loan servicing cost to the FDIC, $2.1 million of fees charged for services provided to the alliance
co-bidders, personnel costs related to former Doral Bank employees retained on a temporary basis and incentive compensation for an aggregate of $7.1 million,
building rent expense of Doral Bank’s administrative offices for $4.1 million, professional fees and business promotion expenses directly associated with the Doral
Bank Transaction and systems conversion for $16.0 million and other expenses, including equipment, business promotions and communications, of $1.3 million.
Includes items corresponding to BPPR, which were taxed at 39% and items corresponding to BPNA, which had an effective tax rate of 0% due to the impact of the
partial reversal of the valuation allowance, mentioned above.
[3] Represents an other than temporary impairment (“OTTI”) recorded on Puerto Rico government investment securities available- for- sale. These securities had an
amortized cost of approximately $41.1 million and a market value of $26.6 million. Based on the fiscal and economic situation in Puerto Rico, together with the
government’s announcements regarding its ability to pay its debt, Popular determined that the unrealized loss, a portion of which had been in an unrealized loss
for a period exceeding twelve months, was other than temporary. The tax effect of this impairment is reflected at the capital gains rate of 20%, except for entities
which had a full valuation allowance on its deferred tax asset.
[4] Represents the partial reversal of the valuation allowance of a portion of the deferred tax asset amounting to approximately $1.2 billion, at the U.S. operations.
[5] Represents the loss on a bulk sale of covered OREOs completed in the second quarter and the related mirror accounting of the 80% reimbursable from the FDIC.
[6] The negative amortization of the FDIC’s Indemnification Asset included a $10.9 million expense related to losses incurred by the corporation that were not
claimed to the FDIC before the expiration of the loss-share portion of the agreement on June 30, 2015, and that are not subject to the ongoing arbitrations. Gains
and losses related to assets acquired from Westernbank as part of the FDIC assisted transaction are subject to the capital gains tax rate of 20%.
[7] Represents the fair value of mortgage servicing rights acquired for a portfolio previously serviced by Doral Bank, for which Popular acted as a backup servicer,
under a pre-existing contract.
[8] Represents impairment based on the estimated fair value of loans acquired from Westernbank, that Popular has the intent to sell and were subject to the ongoing
arbitration with the FDIC.
[9] Represents the impact of a bulk sale of loans at the BPPR segment, which had a book value of approximately $34.4 million.
72
POPULAR, INC. 2016 ANNUAL REPORT
Table 48 - Adjusted Net Income for the Year Ended December 31, 2014 (Non-GAAP)
(In thousands)
U.S. GAAP Net loss
Non-GAAP Adjustments:
Closing Agreement with the PR Department of Treasury [1]
TARP repayment discount amortization [2]
BPNA reorganization [3]
Income tax adjustments [4]
Indemnification asset adjustments [5]
Other adjustments [6]
Adjusted net income (Non-GAAP)
Pre-tax
Income tax
effect
Impact on net
income
–
414,068
200,635
20,048
(12,492)
4,869
(23,427)
8,034
–
–
2,498
–
$ (313,490)
(23,427)
422,102
200,635
20,048
(9,994)
4,869
$ 300,743
[1] Represents a benefit related to a Closing Agreement with the PR Department of Treasury, completed during the second quarter of 2014.
[2] Represents the amortization of the discount and debt issue cost associated with the TARP funds repayment and the negative impact of the deferred tax asset
valuation allowance recorded at the Holding Company, due to the difference in the tax treatment of the interest expense related to the TARP funds and the
$450 million senior notes issued.
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
charges and a non-cash goodwill impairment charge of $186.5 million related to BPNA’s discontinued operations.
[3]
[4] On July 1, 2014, the Government of Puerto Rico approved an amendment to the Internal Revenue Code, which , among other things, changed the income tax rate
for capital gains for 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 asset 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 and represents
the net loss on the early cancellation of a lease at BPNA $1.9 million.
POPULAR, INC. 2016 ANNUAL REPORT
73
Statistical Summary 2012-2016
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
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
Treasury stock – at cost
Accumulated other comprehensive loss, net of tax
Total stockholders’ equity
Total liabilities and stockholders’ equity
74
POPULAR, INC. 2016 ANNUAL REPORT
2016
2015
At December 31,
2014
2013
2012
$
362,394
$
363,674
$
381,095
$
423,211
$
439,363
23,637
2,866,580
2,890,217
59,805
8,209,806
98,101
167,818
88,821
96,338
2,083,754
2,180,092
71,659
6,062,992
100,903
172,248
137,000
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
22,895,172
572,878
121,425
540,651
22,805,974
69,334
543,981
22,453,813
646,115
107,698
537,111
22,455,119
310,221
502,611
19,498,286
2,542,662
93,835
601,792
21,345,321
542,454
494,581
21,704,010
2,984,427
92,144
640,555
23,955,738
948,608
519,516
21,080,005
3,755,972
96,813
730,607
24,008,557
1,399,098
535,793
180,445
155,231
135,500
135,501
266,844
32,128
138,042
196,889
2,145,510
627,294
45,050
$38,661,609
36,685
124,234
211,405
2,193,162
626,388
58,109
$35,761,733
130,266
121,818
148,694
1,636,519
465,676
37,595
$33,086,771
168,007
131,536
161,099
1,686,977
647,757
45,132
$35,748,752
139,058
125,728
154,430
1,568,954
647,757
54,295
$36,506,911
$ 6,980,443
23,515,781
30,496,224
$ 6,401,515
20,808,208
27,209,723
$ 5,783,748
19,023,787
24,807,535
$ 5,922,682
20,788,463
26,711,145
$ 5,794,629
21,205,984
27,000,613
479,425
1,200
1,574,852
911,951
–
33,463,652
762,145
1,200
1,662,508
1,019,018
1,815
30,656,409
1,271,657
21,200
1,701,904
1,012,029
5,064
28,819,389
1,659,292
401,200
1,584,173
766,792
–
31,122,602
2,016,752
636,200
1,777,097
966,249
–
32,396,911
50,160
1,040
4,255,022
1,220,307
(8,286)
(320,286)
5,197,957
$38,661,609
50,160
1,038
4,229,156
1,087,957
(6,101)
(256,886)
5,105,324
$35,761,733
50,160
1,036
4,196,458
253,717
(4,117)
(229,872)
4,267,382
$33,086,771
50,160
1,034
4,170,152
594,430
(881)
(188,745)
4,626,150
$35,748,752
50,160
1,032
4,150,294
11,826
(444)
(102,868)
4,110,000
$36,506,911
Statistical Summary 2012-2016
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 (reversal) for loan losses - covered loans
Net interest income after provision for loan losses
Mortgage banking activities
Net gain (loss) and valuation adjustments on investment securities
Other-than-temporary impairment losses on investment securities
Trading account (loss) profit
Net gain (loss) on sale of loans, including valuation adjustments on loans
held-for-sale
Adjustments (expense) to indemnity reserves
FDIC loss-share income (expense)
Other non-interest income
Total non-interest income
Operating expenses:
Personnel costs
All other operating expenses
Total operating expenses
2016
For the years ended December 31,
2013
2014
2015
2012
$1,459,720
16,428
152,011
6,414
$1,458,706
7,243
126,064
11,001
1,634,573
212,518
1,422,055
171,126
(1,110)
1,603,014
194,031
1,408,983
217,458
24,020
1,252,039
1,167,505
56,538
1,962
(209)
(785)
8,245
(17,285)
(207,779)
457,249
297,936
81,802
141
(14,445)
(4,723)
542
(18,628)
20,062
454,790
519,541
$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
40,591
(40,629)
(103,024)
455,474
386,515
$1,481,096
3,464
141,807
21,573
$1,449,227
3,703
168,632
22,824
1,647,940
303,366
1,344,574
536,710
69,396
1,644,386
362,759
1,281,627
322,234
74,839
738,468
884,554
71,657
7,966
–
(13,483)
(52,708)
(37,054)
(82,051)
896,686
791,013
84,771
(1,707)
–
4,478
(29,414)
(21,198)
(56,211)
530,770
511,489
487,476
768,159
477,519
810,702
418,679
775,005
428,697
793,293
434,333
780,656
1,255,635
1,288,221
1,193,684
1,221,990
1,214,989
Income (loss) from continuing operations, before income tax
Income tax expense (benefit)
294,340
78,784
398,825
(495,172)
(132,231)
58,279
307,491
(251,327)
181,054
(26,403)
Income (loss) from continuing operations
Income (loss) from discontinued operations, net of income tax
$ 215,556
1,135
$ 893,997
1,347
$ (190,510) $ 558,818
40,509
(122,980)
$ 207,457
37,818
Net Income (Loss)
$ 216,691
$ 895,344
$ (313,490) $ 599,327
$ 245,275
Net Income (Loss) Applicable to Common Stock
$ 212,968
$ 891,621
$ (317,213) $ 595,604
$ 241,552
POPULAR, INC. 2016 ANNUAL REPORT
75
Statistical Summary 2012-2016
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
Loans
WB loans
Total loans (net of unearned
income)
Total interest earning assets/
Interest income
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
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
Net interest income on a taxable
equivalent basis
Cost of funding earning assets
Net interest margin
Effect of the taxable equivalent
adjustment
Net interest income per books
2016
2015
2014
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
$ 3,103,390 $
1,567,364
16,428 0.53% $ 2,382,045 $
21,835 1.39
921,249
7,243 0.30% $ 1,305,326 $
13,559 1.47
264,393
4,224 0.32%
4,730 1.79
810,568
15,743 1.94
1,278,469
21,962 1.72
2,006,170
31,913 1.59
127,694
8,496 6.65
159,110
11,776 7.40
188,125
13,450 7.15
4,735,418
181,255
7,422,299
125,231
147,097 3.11
8,784 4.85
201,955 2.72
8,243 6.58
21,113,219 1,320,432 6.25
175,207 8.99
1,949,023
3,275,702
179,928
5,814,458
209,270
105,562 3.22
9,761 5.42
162,620 2.80
13,064 6.24
20,712,524 1,294,714 6.25
208,779 8.95
2,332,784
3,231,806
195,139
5,885,633
339,563
101,650 3.15
10,265 5.26
162,008 2.75
20,914 6.16
19,595,972 1,239,469 6.33
293,610 10.60
2,770,779
23,062,242 1,495,639 6.49
23,045,308 1,503,493 6.52
22,366,751 1,533,079 6.85
$33,713,162 $1,722,265 5.11% $31,451,081 $1,686,420 5.36% $29,897,273 $1,720,225 5.75%
3,900,580
$37,613,742
–
$37,613,742
3,735,224
$35,186,305
–
$35,186,305
–
–
3,758,897
$33,656,170
1,525,687
$35,181,857
–
–
–
–
$14,548,307 $
7,910,063
763,496
1,575,903
45,550 0.31% $12,474,170 $
82,027 1.04
7,812 1.02
77,129 4.89
8,157,908
1,028,406
1,728,928
35,272 0.28% $11,557,597 $
72,261 0.89
7,512 0.73
78,986 4.57
7,556,109
1,886,662
1,627,541
30,187 0.26%
74,900 0.99
67,376 3.57
516,008 31.70
212,518 0.86
–
–
24,797,769
7,535,742
32,333,511
1,754
32,335,265
5,278,477
23,389,412
7,089,940
30,479,352
2,091
30,481,443
4,704,862
194,031 0.83
–
–
688,471 3.04
–
–
22,627,909
6,409,810
29,037,719
1,588,386
30,626,105
4,555,752
$37,613,742
$35,186,305
$35,181,857
$1,509,747
$1,492,389
$1,031,754
0.63%
4.48%
0.62%
4.74%
2.30%
3.45%
87,692
$1,422,055
83,406
$1,408,983
86,682
$ 945,072
*
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.
76
POPULAR, INC. 2016 ANNUAL REPORT
Statistical Summary 2012-2016
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
Loans
WB loans
Total loans (net of unearned income)
Average
Balance
2013
Interest
Average
Rate
Average
Balance
2012
Interest
Average
Rate
$
1,036,495
$
3,464
0.33% $
1,051,373
$
3,704
0.35%
37,429
1,273,766
1,505
28,926
4.02
2.27
34,757
1,038,829
1,418
34,881
4.08
3.36
172,403
12,295
7.13
152,697
9,850
6.45
3,758,610
245,980
5,488,188
416,538
19,572,159
3,227,719
22,799,878
106,377
12,765
161,868
26,026
1,218,349
300,745
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
18,736,207
4,050,338
22,786,545
121,494
14,451
182,094
25,909
1,168,091
301,441
1,469,532
3.24
5.83
3.48
5.81
6.23
7.44
6.45
Total interest earning assets/Interest income
$ 29,741,099
$ 1,710,452
5.75% $ 29,510,753
$ 1,681,239
5.70%
Total non-interest earning assets
Total assets from continuing operations
Total assets from discontinued operations
Total assets
4,362,183
$ 34,103,282
2,163,711
$ 36,266,993
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 expense
Total non-interest bearing liabilities
Total liabilities from continuing operations
Total liabilities from discontinued operations
Total liabilities
Stockholders’ equity
$
$ 11,243,095
7,956,922
2,571,875
1,719,985
23,491,877
6,390,174
29,882,051
2,208,593
32,090,644
4,176,349
Total liabilities and stockholders’ equity
$ 36,266,993
4,486,835
$ 33,997,588
–
–
2,266,443
–
–
$ 36,264,031
31,080
93,777
38,430
140,079
303,366
$
0.28% $ 10,834,812
8,835,308
1.18
2,563,970
1.49
1,850,514
8.14
1.29
–
–
24,084,604
6,130,890
30,215,494
2,204,885
32,420,379
3,843,652
$ 36,264,031
40,069
127,696
46,802
148,192
362,759
0.37%
1.45
1.83
8.01
1.51
–
–
Net interest income on a taxable equivalent basis
$ 1,407,086
$ 1,318,480
Cost of funding earning assets
Net interest margin
Effect of the taxable equivalent adjustment
Net interest income per books
1.02%
4.73%
1.23%
4.47%
62,512
$ 1,344,574
36,853
$ 1,281,627
*
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.
POPULAR, INC. 2016 ANNUAL REPORT
77
Statistical Summary 2015-2016
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
2016
2015
Summary of Operations
Interest income
Interest expense
Net interest income
Provision for loan losses - non-covered loans
Provision (reversal) for loan losses - covered loans
Mortgage banking activities
Net gain and valuation adjustments on investment
$ 411,044 $407,299 $412,210 $404,020 $401,357 $401,282 $ 410,301 $390,074
46,879
50,547
53,612
51,608
55,639
47,748
51,659
48,857
355,405
40,924
441
14,488
353,687
42,594
750
15,272
360,551
39,668
804
16,227
352,412
47,940
(3,105)
10,551
352,500
57,711
820
23,430
350,735
69,568
(2,890)
24,195
362,553
60,468
15,766
21,325
343,195
29,711
10,324
12,852
securities
30
349
1,583
–
–
136
5
Other-than-temporary impairment losses on
investment securities
Trading account (loss) profit
Net (loss) gain on sale of loans, including valuation
–
(1,627)
–
(113)
(209)
1,117
–
(162)
–
(1,631)
–
(398)
(14,445)
(3,108)
–
–
414
adjustments on loans held-for-sale
–
8,549
–
(304)
(60)
–
681
(79)
Adjustments (expense) to indemnity reserves on loans
sold
FDIC loss-share (expense) income
Other non-interest income
Operating expenses
(Loss) income from continuing operations before
income tax
Income tax (benefit) expense
(3,051)
(130,334)
120,319
320,871
(4,390)
(61,723)
118,034
323,672
(5,746)
(12,576)
110,107
309,149
(4,098)
(3,146)
108,789
301,943
(8,647)
(4,359)
123,705
305,808
(5,874)
1,207
111,843
306,897
419
19,075
116,807
363,174
(4,526)
4,139
102,435
312,342
(7,006)
(1,766)
62,649
15,839
121,433
32,446
117,264
32,265
120,599
(16,827)
108,269
22,620
63,904
(533,533)
106,053
32,568
(Loss) income from continuing operations
$
(5,240) $ 46,810 $ 88,987 $ 84,999 $137,426 $ 85,649 $ 597,437 $ 73,485
Income (loss) from discontinued operations, net of
tax
Net (loss) income
Net (loss) income applicable to common stock
Net (loss) income per common share - basic:
Net (loss) income per common share - diluted:
Dividends Declared per Common Share
$
$
$
$
$
1,135
1,341
(4,105) $ 46,810 $ 88,987 $ 84,999 $137,426 $ 85,640 $ 597,452 $ 74,826
(9)
15
–
–
–
–
(5,036) $ 45,880 $ 88,056 $ 84,068 $136,495 $ 84,709 $ 596,521 $ 73,896
(0.05) $
0.44 $
0.85 $
0.81 $
1.32 $
0.82 $
5.80 $
(0.05) $
0.44 $
0.85 $
0.81 $
1.32 $
0.82 $
5.79 $
0.15 $
0.15 $
0.15 $
0.15 $
0.15 $
0.15 $
– $
0.72
0.72
–
Selected Average Balances
(In millions)
Total assets
Loans
Interest earning assets
Deposits
Interest-bearing liabilities
Selected Ratios
Return on assets
Return on equity
$ 39,086 $ 38,091 $ 37,371 $ 35,892 $ 35,576 $ 35,840 $ 35,577 $ 33,806
22,505
30,272
25,593
22,499
22,986
31,937
27,338
23,481
23,148
31,815
27,103
23,816
23,077
35,262
30,637
25,868
23,390
31,965
27,330
23,932
23,144
33,431
28,857
24,679
23,042
34,201
29,411
25,129
23,131
31,733
27,110
23,298
(0.04)% 0.49%
(0.38)
3.46
0.96%
6.80
0.95%
6.58
1.53%
10.77
0.95%
6.79
6.74%
54.93
0.90%
7.02
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.
78
POPULAR, INC. 2016 ANNUAL REPORT
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, 2016. 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, 2016 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, 2016, as stated in their report dated March 1, 2017
which appears herein.
Richard L. Carrión
Chairman of the Board
and Chief Executive Officer
Carlos J. Vázquez
Executive Vice President
and Chief Financial Officer
POPULAR, INC. 2016 ANNUAL REPORT
79
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 income (loss), changes in stockholders’ equity and cash flows present fairly, in all material respects, the
financial position of Popular, Inc. and its subsidiaries (“the Corporation”) as of December 31, 2016 and 2015, and the results of
their operations and their cash flows for each of the three years in the period ended December 31, 2016 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, 2016, 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 internal control over financial reporting, 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.
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.
80
POPULAR, INC. 2016 ANNUAL REPORT
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 1, 2017
CERTIFIED PUBLIC ACCOUNTANTS
(OF PUERTO RICO)
License No. LLP-216 Expires Dec. 1, 2019
Stamp E257030 of the P.R. Society of
Certified Public Accountants has been
affixed to the file copy of this report
POPULAR, INC. 2016 ANNUAL REPORT
81
POPULAR, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share information)
Assets:
Cash and due from banks
Money market investments:
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 2016 - $75,576; 2015 - $82,889)
Other investment securities, at lower of cost or realizable value (realizable value 2016 - $170,890; 2015 - $175,291)
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 28)
Stockholders’ equity:
Preferred stock, 30,000,000 shares authorized; 2,006,391shares issued and outstanding
Common stock, $0.01 par value; 170,000,000 shares authorized; 104,058,684 shares issued (2015 - 103,816,185) and
103,790,932 shares outstanding (2015 - 103,618,976)
Surplus
Retained earnings
Treasury stock - at cost, 267,752 shares (2015 - 197,209)
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.
82
POPULAR, INC. 2016 ANNUAL REPORT
December 31,
2016
December 31,
2015
$ 362,394
$ 363,674
23,637
2,866,580
2,890,217
11,486
48,319
491,843
7,717,963
98,101
167,818
88,821
22,895,172
572,878
121,425
540,651
22,805,974
69,334
543,981
180,445
32,128
138,042
196,889
2,145,510
627,294
45,050
96,338
2,083,754
2,180,092
19,506
52,153
739,045
5,323,947
100,903
172,248
137,000
22,453,813
646,115
107,698
537,111
22,455,119
310,221
502,611
155,231
36,685
124,234
211,405
2,193,162
626,388
58,109
$38,661,609
$35,761,733
$ 6,980,443
23,515,781
30,496,224
479,425
1,200
1,574,852
911,951
–
$ 6,401,515
20,808,208
27,209,723
762,145
1,200
1,662,508
1,019,018
1,815
33,463,652
30,656,409
50,160
50,160
1,040
4,255,022
1,220,307
(8,286)
(320,286)
5,197,957
1,038
4,229,156
1,087,957
(6,101)
(256,886)
5,105,324
$38,661,609
$35,761,733
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 (reversal) for loan losses - covered loans
Net interest income after provision for loan losses
Service charges on deposit accounts
Other service fees (Refer to Note 37)
Mortgage banking activities (Refer to Note 13)
Net gain (loss) and valuation adjustments on investment securities
Other-than-temporary impairment losses 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) income (Refer to Note 38)
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
Goodwill impairment charge
Restructuring costs (Refer to Note 4)
Total operating expenses
Income (loss) from continuing operations before income tax
Income tax expense (benefit)
Income (loss) from continuing operations
Income (loss) from discontinued operations, net of tax (Refer to Note 4)
Net Income (Loss)
Net Income (Loss) Applicable to Common Stock
Net Income (Loss) per Common Share – Basic
Net income (loss) from continuing operations
Net income (loss) from discontinued operations
Net Income (Loss) per Common Share – Basic
Net Income (Loss) per Common Share – Diluted
Net income (loss) from continuing operations
Net income (loss) from discontinued operations
Net Income (Loss) per Common Share – Diluted
Dividends Declared per Common Share
The accompanying notes are an integral part of these consolidated financial statements.
Years ended December 31,
2016
2015
2014
$1,459,720
16,428
152,011
6,414
1,634,573
$1,458,706
7,243
126,064
11,001
1,603,014
$1,478,750
4,224
132,631
17,938
1,633,543
127,577
7,812
77,129
212,518
1,422,055
171,126
(1,110)
1,252,039
160,836
234,770
56,538
1,962
(209)
(785)
8,245
(17,285)
(207,779)
61,643
297,936
487,476
85,653
62,225
42,304
323,043
23,897
53,014
24,512
–
47,119
90,447
12,144
3,801
–
1,255,635
294,340
78,784
215,556
1,135
$ 216,691
107,533
7,512
78,986
194,031
1,408,983
217,458
24,020
1,167,505
160,108
236,090
81,802
141
(14,445)
(4,723)
542
(18,628)
20,062
58,592
519,541
477,519
86,888
60,110
39,797
308,985
25,146
52,076
27,626
–
85,568
95,075
11,019
–
18,412
1,288,221
398,825
(495,172)
893,997
1,347
$ 895,344
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)
(122,980)
$ (313,490)
$ 212,968
$ 891,621
$ (317,213)
2.05
0.01
2.06
2.05
0.01
2.06
0.60
$
$
$
8.65
0.01
8.66
8.64
0.01
8.65
0.30
$
$
$
(1.88)
(1.20)
(3.08)
(1.88)
(1.20)
(3.08)
–
$
$
$
POPULAR, INC. 2016 ANNUAL REPORT
83
POPULAR, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)
Years ended December 31,
2015
2014
2016
$216,691
$895,344
$(313,490)
(4,026)
–
(18,691)
21,948
(3,800)
(59,666)
209
(379)
(3,612)
3,149
(64,868)
1,468
(63,400)
(3,098)
–
(26,283)
20,100
(3,800)
(32,440)
14,445
(141)
(4,376)
4,702
(30,891)
3,877
(27,014)
(4,451)
7,718
(160,679)
(8,505)
3,800
57,401
–
870
(6,613)
6,091
(104,368)
63,241
(41,127)
$153,291
$868,330
$ (354,617)
Years ended December 31,
2015
2014
2016
$ 7,289
(8,562)
1,482
1,081
(42)
39
1,409
(1,228)
$ 1,468
$10,251
(7,839)
1,482
2,569
(2,486)
28
1,707
(1,835)
$ 3,877
$62,664
3,317
(1,482)
(1,414)
–
(48)
2,579
(2,375)
$63,241
(In thousands)
Net income (loss)
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 credit
Unrealized holding (losses) gains on investments arising during the period
Other-than-temporary impairment included in net income
Reclassification adjustment for (gains) losses included in net income
Unrealized net losses on cash flow hedges
Reclassification adjustment for net losses included in net income
Other comprehensive loss before tax
Income tax benefit
Total other comprehensive loss, net of tax
Comprehensive income (loss) , net of tax
Tax effect allocated to each component of other comprehensive loss:
(In thousands)
Adjustment of pension and postretirement benefit plans
Amortization of net losses
Amortization of prior service credit
Unrealized holding (losses) gains on investments arising during the period
Other-than-temporary impairment included in net income
Reclassification adjustment for (gains) losses included in net income
Unrealized net losses on cash flow hedges
Reclassification adjustment for net losses included in net income
Income tax benefit
The accompanying notes are an integral part of these consolidated financial statements.
84
POPULAR, INC. 2016 ANNUAL REPORT
POPULAR, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
(In thousands)
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
Net income
Issuance of stock
Tax windfall benefit on vesting of restricted stock
Dividends declared:
Common stock
Preferred stock
Common stock purchases
Common stock reissuance
Other comprehensive loss, net of tax
Transfer to statutory reserve
Balance at December 31, 2015
Net income
Issuance of stock
Tax windfall benefit on vesting of restricted stock
Dividends declared:
Common stock
Preferred stock
Common stock purchases
Common stock reissuance
Other comprehensive loss, net of tax
Transfer to statutory reserve
Balance at December 31, 2016
Disclosure of changes in number of shares:
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.
Common
stock
Preferred
stock
Surplus
Retained
earnings
Treasury
stock
Accumulated
other
comprehensive
loss
$1,034
$50,160
$4,170,152 $ 594,430
(313,490)
$ (881)
$(188,745)
2
5,392
414
(3,000)
(3,723)
(3,272)
36
23,500
(23,500)
(41,127)
Total
$4,626,150
(313,490)
5,394
414
(3,000)
(3,723)
(3,272)
36
(41,127)
–
$1,036
$50,160
$4,196,458 $ 253,717
$(4,117)
$(229,872)
$4,267,382
2
6,224
169
895,344
(31,076)
(3,723)
(2,086)
102
(27,014)
26,305
(26,305)
895,344
6,226
169
(31,076)
(3,723)
(2,086)
102
(27,014)
–
$1,038
$50,160
$4,229,156 $1,087,957
$(6,101)
$(256,886)
$5,105,324
2
7,435
47
216,691
(62,234)
(3,723)
(2,202)
17
(63,400)
18,384
(18,384)
216,691
7,437
47
(62,234)
(3,723)
(2,202)
17
(63,400)
–
$1,040
$50,160
$4,255,022 $1,220,307
$(8,286)
$(320,286)
$5,197,957
Years ended December 31,
2014
2015
2016
2,006,391
2,006,391
2,006,391
103,816,185
242,499
103,614,553
201,632
103,435,967
178,586
104,058,684
(267,752)
103,816,185
(197,209)
103,614,553
(137,706)
103,790,932
103,618,976
103,476,847
POPULAR, INC. 2016 ANNUAL REPORT
85
POPULAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) 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
Other-than-temporary impairment on investment securities
Fair value adjustments on mortgage servicing rights
FDIC loss-share expense (income)
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 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 decrease (increase) 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 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 (disbursements) repayments on loans
Proceeds from sale of loans
Acquisition of loan portfolios
Acquisition of trademark
Net payments from FDIC under loss sharing agreements
Net cash received and acquired from business combination
Acquisition of servicing advances
Cash paid related to business acquisitions
Return of capital from equity method investments
Net cash disbursed from disposal of discontinued business
Mortgage servicing rights purchased
Acquisition of premises and equipment
Proceeds from sale of:
Premises and equipment
Foreclosed assets
Net cash (used in) 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
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
Years ended December 31,
2016
2015
2014
$
216,691
$
895,344
$ (313,490)
170,016
3,801
12,144
46,874
(40,786)
209
25,336
207,779
17,285
(31,288)
61,574
4,094
(1,962)
(35,517)
19,357
–
(310,217)
89,887
(510,783)
753,839
(13,808)
(26,304)
165
(55,678)
(13,241)
372,776
589,467
241,478
–
11,019
47,474
(73,496)
14,445
7,904
(20,062)
18,628
(24,373)
(519,128)
(3,629)
(141)
(35,013)
60,378
–
(401,991)
124,111
(792,821)
1,083,683
5,392
100,133
528
3,252
(72,980)
(225,209)
670,135
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
(710,125)
(357,706)
(963,933)
(3,407,779)
–
(14,130)
(2,014,315)
(750)
(40,847)
(2,001,940)
(1,000)
(110,010)
1,227,966
4,588
11,122
1,362,712
4,856
46,341
1,722,650
39,962
92,752
5,259
9,021
(267,205)
141,363
(535,445)
–
98,518
–
–
–
907
–
–
(100,320)
8,897
83,357
(3,444,006)
3,286,428
(282,719)
–
(254,816)
165,047
7,437
(65,932)
–
(2,186)
2,853,259
(1,280)
363,674
362,394
$
96,760
14,950
431,676
30,160
(338,447)
(50)
247,976
731,279
(61,304)
(17,250)
13,329
–
(2,400)
(62,656)
12,880
141,145
238,339
207,338
(509,512)
(148,215)
(737,889)
277,398
6,226
(19,257)
–
(1,984)
(925,895)
(17,421)
381,095
363,674
$
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 accompanying notes are an integral part of these consolidated financial statements.
During the year ended December 31, 2016 there have not been any cash flows associated with discontinued operations. The Consolidated
Statement of Cash Flows for the years ended December 31, 2015 and 2014 includes the cash flows from operating, investing and financing
activities associated with discontinued operations.
86
POPULAR, INC. 2016 ANNUAL REPORT
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 and Restructuring Plan
Note 5 - Business Combination
Note 6 - Restrictions on Cash and Due from Banks and Certain Securities
Note 7 - Securities Purchased under Agreements to Resell
Note 8 - Investment Securities Available-For-Sale
Note 9 - Investment Securities Held-to-Maturity
Note 10 - Loans
Note 11 - Allowance for Loan Losses
Note 12 - FDIC Loss Share Asset and True-Up Payment Obligation
Note 13 - Mortgage Banking Activities
Note 14 - Transfers of Financial Assets and Mortgage Servicing Assets
Note 15 - Premises and Equipment
Note 16 - Other Real Estate Owned
Note 17 - Other Assets
Note 18 - Investment in Equity Investees
Note 19 - Goodwill and Other Intangible Assets
Note 20 - Deposits
Note 21 - Borrowings
Note 22 - Offsetting of Financial Assets and Liabilities
Note 23 - Trust Preferred Securities
Note 24 - Stockholders’ Equity
Note 25 - Regulatory Capital Requirements
Note 26 - Other Comprehensive Loss
Note 27 - Guarantees
Note 28 - Commitments and Contingencies
Note 29 - Non-consolidated Variable Interest Entities
Note 30 - Derivative Instruments and Hedging Activities
Note 31 - Related Party Transactions
Note 32 - Fair Value Measurement
Note 33 - Fair Value of Financial Instruments
Note 34 - Employee Benefits
Note 35 - Net Income (Loss) per Common Share
Note 36 - Rental Expense and Commitments
Note 37 - Other Service Fees
Note 38 - FDIC Loss Share (Expense) Income
Note 39 - Stock-Based Compensation
Note 40 - Income Taxes
Note 41 - Supplemental Disclosure on the Consolidated Statements of Cash
Flows
Note 42 - Segment Reporting
Note 43 - Popular, Inc. (Holding company only) Financial Information
Note 44 - Condensed Consolidating Financial Information of Guarantor and
Issuers of Registered Guaranteed Securities
88
88
99
102
103
104
104
105
109
110
119
135
137
137
141
141
142
142
142
146
146
150
151
152
153
155
156
158
165
166
170
174
182
187
194
194
195
195
195
197
200
200
203
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POPULAR, INC. 2016 ANNUAL REPORT
87
In Puerto Rico,
Note 1 - Nature of operations and basis of presentation
Nature of Operations
Popular, Inc. (the “Corporation”) is a diversified, publicly
owned financial holding company subject to the supervision
and regulation of the Board of Governors of the Federal Reserve
System. The Corporation has operations in Puerto Rico, the
the
United States and the Caribbean.
Corporation provides retail, 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. In the U.S. mainland, the Corporation operates
Banco Popular North America (“BPNA”). BPNA focuses efforts
and resources on the core community banking business. BPNA
operates branches in New York, New Jersey and South Florida
under the name of Popular Community Bank. Refer to Note 4
for discussion of the sales of the California, Illinois and Central
Florida regional operations during the year 2014. Note 42 to
the consolidated financial statements presents information
about the Corporation’s business segments.
services
and
as
receiver
(FDIC),
(“Doral”)
from the
Federal Deposit
On February 27, 2015, BPPR,
in an alliance with other
including BPNA, acquired certain assets and all
bidders,
deposits (other than certain brokered deposits) of former Doral
Insurance
Bank
Corporation
Bank
Transaction”). Under the FDIC’s bidding format, BPPR was the
lead bidder and party to the purchase and assumption
agreement with the FDIC covering all assets and deposits
acquired by it and its alliance co-bidders. BPPR entered into
back to back purchase and assumption agreements with the
alliance co-bidders for the transfer of certain assets and
deposits. Refer to Note 5 for further details on the Doral Bank
Transaction.
“Doral
(the
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
transactions have been eliminated in consolidation.
In
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
interest
the limited partner may have
virtually no influence over partnership operating and financial
policies.
received. Limited partnerships
is so “minor” that
are
Basis of Presentation
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 was recognized as expense over the
remaining portion of the Loss Sharing Agreement that expired
in the quarter ending June 30, 2015. After evaluating the
quantitative and qualitative aspects of
the error and the
out-of-period adjustment to the Corporation’s financial results,
management has determined that the misstatement and the
out-of-period adjustment are not material to the 2012, 2013
and 2014 financial statements, respectively.
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.
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.
Business combinations
Business combinations are accounted for under the acquisition
method. Under this method, assets acquired, liabilities assumed
the
and any noncontrolling interest
in the acquiree at
88
POPULAR, INC. 2016 ANNUAL REPORT
liabilities
control. Also,
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. 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
to the measurement period as an
earnings
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
the contingent consideration are
changes in fair value of
recognized in earnings unless the arrangement is a hedging
instrument for which changes are initially recognized in other
comprehensive income.
subsequent
The Corporation determined that the acquisition of certain
assets and assumption of certain liabilities in connection with
the Doral Bank Transaction, completed during the year ended
December 31, 2015, constitutes a business combination as
defined by the Financial Accounting Standards Board (“FASB”)
Codification (“ASC”) Topic 805 “Business Combinations”.
During the fourth quarter of 2015, the Corporation early
adopted ASU 2015-16 “Business Combination”. Accordingly,
adjustments to the initial fair value estimates identified during
the measurement period are being recognized in the reporting
period in which the adjustment amounts are determined. Refer
to Note 5 to the consolidated financial statements for the
related disclosures
in connection with the Doral Bank
Transaction.
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
America
and
assumptions that affect the reported amounts of assets and
liabilities and contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
to make
estimates
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
assets
identical
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
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
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-
for credit cards, which remain
assisted transaction, except
subject to the terms of the FDIC loss sharing agreement, are
considered “covered loans” because the Corporation will be
reimbursed for 80% of any future losses on these loans subject
to the terms of such agreement.
Investment securities
Investment securities are classified in four categories and
accounted for as follows:
(cid:129) Debt securities that the Corporation has the intent and
ability to hold to maturity are classified as securities
held-to-maturity and reported at 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
POPULAR, INC. 2016 ANNUAL REPORT
89
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
a held-to-maturity security is
recognized in other
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.
(cid:129) Debt and equity securities classified as trading securities
are reported at fair value, with unrealized gains and losses
included in non-interest income.
of
in
are
net
that
taxes,
accumulated
(cid:129) 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
fair value, with
and reported at
unrealized gains and losses excluded from earnings and
reported,
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
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
the debt security before its
will be required to sell
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 other factors. The amount of the
total other-than-temporary impairment related to the
credit loss is recognized in the statement of operations.
The amount of the total impairment related to all other
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.
(cid:129) 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
on securities
other-than-temporary,
investment
available-for-sale, held-to-maturity
securities are determined using the specific identification
method and are reported separately in the consolidated
statements of operations. Purchases and sales of securities are
recognized on a trade date basis.
if
any,
and other
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.
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 in accumulated other comprehensive
income and subsequently reclassified to net income (loss) in
the hedged transaction impacts
the same period(s)
earnings. The ineffective portion of cash flow hedges is
immediately recognized in current earnings. For free-standing
derivative instruments, changes in fair values are reported in
current period earnings.
that
documents
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
for undertaking
and strategy
relationship
includes
the
90
POPULAR, INC. 2016 ANNUAL REPORT
instruments 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 it 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.
quotes,
For non-exchange traded contracts, fair value is based on
flow
dealer
methodologies
the
determination of fair value may require significant management
judgment or estimation.
pricing models,
or
cash
for which
discounted
techniques
similar
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
held-in-portfolio when
Loans
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
acquisition. Credit discounts are included in the determination
of fair value; therefore, an allowance for loan losses is not
recorded at the acquisition date.
Purchased loans
accounted at
fair
are
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
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
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
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
in the case of a collateral
365 days past due. However,
dependent
the
excess of the recorded investment over the fair value of the
collateral (portion deemed uncollectible) is generally promptly
charged-off, but
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
the
180 days past due. The Corporation discontinues
loan individually evaluated for impairment,
in any event, not
POPULAR, INC. 2016 ANNUAL REPORT
91
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
15-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.
Purchased impaired loans
accounted for under ASC
Subtopic 310-30 are not considered non-performing and
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.
non-accretable
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
and
providing for quarterly or
management has concluded that
the
borrower would not be in payment default in the foreseeable
future.
semi-annual payments))
is probable that
it
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.
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POPULAR, INC. 2016 ANNUAL REPORT
Loans acquired as part of the Westernbank 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
factors impacting expected cash flows and probable loss
the loan portfolio,
assumptions,
portfolio concentrations, distressed economic
conditions,
quality of underwriting standards of the acquired institution,
reductions
real estate values, among other
considerations that could also impact the expected cash inflows
on the loans.
including the quality of
in collateral
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
deterioration and impairment,
instead of the standard loan
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.
Loans acquired as part of the Doral Bank FDIC-assisted
transaction
Certain residential mortgage loans and commercial
loans
acquired as part of the Doral Bank Transaction were considered
impaired. Accordingly, the Corporation applied the guidance of
ASC Subtopic 310-30. Refer to Note 10 to the consolidated
financial statements for additional information with respect to
the loans acquired as part of the Doral Bank Transaction that
were considered impaired.
Under ASC Subtopic 310-30, the 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
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.
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
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. 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.
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.
For a detailed description of the principal factors used to
determine the general reserves of the allowance for loan losses
and for the principal enhancements Management made to its
methodology, refer to Note 11.
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
the loan agreement. Current
original contractual
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
loans
evaluated
impairment
impairment. Commercial
smaller balance homogeneous
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 troubled 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 thus
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. 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
impairment measurement date. The
appraisal
Corporation
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)
every
two years depending on the total exposure of the borrower. As
the Corporation internally reviews
a general procedure,
appraisals as part of the underwriting and approval process and
also for credits considered impaired.
annually or
and the
appraisal
requests
updated
reports
either
POPULAR, INC. 2016 ANNUAL REPORT
93
involves a degree of
including interest accrued at
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 Corporation 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
considered to determine if a concession was granted, including
the change in the fair value of the underlying collateral that
loan
may be used to repay the loan. Classification of
modifications as TDRs
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
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
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
through maturity; and
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
its 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
94
POPULAR, INC. 2016 ANNUAL REPORT
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 11 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
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)
initially
The FDIC loss
recorded at fair value. Fair value was estimated using projected
cash flows related to the loss sharing agreement.
share indemnification asset was
is measured
The FDIC loss share indemnification asset
is not
separately from the related covered assets as
contractually embedded in the assets and is not transferable
with the assets should the assets be sold.
it
for
covered loans
accounted pursuant
The FDIC loss share indemnification asset is recognized on
the same basis as the assets subject to loss share protection. As
to ASC
such,
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
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 (expense) income.
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 12 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
the Corporation is prevented from derecognizing
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,
other
the
factors concerning the nature and extent of
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
the
loan. Once
the Corporation has
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
servicer
loans originated by others. Whenever
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,
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
adequately compensate
for performing the
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.
separately recognized servicing assets are 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”). 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. Contractual servicing fees including
ancillary income and late fees, as well as fair value adjustments,
and impairment losses, if any, are reported in 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.
All
The fair value of servicing rights is estimated by using a cash
flow valuation model which calculates the present value of
taking into
estimated future net
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,
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
POPULAR, INC. 2016 ANNUAL REPORT
95
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, 2016, 2015
and 2014 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
rent
arrangements
escalations
on
non-cancellable operating leases with scheduled rent increases
are recognized on a straight-line basis over the lease term.
space. Certain of
for
and provide
expense
Rent
for general office
are non-cancellable
options.
renewal
and
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 difference
between the carrying amount of the loan and the fair value less
cost to sell is recorded as an adjustment to the allowance for
to foreclosure, any losses in the
loan losses. Subsequent
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 OREO expenses. The cost of
maintaining and operating such properties is expensed as
incurred.
Updated appraisals 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
96
POPULAR, INC. 2016 ANNUAL REPORT
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 appraisals, every
12 to 18 months.
to age,
adjusted due
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.
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
competitive,
inflows
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 5 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
under
agreements
resell. However,
It is the Corporation’s policy to take possession of securities
purchased
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
Capitalized software is
less accumulated
amortization. Capitalized software includes purchased software
and capitalizable application development costs associated with
internally-developed software. Amortization, computed on a
straight-line method,
the
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 27 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.
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 an 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
Investment
follows:
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
resulting
from
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. Therefore, a pro
accumulated translation adjustment
rata portion of
component of the equity attributable to this equity method
investment was recognized as a loss through earnings.
the
Refer to the disclosure of accumulated other comprehensive
loss included in Note 26.
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
and liabilities
tax assets
POPULAR, INC. 2016 ANNUAL REPORT
97
enacted tax laws and rates applicable to periods in which the
temporary differences are expected to be recovered or settled.
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
and
authorities.
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
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 pre-tax
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
and
(d) tax-deductible dividends paid to shareholders, subject to
certain exceptions.
changes
in tax
status,
rates,
laws
(c)
or
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POPULAR, INC. 2016 ANNUAL REPORT
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
net
income (loss) adjusted for preferred stock dividends,
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, performance shares
and warrants, if any, 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
Recently Issued Accounting Standards Updates
FASB Accounting Standards Update (“ASU”) 2017-05, Other
Income- Gains and Losses from the Derecognition of
Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope
of Asset Derecognition Guidance and Accounting for Partial
Sales of Nonfinancial Assets
The FASB issued ASU 2017-05 in February 2017, which, among
the derecognition of
other
things, clarifies the scope of
in substance financial
nonfinancial assets, the definition of
assets, and impacts
sales of
nonfinancial assets by requiring full gain recognition upon the
sale.
the accounting for partial
The amendments of these Updates are effective for fiscal
years, and interim periods within those fiscal years, beginning
after December 15, 2017.
The Corporation is currently evaluating the impact that the
this guidance will have on its consolidated
adoption of
statements of financial condition and results of operations.
FASB Accounting Standards Update (“ASU”) 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the
Accounting for Goodwill Impairment
The FASB issued ASU 2017-04 in January 2017, which
simplifies the accounting for goodwill impairment by removing
Step 2 of the two-step goodwill impairment test under the
current guidance. Goodwill
impairment will now be the
amount by which a reporting unit’s carrying value exceeds its
fair value, not to exceed the carrying amount of goodwill.
Entities will be required to disclose the amount of goodwill at
reporting units with zero or negative carrying amounts.
The amendments of this Update, which should be applied
on a prospective basis, are effective for annual or any interim
goodwill
tests in fiscal years beginning after
December 15, 2019. Early adoption is permitted for interim or
annual goodwill impairment tests performed on testing dates
after January 1, 2017.
impairment
The Corporation performs a goodwill impairment test at
least on an annual basis. For the annual test as of July 31, 2016,
BPNA failed Step 1, since its carrying amount exceeded its fair
value. However, no impairment charge was recorded since
BPNA passed Step 2 of the impairment test. Refer to additional
information on Note 19. Upon adoption of this standard, if the
carrying amount of any of the reporting units exceeds its fair
value,
the Corporation would be required to record an
impairment charge for the difference up to the amount of the
goodwill.
FASB Accounting Standards Update (“ASU”) 2017-03,
Accounting Changes and Error Corrections (Topic 250) and
Investments- Equity Method and Joint Ventures (Topic 323):
Amendments to SEC Paragraphs Pursuant to Staff
Announcements at the September 22, 2016 and
November 17, 2016 EITF Meetings (SEC Update)
The FASB issued ASU 2017-03 in January 2017, which
incorporates into the Accounting Standards Codification recent
SEC guidance about certain investments in qualified affordable
housing and disclosing under SEC SAB Topic 11.M the effect
on financial statements of adopting the revenue, leases and
credit losses standards.
The Corporation has considered the guidance in this Update
related to the disclosure on the effect on financial statements of
adopting the revenue, leases and credit losses standards in the
preparation of the consolidated financial statements for the year
ended December 31, 2016.
FASB Accounting Standards Update (“ASU”) 2017-01,
Business Combinations (Topic 805): Clarifying the Definition
of a Business
The FASB issued ASU 2017-01 in January 2017, which revises
the definition of a business by providing an initial screen to
determine when an integrated set of assets and activities (“set”)
is not a business. Also, the amendments, among other things,
specify the minimum inputs and processes required for a set to
meet the definition of a business when the initial screen is not
met and narrow the definition of the term output so that the
term is consistent with Topic 606.
The amendments of this Update, which should be applied
on a prospective basis, are effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15,
2017. Early adoption is permitted.
The Corporation will consider this guidance in any business
combinations completed after the effective date.
FASB Accounting Standards Update (“ASU”) 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
The FASB issued ASU 2016-18 in November 2016, which
require entities to present the changes in total cash, cash
equivalents, restricted cash and restricted cash equivalents in
the statement of cash flows. The new guidance also requires a
reconciliation of the totals in the statement of cash flows to the
related captions in the balance sheet if restricted cash and
restricted cash equivalents are presented in a different line item
in the balance sheet.
The amendments of this Update, which should be applied
using a retrospective transition method to each period
presented, are effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2017.
Early adoption is permitted.
The adoption of this standard will change the presentation
in the consolidated statements of cash flows.
POPULAR, INC. 2016 ANNUAL REPORT
99
FASB Accounting Standards Update (“ASU”) 2016-17,
Consolidation (Topic 810): Interests Held through Related
Parties That Are under Common Control
The FASB issued ASU 2016-17 in October 2016, which changes
how a reporting entity that is a single decision maker of a VIE
treats indirect
interests in the entity held through related
the new
parties that are under common control. Under
guidance, if a decision maker is required to evaluate whether it
is the primary beneficiary of a VIE, it will need to consider only
its proportionate indirect interest in the VIE held through a
common control party.
The amendments of this Update are effective for fiscal years,
and interim periods within those fiscal years, beginning after
December 15, 2016. Early adoption is permitted,
including
adoption in an interim period.
Currently, the Corporation does not have indirect interests
held through related parties that are under common control.
The Corporation will continue to evaluate transactions as they
arise in the future that may be impacted by this guidance.
FASB Accounting Standards Update (“ASU”) 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets
Other Than Inventory
The FASB issued ASU 2016-16 in October 2016, which
eliminates the exception for all intra-entity sales of assets other
than inventory that requires deferral of the tax effects until the
transferred asset is sold to a third party or otherwise recovered
through use. The new guidance requires a reporting entity to
recognize the tax expense from the sale of the asset in the
seller’s tax jurisdiction when the transfer occurs, even though
the pre-tax effects of
transaction are eliminated in
consolidation. Any deferred tax asset that arises in the buyer’s
jurisdiction would also be recognized at the time of the transfer.
The amendments of this Update are effective for fiscal years,
and interim periods within those fiscal years, beginning after
the
December 15, 2017. Early adoption is permitted, but
guidance can only be adopted in the first interim period of a
fiscal year. The modified retrospective approach will be
required for transition to the new guidance, with a cumulative-
the
effect adjustment recorded in retained earnings as of
beginning of the period of adoption.
that
The Corporation is currently evaluating the impact that the
adoption of
this guidance will have on its consolidated
statements of financial condition, results of operations, and
presentation and disclosures.
FASB Accounting Standards Update (“ASU”) 2016-15,
Statement of Cash Flows (Topic 230): Classification of
Certain Cash Receipts and Cash Payments
The FASB issued ASU 2016-15 in August 2016, which
addresses specific cash flow issues with the objective of
reducing existing diversity in practice, which may lead to a
transactions between
difference
classification of
in the
100 POPULAR, INC. 2016 ANNUAL REPORT
operating, financing or investing activities. Among other things,
the guidance provides an accounting policy election for
classifying distributions received from equity method investees
and clarifies the application of the predominance principle.
The amendments of this Update are effective for fiscal years,
and interim periods within those fiscal years, beginning after
December 15, 2017. Early adoption is permitted. Entities will
be required to apply the guidance retrospectively to all periods
presented, unless it is impracticable to do so.
The Corporation does not anticipate that the adoption of
this accounting pronouncement will have a material effect on
its consolidated statements of cash flows.
these
conditions
in making
FASB Accounting Standards Update (“ASU”) 2016-13,
Financial Instruments - Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments
The FASB issued ASU 2016-13 in June 2016, which replaces the
incurred loss model with a current expected credit
loss
(“CECL”) model. The CECL model applies to financial assets
subject to credit losses and measured at amortized cost and
certain off-balance sheet exposures. Under current U.S. GAAP,
an entity reflects credit losses on financial assets measured on an
amortized cost basis only when losses are probable and have
been incurred, generally considering only past events and
current
determinations.
ASU 2016-13 prospectively replaces this approach with a
forward-looking methodology that reflects the expected credit
losses over the lives of financial assets, starting when such assets
are first acquired. Under the revised methodology, credit losses
will be measured based on past events, current conditions and
reasonable and supportable forecasts that affect the collectability
of financial assets. ASU 2016-13 also revises the approach to
recognizing credit
losses for available-for-sale securities by
replacing the direct write-down approach with the allowance
approach and limiting the allowance to the amount at which the
security’s fair value is less than the amortized cost. In addition,
ASU 2016-13 provides that the initial allowance for credit losses
on purchased credit impaired financial assets will be recorded as
an increase to the purchase price, with subsequent changes to
the allowance recorded as a credit loss expense.
also
requirements
regarding an entity’s assumptions, models and methods for
estimating the allowance for credit losses.
expands disclosure
ASU 2016-13
The amendments of this Update are effective for fiscal years,
and interim periods within those fiscal years, beginning after
December 15, 2019. Early adoption is permitted as of January 1,
2019.
The Corporation is currently evaluating the impact that the
adoption of
this guidance will have on its consolidated
statements of financial condition, results of operations, and
presentation and disclosures. The Corporation expects an
increase in its allowance for loan and lease losses due to the
consideration of lifetime credit losses as part of the calculation.
FASB Accounting Standards Update (“ASU”) 2016-09,
Compensation - Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment
Accounting
The FASB issued ASU 2016-09 in March 2016 which simplifies
multiple aspects of the accounting for share-based payment
transactions, including the recognition of excess tax benefits
and deficiencies as an income tax benefit or expense in the
income statement and classification in the statement of cash
flows as an operating activity, allowing entities to elect as an
accounting policy to account for forfeitures when they occur,
permitting entities to withhold up to the maximum individual
statutory rate without classifying the awards as a liability, and
requiring that the cash paid to satisfy the statutory income tax
withholding obligation be classified as a financing activity.
The amendments of this Update are effective for fiscal years,
and interim periods within those fiscal years, beginning after
December 15, 2016. Early adoption is permitted.
The Corporation does not anticipate that the adoption of
this accounting pronouncement will have a material effect on
its consolidated statements of financial condition, results of
operations, cash flows or presentation and disclosures.
FASB Accounting Standards Update (“ASU”) 2016-07,
Investments - Equity Method and Joint Ventures (Topic 323):
Simplifying the Transition to the Equity Method of
Accounting
The FASB issued ASU 2016-07 in March 2016, which
eliminates the requirement to retroactively adopt the equity
method of accounting. Therefore, as of the date the investment
becomes qualified for equity method accounting, an entity
should add the cost of acquiring the additional interest in the
investee to the current basis of its previously held interest. For
available-for-sale securities, an entity should recognize through
earnings the unrealized holding gains/losses in accumulated
other comprehensive income/loss as of that date.
The amendments of this Update are effective for fiscal years,
and interim periods within those fiscal years, beginning after
December 15, 2016. Early adoption is permitted.
The Corporation does not anticipate that the adoption of
this accounting pronouncement will have a material effect on
its consolidated statements of financial condition or results of
operations.
FASB Accounting Standards Update (“ASU”) 2016-06,
Derivatives and Hedging (Topic 815): Contingent Put and
Call Options in Debt Instruments
The FASB issued ASU 2016-06 in March 2016, which clarifies
that in assessing whether an embedded contingent put or call
option is not clearly and closely related to the debt instrument,
which is part of the assessment made to determine whether an
embedded derivative must be bifurcated from the host contract,
an entity is required to perform only the four step decision
sequence. The four-step decision sequence requires an entity to
consider whether (1) the payoff is adjusted based on changes in
an index, (2) the payoff is indexed to an underlying other than
interest rates or credit risk, (3) the debt involves a substantial
premium or discount and (4) the put or call option is
contingently exercisable. It does not have to separately assess
triggers its ability to exercise the
whether the event
contingent option itself is indexed only to interest rates and
credit risk.
that
The amendments of this Update are effective for fiscal years,
and interim periods within those fiscal years, beginning after
December 15, 2016. Early adoption is permitted.
The Corporation does not anticipate that the adoption of
this accounting pronouncement will have a material effect on
its consolidated statements of financial condition or results of
operations.
FASB Accounting Standards Update (“ASU”) 2016-05,
Derivatives and Hedging (Topic 815): Effect of Derivative
Contract Novations on Existing Hedge Accounting
Relationships
The FASB issued ASU 2016-05 in March 2016, which clarifies
that a novation, or a change in the counterparty to the
derivative instrument that has been designated as a hedging
instrument under Topic 815 does not, in and of itself, require
that hedging relationship, and therefore
de-designation of
accounting,
discontinuance of
provided that all other hedge accounting criteria continue to be
met.
application of hedge
the
The amendments of this Update are effective for fiscal years,
and interim periods within those fiscal years, beginning after
December 15, 2016. Early adoption is permitted.
The Corporation does not anticipate that the adoption of
this accounting pronouncement will have a material effect on
its consolidated statements of financial condition or results of
operations.
FASB Accounting Standards Update (“ASU”) 2016-02,
Leases (Topic 842)
The FASB issued ASU 2016-02 in February 2016, which
supersedes ASC Topic 840 and sets out the principles for the
recognition, measurement, presentation and disclosure of leases
for both lessors and lessees. The new standard requires lessees
to apply a dual approach, classifying leases as either finance or
operating leases based on the principle of whether or not the
lease is effectively a financed purchase by the lessee. This
classification will determine whether
is
recognized based on an effective interest method or on a
straight-line basis over the term of the lease, respectively. A
lessee is also required to record a right-of-use asset (“ROU”)
and a lease liability for all leases with a term greater than
12 months regardless of their classification. Leases with a term
of 12 months or less will be accounted for similar to existing
expense
lease
POPULAR, INC. 2016 ANNUAL REPORT 101
guidance for operating leases today. The new standard requires
is
for
lessors to account
leases using an approach that
substantially equivalent
to existing guidance for sales-type
leases, direct financing leases and operating leases.
The amendments of this Update are effective for fiscal years,
and interim periods within those fiscal years, beginning after
December 15, 2018, with early adoption permitted.
The ASU is
the Corporation’s
expected to impact
consolidated financial statements since the Corporation has
operating and land lease arrangements for which it is the lessee.
Although the Corporation is still evaluating the impact that the
adoption of this accounting pronouncement will have on its
consolidated financial statements, preliminarily it expects that
the amounts to be recognized as ROU assets and lease liabilities
will be less than 1% of its total assets and will not have a
material impact on its regulatory capital.
FASB Accounting Standards Updates (“ASUs”), Revenue
from Contracts with Customers (Topic 606)
The FASB has issued a series of ASUs which, among other
things, clarify the principles for recognizing revenue and
develop a common revenue standard. The core principle of the
guidance is that an entity should recognize revenue to depict
the transfer of promised goods or services,
the
satisfaction of performance obligations, to customers in an
amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. A
five step process is defined to achieve this core principle. The
new guidance also requires disclosures to enable users of
financial statements to understand the nature, timing, and
uncertainty of revenue and cash flows arising from contracts
with customers.
that
is,
The amendments of these Updates are effective for fiscal
years, and interim periods within those fiscal years, beginning
after December 15, 2017.
The Corporation expects to elect the modified retrospective
approach with the cumulative effect of initially adopting these
Updates recognized in opening retained earnings at the date of
adoption.
The Corporation’s main sources of revenues are related to
financial instruments and are scoped out of the ASUs. The
Corporation is evaluating the impact on fees and other
non-interest revenues and does not expect the recognition of
these to be significantly impacted by the adoption of these ASUs
in light of the timing of when the performance obligations are
fulfilled and the
currently being
recognized. The Corporation does not expect the new revenue
impact on its
recognition provisions to have a material
consolidated financial statements.
related revenues
are
102 POPULAR, INC. 2016 ANNUAL REPORT
FASB Accounting Standards Update (“ASU”) 2016-01,
Financial Instruments - Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and
Financial Liabilities
The FASB issued ASU 2016-01 in January 2016, which
primarily affects the accounting for equity investments and
liabilities under the fair value option as follows:
financial
require equity investments (except those accounted for under
the equity method of accounting or those that result
in
consolidation of the investee) to be measured at fair value with
changes in fair value recognized in net income; simplify the
impairment assessment of equity investments without readily
determinable fair values; require changes in fair value due to
instrument-specific credit risk to be presented separately in
other comprehensive income for financial liabilities under the
fair value option; and clarify that the need for a valuation
allowance on a deferred tax asset related to available-for-sale
securities should be evaluated in combination with the entity’s
other deferred tax assets. In addition, the ASU also impacts the
presentation
financial
instruments.
requirements
disclosure
and
of
The amendments of this Update are effective for fiscal years,
and interim periods within those fiscal years, beginning after
December 15, 2017. Early adoption can only be elected for the
provision to record credit-related fair value changes
for
financial liabilities under the fair value option through other
comprehensive income for those financial statements of fiscal
years and interim periods that have not yet been issued.
the Corporation does not have any financial
Currently,
liabilities under
the
the fair value option.
Corporation does not expect to be significantly impacted by the
changes in the accounting for equity investments under the
revised guidance.
In addition,
Note 4 - Discontinued operations and restructuring plan
During the year ended December 31, 2014, the Corporation
completed the sale of its California, Illinois and Central Florida
regional operations and relocated certain back office operations
to Puerto Rico and New York.
As defined in ASC 805-10-55, the regional operations sold
constituted a business, and for financial reporting purposes, the
results of the discontinued operations are presented as “Assets /
Liabilities from discontinued operations” in the consolidated
statement of condition and “Income (loss) from discontinued
operations, net of
tax” in the consolidated statement of
operations.
As of December 31, 2016, there were no assets and liabilities
held within the discontinued operations. The liabilities held at
December 31, 2015 of $1.8 million, mainly comprised of the
indemnity reserve related to the California regional sale, were
reversed during the quarter ended December 31, 2016, as a
result of the expiration of the two-year period indemnification
provision.
Net income from the discontinued operations amounted to $1.1 million for the year ended December 31, 2016 and $1.3 million
for the year ended December 31, 2015.
Also, in connection with the sale, the Corporation has undertaken a restructuring plan (the “PCB Restructuring Plan”) which
was completed by December 31, 2015, for which the Corporation incurred restructuring charges of $45.1 million, of which
approximately $26.7 million were incurred in 2014 and $18.4 million in 2015. Restructuring charges were mostly comprised of
personnel costs, which amounted to $17.5 million for 2014 and $12.9 million for 2015.
The following table presents the activity in the reserve for the restructuring costs associated with the PCB Restructuring Plan:
(In thousands)
Beginning balance
Charges expensed during the period
Payments made during the period
Ending balance
Years ended December 31,
2016
$ 620
–
(492)
$ 128
2015
$13,536
7,840
(20,756)
$
620
Note 5 - Business combination
On February 27, 2015, BPPR, in an alliance with co-bidders, including BPNA, acquired certain assets and all deposits (other than
certain brokered deposits) of former Doral Bank from the FDIC, as receiver. Under the FDIC’s bidding format, BPPR was the lead
bidder and party to the purchase and assumption agreement with the FDIC covering all assets and deposits acquired by it and its
alliance co-bidders. BPPR entered into back to back purchase and assumption agreements with the alliance co-bidders for the
transfer of certain assets and deposits. BPPR entered into transition service agreements with each of the alliance co-bidders. There
is no loss-sharing arrangement with the FDIC on the acquired assets.
The following table presents the fair values of major classes of identifiable assets acquired and liabilities assumed by the
Corporation as of February 27, 2015.
(In thousands)
Assets:
Cash and due from banks
Investment in available-for-sale securities
Investments in FHLB stock
Loans
Accrued income receivable
Receivable from the FDIC
Core deposit intangible
Other assets
Total assets
Liabilities:
Deposits
Advances from the Federal Home Loan Bank
Other liabilities
Total liabilities
Excess of liabilities assumed over assets acquired
Aggregate fair value adjustments
Additional consideration
Goodwill on acquisition
Book value prior to
purchase accounting
adjustments
Fair value
adjustments
Additional
consideration [1]
As recorded by
Popular, Inc.
$ 339,633
172,706
30,785
1,679,792
7,808
–
23,572
67,676
$2,321,972
$2,193,404
542,000
50,728
$2,786,132
$ 464,160
$
–
–
–
(165,925)
–
–
(10,762)
7,569
$
–
–
–
–
–
480,137
–
–
$(169,118)
$480,137
$
9,987
5,187
(511)
$ 14,663
$(183,781)
$
$
–
–
–
–
$480,137
$ 339,633
172,706
30,785
1,513,867
7,808
480,137
12,810
75,245
$2,632,991
$2,203,391
547,187
50,217
$2,800,795
$ 167,804
[1] The additional consideration represents the cash received from the FDIC for the difference between the net liabilities assumed and the net premium paid on the
transaction.
POPULAR, INC. 2016 ANNUAL REPORT 103
In accordance with ASC Topic 805, the fair values assigned
to the assets acquired and liabilities assumed are subject to
refinement up to one year after the closing date of
the
acquisition as new information relative to closing date fair
values become available, and thus the recognized goodwill may
increase or decrease. During the second and third quarters of
2015, retrospective adjustments were made to the estimated fair
values of certain assets acquired and liabilities assumed as part
of
the Doral Bank Transaction to reflect new information
obtained about facts and circumstances that existed as of the
acquisition date. The retrospective adjustments resulted in a
decrease of $2.1 million to the initial fair value estimate of the
mortgage servicing rights, a decrease in other
liabilities
assumed of $0.5 million and, an increase of $2.6 million in the
receivable from the FDIC related to the acquisition cost of
deposits, all of which were adjusted against goodwill.
During the fourth quarter of 2015, the Corporation early
adopted ASU 2015-16 “Business Combination”. Accordingly,
adjustments to the initial fair value estimates identified during
the measurement period were recognized in the reporting
period in which the adjustment amounts were determined.
Pursuant to ASU 2015-16, adjustments were made effective in
the fourth quarter of 2015 to the estimated fair values of assets
and liabilities assumed with the Doral Bank Transaction to
reflect new information obtained during the measurement
period about facts and circumstances that existed as of the
acquisition date that,
if known, would have affected the
acquisition-date fair value measurements.
During the quarter ended March 31, 2016, the Corporation
recorded adjustments to its initial
fair value estimates in
connection with the Doral Bank Transaction. As a result, the
discount on the loans increased by $4.7 million with a
corresponding increase to goodwill.
The following table presents the principal changes in fair value and the revised amounts recorded during the measurement
period.
(In thousands)
Assets:
Loans
Goodwill
Core deposit intangible
Receivable from the FDIC
Other assets
Total assets
Liabilities:
Deposits
Advances from the Federal Home Loan Bank
Other liabilities
Total liabilities
February 27, 2015
As recasted [a]
February 27, 2015
As previously
reported [b]
$1,513,867
167,804
12,810
480,137
626,177
$2,800,795
$2,203,391
547,187
50,217
$2,800,795
$1,665,756
41,633
23,572
441,721
626,177
$2,798,859
$2,201,455
547,187
50,217
$2,798,859
Change
$(151,889)
126,171
(10,762)
38,416
–
$
$
$
1,936
1,936
–
–
1,936
[a] Amounts reported include retrospective adjustments during the measurement period, in accordance with U.S. GAAP, related to the Doral Bank Transaction.
[b] Amounts are presented as previously reported as of September 30, 2015.
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 $ 1.2 billion at December 31,
2016 (December 31, 2015 - $ 1.1 billion). Cash and due from
banks, as well as other highly liquid securities, are used to
cover the required average reserve balances.
At December 31, 2016, the Corporation held $31 million in
restricted assets in the form of
funds deposited in money
market accounts, trading account securities and investment
securities available for sale (December 31, 2015 - $44 million).
The amounts held in trading account securities and investment
securities available for sale consist primarily of restricted assets
held for the Corporation’s non-qualified retirement plans and
fund deposits guaranteeing possible liens or encumbrances over
the title of insured properties.
Note 7 - 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.
104 POPULAR, INC. 2016 ANNUAL REPORT
The fair value of
the collateral securities held by the
Corporation on these transactions at December 31, was as
follows:
The repledged securities were used as underlying securities
for repurchase agreement transactions.
(In thousands)
Not repledged
Total
2016
2015
$27,388
$111,545
$27,388
$111,545
Note 8 – 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, 2016 and 2015.
(In thousands)
U.S. Treasury securities
Within 1 year
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
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
Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years
Total collateralized mortgage obligations - federal agencies
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
Within 1 year
After 5 to 10 years
Total other
At December 31, 2016
Gross
unrealized
losses
Gross
unrealized
gains
Fair
value
Weighted
average
yield
Amortized
cost
$ 844,002
1,300,729
$ 1,254
214
$
2,144,731
1,468
100,050
613,293
200
713,543
6,419
5,000
17,605
29,024
13
18,524
39,178
1,180,686
1,238,401
55
19,960
317,185
3,805,675
4,142,875
1,246
8,539
1,004
9,543
102
710
–
812
–
–
–
–
–
429
428
6,313
7,170
1
537
3,701
28,772
33,011
876
11
31
42
28
9,551
9,579
–
2,505
–
2,505
161
1,550
4,542
6,253
–
28
61
23,956
24,045
–
43
1,721
68,790
70,554
–
–
–
–
$ 845,228
1,291,392
1.00%
1.11
2,136,620
1.06
100,152
611,498
200
711,850
6,258
3,450
13,063
22,771
13
18,925
39,545
1,163,043
1,221,526
56
20,454
319,165
3,765,657
4,105,332
2,122
8,550
1,035
9,585
0.98
1.38
5.64
1.32
2.89
3.80
7.09
5.60
1.23
2.89
2.68
1.99
2.02
4.76
3.86
2.29
2.47
2.46
7.94
1.78
3.62
1.97
Total investment securities available-for-sale [1]
$8,279,363
$43,379
$112,936
$8,209,806
1.94%
[1]
Includes $4.1 billion pledged to secure public and trust deposits, assets sold under agreements to repurchase, credit facilities and loan servicing agreements that the
secured parties are not permitted to sell or repledge the collateral, of which $3.4 billion serve as collateral for public funds.
POPULAR, INC. 2016 ANNUAL REPORT 105
(In thousands)
U.S. Treasury securities
Within 1 year
After 1 to 5 years
After 5 to 10 years
Total U.S. Treasury securities
Obligations of U.S. Government sponsored entities
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
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
Amortized
cost
$
24,861
1,149,807
9,937
1,184,605
919,819
250
23,000
943,069
7,227
5,925
18,585
31,737
21,446
44,585
1,518,662
1,584,693
22,015
256,097
2,039,217
2,317,329
1,350
8,911
1,311
10,222
At December 31, 2015
Gross
unrealized
losses
Gross
unrealized
gains
Fair
value
Weighted
average
yield
$
335
365
22
722
1,337
1
42
1,380
–
–
–
–
594
733
8,137
9,464
987
4,866
34,839
40,692
1,053
–
39
39
$
–
1,999
–
1,999
4,808
–
–
4,808
199
2,200
6,979
9,378
37
–
33,283
33,320
8
1,197
12,620
13,825
5
28
–
28
$
25,196
1,148,173
9,959
4.31%
1.03
1.99
1,183,328
1.11
916,348
251
23,042
939,641
7,028
3,725
11,606
22,359
22,003
45,318
1,493,516
1,560,837
22,994
259,766
2,061,436
2,344,196
2,398
8,883
1,350
10,233
1.33
5.64
3.22
1.38
3.94
4.02
6.99
5.74
2.81
2.85
1.99
2.02
4.65
2.51
2.83
2.81
7.92
1.71
3.62
1.95
Total investment securities available-for-sale [1]
$6,073,005
$53,350
$63,363
$6,062,992
2.07%
[1]
Includes $2.4 billion pledged to secure public and trust deposits, assets sold under agreements to repurchase, credit facilities and loan servicing agreements that the
secured parties are not permitted to sell or repledge the collateral, of which $1.5 billion serve as collateral for public funds.
The weighted average yield on investment
securities
available-for-sale is based on amortized cost; therefore, it does
not give effect to changes in fair value.
The following table presents the aggregate amortized cost
investment securities available-for-sale at
and fair value of
December 31, 2016 by contractual maturity.
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.
(In thousands)
Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years
Total
Equity securities
Total investment securities
available-for-sale
Amortized cost
Fair value
$ 952,659
1,958,925
362,567
5,003,966
8,278,117
1,246
$ 953,999
1,948,527
363,395
4,941,763
8,207,684
2,122
$8,279,363
$8,209,806
106 POPULAR, INC. 2016 ANNUAL REPORT
equity
securities
During the year ended December 31, 2016, the Corporation
and
securities,
sold mortgage-backed
obligations from the Puerto Rico government and its political
subdivisions. The proceeds from these sales were $ 5.3 million.
During the year ended December 31, 2015, the Corporation
sold U.S. agency securities and obligations from the Puerto Rico
government and its political subdivisions. The proceeds from
these sales were $ 96.8 million. Gross realized gains and losses
on the sale of investment securities available-for-sale, for the
years ended December 31, 2016, 2015 and 2014 were as
follows:
(In thousands)
Gross realized gains
Gross realized losses
Net realized gains (losses) on sale of
investment securities available-for-
sale
Years ended December 31,
2014
2015
2016
$378
–
$226
(85)
$ 4,461
(5,331)
$378
$141
$ (870)
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, 2016, and 2015.
(In thousands)
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
Total investment securities available-for-sale in an unrealized
Less than 12 months
Gross
unrealized
losses
Fair
value
$1,162,110
430,273
6,258
505,503
3,537,606
$ 9,579
2,426
161
8,112
70,173
At December 31, 2016
12 months or more
Gross
unrealized
losses
Fair
value
$
–
3,126
16,512
339,236
15,113
$
–
79
6,092
15,933
381
Total
Fair
value
$1,162,110
433,399
22,770
844,739
3,552,719
Gross
unrealized
losses
$ 9,579
2,505
6,253
24,045
70,554
loss position
$5,641,750
$90,451
$373,987
$22,485
$6,015,737
$112,936
(In thousands)
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 in an unrealized
Less than 12 months
Gross
unrealized
losses
Fair
value
$ 589,689
390,319
884
331,501
1,641,663
45
8,883
$ 1,999
2,128
164
4,446
12,992
5
28
At December 31, 2015
12 months or more
Gross
unrealized
losses
Fair
value
$
–
181,744
19,490
814,195
22,362
–
–
$
–
2,680
9,214
28,874
833
–
–
Total
Fair
value
$ 589,689
572,063
20,374
1,145,696
1,664,025
45
8,883
Gross
unrealized
losses
$ 1,999
4,808
9,378
33,320
13,825
5
28
loss position
$2,962,984
$21,762
$1,037,791
$41,601
$4,000,775
$63,363
POPULAR, INC. 2016 ANNUAL REPORT 107
the accompanying consolidated statement of operations and no
amount remained recognized in the accompanying statement of
other comprehensive income related to this specific security.
The security, for which an other-than-temporary impairment
was recorded, was sold during the fourth quarter of 2016,
resulting in a realized gain of $30 thousand. The proceeds from
this sale were $882 thousand.
investment
During the second quarter of 2015,
the Corporation
recognized an other-than-temporary impairment charge of
$14.4 million on its portfolio of
securities
available-for-sale classified as obligations from the Puerto Rico
government and its political subdivisions. At June 30, 2015,
these securities were rated Caa2 and CCC- by Moody’s and
S&P, respectively. Notwithstanding the payment priorities
established by the Puerto Rico Constitution for these securities,
Puerto Rico’s fiscal and economic situation, together with the
Government’s announcements regarding its ability to pay its
debt and its
intention to pursue a comprehensive debt
restructuring, led management to conclude that the unrealized
losses on these government
securities was attributed to
estimated credit losses. Accordingly, the other-than temporary
impairment was recognized in its entirety in the accompanying
consolidated statement of operations and no amount remained
recognized
other
accompanying
comprehensive income related to these specific securities.
These
other-than-temporary
impairment was recorded, were sold during the third quarter of
2015, resulting in a realized gain of $0.1 million. The proceeds
from this sale were $26.8 million.
for which
securities,
statement
the
an
in
of
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
held-to-maturity
issuer
in which the aggregate amortized cost of such
securities),
securities
equity. This
exceeds
information excludes securities backed by the full faith and
the U.S. Government. Investments in obligations
credit of
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
2016
2015
(In
thousands)
FNMA
Freddie Mac
Amortized
cost
$3,255,844
1,381,197
Fair value
$3,211,443
1,361,933
Amortized
cost
$2,649,860
1,088,691
Fair value
$2,633,899
1,079,956
As of December 31, 2016, the available-for-sale investment
portfolio reflects gross unrealized losses of approximately
$113 million, driven by Mortgage backed securities and
Collateralized mortgage obligations.
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, 2016, management performed its quarterly
analysis of all debt securities in an unrealized loss position.
Based on the analyses performed, management concluded that
no individual debt
security was other-than-temporarily
impaired as of such date. During the quarter ended June 30,
2016 the Corporation recognized an other-than-temporary
impairment charge of $209 thousand on an investment security
available-for-sale classified as obligations from the Puerto Rico
government and its political subdivisions, which at June 30,
2016 was
rated Caa2 and CC by Moody’s and S&P,
fiscal and economic situation,
respectively. Puerto Rico’s
together with, among other factors, the recent moratorium
declared on the payment of principal and interest on
obligations for certain Puerto Rico government securities,
including those issued or guaranteed by the Commonwealth,
led management to conclude that the unrealized losses on this
security
Corporation
determined that the entire balance of the unrealized loss carried
losses.
by this security was attributed to estimated credit
Accordingly, during the quarter ended June 30, 2016 the other-
than-temporary impairment was recognized in its entirety in
other-than-temporary.
The
was
108 POPULAR, INC. 2016 ANNUAL REPORT
Note 9 - 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, 2016 and 2015.
(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, 2016
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
Weighted
average
yield
$ 3,105
14,540
18,635
59,747
96,027
74
74
1,000
1,000
2,000
$
–
–
–
1,368
1,368
$ 1,240
5,957
7,766
8,892
$ 1,865
8,583
10,869
52,223
5.90%
6.02
6.20
1.91
23,855
73,540
3.49
4
4
–
–
–
–
–
3
39
42
78
78
997
961
1,958
5.45
5.45
1.65
2.44
2.05
Total investment securities held-to-maturity [1]
$98,101
$1,372
$23,897
$75,576
3.46%
[1]
Includes $53.1 million pledged to secure public and trust deposits that the secured parties are not permitted to sell or repledge the collateral.
(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
After 1 to 5 years
Total other
At December 31, 2015
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
Weighted
average
yield
$ 2,920
13,655
20,020
62,222
98,817
$
–
–
–
3,604
3,604
$
291
5,015
8,020
8,280
$ 2,629
8,640
12,000
57,546
5.90%
5.98
6.14
2.08
21,606
80,815
3.55
86
86
2,000
2,000
5
5
–
–
–
–
17
17
91
91
1,983
1,983
5.45
5.45
1.81
1.81
Total investment securities held-to-maturity [1]
$100,903
$3,609
$21,623
$82,889
3.52%
[1]
Includes $57.2 million pledged to secure public and trust deposits that the secured parties are not permitted to sell or repledge the collateral.
Securities not due on a single contractual maturity date,
such as collateralized mortgage obligations, are classified in the
period of final contractual maturity. The expected maturities of
collateralized mortgage obligations and certain other securities
may differ from their contractual maturities because they may
be subject to prepayments or may be called by the issuer.
POPULAR, INC. 2016 ANNUAL REPORT 109
The following table presents the aggregate amortized cost and fair value of investments securities held-to-maturity at
December 31, 2016 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
$ 4,105
15,540
18,709
59,747
$98,101
$ 2,862
9,544
10,947
52,223
$75,576
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, 2016 and 2015:
(In thousands)
Obligations of Puerto Rico, States and political subdivisions
Other
Total investment securities held-to-maturity in an unrealized loss
Less than 12 months
At December 31, 2016
12 months or more
Total
Fair
value
$31,294
491
Gross
unrealized
losses
Fair
value
Gross
unrealized
losses
Fair
value
Gross
unrealized
losses
$1,702
9
$30,947
1,217
$22,153
33
$62,241
1,708
$23,855
42
position
$31,785
$1,711
$32,164
$22,186
$63,949
$23,897
Less than 12 months
At December 31, 2015
12 months or more
Total
Fair
value
$
–
1,483
$1,483
Gross
unrealized
losses
Fair
value
Gross
unrealized
losses
Fair
value
Gross
unrealized
losses
$ –
17
$17
$33,334
–
$21,606
–
$33,334
1,483
$21,606
17
$33,334
$21,606
$34,817
$21,623
management concluded that no individual debt security was
other-than-temporarily impaired at December 31, 2016. Further
deterioration of the fiscal crisis of the Government of Puerto
Rico could further affect the value of these securities, resulting
in losses to the Corporation. The Corporation does not have the
intent to sell securities held-to-maturity and it is more likely
than not that the Corporation will not have to sell these
investment securities prior to recovery of their amortized cost
basis.
for
Note 10 - Loans
Loans acquired in the Westernbank FDIC-assisted transaction,
except
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
aggregated
based
pools
on
(In thousands)
Obligations of Puerto Rico, States and political subdivisions
Other
Total investment securities held-to-maturity in an unrealized loss
position
As indicated in Note 8 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
2016 are primarily associated with securities
municipalities of Puerto Rico and are generally not rated by a
credit rating agency. This includes $53 million of securities
issued by three municipalities of Puerto Rico that are payable
from the real and personal property taxes collected within such
municipalities. These bonds have seniority to the payment of
operating cost and expenses of the municipality. The portfolio
also includes approximately $43 million in securities for which
central
the underlying source of payment
government, but
insurance fund
provides a guarantee in the event of default.
in which a government
is not
the
The Corporation performs periodic credit quality reviews on
these issuers. Based on the quarterly analysis performed,
110 POPULAR, INC. 2016 ANNUAL REPORT
expectation of cash flows. The loans which are accounted for
under ASC Subtopic 310-30 by the Corporation are not
considered non-performing and will continue to have an
accretable yield as long as there is a reasonable expectation
about the timing and amount of cash flows expected to be
collected. The Corporation measures additional losses for this
portfolio when it is probable the Corporation will be unable to
collect all cash flows expected at acquisition plus additional
cash flows expected to be collected arising from changes in
estimates after acquisition. Lines of credit with revolving
privileges that were acquired as part of the Westernbank FDIC-
assisted transaction are accounted for under the guidance of
ASC Subtopic 310-20, which requires that any differences
between the contractually required loan payment receivable in
excess of the Corporation’s initial investment in the loans be
accreted into interest income. Loans accounted for under ASC
Subtopic 310-20 are placed in non-accrual status when past due
in accordance with the Corporation’s non-accruing policy and
any accretion of discount is discontinued.
The risks on loans acquired in the FDIC-assisted transaction
are significantly different from the risks on loans not covered
under the FDIC loss sharing agreements because of the loss
protection provided by the FDIC. Accordingly, the Corporation
presents loans subject
to the loss sharing agreements as
“covered loans” in the information below and loans that are not
subject to the FDIC loss sharing agreements as “non-covered
loans”. The FDIC loss sharing agreements expired on June 30,
2015 for commercial (including construction) and consumer
loans, and expires on June 30, 2020 for single-family residential
mortgage loans, as explained in Note 12.
For a summary of the accounting policies 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.
During the year ended December 31, 2016, the Corporation
recorded purchases (including repurchases) of mortgage loans
amounting to $619 million, consumer loans of $164 million
and commercial loans amounting to $51 million. Excluding the
impact of the Doral Bank Transaction, during the year ended
December 31, 2015, the Corporation recorded purchases of
mortgage loans amounting to $588 million, consumer loans of
$72 million and commercial loans of $55 million. Refer to Note
5 for information on loans acquired as part of the Doral Bank
Transaction.
the
year
sales
performed
whole-loan
approximately $47 million during
Excluding the bulk sale of Westernbank loans with a
carrying value of approximately $100 million, the Corporation
sold commercial and construction loans with a carrying value
of
ended
December 31, 2016 (December 31, 2015 - $43 million). The
Corporation
involving
approximately $83 million of residential mortgage loans during
the year ended December 31, 2016 (December 31, 2015 - $98
million). Also, during the year ended December 31, 2016, the
Corporation securitized approximately
$613 million of
into Government National Mortgage
mortgage
Association
and
$163 million of mortgage loans into Federal National Mortgage
Association (“FNMA”) mortgage-backed securities, compared
to $869 million and $219 million, respectively, during the year
ended December 31, 2015.
(“GNMA”) mortgage-backed
securities
loans
Non-covered loans
The following table presents the composition of non-covered
loans held-in-portfolio (“HIP”), net of unearned income, by
past due status at December 31, 2016 and 2015, including loans
previously covered by the commercial FDIC loss sharing
agreements.
(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, 2016
Puerto Rico
Past due
30-59
days
$
232
98,604
12,967
19,156
–
289,635
6,619
11,646
–
12,148
32,441
1,259
$484,707
60-89
days
$
–
4,785
5,014
2,638
–
136,558
1,356
8,752
65
7,918
7,217
294
$174,597
$
90 days
or more
664
51,435
112,997
32,147
1,668
801,251
3,062
18,725
185
20,686
12,320
19,311
$1,074,451
$
Total
past due
896
154,824
130,978
53,941
1,668
1,227,444
11,037
39,123
250
40,752
51,978
20,864
$1,733,755
$
Current
173,644
2,409,461
1,660,497
2,617,976
83,890
4,689,056
691,856
1,061,484
8,101
1,109,425
774,614
154,665
$15,434,669
Non-covered
loans HIP
Puerto Rico
174,540
$
2,564,285
1,791,475
2,671,917
85,558
5,916,500
702,893
1,100,607
8,351
1,150,177
826,592
175,529
$17,168,424
POPULAR, INC. 2016 ANNUAL REPORT 111
(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
Total
(In thousands)
Commercial multi-family
Commercial real estate non-owner occupied
Commercial real estate owner occupied
Commercial and industrial
Construction
Mortgage
Leasing
Legacy [3]
Consumer:
Credit cards
Home equity lines of credit
Personal
Auto
Other
December 31, 2016
U.S. mainland
Past due
60-89
days
90 days
or more
$
–
379
540
610
–
5,272
346
28
1,055
1,675
–
–
$
206
1,195
472
101,257
–
11,713
3,337
30
4,762
1,864
–
8
30-59
days
$ 5,952
1,992
2,116
960
–
15,974
833
8
2,908
2,547
–
–
Total
past due
$ 6,158
3,566
3,128
102,827
–
32,959
4,516
66
8,725
6,086
–
8
Current
$1,058,138
1,353,750
240,617
828,106
690,742
746,902
40,777
92
243,450
234,521
9
180
Loans HIP
U.S.
mainland
$1,064,296
1,357,316
243,745
930,933
690,742
779,861
45,293
158
252,175
240,607
9
188
$33,290
$9,905
$124,844
$168,039
$5,437,284
$5,605,323
December 31, 2016
Popular, Inc.
Past due
30-59
days
$ 6,184
100,596
15,083
20,116
–
305,609
6,619
833
11,654
2,908
14,695
32,441
1,259
$
60-89
days
–
5,164
5,554
3,248
–
141,830
1,356
346
8,780
1,120
9,593
7,217
294
$
90 days
or more
870
52,630
113,469
133,404
1,668
812,964
3,062
3,337
18,755
4,947
22,550
12,320
19,319
$
Total
past due
7,054
158,390
134,106
156,768
1,668
1,260,403
11,037
4,516
Current
$ 1,231,782
3,763,211
1,901,114
3,446,082
774,632
5,435,958
691,856
40,777
39,189
8,975
46,838
51,978
20,872
1,061,576
251,551
1,343,946
774,623
154,845
Non-covered
loans HIP
Popular, Inc. [1] [2]
$ 1,238,836
3,921,601
2,035,220
3,602,850
776,300
6,696,361
702,893
45,293
1,100,765
260,526
1,390,784
826,601
175,717
Total
$517,997
$184,502
$1,199,295
$1,901,794
$20,871,953
$22,773,747
[1] Non-covered loans held-in-portfolio are net of $121 million in unearned income and exclude $89 million in loans held-for-sale.
[2]
Includes $7.3 billion pledged to secure credit facilities and public funds that the secured parties are not permitted to sell or repledge the collateral, of which
$4.5 billion were pledged at the FHLB as collateral for borrowings, $2.3 billion at the FRB for discount window borrowings and $0.5 billion serve as collateral for
public funds.
[3] The legacy portfolio is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part
of restructuring efforts carried out in prior years at the BPNA segment.
112 POPULAR, INC. 2016 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
Total
(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
Total
December 31, 2015
Puerto Rico
Past due
30-59
days
$
459
166,732
14,245
6,010
238
344,858
7,844
11,078
186
13,756
33,554
1,069
60-89
days
$
217
12,520
5,624
6,059
253
162,341
1,630
9,414
292
7,889
7,500
298
$
90 days
or more
1,316
84,982
138,778
38,464
13,738
863,869
3,009
19,098
394
22,625
11,640
19,232
$
Total
past due
1,992
264,234
158,647
50,533
14,229
1,371,068
12,483
39,590
872
44,270
52,694
20,599
$
Current
130,154
2,404,858
1,750,597
2,607,204
86,719
4,756,423
615,167
1,088,755
9,816
1,158,565
763,256
167,885
Non-covered
loans HIP
Puerto Rico
$
132,146
2,669,092
1,909,244
2,657,737
100,948
6,127,491
627,650
1,128,345
10,688
1,202,835
815,950
188,484
$600,029
$214,037
$1,217,145
$2,031,211
$15,539,399
$17,570,610
December 31, 2015
U.S. mainland
Past due
30-59
days
$
33
160
1,490
13,647
–
18,957
1,160
327
3,149
1,836
–
–
60-89
days
$ 253
–
429
1,526
–
3,424
662
134
1,114
690
–
10
90 days
or more
Total
past due
$
–
253
221
75,575
–
13,538
3,649
437
4,176
1,240
6
5
$
286
413
2,140
90,748
–
35,919
5,471
898
8,439
3,766
6
15
Current
$ 693,647
962,610
200,204
780,896
580,158
872,671
58,965
13,037
296,045
168,860
22
289
Loans HIP
U.S.
mainland
$ 693,933
963,023
202,344
871,644
580,158
908,590
64,436
13,935
304,484
172,626
28
304
$40,759
$8,242
$99,100
$148,101
$4,627,404
$4,775,505
POPULAR, INC. 2016 ANNUAL REPORT 113
(In thousands)
Commercial multi-family
Commercial real estate non-owner occupied
Commercial real estate owner occupied
Commercial and industrial
Construction
Mortgage
Leasing
Legacy [3]
Consumer:
Credit cards
Home equity lines of credit
Personal
Auto
Other
December 31, 2015
Popular, Inc.
Past due
$
30-59
days
492
166,892
15,735
19,657
238
363,815
7,844
1,160
11,405
3,335
15,592
33,554
1,069
$
60-89
days
470
12,520
6,053
7,585
253
165,765
1,630
662
9,548
1,406
8,579
7,500
308
$
90 days
or more
1,316
85,235
138,999
114,039
13,738
877,407
3,009
3,649
19,535
4,570
23,865
11,646
19,237
$
Total
past due
2,278
264,647
160,787
141,281
14,229
1,406,987
12,483
5,471
40,488
9,311
48,036
52,700
20,614
$
Current
823,801
3,367,468
1,950,801
3,388,100
666,877
5,629,094
615,167
58,965
1,101,792
305,861
1,327,425
763,278
168,174
Non-covered
loans HIP
Popular, Inc. [1] [2]
$
826,079
3,632,115
2,111,588
3,529,381
681,106
7,036,081
627,650
64,436
1,142,280
315,172
1,375,461
815,978
188,788
Total
$640,788
$222,279
$1,316,245
$2,179,312
$20,166,803
$22,346,115
[1] Non-covered loans held-in-portfolio are net of $108 million in unearned income and exclude $137 million in loans held-for-sale.
[2]
Includes $7.3 billion pledged to secure credit facilities and public funds that the secured parties are not permitted to sell or repledge the collateral, of which
$4.3 billion were pledged at the FHLB as collateral for borrowings, $2.5 billion at the FRB for discount window borrowings and $0.5 billion serve as collateral for
public funds.
[3] The legacy portfolio is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part
of restructuring efforts carried out in prior years at the BPNA segment.
The following tables present non-covered loans held-in-portfolio by loan class that are in non-performing status or are accruing
interest but are past due 90 days or more at December 31, 2016 and December 31, 2015. Accruing loans past due 90 days or more
consist primarily of credit cards, FHA / VA and other insured mortgage loans, and delinquent mortgage loans which are included
in the Corporation’s financial statements pursuant to GNMA’s buy-back option program. Servicers of loans underlying GNMA
mortgage-backed securities must report as their own assets the defaulted loans that they have the option (but not the obligation) to
repurchase, even when they elect not to exercise that option.
(In thousands)
Commercial multi-family
Commercial real estate non-owner
occupied
Commercial real estate owner occupied
Commercial and industrial
Mortgage [3]
Leasing
Legacy
Consumer:
Credit cards
Home equity lines of credit
Personal
Auto
Other
At December 31, 2016
Puerto Rico
U.S. mainland
Popular, Inc.
Non-accrual
loans
Accruing
loans past-due
90 days or more [1]
Non-accrual
loans
Accruing
loans past-due
90 days or more [1]
Non-accrual
loans
Accruing
loans past-due
90 days or more [1]
$
664
$
–
$
206
$–
$
870
$
–
24,611
102,771
31,609
318,194
3,062
–
–
–
20,553
12,320
18,724
–
–
538
406,583
–
–
18,725
185
34
–
587
1,195
472
1,820
11,713
–
3,337
30
4,762
1,864
–
8
–
–
–
–
–
–
–
–
–
–
–
25,806
103,243
33,429
329,907
3,062
3,337
30
4,762
22,417
12,320
18,732
–
–
538
406,583
–
–
18,725
185
34
–
587
Total [2]
$532,508
$426,652
$25,407
$–
$557,915
$426,652
[1] Non-covered loans of $215 million accounted for under ASC Subtopic 310-30 are excluded from the above table as they are considered to be performing due to the
application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analysis.
114 POPULAR, INC. 2016 ANNUAL REPORT
[2] For purposes of this table non-performing loans exclude non-performing loans held-for-sale.
[3]
It is the Corporation’s policy to report delinquent residential mortgage loans insured by FHA or guaranteed by the VA as accruing loans past due 90 days or more
as opposed to non-performing since the principal repayment is insured. These balances include $181 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, 2016. Furthermore, the Corporation has approximately $68 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.
(In thousands)
Commercial multi-family
Commercial real estate non-owner
occupied
Commercial real estate owner occupied
Commercial and industrial
Construction
Mortgage [3]
Leasing
Legacy
Consumer:
Credit cards
Home equity lines of credit
Personal
Auto
Other
At December 31, 2015
Puerto Rico
U.S. mainland
Popular, Inc.
Non-accrual
loans
Accruing
loans past-due
90 days or more [1]
Non-accrual
loans
Accruing
loans past-due
90 days or more [1]
Non-accrual
loans
Accruing
loans past-due
90 days or more [1]
$ 1,062
$
–
$
–
$–
$ 1,062
$
–
33,720
106,449
36,671
3,550
337,933
3,009
–
–
–
22,102
11,640
18,698
–
–
555
–
426,094
–
–
19,098
394
523
–
61
253
221
3,440
–
13,538
–
3,649
437
4,176
1,240
6
5
–
–
–
–
–
–
–
–
–
–
–
–
33,973
106,670
40,111
3,550
351,471
3,009
3,649
437
4,176
23,342
11,646
18,703
–
–
555
–
426,094
–
–
19,098
394
523
–
61
Total [2]
$574,834
$446,725
$26,965
$–
$601,799
$446,725
[1] Non-covered loans by $268 million accounted for under ASC Subtopic 310-30 are excluded from the above table as they are considered to be performing due to
the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analysis.
[2] For purposes of this table non-performing loans exclude $ 45 million in non-performing loans held-for-sale.
[3]
It is the Corporation’s policy to report delinquent residential mortgage loans insured by FHA or guaranteed by the VA as accruing loans past due 90 days or more
as opposed to non-performing since the principal repayment is insured. These balances include $164 million of residential mortgage loans in Puerto Rico insured
by FHA or guaranteed by the VA that are no longer accruing interest as of December 31, 2015. Furthermore, the Corporation has approximately $70 million in
reverse mortgage loans in Puerto Rico which are guaranteed by FHA, but which are currently not accruing interest. Due to the guaranteed nature of the loans, it is
the Corporation’s policy to exclude these balances from non-performing assets.
The following table provides a breakdown of loans held-for-sale (“LHFS”) including loans in non-performing status at
December 31, 2016 and 2015 by main categories.
(In thousands)
Commercial
Construction
Mortgage
Total loans held-for-sale
December 31, 2016
Non-Performing Performing
$–
–
–
$–
$
–
–
88,821
$88,821
December 31, 2015
Non-Performing Performing
$45,074
95
–
$45,169
$
–
–
91,831
$91,831
Total
$
–
–
88,821
$88,821
Total
$ 45,074
95
91,831
$137,000
POPULAR, INC. 2016 ANNUAL REPORT 115
The components of the net financing leases receivable at
At December 31, 2016, future minimum lease payments are
December 31, 2016 and 2015 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
2016
2015
(In thousands)
$601,317
210,761
8,309
117,296
703,091
7,677
$548,438
175,458
8,553
103,433
629,016
11,022
2017
2018
2019
2020
2021 and thereafter
Total
$695,414
$617,994
$136,657
125,327
102,100
106,307
130,926
$601,317
The following table presents loans acquired as part of the Doral Bank Transaction accounted for under ASC subtopic 310-20 as
of the February 27, 2015 acquisition date:
(In thousands)
Fair value of loans accounted under ASC Subtopic 310-20
Gross contractual amounts receivable (principal and interest)
Estimate of contractual cash flows not expected to be collected
$1,178,543
$1,666,695
34,646
$
Covered loans
The following tables present the composition of loans by past due status at December 31, 2016 and 2015 for covered loans
held-in-portfolio. The information considers covered loans accounted for under ASC Subtopic 310-20 and ASC Subtopic 310-30.
(In thousands)
Mortgage
Consumer
Total covered loans
December 31, 2016
30-59
days
60-89
days
$25,506
751
$12,904
245
$26,257
$13,149
Past due
90 days or more
$69,856
1,074
$70,930
Total
past due
$108,266
2,070
Current
$448,304
14,238
$110,336
$462,542
Covered
loans HIP [1]
$556,570
16,308
$572,878
[1]
Includes $337 million pledged to secure credit facilities at the FHLB which are not permitted to sell or repledge the collateral.
(In thousands)
Mortgage
Consumer
Total covered loans
December 31, 2015
30-59
days
60-89
days
$31,413
1,246
$16,593
444
$32,659
$17,037
Past due
90 days or more
$83,132
1,283
$84,415
Total
past due
$131,138
2,973
Current
$495,964
16,040
$134,111
$512,004
Covered
loans HIP [1]
$627,102
19,013
$646,115
[1]
Includes $386 million pledged to secure credit facilities at the FHLB which are not permitted to sell or repledge the collateral.
The following table presents covered loans in nonperforming status and accruing loans past due 90 days or more by loan class
at December 31, 2016 and 2015.
(In thousands)
Mortgage
Consumer
Total [1]
December 31, 2016
December 31, 2015
Non-accrual
loans
Accruing loans past
due 90 days or more
Non-accrual
loans
Accruing loans past
due 90 days or more
$3,794
121
$3,915
$–
–
$–
$3,790
97
$3,887
$–
–
$–
[1] Covered loans accounted for under ASC Subtopic 310-30 are excluded from the above table as they are considered to be performing due to the application of the
accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analyses.
116 POPULAR, INC. 2016 ANNUAL REPORT
The Corporation accounts for lines of credit with revolving
privileges under the accounting guidance of ASC Subtopic
310-20, which requires that any differences between the
contractually required loans payment receivable in excess of the
initial investment in the loans be accreted into interest income
over the life of the loans,
if the loan is accruing interest.
Covered loans accounted for under ASC Subtopic 310-20
amounted to $10 million at December 31, 2016 (December 31,
2015 - $10 million).
Loans acquired with deteriorated credit quality accounted for
under ASC 310-30
The following provides information of loans acquired with
evidence of credit deterioration as of the acquisition date,
accounted for under the guidance of ASC 310-30.
Loans acquired from Westernbank as part of an FDIC-
assisted transaction
The carrying amount of the Westernbank loans consisted of
loans determined to be impaired at the time of acquisition,
which are accounted for in accordance with ASC Subtopic
310-30 (“credit
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.
impaired loans”),
and loans
(In thousands)
Commercial real estate
Commercial and industrial
Construction
Mortgage
Consumer
Carrying amount [1]
Allowance for loan losses
December 31, 2016
Carrying amount
Non-credit
impaired loans
Credit impaired
loans
$ 985,181
103,476
–
587,949
18,775
1,695,381
(61,855)
$14,440
–
1,668
25,781
1,059
42,948
(7,022)
December 31, 2015
Carrying amount
Non-credit
impaired loans
Credit impaired
loans
Total
$ 999,621
103,476
1,668
613,730
19,834
$1,114,368
84,765
8,943
667,023
23,047
1,738,329
(68,877)
1,898,146
(59,753)
$35,393
519
6,027
33,090
1,326
76,355
(3,810)
Total
$1,149,761
85,284
14,970
700,113
24,373
1,974,501
(63,563)
Carrying amount, net of allowance
$1,633,526
$35,926
$1,669,452
$1,838,393
$72,545
$1,910,938
[1] The carrying amount of loans acquired from Westernbank and accounted for under ASC 310-30 which remains subject to the loss sharing agreement with the
FDIC amounted to approximately $563 million as of December 31, 2016 and $636 million as of December 31, 2015.
The outstanding principal balance of Westernbank loans
accounted pursuant to ASC Subtopic 310-30, amounted to
$2.1 billion at December 31, 2016 (December 31, 2015 - $2.4
billion). At December 31, 2016, none of the acquired loans
from the Westernbank FDIC-assisted transaction accounted for
under ASC Subtopic 310-30 were considered non-performing
interest income, through accretion of the
loans. Therefore,
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
to the ASC
the Westernbank loans accounted pursuant
Subtopic 310-30, for the years ended December 31, 2016 and
2015, were as follows:
(In thousands)
Beginning balance
Accretion
Change in expected cash flows
Ending balance
Activity in the accretable yield
Westernbank loans ASC 310-30
For the years ended
December 31, 2016
Credit
impaired
loans
Non-credit
impaired
loans
Total
December 31, 2015
Credit
impaired
loans
Non-credit
impaired
loans
Total
$1,105,732
(162,983)
59,159
$ 6,726
(6,765)
8,218
$1,112,458
(169,748)
67,377
$1,265,752
(192,826)
32,806
$ 5,585
(10,140)
11,281
$1,271,337
(202,966)
44,087
$1,001,908
$ 8,179
$1,010,087
$1,105,732
$ 6,726
$1,112,458
POPULAR, INC. 2016 ANNUAL REPORT 117
(In thousands)
Beginning balance
Accretion
Collections / loan sales / charge-offs [1]
Ending balance [2]
Allowance for loan losses ASC 310-30 Westernbank loans
Carrying amount of Westernbank loans accounted for pursuant to ASC 310-30
For the years ended
December 31, 2016
Credit
impaired
loans
Non-credit
impaired
loans
Total
December 31, 2015
Credit
impaired
loans
Non-credit
impaired
loans
Total
$1,898,146
162,983
(365,748)
$1,695,381
(61,855)
$ 76,355
6,765
(40,172)
$ 42,948
(7,022)
$1,974,501
169,748
(405,920)
$2,272,142
192,826
(566,822)
$ 172,030
10,140
(105,815)
$2,444,172
202,966
(672,637)
$1,738,329
(68,877)
$1,898,146
(59,753)
$ 76,355
(3,810)
$1,974,501
(63,563)
Ending balance, net of ALLL
$1,633,526
$ 35,926
$1,669,452
$1,838,393
$ 72,545
$1,910,938
[1] For the year ended December 31, 2016, includes the impact of the bulk sale of loans with a carrying value of approximately $99 million.
[2] The carrying amount of loans acquired from Westernbank and accounted for under ASC 310-30 which remain subject to the loss sharing agreement with the FDIC
amounted to approximately $563 million as of December 31, 2016 (December 31, 2015- $636 million).
Other loans acquired with deteriorated credit quality
The outstanding principal balance of other acquired loans accounted pursuant to ASC Subtopic 310-30, amounted to $700 million
at December 31, 2016 (December 31, 2015 - $710 million). At December 31, 2016, none of the other acquired loans accounted
under ASC Subtopic 310-30 were considered non-performing loans. Therefore, interest income, through accretion of the difference
between the carrying amount of the loans and the expected cash flows, was recognized on all acquired loans.
Changes in the carrying amount and the accretable yield for the other acquired loans accounted pursuant to the ASC
Subtopic 310-30, for the years ended December 31, 2016 and 2015 were as follows:
Activity in the accretable yield - Other acquired loans ASC 310-30
(In thousands)
Beginning balance
Additions
Accretion
Change in expected cash flows
Ending balance
For the years ended
December 31, 2016 December 31, 2015
$221,128
17,635
(35,030)
75,163
$278,896
$116,304
132,273
(29,277)
1,828
$221,128
Carrying amount of other acquired loans accounted for pursuant to ASC 310-30
(In thousands)
Beginning balance
Purchase accounting adjustments related to the Doral Bank Transaction (Refer to Note 5)
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, 2016 December 31, 2015
$564,050
(4,707)
36,221
35,030
(67,899)
$562,695
(22,431)
$540,264
$212,763
–
386,679
29,277
(64,669)
$564,050
(19,276)
$544,774
The following table presents loans acquired as part of the Doral Bank Transaction accounted for pursuant to ASC Subtopic
310-30 at the February 27, 2015 acquisition date.
(In thousands)
Contractually-required principal and interest
Non-accretable difference
Cash flows expected to be collected
Accretable yield
Fair value of loans accounted for under ASC Subtopic 310-30
118 POPULAR, INC. 2016 ANNUAL REPORT
$560,833
112,153
448,680
113,977
$334,703
losses
inherent
Note 11 - 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
guidance in ASC Section 310-10-35. Also, the Corporation
determines the allowance for loan losses on purchased impaired
loans and purchased loans accounted for under ASC Subtopic
310-30, by evaluating decreases in expected cash flows after the
acquisition date.
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:
(cid:129) Base net
loss rates, which are based on the moving
average of annualized net loss rates computed over a
5-year historical
loss period for the commercial and
construction loan portfolios, and an 18-month period for
the consumer and mortgage loan portfolios. The base net
loss rates are applied by loan type and by legal entity.
(cid:129) Recent loss trend adjustment, which replaces the base loss
rate with a 12-month average loss rate, when these trends
are higher than the respective base loss rates. The
objective of this adjustment is to allow for a more recent
loss trend to be captured and reflected in the ALLL
estimation process.
For the period ended December 31, 2016, 38% (December
31, 2015 - 15%) of the ALLL for non-covered BPPR
segment loan portfolios utilized the recent loss trend
adjustment instead of the base loss. The effect of replacing
the base loss with the recent loss trend adjustment was
mainly concentrated in the leasing, auto, revolving and
commercial and industrial loan portfolios for 2016 and in
the commercial multi-family, commercial and industrial
and mortgage loan portfolios for 2015.
For
the period ended December 31, 2016, 0.11%
(December 31, 2015 - 4 %) of our BPNA segment loan
portfolios utilized the recent loss trend adjustment instead
of the base loss. The effect of replacing the base loss with
the recent loss trend adjustment was concentrated in the
commercial multifamily loan portfolio for 2016 and in the
consumer loan portfolio for 2015.
(cid:129) 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 third quarter of 2016, management completed
the annual review of the components of the ALLL models. As
part of this review management updated core metrics related to
the
the estimation process for evaluating the adequacy of
general reserve of the allowance for loan losses. These updates
to the ALLL models, which are described in the paragraph
below, were implemented as of September 30, 2016 and
resulted in a net increase to the allowance for loan losses of
$9.4 million for the non-covered portfolio. The effect of the
aforementioned updates was immaterial for the covered loans
portfolio.
Management made the following enhancements to the ALLL
models during the third quarter of 2016:
(cid:129) Annual review and recalibration of the environmental
factors adjustment. The environmental factor adjustments
are developed by performing regression analyses on
each
selected credit
applicable loan segment. During the third quarter of 2016,
the environmental
factor models used to account for
changes in current credit and macroeconomic conditions
were reviewed and recalibrated based on the latest
applicable trends.
and economic
indicators
for
The effect of the recalibration to the environmental factors
adjustment resulted in an increase to the allowance for
loan losses of $9.4 million at September 30, 2016, related
to the non-covered BPPR segment. The effect of the
recalibration was immaterial for the BPNA segment.
POPULAR, INC. 2016 ANNUAL REPORT 119
The following tables present the changes in the allowance for loan losses, loan ending balances and whether such loans and the
allowance pertain to loans individually or collectively evaluated for impairment for the years ended December 31, 2016 and 2015.
(In thousands)
Allowance for credit losses:
Beginning balance
Provision (reversal of provision)
Charge-offs
Recoveries
Net recoveries
Ending balance
Specific ALLL
General ALLL
Loans held-in-portfolio:
Impaired non-covered loans
Non-covered loans held-in-portfolio excluding impaired
For the year ended December 31, 2016
Puerto Rico - Non-covered loans
Commercial Construction Mortgage
Leasing
Consumer
Total
$ 186,925
19,147
(62,486)
41,731
4,369
$ 189,686
$
42,375
$ 147,311
$ 4,957
(6,539)
(3,103)
5,124
914
$ 1,353
$
–
$ 1,353
$ 128,327
79,309
(68,075)
3,759
–
$ 10,993
557
(6,151)
2,263
–
$ 138,721
63,386
(106,304)
29,998
162
$ 143,320
$ 7,662
$ 125,963
$
42,428
$
535
$
23,185
$ 100,892
$ 7,127
$ 102,778
$ 338,422
$
–
$ 497,488
$ 1,817
$ 106,615
$
$
$
$
$
469,923
155,860
(246,119)
82,875
5,445
467,984
108,523
359,461
944,342
loans
6,863,795
85,558
5,419,012
701,076
3,154,641
16,224,082
Total non-covered loans held-in-portfolio
$7,202,217
$85,558
$5,916,500
$702,893
$3,261,256
$17,168,424
For the year ended December 31, 2016
Puerto Rico - Covered loans
Commercial Construction Mortgage
Leasing
Consumer
Total
$
$
$
$
$
$
–
–
–
–
–
–
–
–
–
–
$
$
$
$
$
$
–
–
–
–
–
–
–
–
–
–
$
$
$
$
$
33,967
(1,092)
(3,524)
808
30,159
–
30,159
–
$
$
$
$
$
556,570
$ 556,570
$
–
–
–
–
–
–
–
–
–
–
$
$
$
$
$
209
(18)
(19)
19
191
–
191
–
$
$
$
$
$
34,176
(1,110)
(3,543)
827
30,350
–
30,350
–
16,308
572,878
$
16,308
$
572,878
(In thousands)
Allowance for credit losses:
Beginning balance
Provision (reversal of provision)
Charge-offs
Recoveries
Ending balance
Specific ALLL
General ALLL
Loans held-in-portfolio:
Impaired covered loans
Covered loans held-in-portfolio excluding impaired
loans
Total covered loans held-in-portfolio
120 POPULAR, INC. 2016 ANNUAL REPORT
(In thousands)
Allowance for credit losses:
Beginning balance
Provision (reversal of provision)
Charge-offs
Recoveries
Ending balance
Specific ALLL
General ALLL
Loans held-in-portfolio:
Impaired loans
Loans held-in-portfolio excluding impaired loans
Total loans held-in-portfolio
For the year ended December 31, 2016
U.S. Mainland
Commercial Construction Mortgage
Legacy
Consumer
Total
$
$
$
$
9,908
(253)
(1,115)
4,428
12,968
–
12,968
$
–
3,596,290
$3,596,290
$ 3,912
4,260
–
–
$ 8,172
$
–
$ 8,172
$
–
690,742
$690,742
$ 4,985
1,562
(2,506)
573
$ 4,614
$ 2,182
$ 2,432
$ 2,687
(3,257)
(535)
2,448
$ 1,343
$
–
$ 1,343
$ 11,520
12,954
(13,430)
4,176
$ 15,220
$
672
$ 14,548
$
$
$
$
33,012
15,266
(17,586)
11,625
42,317
2,854
39,463
$ 8,876
770,985
$779,861
$
–
45,293
$45,293
$ 2,839
490,298
$493,137
$
11,715
5,593,608
$5,605,323
(In thousands)
Allowance for credit losses:
Beginning balance
Provision (reversal of provision)
Charge-offs
Recoveries
Net recoveries
Ending balance
Specific ALLL
General ALLL
Loans held-in-portfolio:
Impaired loans
Loans held-in-portfolio excluding impaired
loans
Total loans held-in-portfolio
For the year ended December 31, 2016
Popular, Inc.
Commercial Construction Mortgage
Legacy
Leasing
Consumer
Total
$
$
$
$
$
196,833
18,894
(63,601)
46,159
4,369
202,654
42,375
160,279
$ 8,869
(2,279)
(3,103)
5,124
914
$ 9,525
$
–
$ 9,525
$ 167,279
79,779
(74,105)
5,140
–
$ 178,093
$
44,610
$ 133,483
$ 2,687
(3,257)
(535)
2,448
–
$ 1,343
$
–
$ 1,343
$ 10,993
557
(6,151)
2,263
–
$ 7,662
$ 150,450
76,322
(119,753)
34,193
162
$ 141,374
$
535
$ 7,127
$
23,857
$ 117,517
338,422
$
–
$ 506,364
$
–
$ 1,817
$ 109,454
$
$
$
$
$
537,111
170,016
(267,248)
95,327
5,445
540,651
111,377
429,274
956,057
10,460,085
$10,798,507
776,300
$776,300
6,746,567
$7,252,931
45,293
$45,293
701,076
$702,893
3,661,247
$3,770,701
22,390,568
$23,346,625
For the year ended December 31, 2015
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 transferred to
held-for-sale
Allowance transferred from covered loans
Ending balance
Specific ALLL
General ALLL
Loans held-in-portfolio:
Impaired non-covered loans
Non-covered loans held-in-portfolio excluding impaired
loans
Total non-covered loans held-in-portfolio
Commercial Construction Mortgage
Leasing
Consumer
Total
$ 201,589
88,680
(105,716)
31,826
(37,907)
8,453
$ 186,925
$
49,243
$ 137,682
$ 5,483
(2,836)
(13,628)
14,514
–
1,424
$ 4,957
$
264
$ 4,693
$ 120,860
57,876
(53,296)
2,305
$ 7,131
7,165
(5,561)
2,258
$ 154,072
65,947
(110,384)
26,508
–
582
$ 128,327
$
$
42,965
85,362
–
–
$ 10,993
$
573
$ 10,420
–
2,578
$ 138,721
$
23,478
$ 115,243
$ 337,133
$ 2,481
$ 465,117
$ 2,404
$ 109,660
$
$
$
$
$
489,135
216,832
(288,585)
77,411
(37,907)
13,037
469,923
116,523
353,400
916,795
7,031,086
$7,368,219
98,467
$100,948
5,662,374
$6,127,491
625,246
$627,650
3,236,642
$3,346,302
16,653,815
$17,570,610
POPULAR, INC. 2016 ANNUAL REPORT 121
For the year ended December 31, 2015
Puerto Rico - Covered Loans
(In thousands)
Allowance for credit losses:
Beginning balance
Provision (reversal of provision)
Charge-offs
Recoveries
Net write-down related to loans transferred to
held-for-sale
Allowance transferred to non-covered loans
Ending balance
Specific ALLL
General ALLL
Loans held-in-portfolio:
Impaired covered loans
Covered loans held-in-portfolio excluding impaired loans
Total covered loans held-in-portfolio
Commercial Construction Mortgage Leasing Consumer
Total
$
$
$
$
$
$
30,871
10,115
(37,936)
6,504
(1,101)
(8,453)
$ 7,202
15,150
(25,086)
4,700
$ 40,948
(1,011)
(6,158)
930
(542)
(1,424)
(160)
(582)
–
–
–
–
–
–
$
$
$
$
$
–
–
–
–
–
–
$ 33,967
$
–
$ 33,967
$
–
627,102
$627,102
$
$
$
$
$
$
–
–
–
–
–
–
–
–
–
–
–
–
$ 3,052
(234)
(853)
842
(20)
(2,578)
209
–
209
–
19,013
$
$
$
$
$
$
$
$
$
82,073
24,020
(70,033)
12,976
(1,823)
(13,037)
34,176
–
34,176
–
646,115
$ 19,013
$ 646,115
For the year ended December 31, 2015
U.S. Mainland
Commercial Construction Mortgage
Legacy
Consumer
Total
$
$
$
$
9,648
(3,582)
(1,452)
5,294
$ 1,187
2,725
–
–
$ 2,462
(1,727)
(1,670)
391
$ 2,944
(3,017)
(2,019)
4,779
$ 14,343
6,227
(9,507)
3,858
–
–
5,529
–
(3,401)
9,908
$ 3,912
$ 4,985
$ 2,687
$ 11,520
–
$
–
$ 1,064
$
–
$
485
9,908
$ 3,912
$ 3,921
$ 2,687
$ 11,035
$
$
$
$
30,584
626
(14,648)
14,322
2,128
33,012
1,549
31,463
$
–
2,730,944
$2,730,944
$
–
580,158
$580,158
$ 6,815
901,775
$
–
64,436
$ 2,176
489,201
$
8,991
4,766,514
$908,590
$64,436
$491,377
$4,775,505
(In thousands)
Allowance for credit losses:
Beginning balance
Provision (reversal of provision)
Charge-offs
Recoveries
Net (write-down) recovery related to loans transferred to
held-for-sale
Ending balance
Specific ALLL
General ALLL
Loans held-in-portfolio:
Impaired loans
Loans held-in-portfolio excluding impaired loans
Total loans held-in-portfolio
122 POPULAR, INC. 2016 ANNUAL REPORT
For the year ended December 31, 2015
Popular, Inc.
(In thousands)
Commercial Construction Mortgage
Legacy
Leasing
Consumer
Total
Allowance for credit losses:
Beginning balance
Provision (reversal of provision)
Charge-offs
Recoveries
Net write-down related to loans
transferred to held-for-sale
Ending balance
Specific ALLL
General ALLL
Loans held-in-portfolio:
Impaired loans
Loans held-in-portfolio excluding impaired loans
$
$
$
$
$
242,108
95,213
(145,104)
43,624
$ 13,872
15,039
(38,714)
19,214
$ 164,270
55,138
(61,124)
3,626
$ 2,944
(3,017)
(2,019)
4,779
$ 7,131
7,165
(5,561)
2,258
$ 171,467
71,940
(120,744)
31,208
$
601,792
241,478
(373,266)
104,709
(39,008)
(542)
5,369
–
–
(3,421)
(37,602)
196,833
$ 8,869
$ 167,279
$ 2,687
$ 10,993
$ 150,450
49,243
$
264
$
44,029
$
–
$
573
$
23,963
147,590
$ 8,605
$ 123,250
$ 2,687
$ 10,420
$ 126,487
$
$
$
537,111
118,072
419,039
337,133
9,762,030
$ 2,481
678,625
$ 471,932
7,191,251
$
–
64,436
$ 2,404
625,246
$ 111,836
3,744,856
$
925,786
22,066,444
Total loans held-in-portfolio
$10,099,163
$681,106
$7,663,183
$64,436
$627,650
$3,856,692
$22,992,230
The following table provides the activity in the allowance for loan losses related to Westernbank loans accounted for pursuant
to ASC Subtopic 310-30.
(In thousands)
Balance at beginning of period
Provision for loan losses
Net recoveries (charge-offs)
Balance at end of period
Impaired loans
ASC 310-30 Westernbank loans
For the years ended
December 31, 2016 December 31, 2015
$63,563
1,342
3,972
$68,877
$ 78,846
46,643
(61,926)
$ 63,563
The following tables present loans individually evaluated for impairment at December 31, 2016 and December 31, 2015.
December 31, 2016
Puerto Rico
(In thousands)
Commercial multi-family
Commercial real estate non-owner
occupied
Commercial real estate owner
occupied
Commercial and industrial
Mortgage
Leasing
Consumer:
Credit cards
Personal
Auto
Other
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
$
82
$
82
$
34
$
–
$
–
$
82
$
82
$
34
104,119
105,047
24,537
15,935
29,631
120,054
134,678
24,537
131,634
46,862
426,737
1,817
37,464
66,043
2,117
991
169,013
49,301
466,249
1,817
37,464
66,043
2,117
991
13,007
4,797
42,428
535
5,588
16,955
474
168
31,962
7,828
70,751
–
50,094
11,478
87,806
–
–
–
–
–
–
–
–
–
163,596
54,690
497,488
1,817
37,464
66,043
2,117
991
219,107
60,779
554,055
1,817
37,464
66,043
2,117
991
13,007
4,797
42,428
535
5,588
16,955
474
168
Total Puerto Rico
$817,866
$898,124
$108,523
$126,476
$179,009
$944,342
$1,077,133
$108,523
POPULAR, INC. 2016 ANNUAL REPORT 123
December 31, 2016
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
$ 6,381
$ 7,971
$ 2,182
$ 2,495
$ 3,369
$ 8,876
$
11,340
$ 2,182
2,421
39
2,429
39
667
5
300
79
315
79
2,721
118
2,744
118
667
5
(In thousands)
Mortgage
Consumer:
HELOCs
Personal
Total U.S. mainland
$ 8,841
$ 10,439
$ 2,854
$ 2,874
$ 3,763
$ 11,715
$
14,202
$ 2,854
December 31, 2016
Popular, Inc.
(In thousands)
Commercial multi-family
Commercial real estate non-owner
occupied
Commercial real estate owner
occupied
Commercial and industrial
Mortgage
Leasing
Consumer:
Credit Cards
HELOCs
Personal
Auto
Other
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
$
82
$
82
$
34
$
–
$
–
$
82
$
82
$
34
104,119
105,047
24,537
15,935
29,631
120,054
134,678
24,537
131,634
46,862
433,118
1,817
37,464
2,421
66,082
2,117
991
169,013
49,301
474,220
1,817
37,464
2,429
66,082
2,117
991
13,007
4,797
44,610
535
5,588
667
16,960
474
168
31,962
7,828
73,246
–
–
300
79
–
–
50,094
11,478
91,175
–
–
315
79
–
–
163,596
54,690
506,364
1,817
37,464
2,721
66,161
2,117
991
219,107
60,779
565,395
1,817
37,464
2,744
66,161
2,117
991
13,007
4,797
44,610
535
5,588
667
16,960
474
168
Total Popular, Inc.
$826,707
$908,563
$111,377
$129,350
$182,772
$956,057
$1,091,335
$111,377
124 POPULAR, INC. 2016 ANNUAL REPORT
December 31, 2015
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
$102,199
$106,466
$ 30,980
$ 13,779
$ 23,896
$115,978
$ 130,362
$ 30,980
118,253
42,043
2,481
424,885
2,404
38,734
68,509
1,893
524
137,193
43,629
7,878
468,240
2,404
38,734
68,509
1,893
525
12,564
5,699
264
42,965
573
6,675
16,365
338
100
38,955
21,904
–
40,232
–
–
–
–
–
63,383
32,922
–
45,881
–
–
–
–
–
157,208
63,947
2,481
465,117
2,404
38,734
68,509
1,893
524
200,576
76,551
7,878
514,121
2,404
38,734
68,509
1,893
525
12,564
5,699
264
42,965
573
6,675
16,365
338
100
(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
Total Puerto Rico
$801,925
$875,471
$116,523
$114,870
$166,082
$916,795
$1,041,553
$116,523
December 31, 2015
U.S. mainland
(In thousands)
Mortgage
Consumer:
HELOCs
Personal
Impaired Loans - With an
Allowance
Unpaid
principal
balance
Recorded
investment
Related
allowance
Impaired Loans
With No Allowance
Unpaid
principal
balance
Recorded
investment
Impaired Loans - Total
Unpaid
principal
balance
Recorded
investment
Related
allowance
$ 4,143
$ 5,018
$ 1,064
$ 2,672
$ 3,574
$ 6,815
$
8,592
$ 1,064
778
534
796
534
259
226
783
81
783
81
1,561
615
1,579
615
259
226
Total U.S. mainland
$ 5,455
$ 6,348
$ 1,549
$ 3,536
$ 4,438
$ 8,991
$
10,786
$ 1,549
POPULAR, INC. 2016 ANNUAL REPORT 125
December 31, 2015
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
$102,199
$106,466
$ 30,980
$ 13,779
$ 23,896
$115,978
$ 130,362
$ 30,980
118,253
42,043
2,481
429,028
2,404
38,734
778
69,043
1,893
524
137,193
43,629
7,878
473,258
2,404
38,734
796
69,043
1,893
525
12,564
5,699
264
44,029
573
6,675
259
16,591
338
100
38,955
21,904
–
42,904
–
–
783
81
–
–
63,383
32,922
–
49,455
–
–
783
81
–
–
157,208
63,947
2,481
471,932
2,404
38,734
1,561
69,124
1,893
524
200,576
76,551
7,878
522,713
2,404
38,734
1,579
69,124
1,893
525
12,564
5,699
264
44,029
573
6,675
259
16,591
338
100
(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
Total Popular, Inc.
$807,380
$881,819
$118,072
$118,406
$170,520
$925,786
$1,052,339
$118,072
The following tables present the average recorded investment and interest income recognized on impaired loans for the years
ended December 31, 2016 and 2015.
For the year ended December 31, 2016
(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
HELOCs
Personal
Auto
Other
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
$
33
127,508
150,563
57,752
1,107
479,584
2,124
38,168
–
67,308
2,575
683
$
6
5,275
5,757
1,959
–
13,860
–
–
–
–
–
–
$
–
–
–
–
–
8,212
–
–
1,937
529
–
–
$ –
–
–
–
–
178
–
–
–
–
–
–
$
33
127,508
150,563
57,752
1,107
487,796
2,124
38,168
1,937
67,837
2,575
683
$
6
5,275
5,757
1,959
–
14,038
–
–
–
–
–
–
Total Popular, Inc.
$927,405
$26,857
$10,678
$178
$938,083
$27,035
126 POPULAR, INC. 2016 ANNUAL REPORT
For the year ended December 31, 2015
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
$
606
107,442
138,651
121,315
6,350
450,122
–
2,710
40,239
–
70,046
2,005
561
3,527
$
–
5,062
6,936
4,001
88
16,128
–
–
–
–
–
–
–
153
$
–
–
–
50
–
5,279
509
–
–
1,660
427
–
17
–
$ –
–
–
–
–
89
–
–
–
–
–
–
–
–
$
606
107,442
138,651
121,365
6,350
455,401
509
2,710
40,239
1,660
70,473
2,005
578
3,527
$
–
5,062
6,936
4,001
88
16,217
–
–
–
–
–
–
–
153
$943,574
$32,368
$7,942
$89
$951,516
$32,457
(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.
Modifications
Troubled debt restructurings related to non-covered loan
portfolios amounted to $ 1.2 billion at December 31, 2016
(December 31, 2015 - $ 1.2 billion). The amount of outstanding
commitments to lend additional
funds to debtors owing
receivables whose terms have been modified in troubled debt
restructurings amounted $8 million related to the commercial
loan portfolio at December 31, 2016 (December 31, 2015 - $11
million).
At December 31, 2016, the mortgage loan TDRs include
$407 million guaranteed by U.S. sponsored entities at BPPR,
this compares with $359 million at December 31, 2015.
A modification of a loan constitutes a troubled debt
is experiencing
restructuring (“TDR”) when a borrower
a
financial difficulty
concession. For a summary of the accounting policy related to
TDRs, refer to the summary of significant accounting policies
included in Note 2 to these consolidated financial statements.
and the modification constitutes
The following tables present the non-covered and covered loans classified as TDRs according to their accruing status and the
related allowance at December 31, 2016 and December 31, 2015.
(In thousands)
Accruing Non-Accruing
Total
Allowance Accruing Non-Accruing
Total
December 31, 2016
December 31, 2015
Related
Popular, Inc.
Non-Covered Loans
$ 176,887
–
744,926
1,383
100,277
$1,023,473
$ 83,157
–
127,071
434
12,442
$223,104
$ 260,044
–
871,997
1,817
112,719
$ 40,810
–
44,610
535
23,857
$166,415
221
644,013
1,791
104,630
$1,246,577
$109,812
$917,070
$ 88,117
2,259
130,483
609
12,805
$234,273
Related
Allowance
$ 37,355
264
44,029
573
23,963
$ 254,532
2,480
774,496
2,400
117,435
$1,151,343
$106,184
Popular, Inc.
Covered Loans
December 31, 2016
December 31, 2015
Accruing Non-Accruing
Total
Allowance Accruing Non-Accruing
Total
Related
Related
Allowance
$2,950
$2,950
$2,580
$2,580
$5,530
$5,530
$–
$–
$3,328
$3,328
$3,268
$3,268
$6,596
$6,596
$–
$–
POPULAR, INC. 2016 ANNUAL REPORT 127
Commercial
Construction
Mortgage
Leases
Consumer
Total
(In thousands)
Mortgage
Total
The following tables present the loan count by type of modification for those loans modified in a TDR during the years ended
December 31, 2016 and 2015. Loans modified as TDRs for the U.S. operations are considered insignificant to the Corporation.
Popular, Inc.
For the year ended December 31, 2016
Commercial real estate non-owner occupied
Commercial real estate owner occupied
Commercial and industrial
Mortgage
Leasing
Consumer:
Credit cards
HELOCs
Personal
Auto
Other
Total
Commercial multi-family
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
7
43
36
78
–
766
–
1,007
–
35
1,972
1
7
7
80
1
–
1
19
12
–
128
–
–
–
505
1
2
5
1
8
–
522
–
–
–
170
–
668
1
1
2
–
842
Popular, Inc.
For the year ended December 31, 2015
Reduction in
interest rate
Extension of
maturity date
Combination of
reduction in interest
rate and extension of
maturity date
Other
–
9
39
32
1
57
–
802
–
1,012
–
49
2,001
2
12
20
18
1
56
7
–
1
31
11
–
159
–
–
–
–
–
418
16
–
1
–
3
–
438
–
–
–
–
–
113
–
700
2
1
–
–
816
128 POPULAR, INC. 2016 ANNUAL REPORT
The following tables present by class, quantitative information related to loans modified as TDRs during the years ended
December 31, 2016 and 2015. Loans modified as TDRs for the U.S. operations are considered insignificant to the Corporation.
(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, 2016
Commercial real estate non-owner occupied
Commercial real estate owner occupied
Commercial and industrial
Mortgage
Leasing
Consumer:
Credit cards
HELOCs
Personal
Auto
Other
Total
8
50
43
833
2
1,436
7
1,028
22
35
3,464
$ 7,667
29,935
8,402
93,511
36
13,329
602
17,192
263
96
$ 10,272
30,097
9,733
90,840
37
14,918
662
17,296
281
98
$171,033
$174,234
Popular, Inc.
For the year ended December 31, 2015
$ 5,109
894
242
6,822
8
2,042
296
3,548
54
17
$19,032
(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 multi-family
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
2
21
59
50
2
644
23
1,502
4
1,044
14
49
3,414
$
551
69,442
20,323
22,818
308
53,575
651
12,857
197
17,671
142
121
$
551
69,595
19,195
23,757
298
70,527
651
14,552
295
17,734
199
132
$198,656
$217,486
$
2
14,339
889
(6,994)
(170)
6,128
148
2,238
79
3,771
35
20
$20,485
POPULAR, INC. 2016 ANNUAL REPORT 129
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, whichever occurs first. The recorded investment at December 31, 2016 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.
(Dollars In thousands)
Commercial real estate non-owner occupied
Commercial real estate owner occupied
Commercial and industrial
Mortgage
Leasing
Consumer:
Credit cards
HELOCs
Personal
Auto
Other
Total
(Dollars In thousands)
Commercial real estate non-owner occupied
Commercial real estate owner occupied
Commercial and industrial
Construction
Mortgage
Consumer:
Credit cards
Personal
Auto
Other
Total
Popular, Inc.
Defaulted during the year ended December 31, 2016
Loan count Recorded investment as of first default date
2
11
7
169
3
451
1
135
9
3
791
$
327
3,296
905
18,261
28
4,794
43
3,329
171
8
$31,162
Popular, Inc.
Defaulted during the year ended December 31, 2015
Loan count Recorded investment as of first default date
3
1
7
3
189
415
97
6
2
723
$ 7,269
291
1,990
1,442
28,364
4,185
3,006
97
1
$46,645
Commercial, consumer and mortgage loans modified in a
TDR are closely monitored for delinquency as an early indicator
loans modified in a TDR
If
of possible future default.
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 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 risk rating system provides for the
assignment of ratings at the obligor level based on the financial
condition of the borrower. The Corporation’s consumer and
mortgage loans are not subject
to the 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”.
130 POPULAR, INC. 2016 ANNUAL REPORT
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, with
no apparent risk, strong financial position, minimal
operating risk, profitability,
liquidity and strong
capitalization.
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.
The Corporation periodically reviews its loans classification
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 and annual
review process of applicable credit
facilities, the Corporation evaluates the corresponding loan
grades.
unit
each
unit’s
originating
along with
The Corporation has a Loan Review Group that reports
directly to the Corporation’s Risk Management Committee and
administratively to the Chief Risk Officer, which performs
lending
annual comprehensive credit process reviews of all
groups in BPPR. This group evaluates the credit risk profile of
each
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,
risk, evaluate the
determine the current
effectiveness of the credit management process and identify
control deficiencies that may arise in the credit-granting
the Loan Review Group
process. Based on its findings,
that help in
if necessary,
recommends corrective actions,
maintaining a sound credit process. The Loan Review Group
reports the results of the credit process reviews to the Risk
Management Committee of
the Corporation’s Board of
Directors.
level of credit
POPULAR, INC. 2016 ANNUAL REPORT 131
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, 2016 and 2015.
December 31, 2016
Watch
Special
Mention Substandard Doubtful
Loss
Sub-total
Pass/
Unrated
Total
$ 2,016 $
383
$
6,108
$
–
$
– $
8,507 $
166,033 $
174,540
310,510
310,484
136,091
759,101
50
4,407
–
377,858
109,873
133,270
621,384
1,705
1,987
–
342,054
360,941
227,360
936,463
1,668
190,090
3,062
–
–
1,068
–
–
1,068
–
–
812
–
–
812
$764,626 $625,888
18,725
185
21,496
12,321
19,311
72,038
$1,203,321
155
17,788
11,514
29,457
–
–
–
–
–
–
–
–
–
$29,457
$ 13,537 $ 7,796
$
658
$
57,111
9,271
3,048
82,967
3,000
–
921
9,778
–
937
18,511
8,153
–
786
1,720
9,119
153,793
165,290
16,950
11,711
4,400
–
–
–
–
–
–
–
–
–
–
–
–
$ 86,888 $ 27,450
30
1,923
1,252
–
8
3,213
$ 201,564
$ 15,553 $ 8,179
$
6,766
$
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
367,621
319,755
139,139
842,068
3,050
4,407
921
–
387,636
109,873
134,207
639,895
9,858
1,987
786
–
–
–
1,068
–
–
1,068
–
–
812
–
–
812
$851,514 $653,338
343,774
370,060
381,153
1,101,753
18,618
201,801
4,400
3,062
18,755
2,108
22,748
12,321
19,319
75,251
$1,404,885
155
17,788
11,514
29,457
–
–
–
–
–
–
–
–
–
–
$29,457
–
–
12
12
–
–
–
1,030,577
799,086
508,247
2,346,417
3,423
196,484
3,062
1,533,708
992,389
2,163,670
4,855,800
82,135
5,720,016
699,831
2,564,285
1,791,475
2,671,917
7,202,217
85,558
5,916,500
702,893
18,725
185
23,376
12,321
19,311
73,918
1,100,607
–
8,351
–
1,150,177
–
826,592
–
175,529
–
3,261,256
–
12 $2,623,304 $14,545,120 $17,168,424
1,081,882
8,166
1,126,801
814,271
156,218
3,187,338
– $
21,991 $ 1,042,305 $ 1,064,296
–
–
–
–
–
–
–
68,609
18,390
157,778
266,768
28,103
11,711
6,107
1,288,707
225,355
773,155
3,329,522
662,639
768,150
39,186
1,357,316
243,745
930,933
3,596,290
690,742
779,861
45,293
$
$
158
–
252,175
2,839
240,607
609
9
–
188
–
493,137
3,448
$3,448 $ 319,350 $ 5,285,973 $ 5,605,323
128
247,413
238,746
9
180
486,476
30
4,762
1,861
–
8
6,661
$
– $
30,498 $ 1,208,338 $ 1,238,836
–
–
12
12
–
–
–
–
1,099,186
817,476
666,025
2,613,185
31,526
208,195
6,107
3,062
2,822,415
1,217,744
2,936,825
8,185,322
744,774
6,488,166
39,186
699,831
3,921,601
2,035,220
3,602,850
10,798,507
776,300
6,696,361
45,293
702,893
1,100,765
–
260,526
2,839
1,390,784
609
826,601
–
175,717
–
3,448
3,754,393
$3,460 $2,942,654 $19,831,093 $22,773,747
1,082,010
255,579
1,365,547
814,280
156,398
3,673,814
18,755
4,947
25,237
12,321
19,319
80,579
(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.
132 POPULAR, INC. 2016 ANNUAL REPORT
The following table presents the weighted average obligor risk rating at December 31, 2016 for those classifications that
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
[1] Excludes covered loans acquired in the Westernbank FDIC-assisted transaction.
(Scales 11 and 12)
Substandard
(Scales 1 through 8)
Pass
11.12
11.07
11.23
11.09
11.14
11.00
Substandard
11.31
11.70
11.05
11.65
11.62
11.00
11.10
5.95
6.91
7.09
7.19
7.06
7.67
Pass
7.26
6.67
7.32
6.15
6.78
7.67
7.91
POPULAR, INC. 2016 ANNUAL REPORT 133
December 31, 2015
Special
Mention Substandard Doubtful Loss
Watch
Sub-total
Pass/
Unrated
Total
11,133 $
121,013 $
$ 1,750 $ 1,280 $
319,564
316,079
187,620
423,095
162,395
146,216
8,103
399,076
436,442
256,821
825,013
7,269
4,810
–
732,986
5,522
2,794
–
1,100,442
19,806
238,002
3,009
$
–
–
1,915
690
2,605
–
–
–
–
–
1,606
–
–
1,606
–
–
1,448
–
–
1,448
19,098
394
23,116
11,609
18,656
72,873
–
–
–
–
–
–
$
– $
–
–
29
29
–
–
–
–
–
–
30
575
605
1,141,735
916,831
591,376
2,661,075
32,597
245,606
3,009
19,098
394
26,170
11,639
19,231
76,532
1,527,357
992,413
2,066,361
4,707,144
68,351
5,881,885
624,641
1,109,247
10,294
1,176,665
804,311
169,253
132,146
2,669,092
1,909,244
2,657,737
7,368,219
100,948
6,127,491
627,650
1,128,345
10,688
1,202,835
815,950
188,484
3,269,770
3,346,302
$838,698 $742,750 $1,434,132
$2,605
$ 634 $3,018,819 $14,551,791 $17,570,610
$
$
$
$ 14,129 $ 7,189 $
57,450
11,978
10,827
94,384
15,091
–
1,823
6,741
1,074
5,344
20,348
16,948
–
1,973
–
–
–
–
–
–
–
–
–
–
–
–
427
16,646
2,967
131,933
151,973
18,856
13,537
6,134
–
1,550
637
–
–
2,187
$111,298 $ 39,269 $ 192,687
$ 15,879 $ 8,469 $
377,014
328,057
198,447
429,836
163,469
151,560
8,530
415,722
439,409
388,754
919,397
22,360
4,810
1,823
–
753,334
22,470
2,794
1,973
–
1,252,415
38,662
251,539
6,134
3,009
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$
– $
–
–
–
21,745 $
80,837
16,019
148,104
672,188 $
882,186
186,325
723,540
–
–
–
–
266,705
50,895
13,537
9,930
2,464,239
529,263
895,053
54,506
–
2,626
603
–
5
3,234
–
4,176
1,240
–
5
5,421
13,935
300,308
171,386
28
299
485,956
693,933
963,023
202,344
871,644
2,730,944
580,158
908,590
64,436
13,935
304,484
172,626
28
304
491,377
$3,234 $ 346,488 $ 4,429,017 $ 4,775,505
$
–
–
1,915
690
2,605
–
–
–
–
– $
–
–
29
29
–
–
–
–
32,878 $
793,201 $
1,222,572
932,850
739,480
2,927,780
83,492
259,143
9,930
3,009
19,098
4,570
27,410
11,639
19,236
81,953
2,409,543
1,178,738
2,789,901
7,171,383
597,614
6,776,938
54,506
624,641
1,123,182
310,602
1,348,051
804,339
169,552
826,079
3,632,115
2,111,588
3,529,381
10,099,163
681,106
7,036,081
64,436
627,650
1,142,280
315,172
1,375,461
815,978
188,788
3,755,726
3,837,679
–
–
1,606
–
–
1,606
–
–
1,448
–
–
1,448
19,098
1,944
23,753
11,609
18,656
75,060
–
–
–
–
–
–
–
2,626
603
30
580
3,839
$949,996 $782,019 $1,626,819
$2,605
$3,868 $3,365,307 $18,980,808 $22,346,115
(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.
134 POPULAR, INC. 2016 ANNUAL REPORT
The following table presents the weighted average obligor risk rating at December 31, 2015 for those classifications that
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
11.13
11.09
11.23
11.15
11.16
11.18
Substandard
11.00
11.02
11.07
11.57
11.50
11.00
11.11
6.04
6.67
7.08
7.13
6.95
7.56
Pass
7.15
6.92
7.23
6.24
6.81
7.79
7.78
[1] Excludes covered loans acquired in the Westernbank FDIC-assisted transaction.
Note 12 - FDIC loss-share asset and true-up payment
obligation
In connection with the Westernbank FDIC-assisted transaction,
BPPR entered into loss-share arrangements with the FDIC with
respect to the covered loans and other real estate owned.
Pursuant to the terms of the loss-share arrangements,
the
FDIC’s obligation to reimburse BPPR for losses with respect to
covered assets begins with the first dollar of loss incurred. The
to
FDIC reimburses BPPR for 80% of
losses with respect
covered assets, and BPPR reimburses the FDIC for 80% of
recoveries with respect to losses for which the FDIC paid
reimbursement under loss-share arrangements. The loss-share
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 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
Recoveries reimbursable to the FDIC
Net payments from FDIC under loss sharing agreements
Arbitration decision charge
Other adjustments attributable to FDIC loss sharing agreements
Balance at end of period
Years ended December 31,
2016
2015
2014
$ 310,221
(10,201)
–
(239)
8,433
(4,093)
(98,518)
(136,197)
(72)
$ 542,454
(66,238)
–
15,658
73,205
–
(247,976)
–
(6,882)
$ 909,414
(189,959)
12,492
32,038
58,117
–
(256,498)
–
(23,150)
$ 69,334
$ 310,221
$ 542,454
The loss-share component of the arrangements applicable to
commercial (including construction) loans expired during the
quarter ended June 30, 2015. The agreement provides for
reimbursement to the FDIC to continue through the quarter
ending June 30, 2018, and for the single family mortgage loss-
share component of such agreement to expire on April 30, 2020.
During 2016, BPPR recognized pre-tax charges amounting to
$136.2 million and a corresponding reduction to its FDIC
indemnification asset related to the FDIC arbitration decision
denying BPPR’s claim under the loss sharing agreement and
$45.4 million additional adjustments related to the impact in the
true-up payment obligation and other LSA adjustments. Refer to
Note 28, Commitments and Contingencies, for further details.
POPULAR, INC. 2016 ANNUAL REPORT 135
The weighted average life of the single family loan portfolio
accounted for under ASC 310-30 subject to the FDIC loss-
sharing agreement at December 31, 2016 is 7.4 years.
The following table provides
the fair value and the
undiscounted amount of the true-up payment obligation at
December 31, 2016 and 2015.
all
the
recorded as
covered assets under
As part of the loss-share agreements, BPPR has agreed to
make a true-up payment to the FDIC on the date that is 45 days
following the last day (such day, the “true-up measurement
the final shared-loss month, or upon the final
date”) of
disposition of
loss-share
agreements, in the event losses on the loss-share agreements fail
to reach expected levels. The estimated fair value of such
contingent
true-up payment obligation is
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
consecutive
amounts
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%).
servicing
period
every
for
Of
shared-loss payments,
the four components used to estimate the true-up
payment obligation (intrinsic loss estimate, asset discount,
and period servicing
cumulative
amounts) only the cumulative shared-loss payments and the
period servicing amounts will change on a quarterly basis.
These two variables are the main drivers of changes in the
undiscounted true-up payment obligation. In order to estimate
the
portfolio
actual
true-up
loans under both the commercial and
performance for
residential
loss sharing agreement are contemplated. The
cumulative shared loss payments and cumulative servicing
amounts are derived from our quarterly loss reassessment
process for covered loans accounted for under ASC 310-30.
obligation,
expected
and
Once the undiscounted true-up payment obligation is
determined, the fair value is estimated based on the contractual
remaining term to settle the obligation and a discount rate that
is composed of the sum of the interpolated U.S. Treasury Note
(“T Note”), defined by the remaining term of the true-up
payment obligation, and a risk premium determined by the
spread of the Corporation’s outstanding senior unsecured debt
over the equivalent T Note.
136 POPULAR, INC. 2016 ANNUAL REPORT
(In thousands)
December 31, 2016 December 31, 2015
Carrying amount (fair
value)
Undiscounted amount
$153,158
$188,258
$119,745
$168,692
The increase in the fair value of
the true-up payment
obligation was principally due to a decrease in the discount rate
from 7.64% in 2015 to 5.97% in 2016 driven by a lower risk
premium and an unfavorable adjustment of $17.8 million
related to the FDIC arbitration decision. The estimated fair
value of the true-up payment obligation corresponds to the
difference between the initial estimated losses to be reimbursed
by the FDIC and the revised estimate of reimbursable losses. As
the amount of estimated reimbursable losses decreases, the
value of the true-up payment obligation increases.
As described above, the estimate of the true-up payment
obligation is determined by applying the provisions of the loss
sharing agreements and will change on a quarterly basis. The
amount of the estimate of the true-up payment obligation is
expected to change in future periods and may be subject to the
interpretation of provision of the loss sharing agreements.
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
(cid:129) 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
for
its own account and the servicing procedures
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,
(cid:129) exercise its best judgment in managing, administering and
collecting amounts on covered assets and effecting charge-
offs with respect to the covered assets;
(cid:129) 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
(cid:129) retain sufficient staff to perform the duties under the loss-
share agreements;
(cid:129) adopt and implement accounting,
reporting,
systems with respect
record-
to the
keeping and similar
commercial shared-loss assets;
(cid:129) comply with the terms of the modification guidelines
approved by the FDIC or another federal agency for any
single-family shared-loss loan;
(cid:129) 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;
(cid:129) file monthly and quarterly certificates with the FDIC
and
amount of
charge-offs
losses,
specifying
the
recoveries; and
Note 13 - 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
the
and losses on derivative
Corporation’s
addition,
lower-of-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
securitization
activities.
In
(cid:129) maintain books and records sufficient
to ensure and
document compliance with the terms of the loss-share
agreements.
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 (loss) profit:
Unrealized (losses) gains on outstanding derivative positions
Realized (losses) on closed derivative positions
Total trading account (loss) profit
Total mortgage banking activities
Years ended December 31,
2014
2015
2016
$ 58,208
(25,336)
$59,461
(7,904)
$ 41,761
(24,683)
32,872
26,976
51,557
35,336
17,078
31,213
(1)
(3,309)
17
(5,108)
(726)
(16,950)
(3,310)
(5,091)
(17,676)
$ 56,538
$81,802
$ 30,615
Note 14 - Transfers of financial assets and mortgage
servicing assets
consolidated financial statements for a description of such
arrangements.
The Corporation typically transfers conforming residential
mortgage loans
in conjunction with GNMA and FNMA
securitization transactions whereby the loans are exchanged for
the
cash or
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 27 to the
and servicing rights. As
securities
seller,
a
result of
incurred as
No liabilities were
these
securitizations during the years ended December 31, 2016 and
2015 because they did not contain any credit
recourse
arrangements. The Corporation recorded a net gain of
$24.6 million and $32.6 million, respectively, during the years
ended December 31, 2016 and 2015 related to the residential
mortgage loan securitized.
POPULAR, INC. 2016 ANNUAL REPORT 137
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, 2016 and 2015:
(In thousands)
Assets
Investments securities available for sale:
Mortgage-backed securities - GNMA
Mortgage-backed securities - FNMA
Total investment securities available-for-sale
Trading account securities:
Mortgage-backed securities - GNMA
Mortgage-backed securities - FNMA
Total trading account securities
Mortgage servicing rights
Total
(In thousands)
Assets
Trading account securities:
Mortgage-backed securities - GNMA
Mortgage-backed securities - FNMA
Total trading account securities
Mortgage servicing rights
Total
During the year ended December 31, 2016, the Corporation
involving
retained servicing rights on whole loan sales
approximately $70 million in principal balance outstanding
(2015 - $69 million), with net realized gains of approximately
$2.3 million (2015 - $2.7 million). All loan sales performed
during the years ended December 31, 2016 and 2015 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
including
use in estimating future net servicing income,
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,
138 POPULAR, INC. 2016 ANNUAL REPORT
Proceeds obtained during the year ended December 31, 2016
Level 1
Level 2
Level 3
Initial fair value
$–
–
$–
$–
–
$–
$–
$–
$ 41,466
18,605
$ 60,071
$571,602
143,939
$715,541
$
–
$775,612
$
$
$
$
–
–
–
–
–
–
$9,889
$9,889
$ 41,466
18,605
$ 60,071
$571,602
143,939
$715,541
$ 9,889
$785,501
Proceeds obtained during the year ended December 31, 2015
Level 1
Level 2
Level 3
Initial fair value
$–
–
$–
$–
$–
$ 869,210
218,911
$1,088,121
$
–
$1,088,121
$
$
–
–
–
$12,549
$12,549
$ 869,210
218,911
$1,088,121
$
12,549
$1,100,670
The following table presents the changes in MSRs measured
using the fair value method for the years ended December 31,
2016 and 2015.
(In thousands)
December 31, 2016 December 31, 2015
Residential MSRs
Fair value at beginning
of period
Additions
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
$211,405
10,835
(17,482)
(3,109)
$148,694
76,060
(17,539)
(1,897)
(4,745)
(15)
6,087
–
$ 196,889
$ 211,405
[1] Represents the change due to collection / realization of expected cash flow
over time.
Additions to mortgage servicing rights for the year ended
December 31, 2015 include those acquired as part of the Doral
Bank Transaction and those assumed for a portfolio previously
serviced by Doral Bank in connection with a pre-existing
backup servicing agreement.
Residential mortgage
serviced for others were
loans
$18.0 billion at December 31, 2016 (2015 - $20.6 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. The banking subsidiaries receive servicing
fees based on a percentage of the outstanding loan balance. At
December 31, 2016, those weighted average mortgage servicing
fees were 0.30% (2015 – 0.28%). 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, 2016 and 2015 were as
follows:
Years ended
December 31, 2016 December 31, 2015
Prepayment speed
Weighted average life
(in years)
Discount rate (annual rate)
5.2%
10.2
11.0%
8.6%
7.1
11.1%
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 servicing rights purchased from other financial institutions, and the sensitivity to
immediate changes in those assumptions, were as follows as of the end of the periods reported:
(In thousands)
Fair value of servicing rights
Weighted average life (in years)
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, 2016, the Corporation serviced $1.7 billion
(2015 - $1.9 billion) in residential mortgage loans with credit
recourse to the Corporation.
Under
the Corporation, as
servicer, has the right to repurchase (but not the obligation), at
the GNMA securitizations,
Originated MSRs
December 31,
Purchased MSRs
December 31,
2016
2015
2016
2015
$88,056
7.8
4.6%
$ (1,668)
$ (3,590)
11.5%
$ (3,851)
$ (7,699)
$98,648
7.3
6.0%
$ (2,488)
$ (5,241)
11.5%
$ (4,083)
$ (8,206)
$108,833
6.9
4.8%
$ (2,051)
$ (4,400)
11.0%
$ (4,369)
$ (8,778)
$112,757
6.2
6.9%
$ (2,871)
$ (6,034)
11.0%
$ (4,211)
$ (8,525)
individual
its option and without GNMA’s prior authorization, any loan
for a GNMA guaranteed mortgage-backed
that is collateral
security when certain delinquency criteria are met. At the time
that
loans meet GNMA’s specified delinquency
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, 2016, the
Corporation had recorded $49 million in mortgage loans on its
consolidated statements of financial condition related to this
buy-back option program (2015 - $140 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 $224 million of mortgage loans under the
GNMA buy-back option program (2015 - $80 million). The
determination to repurchase these loans was based on the
the transaction, which results in a
economic benefits of
Corporation
2016,
31,
POPULAR, INC. 2016 ANNUAL REPORT 139
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,
the
assets managed together with them by the Corporation,
ended
including its own loan portfolio,
December 31, 2016 and 2015, are disclosed in the following
tables. Loans securitized/sold represent loans in which the
Corporation has continuing involvement in the form of credit
recourse.
the years
for
Quantitative information about delinquencies, net credit
losses, and components of securitized financial assets and other
2016
Total principal amount of
loans, net of unearned
Principal amount 60 days
or more past due
Net credit losses
(recoveries)
$10,798,507
776,300
45,293
702,893
8,448,883
3,754,393
572,878
1,663,701
88,821
$23,346,625
$ 314,339
1,668
3,683
4,418
1,074,252
104,895
84,079
119,458
–
$1,467,876
$ 13,073
(2,935)
(1,913)
3,888
68,530
85,398
2,716
2,281
(5,445)
$171,921
2015
Total principal amount of
loans, net of unearned
Principal amount 60 days
or more past due
Net credit losses
(recoveries)
$10,144,237
681,201
64,436
627,650
9,011,473
3,837,679
646,115
1,883,561
137,000
$22,992,230
$ 411,291
14,086
4,311
4,639
1,188,290
106,194
101,451
144,568
45,719
$1,639,975
$107,955
(886)
(2,760)
3,303
47,552
92,926
58,880
811
37,602
$268,557
(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
(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
140 POPULAR, INC. 2016 ANNUAL REPORT
Note 15 - 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
2016
2015
10-50
2-10
3-10
$120,519
$116,701
516,758
309,294
76,637
902,689
514,892
495,631
302,656
70,449
868,736
503,829
387,797
364,907
35,665
21,003
$543,981
$502,611
Depreciation and amortization of premises and equipment
for the year 2016 was $46.9 million (2015 -$47.5 million; 2014
- $47.1 million), of which $22.6 million (2015 - $22.9 million;
2014 - $23.8 million) was charged to occupancy expense and
$24.3 million (2015 - $24.6 million; 2014 - $23.3 million) was
charged to equipment, communications and other operating
expenses. Occupancy expense is net of rental
income of
$27.8 million (2015 - $28.1 million; 2014 - $28.1 million).
Note 16 - Other real estate owned
The following tables present the activity related to Other Real Estate Owned (“OREO”), for the years ended December 31, 2016,
2015 and 2014. During the second quarter of 2015, the Corporation completed a bulk sale of $37 million of covered OREOs.
(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
Transfer to non-covered status [1]
Ending balance
For the year ended December 31, 2016
Non-covered
OREO
Commercial/Construction
Non-covered
OREO
Mortgage
Covered
OREO
Mortgage
$ 32,471
(2,909)
7,372
(15,894)
(639)
$ 20,401
$122,760
(9,889)
105,140
(56,826)
(1,141)
$ 36,685
(2,273)
17,588
(18,206)
(1,666)
Total
$191,916
(15,071)
130,100
(90,926)
(3,446)
$160,044
$ 32,128
$212,573
Non-covered
OREO
Commercial/Construction
For the year ended December 31, 2015
Non-covered
OREO
Mortgage
Covered
OREO
Commercial/Construction
$ 38,983
(13,356)
17,671
(25,065)
(266)
14,504
$ 32,471
$ 96,517
(8,567)
86,040
(53,782)
(540)
3,092
$122,760
$ 85,394
(20,350)
9,661
(59,749)
(452)
(14,504)
$
–
Covered
OREO
Mortgage
$ 44,872
(3,891)
25,019
(25,990)
(233)
(3,092)
Total
$ 265,766
(46,164)
138,391
(164,586)
(1,491)
–
$ 36,685
$ 191,916
[1] Represents the reclassification of OREOs to the non-covered category, pursuant to the expiration of the commercial and consumer shared-loss arrangement with
the FDIC related to loans acquired from Westernbank, on June 30, 2015.
POPULAR, INC. 2016 ANNUAL REPORT 141
(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, 2014
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
Note 17 - Other assets
The caption of other assets in the consolidated statements of
financial condition consists of the following major categories:
(In thousands)
2016
2015
following table presents
information of
aggregated summarized
the Corporation’s equity method
The
financial
investees:
Years ended December 31,
(In thousands)
2016
2015
2014
Net deferred tax assets (net of valuation
allowance)
Investments under the equity method
Prepaid taxes
Other prepaid expenses
Derivative assets
Trades receivable from brokers and
counterparties
Principal, interest and escrow servicing
advances
Guaranteed mortgage loan claims
receivable
Others
Total other assets
$1,243,668
218,062
172,550
90,320
14,085
$1,302,452
212,838
180,969
79,215
16,959
Operating results:
Total revenues
Total expenses
Income tax expense
Net income
46,630
78,759
69,711
79,862
152,403
138,081
101,628
140,480
$2,145,510
$2,193,162
At December 31,
(In thousands)
Balance Sheet:
Total assets
Total liabilities
$852,160
634,173
47,434
$643,632
414,975
33,920
$715,966
343,100
43,993
$170,553
$194,737
$328,873
2016
2015
$7,640,819
$5,778,619
$7,647,048
$5,388,229
Note 18 - Investments in equity investees
During the year ended December 31, 2016, the Corporation
recorded earnings of $31.3 million, from its equity investments,
compared to $24.4 million for the year ended December 31,
2015. The carrying value of the Corporation’s equity method
investments was $ 218 million and $ 213 million at
December 31, 2016 and 2015, respectively.
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 19 - Goodwill and other intangible assets
The changes in the carrying amount of goodwill for the years ended December 31, 2016, and 2015, allocated by reportable
segments, were as follows (refer to Note 42 for the definition of the Corporation’s reportable segments):
2016
Balance at
January 1, 2016
Goodwill on
acquisition
$280,221
346,167
$626,388
$–
–
$–
Purchase
accounting
adjustments
$
–
4,707
$4,707
Goodwill
impairment
Balance at
December 31,2016
$(3,801)
–
$(3,801)
$276,420
350,874
$627,294
(In thousands)
Banco Popular de Puerto Rico
Banco Popular North America
Total Popular, Inc.
142 POPULAR, INC. 2016 ANNUAL REPORT
(In thousands)
Banco Popular de Puerto Rico
Banco Popular North America
Total Popular, Inc.
2015
Balance at
January 1, 2015
Goodwill on
acquisition
$250,109
215,567
$465,676
$ 3,899
38,735
$42,634
Purchase
accounting
adjustments
$ 26,213
91,865
$118,078
Goodwill
impairment
Balance at
December 31, 2015
$–
–
$–
$280,221
346,167
$626,388
During the year ended December 31, 2016, the Corporation
recorded a goodwill
impairment charge of $3.8 million at
Popular Securities as part of its annual goodwill impairment
test and purchase accounting adjustments of $4.7 million
related to the Doral Bank Transaction.
During the year ended December 31, 2015, the goodwill
accounting
recorded of $163.1 million,
after purchase
adjustments of $120.5 million, was related to the Doral Bank
Transaction. The Corporation
purchase
accounting adjustments during 2015 of $2.4 million to reduce
the goodwill related to the acquisition of an insurance benefits
business during 2014.
recorded
also
At December 31, 2016 and 2015, the Corporation had $ 6.1 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, 2016
Core deposits
Other customer relationships
Total other intangible assets
December 31, 2015
Core deposits
Other customer relationships
Total other intangible assets
Gross
Carrying
Amount
$ 37,274
36,449
$ 73,723
$ 63,539
37,665
$101,204
Accumulated
Amortization
$18,624
16,162
$34,786
$38,464
10,745
$49,209
Net
Carrying
Value
$18,650
20,287
$38,937
$25,075
26,920
$51,995
During the year ended December 31, 2016, core deposit
intangibles with a gross amount of $26.3 million became fully
amortized during 2016.
The following table presents the estimated amortization of
the intangible assets with definite useful lives for each of the
following periods:
Bank Transaction, net
During the year ended December 31, 2015, the Corporation
recorded $12.8 million in core deposit intangibles related to the
Doral
accounting
adjustments of $10.8 million. Also, the Corporation recorded
$17.3 million in customer relationship intangibles related to the
purchase of the Doral Insurance Agency portfolio which was
part of a separate bidding process after Doral Financial
Corporation filed for bankruptcy.
purchase
of
During the year ended December 31, 2016, the Corporation
recognized $ 12.1 million in amortization expense related to
other
lives
(2015 - $11.0 million; 2014 - $8.2 million).
assets with
intangible
definite
useful
(In thousands)
Year 2017
Year 2018
Year 2019
Year 2020
Year 2021
$9,378
9,286
9,042
4,967
2,157
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.
POPULAR, INC. 2016 ANNUAL REPORT 143
Under
applicable
standards,
the reporting unit
for each 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
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
The Corporation performed the annual goodwill impairment
evaluation for the entire organization during the third quarter
of 2016 using July 31, 2016 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 follows
push-down accounting, as such all goodwill is assigned to the
reporting units when carrying out a business combination.
In determining the fair value of a reporting unit,
the
combination of methods,
a
Corporation generally uses
including market price multiples of comparable companies and
144 POPULAR, INC. 2016 ANNUAL REPORT
as well
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:
(cid:129) a selection of comparable publicly traded companies,
based on nature of business, location and size;
(cid:129) a selection of comparable acquisition and capital raising
transactions;
(cid:129) the discount rate applied to future earnings, based on an
estimate of the cost of equity;
(cid:129) the potential future earnings of the reporting unit; and
(cid:129) 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
(“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
financial projections presented to 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 9.47% to 13.72%
for the 2016 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.
The goodwill balance of BPPR and BPNA, as legal entities,
the Corporation’s total
represented approximately 98% of
goodwill balance as of the July 31, 2016 valuation date.
Popular Securities failed Step 1 of the annual goodwill
impairment evaluation as of
July 31, 2016 requiring the
completion of Step 2. The results of the Step 2 indicated that
the implied fair value of goodwill was below the carrying value
resulting in an impairment charge of all goodwill
in that
reporting unit of $3.8 million at July 31, 2016.
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 $549 million or 16% in
the July 31, 2016 annual test.
BPNA failed Step 1 in the annual test as of July 31, 2016
since its carrying amount exceeded its fair value by $84 million
or 5% requiring the completion of Step 2. The results of Step 2
indicated that the implied fair value of goodwill exceeded the
goodwill carrying value at July 31, 2016 by $166 million
resulting in no goodwill impairment. If the fair value of BPNA,
which is principally impacted by its expected level of
profitability, declines
a
corresponding decrease in the fair value of its net assets or if
loan discounts improve without a corresponding increase in fair
value of the BPNA reporting unit, the Corporation may be
required to record a goodwill impairment charge.
future without
in the
further
the
as part of
Furthermore,
analyses, management
performed a reconciliation of
the aggregate fair values
determined for the reporting units to the market capitalization
the fair value results
of Popular,
determined for the reporting units in the July 31, 2016 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.
The following tables present 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, 2016
Balance at
January 1,
2016
(gross amounts)
$280,221
510,578
$790,799
Accumulated
impairment
losses
$
–
164,411
$164,411
Balance at
January 1,
2016
(net amounts)
Balance at
December 31,
2016
(gross amounts)
$280,221
346,167
$626,388
$280,221
515,285
$795,506
Accumulated
impairment
losses
$ 3,801
164,411
$168,212
Balance at
December 31,
2016
(net amounts)
$276,420
350,874
$627,294
December 31, 2015
Balance at
January 1,
2015
(gross amounts)
$250,109
379,978
$630,087
Accumulated
impairment
losses
$
–
164,411
$164,411
Balance at
January 1,
2015
(net amounts)
Balance at
December 31,
2015
(gross amounts)
$250,109
215,567
$465,676
$280,221
510,578
$790,799
Accumulated
impairment
losses
$
–
164,411
$164,411
Balance at
December 31,
2015
(net amounts)
$280,221
346,167
$626,388
POPULAR, INC. 2016 ANNUAL REPORT 145
Note 20 - Deposits
Total interest bearing deposits as of the end of the periods
presented consisted of:
Note 21 – Borrowings
The following table presents the composition of fed funds
purchased and assets sold under agreements to repurchase at
December 31, 2016 and December 31, 2015.
(In thousands)
Savings accounts
NOW, money market and other
interest bearing demand
deposits
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
December 31,
2016
December 31,
2015
$ 7,793,533
$ 7,010,391
(In thousands)
Federal funds purchased
Assets sold under agreements to
December 31,
2016
December 31,
2015
$
–
$ 50,000
8,012,706
5,632,449
repurchase
479,425
712,145
Total federal funds purchased and
assets sold under agreements to
repurchase
$479,425
$762,145
15,806,239
12,642,840
3,570,956
4,138,586
7,709,542
4,014,359
4,151,009
8,165,368
Total interest bearing deposits
$23,515,781
$20,808,208
A summary of
December 31, 2016 follows:
certificates of deposit by maturity
at
(In thousands)
2017
2018
2019
2020
2021
2022 and thereafter
Total certificates of deposit
$3,946,867
1,347,604
653,080
907,971
802,593
51,427
$7,709,542
At December 31, 2016, the Corporation had brokered deposits
amounting to $ 0.6 billion (December 31, 2015 - $ 1.3 billion).
The aggregate amount of overdrafts in demand deposit
accounts that were reclassified to loans was $6 million at
December 31, 2016 (December 31, 2015 - $11 million).
146 POPULAR, INC. 2016 ANNUAL REPORT
The following table presents information related to the Corporation’s repurchase transactions accounted for as secured
borrowings that are collateralized with investment securities available-for-sale, other assets held-for-trading purposes or which
have been obtained under agreements to resell. 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.
Repurchase agreements accounted for as secured borrowings
(Dollars in thousands)
U.S. Treasury Securities
Within 30 days
After 90 days
Total U.S. Treasury Securities
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
Mortgage-backed securities
Within 30 days
After 30 to 90 days
After 90 days
Total mortgage-backed securities
Collateralized mortgage obligations
Within 30 days
After 30 to 90 days
Total collateralized mortgage obligations
Total
December 31, 2016
December 31, 2015
Repurchase
liability
Repurchase liability
weighted average
interest rate
Repurchase
liability
Repurchase liability
weighted average
interest rate
$ 32,700
19,819
52,519
95,720
142,299
25,380
263,399
39,108
58,552
54,560
152,220
11,287
–
11,287
$479,425
0.85%
1.61
1.14
1.00
0.91
1.08
0.96
1.05
0.94
1.09
1.02
0.28
–
0.28
0.98%
$
–
–
–
243,708
–
23,366
267,074
124,878
154,582
142,441
421,901
10,298
12,872
23,170
$712,145
–%
–
–
0.07
–
0.60
0.12
0.72
0.75
1.84
1.11
0.28
0.75
0.54
0.72%
POPULAR, INC. 2016 ANNUAL REPORT 147
The following table presents the composition of notes
payable at December 31, 2016 and December 31, 2015.
(In thousands)
Advances with the FHLB with
maturities ranging from 2017
through 2029 paying interest at
monthly fixed rates ranging
from 0.81% to 4.19 %
(2015 - 0.41% to 4.19%)
Advances with the FHLB with
maturities ranging from 2018
through 2019 paying interest
monthly at a floating rates
ranging from 0.22% to 0.34%
over the 1 month LIBOR
Advances with the FHLB with
maturities ranging from 2017
through 2019 paying interest
quarterly at a floating rate from
(0.01)% to 0.24% over the
3 month LIBOR (2015 - 0.24%
over the 3 month LIBOR)
Unsecured senior debt securities
maturing on 2019 paying
interest semiannually at a fixed
rate of 7.00%, net of debt
issuance costs of $5,212
(2015 - $7,296)
Junior subordinated deferrable
interest debentures (related to
trust preferred securities) with
maturities ranging from 2027 to
2034 with fixed interest rates
ranging from 6.125% to
8.327%, net of debt issuance
costs of $476 (2015 - $505)
Others
December 31,
2016
December 31,
2015
$ 608,193
$ 747,072
34,164
–
30,313
14,429
444,788
442,704
439,323
18,071
439,295
19,008
Total notes payable
$1,574,852
$1,662,508
Repurchase agreements in portfolio are generally short-term,
often overnight and Popular acts as borrowers transferring
assets to the counterparty. As such our risk is very limited. We
manage the liquidity risks arising from secured funding by
sourcing
of
counterparties, providing a range of securities collateral and
pursuing longer durations, when appropriate.
from a
globally
funding
diverse
group
Federal funds purchased and assets sold under agreements to
repurchase:
(Dollars in thousands)
2016
2015
Maximum aggregate balance outstanding
at any month-end
$954,253
$1,224,064
Average monthly aggregate balance
outstanding
$757,230
$1,023,905
Weighted average interest rate:
For the year
At December 31
1.01%
1.12%
0.73%
0.88%
The following table presents information related to the
Corporation’s other short-term borrowings for the periods
ended December 31, 2016 and 2015.
Other short-term borrowings:
(Dollars in thousands)
2016
2015
Balance outstanding at the end of the period
$ 1,200
$ 1,200
Maximum aggregate balance outstanding at
any month-end
$31,200
$128,200
Average monthly aggregate balance
outstanding
Weighted average interest rate:
For the year
At December 31
$ 6,266
$ 4,501
2.15%
9.00%
2.69%
9.00%
148 POPULAR, INC. 2016 ANNUAL REPORT
A breakdown of borrowings by contractual maturities at December 31, 2016 is included in the table below.
(In thousands)
Year
2017
2018
2019
2020
2021
Later years
Total borrowings
Assets sold under
agreements to repurchase
Short-term
borrowings Notes payable
Total
$479,425
–
–
–
–
–
$479,425
$1,200
–
–
–
–
–
$1,200
$ 155,122
183,920
564,699
112,309
21,694
537,108
$ 635,747
183,920
564,699
112,309
21,694
537,108
$1,574,852
$2,055,477
At December 31, 2016 and 2015, the Corporation had FHLB
borrowing facilities whereby the Corporation could borrow up
to $3.8 billion and $3.9 billion,
respectively, of which
$673 million and $762 million, respectively, were used. In
addition, at December 31, 2016, the Corporation had placed
$200 million of the available FHLB credit facility as collateral
for a municipal letter of credit to secure deposits. The FHLB
borrowing
loans
held-in-portfolio, and do not have restrictive covenants or
callable features.
collateralized
facilities
with
are
the discount window of
Also, at December 31, 2016,
the Corporation has a
the Federal
borrowing facility at
Reserve Bank of New York amounting to $1.2 billion (2015 -
$1.3 billion), which remained unused at December 31, 2016
and 2015. The facility is a collateralized source of credit that is
highly reliable even under difficult market conditions.
POPULAR, INC. 2016 ANNUAL REPORT 149
Note 22 – 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, 2016 and 2015.
(In thousands)
Derivatives
Reverse repurchase
agreements
Total
Gross Amount
of Recognized
Assets
$14,094
23,637
$37,731
As of December 31, 2016
Gross Amounts
Offset in the
Statement of
Financial
Position
Net Amounts of
Assets
Presented in the
Statement of
Financial
Position
$–
–
$–
$14,094
23,637
$37,731
As of December 31, 2016
Gross Amounts Not Offset in the Statement of
Financial Position
Financial
Instruments
$551
–
$551
Securities
Collateral
Received
$
–
23,637
$23,637
Cash
Collateral
Received Net Amount
$–
–
$–
$13,543
–
$13,543
Gross Amounts Not Offset in the Statement of
Financial Position
Gross Amount
of Recognized
Liabilities
$ 12,842
479,425
$492,267
Gross Amounts
Offset in the
Statement of
Financial
Position
Net Amounts of
Liabilities
Presented in the
Statement of
Financial
Position
$–
–
$–
$ 12,842
479,425
$492,267
As of December 31, 2015
Gross Amounts
Offset in the
Statement of
Financial
Position
Net Amounts of
Assets
Presented in the
Statement of
Financial
Position
$–
–
$–
$ 16,959
96,338
$113,297
Gross Amount
of Recognized
Assets
$ 16,959
96,338
$113,297
Financial
Instruments
$551
–
$551
Securities
Collateral
Pledged
$
747
479,425
$480,172
Cash
Collateral
Pledged
$–
–
$–
Net
Amount
$11,544
–
$11,544
Gross Amounts Not Offset in the Statement of
Financial Position
Financial
Instruments
$114
–
$114
Securities
Collateral
Received
$
–
96,338
$ 96,338
Cash
Collateral
Received
$–
–
$–
Net
Amount
$16,845
–
$16,845
(In thousands)
Derivatives
Repurchase agreements
Total
(In thousands)
Derivatives
Reverse repurchase agreements
Total
150 POPULAR, INC. 2016 ANNUAL REPORT
As of December 31, 2015
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
$–
–
$–
$ 14,343
712,145
$726,488
Gross Amount
of Recognized
Liabilities
$ 14,343
712,145
$726,488
Financial
Instruments
$114
–
$114
Securities
Collateral
Pledged
$ 4,050
712,145
$716,195
Cash
Collateral
Received Net Amount
$–
–
$–
$10,179
–
$10,179
(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.
In addition,
the Corporation’s Repurchase Agreements and
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 23 – Trust preferred securities
At December 31, 2016 and 2015, 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
(Dollars in thousands)
Issuer
Capital securities
Distribution rate
Common securities
Junior subordinated debentures aggregate liquidation amount
Stated maturity date
Reference notes
common securities of the trusts (the “common securities”),
were used by the trusts to purchase junior subordinated
deferrable
subordinated
(the
debentures”) issued by the Corporation.
interest debentures
“junior
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, 2016 and 2015.
BanPonce
Trust I
Popular
Capital Trust I
Popular
North America
Capital Trust I
Popular
Capital Trust II
$52,865
8.327%
$181,063
6.700%
$91,651
6.564%
$101,023
6.125%
$ 1,637
$54,502
$ 5,601
$186,664
February 2027 November 2033
[2],[4],[5]
[1],[3],[6]
$ 2,835
$94,486
$ 3,125
$104,148
September 2034 December 2034
[2],[4],[5]
[1],[3],[5]
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]
POPULAR, INC. 2016 ANNUAL REPORT 151
Basel III capital rules require the phase out of non-qualifying
Tier 1 capital instruments such as trust preferred securities. At
December 31, 2016, the Corporation had $427 million in trust
preferred securities outstanding which no longer qualified for
Tier 1 capital treatment, but instead qualify for Tier 2 capital
treatment.
Note 24 – 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, 2016 and 2015
consisted of:
their
(cid:129) 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
liquidation preference value, or
of 6.375% of
$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
to any sinking fund
subject
requirement. Cash dividends declared and paid on the 2003
Series A Preferred Stock amounted to $1.4 million for the
year
ended December 31, 2016, 2015 and 2014.
Outstanding shares of 2003 Series A Preferred Stock
amounted to 885,726 at December 31, 2016, 2015 and 2014.
(cid:129) 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
152 POPULAR, INC. 2016 ANNUAL REPORT
Governors of the Federal Reserve System beginning on
May 28, 2013. The redemption price per share is $25.00.
Cash dividends declared and paid on the 2008 Series B
Preferred Stock amounted to $2.3 million for the year
ended December 31, 2016, 2015 and 2014. Outstanding
shares of 2008 Series B Preferred Stock amounted to
1,120,665 at December 31, 2016, 2015 and 2014.
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.
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
its common
on, or purchase, redeem or otherwise acquire,
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, legal availability of funds, recent and
projected financial results, capital levels and liquidity of the
Corporation, general business conditions and other factors
deemed relevant by the Corporation’s Board of Directors.
During the year 2015 the Corporation reinstated the
payment of dividends to shareholders of common stock. Cash
dividends of $0.60 and $0.30 per common share outstanding
were declared during 2016 and 2015,
respectively (no
dividends were declared in 2014). The dividends declared
during 2016 amounted to $62.2 million and $31.1 million in
2015, of which $15.6 million and $15.5 million were payable to
shareholders of common stock at December 31, 2016 and 2015,
respectively ($0 as of December 31, 2014). On January 23,
2017,
the Corporation’s Board of Directors approved an
increase in the Company’s quarterly common stock dividend
from $0.15 per share to $0.25 per share. The dividend is
payable on April 3, 2017 to shareholders of record as of
March 17, 2017. The Board also approved a common stock
repurchase plan of up to $75 million, which may be executed in
the open market or in privately negotiated transactions. The
timing and exact amount of the share repurchases will be
subject to various factors,
position, financial performance and market condition.
including the Company’s capital
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 $
513 million at December 31, 2016 (2015 - $ 495 million; 2014 -
$ 469 million). During 2016, $ 18 million was transferred to the
statutory reserve account (2015 - $ 26 million, 2014 - $ 24
million). BPPR was in compliance with the statutory reserve
requirement in 2016, 2015 and 2014.
Failure
agencies.
Note 25 – Regulatory capital requirements
The Corporation and its banking subsidiaries are subject to
various regulatory capital requirements imposed by the federal
to meet minimum capital
banking
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. On January 1, 2015, the Corporation,
BPPR and BPNA became
capital
requirements,
including also revised minimum and well
capitalized regulatory capital ratios and compliance with the
standardized approach for determining risk-weighted assets.
to Basel
subject
III
The Basel III Capital Rules introduced a new capital measure
known as Common Equity Tier I (“CET1”) and related
regulatory capital ratio CET1 to risk-weighted assets.
The Basel
III Capital Rules provide that a depository
institution will be deemed to be well capitalized if it maintained
a leverage ratio of at least 5%, a CET1 ratio of at least 6.5%, a
Tier 1 risk-based capital ratio of at least 8% and a total risk-
based ratio of at least 10%. Management has determined that at
December 31, 2016 and 2015, the Corporation exceeded all
capital adequacy requirements to which it is subject.
At December 31, 2016 and 2015, BPPR and BPNA were
well-capitalized under the regulatory framework of Basel III.
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, 2016 and 2015
under the Basel III regulatory guidance.
Capital adequacy minimum
requirement (including
conservation capital buffer)
Actual
(Dollars in thousands) Amount Ratio
Amount
Ratio
2016
Total Capital (to Risk-
Weighted Assets):
Corporation
BPPR
BPNA
Common Equity Tier I
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
$4,869,215 19.48% $2,156,365
1,624,727
3,678,619 19.53
501,075
1,040,234 17.91
8.625%
8.625
8.625
$4,121,208 16.48% $1,281,318
965,417
3,436,615 18.24
297,740
997,094 17.16
5.125%
5.125
5.125
$4,121,208 16.48% $1,656,338
1,247,979
3,436,615 18.24
384,883
997,094 17.16
6.625%
6.625
6.625
$4,121,208 10.91% $1,511,403
1,191,783
3,436,615 11.53
306,375
997,094 13.02
4%
4
4
Capital adequacy
minimum
requirement
Actual
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
2015
Total Capital (to Risk-
Weighted Assets):
Corporation
BPPR
BPNA
Common Equity Tier I
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
$4,692,409
3,591,547
945,132
18.78% $1,998,971
1,572,988
18.27
397,519
19.02
8%
8
8
$4,049,576
3,339,165
908,722
16.21% $1,124,421
884,806
16.98
223,604
18.29
4.5%
4.5
4.5
$4,049,576
3,339,165
908,722
16.21% $1,499,229
1,179,741
16.98
298,139
18.29
$4,049,576
3,339,165
908,722
11.82% $1,370,145
1,094,291
12.21
264,547
13.74
6%
6
6
4%
4
4
POPULAR, INC. 2016 ANNUAL REPORT 153
instruments
The final Basel III capital rules require the phase out of
trust
non-qualifying Tier 1 capital
preferred securities. At December 31, 2016, the Corporation
had $427 million in trust preferred securities outstanding. On
January 1, 2016, all $427 million in principal amount of the
trust preferred securities no longer qualified for Tier 1 capital
treatment, but instead qualified for Tier 2 capital treatment.
such as
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.”
The following table presents the minimum amounts and
ratios for the Corporation’s banks to be categorized as well-
capitalized.
(Dollars in thousands)
Amount Ratio Amount Ratio
2016
2015
Total Capital (to Risk-
Weighted Assets):
BPPR
BPNA
Common Equity Tier I
Capital (to Risk-Weighted
Assets):
BPPR
BPNA
Tier I Capital (to Risk-
Weighted Assets):
BPPR
BPNA
Tier I Capital (to Average
Assets):
BPPR
BPNA
$1,883,741
580,956
10% $1,966,236
496,899
10
10%
10
$1,224,432
377,621
6.5% $1,278,053
322,984
6.5
6.5%
6.5
$1,506,993
464,765
8% $1,572,988
397,519
8
$1,489,729
382,968
5% $1,367,864
330,683
5
8%
8
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
154 POPULAR, INC. 2016 ANNUAL REPORT
Note 26 – Other comprehensive loss
The following table presents changes in accumulated other comprehensive loss by component for the years ended December 31,
2016, 2015 and 2014.
Changes in Accumulated Other Comprehensive Loss by Component [1]
(In thousands)
Foreign currency translation
Beginning Balance
Other comprehensive loss before reclassifications
Amounts reclassified from accumulated other comprehensive
loss
Net change
Ending balance
Adjustment of pension and
postretirement benefit plans
Beginning Balance
Other comprehensive loss before reclassifications
Amounts reclassified from accumulated other comprehensive
loss for amortization of net losses
Amounts reclassified from accumulated other comprehensive
loss for amortization of prior service credit
Net change
Ending balance
Unrealized net holding gains (losses)
on investments
Beginning Balance
Other comprehensive (loss) income before reclassifications
Other-than-temporary impairment amounts reclassified from
accumulated other comprehensive (loss) income
Amounts reclassified from accumulated other comprehensive
(loss) income
Net change
Ending balance
Unrealized net losses on cash flow
hedges
Beginning Balance
Other comprehensive loss before reclassifications
Amounts reclassified from other accumulated other
comprehensive loss
Net change
Ending balance
Total
[1] All amounts presented are net of tax.
Years ended December 31,
2014
2015
2016
$ (35,930) $ (32,832) $ (36,099)
(4,026)
(3,098)
(4,451)
–
–
(4,026)
(3,098)
7,718
3,267
$ (39,956) $ (35,930) $ (32,832)
$(211,276) $(205,187) $(104,302)
(11,402)
(16,032)
(98,015)
13,386
12,261
(5,188)
(2,318)
(2,318)
2,318
(334)
(6,089)
(100,885)
$(211,610) $(211,276) $(205,187)
$
(9,560) $
8,465
$ (48,344)
(58,585)
(29,871)
55,987
167
11,959
(340)
(113)
–
822
(58,758)
(18,025)
56,809
$ (68,318) $
(9,560) $
8,465
$
(120) $
(318) $
–
(2,203)
(2,669)
(4,034)
1,921
(282)
2,867
198
$
(402) $
(120) $
3,716
(318)
(318)
$(320,286) $(256,886) $(229,872)
POPULAR, INC. 2016 ANNUAL REPORT 155
The following table presents the amounts reclassified out of each component of accumulated other comprehensive loss for the
years ended December 31, 2016, 2015, and 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 credit
Unrealized holding gains (losses) on investments
Realized gain (loss) on sale of securities
Unrealized net losses on cash flow hedges
Forward contracts
Reclassifications Out of Accumulated Other Comprehensive Loss
Affected Line Item in the
Consolidated Statements of Operations
Years ended December 31,
2014
2015
2016
Other operating income
Total before tax
Income tax (expense) benefit
Total net of tax
Personnel costs
Personnel costs
Total before tax
Income tax benefit (expense)
Total net of tax
Net gain (loss) on sale and valuation adjustments of
investment securities
Other-than-temporary impairment losses on
available-for-sale debt securities
Total before tax
Income tax benefit
Total net of tax
Mortgage banking activities
Total before tax
Income tax benefit
Total net of tax
$
$
– $
– $(7,718)
–
–
–
–
(7,718)
–
– $
– $(7,718)
$(21,948) $(20,100) $ 8,505
(3,800)
3,800
3,800
(18,148)
(16,300)
4,705
7,080
6,357
(1,835)
$(11,068) $ (9,943) $ 2,870
$
379 $
141 $ (870)
(209)
(14,445)
–
170
(14,304)
(870)
3
2,458
48
$
173 $(11,846) $ (822)
$ (3,149) $ (4,702) $(6,091)
(3,149)
(4,702)
(6,091)
1,228
1,835
2,375
$ (1,921) $ (2,867) $(3,716)
Total reclassification adjustments, net of tax
$(12,816) $(24,656) $(9,386)
Note 27 – Guarantees
The Corporation has obligations upon the occurrence of certain
events under
guarantees provided in certain
contractual agreements as summarized below.
financial
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, 2016, the
Corporation recorded a liability of $0.3 million (December 31,
2015 - $0.5 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
If
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, 2016
and 2015, shown in Note 28, 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.
156 POPULAR, INC. 2016 ANNUAL REPORT
Also,
from time to time,
from time to time,
the Corporation securitized
mortgage loans into guaranteed mortgage-backed securities
subject in certain instances, to lifetime credit recourse on the
loans that serve as collateral for the mortgage-backed securities.
The Corporation has not sold any mortgage loans subject to
credit recourse since 2009. Also,
the
in bulk sale transactions, residential
Corporation may sell,
mortgage loans and Small Business Administration (“SBA”)
commercial
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.
loans subject
2016,
the Corporation
recourse provided,
the Corporation is
At December 31, 2016, the Corporation serviced $1.7 billion
(December 31, 2015 - $1.9 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
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 loans serviced with recourse and interest, if
applicable. During
repurchased
approximately $44 million of unpaid principal balance in
mortgage loans subject to the credit recourse provisions (2015 -
$59 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, 2016, the Corporation’s liability
established to cover the estimated credit loss exposure related to
recourse amounted to
loans
$54 million (December 31, 2015 - $59 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, 2016 and 2015.
serviced with credit
sold or
sold”
in the
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
(categorized in the line item “Adjustments (expense) to
indemnity reserves on loans
consolidated
statements of operations) throughout the life of the loan, as
information becomes
necessary, when additional
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
loss experience, foreclosure rate, estimated future
historical
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
twelve-month period.
following
delinquent within the
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
the
loans
characteristics
When the Corporation sells or securitizes mortgage loans, it
generally makes customary representations and warranties
the
regarding
sold. The
of
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. There were no repurchases
under BPPR’s representation and warranty arrangements during
the year ended December 31, 2016, compared to $175 thousand
for the year ended December 31, 2015. 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.
(In thousands)
Balance as of beginning of period
Provision for recourse liability
Net charge-offs
Balance as of end of period
December 31,
2015
2016
$ 58,663
14,548
(18,722)
$ 59,438
22,938
(23,713)
$ 54,489
$ 58,663
POPULAR, INC. 2016 ANNUAL REPORT 157
The
table
presents
following
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,
2016 and 2015.
changes
the
(In thousands)
Balance as of beginning of period
Provision (reversal) for representation and
warranties
Net charge-offs
Settlements paid
Balance as of end of period
2016
2015
$ 8,087
$15,959
3,140
(291)
–
(5,446)
(176)
(2,250)
$10,936
$ 8,087
in the meantime,
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, 2016, the Corporation serviced $18.0 billion in
mortgage loans for third-parties, including the loans serviced
with credit recourse (December 31, 2015 - $20.6 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
the
guarantees programs. However,
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, 2016, the outstanding balance of funds advanced
by the Corporation under
such mortgage loan servicing
agreements was approximately $70 million, including advances
on the portfolio acquired from Doral Bank (December 31, 2015
- $80 million). To the extent the mortgage loans underlying the
Corporation’s
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.
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 $149 million at December 31, 2016 and
December 31, 2015. In addition, at December 31, 2016 and
December 31, 2015, PIHC fully and unconditionally guaranteed
on a subordinated basis $427 million, of capital securities (trust
preferred securities) issued by wholly-owned issuing trust
158 POPULAR, INC. 2016 ANNUAL REPORT
entities to the extent set forth in the applicable guarantee
agreement. Refer to Note 23 to the consolidated financial
statements for further information on the trust preferred
securities.
the financial needs of
Note 28 – 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)
Commitments to
extend credit:
Credit card lines
Commercial and
construction lines
of credit
Other consumer
unused credit
commitments
Commercial letters of
credit
Standby letters of credit
Commitments to
originate or fund
mortgage loans
December 31, 2016 December 31, 2015
$4,562,981
$4,552,331
2,966,656
2,619,092
261,856
1,490
34,644
262,685
2,040
49,670
25,622
21,311
At December 31, 2016 and December 31, 2015,
the
Corporation maintained a reserve of approximately $9 million
and $10 million, respectively, for potential losses associated
with unfunded loan commitments related to commercial and
consumer lines of credit.
Other commitments
At December 31, 2016 and December 31, 2015, the Corporation
also maintained
for
approximately $372 thousand and $9 million, respectively,
primarily for the acquisition of other investments.
commitments
non-credit
other
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
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 42 to the consolidated financial statements.
several
instrumentalities
other Commonwealth
Since February 2014, the three principal rating agencies
(Moody’s, S&P and Fitch) have lowered their ratings on the
General Obligation bonds of the Commonwealth and the bonds
of
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. Currently, the
Commonwealth’s general obligation ratings are as follows: S&P,
‘D’, Moody’s, ‘Caa3’, and Fitch, ‘D’.
PROMESA and the Commonwealth’s Fiscal Plan
On June 30, 2016, President Obama signed the Puerto Rico
Act
and
Oversight, Management
(“PROMESA”) into law. PROMESA established a seven-member
oversight board with broad powers over the finances of the
Commonwealth and its
(the “Oversight
Board”).
instrumentalities
Economic
Stability
the Commonwealth,
Among other things, PROMESA provides for: (i) a stay on
litigation to enforce remedies or rights related to outstanding
its political subdivisions,
liabilities of
including municipalities,
public
the
corporations
restructuring of the debt obligations of such entities. PROMESA
also includes other miscellaneous provisions, including relief
from certain wage and hour
laws and regulations and
provisions for identification and expedited permitting of critical
infrastructure projects.
instrumentalities
two separate processes
and (ii)
and
for
During the first meeting of the Oversight Board, held on
September 30, 2016,
the Oversight Board announced the
designation of a number of entities as covered entities under
PROMESA,
its public
including the Commonwealth, all of
corporations and retirement systems, UPR, and all affiliates and
subsidiaries of the foregoing. While the Oversight Board has the
power to designate any of the Commonwealth’s municipalities
as covered entities under PROMESA, it has not done so as of
the date hereof.
The designation of an entity as a covered entity has various
the
implications under PROMESA. First,
it means
that
to their debts without
Governor will have to submit such entity’s annual budgets and,
its fiscal plans, to the
if the Oversight Board so requests,
Oversight Board for its review and approval. Second, covered
territorial instrumentalities may not issue debt or guarantee,
exchange, modify, repurchase, redeem, or enter into similar
transactions with respect
the prior
approval of the Oversight Board. Third, pursuant to certain
contracting guidelines approved by the Oversight Board, prior
Oversight Board approval is required in connection with any
transaction undertaken by a covered entity that (i) is outside
the ordinary course of business or (ii) has a material financial
impact. Finally, covered entities could also potentially be
eligible to use the restructuring procedures provided by
PROMESA. The first, Title VI, is a largely out-of-court process
through which a government entity and its financial creditors
can agree on terms to restructure such entity’s debt. If a
supermajority of creditors of a certain category agree, that
agreement can bind all other creditors in such category. The
second, Title III, draws on the federal bankruptcy code and
provides a court-supervised process
for a comprehensive
restructuring led by the Oversight Board.
amounted
(“PREPA”).
$584 million,
Power Authority
At December 31, 2016, the Corporation’s direct exposure to
the Puerto Rico government and its instrumentalities and
municipalities
of which
to
approximately $529 million is outstanding ($669 million and
$578 million, respectively, at December 31, 2015). Of the
loans and
amount outstanding, $459 million consists of
$70 million are securities ($502 million and $76 million at
December 31, 2015). Also, of
the amount outstanding,
$17 million represents obligations from the Government of
Puerto Rico or its public corporations each of which has been
designated as a covered entity under PROMESA ($76 million at
December 31, 2015). During the quarter ended September 30,
2016, BPPR sold its $40 million credit facility from Puerto Rico
Electric
remaining
$512 million outstanding 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 ($502 million
at December 31, 2015). 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. The automatic
stay on litigation imposed by PROMESA applies
to all
municipal obligations to which we are a party. Furthermore,
although the PROMESA Oversight Board has not designated
the Commonwealth’s 78 municipalities as covered
any of
entities under PROMESA, it may decide to do so in the future.
Further deterioration of the fiscal crisis of the Government of
Puerto Rico could further affect the value of these loans and
securities, resulting in losses to us.
The
POPULAR, INC. 2016 ANNUAL REPORT 159
The following table details the loans and investments representing the Corporation’s direct exposure to the Puerto Rico
government according to their maturities:
Investment Portfolio
Loans
Total Outstanding Total Exposure
(In thousands)
Central Government
Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years
Total Central Government
Government Development Bank (GDB)
After 1 to 5 years
Total Government Development Bank (GDB)
Public Corporations:
Puerto Rico Aqueduct and Sewer Authority
After 10 years
Total Puerto Rico Aqueduct and Sewer Authority
Puerto Rico Highways and Transportation Authority
After 5 to 10 years
Total Puerto Rico Highways and Transportation Authority
Municipalities
Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years
Total Municipalities
Total Direct Government Exposure
In addition, at December 31, 2016, the Corporation had
$406 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 ($394 million at December 31, 2015).
These included $326 million in residential mortgage loans that
are guaranteed by the Puerto Rico Housing Finance Authority
(December 31, 2015 - $316 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. Under recently enacted legislation, the Governor is
authorized to impose a temporary moratorium on the financial
obligations of Puerto Housing Finance Authority. Also, the
Corporation had $49 million in Puerto Rico housing bonds
pass-through securities backed by FNMA, GNMA or residential
loans, and $31 million of commercial real estate notes issued by
government entities, but payable from rent paid by third parties
($50 million and $28 million at December 31, 2015,
respectively).
Other contingencies
As
indicated in Note 12 to the consolidated financial
statements, as part of the loss sharing agreements related to the
the Corporation
Westernbank FDIC-assisted transaction,
160 POPULAR, INC. 2016 ANNUAL REPORT
$
–
3,456
13,116
407
16,979
2
2
460
460
4
4
3,105
14,540
18,635
16,820
53,100
$
–
–
–
–
–
–
–
–
–
–
–
$
–
3,456
13,116
407
16,979
2
2
460
460
4
4
37,621
128,008
145,005
148,160
458,794
40,726
142,548
163,640
164,980
511,894
$ 50,000
3,456
13,116
407
66,979
2
2
460
460
4
4
45,878
142,548
163,640
164,980
517,046
$70,545
$458,794
$529,339
$584,491
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 $153 million at
December 31, 2016 (December 31, 2015 - $120 million). For
additional information refer to Note 12.
litigation,
Legal Proceedings
The nature of Popular’s business ordinarily results in a certain
investigations, and legal and
number of claims,
administrative cases and proceedings. When the Corporation
it has meritorious defenses to the claims
determines that
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
an accrual
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.
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 $33.9 million as of December 31, 2016. 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
(including the fact
them are currently in
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
unfavorable, may be material to the Corporation’s consolidated
financial position in a particular period.
the ultimate resolution of
these matters,
on
based
claims
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 PCB’s motion to dismiss. The sole surviving claim relates
to PCB’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. PCB subsequently filed a motion in
opposition to plaintiff’s motion for leave to amend and further
sought to compel arbitration. In June 2015, this matter was
reassigned to a new judge and on July 22, 2015, such Court
denied PCB’s motion to compel arbitration and granted
plaintiffs’ motion for leave to amend the complaint to replead
certain
reordering,
misstatement of balance information and failure to notify
customers in advance of potential overdrafts. The Court did
not, however, allow plaintiffs to replead their claim for the
alleged breach of the implied covenant of good faith and fair
dealing. On August 12, 2015, the Plaintiffs filed a second
amended complaint. On August 24, 2015, PCB filed a Notice of
Appeal as to the order granting leave to file the second
amended complaint and on September 17, 2015,
it filed a
motion to dismiss
the second amended complaint. On
February 18, 2016, the Court granted in part and denied in part
PCB’s pending motion to dismiss. The Court dismissed
plaintiffs’ unfair and deceptive acts and trade practices claim to
the extent it sought to recover overdraft fees incurred prior to
September 2011. On March 28, 2016, PCB filed an answer to
second amended complaint and on April 7, 2016, it filed a
notice of appeal on the partial denial of PCB’s motion to
dismiss. A mediation session held on September 21, 2016
proved unsuccessful. Discovery is ongoing.
item processing
Set
forth below are descriptions of
the Corporation’s
significant legal proceedings.
Josefina Valle v. Popular Community Bank
PCB has been named a defendant in a putative class action
complaint captioned Josefina Valle, et al. v. Popular Community
Bank, filed in November 2012 in the New York State Supreme
Court (New York County). Plaintiffs, PCB customers, allege
among other things that PCB 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
PCB improperly disclosed its consumer overdraft policies and
that the overdraft rates and fees assessed by PCB violate New
seek unspecified damages,
York’s usury laws. Plaintiffs
including punitive damages,
interest, disbursements, and
attorneys’ fees and costs.
E-LOAN
PCB has also been named a defendant in a complaint for breach
of contract regarding certain alleged repurchase obligations in
connection with the origination and sale of residential mortgage
loans sold by E-LOAN to plaintiff. In January 2015, the court
consolidated this action with the matter of In re: RFC and
RESCAP Liquidating Trust Litigation, which is composed of
approximately 70 other matters involving repurchase obligation
claims filed by RFC, for pretrial purposes. A joint mediation
hearing was held on September 21, 2016 but did not result in
the settlement of this matter. The case is currently in discovery.
Nora Fernandez v. UBS
BPPR and Popular Securities have also been named defendants
in a putative class action complaint captioned Nora Fernandez, et
al. v. UBS, et al., filed in the United States District Court for the
Southern District of New York (SDNY) on May 5, 2014 on
behalf of investors in 23 Puerto Rico closed-end investment
POPULAR, INC. 2016 ANNUAL REPORT 161
companies. UBS Financial Services Incorporated of Puerto Rico,
another named defendant, is the sponsor and co-sponsor of all
23 funds, while BPPR was co-sponsor, together with UBS, of
nine (9) of those funds. Plaintiffs allege breach of fiduciary duty
and breach of contract against Popular Securities, aiding and
abetting breach of fiduciary duty against BPPR, and similar
claims against the UBS entities. The complaint seeks unspecified
damages, including 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 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
filed an opposition to the
parties. The UBS defendants
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 Popular defendants joined the opposition
and motion filed by UBS. By order dated January 30, 2015, the
court denied the plaintiffs’ motion to consolidate. By order dated
March 30, 2015,
the court granted defendants’ motion to
transfer. On May 8, 2015, plaintiffs filed an amended complaint
in the SDNY containing virtually identical allegations with
respect
to Popular Securities and BPPR. Defendants filed
motions to dismiss the amended complaint on June 18, 2015.
Oral arguments were held on the motions to dismiss in front of
Judge Stein of the SDNY on October 14, 2016. On December 7,
2016, Judge Stein largely granted the motion to dismiss of BPPR
and Popular Securities. Judge Stein’s order (“Order”) dismissed
all claims against BPPR and all but two breach of contract claims
against Popular Securities brought by one named plaintiff.
Specifically,
stemming from
purchases of the funds in 2005, 2007 and 2011 as time-barred by
the Puerto Rico Uniform Securities Act. The Order also
dismissed the claims for breach of fiduciary duty, aiding and
abetting of a breach of
the
covenant of good faith and fair dealing stemming from a 2012
purchase for failure to state a claim. The Court granted Plaintiffs
21 days to amend the complaint for the 2012 claims only, but
plaintiffs chose not to replead. The Order stated that the final
two contract claims, which allege that Popular Securities failed
to conduct a suitability analysis for the named plaintiff as
required by the parties’ contract would be allowed to proceed,
because the Court was not prepared at the motion to dismiss
stage, to conclude that the plaintiff was responsible for all
investments enough to eliminate Popular Securities’ obligations
regarding suitability. The parties are currently in the discovery
phase of the case.
fiduciary duty, and breach of
the Order dismissed claims
Hazard Insurance Commission-Related Litigation
Popular, Inc., BPPR and Popular Insurance, LLC (the “Popular
Defendants”) have recently been named defendants in a
162 POPULAR, INC. 2016 ANNUAL REPORT
putative class action complaint captioned Perez Díaz v. Popular,
Inc., et al. The complaint seeks damages and preliminary and
permanent injunctive relief on behalf of the purported class
against the Popular Defendants, as well as Antilles Insurance
Company, Real Legacy Insurance Company and MAPFRE-
PRAICO Insurance Company (the “Defendant
Insurance
the Popular
Companies”). Plaintiffs essentially allege that
Defendants have been unjustly enriched by failing to reimburse
them for commissions paid by the Defendant
Insurance
Companies to the insurance agent and/or mortgagee for policy
years when no claims were filed against their hazard insurance
policies. They demand the reimbursement to the purported
“class” of an estimated $400,000,000, plus legal interest, for the
the
“good experience”
time
Defendant
period, as well as injunctive relief seeking to enjoin the
Defendant Insurance Companies from paying commissions to
the insurance agent/mortgagee and ordering them to pay those
fees directly to the insured. A hearing on the request for
preliminary injunction and other matters was held on
February 15, 2017, as a result of which plaintiffs withdrew their
request for preliminary injunctive relief. A motion for dismissal
on the merits filed by all defendants, which was unopposed as
of the date of the hearing, was denied with a right to replead
following limited targeted discovery.
allegedly paid by
Insurance Companies during the relevant
commissions
Insurance Commissioner
BPPR has separately been named a defendant in a putative
class action complaint captioned Ramirez Torres, et al. v. Banco
Popular de Puerto Rico, et al. The complaint seeks damages and
preliminary and permanent injunctive relief on behalf of the
purported class against the Popular Defendants, as well other
financial institutions with insurance brokerage subsidiaries in
Puerto Rico. Plaintiffs essentially contend that in November
2015, Antilles Insurance Company obtained approval from the
Puerto Rico
an
endorsement
to obtain a
for good
reimbursement on their
experience, but that defendants failed to offer this product or
favoring other
disclose its existence to their customers,
products instead,
their duties as insurance
seek a determination that defendants
brokers. Plaintiffs
unlawfully failed to comply with their legal and contractual
duty to disclose the existence of this new insurance product, as
well as double or treble damages (the latter subject
to a
determination that defendants engaged in anti-monopolistic
practices in failing to offer this product).
insurance deductible
in violation of
allowed its
to market
customers
that
Other Matters
Puerto Rico Bonds and Closed-End Investment Funds
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
is
Puerto Rico, including Popular Securities. Popular Securities
has received customer complaints and is named as a respondent
(among other broker-dealers) in 59 arbitration proceedings
with aggregate claimed damages of approximately $168 million,
including one arbitration with claimed damages of $78 million
in which one other Puerto Rico broker-dealer
a
co-defendant. It is the view of the Corporation that Popular
Securities has meritorious defenses to the claims asserted. The
Government’s defaults on its debt, its intention to pursue a
comprehensive debt restructuring,
including specifically its
to declare a moratorium on certain principal
decisions
payments on bonds including those issued by Government
Development Bank for Puerto Rico (the “GDB”), may increase
the number of customer complaints (and claimed damages)
against Popular Securities concerning Puerto Rico bonds,
including bonds issued by GDB, and closed-end investment
companies that invest primarily in Puerto Rico bonds. An
adverse result in the matters described above or a significant
increase in customer complaints could have a material adverse
effect on Popular.
for
that
information from departments of
investigate mortgage-related conduct.
Mortgage-Related Investigations
The Corporation and its subsidiaries from time to time receive
the U.S.
requests
government
In
particular, the BPPR has received subpoenas and other requests
for information from the Federal Housing Finance Agency’s
Office of the Inspector General,
the Civil Division of the
Department of Justice, the Special Inspector General for the
Troubled Asset Relief Program and the Federal Department of
Housing and Urban Development’s Office of the Inspector
General mainly concerning real estate appraisals and residential
and construction loans in Puerto Rico. The Corporation is
cooperating with these requests.
payment
obligation”,
FDIC Commercial Loss Share Arbitration Proceedings
As described under “Note 12 – FDIC loss share asset and
true-up
in connection with the
Westernbank FDIC-assisted transaction, on April 30, 2010,
BPPR entered into loss share agreements with the FDIC, as
receiver, with respect to the covered loans and other real estate
owned (“OREO”) that it acquired in the transaction. Pursuant
to the terms of the loss share agreements, the FDIC’s obligation
to reimburse BPPR for losses with respect to covered assets
began with the first dollar of loss incurred. The FDIC was
obligated to reimburse BPPR for 80% of losses with respect to
covered assets, and BPPR must reimburse the FDIC for 80% of
recoveries with respect to losses for which the FDIC paid 80%
reimbursement under those loss share agreements. 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 for losses from
the FDIC. BPPR believes that it has complied with such terms
and conditions. The loss share agreement applicable to the
covered commercial and OREO described below provided for
loss sharing by the FDIC through the quarter ending June 30,
2015 and provides
to the FDIC for
recoveries through the quarter ending June 30, 2018.
reimbursement
for
loans
the FDIC notified BPPR that
December 2014 Dispute
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
that BPPR restructured and consolidated
estate
(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
restructuring and modification of the underlying loans did not
constitute a “Permitted Amendment” under the commercial
thereby causing the bank to breach
loss share agreement,
Article III of
loss share agreement. BPPR
disagreed 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
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 March 19, 2015, BPPR filed a
statement of claim with the American Arbitration Association
requesting that a review board determine BPPR and the FDIC’s
disputes concerning the Disputed Asset. The statement of claim
requested a declaration that the Disputed Asset was properly
considered a “Shared-Loss Asset” under the commercial loss
share agreement, a declaration that the restructuring was a
“Permitted Amendment” under the commercial
loss share
agreement, and an order that the FDIC reimburse the bank for
approximately $53.3 million for the Charge-Off of the Disputed
Asset, plus interest at the applicable rate. On April 1, 2015, the
FDIC notified BPPR that it was clawing back approximately
$1.7 million in reimbursable expenses relating to the Disputed
Asset that the FDIC had previously paid to BPPR. Thus, on
April 13, 2015, BPPR notified the American Arbitration
Association and the FDIC of an increase in the amount of its
damages by approximately $1.7 million. The review board in
the arbitration concerning the Disputed Asset was comprised of
one arbitrator appointed by BPPR, one arbitrator appointed by
the FDIC and a third arbitrator selected by agreement of those
arbitrators. The arbitration hearing was held in August 2016.
On October 3, 2016, the review board in the arbitration
described above issued a final award denying BPPR’s request for
reimbursement on the Disputed Asset. As a result, for the
quarter ended September 30, 2016, the Corporation recognized
a pre-tax charge of
approximately $55 million and a
corresponding reduction to its FDIC indemnification asset.
POPULAR, INC. 2016 ANNUAL REPORT 163
March 2015 Dispute
In addition, in November and December 2014, BPPR proposed
two separate portfolio sales of Shared-Loss Assets to the FDIC.
The FDIC 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. In March
2015, BPPR proposed a third portfolio sale to the FDIC, and in
May 2015, BPPR proposed a fourth portfolio sale to the FDIC.
BPPR disagreed with the FDIC’s characterization of
the
November and December 2014 portfolio sale proposals and with
the FDIC’s interpretation of the commercial loss share agreement
provision governing portfolio sales. Accordingly, on March 13,
2015, BPPR delivered to the FDIC a notice of dispute under the
commercial loss share agreement. On June 8, 2015, BPPR filed a
statement of claim with the American Arbitration Association
requesting that a review board resolve the disputes concerning
those proposed portfolio sales. On June 15, 2015, BPPR amended
its statement of claim to include a claim for the FDIC-R’s refusal to
timely concur in the third sale proposed in March 2015. On
June 29, 2015, the FDIC informed BPPR that it would reimburse
the bank for losses arising from the primary portfolio of the third
proposed sale, but only subject to conditions to which BPPR
objected. The FDIC also informed BPPR that it would not concur
in the sale of the remainder (the “secondary portfolio”) of the
third proposed sale or
in the fourth proposed sale. On
September 4, 2015, BPPR filed a second amended statement of
claim concerning the FDIC’s refusal to concur in the third and
fourth portfolio sales as proposed by BPPR.
On November 25, 2015, BPPR completed the sale of the
loans in the primary portfolio of the third proposed sale, the
losses from which the FDIC partially reimbursed on July 18,
2016. On June 30, 2016, BPPR completed the sales of the
remaining loans included in all of its proposed portfolio sales.
In connection with the arbitration concerning the proposed
portfolio sales, BPPR sought damages in the amount of
$88.5 million plus interest. The FDIC filed a counterclaim for
recoveries allegedly lost on six loans included in the third
proposed sale and on the loans and related assets included in
the subsequent sales. The arbitration hearing was held in
November 2016. The review board in the arbitration was
comprised of one arbitrator appointed by BPPR, one arbitrator
appointed by the FDIC and a third arbitrator selected by
agreement of those arbitrators. On December 12, 2016, the
Review Board issued an award denying BPPR’s loss-share claims
on the portfolio sales. As a result,
for the quarter ended
December 31, 2016,
the Corporation recognized a pre-tax
charge of approximately $116.8 million in connection with
unreimbursed losses considered in the arbitration, the related
adjustment to the true-up obligation owed to the FDIC at the
end of
the loss-share agreements in 2020 and recoveries
previously incorporated in the net damages claimed in the
the FDIC dismissed its
arbitration. On January 11, 2017,
counterclaim without prejudice.
164 POPULAR, INC. 2016 ANNUAL REPORT
loss
the commercial
the FDIC notified BPPR that
January 2016 Dispute
it
On November 12, 2015,
(a) would deny certain claims included in BPPR’s Second
Quarter 2015 Quarterly Certificate and (b) withhold payment
of approximately $5.5 million attributed to $6.9 million in
losses BPPR claimed under that certificate. In support of its
denial, the FDIC alleged that BPPR did not comply with its
obligations under
share agreement,
including compliance with certain provisions of GAAP, acting
in accordance with prudent banking practices, managing
Shared-Loss Assets in the same manner as BPPR’s non-Shared-
Loss Assets, and using best efforts to maximize collections on
the Shared-Loss Assets. BPPR disagreed with the FDIC’s
allegations relating to the denied claims included in BPPR’s
Second Quarter 2015 Quarterly Certificate, and accordingly, on
January 27, 2016 delivered to the FDIC a notice of dispute
under the commercial loss share agreement. On May 20, 2016,
BPPR filed a demand for arbitration with the American
review board,
Arbitration Association requesting that
comprised of one arbitrator appointed by the BPPR, one
arbitrator appointed by the FDIC and a third arbitrator selected
by agreement of those arbitrators, resolve the disputes arising
the Second Quarter 2015 Quarterly
from BPPR’s filing of
Certificate and award BPPR damages
in the amount of
$4.9 million. On June 29, 2016, the FDIC filed its answering
statement and counterclaim, seeking a declaration that the
FDIC properly denied a portion of the bank’s shared-loss claim
for one of the subject assets. In December 2016, the FDIC
withdrew its counterclaim with prejudice on the condition that
BPPR agree not to challenge the FDIC’s refusal to reimburse the
losses on the loan that was the subject of
the FDIC’s
counterclaim. On February 10, 2017, BPPR withdrew one of its
claims, as a result of which its damages demand was reduced to
approximately $4.3 million.
a
December 2016 Dispute
On December 16, 2016, the FDIC initiated a proceeding before
the same panel that sat on a prior arbitration proceeding
between BPPR and the FDIC that resulted in a settlement
among the parties dated as of October 2014. The panel’s chair
also sat on the December 2015 Dispute that resulted in an
adverse award for BPPR. Through this proceeding, the FDIC
sought to claw back a $12.6 million reimbursement paid on one
of the Shared-Loss Assets at issue in the January 2016 Dispute.
On February 23, 2017, the FDIC and BPPR entered into a
settlement in principle whereby the parties agreed to withdraw
both the January 2016 and the December 2016 Disputes in
exchange for a payment by BPPR to the FDIC of approximately
$5.5 million. The Corporation does not expect such payment to
have a material impact on the value of our loss share asset and
related true-up payment obligation to the FDIC.
The loss sharing 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). As of December 31, 2016, the carrying value of
covered loans approximated $573 million, mainly comprised of
single-family residential mortgage loans. To the extent that
estimated losses on covered loans are not realized before the
expiration of the applicable loss sharing agreement, such losses
would not be subject to reimbursement from the FDIC and,
accordingly, would require us to make a material adjustment 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 29 – Non-consolidated variable interest entities
The Corporation is involved with four statutory trusts which it
established to issue trust preferred securities to the public.
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
the trusts are predetermined
trusts since the decisions of
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 and FNMA. These special
purpose entities are deemed to be VIEs since they lack equity
investments at risk. The Corporation’s continuing involvement
includes owning
in these guaranteed loan securitizations
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.
these entities
The Corporation concluded that, essentially,
(FNMA and GNMA) 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. Moreover, through their guarantee obligations, agencies
(FNMA and GNMA) have the obligation to absorb losses that
could be potentially significant to the VIE.
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 32 to the consolidated financial
statements for additional information on the debt securities
outstanding at December 31, 2016 and 2015, which are
classified as available-for-sale and trading securities in the
Corporation’s consolidated statements of financial condition. In
addition, the Corporation holds variable interests in the form of
servicing fees, since it retains the right to service the transferred
loans in those government-sponsored special 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.
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
of GNMA and FNMA loans at December 31, 2016 and 2015.
(In thousands)
Assets
Servicing assets:
Mortgage servicing rights
Total servicing assets
Other assets:
Servicing advances
Total other assets
Total assets
Maximum exposure to loss
2016
2015
$158,562
$163,224
$158,562
$163,224
$ 20,787
$ 24,431
$ 20,787
$ 24,431
$179,349
$187,655
$179,349
$187,655
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 $12.3 billion at December 31, 2016 (December 31,
2015 - $12.8 billion).
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, 2016 and 2015 will not
be recovered. The agency debt securities are not included as
part of the maximum exposure to loss since they are guaranteed
by the related agencies.
In September of 2011, BPPR sold construction and
commercial real estate loans to a newly created joint venture,
PRLP 2011 Holdings, LLC. In March of 2013, BPPR completed
a sale of commercial and construction loans, and commercial
and single family real estate owned to a newly created joint
venture, PR Asset Portfolio 2013-1 International, LLC.
These joint ventures were 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,
POPULAR, INC. 2016 ANNUAL REPORT 165
constructing, developing, leasing and selling any real properties
acquired by the joint ventures through deed in lieu of
foreclosure, foreclosure, or by resolution of any loan.
the acquiring entity’s assets.
BPPR provided financing to PRLP 2011 Holdings, LLC and
PR Asset Portfolio 2013-1 International, LLC for the acquisition
of the assets in an amount equal to the acquisition loan of
$86 million and $182 million, respectively. The acquisition
loans have a 5-year maturity and bear a variable interest at
30-day LIBOR plus 300 basis points and are secured by a pledge
of all of
In addition, BPPR
provided these joint ventures with a non-revolving advance
facility (the “advance facility”) of $69 million and $35 million,
respectively,
and
costs-to-complete related to certain construction projects, and a
revolving working capital line (the “working capital line”) of
to fund certain
$20 million and $30 million, respectively,
operating expenses of
these
transactions, BPPR received $ 48 million and $92 million,
respectively, in cash and a 24.9% equity interest in each joint
venture. The Corporation is not required to provide any other
financial support to these joint ventures.
the joint venture. As part of
commitments
unfunded
cover
to
BPPR accounted for both transactions as a true sale pursuant
to ASC Subtopic 860-10.
The Corporation has determined that PRLP 2011 Holdings,
LLC and PR Asset Portfolio 2013-1 International, LLC are VIEs
but it is not the primary beneficiary. All decisions are made by
Caribbean Property Group (“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 ventures any and all documents, contracts, certificates,
agreements and instruments, and to take any action deemed
necessary in the benefit of the joint ventures.
The Corporation holds variable interests in these VIEs in the
form of the 24.9% equity interests and the financing provided
to these joint ventures. The equity interest is accounted for
under the equity method of accounting pursuant
to ASC
Subtopic 323-10.
The following tables present
the carrying amount and
related to the
the assets and liabilities
classification of
Corporation’s variable interests in the non-consolidated VIEs,
PRLP 2011 Holdings, LLC and PR Asset Portfolio 2013-
International, LLC, and their maximum exposure to loss at
December 31, 2016 and 2015.
PRLP 2011
Holdings, LLC
2015
2016
PR Asset Portfolio
2013-1 International,
LLC
2016
2015
–
–
–
–
–
$
– $
–
$ 35,121
579
1,391
885
401
2,475
22,296
980 $ 3,866
$ 58,302
10 $
19
$
169
$
$
(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:
$
$
$
Equity investment
$ 9,167
$ 13,069 $22,378
$ 25,094
Total assets
Liabilities
Deposits
Total liabilities
$ 9,167
$ 14,059 $26,263
$ 83,565
$(1,127) $(18,808) $ (9,692)
$(1,127) $(18,808) $ (9,692)
$(11,772)
$(11,772)
Total net assets (liabilities) $ 8,040
$ (4,749) $16,571
$ 71,793
Maximum exposure to
loss
$ 8,040
$
– $16,571
$ 71,793
The Corporation determined that the maximum exposure to
loss under a worst case scenario at December 31, 2016 would
be not recovering the net assets held by the Corporation as of
the reporting date.
should be made
to determine whether
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
non-consolidated VIEs has not changed since their initial
evaluation. The Corporation concluded that it is still not the
primary beneficiary of these VIEs, and therefore, these VIEs are
not required to be consolidated in the Corporation’s financial
statements at December 31, 2016.
Note 30 – 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
is to manage interest rate sensitivity by
Corporation’s goal
166 POPULAR, INC. 2016 ANNUAL REPORT
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
fair value
derivatives. Additionally,
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, 2016, inclusion
of the credit risk in the fair value of the derivatives resulted in
loss of $0.9 million (2015 – loss of $ 0.8 million; 2014 – loss of
$0.1 million) from the Corporation’s credit standing adjustment
and a gain of $0.4 million (2015 – gain of $ 0.3 million; 2014 –
gain of $1.2 million) from the assessment of the counterparties’
credit risk.
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, 2016, the amount recognized for
the right
to reclaim cash collateral under master netting
agreements was $4 million and no amount was recognized for
the obligation to return cash collateral (December 31, 2015 -
$10 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, 2016 was $0.8 million (December 31,
2015 - $4 million). Based on the contractual obligations
established on these derivative instruments, the Corporation
has fully collateralized these positions by pledging collateral of
$4 million at December 31, 2016 (December 31, 2015 - $10
million).
POPULAR, INC. 2016 ANNUAL REPORT 167
Financial instruments designated as cash flow hedges or non-hedging derivatives outstanding at December 31, 2016 and 2015 were
as follows:
$105,290
$109,900
Other assets
hedging instruments
$105,290
$109,900
Notional amount
Derivative assets
Derivative liabilities
At December 31,
2015
2016
Statement
of condition
classification
Fair value at
December 31,
2015
2016
Statement of
condition
classification
Fair value at
December 31,
2015
2016
$
$
$
Other liabilities
34
34
$
$
24
24
9
759
$
–
3,760
Other liabilities
Other liabilities
$
709
112,554
$
–
189,152
Trading account
securities
Other assets
2,637
191,738
73,470
140
94,680
90,409
Other assets
Other assets
Other assets
36
388
12,868
1
94
13,080
69,957
86,283
–
–
–
Other liabilities
Other liabilities
–
Interest bearing
deposits
$
$
$
715
715
$
$
232
232
–
810
22
331
–
$
–
4,144
–
94
–
10,964
9,873
(In thousands)
Derivatives designated as hedging
instruments:
Forward contracts
Total derivatives designated as
Derivatives not designated as
hedging instruments:
Forward contracts
Interest rate swaps
Foreign currency forward
contracts
Interest rate caps
Indexed options on deposits
Bifurcated embedded options
Total derivatives not designated as
hedging instruments:
$451,065
$460,664
$14,060
$16,935
$12,127
$14,111
Total derivative assets and
liabilities
$556,355
$570,564
$14,094
$16,959
$12,842
$14,343
168 POPULAR, INC. 2016 ANNUAL REPORT
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 80 days at December 31, 2016.
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)
$(3,612)
$(3,612)
(In thousands)
Forward contracts
Total
Amount of net gain (loss)
recognized in OCI on
derivatives (effective
portion)
$(4,376)
$(4,376)
(In thousands)
Forward contracts
Total
Amount of net gain (loss)
recognized in OCI on
derivatives (effective
portion)
$(6,613)
$(6,613)
(In thousands)
Forward contracts
Total
Year ended December 31, 2016
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)
$(3,148)
$(3,148)
$
$
(1)
(1)
Year ended December 31, 2015
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)
$(4,719)
$(4,719)
$ 17
$ 17
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)
Fair Value Hedges
At December 31, 2016 and 2015, there were no derivatives designated as fair value hedges.
POPULAR, INC. 2016 ANNUAL REPORT 169
Non-Hedging Activities
For the year ended December 31, 2016, the Corporation recognized a loss of $ 0.1 million (2015 – loss of $ 0.3 million; 2014 – loss
of $ 8.5 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
Interest rate caps
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,
2016
Year ended
December 31,
2015
Year ended
December 31,
2014
Mortgage banking activities
Other operating income
Other operating income
Interest expense
Other operating income
Interest expense
Interest expense
$ (160)
333
27
12
57
1,981
(2,374)
$ (124)
$(389)
300
49
(4)
–
(334)
73
$(305)
$(10,876)
1,223
8
5
–
2,815
(1,666)
$ (8,491)
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 conditions with credit
limit approvals and monitoring
procedures. Market value changes on these swaps and other
derivatives are recognized in earnings in the period of change.
Interest Rate Caps
an
The Corporation enters
intermediary on behalf of its customers and simultaneously
takes offsetting positions under the same terms and conditions,
thus minimizing its market and credit risks.
into interest
caps
rate
as
Indexed 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,
the Corporation purchases indexed options which returns are
tied to the same indexes from major broker dealer companies in
the embedded
the over the counter market. Accordingly,
170 POPULAR, INC. 2016 ANNUAL REPORT
options and the related indexed options are marked-to-market
through earnings.
Note 31 – Related party transactions
The Corporation grants loans to its directors, executive officers,
including certain related individuals or organizations, and
affiliates in the ordinary course of business. The activity and
balance of these loans were as follows:
(In thousands)
Balance at December 31, 2014
New loans
Payments
Other changes
Balance at December 31, 2015
New loans
Payments
Other changes
Balance at December 31, 2016
$158,094
29,488
(45,951)
23,607
$165,238
2,639
(30,369)
(687)
$136,551
New loans and payments
includes disbursements and
collections from existing lines of credit.
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, 2016 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. Certain of the loans are secured
by real estate and BPPR commenced collection and foreclosure
proceedings in February 2014. The foreclosure proceedings
were completed in June 2016, when the loans had a principal
outstanding balance of $0.7 million. BPPR had charged off
$0.5 million on these loans. 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, 2016 was approximately
$0.1 million. The second loan is to an entity in which this
individual owns a 33% equity interest and which was secured
with undeveloped land. In June 2016, this loan had a balance of
resolved through a
approximately $0.4 million and was
in for the amount of $0.3 million. The
discounted payoff
brother of
the
same Executive Vice President of
Corporation was granted a commercial loan in 2008. During
2015 and 2016, this loan was modified under a payment plan.
The outstanding balance of the loan as of December 31, 2016
was of approximately $0.2 million.
this
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 were 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, executive officers,
including certain
related individuals or organizations, and affiliates, 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.
At December 31, 2016, the Corporation’s banking subsidiaries
held deposits from related parties, excluding EVERTEC, Inc.
(“EVERTEC”) amounting to $328 million (2015 - $234 million).
From time to time, the Corporation, in the ordinary course
of business, obtains services from related parties that have some
association with the Corporation. Management believes the
terms of such arrangements are consistent with arrangements
entered into with independent third parties.
law firm for
During 2014, the Corporation engaged,
in the ordinary
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
the year 2014 amounted to
approximately $0.7 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 leased office space in the
Corporation’s headquarters building, which is owned by BPPR,
and engaged BPPR as custodian of its retirement plan. During
2014,
to BPPR of
law firm made lease payments
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, 2016, the Corporation
made contributions of approximately $1.5 million to Banco
Popular Foundations, which are not-for-profit corporations
dedicated to philanthropic work (2015 - $0.7 million).
The Corporation provides advisory services to several Puerto
Rico investment companies
in exchange for a fee. The
Corporation also provides administrative, custody and transfer
agency services to these investment companies. These fees are
calculated at an annual rate of the average net assets of the
investment company, as defined in each agreement. Due to its
advisory role,
the Corporation considers these investment
companies as related parties.
For the year ended December 31, 2016 administrative fees
charged to these investment companies amounted to $8.6
million (2015 - $9.1 million) and waived fees amounted to
$2.8 million (2015 - $3.3 million), for a net fee of $5.8 million
(2015 - $5.8 million).
The Corporation, through its subsidiary Banco Popular de
Puerto Rico, has also entered into lines of credit facilities with
these companies. As of December 31, 2016, the available lines
of credit facilities amounted to $357 million (2015 - $364
million). The aggregate sum of all outstanding balances under
all credit facilities that may be made available by BPPR, from
time to time, to those Puerto Rico investment companies for
which BPPR acts as investment advisor or co-investment
advisor, shall never exceed the lesser of $200 million or 10% of
BPPR’s capital.
The Corporation also considers its equity method investees
as related parties. On December 2016, BPPR extended a credit
facility of $50 million to one of its equity method investees,
Banco BHD León. The
additional
information on transactions with equity method investees
considered related parties.
following
provides
POPULAR, INC. 2016 ANNUAL REPORT 171
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, 2016, the
Corporation’s stake in EVERTEC was 16.05%. 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
On May 26, 2016, EVERTEC, Inc. filed its Annual Report on
Form 10-K for the year ended December 31, 2015, which
ended
included restated audited results
years
the
for
December 31, 2014 and 2013, correcting certain errors involved
with the accounting for tax positions taken by EVERTEC in the
2010 tax year and other miscellaneous accounting adjustments.
The Corporation’s proportionate share of the cumulative impact
of the EVERTEC restatement and other corrective adjustments
to its financial statements was approximately $2.2 million and
is reflected as part of other non-interest income.
The Corporation received $4.7 million in dividend
distributions during the year ended December 31, 2016 from its
investments in EVERTEC’s holding company (December 31,
2015 - $4.7 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.
(In thousands)
Equity investment in EVERTEC
December 31, 2016 December 31, 2015
$38,904
$33,590
The Corporation had the following financial condition balances outstanding with EVERTEC at December 31, 2016 and
December 31, 2015. Items that represent liabilities to the Corporation are presented with parenthesis.
(In thousands)
Accounts receivable (Other assets)
Deposits
Accounts payable (Other liabilities)
Net total
December 31, 2016 December 31, 2015
$ 6,394
(14,899)
(20,372)
$(28,877)
$ 3,148
(23,973)
(16,192)
$(37,017)
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
and changes in stockholders’ equity for the years ended December 31, 2016, 2015 and 2014.
(In thousands)
Share of income 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,
2014
2015
2016
$11,796
(573)
$11,593
1,636
$10,536
381
$11,223
$13,229
$10,917
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, 2016, 2015 and 2014. Items that represent
expenses to the Corporation are presented with parenthesis.
(In thousands)
Years ended December 31,
2015
2014
2016
Category
Interest expense on deposits
ATH and credit cards interchange income from services to EVERTEC
Rental income charged to EVERTEC
Processing fees on services provided by EVERTEC
Other services provided to EVERTEC
$
(64) $
(58) $
29,739
6,995
(178,524)
1,052
27,816
6,898
(164,809)
1,311
(67)
26,646
6,874
(154,839)
Interest expense
Other service fees
Net occupancy
Professional fees
1,012 Other operating expenses
Total
$(140,802) $(128,842) $(120,374)
172 POPULAR, INC. 2016 ANNUAL REPORT
EVERTEC had a letter of credit issued by BPPR, for the amount of $4.2 million at December 31, 2015, which expired on
February 10, 2016.
PRLP 2011 Holdings, LLC
As indicated in Note 29 to the consolidated financial statements, the Corporation holds a 24.9% equity interest in PRLP 2011
Holdings, LLC and currently 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, 2016 December 31, 2015
$9,167
$13,069
The Corporation had the following financial condition balances outstanding with PRLP 2011 Holdings, LLC at December 31,
2016 and December 31, 2015.
(In thousands)
Loans
Accrued interest receivable
Deposits (non-interest bearing)
Net total
December 31, 2016 December 31, 2015
$
–
–
(1,127)
$(1,127)
$
980
10
(18,808)
$(17,818)
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 loss from PRLP
2011 Holdings, LLC for the years ended December 31, 2016, 2015 and 2014.
(In thousands)
Share of loss from the equity investment in PRLP 2011 Holdings, LLC
Years ended December 31,
2015
2016
2014
$(502) $(4,021) $(2,947)
During the year ended December 31, 2016 the Corporation received $3.4 million in capital distributions from its investment in
PRLP 2011 Holdings, LLC (December 31, 2015 - $6.6 million). 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, 2016,
2015 and 2014.
(In thousands)
For the years ended December 31,
2015
2016
2014
Category
Interest income on loan to PRLP 2011 Holdings, LLC
$11
$189
$425
Interest income
PR Asset Portfolio 2013-1 International, LLC
indicated in Note 29 to the consolidated financial
As
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, 2016 December 31, 2015
Equity investment in
PR Asset Portfolio
2013-1 International,
LLC
$22,378
$25,094
POPULAR, INC. 2016 ANNUAL REPORT 173
The Corporation had the following financial condition balances
outstanding with PR Asset Portfolio 2013-1 International, LLC,
at December 31, 2016 and December 31, 2015.
(In thousands)
Loans
Accrued interest
receivable
Deposits
Net total
December 31, 2016 December 31, 2015
$ 3,866
19
(9,692)
$(5,807)
$ 58,302
169
(11,772)
$ 46,699
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, 2016,
2015 and 2014.
(In thousands)
Share of (loss) income from the equity
investment in PR Asset Portfolio
2013-1 International, LLC
Years ended December 31,
2014
2015
2016
$(2,057) $(6,280)
$745
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 December 31, 2016, 2015 and 2014.
Years ended December 31,
2015
2016
2014
Category
(cid:129) 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.
(cid:129) 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
can be
corroborated by observable market data for substantially
the full term of the financial instrument.
are observable or
inputs
that
that
(cid:129) Level 3 - Inputs are unobservable and significant to the fair
value measurement. Unobservable inputs
the
Corporation’s own assumptions about assumptions that
market participants would use in pricing the asset or
liability.
reflect
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
interest rates, volatilities, and credit
including yield curves,
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
the
counterparty
amounts
Corporation’s credit standing, constraints on liquidity and
unobservable parameters that are applied consistently.
quality,
reflect
credit
that
$1,011 $2,805 $4,340
Interest income
(4)
(4)
–
Interest expense
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.
–
–
70 Other service fees
(In thousands)
Interest income on
loan to PR Asset
Portfolio 2013-1
International, LLC
Interest expense on
deposits
Servicing fee paid by
PR Asset Portfolio
2013-1
International, LLC
Total
$1,007 $2,801
4,410
820-10 “Fair Value Measurements
Note 32 – Fair value measurement
ASC Subtopic
and
Disclosures” establishes a fair value hierarchy that prioritizes
the inputs to valuation techniques used to measure fair value
into three levels
to increase consistency and
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
174 POPULAR, INC. 2016 ANNUAL REPORT
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, 2016 and 2015 and
on a nonrecurring basis in periods subsequent
to initial
recognition for the years ended December 31, 2016, 2015, and
2014:
At December 31, 2016
(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, excluding derivatives
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
$–
–
–
–
–
–
–
$–
$–
–
–
–
$–
$–
–
$–
$–
–
$–
$2,136,620
711,850
22,771
1,221,526
4,103,940
2,122
9,585
$8,208,414
$
$
–
–
–
–
1,392
–
–
1,392
$
1,164
–
37,991
13,963
53,118
–
14,094
$8,275,626
$
$
$
–
1,321
4,755
602
$
6,678
$ 196,889
–
$ 204,959
$2,136,620
711,850
22,771
1,221,526
4,105,332
2,122
9,585
$8,209,806
$
1,164
1,321
42,746
14,565
$
59,796
$ 196,889
14,094
$8,480,585
$ (12,842) $
$ (12,842)
–
(153,158)
(153,158)
$ (12,842) $(153,158) $ (166,000)
–
POPULAR, INC. 2016 ANNUAL REPORT 175
At December 31, 2015
(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
$ –
–
–
–
–
276
–
$276
$ –
–
–
–
$ –
$ –
–
$276
$ –
–
$ –
$
$
$
–
–
–
–
1,434
–
–
$1,183,328
939,641
22,359
1,560,837
2,344,196
2,398
10,233
1,434
$6,062,992
$
–
1,831
6,454
687
4,590
2,054
51,155
13,860
$1,183,328
939,641
22,359
1,560,837
2,342,762
2,122
10,233
$6,061,282
4,590
223
44,701
13,173
$
$
$
62,687
$
8,972
$
71,659
–
16,959
$ 211,405
–
$ 211,405
16,959
$6,140,928
$ 221,811
$6,363,015
$ (14,343) $
–
–
(120,380)
$ (14,343)
(120,380)
$ (14,343) $(120,380) $ (134,723)
The fair value information included in the following tables is not as of period end, but as of the date that the fair value
measurement was recorded during the years ended December 31, 2016, 2015 and 2014 and excludes nonrecurring fair value
measurements of assets no longer outstanding as of the reporting date.
(In thousands)
Level 1 Level 2
Level 3
Total
NONRECURRING FAIR VALUE MEASUREMENTS
Year ended December 31, 2016
Assets
Loans [1]
Other real estate owned [2]
Other foreclosed assets [2]
Total assets measured at fair value on a nonrecurring basis
Write-downs
$–
–
–
$–
$–
–
–
$–
$ 79,175
44,735
25
$ 79,175
44,735
25
$
$123,935
$123,935
$
(26,272)
(10,260)
(12)
(36,544)
[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] 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.
176 POPULAR, INC. 2016 ANNUAL REPORT
(In thousands)
Level 1 Level 2
Level 3
Total
NONRECURRING FAIR VALUE MEASUREMENTS
Year ended December 31, 2015
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
Write-downs
$–
–
–
–
$–
$ –
–
574
–
$574
$
$ 67,915
44,923
66,694
75
$ 67,915
44,923
67,268
75
(63,002)
(66)
(46,164)
(847)
$179,607
$180,181
$
(110,079)
[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
NONRECURRING FAIR VALUE MEASUREMENTS
Year ended December 31, 2014
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
Write-downs
$–
–
–
–
$–
$
–
–
6,610
–
$ 71,750
21,609
86,520
1,368
$ 71,750
21,609
93,130
1,368
$
(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.
POPULAR, INC. 2016 ANNUAL REPORT 177
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, 2016, 2015, and 2014.
Year ended December 31, 2016
MBS
classified
as investment
securities
available-
for-sale
$1,434
(3)
11
–
–
(50)
$1,392
CMOs
classified
as trading
account
securities
$1,831
(4)
–
233
(309)
(430)
$1,321
MBS
classified as
trading account
securities
$ 6,454
(86)
–
1,128
(1,852)
(889)
$ 4,755
Other
securities
classified
as trading
account
securities
$687
(85)
–
–
–
–
$602
Mortgage
servicing
rights
Total
assets
(25,336)
–
10,835
–
(15)
$211,405 $221,811
(25,514)
11
12,196
(2,161)
(1,384)
$196,889 $204,959
Contingent
consideration
$(120,380)
(32,778)
–
–
–
–
$(153,158)
Total
liabilities
$(120,380)
(32,778)
–
–
–
–
$(153,158)
$
–
$
2
$ (84)
$ 39
$ (4,745) $ (4,788)
$ (32,778)
$ (32,778)
Year ended December 31, 2015
MBS
classified
as investment
securities
available-
for-sale
$1,325
(2)
(7)
118
–
–
–
$1,434
CMOs
classified
as trading
account
securities
$1,375
(2)
–
808
(43)
(307)
–
$1,831
MBS
classified as
trading account
securities
$6,229
(42)
–
1,126
(187)
(672)
–
$6,454
Other
securities
classified
as trading
account
securities
$1,563
94
–
–
–
(970)
–
$ 687
Mortgage
servicing
rights
Total
assets
(13,349)
–
76,060
–
–
–
$148,694 $159,186
(13,301)
(7)
78,112
(230)
(1,949)
–
$211,405 $221,811
Contingent
consideration
$(133,634)
12,292
–
–
–
–
962
$(120,380)
Total
liabilities
$(133,634)
12,292
–
–
–
–
962
$(120,380)
$
–
$
2
$ (21)
$
38
$ 6,087 $ 6,106
$ 12,292
$ 12,292
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
MBS
classified
as trading
account
securities
$ 9,799
(165)
–
805
(2,110)
(2,100)
$ 6,229
Other
securities
classified
as trading
account
securities
$1,929
(366)
–
–
–
–
$1,563
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)
(In thousands)
Balance at January 1, 2016
Gains (losses) included in earnings
Gains (losses) included in OCI
Additions
Sales
Settlements
Balance at December 31, 2016
Changes in unrealized gains (losses)
included in earnings relating to
assets still held at December 31,
2016
(In thousands)
Balance at January 1, 2015
Gains (losses) included in earnings
Gains (losses) included in OCI
Additions
Sales
Settlements
Adjustments
Balance at December 31, 2015
Changes in unrealized gains (losses)
included in earnings relating to assets
still held at December 31, 2015
(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
178 POPULAR, INC. 2016 ANNUAL REPORT
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 years ended December 31, 2016,
2015 and 2014.
Gains and losses (realized and unrealized) included in earnings for the years ended December 31, 2016, 2015, and 2014 for Level 3
assets and liabilities included in the previous tables are reported in the consolidated statement of operations as follows:
2016
2015
2014
Total
gains (losses)
included in
earnings
Changes in unrealized
gains (losses)
relating to assets still
held at reporting date
Total
gains (losses)
included
in earnings
Changes in unrealized
gains (losses)
relating to assets still
held at reporting date
Total
gains (losses)
included
in earnings
Changes in unrealized
gains (losses)
relating to assets still
held at reporting date
$
(3)
$
–
$
(2)
$
–
$
(31)
$
–
(33,413)
(25,336)
(175)
635
(33,413)
(4,745)
(43)
635
9,559
(13,349)
50
2,733
9,559
6,087
19
2,733
(1,791)
(24,773)
(542)
–
(1,791)
(6,120)
(223)
–
(In thousands)
Interest income
FDIC loss share (expense)
income
Mortgage banking activities
Trading account (loss)
profit
Other operating income
Total
$(58,292)
$(37,566)
$ (1,009)
$18,398
$(27,137)
$(8,134)
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,
2016
Valuation technique
Unobservable inputs
$
1,321
Discounted cash flow model Weighted average life
Yield
Prepayment speed
Other - trading
$
602
Discounted cash flow model Weighted average life
Yield
Prepayment speed
Weighted
average
(range)
3.1 years (0.2 - 4.4 years)
3.4% (0.7% - 4.2%)
19.6% (16.5% - 26.7%)
5.4 years
12.4%
10.8%
Mortgage servicing rights
$ 196,889
Discounted cash flow model
Contingent consideration
$(153,158)
Discounted cash flow model
Loans held-in-portfolio
$ 79,123[1]
External appraisal
Other real estate owned
$ 43,497[2]
External appraisal
Prepayment speed
Weighted average life
Discount rate
4.7% (0.2% - 12.9%)
7.3 years (0.1 - 17.3 years)
11.2% (9.5% - 15.0%)
Credit loss rate on
covered loans
Risk premium
component of discount
rate
Haircut applied on
external appraisals
Haircut applied on
external appraisals
3.6% (0.0% - 100.0%)
4.3%
24.5% (15.0% - 25.0%)
18.8% (15.0% - 40.0%)
[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.
POPULAR, INC. 2016 ANNUAL REPORT 179
the constant prepayment
The significant unobservable inputs used in the fair value
the Corporation’s collateralized mortgage
measurement of
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
financial
resulting in a higher yield. These particular
instruments
are valued internally by the Corporation’s
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. The
Corporation’s MSR Committee analyzes changes in fair value
measurements of MSRs and approves the valuation assumptions
at each reporting period. Changes in valuation assumptions
must also be approved by the MSR Committee. The fair value of
MSRs are compared with those of the external service provider
180 POPULAR, INC. 2016 ANNUAL REPORT
on a quarterly basis in order to validate if the fair values are
within the materiality thresholds established by management to
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
(cid:129) 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.
(cid:129) Obligations of U.S. Government sponsored entities: The
sponsored entities
Obligations of U.S. Government
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.
(cid:129) 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.
(cid:129) Mortgage-backed securities: Certain agency mortgage-
backed securities (“MBS”) are priced based on a bond’s
theoretical value derived from similar bonds defined by
fair value
credit quality and market
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
(cid:129) 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.
(cid:129) 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.
(cid:129) Corporate
securities
(included as
in the
“available-for-sale” category): Given that
the quoted
prices are for similar instruments, these securities are
classified as Level 2.
“other”
(cid:129) Corporate securities and mutual
funds (included as
“other” in the “trading account securities” category):
Quoted prices for these security types are obtained from
the quoted prices are for
broker dealers. Given that
similar instruments or do not
trade in highly liquid
markets, these securities are classified as Level 2. The
important variables 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 yield taking into
consideration the aforementioned variables. In addition,
demand and supply also affect the price.
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
characteristics, prepayments
income,
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
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 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.
the collateral held,
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 12 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. The true-up payment
obligation is classified as Level 3.
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
take into
collateral, which is derived from appraisals that
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.
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.
POPULAR, INC. 2016 ANNUAL REPORT 181
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. Many of these estimates
involve various assumptions and may vary significantly from
amounts that could be realized in actual transactions.
The fair values reflected herein have been determined based
on the prevailing rate environment at December 31, 2016 and
December 31, 2015, as applicable. In different interest rate
fair value estimates can differ significantly,
environments,
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 the Corporation’s value as a going concern.
instruments.
that
is,
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 primarily automobiles securing auto loans. The
fair value of foreclosed assets may be determined using an
external appraisal, broker price opinion, internal valuation or
these foreclosed assets are
binding offer. The majority of
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 33 – 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. For those financial instruments with no quoted market
182 POPULAR, INC. 2016 ANNUAL REPORT
The following tables present the carrying amount and estimated fair values of financial instruments with their corresponding
level in the fair value hierarchy. The aggregate fair value amounts of the financial instruments disclosed do not represent
management’s estimate of the underlying value of the Corporation.
(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
Federal funds purchased and 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)
Others
Total notes payable
Derivatives
Contingent consideration
December 31, 2016
Carrying
amount
Level 1
Level 2
Level 3
Fair value
362,394
2,890,217
59,796
8,209,806
$ 362,394
2,854,777
–
–
$
$
$
$
96,027
74
2,000
98,101
58,033
94,672
13,198
1,915
$
$
167,818
88,821
22,263,446
542,528
69,334
196,889
14,094
Carrying
amount
$22,786,682
7,709,542
$30,496,224
$
$
$
479,425
1,200
672,670
444,788
439,323
18,071
$ 1,574,852
$
$
12,842
153,158
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
–
35,440
53,118
8,208,414
–
–
1,738
1,738
58,033
94,672
13,198
–
165,903
504
–
–
–
–
14,094
–
–
6,678
1,392
73,540
78
220
73,838
–
–
–
4,987
4,987
89,509
20,578,904
515,808
63,187
196,889
–
$
$
$
$
$
$
362,394
2,890,217
59,796
8,209,806
73,540
78
1,958
75,576
58,033
94,672
13,198
4,987
170,890
90,013
20,578,904
515,808
63,187
196,889
14,094
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
December 31, 2016
Level 1
Level 2
Level 3
Fair value
–
–
–
–
–
–
–
–
–
–
–
–
$22,786,682
7,708,724
$30,495,406
$
$
$
479,439
1,200
671,872
466,263
399,370
–
$ 1,537,505
$
$
12,842
–
$
$
$
$
$
$
$
$
–
–
–
–
–
–
–
–
18,071
$22,786,682
7,708,724
$30,495,406
$
$
$
479,439
1,200
671,872
466,263
399,370
18,071
18,071
$ 1,555,576
–
153,158
$
$
12,842
153,158
[1] Refer to Note 32 to the consolidated financial statements for the fair value by class of financial asset and its hierarchy level.
[2] Refer to Note 21 to the consolidated financial statements for the composition of other short-term borrowings.
POPULAR, INC. 2016 ANNUAL REPORT 183
(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
Federal funds purchased and assets sold under agreements to
repurchase
Other short-term borrowings [2]
Notes payable:
FHLB advances
Unsecured senior debt
Junior subordinated deferrable interest debentures (related to
trust preferred securities)
Others
Total notes payable
Derivatives
Contingent consideration
December 31, 2015
Carrying
amount
Level 1
Level 2
Level 3
Fair value
$ 363,674
2,180,092
71,659
6,062,992
$ 363,674
2,083,839
–
276
$
$
$
$
$
$
$
$
$
$
$
$
–
96,253
62,687
6,061,282
–
–
1,740
1,740
59,387
97,740
13,198
–
170,325
1,364
–
–
–
–
16,959
–
–
8,972
1,434
80,815
91
243
81,149
–
–
–
4,966
4,966
138,031
20,849,150
593,002
313,224
211,405
–
$ 363,674
2,180,092
71,659
6,062,992
$
$
$
$
$
80,815
91
1,983
82,889
59,387
97,740
13,198
4,966
175,291
139,395
20,849,150
593,002
313,224
211,405
16,959
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
December 31, 2015
Level 1
Level 2
Level 3
Fair value
–
–
–
–
–
–
–
–
–
–
–
–
$19,044,355
8,134,029
$27,178,384
$
$
$
764,599
1,200
780,411
435,186
352,673
–
$ 1,568,270
$
$
14,343
–
$
$
$
$
$
$
$
$
–
–
–
–
–
–
–
–
19,008
$19,044,355
8,134,029
$27,178,384
$
$
$
764,599
1,200
780,411
435,186
352,673
19,008
19,008
$ 1,587,278
–
120,380
$
$
14,343
120,380
$
$
$
$
$
98,817
86
2,000
100,903
59,387
97,740
13,198
1,923
172,248
137,000
21,843,180
611,939
310,221
211,405
16,959
Carrying
amount
$19,044,355
8,165,368
$27,209,723
$
$
$
762,145
1,200
761,501
442,704
439,295
19,008
$ 1,662,508
$
$
14,343
120,380
$
$
$
$
$
$
$
$
$
$
$
$
$
[1] Refer to Note 32 to the consolidated financial statements for the fair value by class of financial asset and its hierarchy level.
[2] Refer to Note 21 to the consolidated financial statements for the composition of other short-term borrowings.
184 POPULAR, INC. 2016 ANNUAL REPORT
The notional amount of commitments to extend credit at
December 31, 2016 and 2015 is $7.8 billion and $7.4 billion,
respectively, and represents the unused portion of credit
facilities granted to customers. The notional amount of letters
of credit at December 31, 2016 and December 31, 2015 is
$36 million and $52 million, respectively, and represents the
contractual amount that is required to be paid in the event of
nonperformance. The fair value of commitments to extend
credit and letters of credit, which are based on the fees charged
to enter into those agreements, are not material to Popular’s
financial statements.
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.
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
(cid:129) 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 general obligations of the
Government of Puerto Rico municipal bonds trades and
recent 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.
(cid:129) 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.
(cid:129) Other: Other securities include foreign debt and a private
non-profit institution security. Given that the fair value
was based on quoted prices for similar instruments,
foreign debt is classified as Level 2. Since the fair value of
the private non-profit institution security was internally
derived using a price/yield methodology, in which the
spread was defined based on the obligor risk rating and
the corresponding transfer price, this security is classified
as Level 3.
Other investment securities
(cid:129) 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.
(cid:129) 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.
(cid:129) 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.
values,
private
(cid:129) 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.
POPULAR, INC. 2016 ANNUAL REPORT 185
Loans held-for-sale
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 that the
valuation methodology uses 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.
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. 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
Deposits
(cid:129) Demand deposits: The fair value of demand deposits,
which have no stated maturity, was calculated based on
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.
(cid:129) 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
the collateral held,
that consider, where applicable,
amounts insured, the remaining term, and the credit
186 POPULAR, INC. 2016 ANNUAL REPORT
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
(cid:129) Securities sold under agreements to repurchase: 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.
to
sold
repurchase are classified as Level 2.
agreements
Securities
under
amount
carrying
Other short-term borrowings
The
short-term borrowings
of other
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
(cid:129)
(cid:129)
(cid:129)
(cid:129)
FHLB advances: The fair value of FHLB advances was
based on the discounted value of contractual cash
flows over their contractual term. In determining the
non-performance credit risk valuation adjustment, the
collateralization levels of
advances were
considered. These advances are classified as Level 2.
these
Unsecured senior debt securities: The fair value of
publicly-traded unsecured senior debt securities was
determined using recent trades of similar transactions.
Publicly-traded unsecured senior debt securities are
classified as Level 2.
subordinated
Junior subordinated deferrable interest debentures
(related to trust preferred securities): The fair value of
junior
debentures was
determined using recent trades of similar transactions.
Thus, these junior subordinated deferrable interest
debentures are classified as Level 2.
interest
require a fair valuation of capital
lease
Others: The other category includes capital
obligations. Generally accepted accounting principles
do not
lease
obligations, therefore; it is included at its carrying
lease obligations are classified as
amount. Capital
Level 3.
Note 34 – 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.
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
invest
in a prudent manner for the exclusive purpose of
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
Equity
Debt securities
Popular related securities
Cash and cash equivalents
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
2016 and 2015, by asset category, is summarized in the table
below.
Minimum
allotment
Maximum
allotment
0%
0%
0%
0%
70%
100%
5%
100%
POPULAR, INC. 2016 ANNUAL REPORT 187
The following table sets forth by level, within the fair value hierarchy, the pension and benefit restoration plans’ assets at fair
value at December 31, 2016 and 2015. Investments measured at net asset value per share (“NAV”) as a practical expedient have not
been classified in the fair value hierarchy, but are presented in order to permit reconciliation of the plans’ assets.
(In thousands)
Level 1
Level 2 Level 3
Measured
at NAV
Total
Level 1
Level 2 Level 3
Measured
at NAV
Total
2016
2015
Obligations of the U.S. Government
and its agencies
Corporate bonds and debentures
Equity securities - Common Stocks
Equity securities - ETF’s
Foreing commingled trust funds
Mutual fund
Mortgage-backed securities
Private equity investments
Cash and cash equivalents
Accrued investment income
$
– $108,572 $
171,632
–
134,015
–
75,801
62,524
–
–
13,910
–
4,786
–
–
–
–
38,158
–
–
–
–
–
–
–
–
–
336
–
3,219
$ 6,731 $115,303 $
6,856
–
–
70,589
–
–
–
–
–
178,488
134,015
138,325
70,589
13,910
4,786
336
38,158
3,219
– $165,960 $
79,175
–
–
218,894
26,835
32,540
–
–
10,016
–
16,315
–
–
–
–
13,540
–
–
–
–
–
–
–
–
–
400
–
1,693
$
– $165,960
79,175
–
218,894
–
59,375
–
79,046
79,046
10,016
–
16,315
–
400
–
13,540
–
1,693
–
Total assets
$234,697 $374,701 $3,555
$84,176 $697,129 $264,974 $298,301 $2,093
$79,046 $644,414
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
(cid:129) Mutual funds – Mutual funds are valued at the NAV of
shares held by the plan at year end. Mutual funds are
classified as Level 2.
used for investments measured at fair value:
(cid:129) 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, except
the
for
governmental index funds that are measured at NAV.
(cid:129) 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, except for the
corporate bond funds that are measured at NAV.
(cid:129) Equity securities - common stocks - Equity securities with
quoted market prices obtained from an active exchange
market and high liquidity are classified as Level 1.
(cid:129) Equity securities - ETF’s - Exchange Traded Funds shares
with quoted market prices obtained from an active
exchange market. Highly liquid ETF’s are classified as
Level 1 while less liquid ETF’s are classified as Level 2.
(cid:129) Foreign commingled trust fund- Collective investment
funds are valued at the NAV of shares held by the plan at
year end.
188 POPULAR, INC. 2016 ANNUAL REPORT
regularly
instruments
(cid:129) Mortgage-backed securities – The fair value is based on
trade data from brokers and exchange platforms where
these
trade. 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 and
prepayment projections. The agency MBS are classified as
Level 2.
(cid:129) Private equity investments - Private equity investments
include an investment in a private equity fund. The fund
value is recorded at its net realizable value 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.
(cid:129) 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. Cash and cash equivalents are classified as
Level 1.
(cid:129) 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 specific attributes, these are reported as
Level 3.
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:
2016
2015
$2,093
$2,103
Change in unrealized (loss) gain relating to
instruments still held at the reporting date
–
–
Purchases, sales, issuance, settlements, paydowns
and maturities (net)
Balance at end of year
1,462
(10)
$3,555
$2,093
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, 2016 and 2015. There were no
transfers in and/or out of Level 1 and Level 2 during the years
ended December 31, 2016 and 2015.
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.
2016
2015
145,637
275,996
common stock
$6,381,805
$7,821,713
Dividends paid on shares of Popular, Inc.
common stock held by the plan
$
21,846
$
41,399
The following table sets forth the aggregate status of the plans and the amounts recognized in the consolidated financial
statements at December 31, 2016 and 2015.
(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 (liabilities) assets:
Net (liabilities) assets 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 (liabilities) assets at end of year
Pension plan
Benefit restoration
plans
2016
2015
2016
2015
$ 736,140
25,166
12,219
(37,443)
$ 777,815
29,613
(34,538)
(36,750)
$ 40,773
1,392
2,533
(2,122)
$ 42,664
1,630
(1,738)
(1,783)
$ 736,082
$ 736,140
$ 42,576
$ 40,773
$ 612,283
30,395
60,000
(37,443)
$ 662,765
(13,732)
–
(36,750)
$ 32,131
1,480
405
(2,122)
$ 34,475
(734)
173
(1,783)
$ 665,235
$ 612,283
$ 31,894
$ 32,131
$ 295,589
$ 294,792
$ 15,577
$ 13,699
$ 295,589
$ 294,792
$ 15,577
$ 13,699
$(123,857) $(115,050) $ (8,642) $ (8,189)
13,588
294,792
289,233
13,699
170,935
(6,193)
60,000
174,183
(3,248)
–
5,057
(567)
405
5,399
(515)
173
224,742
(295,589)
170,935
(294,792)
4,895
(15,577)
5,057
(13,699)
$ (70,847) $(123,857) $(10,682) $ (8,642)
POPULAR, INC. 2016 ANNUAL REPORT 189
The table below presents a breakdown of the plans’ assets and liabilities at December 31, 2016 and 2015.
(In thousands)
Current liabilities
Non-current liabilities
Pension plan
Benefit restoration plans
2016
2015
$
–
70,847
$
–
123,857
2016
$
234
10,448
2015
$ 173
8,469
The following table presents the funded status of the plans at December 31, 2016 and 2015.
(In thousands)
Benefit obligation at end of year
Fair value of plan assets at end of year
Funded status at year end
Pension Plan
Benefit Restoration Plan
2016
2015
2016
2015
$(736,082) $(736,140)
612,283
665,235
$(42,576)
31,894
$(40,773)
32,131
$ (70,847) $(123,857)
$(10,682)
$ (8,642)
The following table presents the change in accumulated other comprehensive loss (“AOCL”), pre-tax, for the years ended
December 31, 2016 and 2015.
(In thousands)
Accumulated other comprehensive loss at beginning of year
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
Pension plan
Benefit restoration plans
2016
2015
2016
2015
$294,792
$289,233
$13,699
$13,588
(19,521)
(17,860)
(1,328)
(1,244)
20,318
797
23,419
5,559
3,206
1,878
1,355
111
$295,589
$294,792
$15,577
$13,699
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 2017.
(In thousands)
Net actuarial loss
Pension plan Benefit restoration plans
$20,215
$1,645
The following table presents information for plans with a projected benefit obligation in excess of plan assets for the years
ended December 31, 2016 and 2015.
(In thousands)
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
Pension plan
Benefit restoration plans
2016
2015
$736,082
736,082
665,235
$736,140
736,140
612,283
2016
$42,576
42,576
31,894
2015
$40,773
40,773
32,131
190 POPULAR, INC. 2016 ANNUAL REPORT
Effective December 31, 2015 the Corporation changed its
estimate of the service and interest cost components of net
periodic benefit cost for its pension and postretirement benefits
plans. Previously, the Corporation estimated the service and
interest cost components utilizing a single weighted-average
discount rate derived from the yield curve used to measure the
benefit obligation. The new estimate utilizes a full yield curve
approach in the estimation of these components by applying
the specific spot rates along the yield curve used in the
determination of the benefit obligation to their underlying
projected cash flows. The new estimate provides a more precise
measurement of service and interest costs by improving the
correlation between projected benefit cash flows and their
corresponding spot rates. The change does not affect
the
measurement of the Corporation’s pension and postretirement
benefit obligations and it is accounted for as a change in
accounting estimate, which is applied prospectively.
To determine benefit obligation at year end, the Corporation
used a weighted average of annual spot rates applied to future
expected cash flows for years ended December 31, 2016 and
2015.
The following table presents weighted – average actuarial assumptions used to determine the benefit obligations at
December 31, 2016 and 2015:
Pension plan Tax qualified restoration plans
2016
2016
2015
2015
Benefit
restoration plans
2015
2016
Discount rate
4.02% 4.27%
3.98%
4.23%
3.99% 4.20%
The following table presents the actuarial assumptions used to determine the components of net periodic benefit cost for the
years ended December 31, 2016, 2015 and 2014.
Pension plan
2015
2016
2014
Benefit restoration plans
2014
2016
2015
Discount rate for benefit obligation
Discount rate for interest cost
Expected return on plan assets
4.27% 3.90% 4.70% 4.23;4.20% 3.90% 4.70%
3.90
3.52
4.70%
4.70% 3.51;3.39
3.90
6.88% 7.00% 7.25%
6.88% 7.00% 7.25%
The following table presents the components of net periodic benefit cost for the years ended December 31, 2016 and 2015.
(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 the year ended December 31, 2017.
(In thousands)
Pension plan
Benefit restoration plans
2017
$ –
$236
Pension plan
2015
2016
2014
Benefit restoration plans
2014
2015
2016
$ 25,166
(38,493)
19,521
$ 29,613
(44,225)
17,860
$ 29,844
(46,521)
8,074
$ 1,392
(2,153)
1,328
$ 1,630
(2,359)
1,244
$ 1,659
(2,422)
431
$ 6,194
$ 3,248
$ (8,603) $
567
$
515
$ (332)
Benefit payments projected to be made from the pension and
benefit restoration plans during the next ten years are presented
in the table below.
(In thousands)
Pension plan Benefit restoration plans
2017
2018
2019
2020
2021
2022 - 2026
$ 38,855
39,420
39,993
40,529
40,993
209,166
$ 2,158
2,247
2,317
2,378
2,433
12,827
POPULAR, INC. 2016 ANNUAL REPORT 191
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 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, 2016 and 2015.
(In thousands)
2016
2015
Change in benefit obligation:
Benefit obligation at beginning of the year
Service cost
Interest cost
Benefits paid
Actuarial (gain) loss
Benefit obligation end of year
Amounts recognized in accumulated
other comprehensive loss:
$ 165,999
1,156
6,021
(6,509)
(4,302) $
$ 161,818
1,470
6,356
(5,360)
1,715
$ 162,365
165,999
Net prior service cost
Net loss
$
(7,270) $ (11,070)
26,536
21,135
Accumulated other comprehensive loss
$ 13,865
$ 15,466
The following table presents the changes in accumulated
the
comprehensive
(income),
pre-tax,
loss
for
other
postretirement health care benefit plan.
(In thousands)
2016
2015
Accumulated other comprehensive (income)
loss at beginning of year
$15,466
$10,947
Increase (decrease) in accumulated other
comprehensive loss:
Recognized during the year:
Prior service credit
Amortization of actuarial losses
Occurring during the year:
Net actuarial (gains) losses
3,800
(1,099)
3,800
(996)
(4,302)
1,715
Total increase (decrease) in accumulated other
comprehensive loss
(1,601)
4,519
Accumulated other comprehensive (income)
loss at end of year
$13,865
$15,466
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 the year ended December 31,
2017.
$(165,999) $(161,818)
(In thousands)
Net prior service credit
Net actuarial loss
2017
$(3,800)
$
570
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 loss
Net liability at end of year
15,466
10,947
(150,533)
(4,476)
6,509
(150,871)
(5,022)
5,360
(148,500)
(150,533)
(13,865)
(15,466)
$(162,365) $(165,999)
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)
2016
2015
2014
$ 1,156
6,021
(3,800)
1,099
$ 1,470
6,356
(3,800)
996
$ 1,457
6,846
(3,800)
–
$ 4,476
$ 5,022
$ 4,503
The table below presents a breakdown of
the liability
Net periodic benefit cost
associated with the postretirement health care benefit plan.
(In thousands)
Current liabilities
Non-current liabilities
2016
2015
$ 6,328
156,037
$ 6,417
159,582
To determine benefit obligation at year end, the Corporation
used a weighted average of annual spot rates applied to future
expected cash flows for years ended December 31, 2016 and
2015.
The following table presents the funded status of
postretirement health care
December 31, 2016 and 2015.
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
2016
2015
$(162,365) $(165,999)
–
–
(162,365)
(165,999)
192 POPULAR, INC. 2016 ANNUAL REPORT
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
Benefit
payments
the
postretirement health care benefit plan during the next ten
years are presented in the following table.
be made
projected
on
to
Weighted average assumptions used to determine
benefit obligation at year ended December 31:
Discount rate for benefit obligation
Initial health care cost trend rate
Ultimate health care cost trend rate
Year that the ultimate trend rate is reached
2016
2015
4.10% 4.37%
6.00% 6.50%
5.00% 5.00%
2019
2019
(In thousands)
2017
2018
2019
2020
2021
2022 - 2026
$ 6,365
6,651
6,924
7,167
7,424
40,683
Savings plans
The Corporation also provides defined contribution savings
the Puerto Rico
to Section 1081.01(d) of
plans pursuant
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. The cost of providing these benefits in the year ended
December 31, 2016 was $8.8 million (2015 - $6.4 million, 2014
- $5.0 million).
The plans held 1,797,267 (2015 – 1,979,558) shares of
common stock of the Corporation with a market value of
approximately $78.8 million at December 31, 2016 (2015 -
$56.1 million).
Weighted average assumptions used to
determine net periodic benefit cost for the
year ended December 31:
Discount rate for benefit obligation
Discount rate for service cost
Discount rate for interest cost
Initial health care cost trend rate
Ultimate health care cost trend rate
Year that the ultimate trend rate is reached
2016
2015
2014
4.37% 4.00% 4.80%
4.63% 4.00% 4.80%
3.70% 4.00% 4.80%
6.50% 7.00% 7.50%
5.00% 5.00% 5.00%
2019
2019
2019
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.
(In thousands)
Effect on total service cost and
interest cost components for
the year ended
Effect on accumulated
postretirement benefit
obligation at year end
December 31, 2016
1-percentage
point increase
1-percentage
point decrease
$ 213
$ (243)
$4,928
$(6,153)
The
following
the
postretirement health care benefit plan with an accumulated
post retirement benefit obligation in excess of plan assets.
information
presents
table
for
(In thousands)
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
2016
2015
$162,365
162,365
–
$165,999
165,999
–
The Corporation expects to contribute $6.4 million to the
postretirement benefit plan in 2017 to fund current benefit
payment requirements.
POPULAR, INC. 2016 ANNUAL REPORT 193
Note 35 – Net income (loss) per common share
The following table sets forth the computation of net income (loss) per common share (“EPS”), basic and diluted, for the years
ended December 31, 2016, 2015 and 2014:
(In thousands, except per share information)
Net income (loss) from continuing operations
Net income (loss) from discontinued operations
Preferred stock dividends
Net income (loss) 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
Potential common shares consist of common stock issuable
under the assumed exercise of stock options, restricted stock
and performance shares awards using the treasury stock
method. This method assumes that
the potential common
shares are issued and the proceeds from exercise, 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, restricted stock
and performance shares awards, if any, 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 years ended December 31, 2016 and 2015, there
were no stock options outstanding. There were 45,205
weighted average antidilutive stock options outstanding for the
year ended December 31, 2014.
2016
2015
2014
$
215,556
1,135
(3,723)
$
893,997
1,347
(3,723)
(190,510)
(122,980)
(3,723)
212,968
$
891,621
$
(317,213)
103,275,264
102,019
102,967,186
157,123
102,848,792
–
103,377,283
103,124,309
102,848,792
2.05
0.01
2.06
2.05
0.01
2.06
$
$
$
$
$
$
8.65
0.01
8.66
8.64
0.01
8.65
$
$
$
$
$
$
(1.88)
(1.20)
(3.08)
(1.88)
(1.20)
(3.08)
$
$
$
$
$
$
$
$
Note 36 – Rental expense and commitments
At December 31, 2016, the Corporation was obligated under a
number of non-cancelable leases for land, buildings, and
equipment which require rentals as follows:
Year
2017
2018
2019
2020
2021
Later years
Minimum
payments [1]
$
(In thousands)
34,530
30,463
28,510
26,861
24,696
126,308
$
271,368
[1] Minimum payments have not been reduced by minimum non-cancelable
sublease rentals due in the future of $ 0.9 million at December 31, 2016.
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, 2016 was $ 32.4 million (2015 - $
35.9 million; 2014 - $ 35.0 million), which is included in net
occupancy, equipment and communication expenses, according
to their nature.
194 POPULAR, INC. 2016 ANNUAL REPORT
Note 37 – Other service fees
The following table presents the major categories of other
service fees for the years ended December 31, 2016, 2015 and
2014.
(In thousands)
Debit card fees
Insurance fees
Credit card fees
Sale and administration of
investment products
Trust fees
Other fees
2016
2015
2014
$ 46,241
63,482
70,526
$ 46,176
63,976
68,166
$ 43,146
54,158
67,639
21,450
18,811
14,260
23,846
18,866
15,060
27,711
18,209
14,402
Total other service fees
$234,770
$236,090
$225,265
Note 38 - FDIC loss share (expense) income
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,
2015
2014
2016
$ (10,201)
$(66,238)
$(189,959)
–
–
12,492
credit impairment losses[1]
(239)
15,658
32,038
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
Change in true-up payment
obligation
Arbitration decision charge[2]
Other
Total FDIC loss share
(expense) income
8,433
73,205
58,117
(31,338)
(13,836)
(13,124)
(33,413)
(136,197)
(4,824)
9,559
–
1,714
(1,791)
–
(797)
$(207,779) $ 20,062
$(103,024)
[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.
[2] Refer
to Note 28, Commitments and Contingencies,
for additional
information on the FDIC arbitration decision.
Note 39 - 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
options, or non-statutory stock options of the Corporation. In
April 2004,
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.
the Corporation’s
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
year, subject
termination of
to an acceleration clause at
employment due to retirement.
As of December 31, 2016 there were no stock options
outstanding. During the first quarter of 2015, all stock options
outstanding which amounted to 44,797 with a weighted-
average exercise price of $ 272 expired.
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
schedule. The first part
is vested ratably over five years
commencing at the date of grant and the second part is vested
at termination of employment after attainment of 55 years of
POPULAR, INC. 2016 ANNUAL REPORT 195
age and 10 years of service. The five-year vesting part is
accelerated at termination of employment after attaining 55
years of age and 10 years of service. The vesting schedule for
restricted shares granted on 2014 and thereafter was modified
as follows, the first part ratably over four years commencing at
the date of
is vested at
the grant and the second part
termination of employment after attainment the earlier 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 the earlier of 55
years of age and 10 years of service or 60 years of age and 5
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.
is not subsequently revised based on actual performance. The
EPS performance metric is considered to be a performance
condition under ASC 718. The fair value is determined based
on the probability of achieving the EPS goal as of each reporting
period. The TSR and EPS metrics are equally weighted and
work independently. The number of shares that will ultimately
vest ranges from 50% to a 150% of target based on both market
(TSR) and performance (EPS) conditions. The performance
shares vest at the end of the three-year performance cycle. The
vesting is accelerated at
termination of employment after
attaining the earlier of 55 years of age and 10 years of service or
60 years of age and 5 years of service. For the year ended
December 31, 2016, 64,598 performance shares (2015 - 91,984)
were granted under this plan.
The following table summarizes the restricted stock activity
under the Incentive Plan for members of management.
(Not in thousands)
Non-vested at January 1, 2014
Granted
Vested
Forfeited
Non-vested at December 31, 2014
Granted
Vested
Forfeited
Non-vested at December 31, 2015
Granted
Quantity adjusted by TSR factor
Vested
Forfeited
Shares
585,247
365,831
(311,078)
(11,991)
628,009
323,814
(430,646)
(25,446)
495,731
344,488
39,566
(487,784)
(8,019)
Non-vested at December 31, 2016
383,982
Weighted-average
grant date
fair value
$21.16
29.86
19.02
29.33
$27.13
33.37
30.45
28.65
$28.25
25.86
24.37
27.72
29.13
$26.35
During the year ended December 31, 2016, 279,890 shares
of restricted stock (2015 - 231,830; 2014 - 365,831) were
awarded to management under the Incentive Plan, from which
no shares were awarded to management consistent with the
requirements of the TARP Interim Final Rule during 2016 and
2015 (2014 - 162,332).
Beginning in 2015, the Corporation authorized the issuance
of performance shares, in addition to restricted shares, under
the Incentive Plan. The performance share awards consist of the
opportunity to receive shares of Popular, Inc.’s common stock
provided that the Corporation achieves certain goals during a
three-year performance cycle. The goals will be based on two
metrics weighted equally: the Relative Total Shareholder Return
(“TSR”) and the Absolute Earnings per Share (“EPS”) goals.
The TSR metric is considered to be a market condition under
ASC 718. For equity settled awards based on a market
condition, the fair value is determined as of the grant date and
196 POPULAR, INC. 2016 ANNUAL REPORT
incentive
awards, with a
During the year ended December 31, 2016, the Corporation
recognized $7.3 million of restricted stock expense related to
management
tax benefit of
$1.4 million (2015 - $10.7 million, with a tax benefit of
$1.6 million; 2014 - $6.8 million, with a tax benefit of
$1.1 million). During the year ended December 31, 2016, the
fair market value of the restricted stock vested was $8.7 million
at grant date and $9.0 million at vesting date. This triggers a
shortfalls, of $0.1 million of which
windfall, net of
$47 thousand was recorded as a windfall pool in additional paid
in capital. No windfall pool was recorded for the remaining
$54 thousand due to the valuation allowance of the deferred tax
asset. During the year ended December 31, 2016 the
Corporation recognized $1.5 million of performance shares
expense, with a tax benefit of $ 0.1 million (2015 - $2.2 million,
with a tax benefit of $0.2 million). The total unrecognized
compensation cost related to non-vested restricted stock awards
to members of management at December 31, 2016 was
$7.4 million and is expected to be recognized over a weighted-
average period of 2.4 years.
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, 2014
Granted
Vested
Forfeited
Non-vested at December 31, 2014
Granted
Vested
Forfeited
Non-vested at December 31, 2015
Granted
Vested
Forfeited
–
23,135
(23,135)
–
–
22,119
(22,119)
–
–
40,517
(40,517)
–
Non-vested at December 31, 2016
–
–
$30.43
30.43
–
–
$32.29
32.29
–
–
$29.77
29.77
–
–
During the year ended December 31, 2016, the Corporation
granted 40,517 shares of restricted stock to members of the
Board of Directors of Popular, Inc., which became vested at
grant date (2015 - 22,119; 2014 – 23,135). During this period,
the Corporation recognized $1.1 million of restricted stock
expense related to these restricted stock grants, with a tax
benefit of $0.1 million (2015 - $0.5 million, with a tax benefit
of $77 thousand; 2014 - $0.5 million, with a tax benefit of $57
thousand). The fair value at vesting date of the restricted stock
vested during the year ended December 31, 2016 for directors
was $1.2 million.
Note 40 - Income taxes
The components of income tax expense (benefit) for the years
ended December 31, are summarized in the following table.
(In thousands)
2016
2015
2014
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
$11,031
7,059
18,090
$ 16,675
7,281
$ 7,814
6,953
23,956
14,767
36,423
24,271
63,808
(582,936)
12,569
2,861
–
–
–
–
8,034
20,048
60,694
(519,128)
43,512
Total income tax expense (benefit)
$78,784
$(495,172) $58,279
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
State and local taxes
Others
Income tax expense (benefit)
Amount
$114,792
(63,053)
11,155
16,585
–
(4,092)
–
(4,442)
9,081
(1,242)
$ 78,784
2016
% of pre-tax
income
39%
(22)
4
6
–
(1)
–
(2)
3
–
27%
2015
2014
Amount
$ 155,542
(60,049)
(10,010)
(586,159)
–
(3,008)
–
–
4,543
3,969
$(495,172)
% of pre-tax
income
Amount
% of pre-tax
income
39%
(15)
(3)
(147)
–
(1)
–
–
1
1
(51,570)
(67,636)
(21,909)
(4,281)
178,219
(2,403)
20,048
(3,601)
6,248
5,164
39%
51
18
3
(135)
2
(16)
3
(5)
(4)
(125)% $ 58,279
(44)%
Includes the impact of the Closing Agreement with the P.R. Treasury signed in June 2014.
[1]
[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.
The results for the year ended December 31, 2015, reflect a
tax benefit of $589 million as a result of the partial reversal of
the valuation allowance on the Corporation’s deferred tax asset
from the U.S. operation as further explain below.
During the third quarter of 2016, a reversal of $4.4 million
in the reserve for uncertain tax positions, including interest was
recognized due to the expiration of the statute of limitation in
the P.R. operations.
During the year ended December 31, 2014, 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, as a result of the increase in the
income tax for capital gains from 15% to 20%. Additionally,
during the second quarter of 2014 the Corporation entered into
a Closing Agreement with the Puerto Rico Department of the
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
Westernbank loan portfolio.
POPULAR, INC. 2016 ANNUAL REPORT 197
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 carry
forward
Net operating loss and other carry
forward available
Postretirement and pension
benefits
Deferred loan origination fees
Allowance for loan losses
Deferred gains
Accelerated depreciation
Intercompany deferred gains
Differences between the assigned
values and the tax basis of assets
and liabilities recognized in
purchase business combinations
Other temporary differences
December 31,
2016
December 31,
2015
$
18,510
$
13,651
1,238,222
1,262,197
94,741
6,622
649,107
4,884
9,828
2,496
116,036
6,420
670,592
5,966
8,335
2,743
13,160
31,127
12,684
29,208
Total gross deferred tax assets
2,068,697
2,127,832
Deferred tax liabilities:
FDIC-assisted transaction
Indefinite-lived intangibles
Unrealized net gain on trading and
available-for-sale securities
Other temporary differences
Total gross deferred tax
liabilities
Valuation allowance
Net deferred tax asset
58,363
73,974
21,335
8,477
162,149
664,287
90,778
63,573
22,281
6,670
183,302
642,727
$1,242,261
$1,301,803
The net deferred tax asset shown in the table above at
December 31, 2016 is reflected in the consolidated statements
of financial condition as $1.2 billion in net deferred tax assets
(in the “other assets” caption) (2015 - $1.3 billion in deferred
tax asset in the “other assets” caption) and $1.4 million in
deferred tax liabilities (in the “other liabilities” caption) (2015 -
$649 thousand in deferred tax liabilities in the “other liabilities”
reflecting the aggregate deferred tax assets or
caption),
liabilities
the
of
Corporation.
subsidiaries
tax-paying
individual
of
Included as part of the other carryforwards available are
$44.2 million related to contributions to BPPR’s qualified
pension plan and $30.4 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 limited liability company
with partnership election. Additionally, the deferred tax asset
198 POPULAR, INC. 2016 ANNUAL REPORT
related to the NOLs outstanding at December 31, 2016 expires
as follows:
(In thousands)
2018
2019
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
$
5,116
1,080
108
2,071
1,444
9,548
14,057
13,359
42,062
504,976
170,691
171,897
134,106
25,043
1,757
66,268
$1,163,583
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.
At December 31, 2016 the net deferred tax asset of the U.S.
operations amounted to $1.1 billion with a valuation allowance
of approximately $617 million, for a net deferred tax asset after
valuation allowance of approximately $525 million. During the
year ended December 31, 2015, after weighting all positive and
negative evidence, the Corporation concluded that it is more
likely than not that a portion of the total deferred tax asset from
the U.S. operations, comprised mainly of net operating losses,
will be realized. The Corporation based this determination on
its estimated earnings for the remaining carryforward period of
eighteen years beginning with the 2016 fiscal year, available to
utilize the deferred tax asset,
to reduce its income tax
obligations. The historical level of book income adjusted by
permanent differences, together with the estimated earnings
taking into account
after the reorganization of the U.S. operations and additional
estimated earnings from the Doral Bank Transaction were
objective positive evidence considered by the Corporation. As
of December 31, 2015 the U.S. operations were not in a three
year loss cumulative position,
taxable
income exclusive of reversing temporary differences. All of
these factors led management to conclude that it is more likely
than not that a portion of the deferred tax asset from its U.S.
operations will be realized. Accordingly,
the Corporation
recorded a partial reversal of the valuation allowance on the
from the U.S. operations amounting to
deferred tax asset
approximately $589 million. As of December 31, 2016,
management estimated that the U.S. operations would earn
enough pre-tax Income during the carryover period to realize
the total amount of net deferred tax asset after valuation
allowance. After weighting all available positive and negative
evidence, management concluded that is more likely than not
that a portion of the deferred tax asset from the U.S. operation,
amounting to approximately $525 million, will be realized.
Management will continue to evaluate the realization of the
deferred tax asset each quarter and adjust as any changes arises.
At December 31, 2016, the Corporation’s net deferred tax
assets related to its Puerto Rico operations amounted to
$718 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, 2016. 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 management’s estimate of future taxable
income, 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.
taking into account
The Holding Company operation is in a cumulative loss
taxable income exclusive of
position,
reversing temporary differences,
for the three years period
ending December 31, 2016 Management expect these losses will
be a trend in future years. This objectively verifiable negative
evidence 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
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, the Corporation has
maintained a full valuation allowance on the deferred tax asset
of $47 million as of December 2016.
and negative
all positive
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 subsidiaries in the United States file a
consolidated federal
income tax return. 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.
The
reconciliation
presents
of
a
table
unrecognized tax benefits.
following
(In millions)
Balance at January 1, 2015
Additions for tax positions related to 2015
Reduction as a result of settlements
Balance at December 31, 2015
Additions for tax positions related to 2016
Additions for tax positions taken in prior years
Reduction as a result of lapse of statute of limitations
Balance at December 31, 2016
$ 8.0
1.5
(0.5)
$ 9.0
1.1
0.3
(3.0)
$ 7.4
of
in
the
financial
statement
the total amount of
At December 31, 2016,
interest
recognized
condition
approximated $2.9 million (2015 - $3.2 million). The total
interest expense recognized during 2016 was $1.2 million
the reversal of
(2015 - $57 thousand), which is net of
$1.4 million due to the expiration of the statute of limitations.
Management determined that, as of December 31, 2016 and
2015, there was no need to accrue for the payment of penalties.
The Corporation’s policy is to report
related to
unrecognized tax benefits in income tax expense, while the
penalties, if any, are reported in other operating expenses in the
consolidated statements of operations.
interest
After consideration of the effect on U.S.
federal tax of
the total amount of
unrecognized U.S. state tax benefits,
unrecognized tax benefits, including U.S. and Puerto Rico that,
if recognized, would affect the Corporation’s effective tax rate,
was approximately $9.0 million at December 31, 2016 (2015 -
$11.2 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, 2016, the following years remain subject to
examination: U.S. Federal jurisdiction – 2013 through 2016 and
Puerto Rico – 2012 through 2016. The Corporation anticipates
POPULAR, INC. 2016 ANNUAL REPORT 199
a reduction in the total amount of unrecognized tax benefits
to
within the next 12 months, which could amount
approximately $4.8 million.
Note 41 - 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, 2016, 2015 and 2014 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
Financed sales of other real estate assets
Financed sales of other foreclosed assets
Total financed sales of foreclosed assets
Transfers from loans held-in-portfolio to loans held-for-sale
Transfers from loans held-for-sale to loans held-in-portfolio
Transfers from trading securities to available-for-sale securities
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
[1]
Includes loans securitized into trading securities and subsequently sold before year end.
2016
2015
2014
$ 3,763
212,353
$
7,152
193,503
$
54,520
696,631
$117,334
28,614
$ 136,368
36,106
$ 154,358
38,958
145,948
15,452
17,351
32,803
7,249
5,947
–
775,612
46,630
102
10,884
172,474
24,104
22,745
46,849
65,063
17,065
63,645
1,088,121
78,759
6,150
13,460
193,316
26,869
23,762
50,631
2,161,669
41,293
–
899,604
66,949
2,000
12,583
As previously disclosed in Note 5, Business Combination, on
February 27, 2015, the Corporation’s Puerto Rico banking
subsidiary, BPPR, in an alliance with co-bidders, including the
Corporation’s U.S. mainland banking subsidiary, BPNA,
acquired certain assets and all deposits (other than certain
brokered deposits) of Doral Bank from the FDIC as receiver. As
part of this transaction, BPPR received net cash proceeds of
approximately $ 731 million for consideration of the assets and
liabilities acquired.
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 a net cash
disbursement of $206.0 million for consideration of the assets
and liabilities sold, as follows:
(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)
Note 42 - Segment reporting
The Corporation’s
two
reportable segments – Banco Popular de Puerto Rico and Banco
consists of
corporate
structure
200 POPULAR, INC. 2016 ANNUAL REPORT
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 and sold during
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
structure, which
determined based on the organizational
focuses primarily on the markets the segments serve, as well as
on the products and services offered by the segments.
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, 2016, additional disclosures
are provided for the business areas included in this reportable
segment, as described below:
(cid:129) Commercial
banking
represents
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
includes aspects of
It
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.
includes the expenses of certain corporate areas that are
to the organization: Finance, Risk
identified as critical
Management and Legal.
(cid:129) 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
(cid:129) 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
2008. During the third quarter of 2015, BPNA and E-LOAN
completed an asset purchase and sale transaction in which
E-LOAN sold to BPNA all of its outstanding loan portfolio,
including residential mortgage loans and home equity lines of
approximately
credit, which had a
carrying
$213 million. Prior
the Corporation
provided additional disclosures
the BPNA reportable
segment related to E-LOAN. After the close of the above
mentioned asset purchase and sale transaction, additional
disclosures with respect to E-LOAN are no longer considered
relevant to the financial statements and accordingly are not
Inc. also holds a
presented. Popular Equipment Finance,
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.
transaction,
value of
to this
for
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, Leon. The Corporate group also
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:
(In thousands)
Net interest income
Provision for loan losses
Non-interest income
Amortization of intangibles
Goodwill impairment charge
Depreciation expense
Other operating expenses
Income tax expense
Net income
Segment assets
December 31, 2016
Banco Popular
de Puerto Rico
Banco Popular
North
America
Intersegment
Eliminations
$ 1,224,771
154,785
243,368
11,479
3,801
39,505
952,894
75,615
$
230,060
$ 258,416
15,266
21,651
665
–
6,715
174,585
36,712
$
46,124
$
(474)
–
(119)
–
–
–
(779)
92
$
94
$29,841,854
$8,629,439
$(31,397)
December 31, 2016
Reportable
Segments
Corporate Eliminations Total Popular, Inc.
$ 1,482,713 $ (60,658) $
–
$ 1,422,055
170,051
264,900
(35)
35,705
–
(2,669)
170,016
297,936
12,144
–
–
12,144
3,801
46,220
1,126,700
–
654
68,694
–
–
(2,578)
3,801
46,874
1,192,816
(In thousands)
Net interest income
(expense)
Provision (reversal of
provision) for loan
losses
Non-interest income
Amortization of
intangibles
Goodwill impairment
charge
Depreciation expense
Other operating expenses
Income tax expense
(benefit)
112,419
(33,617)
Net income (loss)
$
276,278 $ (60,649) $
(18)
(73)
78,784
$
215,556
Segment assets
$38,439,896 $4,982,113 $(4,760,400)
$38,661,609
(In thousands)
Net interest income
Provision for loan losses
Non-interest income
Amortization of intangibles
Depreciation expense
Other operating expenses
Income tax expense (benefit)
Net income
Segment assets
December 31, 2015
Banco
Popular de
Puerto Rico
$ 1,231,585
240,817
464,786
10,465
40,440
970,201
116,058
Banco Popular
North America
Intersegment
Eliminations
$
$ 239,379
626
22,667
554
6,272
188,102
(580,738)
–
–
125
–
–
–
–
125
$
318,390
$ 647,230
$
27,907,350
7,780,002
(129,038)
POPULAR, INC. 2016 ANNUAL REPORT 201
December 31, 2015
Reportable
Segments
Corporate Eliminations Total Popular, Inc.
Puerto Rico reportable segment are as follows:
Additional disclosures with respect to the Banco Popular de
December 31, 2016
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
Goodwill
impairment
charge
Depreciation
expense
Other operating
expenses
Income tax expense
472,948 $
742,854 $ 6,172 $
2,797 $ 1,224,771
12,884
141,901
–
–
154,785
(91,411)
232,113 103,005
(339)
243,368
145
7,042
4,292
–
–
3,801
16,956
21,684
865
–
–
–
11,479
3,801
39,505
251,375
41,639
631,234
24,068
70,624
9,908
(339)
–
952,894
75,615
Net income
$
58,538 $
149,038 $ 19,687 $
2,797 $
230,060
Segment assets
$15,263,278 $17,592,743 $406,429 $(3,420,596) $29,841,854
December 31, 2015
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
Other operating
expenses
Income tax expense
457,119 $
760,157 $ 7,793 $
6,516 $ 1,231,585
101,840
138,977
–
–
240,817
113,697
248,024 103,464
(399)
464,786
7
7,330
3,128
16,984
22,385
1,071
–
–
10,465
40,440
281,995
48,793
617,973
55,429
70,632
11,836
(399)
–
970,201
116,058
Net income
$
121,197 $
166,087 $ 24,590 $
6,516 $
318,390
Segment assets
$12,169,349 $15,662,115 $392,658 $(316,772) $27,907,350
(In thousands)
Net interest income
(expense)
Provision for loan losses
Non-interest income
Amortization of
intangibles
Depreciation expense
Other operating expenses
Income tax benefit
$ 1,470,964 $ (61,981) $
241,443
487,578
35
34,486
11,019
46,712
1,158,303
(464,680)
–
762
74,212
(30,595)
–
–
(2,523)
–
–
(2,787)
103
$ 1,408,983
241,478
519,541
11,019
47,474
1,229,728
(495,172)
Net income (loss)
$
965,745 $ (71,909) $
161
$
893,997
Segment assets
35,558,314 4,945,704 (4,742,285)
35,761,733
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)
December 31, 2014
(In thousands)
Net interest income (expense)
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)
Reportable
Segments
Corporate Eliminations
Total
Popular,
Inc.
$ 1,446,590 $ (501,518) $
– $
945,072
270,334
347,570
8,160
45,679
532
1,068,658
81,074
(200)
41,695
–
648
–
72,759
(22,796)
–
(2,750)
–
–
–
(2,752)
1
270,134
386,515
8,160
46,327
532
1,138,665
58,279
Net income (loss)
Segment assets
$
319,723 $ (510,234) $
1 $ (190,510)
$32,869,630 $4,927,448 $(4,710,307) $33,086,771
202 POPULAR, INC. 2016 ANNUAL REPORT
Note 43 - 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, 2016 and 2015, and the results of its operations
and cash flows for each of the three years in the period ended
December 31, 2016.
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
Net interest income $
Provision for loan
losses
Non-interest
income
Amortization of
intangibles
Depreciation
expense
Other operating
expenses
Income tax expense
512,920 $
766,758 $ 9,207 $
4 $ 1,288,889
138,247
150,937
–
–
289,184
6,217
178,434
98,794
(194)
283,251
4
6,836
511
16,445
21,513
1,104
–
–
7,351
39,062
257,970
22,899
558,521
38,825
67,992
16,249
(194)
–
884,289
77,973
Net income
$
83,572 $
168,560 $ 22,145 $
4 $
274,281
Segment assets
$11,508,845 $17,654,762 $591,955 $(2,371,393) $27,384,169
Geographic Information
(In thousands)
Revenues: [1]
Puerto Rico
United States
Other
2016
2015
2014
$1,361,663
283,349
74,979
$1,598,066
255,714
74,744
$1,024,416
223,264
83,907
Total consolidated revenues
$1,719,991
$1,928,524
$1,331,587
[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]
2016
2015
2014
$28,813,289
16,880,868
23,185,551
$26,764,689
17,477,070
20,893,232
$26,267,180
17,704,170
20,365,445
$8,928,475
5,799,562
6,266,473
$919,845
755,017
1,044,200
$7,858,712
4,873,504
5,288,886
$1,138,332
778,656
1,027,605
$5,689,061
3,568,564
3,442,084
$1,130,530
780,483
1,000,006
[1] Represents deposits from BPPR operations located in the U.S. and British
Virgin Islands.
POPULAR, INC. 2016 ANNUAL REPORT 203
Condensed Statements of Condition
(In thousands)
ASSETS
Cash and due from banks (includes $47,614 due from bank subsidiary (2015 – $24,124))
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 (2015 – $8,725))[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
Other loans
Less – Allowance for loan losses
Premises and equipment
Investment in equity method investees
Other assets (includes $936 due from subsidiaries and affiliate (2015 –$1,667))
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Notes payable
Other liabilities (includes $2,574 due to subsidiaries and affiliate (2015 – $1,133))
Stockholders’ equity
Total liabilities and stockholders’ equity
[1] Refer to Note 23 to the consolidated financial statements for information on the statutory trusts.
December 31,
2016
2015
$
47,783
252,347
2,640
–
$
24,298
262,204
2,020
216
9,850
3,658,451
1,707,167
243,993
1,142
2
3,067
51,259
11,257
9,850
3,598,393
1,687,104
253,828
1,176
3
2,823
45,262
10,817
$5,988,954
$5,897,988
$ 735,600
55,309
5,198,045
$ 733,516
59,148
5,105,324
$5,988,954
$5,897,988
204 POPULAR, INC. 2016 ANNUAL REPORT
Condensed Statements of Operations
(In thousands)
Income:
Dividends from subsidiaries
Interest income (includes $1,965 due from subsidiaries and affiliates (2015 – $1,188; 2014 – $1,829))
Earnings from investments in equity method investees
Gain on sale and valuation adjustment of investment securities
Trading account profit (loss)
Total income
Expenses:
Interest expense
Provision (reversal of provision) for loan losses
Operating expenses (includes expenses for services provided by subsidiaries and affiliate of $8,160
(2015 – $7,309 ; 2014 – $6,882)), net of reimbursement by subsidiaries for services provided by
parent of $74,573 (2015 – $74,799 ; 2014 – $67,021)
Total expenses
Income (loss) before income taxes and equity in undistributed earnings of subsidiaries
Income tax expense (benefit)
Income (loss) before equity in undistributed earnings of subsidiaries
Equity in undistributed earnings of subsidiaries
Income (loss) from continuing operations
Equity in undistributed earnings (losses) of discontinued operations
Net income (loss)
Comprehensive income (loss), net of tax
Years ended December 31,
2014
2015
2016
$102,300
2,141
12,352
1,767
90
$ 41,350
1,332
13,710
–
(187)
118,650
56,205
$
–
1,931
12,291
–
(40)
14,182
52,470
(35)
52,470
35
492,657
(200)
(4,208)
(1,293)
1,633
48,227
70,423
19
70,404
145,152
215,556
1,135
51,212
494,090
4,993
(186)
5,179
888,818
893,997
1,347
(479,908)
5,580
(485,488)
294,978
(190,510)
(122,980)
$216,691
$895,344
$(313,490)
$153,291
$868,330
$(354,617)
POPULAR, INC. 2016 ANNUAL REPORT 205
Condensed Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Equity in undistributed earnings of subsidiaries and dividends from subsidiaries
Provision (reversal) for loan losses
Net accretion of discounts and amortization of premiums and deferred fees
Earnings from investments under the equity method
Deferred income tax expense (benefit)
Sale and valuation adjustments of investment securities
Net (increase) decrease in:
Trading securities
Other assets
Net increase (decrease) in:
Interest payable
Other liabilities
Total adjustments
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Net decrease (increase) in money market investments
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Other
Proceeds from sale of investment securities:
Available-for-sale
Other
Capital contribution to subsidiaries
Net decrease in advances to subsidiaries and affiliates
Net repayments (originations) on other loans
Return of capital from equity method investments
Return of capital from wholly owned subsidiaries
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:
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 financing activities
Net increase in cash and due from banks
Cash and due from banks at beginning of period
Cash and due from banks at end of period
Years ended December 31,
2015
2014
2016
$ 216,691
$ 895,344
$(313,490)
(146,287)
(35)
2,087
(12,352)
19
(1,767)
(890,165)
35
2
(13,710)
(186)
–
(171,998)
(200)
404,461
(12,291)
8,203
–
(620)
4,473
–
(3,854)
(380)
8,781
–
(5,622)
(288)
4,736
7,066
(180)
(158,336)
(901,245)
239,509
58,355
(5,901)
(73,981)
9,857
(242,457)
(1,026)
–
–
1,000
278
1,583
–
–
35
433
14,000
(953)
56
434
–
–
–
53,769
24
11,500
203,000
(1,079)
–
–
(100,000)
465,731
(279)
–
210,000
(1,075)
9
–
48
–
25,723
24,766
574,399
–
–
7,437
(65,932)
–
(2,098)
–
–
6,226
(19,257)
–
(1,984)
(936,000)
450,000
5,394
(3,723)
(3,000)
(3,236)
(60,593)
(15,015)
(490,565)
23,485
24,298
3,850
20,448
9,853
10,595
$ 47,783
$ 24,298
$ 20,448
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, 2016 (2015 – $4.7 million).
206 POPULAR, INC. 2016 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 23 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, 2016:
the financial position of Popular,
Note 44 – Condensed consolidating financial information of
guarantor and issuers of registered guaranteed securities
The following condensed consolidating financial information
presents
Inc. Holding
Company (“PIHC”) (parent only), Popular North America, Inc.
(“PNA”) and all other subsidiaries of
the Corporation at
their
December 31, 2016 and 2015, and the results of
operations and cash flows for the periods ended December 31,
2016, 2015 and 2014.
Year
2017
2018
2019
2020
2021
Later years
No stated maturity
Total
(In thousands)
$
–
–
444,788
–
–
290,812
–
$735,600
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, INC. 2016 ANNUAL REPORT 207
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
Popular Inc.
Holding Co.
$
47,783
252,347
2,640
–
–
9,850
5,609,611
–
1,142
–
–
2
1,140
–
3,067
81
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
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
208 POPULAR, INC. 2016 ANNUAL REPORT
At December 31, 2016
All other
subsidiaries and
eliminations
PNA
Holding Co.
Elimination
entries
Popular, Inc.
Consolidated
$
591
13,263
–
–
–
4,492
1,818,127
–
$
362,101
2,891,670
57,297
8,209,806
98,101
$
(48,081)
(267,063)
(132)
–
–
$
362,394
2,890,217
59,805
8,209,806
98,101
153,476
–
88,821
–
(7,427,738)
–
167,818
–
88,821
–
–
–
–
–
–
–
–
22,894,030
572,878
121,425
540,649
22,804,834
69,334
540,914
180,364
32,128
137,882
196,889
2,073,562
627,294
44,497
$38,568,970
–
–
–
–
–
–
–
–
22,895,172
572,878
121,425
540,651
22,805,974
69,334
543,981
180,445
–
(90)
–
(14,968)
–
–
$ (7,758,072)
32,128
138,042
196,889
2,145,510
627,294
45,050
$38,661,609
–
112
–
61,770
–
553
$5,988,954
–
138
–
25,146
–
–
$ 1,861,757
$
$
–
–
–
–
–
–
$ 7,028,524
23,782,844
30,811,368
$
(48,081)
(267,063)
(315,144)
$ 6,980,443
23,515,781
30,496,224
–
–
735,600
55,309
790,909
–
–
148,512
6,034
154,546
50,160
1,040
4,246,495
1,228,834
(8,198)
(320,286)
5,198,045
$5,988,954
–
2
4,111,207
(2,382,049)
–
(21,949)
1,707,211
$ 1,861,757
479,425
1,200
690,740
865,861
32,848,594
–
56,307
5,717,066
264,944
–
(317,941)
5,720,376
$38,568,970
–
–
–
(15,253)
(330,397)
479,425
1,200
1,574,852
911,951
33,463,652
–
(56,309)
(9,819,746)
2,108,578
(88)
339,890
(7,427,675)
$(7,758,072)
50,160
1,040
4,255,022
1,220,307
(8,286)
(320,286)
5,197,957
$38,661,609
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
Popular, Inc.
Holding Co.
$
24,298
262,204
2,020
216
–
9,850
5,539,325
–
1,176
–
–
3
1,173
–
2,823
532
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
At December 31, 2015
All other
subsidiaries and
eliminations
PNA
Holding Co.
Elimination
entries
Popular, Inc.
Consolidated
$
600
23,931
–
–
–
4,492
1,789,512
–
$
363,620
2,179,887
69,639
6,062,776
100,903
$
(24,844)
(285,930)
–
–
–
$
363,674
2,180,092
71,659
6,062,992
100,903
157,906
–
137,000
–
(7,328,837)
–
172,248
–
137,000
–
–
–
–
–
–
–
–
22,452,637
646,115
107,698
537,108
22,453,946
310,221
499,788
154,699
36,685
124,070
211,405
2,132,616
626,388
57,555
$35,679,104
–
–
–
–
–
–
–
–
22,453,813
646,115
107,698
537,111
22,455,119
310,221
502,611
155,231
–
(36)
–
(17,958)
–
–
$(7,657,605)
36,685
124,234
211,405
2,193,162
626,388
58,109
$35,761,733
–
85
–
54,908
–
554
$5,897,988
–
115
–
23,596
–
–
$ 1,842,246
$
$
–
–
–
–
–
–
$ 6,426,359
21,094,138
27,520,497
$
(24,844)
(285,930)
(310,774)
$ 6,401,515
20,808,208
27,209,723
–
–
733,516
59,148
–
792,664
–
–
148,483
6,659
–
155,142
50,160
1,038
4,220,629
1,096,484
(6,101)
(256,886)
5,105,324
$5,897,988
–
2
4,111,208
(2,416,251)
–
(7,855)
1,687,104
$ 1,842,246
762,145
1,200
780,509
971,429
1,815
30,037,595
–
56,307
5,712,635
128,459
–
(255,892)
5,641,509
$35,679,104
–
–
–
(18,218)
–
(328,992)
762,145
1,200
1,662,508
1,019,018
1,815
30,656,409
–
(56,309)
(9,815,316)
2,279,265
–
263,747
(7,328,613)
$(7,657,605)
50,160
1,038
4,229,156
1,087,957
(6,101)
(256,886)
5,105,324
$35,761,733
POPULAR, INC. 2016 ANNUAL REPORT 209
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 income (expense)
Provision (reversal) for loan losses- non-covered loans
Provision (reversal) for loan losses- covered loans
Net interest income (expense) after provision for loan losses
Service charges on deposit accounts
Other service fees
Mortgage banking activities
Net gain on sale of investment securities
Other-than-temporary impairment losses on investment
securities
Trading account profit (loss)
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
Other real estate owned (OREO) expenses
Other operating expenses
Amortization of intangibles
Goodwill impairment charge
Total operating expenses
Popular, Inc.
Holding Co.
PNA
Holding Co.
Elimination
entries
Popular, Inc.
Consolidated
Year ended December 31, 2016
All other
subsidiaries and
eliminations
$102,300
78
1,399
664
–
104,441
$
–
–
101
322
–
423
$
–
1,459,642
16,428
151,025
6,414
1,633,509
$(102,300)
–
(1,500)
–
–
(103,800)
$
–
1,459,720
16,428
152,011
6,414
1,634,573
–
–
52,470
52,470
51,971
(35)
–
52,006
–
–
–
1,767
–
90
–
–
–
12,352
14,209
48,032
3,630
2,807
187
10,817
520
2,261
–
52
(72,514)
–
–
(4,208)
–
–
10,769
10,769
(10,346)
–
–
(10,346)
–
–
–
–
–
–
–
–
–
(2,559)
(2,559)
–
–
–
1
122
–
–
–
–
60
–
–
183
129,077
7,812
13,890
150,779
1,482,730
171,161
(1,110)
1,312,679
160,836
237,342
56,538
195
(209)
(831)
8,245
(17,285)
(207,779)
51,903
288,955
439,444
82,023
59,418
42,116
312,517
23,377
50,753
24,512
47,067
165,066
12,144
3,801
1,262,238
(1,500)
–
–
(1,500)
(102,300)
–
–
(102,300)
–
(2,572)
–
–
–
(44)
–
–
–
(53)
(2,669)
–
–
–
–
(413)
–
–
–
–
(2,165)
–
–
(2,578)
127,577
7,812
77,129
212,518
1,422,055
171,126
(1,110)
1,252,039
160,836
234,770
56,538
1,962
(209)
(785)
8,245
(17,285)
(207,779)
61,643
297,936
487,476
85,653
62,225
42,304
323,043
23,897
53,014
24,512
47,119
90,447
12,144
3,801
1,255,635
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 earnings of discontinued operations
Net Income
Comprehensive income, net of tax
70,423
19
70,404
145,152
215,556
–
1,135
$216,691
$153,291
(13,088)
(4,581)
(8,507)
41,574
33,067
–
1,135
$ 34,202
$ 20,108
339,396
83,364
256,032
–
256,032
1,135
–
$ 257,167
$ 195,118
(102,391)
(18)
(102,373)
(186,726)
(289,099)
–
(2,270)
$(291,369)
294,340
78,784
215,556
–
215,556
1,135
–
$ 216,691
$(215,226)
$ 153,291
210 POPULAR, INC. 2016 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 on sale of investment securities
Other-than temporary impairment losses on investment
securities
Trading account loss
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 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
Other real estate owned (OREO) expenses
Other operating expenses
Amortization of intangibles
Restructuring costs
Total operating expenses
Popular, Inc.
Holding Co.
$ 41,350
673
40
619
–
42,682
–
–
52,470
52,470
(9,788)
35
–
(9,823)
–
–
–
–
–
(187)
–
–
–
13,710
13,523
49,112
3,591
2,240
(822)
11,384
519
1,868
–
–
(69,185)
–
–
(1,293)
Year ended December 31, 2015
All other
subsidiaries and
eliminations
Elimination
entries
PNA
Holding Co.
$
–
3
8
322
–
333
–
502
10,779
11,281
(10,948)
–
–
(10,948)
–
–
–
–
–
–
–
–
–
(244)
(244)
–
–
–
–
504
–
–
–
–
463
–
–
967
$
–
1,458,613
7,245
125,123
11,001
1,601,982
107,583
7,593
15,737
130,913
1,471,069
217,423
24,020
1,229,626
160,108
238,566
81,802
141
(14,445)
(4,536)
542
(18,628)
20,062
45,173
508,785
428,407
83,297
57,870
40,619
297,392
24,627
50,208
27,626
85,568
166,289
11,019
18,412
1,291,334
$
(41,350)
(583)
(50)
–
–
(41,983)
(50)
(583)
–
(633)
(41,350)
–
–
(41,350)
–
(2,476)
–
–
–
–
–
–
–
(47)
(2,523)
–
–
–
–
(295)
–
–
–
–
(2,492)
–
–
(2,787)
Popular, Inc.
Consolidated
$
–
1,458,706
7,243
126,064
11,001
1,603,014
107,533
7,512
78,986
194,031
1,408,983
217,458
24,020
1,167,505
160,108
236,090
81,802
141
(14,445)
(4,723)
542
(18,628)
20,062
58,592
519,541
477,519
86,888
60,110
39,797
308,985
25,146
52,076
27,626
85,568
95,075
11,019
18,412
1,288,221
Income (loss) before income tax and equity in earnings of
subsidiaries
Income tax (benefit) expense
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 earnings of discontinued operations
Net Income
Comprehensive income, net of tax
4,993
(186)
5,179
888,818
893,997
–
1,347
$895,344
$868,330
(12,159)
305
(12,464)
638,341
625,877
–
1,347
$627,224
$623,433
447,077
(495,394)
942,471
–
942,471
1,347
–
$ 943,818
(41,086)
103
(41,189)
(1,527,159)
(1,568,348)
–
(2,694)
$(1,571,042)
398,825
(495,172)
893,997
–
893,997
1,347
–
$ 895,344
$ 916,942
$(1,540,375)
$ 868,330
POPULAR, INC. 2016 ANNUAL REPORT 211
Condensed Consolidating Statement of Operations
(In thousands)
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 (expense) income
Provision (reversal) 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
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
–
405
10,826
11,231
(10,902)
–
–
(10,902)
–
–
–
–
–
–
–
–
(16)
(16)
–
–
–
–
1,119
–
–
–
–
–
435
–
–
1,554
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
(1,202)
(22)
–
–
(1,224)
(8)
(1,216)
–
(1,224)
–
–
–
–
–
(2,741)
–
–
–
–
–
–
(9)
(2,750)
–
–
–
–
(229)
–
–
–
–
–
(2,523)
–
–
(2,752)
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
(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
Net (Loss) Income
(479,908)
5,580
(485,488)
294,978
$(190,510)
–
(122,980)
(313,490)
(12,472)
–
(12,472)
32,484
$ 20,012
–
(122,980)
(102,968)
360,147
52,698
307,449
–
$ 307,449
(122,980)
–
184,469
2
1
1
(327,462)
$(327,461)
–
245,960
(81,501)
(132,231)
58,279
(190,510)
–
$ (190,510)
(122,980)
–
(313,490)
Comprehensive (loss) income, net of tax
$(354,617)
$ (79,665)
$ 144,355
$ (64,690)
$ (354,617)
212 POPULAR, INC. 2016 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 provided by (used in) operating activities:
Equity in undistributed earnings of subsidiaries
Provision (reversal) 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
Other-than-temporary impairment on investment securities
Fair value adjustments on mortgage servicing rights
FDIC loss-share expense
Adjustments (expense) to indemnity reserves on loans sold
(Earnings) losses from investments under the equity method
Deferred income tax expense (benefit)
(Gain) loss on:
Disposition of premises and equipment and other productive assets
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
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 provided by (used in) operating activities
Cash flows from investing activities:
Net decrease (increase) in money market investments
Purchases of investment securities:
Available-for-sale
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 (disbursements) 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
Return of capital from wholly-owned subsidiaries
Acquisition of premises and equipment
Proceeds from sale of:
Premises and equipment and other productive assets
Foreclosed assets
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Net increase (decrease) in:
Deposits
Federal funds purchased and assets sold under agreements to repurchase
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
Return of capital to parent company
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
Popular, Inc.
Holding Co.
PNA
Holding Co.
Elimination
entries
Popular, Inc.
Consolidated
Year ended December 31, 2016
All other
subsidiaries
and eliminations
$ 216,691
$ 34,202
$
257,167
$(291,369)
$
216,691
(146,287)
(35)
–
–
654
2,087
–
–
–
–
(12,352)
19
(2)
(1,767)
–
52
–
–
–
(620)
(27)
3,796
–
–
(3,854)
(158,336)
58,355
(42,709)
–
–
–
–
28
–
–
–
–
2,559
(4,581)
–
–
–
–
–
–
–
–
(23)
(3)
–
–
(624)
(45,353)
(11,151)
–
170,051
3,801
12,144
46,220
(42,901)
209
25,336
207,779
17,285
(21,495)
66,154
4,096
(195)
(35,517)
19,305
(310,217)
89,887
(510,783)
754,326
(13,812)
(27,125)
219
(55,678)
(11,781)
387,308
644,475
188,996
–
–
–
–
–
–
–
–
–
–
(18)
–
–
–
–
–
–
–
133
54
(2,972)
(54)
–
3,018
189,157
(102,212)
–
170,016
3,801
12,144
46,874
(40,786)
209
25,336
207,779
17,285
(31,288)
61,574
4,094
(1,962)
(35,517)
19,357
(310,217)
89,887
(510,783)
753,839
(13,808)
(26,304)
165
(55,678)
(13,241)
372,776
589,467
9,857
10,668
(711,782)
(18,868)
(710,125)
–
–
–
–
–
278
1,583
35
–
–
–
433
14,000
(953)
56
434
25,723
–
–
–
–
–
–
–
–
–
–
–
474
–
–
(3,407,779)
(14,130)
1,227,966
4,588
11,122
4,981
7,438
(267,240)
141,363
(535,445)
98,518
–
–
(99,367)
–
–
11,142
8,841
82,923
(3,448,003)
–
–
–
–
–
–
–
–
–
–
–
–
(14,000)
–
–
–
(32,868)
(3,407,779)
(14,130)
1,227,966
4,588
11,122
5,259
9,021
(267,205)
141,363
(535,445)
98,518
907
–
(100,320)
8,897
83,357
(3,444,006)
–
–
–
–
7,437
–
(65,932)
(2,098)
–
(60,593)
23,485
24,298
$ 47,783
–
–
–
–
–
–
–
–
–
–
(9)
600
591
$
3,290,797
(282,719)
(254,816)
165,047
–
(102,300)
–
–
(14,000)
2,802,009
(1,519)
363,620
362,101
$
(4,369)
–
–
–
–
102,300
–
(88)
14,000
111,843
(23,237)
(24,844)
$ (48,081)
3,286,428
(282,719)
(254,816)
165,047
7,437
–
(65,932)
(2,186)
–
2,853,259
(1,280)
363,674
362,394
$
During the ended December 31, 2016 there have not been any cash flows associated with discontinued operations.
POPULAR, INC. 2016 ANNUAL REPORT 213
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
Other-than-temporary impairment on investment securities
Fair value adjustments on mortgage servicing rights
FDIC loss-share income
Adjustments (expense) to indemnity reserves on loans sold
Earnings losses from investments under the equity method
Deferred income tax 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 foreclosed assets, including write-downs
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 (decrease) increase 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 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
Acquisition of trademark
Net payments from FDIC under loss-sharing agreements
Net cash received and acquired from business combination
Acquisition of servicing assets
Cash paid related to business acquisitions
Return of capital from equity method investments
Return of capital from wholly-owned subsidiaries
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 (decrease) increase in:
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
Return of capital to parent company
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
Deposits
Federal funds purchased and assets sold under agreements to repurchase
Other short-term borrowings
Popular, Inc.
Holding Co.
PNA
Holding Co.
Year ended December 31, 2015
All other
subsidiaries
and eliminations
Elimination
entries
Popular, Inc.
Consolidated
$ 895,344
$ 627,224
$
943,818
$(1,571,042) $
895,344
(890,165)
35
–
761
2
–
–
–
–
(13,710)
(186)
(2)
–
–
–
–
–
–
(639,688)
–
–
–
–
–
–
–
–
244
–
–
–
–
–
–
–
–
(380)
(10)
8,032
–
–
(5,622)
(901,245)
(5,901)
–
(3)
342
(26)
–
(187)
(639,318)
(12,094)
–
241,443
11,019
46,713
(73,498)
14,445
7,904
(20,062)
18,628
(10,907)
(519,045)
(3,627)
(141)
(35,013)
60,378
(401,991)
124,111
(792,821)
1,084,063
5,395
92,032
564
3,252
(67,180)
(214,338)
729,480
1,529,853
–
–
–
–
–
–
–
–
–
103
–
–
–
–
–
–
–
–
241,478
11,019
47,474
(73,496)
14,445
7,904
(20,062)
18,628
(24,373)
(519,128)
(3,629)
(141)
(35,013)
60,378
(401,991)
124,111
(792,821)
–
10
(273)
1,083,683
5,392
100,133
(10)
–
9
1,529,692
(41,350)
528
3,252
(72,980)
(225,209)
670,135
(242,457)
(23,574)
(376,248)
284,573
(357,706)
–
–
–
–
–
–
(2,014,315)
(750)
(40,847)
1,362,712
4,856
46,341
–
–
–
–
–
–
(2,014,315)
(750)
(40,847)
1,362,712
4,856
46,341
–
–
–
–
–
–
–
–
53,793
–
–
–
–
–
–
–
11,500
203,000
–
(1,079)
9
–
24,766
–
–
350
–
(350)
–
–
–
–
–
1,829
200,000
–
–
–
–
178,255
–
–
–
–
–
6,226
–
(19,257)
(1,984)
–
(15,015)
3,850
20,448
$ 24,298
–
–
–
(8,169)
–
–
–
–
–
(158,000)
(166,169)
(8)
608
600
$
$
96,760
14,950
431,302
30,160
(338,097)
(50)
247,976
731,279
(61,304)
(17,250)
–
–
(2,400)
(61,577)
12,871
141,145
207,514
495,904
(509,512)
(201,984)
(729,720)
277,398
–
(41,350)
–
–
(245,000)
(954,264)
(17,270)
380,890
363,620
–
–
(53,769)
–
–
–
–
–
–
–
–
(403,000)
–
–
–
–
(172,196)
(288,566)
–
53,769
–
–
–
41,350
–
–
403,000
209,553
(3,993)
(20,851)
(24,844) $
$
96,760
14,950
431,676
30,160
(338,447)
(50)
247,976
731,279
(61,304)
(17,250)
13,329
–
(2,400)
(62,656)
12,880
141,145
238,339
207,338
(509,512)
(148,215)
(737,889)
277,398
6,226
–
(19,257)
(1,984)
–
(925,895)
(17,421)
381,095
363,674
The Condensed Consolidating Statements of Cash Flows include the cash flows from operating, investing and financing activities associated with discontinued operations.
214 POPULAR, INC. 2016 ANNUAL REPORT
Condensed Consolidating Statement of Cash Flows
(In thousands)
Cash flows from operating activities:
Net (loss) income
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Equity in undistributed (earnings) losses of subsidiaries
Provision (reversal) 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.
Elimination
entries
Popular, Inc.
Consolidated
Year ended December 31, 2014
All other
subsidiaries
and eliminations
$(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.
POPULAR, INC. 2016 ANNUAL REPORT 215
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P.O. BOX 362708 | SAN JUAN, PUERTO RICO 00936-2708